Q4 2023 Prosperity Bancshares Inc Earnings Call

© transcript Emily Beynon

Good day and welcome to the Prosperity Bank Shares 4th Quarter 2023 Earnings Conference Call.

Good day and welcome the prosperity Bancshares fourth quarter 'twenty twenty-three earnings conference call.

All participants will be in a listen-only mode.

All participants will be in a listen only mode.

Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation, there will be an opportunity to ask questions.

After todays presentation, there will be an opportunity to ask questions.

To ask a question, you may press star then 1 on a touchtone phone.

To ask a question you May press Star then one on a touchtone phone.

To withdraw your question, please press star, then 2.

To withdraw your question. Please press Star then two.

Please note this event is being recorded.

Please note this event is being recorded.

I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

I would now like to turn the conference over to Charlotte Rasche E. Please go ahead.

Charlotte M. Rasche: Thank you.

Charlotte M. Rasche: Thank you.

Charlotte M. Rasche: Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' fourth quarter 2023 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

Charlotte M. Rasche: Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' fourth quarter 2023 earnings Conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks I'm Charlotte Rasche date, Executive Vice President and General counsel of prosperity Bank.

Charlotte M. Rasche: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer.

Speaker Change: Chairs and here with me today is David Zalman, Senior Chairman and Chief Executive Officer.

Speaker Change: H.E. Tim Tamanis, Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Saffody, Vice Chairman

Speaker Change: H eight Tim to manage junior Chairman also back out some mono chief financial Officer.

Speaker Change: Saturday Vice chairman.

Speaker Change: Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Karnes, Chief Credit Officer, and Bob Dowdell, Executive Vice President. Maze Davenport, our Director of Corporate Strategy, is ill and unable to join us today.

Speaker Change: Kevin Hanigan, President and Chief operating Officer, Randy Hester, Chief lending Officer, Merle Karnes, Chief Credit Officer, and Bob Dowdell Executive Vice President.

Staff import our director of corporate strategy is ill and unable to join us today.

Speaker Change: David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Tomanis, who will discuss our lending activities, including asset quality.

David Zalman will lead off with a review of the highlights for the recent quarter.

David E. Zalman: He will be followed by also backups manav.

David E. Zalman: I'll review some of our recent financial statistics, and Tim Tamara, who will discuss our lending activities, including asset quality.

Speaker Change: Finally, we will open the call for questions.

David E. Zalman: I'm Lee we will open the call for questions.

Speaker Change: Before we begin, let me make the usual disclaimer.

Tim Tamara: Before we begin let me make the usual disclaimers.

Speaker Change: 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 Bank shares to be materially different from future results or performance expressed or implied by such forward-looking statements.

Lee: 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 bank.

Shares can be materially different from future results or performance expressed or implied by such forward looking statements additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in our filings with the securities and exchange.

Speaker Change: 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 10Q and 10K and other reports and statements we have filed with the SEC.

Lee: Strange Commission, including forms 10-Q, and 10-K and other reports and statements we have filed with the FCC.

Speaker Change: All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Lee: 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.

Speaker Change: Now let me turn the call over to David Zalman. Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call.

David E. Zalman: I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call.

David E. Zalman: For the three months ending December 31, 2023, our net income was $95 million, or $1.02 per diluted common share, compared with $112 million, or $1.20 per diluted common share, for the three months ending September 30, 2023.

David E. Zalman: For the three months ending December 31, 2023, our net income was 95 million $1.02 per diluted common share compared with a $112 million or $1 20 per diluted common share for the three months ending September 32023.

David E. Zalman: and was impacted by a one-time FDIC special assessment of $19.9 million and merger-related expenses.

David E. Zalman: And was impacted by a one time FDIC special assessment of $19 9 million and merger related expenses.

David E. Zalman: Excluding the FDIC special assessment, net of tax and merger related expenses, net of tax, net income was $111 million or $1.19 per diluted common share for the three months ending December 31, 2023.

David E. Zalman: Excluding the FDIC special assessment net of tax and merger related expenses net of tax net income was $111 million.

David E. Zalman: Or $1 19 per diluted common share for the three months ending December 31 2023.

David E. Zalman: Our annualized return on average assets, average common equity, and average tangible common equity, excluding the FDIC special assessment net of tax and merger-related expenses net of tax for the three months ended December 31st, 2023.

David E. Zalman: Our annualized return on average assets average common equity and average tangible common equity excluding the FDIC special assessment net of tax and merger related expenses net of tax for the three months ended December 31, 2023, or 1.15% return on average assets.

David E. Zalman: For 1.15% return on average assets, 6.29% return on average common equity, and 12.3% return on average tangible common.

David E. Zalman: 6% to 9% return on average common equity of 12, 3% return on average tangible common equity.

David E. Zalman: Although our earnings, excluding the one-time FDIC assessment and merger-related expenses, were strong, they are still lower than last year.

David E. Zalman: Although our earnings excluding the one time FDIC assessment and merger related expenses were strong they are still lower than last year.

David E. Zalman: primarily because a majority of our earning assets have not yet repriced and our interest-bearing liabilities have. This will correct over time, and we expect that our operating ratios will be more reflective of our historical returns.

Merrily, because a majority of our earning assets have not yet repriced and our interest bearing liabilities has this will correct over time, and we expect that our operating ratios will be more reflective of our historical returns.

David E. Zalman: Loans were $21.2 billion on December 31, 2023, a decrease of $252 million, or 1.2% from the $21.4 billion on September 30, 2023.

David E. Zalman: Loan.

David E. Zalman: Loans were $21 2 billion on December 31, 2023, a decrease of $252 million or one 2% from the 21 4 billion on September 32023.

David E. Zalman: Loans increased $2.3 billion or 12.4% compared with $18.8 billion on December 31, 2022.

David E. Zalman: Loans increased to $3 billion or 12, 4% compared with $18 8 billion on December 31 2022.

David E. Zalman: When loans excluding the warehouse purchase program loans and loans acquired in the merger of First Bank Shares of Texas

David E. Zalman: When loan loans, excluding the warehouse purchase program loans and loans acquired in the merger at first Bancshares of taxes increased 882 million or four 9% during 2023.

David E. Zalman: increased $882 million or 4.9% during 2023.

David E. Zalman: We did see a slight decrease in loans in the fourth quarter. However, we grew loans organically for the year as projected.

David E. Zalman: We did see a slight decrease in loans in the fourth quarter. However, we grew loans organically for the year as projected.

David E. Zalman: Our deposits were $27.2 billion on December 31, 2023, a decrease of $133 million, or one-half of 1%, compared with $27.3 billion on September 30, 2023.

David E. Zalman: Our deposits were $27 2 billion on December 31, 2023, a decrease of $133 million or one half of 1% compared with 27 3 billion on September 32023.

David E. Zalman: Deposits decreased $1.4 billion or 4.7% compared with $28.5 billion on December 31, 2022.

David E. Zalman: Deposits decreased one four I'm, sorry on deposits decreased $1 4 billion or four 7% compared with $28 5 billion on December 31 2022.

David E. Zalman: Our deposit outflows have mitigated since last March, however, we still have customers moving money into higher paying instruments such as high yielding government bonds or high rate products offered by competitors.

David E. Zalman: Our deposit outflows have mitigated since last March however, we still have customers moving money into higher paying instruments, such as high yielding government bonds or high rate products offered by competitors.

David E. Zalman: When we saw the increase in deposits during the previous two years, we knew that some portion of them would leave the bank, and that's what's happening now.

When we saw the increase in deposits during the previous two years, we knew that some portion of them would leave the bank and that's what's happening now.

David E. Zalman: As the Federal Reserve reduces the money it has put into the economy by reducing its debt, depositors are replacing it by the higher rate securities it had previously.

David E. Zalman: As the federal reserve reduces the money it has put into the economy by reducing its debt depositors are replacing it by in a higher rate securities. It had purchased.

Speaker Change: Prosperity has one of the best core deposit bases in the business. We have non-interest-bearing deposits of $9.8 billion, representing a strong 36% of total deposits.

David E. Zalman: Prosperity has one of the best core deposit basis, and the business, we have noninterest bearing deposits of $9 8 billion, representing a strong 36% of total deposits.

Speaker Change: and certificates of deposits representing only 13% of total deposits.

David E. Zalman: And certificates of deposits, representing only 13% of total deposits.

Speaker Change: Further, we have not purchased any broker deposit.

David E. Zalman: Other we have not purchased any broker deposits.

Speaker Change: Our non-performing assets totaled $72.7 million for 21 basis points of quarterly average interest earning assets on December 31, 2023.

David E. Zalman: Our nonperforming assets totaled $72 7 million or 21 basis points of quarterly average interest, earning assets on December 31, 2023, compared with $69 5 million or 20 basis points of quarterly average interest earning assets on September 30.

Speaker Change: compared with 69.5 million or 20 basis points of quarterly average interest earning assets on September 30, 2023.

David E. Zalman: 2023, and $27 5 million or eight basis points of quarterly average interest, earning assets on December 31, 2020 to be.

Speaker Change: and 27.5 million or eight basis points of quarterly average interest earning assets on December 31st, 2022.

Speaker Change: The increase during 2023 was primarily due to the first bank shares merged.

David E. Zalman: The increase during 2023 was primarily due to the first bancshares merger.

Speaker Change: Despite a relatively low non-performing asset ratio, it is higher than our historical levels due to the recent merger. This is not unusual for us, and we expect to reduce our non-performing asset ratio to a more normal level within a reasonable period of time.

David E. Zalman: Despite a relatively low nonperforming asset ratio is higher than historical levels due to the recent merger. This is not unusual for us and we expect to reduce our nonperforming asset ratio to a more normal level within a reasonable period of time the.

Speaker Change: The acquired loans charged off during the fourth quarter were fully reserved.

David E. Zalman: The acquired loans charged off during the fourth quarter were fully reserved for.

Speaker Change: Their allowance for credit losses on loans and off-balance sheet credit exposure was $369 million on December 31, 2023, compared with $72.7 million in non-performing assets.

David E. Zalman: Allowance for credit losses on loans and off balance sheet credit exposure was 369 million on December 31 2023.

David E. Zalman: Paired with $72 7 million in nonperforming assets.

Speaker Change: We look forward to our acquisition of Lone Star State bank shares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon. We remain interested in M&A and believe our company is in a strong position to participate, especially given our capital.

We look forward to our acquisition of Lone Star State Bancshares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them. Soon we remain interested in M&A and believe our company is in a strong position to participate, especially given our capital.

Speaker Change: Merger and acquisition experience and the relationships we have built over the years.

David E. Zalman: Merger and acquisition experience and relationships, we have built over the years.

Speaker Change: Prosperity operates in two of the best economies in the U.S. Even with the recent interest rate increases, economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and future of our company. Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities, such as mergers and acquisitions, and the repurchase of our stock when appropriate.

While it's very operates in two of the best economies in the U S. Even with the recent interest rate increases economic activity and job growth in Texas, and Oklahoma remains solid.

David E. Zalman: We are excited about our growth and future of our company Prosper. He has a strong capital position that provides us with flexibility in pursuing strategic opportunities such as mergers and acquisitions and the repurchase of our stock when appropriate and.

Speaker Change: We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share.

David E. Zalman: We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share.

Speaker Change: Further, we have a strong core deposit base with 36% of our deposits in non-interest-bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.

David E. Zalman: Further we have a strong core deposit base with 36% of our deposits in noninterest bearing accounts I would like to thank all of our customers associates directors of shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to also back us mono, our chief financial officer to discuss some of the specifics.

Mono: Actual results we achieved thank.

Asylbek Osmonov: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2023 was $237 million compared to $239.5 million for the quarter ended September 30, 2023 and $256.1 million for the same period in 2022.

Alba: Thank you Mr. Zalman. Good morning, everyone net interest income before provision for credit losses for the three months ended December 31, 2023 was $237 million compared to $239 5 million for the quarter ended September 32023 and $256.

Alba: $1 million for the same period in 2022.

Asylbek Osmonov: The net interest margin on a tax equivalent basis was 2.75% for the three-month ended December 31, 2023 compared to 2.72% for the quarter ended September 30, 2023 and 3.05% for the same period in 2022.

Alba: The net interest margin on a tax equivalent basis was $2 seven 5% for the three months ended December 31 2023.

Alba: <unk> to $2, 72% for the quarter ended September 32023, and 3.05% for the same period in 2022.

Asylbek Osmonov: Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2023 was 2.71% compared to 2.68% for the quarter ended September 30, 2023 and 3.04% for the same period in 2022.

Alba: Excluding purchase accounting adjustments the net interest margin for the three months ended December 31.

Alba: 23 was 271% compared to $2, 6% to 8% for the quarter ended September 32023, and 3.0% to 4% for the same period in 2022.

Asylbek Osmonov: The fourth quarter increase in net interest margin was primarily due to the decrease in borrowings of $525 million during the fourth quarter of 2023.

Alba: The fourth quarter increase in net interest margin was primarily due to the decrease in borrowings of $525 million during the fourth quarter 2023.

Asylbek Osmonov: Non-interest income was $36.6 million for the three months ended December 31, 2023, compared to $38.7 million for the quarter ended September 30, 2023, and $37.7 million for the same period in 2022.

Alba: Noninterest income was $36 6 million for the three months ended December 31, 2023, compared to $38 7 million for the quarter ended September 32023, and $37 7 million for the same period in 2022.

Asylbek Osmonov: Non-interest expense for the three months ended December 31, 2023 was $152.2 million compared to $135.7 million for the quarter ended September 30, 2023 and $119.2 million for the same period in 2020.

