Q4 2022 Prosperity Bancshares Inc Earnings Call
Yes.
[music].
Good morning, welcome to the prosperity Bancshares, Inc. Fourth quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you may cause star then one on your telephone keypad.
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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' fourth 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 several weeks I'm Charlotte Rushee.
Council prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer.
H eight Tim to Manish Junior Chairman also back all small enough Chief Financial Officer, 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 backups manav.
Reviews, some of our recent financial statistics and Tim to me on it he will discuss our lending activities, including asset quality.
Finally, we will open the call for questions.
During the call interested parties may participate live by following the instructions that will be provided by our call moderator M day.
Before we begin let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward looking statements for purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the actual results or performance of prosperity Bancshares.
Being 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 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 fourth quarter 2022 conference calls or.
Our annualized return on average assets for the three months ended December 31, 2022 was 147% range.
Annualized return on average tangible common equity.
Came in at $16 to 16, 2%.
Prosperities efficiency ratio was 48% for the three months ending December 31 2022.
Our net income was $137 9 million for the three months ending December 31 2022.
And that was compared with $126 million for the same period in 2021, which represented an increase of eight 7%.
The net income per diluted common share was $1 51 for the three months ending December 31, 2022, compared with $1 38 for the same period in 'twenty, one which represented an increase of nine 4%.
Our net income was $524 million for the year ended December 31, 2022, compared with $519 million for 2021, an increase of $5 million or 1%.
Net income per diluted common share was $5 73 for the year ending December 31 2022.
Compared to $5 62.
For 2021.
An increase of two 3%.
Our loans, excluding warehouse purchase program.
P loans at December 31, 2022, we're $18 billion compared with 16 billion $16 7 million at December 31, 2021.
An increase of $1 $4 billion or eight 5%.
Our linked quarter loans.
Excluding warehouse purchase program and PPP loans.
<unk> $518 million or 3%.
11, 8% annualized from the $17 6 billion at September 32022.
Our deposits at December 31, 2022.
With $28 5 billion, a decrease of $2 2 billion or seven 3%. When you compare to 38 billion at December 31, 2021, primarily due to a decrease in public fund deposits.
Linked quarter deposits decreased to $766 million.
Our two 6% from the $29 3 billion at September 32022.
Our period end and average non interest bearing deposits saw small increases, but as mentioned earlier most of the decrease in the total deposits was in public fund category.
Our asset quality nonperforming assets totaled 27 million or eight basis points of quarterly average interest, earning assets at December 31, 2022, and that's compared with $28 million or nine basis points of quarterly average interest.
Earning assets at December 31, 2021.
The allowance for credit losses on loans and off balance sheet credit exposure was $311 million at December 31, 2022.
Paired with $316 million last year December 31, 2021, and $312 million at September 32022.
We are excited about our pending mergers with <unk> Bancshares of Texas, and Lone Star State Bancshares, the combined banks will add approximately $3 billion in assets and increase our market share in the West, Texas West, Texas areas of Lubbock Midland.
In Odessa as well as provide entry into new markets to us and Wichita Falls, Amarillo, and Horseshoe Bay, Marvel balls, and Fredericksburg areas in Central Texas.
The transactions are pending regulatory and shareholder approvals and are expected to close during the first half of 2023, although delays could occur.
During the fourth quarter of 2020 to prosperity continue to see growth in loans, which we expect will continue into 2023.
Growth comes from loans as well as existing loans not paying off as fast as they did when rates were low and it was opportunistic for borrowers to repay or move the loans.
Consumer spending remains strong, especially in the tourism restaurant and hospitality sectors.
Real estate sales and pricing have been affected by the increase in rates, but we expect that because of inventory levels and the population growth the impact will be less in Texas and Oklahoma.
We believe that the economies in Texas, and Oklahoma will outperform other sites.
Over the next several years as companies and individuals continue to move to the state because of lower tax rates and a business friendly political environment.
We expect that companies will need more infrastructure and buildings that consumers will need more housing and places to spend their money and both will need banks to finance the growth.
While the net interest margin at some banks has improved immediately because of higher rates.
We expect Prosperities net interest margin to continue to improve over the next several years as our bond portfolio, which yield at 196% during the fourth quarter of 2020 to REIT prices, the higher yields assuming that rates normalize near the current rate.
Overall, we are excited about the growth and future of our company I would like to thank our customers associates directors or shareholders, we're helping build such a successful Bonnie. Thanks again for your support of our company, Let me turn it over our discussion to ASO that 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 ended December 31, 2022 was $256 1 million compared to $244 8 million for the same period in 2021, an increase of $11 4 million or four 6%.
This was due an increase in our loan and security interest income of $28 9 million and $25 7 million, respectively, partially offset by increase in interest expense of $43 6 million.
