Q3 2023 Prosperity Bancshares Inc Earnings Call
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Okay.
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Hello, and welcome to the prosperity Bancshares third quarter 2023 earnings conference call, all participants will be in listen only mode.
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Please note today's event is being recorded.
I would now like to turn the conference over to Charlotte Rashi. Please go ahead.
Thank you good morning, ladies and gentlemen, and welcome to prosperity Bancshares' third quarter 2023 earnings Conference call.
This call is being broadcast on our website and will be available for replay for the next few weeks and Charlotte Rasche Executive Vice President and General counsel of prosperity Bancshares and here with me today is David Zalman.
And your chairman and Chief Executive Officer.
Gee, Tim to manage junior Chairman also back US Manav, 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 backed out Manav, who will review some of our recent financial statistics, and Tim <unk>, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions.
Before we begin let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward looking statements for purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the actual results or performance of prosperity bancshares to be.
Different from future results or performance expressed or implied by such forward looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in our filings with the securities and Exchange Commission, including forms 10-K, and 10-Q 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.
I'm pleased to announce that the board of directors approved raising the fourth quarter 2023 dividend to <unk> 56 cents per share from 55 cents per share that was paid in the prior four quarters the.
The increase reflects the continued confidence the board has in our company and our markets.
Compounded annual growth rate in dividends declared in 2003 to 2023 was 11, 5%.
We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases, while also continuing to grow our capital.
Our tangible capital increased $243 million from September 32022 to September 32023.
This is the amount prosperity retained after paying $203 million in dividends and repurchasing $72 million of our common stock during this period, reflecting prosperity stable earnings.
Prosperity reported net income of $112 million for the quarter ended September 32023.
Paired with $135 million for the same period in 2022.
Our net income per diluted common share was $1.20 for the quarter ended September 32023, compared with $1 49 for the same period in 2022.
<unk> earnings were primarily impacted by a lower lower than normal net interest margin.
Although our net interest margin is lower than we would like the good news is that based on our models. We show our net interest margin improving and at 12 months and 24 month time period to our more normal levels as our assets repriced to market rates. However, if rates increase more than we anticipate.
This could change.
The net interest margin on a tax equivalent basis was $2 seven 2% for the three months ended September 32023.
Stable when compared with $2 $2 73 for the three months ended June 32023.
Prosperity continues to exhibit solid operating metrics with annualized return on tangible equity at $12 five 8%.
Assets of 1.13% for the third quarter of 2023.
Our loans were $21 4 billion at September 32023, a decrease of $221 million or 1% from the 21 7 billion at June 32023.
Our loans increased 2.9 billion or 15, 8% compared with $18 5 billion on September 32022.
Excluding the loans acquired in the first capital acquisition.
And new production by the acquired lending operation since May one 2023, and the warehouse purchase program loans.
As of September 32023 grew $111 million or two 3% annualized compared with June 32023, and grew $1 4 billion or eight 2% compared with September 32.
'twenty two.
Interest rates have continued to increase and there are signs of the economy slowing and low non growth moderating as intended by the federal reserve's actions.
Deposits were $27 3 billion on September 32023, a decrease of $68 million or two basis points compared with $27 4 billion on June 32023.
Positive decreased 2 billion or six 8% compared with $29 3 billion.
On September 32022, primarily due to a decrease in business deposits and public fund deposits, partially offset by an increase in merger acquired deposits.
After a more challenging time in the first quarter of the year due to large bank failures outside of Prosperities markets, our deposits stabilized during the third quarter total deposits, excluding public bonds increased $216 million during the quarter importantly.
This was achieved without the purchase of any broker deposits are non interest bearing deposits represented a strong 37, 6% of total deposits.
Our nonperforming assets totaled $69 million or 20 basis points of quarterly average interest, earning assets on September 32023, compared with 62 million or 18 basis points of quarterly average interest earning assets on June 32002.
'twenty, three and $19 9 million or six basis points of quarterly average interest earning assets on September 32022.
Increased during 2023 was primarily due to the merger and an increase in other real estate.
Our asset quality remains sound and the allowance for credit losses on loans and off balance sheet credit exposure was 388 million on September 32023.
As mentioned in our last conference call. The accounting for acquired loans has changed under the new accounting rules. The pool of loan balance of each acquired loan is booked at closing and reserve as needed is set aside.
Our nonperforming assets include approximately $23 $7 million from the first capital acquisition the bank appropriately reserved for these loans at closing based on data. They want a county. However, we are now doing a deeper dive into the collateral values and liquidation alter.
Turning to us for these loans if appropriate charged down to the allowance for credit losses may occur in the next several quarters again these loans are fully reserved for.
Our.
Vision of Lonestar Bancshares is pending the receipt of regulatory approvals, we are committed to the transaction and continue to work together with lone star in anticipation of the closing.
The parties have extended the termination date in the merger agreement to March 31, 2024 and are prepared to complete the transaction as soon as possible following receipt of regulatory approval.
Our operational conversion date is set for second quarter 2024, we continue to have conversations with bankers considering opportunities, we believe that higher technology costs salary increases loan competition funding cost.
<unk> planning concerns and increased regulatory burden.
The continued consolidation.
The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulation. This combined with people moving to the states requires additional housing and infrastructure a driver for loans and increased business opportunities are there.
Although there are signs of the economy slowing and loan growth moderating I believe our bank is located in two of the best state, we can be for future growth and continued prosperity.
Thanks 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 hostile back. Thank you. Mr. Zalman. Good morning, everyone net interest income before provision for credit losses for the three months ended September <unk>.
It is 2023 was $239 5 million compared to $236 5 million for the quarter ended June 32023, an increase of $3 1 million or one 3% and compared to $260 7 million for the same period in two <unk>.
22, a decrease of $21 2 million or eight 1%.
