Q2 2023 Prosperity Bancshares Inc Earnings Call
Good day and welcome to the prosperity Bancshares second quarter 'twenty twenty-three 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 too.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Charlotte Rushee. Please go ahead.
Thank you good morning, ladies and gentlemen, and welcome to prosperity Bancshares' second quarter 2023 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, a general counsel of prosperity Bancshares and here with me today is David.
It's Aman senior Chairman and Chief Executive Officer.
H T. Jim manage junior Chairman I'll come back out Manav, Chief Financial Officer, Eddie Saturday Vice Chairman.
Kevin Hanigan, President and Chief operating Officer, Randy has start 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 awesome back Us Manav, who will review some of our recent financial statistics and Tim to man, that's who will discuss our lending activities, including asset quality. Finally, we will open the call up for questions.
Before we begin let me make the usual disclaimers certain of the matters discussed in this presentation may constitute forward looking statements for the purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the app.
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.
It 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 Charlie I would like to welcome and thank everyone listening to our second quarter 2023 conference call.
I'm pleased to announce that on May 1st 2023 prosperity completed the merger with burst bancshares of taxes and.
And its wholly owned subsidiary first capital Bank headquartered in Midland, Texas.
First capital Bank operated 16 full service banking offices in six different market.
And west North and Central Texas areas, including its main office in Midland and banking offices in Midland.
Amarillo Wichita falls.
Mark Burnett buyers Henrietta Dallas, Horseshoe Bay marble falls, and Brexit Berg, Texas.
For the second quarter of 2023, Prosperities net income was impacted by merger related charges excluding.
Excluding those charges our earnings remained strong but are lower than previous quarters.
Primarily because of the timing differences and that our cost of funds has increased faster than our earning assets have repriced.
The good news is that based on our models.
Our net interest margin, improving and a 12 months and 24 month time period to more normal levels. However, if rates increase more than we anticipated this could change.
Together with our model projections, our strong capital position, our liquidity earnings strong cost controls and sound asset quality, we believe opportunities remain for our continued growth and expansion.
I would like to welcome our new associates and thank our current associates associates for all the hard work and integrity. They show every day, taking care of our customers.
On a linked quarter basis net income was $86 9 million for the three months ending June 32023.
Paired with $124 7 million.
For the three months ended March 31 2023.
<unk> was primarily due to the merger.
Net income per diluted common share was <unk> 94 cents for the three months ending June 32023, compared with $1 37 for the three months ended March 31 2023.
During the second quarter of 2023 prosperity incurred a merger related provision for credit losses of $18 5 million and merger related expenses of $12 9 million.
Excluding these charges earnings per diluted common share was $1 21 for the second quarter of 2023.
Excluding the merger related provision and expenses net of tax the annualized return on average assets and average tangible common equity for the three months ended June 32023.
1.14% and $12 four 3%.
Prosperity had strong loan growth for the quarter loans at June 32023 were $21 6 billion, an increase of $2 3 billion or 12% from $19 3 billion at March 31 2003.
Excluding the loans from the first capital acquisition loans increased 729 million or three 7%.
15% annualized.
Excluding warehouse purchase program loans, and first capital loans, the organic loans increased 8% annualized.
Our deposits at June 32023, or 27, 4 billion, an increase of $376 7 million or one 4% compared with 27 billion at March 31 2023.
Excluding the deposits from the first capital acquisition.
<unk> decreased $1 1 billion during the quarter ended June 32023, compared with the quarter ended March 31 2023.
Historically, we generally experienced a decrease in deposits in the second quarter, primarily due to public fund accounts.
Using their funds. However, this year. We also saw a decrease in core deposits. However over the last three weeks the decrease in core deposits has stabilized.
We have not purchased any broker deposits to offset the deposit loss and we do not currently intend to do so our bankers are focused as our focus is on building core deposits.
Our non interest bearing deposits represented 37, 9% of our total deposits at period end June 32023.
Our nonperforming assets totaled $62 7 million or 18 basis points of quarterly average interest, earning assets at June 32023, compared with $22 million.