Comparing to the quarter ended December 31, 2022 to the same period in 2021. The net interest income increased $11 4 million, despite having seven $9 million less in PPP loan fee income and $4 $5 million less than fair value loan income.
The net interest margin on a tax equivalent basis was 3.05% for the three months ended December 31, 2022 compared to.
297% for the same period in 2021 and $3 one 1% for the quarter ended September 32022 <unk>.
Excluding purchase accounting adjustments the net interest margin for the quarter ended December 31, 2022 was 3.04% compared to 291% for the same period in 2021 and three 1% for the quarter ended September 32022.
Noninterest income was $37 7 million for the three months ended December 31, 2022, compared to $35 8 million for the same period in 2021 and $34 7 million for the quarter ended September 32022.
Noninterest expense for the three months ended December 31, 2022 was $119 2 million compared to $119 5 million for the same period in 2021 and $122 2 million for the quarter ended September <unk> 2022.
For the first quarter 2023, the new FDIC assessment rate is expected to increase expenses by approximately $2 million. As a result, we expect noninterest expense for the first quarter 2023 to be in the range of $122 million to $124 million.
This excludes any potential impact from one time merger related costs for our pending acquisition, which I expected to close in the first half of 2023.
The efficiency ratio was 49% for the three months ended December 31 2022.
242, 8% for the same period in 2021 and 41, 4% for the three months ended September 32022.
The bond portfolio metrics at 12, 31, 2022 showed a weighted average life of five three years and projected annual cash flows of approximately $2 2 billion and with that let me turn over the presentation to Tim to Madison to manage for some details on loan and asset quality and honest.
You also back.
Our nonperforming assets.
At quarter end December 31, 2022.
Totaled $27 million $494000.
Our 15 basis points of loans and other real estate.
Compared to $19 million.
878000.
Our 11 basis points at September 32022.
This represents approximately a 38% increase in nonperforming assets.
The December 31, 2022 nonperforming.
Nonperforming asset total was comprised of $25 million.
$531000 in loans.
Zero dollars in repossessed assets.
And $1.963 million in other real estate.
Yeah.
Of the $27 million $494000 in nonperforming assets.
Only $767000 or energy credits.
Since December 31 2022.
$6 million $114000 in nonperforming assets have been removed.
This represents 22% of the nonperforming assets at December 31.
Net charge offs for the three months ended December 31, 2022 were $603 million compared to.
Excuse me $603000 compared to $1 million $780000 for the quarter ended September 30th.
2022.
No dollars were added to the allowance for credit losses. During the quarter ended December 31, 2022, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended December 31, 2022 was $613 million.
Loans outstanding at December 31, 2022 were approximately $18.841 billion compared to $18 five 6 billion at September 32022.
The December 31, 2022 loan total is made up of 42% fixed rate loans.
30% floating rate and 28% variable rate.
Yes.
I will now turn it over to Charlotte Rasche. Thank you Tim at this time, we are prepared to answer your questions. Jay can you. Please assist us with questions.
Yes, it's karri.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question you May Press Star then two.
At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Brady Gailey with <unk>. Please go ahead.
Your line is open.
Sorry, I was muted good morning, guys.
Okay.
So the margin took a little bit of a step back in the fourth quarter either longer term as the bond book re prices higher.
Very beneficial to the margin, but yes.
Do you think the margin when do you think the margin can really start to see some material upside from this dynamic of the bond book pricing higher.
And Brian just thoughtful about I'll take that and maybe we can add more later, but our store doesn't change right. It's all about our balance sheet mix.
If you look at long term you are right I mean long term looks very positive for us because of higher interest rate environment. We are right now we have all of the $14 billion in bond portfolio, right, now, which is yielding land less than 2% and if you look at our loan portfolio as Mr. <unk> just mentioned, we have 42% in fixed.
Dan or 28% in variable, though is going to be repriced and over time as well so that looks very positive and if you look at our bond portfolio. We have $2 2 billion cash flow coming in every year and we've had very strong loan growth for the past few quarters and if you could just take that cash flow and put a toll.
The high yielding loans.
Which Jenny was six 7% right now yield on loans, that's going to be very positive in the long term and one more thing I will add if you look at our IRR model. If you look at 12 months 24 months, we see expanding NIM and that's very consistent what we've done in the last rate cycle.
That's a little more color on the long term, but if you look at the short term maybe the first quarter I would say, our NIM going to be a flattish because of the repricing of that.
Deposits and that's I think.
The wildcard is the repricing of the deposits specially with the environment. We are in competition, but we feel very positive about our long term our margin.
And that's.
That should expand in the long term.
Randy I'm going to jump in for just a minute if I can.
Based on our models that we have we show pretty significant increases in our net interest margins starting in.
The six month period 12 month period were really nice 24 months as Unbilled, it's hard to believe other than what the model says, sometimes however, that's predicated on.