The net interest margin on a tax equivalent basis was 272% for the three months ended September 32023, compared to $2 seven 3% for the quarter ended June 32023, and three point and one 1% for the same period in 2022.
Period end borrowings decreased $550 million during the third quarter 2023, primarily funded by cash flows from the bond portfolio.
Noninterest income was $38 7 million for the three months ended September 32023, compared to $39 7 million for the quarter ended June 32023, and $34 7 million for the same period in 2022.
Noninterest expense for the three months ended September 32023 was $135 7 million compared to $145 9 million for the quarter ended June 32023, and $122 2 million for the same period in 2022.
The linked quarter decrease was primarily due to the merger related expenses in the second quarter relates to the first capital Bank acquisition.
For the fourth quarter of 2023, we expect noninterest expense to be in the range of $134 million to $136 million.
The efficiency ratio was 48, 7% for the three months ended September 32023, compared to 53, 2% for the quarter ended June 32023, and 41, 4% for the same period in 2022.
The bond portfolio metrics at 932023 showed a weighted average life of five two years and projected annual cash flows of approximately $2 1 billion.
And with that let me turn over the presentation to attempt to manage for some details on loans and asset quality.
Okay.
Thank you also back.
Our nonperforming assets at quarter end September 30.
2023.
Totaled $69 million $481000.
Our 32 basis points.
Of loans and other real estate.
Compared to $62 million $727000 or 29 basis points at June 32023.
This represents a $6 million $754000 increase.
The September 32023 <unk>.
Nonperforming asset total was comprised of $60 million.
$126000 in loans.
$35000 in repossessed assets.
And $9 million $320000.
And other real estate.
Net charge offs for the three months ended September 32.
2023.
$3 million $408000.
Impaired to net charge offs of $16.065 million for the quarter ended June 30th 2023.
This is a 79% decline on a linked quarter basis.
There was no addition to the allowance for credit losses during the quarter ended September 32023.
Compared to an $18 million $540000 addition to the allowance during the quarter ended June 32023 that resulted from the acquisition of first capital Bank of Texas.
No dollars were taken into income from the allowance during the quarter ended September 32023.
The average monthly new loan production for the quarter ended September 32023 was.
Was $398 million.
Compared to $565 million for the quarter ended June 32023.
Loans outstanding at September 32023, or approximately $21 $433 billion compared to 21.654 billion at June 32023.
As a 1% decrease on a linked quarter basis.
The September 32023 loan total is made up of 42% fixed rate loans.
27% floating rate loans and.
And 31% variable rate loans.
I'll now turn it over to Charlotte Rasche.
Thank you Tim at this time, we are prepared to answer your questions. Our call operator, MJ will help us with questions.
Thank you.
We'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause briefly to assemble our roster.
Today's first question comes from Brady Gailey with K B W. Please go ahead.
Okay. Thank you and good morning.
Good morning, Randy.
Well I know in the past we've talked about the dynamic of the asset repricing pushing the net interest margin higher.
Previously you talked about a 3% margin within a year and a $3 30 to $3 40 margin what's that a couple of years is that still the right way to frame the amount of NIM upside you are seeing going forward.
Every time I answer that question Brady I get looks in the room for my General counsel that I'm supposed to be cautious on this all the time, but the answer is yes, I mean, our numbers are still showing.
Again, we're showing.
We feel like we've kind of bottomed out where we're at we feel there'll be a decent increase in six months 12 months and 24 months based on some of the numbers you just mentioned and Thats in our models. We just ran our models again has a $930 23, and we're still showing that right now.
Okay.
You can get there tomorrow, if you restructured the bond book, that's such a big opportunity and you guys clearly have the excess capital to consider doing something like that.
Although it has gotten more costly just with the tick up in rates that we've seen but it also would be more EPS accretive if you pull the triggers maybe just updated thoughts on how youre thinking about a possible bond restructuring or just a partial bond restructure.
Well, we've looked at it I mean.
Again, you either how the bonds for three years and you get your money back or you sell them right now and take your loss.
And you'll get your money back through an accounting accretion, but to me. That's just kind of Voodoo accounting really it would it would take our earnings from <unk>.
Where we're at next year at 500 to maybe 600 and something million dollars of $650 million.
It would just propel the earnings but again those earnings would be propelled primarily from accretion numbers in more so than that.
Under accounting you have to you have to put your bonds either on available for sale or HTM and since this bank has began.
Again, just because we were such an acquisitive bank, we always have to watch our capital and so we never could take the chances when we didn't have that much capital to have a lot of big changes in our in our capital accounts. So we pretty much put probably 90% plus of all of our securities in HTM. So you really couldnt do it from an accounting.
Standpoint, and if you did do it once you did it.
It would change everything you Couldnt go back to the HTM. So.
Yes, that's correct and I would just add to his question Ray you said, partially I know if you have to take the whole portfolio you have to do the 100%. So that decision would have to go and you want to take the whole portfolio. Not then I think at that point with the duration being for it then we can get all of the cash within three or four years, we determined just leave it and let it.
Reprice and use that cash flows while paying off our borrowings.
Yeah.
Okay and then finally for me just a quick one on the provision.
Looks like you booked.
About 3 million of net charge offs you built the reserve by about 6 million.
Would've thought the provision would have been like nine or $10 million, but its zero. So there must be something going on there.
Yeah on the provision Brady and we did put additional about $10 million for STB as we mentioned in our.
Comments earlier, we will kind of diving a little bit and we had to put an additional 10 million that as it relates to FCB, but the charge off of $3 million plus some of them were related to overdrafts and loans. So it's only $3 million idling side. It is crazy amount of a lot of times. It goes through the through that category, but Bobby.
The majority a lot of that time to just overdrafts and stuff like that combination of investment last year, and 3 million being not material. We determined we don't need to probably isn't anything this quarter and our model shows that we have.