Or seven basis points of quarterly average interest, earning assets at June 32022, and $24 5 million or seven basis points of quarterly average interest earning assets at March 31 2023.
Over 20 million of the increase was due to the acquisition.
In prior transactions the amount of nonperforming assets that would be reflected as a nonperforming asset was the loan balance net of the mark on.
Under the new accounting rules, the full loan balance of all acquired nonperforming assets must be reflected regardless of the amount of the reserve.
In this case, we have accrued an approximate 70% reserve for these acquired nonperforming loans.
Additionally, there were two other loans totaling 14 million placed on non accrual status, one of which is under contract for sale.
After the merger.
Adjustments the allowance for credit losses on loans and off balance sheet credit exposures was $381 7 million at June 32023.
Compared with $312 million at March 31st 2023.
Further the allowance for credit losses on loans to total loans, excluding the warehouse purchase program loans increased to 1.68%.
Our merger with Lone Star State Bancshares is pending regulatory approvals and is expected to close during the third quarter of 2023, although delays could occur.
We continue to have conversations with other bankers considering opportunities, we believe that higher technology and staffing cost funding costs loan competition succession planning concerns and increased regulatory burden all point to continued consolidation.
We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long term future and will increase shareholder value.
Texas, and Oklahoma continue to shine as more people and more companies move to the states because of business friendly political structure and no state income tax.
<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 intend to continue to grow the company, both organically and through mergers and acquisitions I want to thank everyone involved in our company for helping to make it the success it has become.
Again for your support of our company, let me turn over our discussion to also 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 ended June 32023 was $236 5 million compared to $248 5 million for the same period in 2022, a decrease of $12 million or four 8%.
Our loan and security interest income increased $93 9 million and seven 9 million respectively. In the second quarter 2023, compared to the second quarter of 2022.
This was offset by an increase in interest expense of $114 7 million and a decrease in PPP loan fee income of $2 4 million.
During the second quarter 2023, we recognized $18 5 million of day, two accounting provision expense related to the first capital acquisition.
The net interest margin on a tax equivalent basis was 273% for the three months ended June 32023, compared to 297% for the same period in 2022 and $2, 93% for the quarter ended March 31 2023.
Excluding purchase accounting adjustments the net interest margin for the quarter ended June 32023 was two 7% compared to 297% for the same periods in 2022 and $2, 91% for the quarter ended March 31 2023.
The current quarter net interest margin was impacted by an increase in deposit rates at the end of the first quarter 2023, an increase in borrowings.
Noninterest income was $39 7 million for the three months ended June 32023, compared to $37 6 million for the same period in 2022 and $38 3 million for the quarter ended March 31 2023.
Noninterest expense for the three months ended June 30th 2023 was $145 9 million compared to $122 9 million for the same period in 2022 and $123 million for the quarter ended March 31023.
The linked quarter increase was primarily due to merger related expenses of $12 9 million and two months of first capital bank's operation.
For the third quarter 2023, we expect noninterest expense to be in the range of $134 million to $136 million, which includes the additional operating expenses from the first capital acquisition.
However, this projection excludes one time merger related cost estimated to be around $10 million to $12 million and additional operating expenses from the pending acquisition of Lone Star Bank.
Further the third quarter results will be impacted by day to accounting provision expense related to the expected Lonestar acquisition in the third quarter, which is estimated to be 10 to 13 million.
The efficiency ratio was 53, 2% for the three months ended June 32023.
<unk> 243, 1% for the same period in 2022 and 43, 7% for three months ended March 31 2023.
Excluding merger related expenses the efficiency ratio was 48, 5% for the three months ended June 32023.
The bond portfolio metrics at the 632023 showed a weighted average life of five three years and projected annual cash flows of approximately 2.17 billion and with that let me turn over the presentation to attempt to manage for some details on loans and asset quality so to manifest.
Thank you you also back.
Our nonperforming assets at quarter end June 32023.
<unk> totaled $62 million.
$727000.
Our 29 basis points of loans and other real estate.
Compared to $24 million $485000 or 13 basis points.
At March 31 2023.
This represents a $38 million $242000 increase in nonperforming assets.
$21 million.
$875000 of which came from first capital Bank of Texas.