Rates, where they are at today and as rates increase I think they have plugged in and this model at 25 basis points increased in in January I'm, sorry in February and a 25 basis points increase in March and the model for every 100 basis points increase takes into consideration like on your <unk>.
Money market accounts and everyone has a different beta, but we 65 basis points of that for the increase so if things went up 100 basis points, we would say 65% in our models. So that's I'm just trying to give you some background on that.
That's based on the model, having said that the.
The things that always could change that you saw that deposit pressure was there that you had to raise.
Rates faster or more than that in the short term and we thought that could also that could change the net interest margin as when you do get it I guess, that's the point.
I would make and making it simple no matter how you look at it we have a really long way to go at a normalized rate environment with our deal it just depends.
The timing of it I think so.
I think where other banks are.
<unk> gotten most of their their net interest margin gain already ours is yet to come it's just a matter of when.
Sure. So the bond book the yield on the bond book is 196%. When you are buying new bonds. Today are like if you look at the bond purchases you did in the fourth quarter, what was the new yield on those.
Well, we don't have to buy them anymore, because our loans have been growing so we didnt put it all in the loans.
Well the fact of the matter is.
I think for the short term I don't see it really buying bonds as much as really increase in our loan portfolio really.
I think we increased our loan portfolio of $500 million in the last quarter. The first quarter still looks pretty good too I know that in some areas of the country. They are talking about a recession, but right now.
We still see some strength in.
The mainland loan portfolio. If you ask me my gut feeling with the amount of money that we're borrowing right now and what we're what we're doing in loans I think that most of it will go more towards loans and a reduction in the federal home loan bank.
Borrowings profitably I think to what the 15 year mortgage backs now are about four 5% is probably so.
And thank you for the <unk>.
Our preference to put those dollars in loans.
In securities at that level, and we've had some success at that here lately. So that's that's the plan.
And on the loan growth I think you guys kind of longer term guide to a mid single digit level loan growth, but as I look at the last three quarters.
Annualized year grow like north of 10%. So how do you think about loan growth for 2003.
Kevin you want to take it.
Brady I think.
Part of this loan growth is driven by slower paydowns across the portfolio and in particular of that structured real estate portfolio.
But we had legacy which was down under $400 million now so that those payoffs are really slowing down on that side.
David mentioned the first.
Yes.
Months of the year with almost behind US really strong loan growth for this first month consistent with what we've seen in the last couple of quarters.
Maybe even a little better than what we've seen in the last couple of quarters.
Quarter to date, so if I think about the year.
I would say somewhere in the mid single digits to the very high single digits with the difference being.
Where single family mortgage origination.
Pricing comes in.
At the lower end of single family mortgage originations it might make more sense for us to package those things and sell them off for the game and.
And we will make money on the gain versus the loan growth. So if rates are such that that happens I would say more towards the mid single digit range to the extent we portfolio those high single digit.
Loan growth. So that's the swing factor either way, we're going to make more money.
And we're just cognizant of where the rates are in these things and we will we will be.
Both strategic and thoughtful.
On.
Whether we portfolio.
Loans or sell them.
Okay that makes sense thanks, Kevin.
The next question comes from Michael Rose with Raymond James. Please go ahead.
And maybe just sticking with loan growth Kevin.
On the usual update on the warehouse it looks like the not surprisingly.
The volumes are a little bit less.
What you'd kind of talked about back.
Back in October not not surprised just given the mba's forecast, but any sort of staff in the near term for us.
For warehouse volumes I would probably expect COVID-19 more downward pressure and then maybe some stabilization, but would just love your thoughts thanks, yes, sorry.
Saw your note. This morning have me scrambling for our transcript because I thought I guided right to the number we had.
I'll call you later on that once I confirm.
Yeah.
Sandy has trickled down.
In January it always does Michael we're averaging so far for the quarter exactly $590 million. So it's off from the <unk>.
Last quarter average of 729, I think something like that so.
I expect this to be kind of a low points for the quarter and we may rally from here, a little bit again, depending upon where.
The 10 year moves, but it seems to be settling in.
I'm going to say, we're going to average for the quarter somewhere between $5 50 and 600.
Perfect.
And then maybe just for David Zalman.
Obviously, the two deals.
Announced recently I know Theres a lot of other banks out there a lot of dislocations just any change in an update on kind of your thought process around M&A at this point.
Would you potentially look to maybe do additional deals here in the next couple of quarters, even if you're still integrating that you're that you've already announced.
Alright, Thanks, Ed.
M&A is part of our plan I mean Lee boys.
Last 2030 years, our plan has been trying to shoot for about an 8% organic growth rate on the loans and about 4% on the deposits and the rest of the double digit always came in with the M&A. So the answer to that would be yes.
I think that if you asked me if it is as busy as it was.
Last year I think that there are still deals out there we're still getting calls I think it's more tempered.
Something that is more challenging is the OCI on most of the banks and Brooks right now I think thats the <unk>.