Appropriately have the allowance balance we had $388 million in allowance for credit losses, and $60 million in nonperforming. So I'd say, we're covered pretty good probably.
That's pretty strong alright, great.
I will say that a lot of that money I mean, some of that money was first capital reserves I mean, we put again I don't know the exact number that $85 million or so in reserves for first cap, including everything is about $95 million of $95 million, including them.
And no matter, how you look at it $388 million, even if we decided to charge off charge off but <unk>.
We look at some of those things I think you still have $388 million and $60 million still a very strong position.
Great. Thank you.
The next question comes from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning nice quarter.
Morning, Dave.
I appreciate the update on the longer term NIM outlook and it's good to hear the NIM has bottomed here and that makes sense just given the repricing opportunity you guys have on the asset side.
What are you guys expecting at this point for NIM more near term anyway to put some parameters around that expansion that you're expecting here in <unk> and into next year.
Yeah. If you look at the I would say for the fourth quarter, we would have probably a moderate increase as we based on our what we'll look at our balance sheet. We see third quarter. We believe is the bottom on the NIM perspective. So now we're going to as we continue to optimize our balance sheet from the standpoint, we using our bond portfolio.
Cash flow to pay off higher borrowing as you saw we paid off $550 million right now.
Third quarter. So we'll continue to do that optimization on balance sheet that will be NIM accretive for us and as we continue to grow the loans that will reprice over time that should help us from that standpoint, So I would say a moderate increase in the fourth quarter with that although what I would describe right now with balance sheet optimization.
And then <unk> is normally a pretty good quarter for deposit growth right. I mean, it's normally see some seasonal strength there that should help pay down some more of those borrowings potentially.
So we usually see the public fund growing the fourth quarter as the because of the tax payment. This usually end of the fourth quarter or like in the end of December and January but I think more of the impact we'll see in the first quarter and what would also seeing that public funds, but not probably not keep that are deposit as longer buy used.
Because they are moving to some taxable or other areas, but we will see the benefit of it in the fourth quarter, but I don't know how much of that.
Significantly we will see but what we usually see about four to 500 million deposit to increase due to the tax collections from the public funds.
But again, just cautionary lap that money with a lot of times, but now that they can get 5% to 6%.
They may move it quicker to growth I think the timing of that keeping is probably very sure there'll be a once a color on so they have been moving out to the higher yielding.
Excellent.
And that expansion, you're talking about a <unk> isn't dependent on on that kind of growth. It sounds like that's more from the asset repricing and stabilization of the core deposit side that.
That's correct and especially what we said you know in bond portfolio about two and a half or $2 1 billion cash flow with paying off.
And if you look at our loan portfolio, we have about 5 billion of cash flow from the loan portfolio, that's going to reprice.
But you have to keep in mind on the loan portfolio without a $5 billion about 65% is fixed to variable loans that probably at five and five 5%, yielding so they're going to replace the eight in eight and a half right now and but the notified.
Great and you are seeing new loan yields are still in that eight to eight 5% range.
That's why we're seeing it.
Okay.
Great maybe just one more on capital.
Youre just about back to 50% CET one right now.
Wondering what your thoughts were on the buyback here with the stock near 50. It seems like you've got a lot of excess capital here that you can deploy I know some of that will go to the deal closing coming up but.
15% gives you a lot of flexibility there. So just wanted to get your updated thoughts.
We do we do have a lot of capital.
A lot of People's questioning why we're not doing more at the same time, there's a lot going on I think that.
Again, I've always said that we like we like to use our capital for primarily mergers and acquisitions and also increasing dividends at the same time, we truly are building capital you can see that even not one of our best years, we still retain quite a bit even after dividends and in share repurchases, but.
One thing that we're looking at right now is with the regular regulatory agencies looking on what their new requirements are we've been hesitant I mean, right now would be like <unk> like you mentioned it couldnt be a better time they'd be buying our stock at least in my opinion. This is one of the cheapest things I've ever seen trading under 10.
Times next year's earnings so it would be a time I think right now we're just we're really trying to see from a regulatory standpoint, what theyre going to what their new requirements are going to be how they're going to consider.
Losses in the bond portfolio as they consider that part of your capital is not part of your capital. However are as soon as an HTM right now it doesn't seem like it's on the block for anything any change on that it does look like if you gave your bonds.
Per sale that is going to be part of your capital calculation at least right now things could change, but we're just waiting to see that and we do think there's going to be a number of opportunities out there right now with just with everything happening so.
Having excess funds is not a bad place to be it's a high class problem right now so.
Okay, great great.
Great. Thanks, guys.
Mhm.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, Thanks for taking my questions.
<unk> been asked and answered but.
Kevin while I have you on here.
Comment on the warehouse your your guidance last quarter was pretty much spot on and just wondering CAGR Crystal ball is looking as we think about that business over the next 90.
90 days ago, we said, we'd probably average about $9 50, we did just a shade better than that.
Michael through last night.
The average is.
Down from that $9 72 for the quarter, it's down to 816.
So it's dropped off pretty significantly.
We closed yesterday at $740 million almost exactly.
Out in the warehouse, so I think for the quarter.
Not unlike two unlike last years fourth and first quarter.
We're probably looking more in the neighborhood of $725 million on average so Amy Amy.
<unk>.
Kind of a shortfall, we would have gotten out of the public funds in terms of excess liquidity coming into the fourth quarter.
I have a couple of hundred million here.
Come off the warehouse that we all use.
If there is loan production will go to loan production, if there's not we'll go to.
Pay down.
Federal home loan bank borrowings so.
It'll be down we've got some uses for it.
Helpful. And then maybe just on the on the production you guys have had pretty decent growth.
This year I think some of the dislocations.