The June 32023, nonperforming asset total.
It was made up of $59 million.
$467000 in loans.
$153000 in repossessed assets.
And $30 million $107000.
And other real estate.
Of the $62 million.
$727000 in nonperforming assets.
$8.294 million or energy credits.
$7 million $923000 of which are from first capital Bank of Texas.
Since June 32023.
$11 million 360, $360000 and nonperforming assets have been removed or are under contract to be sold this represents 18%.
As of quarter end nonperforming assets.
Yeah.
Net charge offs for the three months ended June 32023 were $16 million $65000.
Compared to net recoveries of $615000 for the quarter ended March 31 2023.
$14 million $976000 of the net charge offs were from one loan that lagging legacy, Texas Bank, adding this portfolio when the bank joined us.
$18 million and $540000 was added to the allowance for credit losses during the quarter ended June 32023.
This addition to the allowance resulted from the acquisition of first capital Bank of Texas.
Okay.
The average monthly new loan production for the quarter ended June 32023.
It was $565 million.
Up from $436 million from the prior quarter.
For a 30% increase.
Loans outstanding at June 32023 were approximately 21 $654 billion.
Compared to $19 334 billion at March 31, two.
2023.
This is a 12% increase on a linked quarter basis.
The June 32023 loan total is made up of 41% fixed rate loans.
29% floating rate and 30% variable rate.
I will now turn it over to Charlotte Rasche.
Thank you Tim at this time, we are prepared to answer your question Rocco can you. Please assist us with questions.
Absolutely if you would like to ask a question. Please press star and one on your telephone keypad.
Austin has already been addressed and you'd like to remove yourself from queue. Please press Star then two.
Today's first question comes from Michael Rose at Raymond James. Please go ahead.
Hey, good morning, guys. Thanks for excuse me thanks for taking my questions.
Maybe we could just good morning, maybe we could just start on the core margin.
Decline and what the expectations could be and then also Bakken excuse me. If you can give us some color on what you expect.
The accretion to be.
With.
With the first capital deal.
Yes going forward and then what the what the other deal will.
Add in terms of Accretable yield.
As we move forward. Thanks.
Yeah. If you look at talking about margin. This quarter, we were down 20 basis points, but it was the impact of several things as we discussed in.
The announced increase in deposit rate that we announced in our call during that first of all the earnings call impact that will have had full impact in the second quarter and we've had a little bit of a more borrowings than we had in the first quarter. So those two items impacted our margin because as we stated in our comments Mr was almost a four hour asked.
It takes time to reprice it takes time to reprice.
Our loan portfolio in Securities as you saw in our security we average yield on securities was 2.07% on average our loans were $5, 48%. So as time passes and those reprice then right now related to specific security, we're not buying any six.
So that's why the yields staying the same we're using the cash flow we have about $2 2 billion cash flow from the security with either using towards.
Putting on the loans or paying down on borrowings depending how it is in the second quarter, we had strong loan growth that which we used the funds towards loan growth, but if you just look at it Michael from that if we can reprice, our security with generating 2207, right now and putting our new loans, we're getting there.
About 8% I mean, that's almost 6% spread that would help us but again, it's taking a time and as we mentioned if you look at 12 months 24 months or 36 months those really look good but near term. Yes. We did have some compression on the NIM I know I kind of talk big picture, but that's how we see our.
Balance sheet says yeah, Michael I mean, it's I've always referred to as where like the Queen Mary in here.
It just takes time and our models have been pretty good our models. We've used for the last 30 years 35 years and they've always been I think very very close and very spot on and what our model show is that in a 12 month timeframe. Our net interest margin hits in around the 3% range, maybe a little bit better than that.
And then in a 24 month timeline when you go back to the $333 40.
Net interest margin, but again it just takes time.
That's just the situation that we're in right now not just.
The amount of time it takes to reprice our assets.
<unk>.
The accretable yield for the on the we expect about $3 million from the first capital bank on quarterly basis.
Okay. That's helpful and then.
Just following up on the final repricing I totally understand that but what about on the on the loan side I think if I look at your call report I think if I remember correctly at 12% of the logs are expected to reprice them into.