That's a deal that will have to work through on some of these deals in the past.
On larger deals sometime you were able to take.
Take it and make the market in on some of the smaller deals we mark to Mark.
And the price.
So there is good is that they will have to be some discussion and adjustment with regard to the <unk>, but I think.
There is always going to be M&A times chain, you wake up one morning, they're not the same as it was the next morning for people and Theres just a lot of stuff that always goes on so I think there will always be M&A will probably be a player in that.
Okay, and maybe finally for me just on the buyback announcement, you havent repurchased shares here recently.
Our recently is that just more of a kind of a tool in case, theres dislocations or would you actually.
<unk> may be potentially be a little bit opportunistic here. Thanks.
Historically, we've used it for dislocation I think whenever the price gets a little crazy gets under 70, I think that we've been going back into the market. So.
In the past and I would say that I'm, not saying that it will be just like that but.
In the past we've used it primarily for dislocation.
Alright, great. Thanks for taking my questions.
Okay.
The next question comes from Dave Rochester with Office claimed please go ahead.
Hey, good morning, guys.
Morning.
I appreciated all the color on the margin earlier I was just wondering if you could talk about where your incremental loan production yields are what you are saying today I know the curve has been all over the place.
Given where we are today and what are you guys Sam.
Basically on the low end.
Six 5%.
On the high end eight.
And they are fluctuating within that range.
Got it so you got a decent amount of upside there from from your average yields on the quarter alone.
Sure.
We averaged $5 for the quarter, if I remember it correctly.
So there is quite a bit of upside available that's correct yes.
Sounds good.
And then just a quick one on expenses.
I appreciated the <unk> outlook.
But I know you guys have your merit increases in Q2, I think midway through so if you have any visibility into how much of a step up and you guys are expecting from that in Q2 maybe into <unk>.
A full quarter impact by through Q that'd be great.
Yeah.
I'll take this one and from the Merit increase historically, we increased about three.
Three 4% I think.
From the dollar wise I think it will be consistent with the increase we had last year. So it's going to probably add another.
$2 million to $3 million additional.
Yeah, So it's going to be about I think calculating about 2 million additional expenses starting in the second quarter.
Okay great.
Great and maybe one last one on deposits.
I was wondering how much in the way of public deposits you guys have left after the decline in <unk> and then are you guys still thinking about core deposit growth of roughly 2% you were talking about before has that changed at all and then last one how are you thinking about deposit betas for the cycle at this point. Thanks.
I'll, maybe take some of them on the public funds.
We ended the year at about $3 3 billion.
And Thats about where we are right now.
I think it's safe to say that we have a good relationship with all of our public fund customers.
With tax pool, and other rate payers like that.
Above 4% right now it's in our best interest we believe to let some of that money go at those rates instead of paying that ourselves.
That has no Andy.
The indication that we don't have a good relationship with those public funds, we still have their operating accounts and we still have their day to day dollars with us and.
And we don't see that changing we do have several bids coming up this year and Thats always a challenge because some banks are tend to be overly aggressive and some tend to be reasonable. So we just deal with that on a case by case basis.
But I think.
I think we feel good about where we are on public funds right now.
Yes, thank you as far as the 2% increase.
I would it's hard for me to say that we would grow 2% because it just because the interest rates.
Some of the Reits other banks are paying are pretty high and we haven't chased array. So.
Normally I would just I would always tell you to lay down that we're going to be 2% to 4% organically, but I Couldnt tell you that right now, we still want to see where where the deposit stabilized for our sales even right now yes.
Probably also boasts the best Guy to answer on I think you asked about beta as well through the cycle I think I know where it is but also on top of that one yes. So if you look at just cycle and I'll tell the cycle before the December rate increases to over $3 75 fed rate increase our beta for the interest bearing deposits was like <unk>.
20 basis points and if you just look at total deposits like 12 basis points over that period, but it's running less than what we project in our IRR report, but as we know the beta start slow and kind of ramps up a little bit, but we're not even at the beta wise, we're not there yet what we had experienced back in 2015.
Or 16, when that rate increase so we feel very good about that but I think there is a competition going on on the deposits and I think it's going to put a little bit of pressure on us and it's not only deposits as competitors.
I don't know is it may be 10, 15 20 years since we been so I can't give you as much of a scenario, where we've not had deposit growth so that.
People are going out and you can buy a four 2% treasury for two years and they are just other options and people are looking at some of that stuff and thats why its hard to really.
Historically, we had something to model. It on we can give you a better opinion, we're just watching it and making changes as we need to on a daily basis, but again this hasn't happened so long as banking and then last previous year to gain all the helicopter money. They came in at $2 $3 billion a year. So we're trying to see where it all on that.
And where it stabilizes.
Okay. Okay, great. Thanks, guys appreciate the color.
The next question comes from Peter Winter with D. A Davidson. Please go ahead.