Alba: Noninterest expense for the three months ended December 31, 2023 was $152 2 million compared to $135 7 million for the quarter ended September 32023, and $119 2 million for the same period in 2022.

Asylbek Osmonov: The lean quarter increase was primarily due to one-time FDIC special assessment of $19.9 million.

Alba: The linked quarter increase was primarily due to one time FDIC special assessment of $19 9 million.

Asylbek Osmonov: For the first quarter 2022, we expect non-interest expense to be in the range of $134 to $136 million.

Alba: For the first quarter of 2022, we expect noninterest expense to be in the range of $134 million to $136 million.

Asylbek Osmonov: The efficiency ratio was 55.6% for the three months ended December 31, 2023, compared to 48.7% for the quarter ended September 30, 2023, and 40.9% for the same period in 2022.

Alba: The efficiency ratio was 55, 6% for the three months ended December 31, 2023, compared to 48, 7% for the quarter ended September 32023, and 49% for the same period in 2022.

Asylbek Osmonov: Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the fourth quarter of 2023.

Excluding the FDIC special assessment the efficiency ratio was 48, 3% for the fourth quarter 2023.

Asylbek Osmonov: The bond portfolio metrics at 12-31-2023 showed a weighted average life of five years and projected annual cash flows of approximately $2.2 billion.

Alba: The bond portfolio metrics at 12, 31, 2023 showed a weighted average life of five years and projected annual cash flows of approximately $2 2 billion and.

Emily Beynon: transcript Emily Beynon Good day and welcome to the Prosperity Bank Shares 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode.

Asylbek Osmonov: And with that, let me turn over the presentation to Tim Tumanis for some details on loans and asset quality.

Speaker Change: And with that let me turn over the presentation to Tim to manage for some details on loans and asset quality.

Tim Tumanis: Thank you, Asylbek.

Speaker Change: Yes.

Tim Tamara: You also back.

Tim Tumanis: Thank you.

Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touchtone phone.

Tim Tumanis: Our non-performing assets at quarter end, December 31st, 2023, December 31st, 2023

Tim Tamara: Our nonperforming assets at quarter end December 31, 2023.

Tim Tumanis: totaled $72,667,000 or 34 basis points of loans and other real estate.

Tim Tamara: Totaled $72 million $667000.

To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please do so.

Our 34 basis points of loans and other real estate.

Tim Tumanis: compared to 69 million

Tim Tamara: Compared to $69 million $481000 or 32 basis points at September 30th 2023.

Tim Tumanis: $481,000

Tim Tumanis: are 32 basis points at September 30th, 2023.

Charlotte M. Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' fourth quarter 2023 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks.

Tim Tumanis: This represents a 4.6% increase.

Tim Tamara: This represents a four 6% increase.

Tim Tumanis: Since December 31st, 2023,

Tim Tamara: Since December 31 2023.

Tim Tumanis: $3.2 million of non-performing assets have been removed or put under contract for sale.

Tim Tamara: $3 $2 million of nonperforming assets have been removed or put under contract for sale.

Charlotte M. Rasche: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer. H.E. Tim Tamanis, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Saffody, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; and Bob Dowdell, Executive Vice President. Maze Davenport, our Director of Corporate Strategy, is ill and unable to join us today.

Tim Tumanis: The December 31st, 2023.

The December 31 2023.

Tim Tumanis: Non-Performing Asset Total

Tim Tamara: Nonperforming asset totals.

Tim Tumanis: was made up of 70 million

Tim Tamara: It was made up of $70 million.

Tim Tumanis: $883,000 in loans.

Tim Tamara: $883000 in loans.

Tim Tumanis: $76,000 in repossessed assets

Tim Tamara: $76000 in repossessed assets.

Tim Tumanis: and $1,708,000 in other real estate.

And $1 million $708000 in other real estate.

Tim Tumanis: Net charge-offs for the three months ended December 31st, 2023

Tim Tamara: Net charge offs for the three months ended December 31 2023.

Tim Tumanis: for $19,133,000.

Tim Tamara: For $19 million $133000.

Tim Tumanis: compared to net charge-offs.

Tim Tamara: Compared to net charge offs of.

Tim Tumanis: $3,408,000

Charlotte M. Rasche: David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Tomanis, 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 disclaimer.

Tim Tamara: A $3 million $408000.

Tim Tumanis: for the quarter ended September 30th, 2023.

Tim Tamara: For the quarter ended September 32023.

Tim Tumanis: This is a $15,725,000 increase.

Tim Tamara: This is a $15 million $725000 increase on a linked quarter basis.

Tim Tumanis: on a length quarter basis.

Tim Tumanis: There was no addition to the allowance for credit losses during the quarter ended December 31st, 2023.

Tim Tamara: There was no addition to the allowance for credit losses during the quarter ended December 31 2023.

Tim Tumanis: Also, there was no addition to the allowance during the quarter ended September 30th, 2025.

Charlotte M. Rasche: 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 Bank shares 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 from those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10Q and 10K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman. Thank you, Charlotte.

Tim Tamara: Also there was no addition to the allowance during the quarter ended September 32023.

Tim Tumanis: No dollars were taken into income from the allowance during the quarters ended December 31st, 2023.

Tim Tamara: No dollars were taken into income from the allowance during the quarters ended December 31 2023.

Tim Tumanis: and September 30th, 2022.

Tim Tamara: And September 32023.

Tim Tumanis: The average monthly new loan production.

Tim Tamara: The average monthly new loan production for the quarter ended December 31, 2023 was $300 million.

Tim Tumanis: For the quarter ended December 31st, 2023.

Tim Tumanis: was $300 million.

Tim Tumanis: compared to $398 million for the quarter ended September 30th, 2023.

Tim Tamara: Compared to $398 million for the quarter ended September 32023.

Tim Tumanis: Loans outstanding at December 31st, 2023 were approximately $21.181 billion.

Tim Tamara: Loans outstanding at December 31, 2023 were approximately 21 $181 billion.

Tim Tumanis: compared to $21.33 billion at September 30th, 2023.

Tim Tamara: Compared to 21.3 dollars 3 billion.

Tim Tamara: At September 30th two.

Tim Tamara: 2023.

Tim Tumanis: The December 31st, 2023 loan total is made up of 42% fixed rate loans,

Tim Tamara: The December 31, 2023 loan total is made up of 42% fixed rate loans.

David E. Zalman: I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call. For the three months ending December 31, 2023, our net income was $95 million, or $1.02 per diluted common share, compared with $112 million, or $1.20 per diluted common share, for the three months ending September 30, 2023, and was impacted by a one-time FDIC special assessment of $19.9 million and merger-related expenses. Excluding the FDIC special assessment, net of tax and merger-related expenses, net of tax, net income was $111 million, or $1.19 per diluted common share, for the three months ending December 31, 2023.

Tim Tumanis: 27% floating right loans.

Tim Tamara: 7% floating rate loans, and 31% variable rate loans.

Tim Tumanis: and 31% variable rate.

Speaker Change: I'll now turn it over to Charlotte.

Speaker Change: I'll now turn it over to Charlotte Rasche.

Charlotte M. Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Thank you Tim at this time, we are prepared to answer your questions our call operator will assist us with questions.

Speaker Change: We will now begin the question and answer session.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question, you may press star, then 1 on your touchtone phone.

Speaker Change: Ask a question you May press Star then one on your Touchtone phone.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the key.

Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: Yes.

Speaker Change: The first question comes from Dave Rochester with Compass Point. Please go ahead.

Speaker Change: The first question comes from Dave Rochester, with Compass point. Please go ahead.

David E. Zalman: Our annualized return on average assets, average common equity, and average tangible common equity, excluding the FDIC special assessment net of tax and merger-related expenses net of tax for the three months ended December 31st, 2023. For 1.15% return on average assets, 6.29% return on average common equity, and 12.3% return on average tangible common equity. Although our earnings, excluding the one-time FDIC assessment and merger-related expenses, were strong, they are still lower than last year, primarily because a majority of our earning assets have not yet been repriced, and our interest-bearing liabilities have.

Dave Rochester: Hey, good morning, guys. Good morning. I was hoping to get your outlook for the margin in NII for either 2024 or at least maybe the first quarter, and any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on.

Dave Rochester: Good morning, guys.

Dave Rochester: Good morning was hoping to get your outlook for the margin and NII for either 2020 for at least maybe the first quarter and any comments on the trajectory from there through the year would be great, specifically, where you see the bottom in NII and I know your outlook is pretty positive over the next few years, but.

Dave Rochester: Just more near term trends.

Speaker Change: It would be great to hear and get your thoughts on.

Speaker Change: So if you look at our margin in the short term, as we discussed that, you know, we're still having a lot of, you know, tailwind from our repricing of the loan and asset from the standpoint. From our borrowing side of it, as you saw, we decreased our borrowing $525 million. So we're picking up that margin there from paying off, wait, from the cash flow on the investments, paying down our borrowing. So we're picking up about 300 basis points there. So with a combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And what you saw, we had three basis points expansion in the fourth quarter, and we continue to see that marginal expansion in the first quarter and beyond. But if you look at it in the long term, we see really, I think on the second half, we see more expansion in the margin than we see in the first half of it just because it takes time for the assets repriced. I think the guidance we gave last quarter that, you know, in 24 months, our name being like 330, 340, our model still shows that expansion in 24 months at 330, 340. So I think it's looking promising.

Speaker Change: So if you look at our margin in the short term as we discussed that.

Speaker Change: We still having a lot of <unk>.

Speaker Change: Tailwind from our repricing of our loan and asset.

Speaker Change: From the standpoint.

Speaker Change: From our.

Speaker Change: Borrowing side of it as you saw we decreased our borrowing $525 million. So we're picking up that margin there from paying off from the cash flow on the investments paying down our borrowings. So we're picking up about 300 basis points. There so with a combination of loan repricing and paying down on borrowers.

David E. Zalman: This will correct over time, and we expect that our operating ratios will be more reflective of our historical returns. Loans were $21.2 billion on December 31, 2023, a decrease of $252 million, or 1.2%, from $21.4 billion on September 30, 2023. Loans increased $2.3 billion, or 12.4%, compared with $18.8 billion on December 31, 2022. When excluding the warehouse purchase program loans and loans acquired in the merger of First Bank Shares of Texas, loans increased $882 million or 4.9% during 2023. We did see a slight decrease in loans in the fourth quarter.

Speaker Change: <unk>, we should see expansion on the margin and what you saw with has three basis points expansion in the fourth quarter and we continue to see that marginal expansion in the first quarter and beyond but if you look at on a long term, we'll see a really I think on the second half will see more expansion to margin than we've seen in the first half of adjusted.

Speaker Change: Was it takes time for the asset repricing.

Speaker Change: I think the guidance, we gave last quarter and 24 months, our name being like $333 40, our model still shows that expansion in 24 months at 330 340, So I think it's looking promising.

Speaker Change: I think Dave, I think that what we said is that

David E. Zalman: However, we grew loans organically for the year as projected. Our deposits were $27.2 billion on December 31, 2023, a decrease of $133 million, or one-half of 1%, compared with $27.3 billion on September 30, 2023. Deposits decreased $1.4 billion or 4.7% compared with $28.5 billion on December 31, 2022. Our deposit outflows have mitigated since last March, but we still have customers moving money into higher paying instruments such as high yielding government bonds or high-rate products offered by competitors. When we saw the increase in deposits during the previous two years, we knew that some portion of them would leave the bank, and that's what's happening now. As the Federal Reserve reduces the money it has put into the economy by reducing its debt, depositors are replacing it with the higher-rate securities it had previously. Prosperity has one of the best core deposit bases in the business. We have non-interest-bearing deposits of $9.8 billion, representing a strong 36% of total deposits, and certificates of deposits representing only 13% of total deposits. Furthermore, we have not purchased any broker deposit.

Speaker Change: Great.

Speaker Change: Dave I think that what we said is that.

Speaker Change: Thank you for joining us. We're pretty excited.

Quarter to quarter before that in 12 months that we'd be at 3% I think that if you look at the models that we're running again. These are just models and our models take into consideration that you have.

Speaker Change: Youre not going down allowances are not going up on loans going down at a pause not going up it's pretty static model yes.

Speaker Change: Black set at six months, we're looking at around $2 96, and 12 months $3 14, and 24 months, even better than that and.

Speaker Change: It also what's good even if interest rates go up or down our models are still showing our net interest margin expanded to really get more normal levels. So we're pretty excited about that.

Dave Rochester: Great. And so are you assuming a forward curve in that analysis at all, even though you're keeping the balance sheet static?

Speaker Change: Okay, great and so are you assuming the forward curve and that analysis at all even though you are keeping the balance sheet static.

Speaker Change: Yeah, on this one, what the numbers we showed, that is the, you know, rates staying the same. But if you look at our model being 100 basis points down or 200 basis points, our margin still holds up. I think at down 224 months, our margin might be a few basis less than what we're projecting on the flat environment, but it's still expending in the 12-24 months.

Speaker Change: Yeah on this and what the numbers, we showed that as ray staying the same but if you look at our model of being a 100 basis points down 200 basis points, our margin still holds up.

Speaker Change: I think down 224 months, our margins might be a few basis less than what we are projecting on the flat environment, but it's still is expanding.

Speaker Change: And the 24 12 24 months.

Speaker Change: Okay, great. And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year?

Speaker Change: Okay great.

Speaker Change: Including in that expectation I guess, it's it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year.

Speaker Change: That's probably the million dollar question, Dave, you know, it's just, I don't know that anybody really, you know, historically, we've always grown the bank organically, two to four percent, you know, these last several years were kind of crazy, we, you know, we took in, we were growing 10% a year, and so we did something the other day, we went back and looked and Asylbek and I looked and said, okay, so after all the deposits we lost recently, and we went back three years before the COVID, what's really crazy, when you even

Speaker Change: That's probably the 1 million dollar question.