Your Texas markets, especially for some of your competitors, but it seems like some of those competitors are starting to get a little bit more aggressive on growth and just wanted to.
Let's see where that leaves you guys and should we can yes.
Consider kind of a mid single digit growth rate for next year kind of what you've guided to for this year. Thanks.
Yeah, I think Michael I would tell your low to mid and off from what I've said was mid last quarter.
And that.
Just by recapping part of that is our decision to sell mortgages rather than through a portfolio of them.
And that's brought us into that mid range.
We've seen some relatively weaker loan demand I'd say over the last month or so.
And there's a lot of things that don't pencil out real well.
These rates or it takes so much equity into a deal.
It's just harder to get deals done so.
Look if it's on the lower side that will be more money.
Used to pay down the borrowings.
The borrowings and if it's on the mid side that would be great. So just looking forward I would say.
Low to mid.
And a lot of it has.
When we were just fluctuate deposits, we were looking at all kinds of loans, whether people had relationships with us or didn't have relationships with us and now with deposits not being in the banks and everybody's trying to reduce our borrowings we ourselves kind of restricted loans a lot because some of them that we would normally have made.
Six months ago.
We won't we don't like today, because we're not getting a complete deposit relationships. So some of this is by our own making too. So I guess, we were wanted in spectrum. We went to another end of the spectrum and I guess, where are we finally have a desk setups, where we all Linda there was a lot of pluses and minuses right. There's a lot of people.
Really restricted.
Basically a shutdown, which you think great opportunity.
And I think we're in that period, where the markets adjusting and borrowers are getting used to having to pay up.
And our requirement of a while.
While you might have done this historically with bank X Y Z. If you are coming here you need to move your deposits from xyz to us or we're not interested so we are.
We're going through that adjustment period, as we speak and if people are willing to pay up and move us deposits will be therefore.
I guess total yesterday that one of the lenders.
<unk> said that the.
<unk>.
One of the deals that they are in two or three of the banks that are participating in their line of credit.
Not willing to participate anymore and ask it we would participate.
I ask what the rate was and it was still.
I think sulphur plus anyway. The total right was about seven five and this guy has always wanted to good customers have always wanted to do business with us, but we've always been about half a point short so the lender as said, we'd really like to come back in like us to do it and he says.
Joe is about a half a point higher and that's why we still are so.
So if they if.
If we do see the pricing where it becomes better and that we may take more risk costs. So I think at the same time.
Paul We got it great color and maybe just one final one for me David you threw out a lot of.
Potential drivers for M&A as we as we move forward.
Just broadly speaking how do you think this all plays out and then if you could just give us kind of a quick update on the lone star deal and maybe what's holding it up I know you talked about it last quarter I just wanted to see if anything has changed thanks.
I was hoping if some of the FDIC people were on the line maybe they could answer that about approval on lone star, but we.
We are still working with the regulators to get approval on the Lone Star deal I'm, hoping it's just at this time.
I can say is times are a lot different than where they were a year ago, but we're still completely committed to it we're trying to get it done and hopefully we can get that thing done and approved hopefully there'll be some more opportunities out there that we're looking at we'd like to move forward with those also.
Okay.
Great. Thanks for taking my questions.
Our next question comes from Peter Winter with D. A Davidson. Please go ahead.
Thank you.
Tim I just want to go back to the comment about selling resi mortgages, you had talked about that.
Last quarter, but rather the mortgage was a pretty strong quarter for loan growth.
This quarter and I'm, just wondering is that kind of happened towards the end of the quarter and it all accelerate from here in terms of originate and sell.
I think a lot of that.
Growth that you're saying what.
It's already in the pipeline.
It's not unusual to take.
60 to 90 days from the date of application.
To get into alone actually closed and funded.
So a lot of what you've seen for this quarter was really a carryover.
From the prior quarter.
And I think you'll see more moderation going forward.
If that makes sense.
Yes.
Thank you.
And then.
Can I just ask about what youre seeing in terms of credit quality within commercial real estate, particularly multifamily and office.
A number of articles.
Talking about office pressure, particularly in the Texas market.
We have seen very few problems up to this point in time.
Really almost none.
And I think.
There are a few obvious reasons for that.
If you take office first.
We typically have done owner occupied as opposed to non owner occupied.
And the projects that we've been involved in had been.
Reasonably small.
Two to three storey type facilities.
So we're really not in the large <unk>.
Non owner occupied office market.
Really never have been.
So that has insulated us somewhat from the problems that you've referred to.
And office.
And.
In terms of multifamily we've always tried to be very careful obviously with any loan, but certainly with multifamily.
And I think our way of.
Waiting through those opportunities and checking them out.
Has benefited us so far.
The developers that we've done business with have got pretty decent projects and are holding their own.
There continues to be growth in our markets in terms of population.
So that certainly hasnt hurt the.
Multifamily piece of it.
So I think it's stable right now.
And I don't see any reason to think that thats going to change overnight.
Obviously from a macro standpoint.
Out there in the world So to speak there are a lot of disconcerting things.
Most of those really don't.
Directly affect the markets that we're in in Texas and Oklahoma.
And we just don't see a big change in that anytime soon.
So we think it's pretty stable going forward.
Okay, Great and then just one.
And last question just.
Credit obviously is very strong yeah, nice reserve coverage to nonperforming loans, but is there.
How much longer can you take a zero provision expense do you think.
Well I'll make a quick comment.
A lot of that reserve is based on what we call environmental factors.
And I mentioned it in just a minute ago and what I was saying there is some weakness out there in the world.
There are some things to be concerned about.
And.
Do those end up affecting us more than they have today.
Who knows but that possibility is there.
You asked about and I mentioned the office market, that's a pretty good example.
If you look at the statistics.
They're not.
They're not good.
And does that tend to creep into other segments.
No.
We're trying to be prepared for the future in a reasonable way.