Thanks, Good afternoon.
Credit obviously, the hallmark for you guys.
When I look at that reserve coverage, it's 10 times.
Nonperforming loans. So the question is can you guys still keep a zero provision expense this year, even with a mild recession.
Yes, I can maybe give a little bit of color from them, we will run the model and as we explained before we have a base scenario and we also baked in.
Recessionary scenarios, so based on the two scenario combined that the allowance levels. We have right now is considered to appropriate and I think going forward. We'll just have to run the model and see where the economy is that time and to see where the allowance will be but.
Yes, I mean, the first time.
We used in the model, we had a COVID-19 varian in there so we were using.
Using that and then.
We went to oil is I think at some point, we use that now right now the.
There is some talk of a recession in this year so.
That allows us to keep more money in the reserve using those variables like that.
Yes, I think its highly dependent on how high rates yet.
And that remains to be seen.
And if for some reason population growth should slow down or even go the other direction in Texas, and Oklahoma that would have an impact on it we don't foresee that but.
Thanks happened in life that you don't foresee.
So.
I think to answer your question is certainly at this point in time, we wouldn't anticipate.
Right away and increase in the reserve, but as the year plays out.
Have to watch some of those things that I just mentioned.
Yes.
One thing I'd add and I think Tim covered it in his prepared remarks was that.
We did move up Npa's moved up to $27 million from 19 or 20.
Most of that was just some loans that didn't get renewed at year end.
Subsequently been renewed so that number is back down to where it had been so.
In terms of stress, we haven't seen any yet that doesn't mean, we can walk out of this meeting and get a phone call with somebody stumbled but.
We're watching it and we feel good about where we sit.
Thats correct.
A wildcard as is always the prices of oil and gas.
And right now.
Good it's stable.
But it never stays the same if we've learned anything we've learned.
So.
Next year.
We still think it would probably be stable, but.
We will just have to see where it goes.
Okay.
And then just a second question just.
I realize regulators operate kind of in a black box, but when you first announced.
The two acquisitions. The thought was you were going to close it in.
In the first quarter now you are saying.
In the first half of the year.
One does that impact the <unk>.
The synergies from the deal the accretion to the deal maybe pushes out a little bit too.
Or are the regulators, saying anything causing.
Causing took.
Changed a little bit in terms of the timing of closing the deals.
And blaming that statement on our general counsel.
Thanks, Kevin.
Explain from closing the first quarter to the first half just to be just to be cautious on the deal with everything happening I mean, I think we're still trying to shoot for a first quarter closing.
As she felt that we should that we should put first half just because of the way things are in the regulatory environment right now.
I think it's important to emphasize we don't have an answer yet from the regulators.
So.
Until we do we can't schedule of closing.
Got it.
Okay. Thank you.
The next question comes from Milan, <unk> with Morgan Stanley . Please go ahead.
Hey, good afternoon.
Good afternoon.
I had a question on <unk>.
And then just given the positive dynamics that you have on the security side.
How should we think about the potential downside and then.
Begins cutting rates in the back half of the CR.
Should that actually being maybe a little bit of a benefit in the near term.
Deposit competition alleviates any securities keeping pricing higher.
I think overall big picture I mean, even the fed would decrease right and we don't know we just speculate I mean, if they would and how much we still in the bond portfolio was sitting in less than 2%. So even the decrease I mean, there is still a lot of upside for US and then also on the loan so even if there is a foreseeable future.
You see the decrease I think it was still have upside in that definitely you arrived I think from the cost perspective on deposit costs definitely helped the decreased rate environment and I think it probably helps on mergers and acquisitions to change the valuation of the loss in the portfolio on the OCI, probably but for the most part.
Are the yields that we have in the bond portfolio today really reflect.
At a time.
Timing period that we've not seen before in banking, where interest rates were at zero, so and any type of normal normalization of rates, we stand a benefit on our re pricing too.
Got it and then maybe to round out the discussion on the funding side.
Can you help us with how we should think about FH L D and Cds as a source of funding so to the extent that deposit pressure accelerates from here.
How much room do you have a brain your loan to deposit ratios up versus that 66% or so it is that right now.
Well first of all we have the capability to borrow a $15 billion, if we werent overnight because of our pledging that we have at the federal home loan bank.
For the most part.
You can jump in and answer that yield, but we have a certain amount of bonds. It just rolls off every year, which is about $2 billion close to $2 billion. So instead of buying instead of buying.
Securities like we have in the past, we would take that money and either put them into the loans that we discussed relative to <unk>.
And also the reduction in the debt also the banks that are joining us.
We will probably take a certain portion of the.
Their liquidity instead of reinvesting it and probably pay down the federal home loan 19, so it'd probably be a combination of money that we get from Paydowns and our own portfolio and also the banks that join us Lone star doesn't really necessarily ever.