David E. Zalman: Our non-performing assets totaled $72.7 million for 21 basis points of quarterly average interest earning assets on December 31, 2023, compared with $69.5 million or 20 basis points of quarterly average interest earning assets on September 30, 2023, and $27.5 million or eight basis points of quarterly average interest earning assets on December 31st, 2022. The increase during 2023 was primarily due to the first bank shares being merged. Despite a relatively low non-performing asset ratio, it is higher than our historical levels due to the recent merger. This is not unusual for us, and we expect to reduce our non-performing asset ratio to a more normal level within a reasonable period of time. The acquired loans charged off during the fourth quarter were fully reserved.

Speaker Change: Its just I don't know that anybody really historically, we've always grown the bank organically too.

Speaker Change: 2% to 4%.

Speaker Change: The last several years were kind of crazy.

Speaker Change: We took and we were growing 10% a year and so we did something the other day, we went back and look and also back and I looked and said okay. So after all the deposits we lost.

Recently, we went back three years before the call, but what's really crazy when you even.

Speaker Change: With the amount that we gained, we're still about 15% ahead, so that still gave us about a 5% organic growth rate over those years.

Speaker Change: With the amount that we gain we are still we sell about 15% ahead. So that still gave us about a 5% organic growth rate over those years. So.

Speaker Change: Going forward, though, you know, it's really hard because, again, not trying to make excuses, but one of the main objectives of the Federal Reserve is to really slow the economy, and that comes two ways. One, increasing interest rates, reducing borrowers, and number two, pulling money out of the system, and they pulled a trillion dollars out of the system, you know, in the last year or so.

Speaker Change: Going forward, though it's really hard because again not trying to make excuses, but one of the main objective of.

Speaker Change: That reserve is C is truly slow the economy and that kind of two ways, one reducing and increasing interest rates, reducing borrower borrowers and number two pulling money out of the system and they pulled a trillion dollars out of the system.

David E. Zalman: Their allowance for credit losses on loans and off-balance sheet credit exposure was $369 million on December 31, 2023, compared with $72.7 million in non-performing assets. We look forward to our acquisition of Lone Star State Bank shares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon.

In the last year so.

Speaker Change: When they're pulling money out, that's something that's going to reduce money in the banks unless you're buying brokered funds, and I would say that.

Speaker Change: When they are pulling money out.

Speaker Change: Yes.

Speaker Change: It's something that it's going to reduce money in the bank and less and lesser bond brokered funds and I would say that.

Speaker Change: You know, we know that some banks do. I'm not saying it's wrong or right. We just elected to keep our cost of money.

Speaker Change: Yeah.

Speaker Change: We know that some banks do and I'm, not saying, it's wrong or right. We just elected to keep our cost of money yet.

Speaker Change: We're with Core Deposits and not Chase, and not Chase, the broker fund. So that's just a position we took. I don't know what's right or wrong, and I'm not getting to what you're really asking what we think. I would think at best, at best, it's probably a 2% gain in deposits probably.

David E. Zalman: We remain interested in M&A and believe our company is in a strong position to participate, especially given our capital, merger and acquisition experience, and the relationships we have built over the years. Prosperity operates in two of the best economies in the U.S.

Speaker Change: Yes.

Speaker Change: With core deposits in our case and not chase the broker firm. So that's just the position we took I don't know, what's right or wrong and I'm not getting to what you're really asking what we think.

Speaker Change: Best at Best is probably at 2% gain in deposits properties, you can disagree or that yeah. I think it's not usually historically if you look at our deposits in the first quarter because of tax payment as usual.

Speaker Change: Yeah, I think usually historically, if you look at our deposits, the first quarter because of tax payment usually goes down a little bit historically, but in the long term, I think we should be able to get to a historical rate. But it all depends on the microeconomic conditions and with the quantitative tightening, too, that will impact as well. The main thing is I don't see a 5% organic growth rate or that, not this year, that's for sure. Yeah, I agree.

David E. Zalman: Even with the recent interest rate increases, economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and the future of our company. Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities, such as mergers and acquisitions, and the repurchase of our stock when appropriate. We expect that our net interest margin will continue to expand to historically normal levels as our assets revalue over the next several years, increasing our earnings per share. In addition, we have a strong core deposit base with 36% of our deposits in non-interest-bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such a successful bank.

Speaker Change: Goes down a little bit historically, but in the long term I think we should be able to get to our historical rates.

Speaker Change: Depend on the microeconomic conditions in.

Speaker Change: The quantitative tightening too that will impact as well. The main thing is I don't see I don't see a 5% organic growth growth writer that not this year and auto share, yes I agree.

Speaker Change: Okay, great. Thanks, guys.

Speaker Change: Okay, great. Thanks, guys.

Speaker Change: Okay.

Speaker Change: The next question comes from Brett Rabatin with Havdi Group. Please go ahead.

Speaker Change: The next question comes from Brett Robinson with <unk>. Please go ahead.

Brett Rabatin: Hey, good morning, everyone.

Brett Robinson: Hey, good morning, everyone.

Brett Robinson: Yes.

Brett Rabatin: I wanted to stick with the balance sheet and the margin and just looking at the securities portfolio, you know, it's about $13 billion, and I know you've got, you know, over $2 billion in cash flow annually. But if you look at the yield kind of year over year, it's kind of flattish at $2.07. Does that start to move up, you know, in the next quarter or two, or can you give us any thoughts on the securities portfolio progression from a yield perspective from here? Yeah, since we're not purchasing any new securities, I think yield is going to hold up as what we see at around $2.05. But I think it also depends, you know, how the mortgage rate is going to do, if there will be a lot of, you know, increase in the mortgage or decrease in the mortgage rate, they might speed up a little bit turnover of those securities, and maybe we'll pick up a little bit of yield there. But overall, we're not expecting the security yield to go up more significantly. I think it will come down more than that. You know, the only way that the yield would go up in the bond portfolio is if we elected instead of reducing debt or putting the money in the loans where we prefer putting it, we would buy back securities. In that case, then it would go up. Exactly. Otherwise, you know, it's probably going to stay stagnant for the most part or flat.

Brett Robinson: Wanted to stick with the balance sheet and the margin and just look at looking at the Securities portfolio. You know, it's about $13 billion and I know you've got over $2 billion.

Thanks again for your support of our company. Let me turn our discussion over to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Thank you, Mr. Zalman. Good morning, everyone.

Brett Robinson: And cash flow annually, but if you look at the yield kind of year over year, it's kind of flattish at 207 does that start to move up.

Net interest income before provision for credit losses for the three months ended December 31, 2023 was $237 million compared to $239.5 million for the quarter ended September 30, 2023 and $256.1 million for the same period in 2022. The net interest margin on a tax equivalent basis was 2.75% for the three-month ended December 31, 2023 compared to 2.72% for the quarter ended September 30, 2023 and 3.05% for the same period in 2022. Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2023 was 2.71% compared to 2.68% for the quarter ended September 30, 2023 and 3.04% for the same period in 2022. The fourth quarter increase in the net interest margin was primarily due to a decrease in borrowings of $525 million during the fourth quarter of 2023.

Speaker Change: Quarter, two or can you give us any thoughts on the securities portfolio progression from a yield perspective from here, yes. Since we're not purchasing any new securities I think you will yield going to holdup as what we see at around $2 five but I think it's also depends.

Speaker Change: How the mortgage rates going to do if there'll be a lot of the.

Speaker Change: The increase in the mortgage or decrease in our mortgage rates they might speed up little bit turnover of those security and maybe it will pick up with about yield there, but overall, we're not expecting the secured yield to go up more significantly will come down more but the only way that the yield would go up in the bond portfolio, we elected instead of reducing debt.

Speaker Change: The money and the loans, where we prefer putting it we would buy back securities in that case, then it would go up exact otherwise.

Speaker Change: It's probably going to stay stagnant for the most part are flat.

Speaker Change: Okay, and then on the funding side, can you give us a refresher on how much you guys have in index deposits and then just thinking about the usual seasonality for municipal deposits, how much you guys have in that and how you see the next quarter or two playing out from that perspective? Okay, from the overall funding, let's talk, we have in the borrowing, we still have about $3.7 billion, around 5%. So we're paying down with cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposit in time deposits. But that's the special program we introduced paying 5%. We just want to give our customers some way of earning, rather just leading to competition. We want to pay up. We want to pay up on those. And those are only seven months. So we're keeping them short term. So when rates would come down, we can reprice them quickly and kind of get out of our system within seven months. So we have about $3.5 billion in the CDs. But out of that,

Speaker Change: Okay and.

Speaker Change: And then on the funding side can you give us a refresher on how much you guys have an index deposits and then just thinking about the.

Speaker Change: Do you usual.

Seasonality for municipal deposits, how much you guys have an add on that and how you see the next quarter or two playing out from our perspective, okay from the overall funding, let's talk we have on the book.

Non-interest income was $36.6 million for the three months ended December 31, 2023, compared to $38.7 million for the quarter ended September 30, 2023 and $37.7 million for the same period in 2022. Non-interest expense for the three months ended December 31, 2023 was $152.2 million, compared to $135.7 million for the quarter ended September 30, 2023 and $119.2 million for the same period in 2020. The lean quarter increase was primarily due to a one-time FDIC special assessment of $19.9 million.

Speaker Change: <unk> you still have about $3 7 billion around 5%. So we're paying down with the cash flow from the investment portfolio related to.

Speaker Change: Time deposits, we have 13% of our deposit and time deposits, but that said the special program. We introduced paying 5%. We just want to give our customers. Some way of earnings raise rather just lead into competition, we want to pay up on those and those are only seven months CD. So we're keeping them short term so when rates would come down.

Speaker Change: We can reprice them quickly and kind of get out of our system within seven months. So we have.

Speaker Change: About three and a half billion dollar in the Cds.

Speaker Change: But out of that $3 1 billion will be maturing within 12 months and our special Cds about I think $1 8 billion.

For the first quarter of 2022, we expect non-interest expense to be in the range of $134 to $136 million. The efficiency ratio was 55.6% for the three months ended December 31, 2023, compared to 48.7% for the quarter ended September 30, 2023, and 40.9% for the same period in 2022. Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the fourth quarter of 2023.

Speaker Change: 3.1 billion will be maturing within 12 months, and those special CDs, about, I think, 1.8 billion.

Speaker Change: The rest of them is money market in non-interest bearing deposits.

Speaker Change: Rest of them as money market in noninterest bearing deposits.

Speaker Change: Okay, and any thoughts on the municipal deposits and how those trend from here?

Speaker Change: Okay, and then any thoughts on municipal deposits and how those strong from here.

Speaker Change: Generally, the municipal deposits really increased at year-end. Again, when we compare this year's municipal deposits to last year, we're down about $500 million. It's just, you know, they're taking it and putting it in higher, you know, a tax pool or something like that. So, we didn't get as much in public funds this quarter at the end of year-end as we did in the previous, and I think that was a good thing.

Speaker Change: Generally the municipal deposits really increase at year end again, when we compare this year's municipal deposits to last year, we're down about $500 million, it's just they're taking it and put it in and higher <unk>.

The bond portfolio metrics at 12-31-2023 showed a weighted average life of five years and projected annual cash flows of approximately $2.2 billion. And with that, I will turn over the presentation to Tim Tumanis for some details on loans and asset quality. Thank you, Asylbek.

Speaker Change: A text pool or something like that so we didn't get as much in public bonds. This this.

Speaker Change: This this quarter at the end of year and as we did in the previous in and I think that was expected yeah and on the public funds. One note I would say I think we are down to almost to their operating accounts because all the excess they could earn.

Speaker Change: Yeah, and on the public funds one note, I would say I think we are down to almost to their operating accounts because all the excess they could earn, they probably moved out to tax pools, so we're kind of maintaining their operating accounts. Maybe a little bit higher right now. Yeah, yeah. People are still paying tax dollars, but again, most of the money that we do is their operating accounts. It's not their investment funds. Yeah, in the big picture, correct.

Thank you. Our non-performing assets at quarter end, December 31st, 2023, December 31st, 2023, totaled $72,667,000 or 34 basis points of loans and other real estate, compared to 69 million $481,000, or 32 basis points at September 30th, 2023. This represents a 4.6% increase. Since December 31st, 2023, $3.2 million of non-performing assets have been removed or put under contract for sale. The December 31st, 2023. Non-Performing Asset Total was made up of 70 million and $883,000 in loans. $76,000 in repossessed assets and $1,708,000 in other real estate.

Speaker Change: <unk>, probably moved out to taxables. So we are kind of maintaining their operating accounts, maybe a little bit higher right now.

Speaker Change: We're still paying tax dollars, but again most of the money that we did as their operating accounts is not their investment.

Speaker Change: And then big picture correct.

Speaker Change: Okay, that's helpful. If I could sneak in one last one just around the Lone Star transaction. Any update there? I know that Justice Department is reviewing that one, so it's taking longer, but have you guys heard anything or any update from a timeline perspective when that might close?

Speaker Change: Okay. That's helpful. If I could sneak in one last one just around the lone star transaction any update there I know that Jeff.

Speaker Change: Just department.

Speaker Change: Viewing that one so its taking longer but have you guys heard anything or any update on from a timeline perspective when that might close.

Speaker Change: We were really hoping to be able to say something at this meeting. Unfortunately, we're not, but we're still very hopeful that we're going to get the deal done, and hopefully we'll hear about it soon.

Speaker Change: We were really hoping to be able to say something at this at this meeting Unfortunately were not that were still.