And the next year can you just give us a sense for if that's correct.
And then what the yields on the nearer term maturities are and assuming they would reprice somewhere where current yields are I would expect that you would.
See some pick up there I think it'd just be helpful. If you could provide some some greater color there. Thanks.
I'll, let somebody jump in but your 12% number seems low to me.
Straight straight off maturities as opposed to okay, because our because our average life and our portfolio is about three years, so that seems a little bit.
R.
All new loans, we're putting on are somewhere between 775 to eight and a half I think.
Kevin mentioned, the other day, we had one at 9%, but somewhere in that range.
Thats correct.
The basic run on that is about on the low end and 775 update.
Right, Yeah, and if you look at our cash flow, where we analyze our annual cash flow. So within the next 12 months, we're going to get about $5 billion.
Either paying down paying off a maturity of the loans and I think I'll call reports show a $6 billion, but there was some including loans that's going to have for variable rate, but the $5 billion of next 12 months should reprice in average rates you asked when we calculated was very close to what our rates showing our margin.
It's about a $5 50.
Okay. So there's some potential upside there okay great.
And then maybe just finally for me the loan growth has been pretty good I know you guys have talked about.
Previously.
Being a.
Not a lender of last resort, but certainly given some of the other competitors.
Have slowed down a little bit because there Paul in terms of loan to deposit ratios things like that it seems like that is good.
Any sense for kind of pipeline and just the healthier markets and then Kevin if you could just provide some comments on the warehouses given you've had some competitors kind of exit the space it looks like the.
Average balances were a little bit higher than what you guided to.
Sure Let me do the warehouse first Michael.
There have been a couple of competitors in the exited the space.
I think.
First reaction might be they would scramble to get capacity elsewhere, but what the shrinkage of the overall business.
There haven't been many requests for increases where we had common clients there might have been one or two but not to the extent you might otherwise think I think the increase in volume, which was nice for the quarter. I think we had indicated we thought on average the warehouse might run 808 50 for the quarter. It ran almost 900.
99.
So it was a little better than we thought but I would say that's more seasonal.
Yes.
May was Okay June was really good April was pretty soft.
And I would expect going forward.
July has been pretty good so far give you an idea through last night, we've averaged a $1 billion 62 in the warehouse. So so July has been pretty good to us.
Suspect August will also be pretty good and then September tends to weaken up a little bit with people returning to school and come back off vacations and.
And things moderate down a little bit so for Q3.
<unk>, Michael Im going to say 900 on average $950 million to $1 billion.
So we're a bit <unk>.
62, right now I think.
Net net we might give a little bit of that back and on the top side, maybe average 1 billion for the quarter.
So that covers the warehouse.
<unk> you want me to take loan growth loan growth has been strong if we go back to January when we talked about what we expected for the year, we said high single digits.
And we've been running high single digits for the first six months, but we caution that if we elected to begin selling.
Mortgages in the secondary market rather than holding them that number would go down we have made the decision that we made the decision probably a month ago, maybe a little longer than a month ago too.
To position ourselves to start selling some mortgages in the secondary market and take the gain on sales and that strictly just the right there they're coming on the books at.
Versus the gain on sale, we think the gain on sales a better proposition for US now and we've got other uses for the cash even if thats paying down borrowings.
Either way, it's good for the organization.
It takes a while to put in place.
I'd say, where we sit today is probably 30% of our origination volume is available to be sold so we're packaging that up and we'll begin the sales process, we had to get back in front of all of our secondary market participants and let them know we were back.
And re Greece those skills. So as a result of that decision I think loan growth will moderate a little bit for the remainder of the year.
We will feel some of that impact probably in the latter stages of Q3 and full effect of it in Q4 as we.
We prepare to sell more of those mortgages that we originate so going forward, maybe second half of the year.
What we said in January was if we did that we might grow at five six kind of mid single digits versus high So I think thats, probably a safe number for the second half of the year.
Yeah.
Thanks.
Guys I appreciate it.
Okay.
The rest of the loan portfolio in other words other than warehouse and mortgage.
Really interesting to see how reasonably steady that demand has been.