A big portfolio, but the other one I'd.
I'd have to look and see but we're looking at doing that and probably using that money just to pay down the federal home loan bank probably.
Got it so it feels like you wouldnt be leaning into Cds at all.
I think that people are going to move money and Cvs over time as rates at bright stay higher like they are again.
We've not been the type of bank debt. He goes in advertising in the paper for Cds or high CD rates or really any high rates that.
That may change, we don't see that right now, but historically, that's just not something we've never chased the money before because we've had so much liquidity and.
We still have tremendous amount of liquidity.
When you look at our ability to borrow.
Core deposits that we have.
Great I appreciate it thank you.
The next question comes from Matt Olney with Stephens. Please go ahead hi.
Thanks, Good morning, everybody.
Right.
I wanted to drill down on deposit pricing and I think last quarter, you mentioned that.
Early in <unk>, you increase some of the posted rates across the network and obviously, we saw that in the <unk> results and some of the deposit pricing pressure.
I'll go back you mentioned incremental deposit pricing pressure in <unk> any notable changes in the deposit posted rates over the last few weeks or months.
Yes.
The end of December we increased our deposit a little bit again, but overall if you look at the.
Third or fourth quarter, our beta was overall on interest bearing deposits for the fourth quarter was like 30 basis points. So.
Right now we sit there we might increase a little bit rates on deposits, but we don't have a specific how much of an increase will be if you remember our last meeting Matt our last time, I said that probably.
We saw interest rates going up and really our money market rate was hardly add anything.
50 basis points of that and I mention that.
Be prepared at our net interest margin would probably go down five or six basis points, which you did because we did take our money market account all the way up to 2.25% and we also offered.
And one of the CD products. If he went for 22 months at three 5% on that so those are the two things that move I would say if we go up some more it would be.
Okay.
We see a quarter point increase in February and a quarter of a point in March.
Our model has it that we're going to double up 65 basis points out of that so what 60 times, 6%, 6% of 50. So that's another 30 basis points or something like that so you could see us steel raise.
In our modeling that that could go up to now and we saw something that really changed here with so much competition money. We're just rolling out of the bank or something we might have to make a difference we might have to go up more or something like that but again.
I don't think any of that changes our modeling we've never been a quarter to quarter player. We've been a long term player. Our net interest margin over time no matter. How you cut it is still real positive and the reason we raised rates last time is because we had core customers and we wanted to be more fair with them and give them more to them than even.
If that happened again, we would do that but again, it's still not going to changing the longer term outlook of the net interest margin. Yes, Matt. This is Kevin I'll, just add with the cash flows coming off the bond book.
And our loan to deposit ratio sub 70, we've got a little room to let that loan to deposit ratio drip dripped up and protect margin at least in the short run front, yes, I think we even improve your margin just if you can keep up your loans to just.
I'm, not even saying 10%.
You picked up.
Pick up 2% or three on.
A couple of billion dollars' worth of loans, you really improve your margin dramatically.
And sticking with the deposits I was encouraged that you're.
The average basis, your noninterest bearing deposits were pretty flat.
And <unk> from <unk> most of your competitors are seeing some pretty big pressure there any color on your depositors and maybe how they're they're unique versus some of your other public bank peers in Texas.
I guess, we see some of our depositors I think there was a lot of money that came into the banks with the helicopter money and.
People that had people that add investments everywhere else nobody was paying anything so.
You see some depositors.
I think it's really.
Some of your bigger deposit if you like I'll watch knows antitrust Committee meeting day before yesterday, and I saw where this customer but at $15 million with us in the bank, but he moved over to our Trust Department because our trust Department was hiring another higher rate from a Goldman Sachs or something like that so we are seeing some of that at the same time.
Yes.
Greater percentage of retail deposits more granularity drives some of that for us compared to some of our Texas peers anyhow, maybe more.
Commercial deposits with the small towns, where we have really big market shares and granular portfolios, where we're getting pressure or people to ask us to come off of our rate sheets tends to be from professionally managed money bigger company Scott.
<unk>.
<unk> 50, 60 $70 million in the bank, that's got a CFO , that's keeping track of things in and we can count those on our hands right. There's only a handful of those and they are willing to work with us that's kind of a we don't have to go all the way to the market.
That's usually a conversation between either IV, David Tim and myself.
Let's take these guys did to $2 50, or $2, 75% of our rate sheets during the quarter.
And thus far are anyhow.
Kept most of the money with us.
I think I think what you've just said Kevin is 100% correct.
I would say what I've said previously that we have a good relationship with our public fund customers I think thats the same with all of our deposit customers.
And they don't turn if they feel like they need a higher rate. They don't turn just to take money out of the bank.
And put it somewhere they can't do they tend to contact us first and we talk about it.
And while.
We do have to go up sometimes.
We typically don't have to go for and above.
At least that's been the case so far so.
I think.