Speaker Change: Still very helpful that we're going to get the deal done.

Speaker Change: Hopefully we will hear about it soon.

Speaker Change: Yeah, and you mentioned Justice Department. We're out of the Justice Department.

Speaker Change: Yeah, and you mentioned justice or rather the Justice department right, rather than just cleared us.

Speaker Change: Right, Brad and Jennifer. They've cleared it.

Speaker Change: Okay. Okay. Great. Thanks for all the color.

Speaker Change: Okay, Okay, great. Thanks for all the color.

Speaker Change: Still at the FDIC and they take off most of Christmas for December.

Speaker Change: Still at the FDIC and they take off most of Christmas for December so.

Speaker Change: Sure.

Speaker Change: The next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker Change: The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions.

Michael Rose: I wanted to start on some of the proposals that are out there as it relates to interchange and overdrafts, and I know these won't hit until later this year or next year for that matter, but if you guys looked at those and what could the potential impact be for prosperity? Thanks.

Michael Rose: Wanted to start on some of the proposals that are out there as it relates to interchange and overdrafts and I know these won't hit until later this year next year for that matter, but if you guys looked at those and what could the potential impact be for prosperity.

Net charge-offs for the three months ended December 31st, 2023, were $19,133,000, compared to net charge-offs of $3,408,000 for the quarter ended September 30th, 2023. This is a $15,725,000 increase, on a length quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31st, 2023. Also, there was no addition to the allowance during the quarter ended September 30th, 2025. Additionally, no dollars were taken into income from the allowance during the quarters ended December 31st, 2023, and September 30th, 2022.

Speaker Change: You hit one of my hot buttons, Michael. I hope, you know, if it goes through, you know, if it goes through, really, I think it's in the latter part of 2025. I'm hoping maybe there will be a new administration that can stop it because it's really, it's really a misguided thing to think that.

Speaker Change: If you hit one of my Hot buttons Michael.

Speaker Change: I Hope you know sorry.

Speaker Change: It goes through that goes through.

It really I think it's the latter part of 2025, I'm, hoping maybe there'll be a new administration that could stop it because it's really it's really a misguided.

Speaker Change: to bring the overdraft charges to $0 or $3 or $17. I mean, really, it's a behavior I think that you don't want to promote. I mean, think about it on the other end that, you know, it's like telling your kids something's wrong, but you're going to reward them for continuing to do it. And think on the other end where the person is giving a check and is buying a good to the merchant or the retailer, and that person on the other end, they're not getting their money. I mean, they've lost the money on the deal where the bank, in a lot of times, pays that overdraft. You know, you won't see that overdraft. You know, we might not be paying them in the future. So, the bottom line, I think it's inconceivable. I'm hoping that Rhoda Chopra will reconsider this deal. I'm hoping he will. I hope we can get to talk to him. And more so than that, if banks have to continue, they need to service charge income. I mean, the regulatory burden is just unbelievable right now. And so, you know, banks would have to go to really a different type of service charge where we're offering free checking accounts right now to really people on the lower end with lower amounts of deposits. I think in the future, if this deal does go through, I think the banks will have to say, okay, you know, your minimum balance now may have to be $2,000 or $3,000 or you're going to get a service charge. And that would eliminate a lot of the lower end checking accounts that the regulators and the financial institutions are going to have to deal with. So, you know, I don't think it's completely over yet. But if it does, there's no question it would be impactful to us. The impact would either be whether it's that, you know, are they going to let you charge $17? Are they going to let you charge $3, you know? So, if that's the case, it could be, you know, if it's $17 and you get to charge $17 or $15, it's probably...

Thanks.

Speaker Change: To bring this overdraft charges.

Speaker Change: <unk> are $3 $17, I mean really its a behavior I think that you don't want to promote I mean think about it on the other end that that slide telling your kids something's wrong, but youre going to reward them for continuing to do it. Thank you on the other end where the person is given a check is buying a good to the merchant or the retail.

The average monthly new loan production for the quarter ended December 31st, 2023, was $300 million, compared to $398 million for the quarter ended September 30th, 2023. Loans outstanding at December 31st, 2023 were approximately $21.181 billion, compared to $21.33 billion at September 30th, 2023. The December 31st, 2023 loan total is made up of 42% fixed rate loans, 27% floating rate loans, and 31% variable rate. I'll now turn it over to Charlotte. Thank you, Tim.

Speaker Change: And that person on the other end there they're not getting their money they lost money on the Delaware The bank and a lot of times PE that overdraft.

Speaker Change: I don't see that.

Speaker Change: Don't see that overdrafts.

Speaker Change: We might not be paying them in the future. So the bottom line I think it's indicative I'm, hoping it relative Chopra reconsider this deal I'm, hoping you will hope we can get to talk to them and more so than that.

Speaker Change: Thanks, Kat the continued they need the service charge income I mean, the regulatory burden is is just unbelievable right now and so.

Speaker Change: Banks would have to go to.

Speaker Change: So really a different type of service charge, where we're offering free checking accounts right now to really people on the lower end with lower amounts of deposits I think in the future. If we if this deal does go through I think the banks will have to say okay.

Charlotte M. Rasche: At this time, we are prepared to answer your questions. Our call operator will assist us with questions. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone.

Speaker Change: The minimum balance now in May after the 2000 or 3000, youre going to get our service charge and that would eliminate a lot of the lower and checking accounts.

Speaker Change: That the regulators and the fed is really one of us to get those people have accounts.

Speaker Change: I don't think it's completely over yet, but if it does there is no question it would be impactful to us the impact would either be whether its at.

Operator: If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with Compass Point.

Speaker Change: Are they going electric charge $17 like an electric charge $3.

So if that's the case it could be.

Speaker Change: $17 when you get the chart 17 or $15, it's probably.

Speaker Change: Thank you for joining us.

Speaker Change: 10 or $11 million before tax.

Speaker Change: If it's $3 and it's more like.

Dave Rochester: Please go ahead. Hey, good morning, guys. Good morning.

Speaker Change: Again, I think probably more like.

Speaker Change: 16 or 17 before tax, something in that category. On the other hand, we would have to find ways to increase service charges and other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire makeup, but you would have to come up with some other charges, some other.

Speaker Change: 16, or 17 before tax something in that category.

David E. Zalman: I was hoping to get your outlook for the margin in NII for either 2024 or at least maybe the first quarter, and any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on. So if you look at our margin in the short term, as we discussed, we're still having a lot of, you know, tailwind from our repricing of the loan and asset from the standpoint. From the borrowing side of it, as you saw, we decreased our borrowing by $525 million. So we're picking up that margin there from paying off, wait, from the cash flow on the investments, paying down our borrowing. So we're picking up about 300 basis points there. So with a combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And as you saw, we had three basis points of expansion in the fourth quarter, and we continue to see that marginal expansion in the first quarter and beyond.

Speaker Change: On the other hand, we would have to find ways to increase service charges and other areas to cover compensate for that I don't know that you had covenant compensate for the entire makeup that you would have to come up with some other charges. Some other places.

Speaker Change: I gave you too much information, Michael. No, that's great, and sorry to hit a hot-button topic for you.

Speaker Change: Yeah got it okay.

Speaker Change: Too much information Michael.

Michael Rose: That's great and sorry to hit a hot button topics.

Speaker Change: Maybe just as a follow-up.

Maybe just as a as.

Michael Rose: As a follow up.

Speaker Change: You guys announced a new share repurchase program the other day, and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of balance sheet or loan growth this year. Any sort of thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign? Thanks.

Michael Rose: You guys announced the new share repurchase program. The other day and you guys haven't been very active with capital levels are a really high I don't think youre expecting Todd in terms of.

Balance of our loan balance sheet, our loan growth this year any sort of.

Michael Rose: Thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign.

Speaker Change: Yeah, I mean, I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. I think we did use it last year. I think how many shares, Colin, did we purchase last year? About 1.2 million shares. 1.2 million. Again, not a lot, but we still did. I think that, you know, we were very cautious with – look, last year was a year that we wished would have never happened starting in March with Silicon Valley Bank and its signature bank. And so – and then you have –

Speaker Change: Yes, I mean, I don't think that we would have ever issued a repurchase agreement or it wasn't our intention too to use it I think we did.

Speaker Change: We didn't use it last year thank him any shares currently.

Speaker Change: Purchase last year about $1 2 million shares $1 2 million again, not a lot, but we still did I think that we have.

But if you look at it in the long term, we see really, I think in the second half, we see more expansion in the margin than we see in the first half of it just because it takes time for the assets to be repriced. I think the guidance we gave last quarter that, you know, in 24 months, our name being like 330, 340, our model still shows that expansion in 24 months at 330, 340. So I think it's looking promising. I think Dave, I think that what we said is that, Thank you for joining us.

Speaker Change: We're very cautious.

Speaker Change: With last year was a year that we wished would've never happened starting in March with the Silicon Valley.

Speaker Change: Valley Bank and in signature Bank and so and then you had.

Speaker Change: People were still being very critical of, you know, what kind of bond portfolios you have, what kind of loss is there. And so, you know, we took all that into consideration. The regulators were a little bit antsy about everything, too, liquidity and that. So we were more cautious. I think we all feel much better right now. And I think that if we don't use it in another way, you know, our perspective is that we always like to increase dividends, of course. That's kind of our deal. But if we don't, we wouldn't use it all there. We would probably look at, you know, we don't get an M&A deal, you know, then we will look at purchasing stocks.

Speaker Change: People were still being very critical.

Speaker Change: What kind of bond portfolio, you have and what kind of losses there. So.

Speaker Change: We took all of that in consideration of the regulators were a little bit.

Speaker Change: See about everything to get liquidity in that so we were more cautious I think we all feel much better right now and I think that if we don't use it in another way.

Speaker Change: Our perspective is that we always like to increase dividends of course, that's kind of our deal, but if we don't.

Speaker Change: We wouldnt use it all there we would probably look at.

Speaker Change: And we don't get an M&A deal.

David E. Zalman: We're pretty excited. Great And so are you assuming a forward curve in that analysis at all, even though you're keeping the balance sheet static? Yeah, on this one, the numbers we showed, that is, you know, rates staying the same. But if you look at our model being 100 basis points down or 200 basis points down, our margin still holds up. I think at 224 months, our margin might be a few basis points less than what we're projecting on the flat environment, but it's still investing in the 12-24 months. Okay, great.

Speaker Change: We will look at it purchasing stock.

Speaker Change: If the stock's not appropriately priced.

Speaker Change: Yet the stock is not appropriately priced.

Speaker Change: Make sense. And then last for me, Kevin, can we just get an update on the warehouse since you guys came in a little bit higher than what you talked about last quarter? Thanks. Yeah, Michael, as you know, I always talk in average balances for the quarter and we did come in a little higher. I think my high side estimate was maybe $750 million and we ended up at $770 million as an average for the quarter.

Makes sense and then last for me Kevin can we just get an update on the warehouse. Since you guys came in a little bit higher than what you had talked about last quarter.

Kevin J. Hanigan: Yes, Michael as you know I always talk and average balances for the quarter and we did come in a little higher I think my high side estimate was maybe $750 million and we ended up at 770 as an average for the quarter.

Speaker Change: Um,

Kevin J. Hanigan: The first quarter is typically the weakest quarter. It hasn't always showed up that way over the last 10 years because we had so many refinance booms and re-refinance booms and everything else, but the first quarter is generally pretty weak.

Kevin J. Hanigan: The first quarter is typically the weakest quarter, Doug Hasnt always showed up that way over the last 10 years, because we had so many refinance booms and re refinance booms and everything else with the first quarter is generally pretty weak.

Kevin J. Hanigan: January of this year has started off a lot like January of last year week. The average, Michael, through last night has come down from that 770 for the fourth quarter down to 704.

Kevin J. Hanigan: January of this year has started awful lot like January of last year week.

Kevin J. Hanigan: The average Michael through last night has come down from that 770 for the fourth quarter down to 704.

And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year? That's probably the million dollar question, Dave, you know, it's just, I don't know that anybody really, you know, historically, we've always grown the bank organically, two to four percent, you know, these last several years were kind of crazy, we, you know, we took in, we were growing 10% a year, and so we did something the other day, we went back and looked and Asylbek and I looked and said, okay, so after all the deposits we lost recently, and we went back three years before the COVID, what's really crazy, when you even, With the amount that we gained, we're still about 15% ahead, so that still gave us about a 5% organic growth rate over those years.

Michael Rose: And last night's balance was maybe $610 million. So we're hitting a low point. I expect it to drift a little lower and get under $600 million here for a few days.

Kevin J. Hanigan: And last night's balance was maybe $610 million. So we're hitting a low point I expect it to drift a little lower and get under $600 million here for a few days.

Michael Rose: Before it begins to rebound. So January and February are generally going to be pretty weak. March picks back up. My best guesstimate for the average for the quarter, I'm going to say $650 million, but could be as low as $625.

Kevin J. Hanigan: Before it begins to rebound so January and February are generally going to be pretty weak March picks back up.

Kevin J. Hanigan: My Best guess.

Kevin J. Hanigan: Guesstimate for the average for the quarter I'm going to say, it's $650 million, but could be as low as 625%.

Michael Rose: I had to pick a number, I'd go six.

Kevin J. Hanigan: Alright, I had to pick a.

Kevin J. Hanigan: <unk> hundred 50.

Speaker Change: Sounds good. Thanks, Kevin. And thanks for taking all my questions, everyone.

Speaker Change: Sounds good thanks, Kevin and thanks for taking all my questions everyone.

Speaker Change: Okay.