What has fallen off seems to be that very large expensive real estate projects, they're not quite what they were.
But the rest of the loan market seems to be reasonably steady and.
<unk> of higher interest rates and talk about recessions etcetera.
And I guess, we attribute that to the economy in Texas, and Oklahoma, which are two economies that David just mentioned here.
The maintain their steady growth so.
So far we see loan growth pretty doggone basin.
Thanks, guys I appreciate it.
Thank you and our next question today comes from Peter Winter.
Emerson. Please go ahead.
Hi, good morning.
I just wanted to follow up on Michael's question about.
The loans maturing.
Over the next 12 months, if we exclude the floating rate book.
Do you have a sense.
Much actually.
We will mature in the next 12 months in the fixed rate book and what those yields are.
Yeah, I think when we looked at it we looked at in general.
When I said that 5 billion is going to be maturing next 12 months and I think more than half going to first six months later and the right like when we calculate a radius will supply 556 average on those and I know that.
We have we've mentioned about 41% fixed mortgages, so I think.
I would say around 41 would be fixed that's going to be maturing.
Next 12 month.
I don't have any specific but we can get back with you on the specifics.
On the fixed.
Okay.
And.
It's likely that the fed will increase rates today and then on hold.
What's the outlook for the margin in the second half of the year do you see.
That youll need to do another kind of deposit rate increase.
We've talked about increasing rates right.
Right now probably the.
The highest that we pay on a money market account unless it's unless.
Theres always some bigger customers haven't negotiated type of deal, but for the most part we paid 3% and I'd say, if you have over $250000. The rest of our CD rates are pretty low.
I think that we have come up with a CD special rate for 7% that's I'm sorry, seven months, that's a thought.
5%. So we do have that you would think that a lot of money would have flown into that account.
It's probably about $1 billion I would've thought that more money would have gone into that but our cost of funds right now R. R.
Our total cost of funds when you add everything into it and that's federal Homelink home loan Bank borrowings Federal reserve borrowings.
Interest on deposits is 155% and when you look at just our total deposits our cost of funds are 94% and when you look at just the interest on deposits not including the federal home loan bank and and not including the noninterest bearing.
Deposits of 12, five one so our cost of funds are extremely long we have we have a good core.
<unk> core business I think I heard.
So that can call and talk to in a while ago about 85% of our business is consumer and accounts.
It probably on a percentage basis of deposits also that companies of about 53% of the dollar wise as to.
Consumer and 47 commercial and at the end of <unk>.
But the commercial represents about 15% of our accounts along with 47% of the deal. So our mix of money is good core we we haven't chased the money I mean, it could have been very easy for us.
The increase like some of the other banks 1 billion or $2 billion by going out and buying broker deposits. This quarter. We didn't do that are truly intent is to try to pay down federal home loan bank to a certain amount.
We talked about a while ago, reducing navy the amount of home loans that we are that we're that we're keeping on our books and selling so it's our goal to really reduce some of the higher cost money and our real focus is deposits and that is to go out where the last two years, all we really hammered.
Everybody's mind was loans loans loans were hammering right now our deposits deposits deposit. So as this thing turns around our goal was really to reduce some of our borrowings and to really go after our core core deposits.
So long it's a long answer around a question are you going to raise rates.
With a 25 basis points increase in I guess the answer is right now we're probably just would be watching it. It didn't say, we wouldn't but we feel like our deposits have stabilized over the last three weeks.
<unk>.
We don't see much change of $100 million.
May be lower at the end of the week and $100 million $50 million gain at the beginning of the week. So we really don't see a whole lot of changes. So are really a lot of it is just Japan as long as our deposit stabilized that's where we're at we've never really we've never really run after hot.
Higher cost money I think it's hard once you do to get out of it. So we really don't want to jump into that so that's kind of our story.
Okay.
And just based on that the outlook for the margin in the second half of the year.
Yeah.
I looked at the model and I looked at 12 months.
We will probably pull my notes out and see what it does in six months and 12 months, we do know that it does go more toward a 3% net interest margin I'd have to look and see in six months, what it is and the other thing it's kind of hard to answer specifically, we have the alone pendant Lone star acquisition coming in.