There is upward pressure on deposit rates, but I don't see it getting out of hand.
I think it's relatively stable and I think we haven't accounted relationship with our customers where it can be managed.
Said this on the last call too in this rate environment.
From a guy who ran.
<unk> 90, 598% loan to deposit ratio bank ex the warehouse, so with warehouse and I was running 110.
I am glad to be sitting in this room.
Mhm.
Okay I appreciate all the color there guys and then just one more on loan growth.
It looks like the drivers of that for Q loan growth was from construction and single family.
Kevin you address the single family portfolio kind of driven by yields as far as kind of a factor in 2023, what about construction is that going to be the primary driver of the loan growth in 2023.
I think we're going to see it in construction, which is funding our projects that we've approved we got a big very large unfunded.
And funding up construction book.
Really good customers.
Underwritten for for rates being materially higher than they are now.
And we feel pretty good about that portfolio.
And I think we're going to continue to see some success this year on the C&I side.
Yes, some of our markets really have some unfunded loan commitments that are really strong right now our Houston market had probably over.
700, 700 million in Central Texas had demonstrated against three or 403, so if those hold up our our book it looks it looks pretty good but again anything can change with us in order to tell you something thats going to be this glorious because if you do go into a recession or something like that that can all change overall.
I think the guideline the guidance said.
Kevin gave a while ago that are really good.
Just to stick with really.
Okay. Thanks.
Thanks, guys.
Yes.
The next question comes from John R.
RBC capital markets. Please go ahead.
Good morning, everyone.
John .
I'm, probably not going to ask about deposit pricing.
Yeah.
I guess.
Okay.
How just stepping back how optimistic are you on the longer term margin you talked about.
Putting on loans of 6% to 8% and certainly securities yields are higher.
And youre, saying that youre not overly worried about deposit pricing.
What could this margin look like in 12 or 24 months.
That kind of increase in earning asset yields.
Gave you what the model is set in front of me, but somebody may may MSA.
Yes.
I think that I would take away from it it's not a question whether the net interest margin.
A lot of.
Big increase and it is just when it happens.
If we if.
If we stick with that we stick with not having to increase rates.
A whole lot more than where we're at right now you start seeing <unk> pretty good increases in six months.
12 months 24 months is huge on the other hand, if or something for some reason.
For some reason if.
Yes.
If the competition got back or we just saw.
The deposits going somewhere else that we have to change overnight that we changed the duration. When this net interest margin would increase but overall it.
It looks extremely positive it's just a matter of managing it really timing.
Timing wise I think the sooner the better.
The fed goes into pause mode. The sooner this happened when you got it.
Got an inversion factor here right now to me, that's a really big deal.
When you are 10 years planned three and a half and two year treasuries <unk> Theres, adding version factor at the same time so.
I don't want to be evasive, what you're asking John I guess, it's just it's really hard we're trying to manage through it ourselves, but again I believe the term.
Parking the Queen Mary out in the park.
Market quite a few times so.
We're probably in that process right now navigating khaki Mclean Mary right now.
Yeah.
It ties into my next question, but I agree I think a pause.
But part of that would be great for you guys.
And just to help us there.
This kind of goes back to the I guess the Queen Mary.
Parking lot I'm thinking of sugar land, but.
Yes.
You talked about the marks on M&A targets.
Brian .
What are you seeing there is this is this like SMB type issues.
Is it that bad yet or do you expect it to be like that where youre going to have bigger opportunities longer term, how big of an issue is that and what have you seen from some of these potential sellers whats the message.
I think the real challenge on LCI is if youre talking about a real large merger partner.
Mahler, one UK deal with and.
Really in some of the smaller ones that we've done we mark to market. What it is so the seller actually takes the hit on the on the loss I think it's really the bigger the bigger ones that we're really looking at and it's.
Okay, just one of those saying it's hard to do the deal. It is big enough to have that issue and if there its hard to pay what they wanted in the past I would say it like this.
And if you have to mark to market on a bigger deal. It just hurts your it hurt your capital your tangible capital ratio and it's not something that we're willing to go down on that much area seems to be some give and take naturally some give and take on the seller and the buyer I think in the future. If it's a bigger deal we earned back part isn't.
It's very calculable right.
Goodwill forever and those.
These bigger deals.
<unk> goodwill number that you don't get removed from the earnings standpoint, when you look at one of these deals when you model it out the earnings Rguest.
Mark everything to market are just phenomenal bizarre blip.
<unk> bond portfolio may be like us instead of waiting.
Two to three years to get all of that money back youre, marking to market right there and so the earnings for the first two or three year, just look phenomenal on a deal like that but the problem is really on the tangible capital ratio.
Okay. Okay.
Thanks for the time I appreciate it.
The next question comes from Bill car cash with Wolfe Research. Please go ahead.
Okay.
Thanks, Good morning, everyone.