Speaker Change: The next question comes from Brandon King with Truer Securities. Please go ahead.

Speaker Change: The next question comes from Brandon King with <unk> Securities. Please go ahead.

Brandon King: Hey, good morning. Good morning.

Brandon King: Hey, good morning, good morning.

Brandon King: Morning.

Brandon King: So I had a question on deposits and, you know, we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice?

Brandon King: So I had a question on deposits.

Going forward, though, you know, it's really hard because, again, not trying to make excuses, but one of the main objectives of the Federal Reserve is to really slow the economy, and that comes two ways. One, increasing interest rates, reducing borrowers, and number two, pulling money out of the system. And they pulled a trillion dollars out of the system, you know, in the last year or so. When they're pulling money out, that's something that's going to reduce money in the banks unless you're buying brokered funds, and I would say that. You know, we know that some banks do. I'm not saying it's wrong or right.

Brandon King: Looking at potential rate cuts. This year. So how are you thinking about the ability to maybe re price. Some of your core deposits given that you are already quite low compared to some of your competitors.

Brandon King: Some of your core deposits, given that you're already quite low compared to some of your competitors.

Brandon King: So if you just look at cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program, we have $3.7 billion paying around 5%. So any cut we have is going to be direct impact to that. So we're going to get direct benefit from that standpoint. As the rate, the second part, I would say probably those special CD we're offering at 5% right now. So if the rate would cut down, we would cut those down, probably linger a little bit, but within seven months, we should be able to reprice that balance.

Brandon King: So if you just look at the cost of funding, let's say, let's start with the borrowing that we have with the fed and term bank funding program will have $3 7 billion paying around 5%. So any cost we have is going to be direct impact of that so we're going to get direct benefits from that standpoint as the rate of the second part I would say probably those.

Brandon King: Special CD offering at 5% right now so if there are rate would cut down we would cut that was down probably little lingered, a little bit but within seven months, we should be able to reprice that.

David E. Zalman: We just elected to keep our cost of money. We're with Core Deposits and not Chase, and not Chase, the broker fund. So that's just a position we took. I don't know what's right or wrong, and I'm not getting to what you're really asking what we think.

Speaker Change: That's TD as well, lower rate. On other ones, I agree, probably will not be able to cut a lot on some money market because we don't offer high rates for our customers. So there might be a little bit of delay on that, you know, compared to if you had offer 5% money market, probably could cut right away when the rate goes down. With us, probably takes time with that. So I think that's overall compositional or deposit. I would say also to that, Brandon, is that if rates go down dramatically, which I don't think that they will, quite frankly, but if they do go down, I think that'll take the strain off of the non-interest bearing deposits leaving the bank more people. Unless they can get a lot of big interest rates somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also.

Brandon King: That's TD as well lower rate on other ones I agree probably will not be able to cut a lot on some money market because we don't offer higher rates for our customers. So there might be a little bit of a delay on that.

I would think, at best, it's probably a 2% gain in deposits. Yeah, I think usually, historically, if you look at our deposits, the first quarter because of tax payment usually goes down a little bit historically, but in the long term, I think we should be able to get to a historical rate. But it all depends on the microeconomic conditions, and with the quantitative tightening, too, that will impact it as well. The main thing is I don't see a 5% organic growth rate or that, not this year, that's for sure. Yeah, I agree. Okay, great. Thanks, guys. The next question comes from Brett Rabatin with Havdi Group. Please go ahead. Hey, good morning, everyone.

Brandon King: Compared to if you've had offer 5% money market is probably it could cut right away when the rate goes down with us probably it takes time with that so I think that's overall.

Brandon King: Composition of our deposit I would say also I'd add to that Brandon is that as if rates go down dramatically, which I don't think that they will quite frankly, but if they do go down I think that would take the strain off of the noninterest bearing deposits, leaving behind more people unless they can get a lot of a big Bang.

Brandon King: Interest rates somewhere else they'll start, leaving more money in their checking accounts and so I think that will help also.

Speaker Change: Got it. Very helpful. And then could you give us kind of the puts and takes on how you're thinking about loan growth this year? And within that, also kind of talk about what you're seeing in regards to prepayment activities.

Speaker Change: Got it very helpful. And then could you give us kind of the puts and takes on how you're thinking about loan growth. This year and then within that also kind of talk about what you're seeing in regards to a prepayment activity.

Kevin J. Hanigan: I wanted to stick with the balance sheet and the margin and just look at the securities portfolio. It's about $13 billion, and I know you've got, you know, over $2 billion in cash flow annually. But if you look at the yield kind of year over year, it's kind of flattish at $2.07. Does that start to move up, you know, in the next quarter or two, or can you give us any thoughts on the security portfolio progression from a yield perspective from here? Yeah, since we're not purchasing any new securities, I think yield is going to hold up as well as what we see at around $2.05. But I think it also depends, you know, how the mortgage rate is going to do. If there will be a lot of increases in the mortgage or decreases in the mortgage rate, they might speed up a little bit the turnover of those securities, and maybe we'll pick up a little bit of yield there.

Speaker Change: Yeah, Brandon, this is Kevin. I think as we look at the year, you know, our thoughts as we sit here today is kind of 3% to 5% loan growth.

Speaker Change: Yeah, Brian This is Kevin I think as we look at the year, our thoughts as we sit here today is kind of 3% to 5% loan growth.

Kevin J. Hanigan: I would have said more back-end loaded, but we have had a few nice deals approved in loan committee that we have to fund this quarter.

Kevin J. Hanigan: I would've said more backend loaded but.

We have had a few nice deals approved in loan committee that has yet to fund this quarter.

Kevin J. Hanigan: So I think a couple of those are going to fund here towards the end of the month and early into February. And we're talking about some fairly meaningful funding. So I think Q1 might be.

Kevin J. Hanigan: So I think a couple of those are going to fund here towards the end of the month and early into February and we were talking about some fairly meaningful funding. So I think Q1 might be.

Kevin J. Hanigan: You know, pretty good for us.

Kevin J. Hanigan: Pretty good for us.

Kevin J. Hanigan: <unk>.

Kevin J. Hanigan: In addition to that, we started off Q3.

In addition.

Kevin J. Hanigan: And of that we started off Q3.

Kevin J. Hanigan: with a lot of payoffs in July, just a ton of payoffs in July. And we had started off Q1 here with very few payoffs. So, and I meant Q4 on that previous statement, I'm sorry.

Kevin J. Hanigan: With a lot of pay offs in July just a ton of payoffs in July and we have started off Q1 here with with.

Kevin J. Hanigan: But overall, we're not expecting the security yield to go up more significantly. I think it will come down more than that. You know, the only way that the yield would go up in the bond portfolio is if, instead of reducing debt or putting the money in the loans where we prefer to put it, we would buy back securities. In that case, then it would go up.

Kevin J. Hanigan: With the <unk>.

Kevin J. Hanigan: Very few payoffs, so and I make Q4 on the previous statement I'm sorry.

Kevin J. Hanigan: We're actually slightly up for loan growth. It's nominal, but we are slightly positive year-to-date. And, again, we've got a couple of big fundings coming up. So I think we're comfortable with a 3% to 5% kind of number to the extent that the economy rebounds and GDP is higher than anticipated. That number could go up in the latter part of the year if, in fact, there are rate cuts. As David said, we're –

Kevin J. Hanigan: We were actually slightly up for loan growth its nominal but we are slightly positive year to date.

Kevin J. Hanigan: And again, we've got a couple of big fundings coming up so I think we're comfortable with a three or five 3% to 5% kind of number.

Otherwise, you know, it's probably going to stay stagnant for the most part or flat. Okay, and then on the funding side, can you give us a refresher on how much you guys have in index deposits and then just thinking about the usual seasonality for municipal deposits, how much you guys have in that, and how you see the next quarter or two playing out from that perspective? Okay, from the overall funding, let's talk, we still have about $3.7 billion in borrowing, around 5%. So we're paying it down with cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposits in time deposits, but that's the special program we introduced paying 5%. We just want to give our customers some way of earning, rather than just leading to competition.

Kevin J. Hanigan: To the extent that the economy rebounds, and GDP is higher than anticipated that.

Kevin J. Hanigan: That number could go up in the latter part of the year. If in fact, there are rate cuts as David said were.

Speaker Change: We're probably less enthusiastic on our thoughts about rate cuts than many, and to the extent there are any, we think they'll be later in the year. And I don't mean to speak for David, but I think around this table, we're not as

Kevin J. Hanigan: We're probably less enthusiastic.

Kevin J. Hanigan: Our thoughts about rate cuts than many.

Kevin J. Hanigan: And to the extent there are any we think there'll be later in the year.

Speaker Change: Want me to speak for David but I think.

Speaker Change: Around this table, we're not us.

Speaker Change: Charged Up About

Charged up about the prospects of <unk> million.

Speaker Change: and other prospects.

Speaker Change: I'd also comment, Brandon, that I think that, you know, our customers, I'm not saying other banks' customers aren't the quality that ours, but we do have a real high-quality customer. And a lot of our customers really were borrowing when interest rates were – they left money in their checking accounts. As interest rates – what we saw as interest rates started increasing on their loans, they took money out of their checking accounts and really applied those more to the loans. So I think that's probably mitigated and stabilized also. Yeah, we saw that particularly in our C&I book. Right. Just a ton of –

Speaker Change: I would also comment Brandon that I think that.

Our customers I'm, not saying other base of tests regarding quality at ours, but we do have a real high quality customer and a lot of our customers really were borrowing.

We want to pay it up. We want to pay it up on those. And those are only seven months.

Speaker Change: When interest rates, whereas they left money in their checking accounts and interest rates, but we saw as interest rates started.

So we're keeping them short term so when rates come down, we can reprice them quickly and kind of get them out of our system within seven months. So we have about $3.5 billion in the CDs. But out of that, 3.1 billion will be maturing within 12 months, and those special CDs, about, I think, 1.8 billion. The rest of them are money market in non-interest bearing deposits. Okay, and any thoughts on the municipal deposits and how those will trend from here? Generally, municipal deposits really increased at year-end.

Speaker Change: Increasing on their loans, they take money out of their checking accounts and really apply those more to the loan. So I think that's probably mitigated has stabilized and we saw that particularly in our C&I book just a touch.

Speaker Change: One of the.

Speaker Change: Thank you for joining us.

Speaker Change: Deposit decline with the money not going out of the bank is going to pay off loans and even when we saw some real estate deals where they.

Speaker Change: They might have been at 5% or so in the rate was going to go to eight or eight and a half and latest elected to pay off the whole loan sale of certain smaller loans like that customers had money in money in our accounts on a pay those loans off.

Speaker Change: which is, it's a good time.

David E. Zalman: Again, when we compare this year's municipal deposits to last year, we're down about $500 million. It's just, you know, they're taking it and putting it in a higher tax pool or something like that. So, we didn't get as much in public funds this quarter at the end of year-end as we did in the previous, and I think that was a good thing. Yeah, and on the public funds one note, I would say I think we are down to almost their operating accounts because all the excess they could earn, they probably moved out to tax pools, so we're kind of maintaining their operating accounts. Maybe a little bit higher right now. Yeah, yeah. People are still paying tax dollars, but again, most of the money that we do is in their operating accounts.

Speaker Change: Which is a good thing too.

Speaker Change: Yeah.

Speaker Change: Great. Thanks for all the commentary. I'll hop back in the queue.

Speaker Change: Great. Thanks for all the commentary I'll hop back in the queue.

Speaker Change: The next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Speaker Change: Next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Stephen Scouten: Yeah, thanks. Good morning. I'm just kind of wondering with the Lone Star deal, if that gives any kind of...

Stephen Scouten: Hey, Thanks, good morning.

Asylbek Osmonov: Approximately $2.2 billion. Now, let me turn over the presentation to Tim Tumanis for some details on loans and asset quality.

Stephen Scouten: I'm kind of wondering with the lone.

Stephen Scouten: The Lone Star deal if that gives you any kind of <unk>.

Stephen Scouten: Preparation around future deals or changes maybe how you think about the timeline of approval for future deals or is this more just still specific to Lone Star in particular?

Stephen Scouten: Trepidation around future deals or changes, maybe how you think about the timeline of approval for future deals or is this more just still specific to lone star in particular.

Tim Tumanis: Thank you, Asylbek, clear throat. Our non-performing assets at quarter end December 31st, 2023, totaled $72,667,000 or 34 basis points of loans and other real estate compared to 69 million. $481,000, or 32 basis points at September 30th, 2023. This represents a 4.6% increase since December 31st, 2023. $3.2 million of non-performing assets have been removed or put under contract for sale. The December 31st, 2023. Non-Performing Asset Total was made up of 70 million... $883,000 in loans. $76,000 in repossessed asbestos and $1,708,000 in other real estate.

Speaker Change: I can't say it's specific to Lone Star Army because like I said, it's out of the Justice Department. It's really at the FDIC right now. I think all deals are going to take longer. But again, I think that...

Speaker Change: I can't say, it's specific to launch the army because like I said, it's out of the Justice Department is really at the FDIC right now I think I think all deals are going to take longer.

It's not their investment funds. Yeah, in the big picture, correct. Okay, that's helpful. If I could sneak in one last one around the Lone Star transaction. Any update there?

Speaker Change: But again I think that.

Speaker Change: I still feel certain that we have a good banking.

David E. Zalman: I know that the Justice Department is reviewing that one, so it's taking longer, but have you guys heard anything or any update from a timeline perspective on when that might close? We were really hoping to be able to say something at this meeting. Unfortunately, we're not, but we're still very hopeful that we're going to get the deal done, and hopefully we'll hear about it soon. Yeah, and you mentioned the Justice Department. We're out of the Justice Department. Right, Brad and Jennifer.