With their loans, so that's going to impact too, but like if we were saying 12 months definitely up I would say in six months flat.
And maybe to ask but it all depends on the lone star as well.
And Peter I know you asked me about the fixed versus variable I found my information. So we'll have a little bit more than 50% of fixed going to reprice out of $5 billion.
Fixed rate loans as well.
Right.
50% is a little bit.
Okay.
Yes.
Over the next 12 months, yes.
But out of 5 billion that we said that the cash flowing.
I found some numbers Peter on on the six months.
Our six month projection is to go to around again, this probably isn't exactly exactly accurate because of the.
Because this is flat that's no growth in deposits.
Our growth in loans deposits or anything like that this is just straight.
Is it it's about $2, 86% and six months.
And thats not including Lone stars No Thats too early Craig I'd say $2 60 to 90, and Lone star should improve and help us a little bit.
That's great.
Thanks, David.
Thank you and our next question today comes from Dave Rochester with Compass point. Please go ahead.
Hey, good morning, guys.
<unk>.
Just to make sure I heard you right. So its $2 86 in six months from now that includes the rate hike.
But no lone star is that right.
Let me see if that includes the rate hike I think it does.
It does not include launching it doesn't include Lone star, but it does include the rate hike.
Okay, just one hike and no cuts or anything like that that's the only change in fed funds.
And the mix of our six month ish, we're projecting we're projecting the prime to be eight and a half.
Yes.
Perhaps for the at least the next six months.
Gotcha and then so this time next year or maybe <unk> of next year back half of next year, you're thinking 3% plus on the margin is that right.
Yes, okay.
Great.
Appreciate that on the expenses real quick I appreciate all the guidance. There was first wondering if you thought that <unk> range. The 134 to 136. It was good for <unk> as well.
The Lone Star deal and then what are you guys expecting for the size of that one store expense base that you're going to brand.
So on the 134 136, I think thats a good run rate because we're going to have full three months of first capital bank when it and if you look at I think thats going to stay the same for the fourth quarter, I mean might change a little bit, but I think that's kind of the same guidance for the fourth quarter.
The first.
I'm sorry on Lone Star I know, we're going to have one time expenses.
But.
I think the Lonestar brings additional on a quarterly basis.
Around I think between $7 million to $10 million quarterly expenses before we'd get some savings.
Okay.
Great.
And then just one on capital how are you guys thinking about the buyback here.
The current stock price, which is a little bit higher than.
Where you were buying this past quarter and then just given your thoughts on M&A and growth going forwards.
Are you thinking this <unk> pace for buybacks is more what you would expect or could you accelerate that just given you've got a whole lot of excess capital here. Thanks.
Yes, what we have if you saw we have for the last two quarters above that how many of that 1 million share.
200000 shares so we definitely start to.
C G.
At the same time, we're always focused on we wanted to increase dividends and we still want to do some <unk>.
Mergers and acquisitions, so I think a lot of it depends on our our activity in M&A.
If we don't do the M&A youll, probably see more of the.
The buybacks, if youre seeing M&A that may not be as much.
Yes.
Okay, and then maybe just on M&A. What are you guys seeing in terms of conversation levels or activity in the market at this point I know some folks see purchase accounting marks as a big headwind you guys list a lot of reasons why banks are going to want to combine was curious.
The opportunity to say Youre looking at right now and how active is.
How are those banks.
Banks in conversations or whatnot that you're saying.
I think M&A activity has increased significantly.
Okay.
Okay, great. Thanks, guys.
Thank you. Thank you and our next question today comes from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Morning.
I just wanted to ask about credit quality, we saw some noise there in the quarter, but all the numbers are still very low and I know a lot of the noise related to acquisitions and you previously.
The acquired loans as well, but when you take a step back and look at credit quality for prosperity or are there any concerning trends or are you guys still pretty confident on where you stand with credit quality.
I would say we're confident.
Most of.
What deterioration you've seen.
As a result of loans that joined us.
And.
There may be a bit more of that to go.
Not an overwhelming total by any means but there might be a bit more.
We've actually been a little bit surprised.