I wanted to follow up on your comments around why your noninterest bearing deposit mix has held up materially better than many other banks I. Appreciate all the color that you gave I wanted to ask if you could also discuss how much of a role earnings credit adjustments.
In your relationship with some of your commercial customers and has that been entering into the discussion is more.
I'll start it off.
The earnings credit.
Again, we've been raising that I think we raised at 10 basis points. This morning, but again, we continue to raise that I think the granularity is really the reason for the noninterest bearing accounts, we don't have.
We don't have like 10, or 20% of our customers that can travel almost everything in the bank.
We have so many businesses and small businesses around the state.
Just because of that.
We're in metro areas, where in small communities and I think it's just extremely good granular and theres not one person they're not one persist one was the bank I guess you could say.
It's made up of a bunch of immigrants from everywhere.
All of that makes it more granular I think on the ECR.
We get rate request for offshoot rate requests.
Frequently the ECR doesn't come up all that frequent emmis that professionally manage larger corporation that Scott.
A bunch of money with us, which we can count on a couple of hands, where those CFO or something on us for ECR, but we haven't had to move nearly as much as you would think.
Okay.
That's very helpful.
I just haven't seen that much pressure at all on the ECR I can think of one client.
But it has been pretty adamant about.
Is keeping pace.
And.
That's the only phone call I've received.
A couple of months that one was friendly pressure it was probably I'm not sure if I K South way on this thing and we will we'll just call today in rice and.
I think specifically in that case, Jim and I have a conversation came up with a number went back to the CFO and he said I will take it where good talk.
Talk soon.
It was a very reasonable conversation.
Yes.
Makes a lot of sense that's super helpful color. Thank you.
Separately I wanted to circle back on.
The commentary about the expected improvement in NIM over the next several years as the bond portfolio re prices.
I wanted to ask if there's any way you consider putting on swaps to potentially lock in some of the benefit of higher the higher rate environment to the extent that we do start to think about the scenario, where the fed ends up cutting before you have the opportunity to fully see that repricing benefit show up.
Curious.
What your thoughts are around potentially putting on swaps or otherwise using.
Synthetic.
Isn't that.
Good.
Historically and again, thanks change all the time historically, when we would look at doing swaps.
By the time, you pay the premium to data swap and everything your profit was all gone.
<unk> business primarily.
Our business is primary.
Monitoring risk and taking risk and Thats, we made more money.
Taking risks.
There are periods of time in understanding what the risks are and painted to somebody else I guess that may change at some point in time, but again from what we've looked at it we've been able to combine and BD insurance Sky our sales sometime.
I've had a couple of theoretical questions.
Thought processes and discussions around that nothing thats caused us to pull the trigger on anything.
Yes.
If you look historically.
And thanks don't always repeat themselves, but historically.
We've been able to manage.
All types of environments without really go into derivatives.
All in way I think was unable to do that though Tim is because because of the makeup of the bank and the depositors theres. So many absolutely I think if you had so much of your money in high yielding money market Cds and <unk>.
Our customer base wasn't so granular as some mix I don't think we can do it but because we're so mix, we're able to do that I think.
The banks aren't in that and our loan to deposit ratio gives us room.
We are not under the pressure summer.
Okay.
That's really helpful. If I may squeeze in one last one.
In an environment, where rates do stay higher for longer as deferred proceeds with QE I'd love to hear David from you and the rest of the team how youre thinking about the risk that the mix of noninterest bearing deposits may not just go back to sort of the 2019 pre COVID-19 levels, but could potentially overshoot back towards even pre <unk>.
Levels of course back then everyone's noninterest bearing mix was much lower.
I don't know that ours was a whole lot lower what are we at 38% right now.
So to you Paul.
38 <unk>.
We were probably bearing probably before that we were probably averaging about 30%, 35% thats correct or something like that.
I don't see a tremendous amount of change again.
I just think it's a real granular deal so I really don't see that.
That happening.
It could lessen but.
I don't see it falling.
I think it will change I think that I think.
You're going to see depositors take money out sometimes out of checking accounts or even interest bearing checking accounts in <unk>.
Monarch answered it.
These rates stay where they are at they are going to go into Cds and stuff like that so I guess I do think youll see a mix where you had.
Less than 10% of your money in Cds.
I don't think we will get back to where it was at one point at one point we had.
What 20 or 30% of our money on ladies I don't know if wanted to add.
I don't think it would be unreasonable to say that you could have 20% of your money in Cds again, one day, if rates stay up where they are at right.
Well, we're at 7% now and that flow is critical.
It's because we're not paying anything thats the problem.
Okay.
That's the opportunity.
Fantastic. Thank you again for taking all my questions really appreciate it it's very helpful.
This concludes our question and answer session I would like to turn the conference back over to Charlotte Ritchie 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.
Yes.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
<unk>.
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Yeah.
Yes.
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Yes.
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