Speaker Change: I still feel certain that we have a good good bank and it may take a little bit more work, but we make something happen in the regulators like it they're going to.

Speaker Change: Thank you for joining us.

It will get done it's just that.

Speaker Change: But there's no question getting something done today as compared to the a few years ago, it's a whole different holders.

Speaker Change: Getting something done today as compared to a few years ago, it's a whole different horse right now.

Speaker Change: Right now.

Speaker Change: Yeah, fair enough. Okay. And just kind of switching. This particular deal has some more issues than just the normal issues.

Speaker Change: Yeah Fair enough, Okay, and then just kind of switching we thought by this particular.

David E. Zalman: They've cleared it. Okay. Okay. Great. Thanks for all the color.

Speaker Change: <unk> deal has some more issues and just the normal issues based on time so.

Speaker Change: hopefully we won't run into some of that stuff and it wasn't with their bank let me just say this one there was just a number of different things that we had to go through

Operator: Still at the FDIC, and they take off most of Christmas for December. The next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker Change: We won't run into some of that stuff and it wasn't with their bank. Let me just say this and we just don't have a number of different things that we have to go through.

Speaker Change: Got it. And then just hopping back to the idea of the net interest margin, I know you guys said you're not assuming we'll see as many rate cuts as maybe the forward curve would suggest, and I agree with you there. But, I mean, if we get, you know, can you guys quantify maybe for each 25 basis point cut, maybe there's a basis point or two in them downside, or do you think even with...

Speaker Change: Got it and then just happened back to the idea of the net interest margin I know you guys said youre not assuming we'll see as many rate cuts as maybe the forward curve would suggest and I agree with you there, but I mean, if we get can.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions. I wanted to start on some of the proposals that are out there as it relates to interchange and overdrafts, and I know these won't hit until later this year or next year, for that matter, but if you guys looked at those, and what could the potential impact be on prosperity, would you? Thanks. You hit one of my hot buttons, Michael.

Net charge-offs for the three months ended December 31st, 2023, were $19,133,000, compared to net charge-offs of $3,408,000 for the quarter ended September 30th, 2023. This is a $15,725,000 increase on a length quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31st, 2023. Also, there was no addition to the allowance during the quarter ended September 30th, 2021. Additionally, no dollars were taken into income from the allowance during the quarters ended December 31, 2023, and September 30th, 2021.

Speaker Change: Can you guys quantify maybe for each 25 basis point cut maybe there's a basis point or two in NIM downside or.

Or do you think even with.

Speaker Change: Those cuts, you know, over that 24-month period of time that you stated that there really is de minimis kind of downside on a basis point perspective.

Those cuts over that 24 month period of time that you stated that there really is de minimis kind of downside on a basis point perspective.

Speaker Change: Yeah, I think if you just look at our balance sheet and kind of go through what impact would be, I think the first impact would be on our funding borrowing side of it. We have $3.7 billion that we're paying down, but if there would be a rate cut, you would see immediate impact over there. I think with a 25 base points cut, I don't think the loan rate would kind of change significantly. I think it's just going to reprice at 8% or whatever we're getting right now. So, if you look at long-term, I mean, our balance sheet is very neutrally positioned, so we benefit in rate cut or increases in this situation in rate cut. And like I said, in 24 months, if we're looking at our model, our margin, yeah, it drops a little bit, but not significantly from what the guidance we gave you over 24 months because the power of our repricing of assets continues. If you look at our loans, which… We have about a principal pay down about four and a half.

Speaker Change: Yeah, I think if you just look at our balance sheet and kind of go through what the impact would be I think the first impact would be on our funding borrowing side of it it will have $3 $7 billion that we are paying down but if they want the rate cut you would see immediate impact over there.

David E. Zalman: I hope, you know, if it goes through, you know, if it goes through, really, I think it's in the latter part of 2025. I'm hoping maybe there will be a new administration that can stop it because it's really, it's really a misguided thing to think that bringing the overdraft charges to $0 or $3 or $17 is a good idea. I mean, really, it's a behavior that I think you don't want to promote.

I think with a 25 basis points cut I don't think the rate the loan rates would kind of change significantly I think it's just going to reprice it.

Speaker Change: 8% or whatever we're getting right now so if you look at long term I mean, our.

David E. Zalman: I mean, think about it on the other end where, you know, it's like telling your kids something's wrong, but you're going to reward them for continuing to do it. And think on the other end where the person is giving a check and is buying a good from the merchant or the retailer, and that person on the other end, they're not getting their money. I mean, they've lost money on the deal where the bank, a lot of times, pays that overdraft. You know, you won't see that overdraft. You know, we might not be paying them in the future. So, the bottom line is, I think it's inconceivable. I'm hoping that Rhoda Chopra will reconsider this deal. I'm hoping he will

Speaker Change: <unk> is very neutral position, so we benefit in rate cuts or increases in this situation the rate cut.

Speaker Change: Like I said in 24 months, if we're looking at our model our margin. It's yes, it drops a little bit, but not significantly from where the guidance. We gave you over 24 months because the power of our repricing of assets continues if you look at our loans.

Charlotte M. Rasche: The Average Monthly New Loan Production for the quarter ended December 31st, 2023, was $300 million, compared to $398 million for the quarter ended September 30, 2023. Loans outstanding at December 31, 2023 were approximately $21.181 billion, compared to $21.33 billion at September 30th, 2023. The December 31st, 2023 loan total is made up of 42% fixed rate loans, 27% floating right loans, and 31% variable. I'll now turn it over to Charlotte. Thank you, Tim.

Speaker Change: Have about Prince.

Speaker Change: Principal pay down about four and a $5 billion out of that 60% of fixed loans, which on the average rate is around 5%, so you're repricing that that 5%.

David E. Zalman: I hope we can get to talk to him. And more so than that, if banks have to continue, they need service charge income. I mean, the regulatory burden is just unbelievable right now. And so, banks would have to go to a different type of service charge where we're offering free checking accounts right now to people on the lower end with lower amounts of deposits. I think in the future, if this deal does go through, banks will have to say, okay, you know, your minimum balance now may have to be $2,000 or $3,000, or you're going to get a service charge. And that would eliminate a lot of the lower-end checking accounts that the regulators and the financial institutions are going to have to deal with. So, you know, I don't think it's completely over yet. But if it does, there's no question it would be impactful on us. The impact would either be whether or not it's that, you know, are they going to let you charge $17? Are they going to let you charge $3?

Speaker Change: <unk>, 8% on a you're picking up 300 basis points there and.

Speaker Change: If rates if the rate goes down you're picking up on borrowing so I mean, we look good in either way. So I would say also that again I'm just looking at the model. It doesn't go in 25 basis points increments that we go up 100 or down 100, even down 100.

Speaker Change: Six months instead of $2 96, net interest margin, we're showing 307 in 12 months.

Operator: At this time, we are prepared to answer your questions. Our call operator will assist us with questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone.

Speaker Change: We were at $3 14 flat if it goes down by $3 24, and so even in the 24 month. It goes at three <unk>.

Speaker Change: So I think down 100, we still to even do better than that over time, even with interest rates going down maybe 200 basis points because of borrowing Colorado.

Operator: If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with Compass Point.

Speaker Change: Okay. That's extremely helpful. Thanks for that color and then just lastly for me I mean, the loan loss reserve is still 163 alone do you think we could continue to see the zero provision for.

David E. Zalman: So, if that's the case, it could be, you know, if it's $17 and you get to charge $17 or $15, it's probably... Thank you for joining us. 16 or 17 before tax, something in that category. On the other hand, we would have to find ways to increase service charges and other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire makeup, but you would have to come up with some other charges, some other things. I gave you too much information, Michael.

Speaker Change: For some time here in the future.

Speaker Change: It's pretty it's pretty hard to see with $370 million in an allowance for loan losses of $72 million in nonperforming that we will be putting a lot I know that you saw the charge offs. This time at all.

Dave Rochester: Please go ahead. Hey, good morning, guys. Good morning.

Unnamed Speaker: I was hoping to get your outlook for the margin in NII for either 2024 or at least the first quarter, and any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on. So if you look at our margin in the short term, as we discussed, we still have a lot of, you know, tailwind from our repricing of the loan and asset from the standpoint. From the borrowing side of it, as you saw, we decreased our borrowing by 525 million.

Speaker Change: Its entirety was due to.

Speaker Change: The first capital bank merger deal and.

Speaker Change: Again.

Speaker Change: Really some of those loans that I think with the new accounting some of as long as we like it the outlay, we charge those things off and as we collected on then we would take it in the recount reenter the new seasonal DLP think theres a chance of recovery he put them on the books and I wish that we wouldn't have put some of those on the books, but again, we had to kind of bleed.

Michael Rose: No, that's great, and sorry to hit a hot-button topic for you. Maybe just as a follow-up. You guys announced a new share repurchase program the other day, and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of balance sheet or loan growth this year. Any sort of thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign? Thanks. Yeah, I mean, I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. But I think we did use it last year.

Speaker Change: And what some of the guys. It tells that they were collectable.

Speaker Change: The truth of the matter is we have theyre fully reserved anyway, it's just a different way of accounting for them I think we reserve between the allows.

Speaker Change: The allowance for loan loss that we brought over.

Speaker Change: Allowance that we put in I mean, it was like $80 million or something like that $80 million to $90 million. So again I think that were good we do have some loans on the.

Unnamed Speaker: So we're picking up that margin there from paying off, like from the cashflow on the investment, paying down the borrowing. So we're picking up about 300 basis points there. So with a combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And as you saw, we had three basis points of expansion in the fourth quarter, and we continue to see that marginal expansion in the first quarter and beyond.

Speaker Change: That increase right now the $72 million in nonperforming again, the majority of those were from from the merger.

Again, I don't see I don't see full losses in those loans like we had in those.

David E. Zalman: I think how many shares, Colin, did we purchase last year? About 1.2 million shares. 1.2 million.

Speaker Change: In those first charge offs, there may be a little bit of loss, but there shouldnt be a whole lot I think in most of the deals. We have deal is working on them right. Now, it's just going to take us a little bit longer to work out of them I'd say.

David E. Zalman: Again, not a lot, but we still did. I think that, you know, we were very cautious with – look, last year was a year that we wished would never happen, starting in March with Silicon Valley Bank and its signature bank. And so – and then you have people who were still being very critical of, you know, what kind of bond portfolios you have, what kind of losses there are.

Unnamed Speaker: But if you look at it in the long term, we see really, I think in the second half, we see more expansion in the margin than we see in the first half of it, just because it takes time for the assets to be repriced. I think the guidance we gave last quarter that, you know, in 24 months, our name being like 330, 340, our model still shows that expansion in 24 months at 330, 340. So I think it's looking promising.

Speaker Change: Probably it takes six months or a year to work out of those those credits and I think that our.

Speaker Change: Our nonperforming should be back down to more historical levels, Yeah, I'll, just add to that and it will run the model and based on the model, what we see how much provision needed, but since we have.

David E. Zalman: And so, you know, we took all that into consideration. The regulators were a little bit antsy about everything, too, liquidity and that. So we were more cautious. I think we all feel much better right now.

Speaker Change: Full reserve for those.

Speaker Change: Acquired loans, we didn't need to put any provision based on the model, but we will be running the model with the economic variables there and see if it requires any provision on that our models are still showing that we have plenty in the accounts.

Unnamed Speaker: I think that Dave, I think that what we said is that, quarter to the quarter before that in 12 months that we'd be at 3%. I think that if you look at the models that we're running again, these are just models and the models taking the consideration that you have, you know, you're not going down on loans, you're not going up on loans, you're not going down on deposits, you're not going up. It's a pretty static model.

David E. Zalman: And I think that if we don't use it in another way, you know, our perspective is that we always like to increase dividends, of course. That's kind of our deal. But if we don't, we wouldn't use it all there. We would probably look at, you know, if we don't get an M&A deal, then we will look at purchasing stocks if the stock's not appropriately priced.

Speaker Change: Yes that will have a little bit of a recessional munis site.

Speaker Change: Okay Super that's great color I appreciate all the time guys.

Speaker Change: Sure.

Unnamed Speaker: The model reflects that, you know, in six months, we're looking at around 296 and 12 months, 314 and 24 months, even better than that. And what's good, even if interest rates go up or down, our models are still showing our net interest margin expanding to really more normal levels. So we're pretty excited about that. You're great.

Speaker Change: The next question comes from Mignon Ghazaliyah from Morgan Stanley. Please go ahead.

Mignon Ghazaliyah: Hi, good afternoon.

Michael Rose: Make sense. And then last for me, Kevin, can we just get an update on the warehouse since you guys came in a little bit higher than what you talked about last quarter? Thanks.

Mignon Ghazaliyah: Yes, maybe.

Mignon Ghazaliyah: Big picture question on loan growth.

Mignon Ghazaliyah: I mean, it looks like we're going to get a soft landing.

Kevin J. Hanigan: Yeah, Michael, as you know, I always talk in average balances for the quarter, and we did come in a little higher. I think my high-side estimate was maybe $750 million, and we ended up at $770 million as an average for the quarter. Um, the first quarter is typically the weakest quarter. It hasn't always shown up that way over the last 10 years because we have had so many refinance booms and re-refinance booms and everything else, but the first quarter is generally pretty weak. January of this year has started off a lot like January of last year.

Mignon Ghazaliyah: Many of your peers are talking about loan growth re accelerating in the back half of the or and.