And we think that per our models and all of our calculations, we think where we are right now all of the reserve is appropriate.
And I wouldn't see any significant change anytime real soon on that so we're not expecting to take money out of the reserve, we don't see any huge additions to the reserve either.
Based on what we see right now so I think we feel comfortable with where we are and we think it's steady as it goes for a little while.
I think most banks Peter probably.
Probably there's not many banks, probably carrying a remodel reserve like us at one 7% reserve.
Compared to the losses that we've had historically, so I think tend to be bringing a lot to the environmental factors probably.
There's probably a big piece there is a larger piece in our reserves for the environmental factors, So where a number of banks a year or two ago, where we're pulling money out of the reserve and putting back into income we never did that we've left that money. So we really don't like to play with that.
Taking money and putting money out at different times, we'd like to be pretty consistent. So we do feel we're well reserved and we shouldnt I don't see putting money in.
Yes.
Unless something catastrophic happens I don't see us putting money in for the next 12 months such as me.
Great. Thanks, David.
The next question comes from Brandon <unk> with <unk> Securities. Please go ahead.
Hey, good morning.
Good morning, good morning.
So the industry is experiencing a softer revenue growth outlook next year, although not as much the case for prosperity, but I just wanted to get your thoughts on how you're thinking about expense growth next year I know a lot of other banks are announcing initiatives.
Restructurings, but just wanted to get a sense of what youre thinking.
How do you want to manage expenses going forward.
So Brendan.
Short term I will talk about the fourth quarter I think it's going to be in line. What we had in the third quarter as I mentioned, it's 134 to 136, but if you go out for 2024, I think with the inflationary environment. We are right now and we do our merit increases annually. So I would expect for next year, probably 2% to 3%.
Expense growth, but we have a lot of initiative, we are trying to automate fewer things, but nothing significant that would but we're trying to mitigate that cost, but if I had to get guidance for next year that would be 2% to 3% increase but thats not including the special FDIC assessment is going to come in in the first quarter.
Excluding that special assessments.
Say, 2% to 3% how much is at FERC. So I think based on our initial calculations, but kind of a $10 million annually 10 million on the FDA, especially Ibi's assessment. In addition that we're already ahead of assessment in 2023, which is causing another $10 million. So so really you're talking about an extra $2 5 million or so.
<unk> got two two and $2 5 million per quarter expenses, that's on the FDIC assessment.
Okay.
That's very helpful.
And then lastly for me I am sorry, if I missed it already but what are you expecting for it security cash flows and maturities over the next 12 months.
So our cash flow, it's about $2 1 billion next 12 months.
That's on the secured on a 600 year.
I'm sorry on the launch that's about $5 billion.
But again at some point does that work.
Yes.
Okay sounds good thanks for taking my questions.
The next question comes from Milan, <unk> with Morgan Stanley. Please go ahead.
Hey, good morning.
Thanks for taking my question.
Can you give us some more detail on the fixed rate loan repricing dynamic state are you expecting from here.
You mentioned <unk>.
5% is fixed to variable rate loans repricing about three percentage points higher but how much.
After launch.
In dollars or in percentage is set to repay between now.
Now and the end of next year.
And how does the increase in duration as a result of the <unk>.
Higher long end rates in fact.
Pricing dynamic.
So then when we looked at the 5 billion that is including all the duration we have already in an.
In our loan portfolio and from the cash flow I would say, maybe a little bit higher in the first half than second half, but essentially the cash.
Cash flow would be.
If you look back in the I will just give you numbers what happened last three quarters and maybe that gives you. Some information on its back in the Q1, we had $1 3 billion in Q2, we had $1 5 billion and in Q3, we had $1 4 billion. So based on that the cash flow you can see that the actual cash flows you can see.
That's the.
That's kind of beyond the evenly distributed over a 12 month.
And that's that as loans reprice, saying about three percentage points higher.
On the fixed and variable loans.
Out of that 65% out of.
<unk> 5 billion.
The repricing.
<unk>, 3%, but Florida is floating so it's.
Alright, Thanks, Brian Yeah, it's already repriced.
Sorry, I meant that the numbers you gave for the last three quarters, where all of those repricing three percentage points higher or was it only.
Half of that or can you can you help us think through that.
I think thats, a same percentages willing to take.
Of that 1415.
$5 billion.
Fixed or variable that is repricing higher in the other 35%.
Floating is floating so the competition is very similar to what we had experienced cash flow than what we expect.
Got it and as we.
Thanks drew.
Your model for NIM to improve over a six to 12 and 24 months timeframe.
How much of that improvement is coming from.
The securities maturing and the pay downs.
And then higher cost funding.
Is repricing and launch.
I would say this one out of the model that we disclose that.
That's a fixed balance sheet status static balance with what we have that.
That's getting worse.
We have $2 1 billion on the bond bond portfolio and <unk> 5 billion on the loan so and that's assuming it also just make sure that model assumes that you know deposit static stays flat and there is no <unk>.
<unk> repricing.
The bond side Im sorry in the deposit cost, but with our competition and all of that you don't know where we're going to be but that's our model. So thats available. We use I mean, basically what we're saying is everything static the amount of money in federal home loan bank Mount a low amount of deposits suggest repricing duration changes that bring this net interest margin.
That's correct.
Got it that's very helpful and if I could just get a clarification I think in the.
Prepared comments, you mentioned that if rates increase more than you anticipated.
That NIM trajectory could change.
Does that mean that if rates are higher than you anticipate then.
NIM would be higher because of the repricing dynamic or would it be lower either because of duration because if deposit repricing.
I mean, our balance sheets, we have printed neutral on that standpoint, so if longer rates stays higher as benefits for us because it's longer time for all that balance.
<unk> asset to reprice and but on the deposit I think we have assumed what we have right now with a little bit just rip.