How well the quality is held up once again, given the higher interest rates and our pressure that puts on borrowers.
But but we see it as steady right now we don't see really any red flags.
Yes Brady this.
As Kevin the loss, we took was on.
On a legacy deal that form restructured CRE portfolio that you are pretty familiar with.
It was in.
Office building located here in Dallas.
$32 million loan that lost several tenants.
Coupled within the quarter.
And we move to foreclose and sell that loan in a hurry figure in the first loss as the best loss.
We ran a process and settle on the buyer of the paid $17 million for it. So it was a $15 million loss.
And that structured CRE portfolio, which was at one point above $2 billion. In total is now down to $305 7 million. So it has come down materially.
The amount of office exposure left out of that portfolio is $126 $3 million. So it is not much left in terms of office exposure and the remaining office exposure that we do have is all current and paying so.
At this point it seems like an outlier that doesn't mean something can't go wrong somewhere, but if I was to just say if somebody said, where do you think the risk is in this $40 billion balance sheet.
I look right into that $126 $3 million worth of former legacy structured CRE portfolio, even though it's still performing well class B office is not a great place to be.
Fortunately, we've worked it down to the $126 million, but.
Outside of that and that portfolio is still doing just fine today, but I think thats, where the risk lies I think what Kevin incentives as real accurate not also say that.
Again this this loan never even hit the past is sheet or.
It's never fast food network capacity or even on our deal and I think that.
Probably some other banks would have taken it and held out and maybe try to sell it over a year or two years.
We're just not like that we ticket we sold it we got what we thought we could get for it and we usually try to get all of our non accruals are nonperforming off of the books just like.
We saw a $62 million in nonperforming this time increased significantly over $20 million came from.
From first capital and we intend to get that off but the other two loans.
At the $18 million that we talked about.
Probably we already have a contract on it on a deal that's going to take out most of that majority of the two thirds of that we already have a contract on that so we sell it and get out of it and by the way.
It won't be that kind of loss.
This two orange.
But we did have nowhere near that kind of losses as David said. This was an intra quarter event. This went from losing enough tenants to two.
To us foreclosing, and that's running a process and getting it moved off the books and within a 90 day period. It inside of the 90 day period of time.
Alright, that's helpful. And then you know lone star has been pending regulatory approval for a while I think in the press release, you all talk about hoping to close that this quarter and through Q1, what's been the holdup with getting regulatory approval for that deal.
Up until this point it really had been held up at the Department of Justice, primarily it was based on a oh.
One of them banking centers or bank branch banks that.
They felt like that.
Didn't know if they are willing to let us keep or not this was really a branch bank in autonomy. How many nine 9000, so we thought that for the longest time and finally, two weeks ago or a week ago. Finally got clearance on that that the Doj, let us go through with it and so really from that point was at the FDA.
I see.
Our contacts with the FDIC, we felt that.
We really will get it done in just a few days, it's taken longer than that because now most everything even though the size of it and the small size of it. It still has to go to Washington, I don't know maybe they were dealing with the Pac West deal last night and the week before I don't know that.
We're really hoping to get it we should get it we don't know we don't know of anything that why it shouldnt be let me say that.
Yes.
Okay, great. Thanks, guys.
Mhm.
Thank you and our next question comes from Manav Gupta with Morgan Stanley . Please go ahead.
Hi, good morning.
Morning.
Yes.
I apologize if I missed it but can you talk about what your models assume four.
No deposit beta as well as the mix of fan IV deposits.
Our beta for the.
Interest bearing deposits 36 basis points, that's what we use in the model and but if you look at our deposit over this interest rate cycle on interest bearing deposits of 27 basis points. So we're running below the model that way.
I would have for the deposits interest bearing deposit betas.
Got it Andy and it'd be a mix.
Non interest bearing.
I think it's the same.
I don't think we show a decrease in it probably on a model now it's just flat to where it isn't in fact really our noninterest bearing as a percentage of your deposits has really gone up this quarter.
There hasn't it.
First quarter, Yeah went up 37, 9%, so actually our noninterest bearing has really held up better than most of our other accounts.
Alright perfect.