Unnamed Speaker: And so are you assuming the forward curve in that analysis at all, even though you're keeping the balance sheet static? Yeah, on this term, the numbers we showed, that is, you know, rates staying the same. But if you look at our model being 100 basis points down or 200 basis points down, our margin still holds up. I think down to 124 months, our margin might be a few basis points less than what we're projecting in the flat environment, but it's still expanding in the 12-24 months. Okay, great.

Mignon Ghazaliyah: It sounds like you're saying that too, but you still have all of this capital.

Mignon Ghazaliyah: On the books, so why not lean in a little bit more now and get that loan repricing and NIM benefit faster right now, especially if you can put it in some longer dated launched and lock in some red.

Yes, I think we're thinking about the exact opposite way.

Mignon Ghazaliyah: Yes.

Kevin J. Hanigan: The average, Michael, through last night has come down from that 770 for the fourth quarter down to 704. And last night's balance was probably $610 million. So we're hitting a low point. I expect it to drift a little lower and get under $600 million for a few days. Before it begins to rebound, so January and February are generally going to be pretty weak. March picks back up. For my best guesstimate for the average for the quarter, I'm going to say $650 million, but it could be as low as $625. If I had to pick a number, I'd go with six.

Mignon Ghazaliyah: <unk>.

Mignon Ghazaliyah: We all are still hopeful of a soft landing I believe that's a possibility.

Unnamed Speaker: And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year? That's probably the million-dollar question, Dave, you know. It's just I don't know that anybody really, historically, we've always grown the bank organically, two to two to 4%. You know, the last several years were kind of crazy.

Mignon Ghazaliyah: At today's rates, it's really hard to make a lot of things work.

Mignon Ghazaliyah: By way of example.

Mignon Ghazaliyah: Go back two years ago, when we had lower rates. If we were looking at the multifamily construction project, we might have done it.

Mignon Ghazaliyah: Low seventy's flown to hard costs kind of kind of a number.

Mignon Ghazaliyah: And that would produce caller.

Mignon Ghazaliyah: A very comfortable 125 debt service coverage ratio, we've been under a little bit of a stress.

Unnamed Speaker: We, you know, we took in 10% a year. And so we did something the other day, we went back and looked, and Asylbek and I looked and said, Okay, so after all the deposits we lost recently, and we went back three years before COVID was really crazy. When you even consider the amount that we gained, we're still about 15% ahead. So that still gave us about a 5% organic growth rate over those years. And going forward, though, you know, it's really hard because, again, I'm not trying to make excuses, but one of the main objectives of the Federal Reserve is to really slow the economy. And that comes in two ways: one, increasing interest rates, reducing borrowers, and number two, pulling money out of the system.

Mignon Ghazaliyah: Today that same exact loan.

Michael Rose: Sounds good. Thanks, Kevin. And thanks for taking all my questions, everyone. The next question comes from Brandon King with Truer Securities. Please go ahead. Hey, good morning. Good morning.

Mignon Ghazaliyah: <unk>.

Mignon Ghazaliyah: We'll require somewhere between 50% and 52% equity to get that same kind of the comfort to debt service coverage ratio level.

Mignon Ghazaliyah: So.

Mignon Ghazaliyah: We could lean into that but there's not many equity players who want to lean into that with us.

Brandon King: So I had a question on deposits and, you know, we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice? Some of your core deposits, given that you're already quite low compared to some of your competitors. So if you just look at the cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program, we have $3.7 billion paying around 5%. So any cut we have is going to have a direct impact on that, so we're going to get direct benefit from that standpoint.

Mignon Ghazaliyah: They're just going to wait for a better time and lower rates to do some of these projects. So.

Mignon Ghazaliyah: We're being cautious and I think we're being prudent and cautious at the same time.

Mignon Ghazaliyah: I think we will we will get our fair share and I believe we will grow.

At or slightly above the GDP rates.

Mignon Ghazaliyah: Just maybe a little backend loaded as I say I think we have some fortunate here in the first quarter things can always not not close for various reasons, but we've got some some pretty nice deals that are teed up to close that.

Unnamed Speaker: And they pulled a trillion dollars out of the system, you know, in the last year. When they're pulling money out, that's something that's going to reduce money in the banks, unless you're buying brokered funds, and I would say that. You know, we know that some banks do it; I'm not saying it's wrong or right. We just elected to keep our cost of money, Yes, but with core deposits and not chase and not chase the broker fund. So, you know, that's just a position we took. I don't know what's right or wrong.

As for the rate, the second part, I would say probably those special CDs we're offering at 5% right now. So if the rate were to cut down, we would cut those down, probably linger a little bit, but within seven months, we should be able to reprice that balance. That's TD as well, at a lower rate.

Speaker Change: We're pretty optimistic first quarter is going to be pretty good and I think last go ahead Tim.

Speaker Change: The good news is that virtually all of our customers.

Speaker Change: Are doing okay.

Speaker Change: They're not an <unk>.

On other ones, I agree, probably will not be able to cut a lot on some money markets because we don't offer high rates for our customers. So there might be a little bit of delay on that, you know, compared to if you had offered 5% money market, probably could cut right away when the rate goes down. With us, it probably takes time with that. So I think that's overall compositional or deposit.

Financial difficulty.

Unnamed Speaker: And I'm not getting to what you're really asking what we think. I would think, at best, it is probably a two percent gain in deposits. Probably.

Speaker Change: The reason they are not doing more in the marketplace as they are waiting to see if rates do go down.

Speaker Change: And they are waiting to get a little better handle on exactly where the overall economy is headed.

Unnamed Speaker: I think, historically, if you look at our deposits, the first quarter because of tax payment usually goes down a little bit historically, but in the long term, I think we should be able to get to a historical rate. But it all depends on the microeconomic conditions and with the quantitative tightening too, that will impact as well. The main thing is I don't see a 5% organic growth rate or that, not this year. That's for sure.

Speaker Change: But they as entities are are.

David E. Zalman: I would also add to that, Brandon, if rates go down dramatically, which I don't think that they will, quite frankly, but if they do, I think that'll take the strain off of the non-interest bearing deposits leaving the bank with more people. Unless they can get a lot of big interest rates somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also. Got it. Very helpful.

Speaker Change: <unk> had good positions almost all of them, so if and when.

Speaker Change: The picture is brighter and the cost of doing something as Lasse.

Speaker Change: I think where we have an excellent chance of seeing a lot of good loans come our way.

Speaker Change: I think.

Speaker Change: To your lean endpoint the things we would lean in on our.

Brett D. Rabatin: I agree. Okay. Great. Thanks, guys. The next question comes from Brett Rabatin with Hovde Group. Please go ahead. Hey, good morning, everyone.

Speaker Change: Not to not to name any names, but thanks for the really high loan to deposit ratio that may have a customer request for good long time customer that.

Brandon King: And then could you give us kind of the puts and takes on how you're thinking about loan growth this year? And within that, also kind of talk about what you're seeing in regards to prepayment activities. Yeah, Brandon, this is Kevin.

Speaker Change: They would love to do but maybe they just don't have the capacity to do as well or as much anymore.

Unnamed Speaker: I wanted to stick with the balance sheet and the margin and just look at the securities portfolio. It's about $13 billion, and I know you've got over $2 billion in cash flow annually. But if you look at the yield, kind of year over year, it's kind of flattish at $2.07. Does that start to move up, you know, in the next quarter or two? Or can you give us any thoughts on the security portfolio progression from a yield perspective from here? Yeah, since we're not purchasing any new securities, I think yield is going to hold up as what we see at around $2.05. But I think it also depends on how the mortgage rate is going to do. If there'll be a lot of increases or decreases in the mortgage rate, they might speed up a little bit the turnover of those securities, and maybe we'll pick up a little bit of yield there. But overall, we're not expecting the security yield to go up more significantly or come down more. The only way that the yield would go up in the bond portfolio is if we elected, instead of reducing debt or putting the money in the loans where we prefer to put it, we would buy back securities.

Speaker Change: We would like to lean into those where we get a full blown hey, we're going to help you out on this but we wanted to we wanted a full relationship here north of deposits and we wanted to do a full relationship.

Kevin J. Hanigan: I think as we look at the year, you know, our thoughts as we sit here today are kind of 3% to 5% loan growth. I would have said more back-end loaded, but we have had a few nice deals approved in loan committee that we have to fund this quarter. So I think a couple of those are going to fund here towards the end of the month and early into February. And we're talking about some fairly meaningful funding. So I think Q1 might be.

Speaker Change: I see I see ourselves leaning into some of those situations when they come up.

Speaker Change: Those banks.

Speaker Change: They can they can raise money.

Speaker Change: <unk> raised some money in broker deposits, which we've chosen not to do but if you go get a broker deposit of five or five 5%. These days and try to try to make a loan to a good customer.

Kevin J. Hanigan: You know, pretty good for us. In addition to that, we started off Q3, with a lot of payoffs in July, just a ton of payoffs in July. And we had started off Q1 here with very few payoffs. So, and I meant Q4 in that previous statement, I'm sorry.

Speaker Change: Eight in a quarter rate in half, there's just not there's not much in it once you put up.

Speaker Change: Some operating costs in the provision against it so.

Speaker Change: Are the opportunities we would lean into.

Speaker Change: That's absolutely right I think from a competitive standpoint.

Speaker Change: Some banks are just not able to.

Speaker Change: Move forward on the on the loan front in a very aggressive way.

David E. Zalman: We're actually slightly up for loan growth. It's nominal, but we are slightly positive year-to-date. And, again, we've got a couple of big funding rounds coming up. So I think we're comfortable with a 3% to 5% kind of number to the extent that the economy rebounds and GDP is higher than anticipated. That number could go up in the latter part of the year if, in fact, there are rate cuts. As David said, we're probably less enthusiastic about our thoughts about rate cuts than many, and to the extent there are any, we think they'll be later in the year. And I don't mean to speak for David, but I think around this table, we're not as Charged Up About, and other prospects.

Speaker Change: Have a more flexibility and a lot of banks do in that regard so.

Unnamed Speaker: In that case, then it would go up. Otherwise, you know, it's probably going to stay stagnant for the most part of the last. Okay.

Speaker Change: If a bank is.

Speaker Change: Is dragging its feet so to speak in getting an approval. We don't we don't have that problem.

Unnamed Speaker: And then on the funding side, can you give us a refresher on how much you guys have in index deposits? And then just thinking about the usual seasonality for municipal deposits, how much you guys have in that, and how you see the next quarter or two playing out from that perspective? Okay.

Speaker Change: We can look at a deal and give somebody an answer and move forward with it but also you have to.

Speaker Change: Admit that last year was kind of a strange year, we're cautious deposits were leading the bank, where we probably cut our our own loan growth down because we were trying to set a financing dry relationships. We really went back to look just at customers that where customers that could be a deposit customer total relationships. So we probably.

Unnamed Speaker: From the overall funding, let's talk, we have in the borrowing, we used to have about $3.7 billion, around 5%. So we're paying it down with cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposits in time deposits, but that's the special program we introduced paying 5%. We just want to give our customers some way of earning rates, rather than just leading to competition. We want to pay up on those. And those are only seven months of TDA.

Speaker Change: Cut ourselves off from a number of deals last year I think.

David E. Zalman: I'd also comment, Brandon, that I think that, you know, our customers, I'm not saying other banks' customers aren't the quality that ours, but we do have real high-quality customers. And a lot of our customers really were borrowing when interest rates were so low that they left money in their checking accounts. As interest rates – what we saw as interest rates started increasing on their loans, they took money out of their checking accounts and really applied those more to the loans.

Speaker Change: Your point is well taken maybe.

Speaker Change: Do look better but again.

Speaker Change: To make sure I don't think we are a bank that wants to end up with a.

Speaker Change: 90% loan to deposit ratio, we want to have liquidity in the bank and so you have to grow deposits and loans at the same time just to think you can grow deposits are not growth. Thank.

Unnamed Speaker: So we're keeping them short term so when rates come down, we can reprice them quickly and kind of get them out of our system within seven months. So we have about $3.5 billion in the CDs. But out of that, 3.1 billion will be maturing within 12 months, and those special CDs, I think 1.8 billion. The rest of them are money market in non-interest bearing deposits. Okay, and any thoughts on the municipal deposits and how those will trend from here? Generally, municipal deposits really increased at year-end.

Speaker Change: Thank you can grow the loans in non grow deposits would be would be a mistake I know a lot of people don't see that but you need to keep liquidity that if theres anything we should have learned this last year that is to have liquidity in the banking and I don't believe again I'm not judging other bankers I just don't believe the broker deposits as true liquidity that's not.

David E. Zalman: So I think that's probably mitigated and stabilized also. Yeah, we saw that particularly in our C&I book. Right. Just a ton of – Thank you for joining us, which is, it's a good time. Great. Thanks for all the commentary. I'll hop back in the queue. The next question comes from Stephen Scouten with Piper Sandler. Please go ahead. Yeah, thanks. Good morning.

Speaker Change: Core deposits and so.

Speaker Change: We'll keep an eye on both of those both of those sides.

Speaker Change: Yes.

Speaker Change: It served us pretty well.

Speaker Change: Youre not chasing the deposit side.

Speaker Change: But we are starting to inflect that our loan to deposit ratio limits I think we have policy limits at 85%, we're not there yet.

Unnamed Speaker: Again, when we compare this year's municipal deposits to last year, we're down about $500 million. It's just, you know, they're taking it and putting it in a higher tax pool or something like that. So we didn't get as much in public funds this quarter at the end of year-end as we did in the previous quarter. And I think that was a... Yeah, and on the public funds one note, I would say, I think we're down to almost their operating accounts because all the excess they could earn, they probably moved out to tax pools. So we're kind of maintaining their operating account, maybe a little bit higher right now. Yeah, people are still paying tax dollars. But again, most of the money that we do is their operating accounts; it's not their investment, and Dick Bittcher is right. Okay, that's helpful. If I could sneak in one last one just around the Lone Star transaction, Any update there?