The repricing of maturing Cds, but other than that we don't have any additional increases in the deposits.
Now, let me make an overall statement that higher rates.
Lower rates.
We still we still have three.
Three.
Still significant increase in net margin, where it does affect you or at least what im looking at and the model is more in the short term on the six and 12 month time horizon. So if you look at 12 months.
You actually might be better.
Might do better.
Interesting down 110, you are if they stay the same on the other hand over 24 months, we still do better.
Interest rates going up or down 300 basis points I know it gets kind of complicated but yeah. It is.
I mean, if fed cuts the rates tomorrow benefit because.
Our overnight borrowings reprice lower.
We actually do better.
It looks like if they do cut if interest rates went down 100 basis points, we actually do better.
A little bit better it's very helpful.
Very helpful. Thank you.
Okay.
The next question comes from Bill car cash with Wolfe Research. Please go ahead.
Hi, Thank you for taking my questions.
The debate continues around how long the fed will keep rates higher for longer do you think you have a good handle on which of your customers put on swaps couple say two to three years ago. When we were still underserved.
I have so far been isolated from the impact of higher rates.
Or are your customers not using swaps just curious how you're thinking about that sort of interest rate reset risk across your commercial customer base.
Yes. This is Kevin we don't we don't have a ton of swaps on the books.
In the early days when people were talking about swaps, we offered them a fixed rate just straight out for five years or seven years.
And.
Quick question the wisdom of that those are our repricing opportunities today.
So.
Swaps, we have in the book is pretty negligible most of the client base. We have is.
Generally.
Our opinion not sophisticated enough for swaps, we tend to do smaller middle market clients, where you're educating them on swaps. The ones. We have are larger companies, but theres just not a we don't have a lot of swaps on the books. It was really I mean, you have some smaller ones, but most of our swaps are in the middle market lending really our larger accounts larger middle market client Calvert.
Notionally, it's a couple of hundred million dollars.
I think it's actually lower than that now.
I guess youre right one of them.
Recently paid off.
It's down below $100 million, yeah, so it's pretty much.
Okay understood. That's really helpful. And then following up on your comments that you made around the deposit base.
Maybe if you could just speak to whether you see any risk.
That you.
Maybe terminal beta expectations could have to do.
Drift a little bit higher next year, if rates were to hold just that these.
At these current levels.
Yes, I think you have to look at you know, what's the competition doing I think thats the main draw.
<unk> I mean, if you say.
Grateful longer it might be impacted by what we've seen the last I'll look at last few quarters, we had a.
If you just look at cost of our deposit has increased in the first quarter because of the rate environment will have significant <unk>.
The increase in the second quarter on the hour cost deposit, but in the third quarter, we actually saw that increase being less than what we had in the second quarter. So I think that we are optimistic that the increase in the deposit going to slow down then we forgo further because I think everyone who want a reprised. They all are took opportunity to reprice them.
We believe it's going to slow down a little bit on the increase on the deposit level of increase going forward complete.
Completely agree with us we'll aspects.
If we use history as a guide once the fed pauses, it's not atypical for betas to continue to rise.
Vastly reduced rates.
And they may Raj for up to six months.
Pause.
Again at nominal levels, but.
It's not an immediate.
Free.
Credit losses.
Got it.
Helpful and then lastly.
Yeah, just one last point, we have a really unlike a lot of banks of our size, we have a really pretty significant.
I would call smaller smaller town retail deposits that seem to be a lot less sensitive to rates.
Understood.
That makes a lot of sense.
Finally, if I could squeeze in one last one we've heard other banks talk about positive operating leverage is going to be difficult to achieve next year.
Maybe if you could just help us understand how you're thinking about.
Positive operating leverage as you look to the new year, given given all the moving parts.
What do you mean by positive operating leverage, but maybe the ability to grow to grow your revenues faster than your expenses and effectively manage expenses for the revenue environment.
Potentially cut expenses, if revenues were to slower or have a little bit more room to do.
To invest if revenue growth was strong or just the idea of managing expenses. So that revenue growth outpaces expense growth and thanks, that's the beauty of our whole bank I mean, thats the whole story, where everybody else is there almost maxed out because they have their rights.
Already are you already taking advantage of higher rates, we're just going to hit it will just be going into our stride. So even though we will have higher expenses than we probably manage expenses better than any than anybody and we will continue to do that but the beauty of this whole bank really is it the models work and everything goes where everybody else is.
To have that challenge, we should be doing much better yes, we're expecting some positive operating leverage.
Efficiency ratio because of the NIM declines largely gone from 42 to 48.
Okay.
As NIM returns NII improves because of it.
Our normal levels local authorities.
Normally play and Bravo and that's just that's really just a function of this.
Late stage asset repricing that we have once the Queen Mary turns we will be doing better.
Yes.
Understood that is super helpful. Thank you so much I appreciate it.
The next question comes from Brody Preston with UBS. Please go ahead.
Hey, good morning, everyone.
Good morning.
Just wanted to clarify something on the expense.
Guidance I think you said, 2% to 3% for next year, excluding the special assessment is that inclusive of lone star or with Lone star be additive to that expense guide.
The core number I was giving alongside will be added on top of it.
Got it thank you for that and I know, it's challenging but you know if.
If you had to kind of hazard a guess for our modeling purposes. When do you think we should layer lonestar in.
From a from a closing timing perspective.
Yeah.
I'd say, it's hard to say, we are hoping sooner rather than later our latest extension with them is through March 31st right. So.
Yes.
I think both companies are focused on getting it done before then.
Got it thank you for that.
And then I just wanted to clarify on the timing of the cash flow from the Securities book is that pretty even as well so about $500 million a quarter moving forward.
That's even.
Got it and just just given that you have seasonal muni strength through the fourth quarter and the first quarter.