And then maybe just to approach some of the prior questions in a different way.
On deposit beta as I think you've always had a significantly lower deposit beta than your peers.
<unk>.
Maybe you could talk about if rates stay higher for longer what do you think about your ability to keep that spread relative to your peers or.
As rates stayed higher for longer and loan growth continues do you see that spreads compressing.
I don't think so I mean, this which we've been pretty consistent if anything in our models really after 12 months or after 24 months show really some crazy stuff.
Some really high net interest margins I would say if that becomes true.
We may give more of that back to the customer and so it just that basically from what we're seeing in the and the time horizons at 12 and 24 months.
Much think we are where we are yeah, I mean, otherwise paying it as we reprice, our loans reprice official and repriced, our bond portfolio at $13 billion generating 2.07%.
Would help us from the ASP.
Assets of interest, earning assets. So we could increase our cost of deposits, but save the margin protect the margin.
Timing issue for us and as we improve on the asset size, what could be a little bit on that.
The deposit side, but still protect the margin right, we need a fed pause.
Got it got it that makes sense and.
Maybe last question just as we think about the Securities book.
Should we think about that yield remaining flat as you wrap up with sort of securities into loans or has it as more of the back book sort of runs off at low rates should we still see that weighted average rate on those securities rise in the coming quarters.
Yeah, I think if you look at security, we're not buying any new securities. So we're not repricing those securities to higher yield over what we've discussed that we're using that cash flow first of all getting higher yielding loans or if we have any of the funds are available we're going to be paying down both of them very accretive to the net.
And the margin from our standpoint, so from the rate on the.
Security I don't think it's going to have significant change what we see right now.
Got it all right perfect.
All of the repricing when you look at what our yield is on securities and look at what our yield is in loans and you look at what the yield.
What we're getting today you can see how significant that is it just takes us time to turn this ship around like the yeah, I mean, the spread with getting on every dollar we get from the in the security on the loans, we're getting 556, 5% spread on if we're putting on new loans.
Pay your federal home loan Bank card I think we're getting there you're saving over 3% right every three 5%.
Yes.
Great. Thank you.
Thank you and our next question comes from Brandon King I Truest. Please go ahead.
Hey, good morning.
Good morning, Brandon.
Good morning.
So yes could you give us some commentary on what you're seeing in regards to prepayments in your CRE book.
In fact with this interest rate environment.
We mitigate interest rate environment, the average life of loans could be extended just given the dynamics around that.
Well I think thats right.
Were not seeing excessive prepayments on loans.
Yes, I think what we'll continue to see us multifamily deals that stabilize.
Because of the inversion of the curve can go out to the agencies and get a lower.
Longer term fixed rate loan.
Then they might have had from our floating rate perspective. So we'll continue to see some pay down there, but Tim is absolutely right as we look across the entire book, it's a slowdown of the more traditional kind of kind of a deals. These big multifamily deals have an option to go out and walk up now.
Non recourse.
Debt off the inverted curve.
Correct.
Still think once all of these rates rising.
It always it always comes back around they're always becomes competition and everybody starts trying to undercut you in trying to get better rates from different maybe even non non banks and so I think youll see that in the future as rates stabilize and maybe even consider coming down next year.
I don't think rates are going to go down.
As much as everybody else. Thanks, Youre going to go down I think rates are going to stay higher for longer. However, there is always that competition and things always turnaround. It's just that's just the way it is.
Got it and do you think that potentially limits the benefit of the fixed rate repricing.
Given how we have the contractual maturities in place biopsy assume a certain weighted average life of those loans, but that dynamic kind of limit that.
<unk> at least over the next year.
Now the maturities are still the maturities and it's an opportunity for a rate increase.
Thanks, So yes.
Okay, Okay, and then going back to the NIM guidance I believe you said 262 9 million six months.
What are you assuming as far as paying down borrowings within that mass.
I think in our guidance.
Our borrowing base flat in our model.
Yeah.
Okay. So no benefit there is kind of where you're thinking about it right.
Yes.
Okay.
That's all I had thanks for taking my questions.
Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Charlotte Rajeev for 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.
Thank you. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.