Typically I think you even said earlier you can pay down more deposits is there any thought to maybe just keeping a little bit of that leftover in cash just for the eventual third quarter kind of run off a little bit next year.
So you don't have to take up borrowings next year in case in case, you do get that <unk> runoff of Muni.
Yes, I think we'll definitely the cash coming in from them.
Public funds will probably keep it but.
We don't know how long they are going to keep it probably not long term so from that standpoint, we're not going to be investing but yes, I think we will.
Keep it.
Ballpark same I don't think we're gonna interest significant order increased significant our cash right.
I mean, the bottom line is we don't want to be borrowing at $4 billion.
So that's the way our bank historically, we've never I guess, if you go back we it's not uncommon to see is a $1 billion or $2 billion, but we don't like being <unk> 5 billion.
Got it understood I appreciate that.
And so the.
At what point I guess from the from the Securities.
Roll off perspective would you think about maybe reinvesting some of those cash flows is it kind of one's borrowings gets back down close to zero I'm just trying to think about when the yield on that portfolio could start to pick up again.
Right now I see all of the payments being going to reduce our debt. So I don't see asked me in a couple of quarters maybe.
I think the money is probably spoken for for a while here I think you said to reinvest anything I think we're going.
Hey, just paying down tomorrow at this moment and loan demand is going to play a factor in that.
Yes, that's true I mean, the loan demand, even though we've tried to moderated we've tried to cut it down.
We may decide thanks to the pricing does get good and we're finally getting terms and conditions that we like we may want to increase that so that's a good point Tim.
Got it okay, and sorry to stay kind of in the weeds here, but.
Any thought given to.
When you do decide to start reinvesting maybe putting some of those securities on as.
Yes, just to give you more flexibility in the future than the HTM book gives you.
No.
Got it thank you.
And then I also just wanted to ask you know I noticed that there was some strength from first capital on the deposit side.
When I was looking at the press release.
Anything specific that drove that.
I think right at quarter end, they had a customer that sold his business.
And.
It was pretty good size chunk of money.
That money is moving and subsequently moved off the balance sheet.
Got it and then this is my last one I just wanted to try the buyback question.
A little bit differently David.
I just pulled up.
Price to tangible book chart on SNL and Max.
Max just to get a long term view.
This is at.
At least per Snl's history, the cheapest your stock has ever been on price to tangible book value.
So if if you do get the clarity that you're looking for in terms of whether or not HTM is gonna be included.
<unk> capital and as you noted it doesn't feel like the winds are blowing that way right now.
How aggressive would you be on the buyback I think you've got you know.
Three 4 million shares left in the existing authorization.
That expires in January I assume you would re up that but you just got a lot of capital to stocks very cheap and so once we get that clarity would you would you look to be more aggressive than even perhaps you've you've typically been in the past.
I mentioned earlier I think this is the best price and we've never had anything they could buy in right now into our stock so.
I think we would we would be interested in purchasing more on the other hand, a lot of it depends on.
A possible mergers and acquisitions at the same time too. So we have to keep both of those and a consideration I think do we really think is it better to buy our stock back or can we make more money by buying or acquiring another bank and so I know that's hard it's not giving you, which you need but those are really truthfully. Both both of those go hand in hand and how much.
We can buy back and how much we I really don't think that we're going to be impacted by the HTM number.
I don't think I mean, the fed themselves have a trillion 200 million loss on their balance sheet. So it'd be hard to spank somebody else. When we've got such a when the feds got such a big loss, but and I know that time will work that out. So I did I don't think that's going to be an issue. So I think.
Once we do find out really what regulatory youre going to be.
Would it be more interested in buying our stock, especially at these prices, but again, we still were constantly in talks with other banks at the same time too that that would impact that it would be a fair statement to say that when we look at buying another bank, particularly bank of size.
We look at tangible book value earn back on that transaction versus a buyback right.
We do realize there's not much integration risk on doing the buyback.
A safer.
So you'd be willing to suffer more dilution on your own deal then you would.
Bye.
And what's different this time I think in M&A than it's ever been before when your when Youre looking at acquiring emerging with the bank.
<unk> losses in there in their portfolio. So instead of being net capital positive is this with somebody recommended at the beginning of the call why don't you take some of your capital and redo your bond portfolio were not willing to do that.
Merger and acquisition you got a market to market, so youre going to mark their capital down which would bring the overall capital down although we will get that we will get that money back really quickly. So those are just the considerations.
I would just think that just given the experience with lone star.
Relatively simple deal.
And it's been extended.
Due to factors that are outside of your control and may not be warranted.
It just seems like the buyback, which is something that I know you are shareholders.
Would like would be the safest and easiest route so youre not kind of tied up with.
With the merger.
I appreciate it.
If there's nothing else, we will buy back our stock let me say that.
Got it thanks guys.
Okay.
Yeah.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, Thanks, guys just.
Following up on the time deposits also back do you have any color on those time deposits being <unk>.
Rolled over here in the near term just the the dollar amounts and and the prices though.
Coming off of that.
Yes, I mean, we introduced our seven months special CD program all several months ago. So we see those rolling over and we see a good level of renewal on that one.
But from the growth I, we don't see as much of our increase in the growth what we saw in the first two months of it.
From dollar wise.
Matt I think I need to get back with you I don't have specifics on that and how much is in that we sold in that product that one.
Okay.
And then $5 billion 5 billion something like that and we don't have hardly any sea days that go beyond two years.
Our total seat either what right now I doubt that they are under 10% of our.
About 12% higher than the 10%, but that only grows or we see that is in that seven months special program and they are just renewing it.
Over time, if rates stay higher I think you will see the percentage of Cds to the deposits continue to grow I remember before rates went to zero it was.
Isn't uncommon for a bank like us have 20 or 30% of their money in certificates of deposits so over time.
Thank you could see that change for sure Yeah, Matt did confirm its $1 $5 billion on the seven month specialty right.
Okay. Thanks for that and then on the $4 billion borrowing position any color on the duration here I assume most if not all of these are eligible to be paid down in the near term.
Yeah, essentially we have a $3 billion from the fact that we can pay off anytime and rest of them are FHL being overnight print in Mysore all 4 billion can be payoff in that day, if we need to.
Okay, perfect and then on those cash flows you mentioned I'll fall back that $2 $1 billion that you expect over the next 12 months any color or commentary you can give us as far as the yields are.
On those on those maturities.
2%.
<unk> exactly pretty much the same with our portfolio shows around 2%.
Okay got it.
Okay. That's all from me thanks, guys.
The next question comes from Jon Atkin with RBC capital markets. Please go ahead.
I hope I'm left on the line.
Yeah.
We had heard from me for a while we thought you split loving us.
All right.
Look David 20 year 20 year low.
Yes.
Just real.
Real quick.
The 10 billion a little over 10 billion and noninterest bearing deposits do you feel like is that a floor is it over in terms of the noninterest bearing outflows.
The first.
Anybody who would like to say, yes that it is but.
We really don't know that I think that if interest rates stay high.
When I see many movie.
Normally you would think it's because of our money market rate, we're paying about 3%. That's if you have over $1 million in it or something or 100000.
And for the 30% of that yet.
Good luck.
500000, Okay. So you would think that maybe that's where the money would be leaving from to go to buying these treasures in that but when I really look at it.
We have another not only the $10 billion that we have in noninterest bearing we have another how much in.
In the interest.
Interest bearing checking as paint 2015, or 25 basis points, a huge amount of money in but those are the two categories that I actually see go people are they're just starting to work their money more so I guess the answer to the question is.
Uh huh.
And and by itself I think.
We probably will see we will see money come out of those accounts buying either higher rate Cds are going to buy treasuries at the same time hopefully.
Our bank historically, John has grown the bank, 2% to 4% a year organically in deposits and of course, he hadn't seen that at all so I'm. Hoping this is just a gut feel is that.
We will start 90 90 at some point, we will turn around and start building that bank again, offset literally going out but people. The bottomline people are working their money. This is an interesting because I asked also back to look into it our bank historically before you had all of the helicopter money drop we would grow the bank, 2% to 4% organic.
Every year on deposit side, and then of course, you got 10%, 20% gains with helicopter money, but also back went back into.
All of the money that we've lost and and taken out.
The 19 that came from the acquisition of first capital and believe it or not today. If you would've never had the helicopter money, we're kind of out in the same place we're still have grown about 2% to 4%.
So so whether it looks like a lot of the money is left the bank.
You wouldn't had it to begin with all of the helicopter money with probably right, where we would have been to begin with I know, that's getting kind of esoteric, but we really wanted to look at that so that.
So I think the future is we will still get back to that as a category.
He will see banks in the future start growing deposits again organically.
At some point in time.
Okay.
Just two more random ones.
Ftes were up 140 employees I normally wouldn't ask about it but that's more than normal.
Is that acquisition related or what's driving that.
Yes, I think because the acquisition had an impact on it because FTE count on average so that's why that three months of people from the STB acquisition Thats impacting.
But you also have the.
The regulators are pushing harder for data governance are pushing harder in BSA. They are pushing harder and compliance I think youre seeing all of that now some of that can probably be offset by the mortgage department the mortgage.
We're letting people go or reassessment in the mortgage department, so we might be able to offset that but part of that is just regulatory burdens.
As you get bigger and bigger the regulatory burden.
Nobody would believe it's just it's crazy.
Yes.
Yes, that's what I was getting that that's what I was wondering I remember you, saying once David you had after the financial crisis 2000, new employees working for the government, but they were on your payroll. So the government something like this was just wanted to know.
Probably over 200 now.
Okay, and just one more on this can be quick but on credit.
Sounds like you're not seeing anything but I'm curious do you guys expect a credit cycle for the industry. When you look around and you look at your peers.
You look at some of the proposals that you're making to take loans from other banks do you guys expect the credit cycle.
To me I mean, I'll be the first answering the other guys can answer too, but I think the credit cycle is probably going to be more regional in nature I think that if.
I think if you're in San Francisco or.
New York and you have populations that are moving out I think those are going to probably be impacted especially from the office space and more so than I think what.
What we're seeing in Texas, and Oklahoma, a properties don't seem to be affected at all in fact, if anything more people are moving to the a properties. It's really the b and C properties are they impacted in the bigger charge off that we had last quarter or so really came from three <unk> deal office deal that we haven't really nevertheless.
And then maybe we jumped the gun and you sold it to <unk>, but we always like to get rid of our problems right away, but so I think you do see that seasonally popping up I do think that.
From the first capital Bank that we acquired we do see some problems, but theyre not really commercial real estate office problems or more in what nursing home Randy a couple of nursing homes and stuff from acute care spotty.
So we see that and so I think a lot of it I think a lot of it has to do with the underwriting and the risk that the banks took too but it also it also comes from where you are located I think here. There are circumstances around you add a lot to it so I think the banks that had good underwriting.
Alright.
Banks that had good underwriting are located in real estate youre going to be fine.
Banks that have good underwriting and states, where theyre seeing outflow.
They probably would be fine too, but the banks that historically, they had bad underwriting theyre going to be bad in both of those scenarios regional and I think you just can always go back I think it's going to go back to your underwriting really that's just me.
Okay.
Alright, thanks for the time I appreciate it.
Yeah.
This concludes our question and answer session I would now like to hand, the call back 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.
Okay.
The conference has now concluded.
Thank you for your participation you may now disconnect your lines.
Okay.
Okay.
Yeah.
Yeah.
Great.
Yes.
Yeah.
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