Speaker Change: But we have stuck to our core deposit franchise.

Speaker Change: If you look at way more banks than I do but I look actively at a number of banks, particularly during earning season that around our size or in our markets.

Speaker Change: And we came into this in a very enviable position, maybe a 62% to 65% loan to deposit ratio, we didn't have to chase deposits.

Stephen Scouten: I'm just kind of wondering with the Lone Star deal, if that gives any kind of... preparation around future deals or changes maybe how you think about the timeline of approval for future deals, or is this more just still specific to Lone Star in particular? I can't say it's specific to Lone Star Army because, like I said, it's out of the Justice Department.

Speaker Change: To fund loans, we could bring commercial deposits run off our loan to deposit ratio.

Co op and maintain the core deposit franchise underneath it all and as a result, we come through a quarter, where our total funding cost goes up only four basis points.

David E. Zalman: It's really at the FDIC right now. I think all deals are going to take longer. But again, I think that... I still feel certain that we have a good banking system. Thank you for joining us.

Speaker Change: And now is it.

Speaker Change: For interest bearing liabilities that includes the debt to five 8%.

Unnamed Speaker: I know that the Justice Department, you know, is reviewing that one, so it's taking longer, but have you guys heard anything or any update on it from a timeline perspective as to when that might close? We were really hoping to be able to say something at this meeting. Unfortunately, we're not. But we're still, you know; we're still very hopeful that we're going to get the deal done. And, you know, hopefully we'll hear about it soon. Yeah, and you mentioned the Justice Department.

Don't need to tell you where some of the other banks are reporting, but we're seeing numbers above three were seeing numbers above three in a quarter.

Operator: Getting something done today as compared to a few years ago, it's a whole different horse right now. Yeah, fair enough. Okay. And just kind of switching.

Speaker Change: It gives us a $50 to 75 basis points.

Speaker Change: Spread to them.

Speaker Change: In this kind of environment, because we haven't chased it.

Stephen Scouten: This particular deal had some more issues than just the normal issues; hopefully, we won't run into some of that stuff and it wasn't with their bank. Let me just say that with this one, there was just a number of different things that we had to go through. Got it. And then just hopping back to the idea of the net interest margin, I know you guys said you're not assuming we'll see as many rate cuts as maybe the forward curve would suggest, and I agree with you there. But, I mean, if we get, you know, can you guys quantify maybe for each 25 basis point cut, maybe there's a basis point or two in them downside, or do you think even with those cuts, you know, over that 24-month period of time that you stated that there really is a de minimis kind of downside on a basis point perspective?

Speaker Change: And as I, just do look at our overall cost of funds.

Speaker Change: It's driven largely now 37, almost 38% of our <unk>.

Unnamed Speaker: We're out of the Justice Department. Right, Rabin, yes, they've cleared it. Okay. Okay. Great. Thanks for all the power.

Speaker Change: Interest bearing cost is in our debt and as you know, we're all we're paying down that debt as the bonds.

Michael Rose: We're still at the FDIC, and they take off most of Christmas for December, so... The next question comes from Michael Rose with Raymond James. Please go ahead.

Speaker Change: Our cash flow to us so we expect $2 billion worth of pay downs and the debt roughly.

Speaker Change: And.

Yes.

Speaker Change: That's meaningful.

Speaker Change: That was $52 million worth of cost.

Speaker Change: In the first quarter or in the fourth quarter out of a $139 million worth of deposit costs. So we've got that to look forward to which is why we're so enthusiastic about our prospects for NIM improvement I think we're at a point in time, where.

Unnamed Speaker: Hey, good morning, guys. Thanks for taking my questions. Wanted to start on some of the proposals that are out there as it relates to interchange and overdrafts. And I know these won't hit until later this year or next year for that matter, but have you guys looked at those, and what could the potential impact be on prosperity? Thanks.

Speaker Change: Where we were all locking into longer term assets when rates were so low I think now I think your actions that you do right now by buying money and not having core deposits increasing your rights on all your deposits could be the next mistake. So I think what may not look so good right.

Stephen Scouten: Yeah, I think if you just look at our balance sheet and kind of go through what the impact would be, I think the first impact would be on our funding borrowing side of it. We have $3.7 billion that we're paying down, but if there were a rate cut, you would see an immediate impact over there. I think with a 25 base points cut, I don't think the loan rate would kind of change significantly. I think it's just going to reprice at 8% or whatever we're getting right now. So, if you look at long-term, I mean, our balance sheet is very neutrally positioned, so we benefit in rate cuts or increases in this situation due to rate cuts. And like I said, in 24 months, if we're looking at our model, our margin, yeah, it drops a little bit, but not significantly from what the guidance we gave you over 24 months because the power of our repricing of assets continues. If you look at our loans, which... We have about a principal pay down of about four and a half.

Unnamed Speaker: If you hit one of my hot buttons, Michael, I hope, you know, it goes through. I think it's in the latter part of 2025. I'm hoping maybe there'll be a new administration that can stop it because it's really, it's really a misguided thing to think that bringing the overdraft charges to zero or $3 or $17. I mean, really. It's a behavior, I think, that you don't want to promote.

Speaker Change: Now may be prudent going into the future.

Speaker Change: Got it I really appreciate the fulsome answer here.

Speaker Change: Maybe on the core deposits I think you said a little bit earlier that for niv growth.

Speaker Change: Good.

Unnamed Speaker: I mean, think about it on the other end, that, you know, it's like telling your kids something's wrong, but you're going to reward them for continuing to do it. And think on the other end, where the person is giving a check and is buying a good from the merchant or the retailer, and that person on the other end, they're not getting their money. They've lost the money on the deal, where the bank, a lot of times, pays that overdraft. You know, you won't see that.

Speaker Change: See some more customers leave more deposit rate.

Speaker Change: It's go down.

Speaker Change: How how quickly do you do you think that can happen do you think that can happen as soon as you get three or four rate cuts or do you need to see rates go down closer to maybe three to three 5% range to fall youll see that happen.

Speaker Change: I think you will see I don't think it will be they are not going to rush to bring it back in but every time the rates go down and I think you could get three or four rate cuts youre talking 100 basis points that would be meaningful.

Unnamed Speaker: You won't see that overdraft. You know, we might not be paying them in the future. So the bottom line, I think it's inconceivable. I'm hoping that Rhoda Chopra will reconsider this deal. I'm hoping he will

Speaker Change: I mean, I think it wouldn't I think again I think you'll start seeing.

Unnamed Speaker: I hope we can get to talk to him. And more so than that, if banks have to continue, they need service charge income. I mean, the regulatory burden is just unbelievable right now. And so, banks would have to go to a different type of service charge, where we're offering free checking accounts right now to people on the lower end with lower amounts of deposits. I think in the future, if this deal does go through, banks will have to say, okay, you know, your minimum balance now may have to be $2,000 or $3,000, or you're going to get a service charge. And that would eliminate a lot of the lower-end checking accounts that the regulators and the Fed have really wanted us to get those people to have accounts. So, you know, I don't think it's completely over yet.

Speaker Change: People moving money back in I don't think that you're ever going to go back as zero deposit side, I shouldn't say never but not in my lifetime, but.

Hi.

Speaker Change: What youre going to see as interest rates probably.

Speaker Change: Again, I don't think I don't know if you think in the first quarter to the second quarter, having said this a changes so fast from quarter to quarter.

Speaker Change: Thank you Yossi, probably interest rates go down the short term interest rates.

Speaker Change: Again, you are here.

Speaker Change: Year, five year and 10 year I think these are rates that are going to be this is normalization and youre going to probably see those rates, where they are at or maybe even go up a little bit.

Speaker Change: Last point is I think this is playing out pretty much the way we bought exactly let's just go back to last quarter I Havent re read the transcript.

Unnamed Speaker: But if it does, there's no question it would be impactful to us. The impact would either be whether or not it's that, you know, are they going to let you charge $17? Are they going to let you charge $3, you know? So if that's the case, it could be, you know, if it's $17 and you get to charge $17 or $15, it's probably $10 or $11 million before tax. If it's $3, then it's more like, again, I think probably more like 16 or 17 before tax, something in that category. On the other hand, we would have to find ways to increase service charges and other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire cost, but you would have to come up with some other charges, some other. I gave you too much information, Michael.

Speaker Change: I should probably do that before I come in to these calls but.

Speaker Change: I do recall us talking about when rates pause.

Speaker Change: It is not unusual in fact, it's expected that deposit funding cost and mix changes continue for about six months thereafter.

Speaker Change: And I think we're all into that process right now.

Speaker Change: So.

Speaker Change: Some of this mix change to go on is another quarter, yes.

Speaker Change: But it is coming at lower and lower levels I mean, our total cost of funds went up.

Speaker Change: A whopping four basis points.

Speaker Change: Last quarter, and so it's abating, but it's playing about how its played out in prior cycles, but the fed pauses and rates continue to go up in the banking system for six months I mean, your point is well taken in previous quarters, we actually said that historically banks at 20 or 30% of their money in certificates of deposits.

Unnamed Speaker: No, that's great, and sorry to hit a hot-button topic for you. Maybe just as a follow-up. You guys announced a new share repurchase program the other day, and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of balance sheet or loan growth this year. Any thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign? I mean, I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. I think we did. Yes, we did. We did use it last year,

Speaker Change: And as rates go up we would see money lead where we.

Speaker Change: We're at and go into some of these higher rate sales and that's exactly what's happening.

Speaker Change: Vice versa will happen when rates go back well were halfway through it let's hope we're right about that.

Speaker Change: The second half.

Speaker Change: Quarter being at the end of it.

Speaker Change: Great really appreciate it thank you.

Speaker Change: Yes.

Speaker Change: The next question comes from Jon <unk> with RBC capital markets. Please go ahead.

Unnamed Speaker: I think how many shares, Colin, did we purchase last year? About 1.2 million shares. 1.2 million.

Jon: Good morning.

Jon: Good morning, just to follow up on that you think that within the next couple of quarters.

Unnamed Speaker: Again, not a lot, but we still did. I think that, you know, we were very cautious with... Look, last year was a year that we wished would never happen, starting in March with Silicon Valley Bank and Signature Bank. And then you have... People were still being very critical of, you know, what kind of bond portfolios we had, what kind of losses there, and so, you know, we took all that into consideration. The regulators were a little bit antsy about everything, too, liquidity and that, so we were more cautious. I think we all feel much better right now, and I think that if we don't use it in another way, you know, our perspective is that we always like to increase dividends. Of course, that's kind of our deal.

Jon: Deposit costs really stopped going up for you is that fair.

Jon: I would say absolutely, yes, if you look at.

Jon: Let's just look at certain certainly overall funding cost exactly if you look at our cost of fund John.

Well I was just kind of look at the trends from the.

Jon: Q4 averages to Q1 increased 41 basis points increase from second of from first to second like 46 basis points and then Dennis increased only 18 basis point at this time, we only had three basis points incurred cost of funds. So you can see it's coming down yes.

We had significant increases in the first few quarters about pace of increase is slowing down, especially if you have some.

Unnamed Speaker: But if we don't, we wouldn't use it all there, we would probably look at, and if we don't get an M&A deal, you know, then we will look at purchasing stocks if the stock's not appropriately priced. I think my high-side estimate was maybe $750 million, and we ended up at $770 as an average for the quarter. The first quarter is typically the weakest quarter. It hasn't always shown up that way over the last 10 years because we have had so many refinance booms and re refinance booms and everything else, but the first quarter is generally pretty weak. January of this year has started off a lot like January of last year.

Jon: <unk> cabinets should slowdown or a couple of ago, maybe reverse yeah, obviously, it's a big part John of R. R.

Jon: <unk>.

Jon: Our feelings about our strength of our feelings about our NIM improvement.

Jon: It's a big component of it obviously.

Jon:

Jon: One more on deposits.

Jon: Klein in deposits from a year ago.

Speaker Change: Would you say, that's all rate driven and does that stuff gone forever.

Speaker Change: Or can that start to come back.

Speaker Change: I mean rates are stable.

Speaker Change: Yes.

Speaker Change: Hi.

Speaker Change: I think that rates do you think that I don't know that its all rate driven.

For the most part it is I think I think it is there is some portion of I don't know what where.

Speaker Change: We have big accounts that have $20 million to $30 million in the account and even though the CFO may like us they have a board of directors and our CFO says well why take any chance you can go to J P. Morgan Chase or Wells Fargo. So that that's certainly asked has some impact but I have noticed.

Unnamed Speaker: The average, Michael, through last night has come down from that 770 for the fourth quarter down to 704. And last night's balance was maybe $610 million, so we're hitting a low point. I expect it to drift a little lower and get under $600 million here for a few days before it begins to rebound. So January and February are generally going to be pretty weak. March picks back up. For my best guesstimate for the average for the quarter, I'm going to say 650 million but it could be as low as 625. But if I had to pick a number, I'd go with six.

Speaker Change: As things become more normalized people aren't fearful I think you will get.

Speaker Change: A good chunk of the money back.

Speaker Change: I do believe I think we're already seeing that David.

Speaker Change: We've had.

Speaker Change: A number of customers.

Speaker Change: That initially moved money out.

Speaker Change: Nine months to a year ago really nine months ago.

Speaker Change: When the bank started to fail.

Kevin J. Hanigan: Sounds good. Thanks, Kevin, and thanks for taking all my questions, everyone. The next question comes from Brandon King with Truer Securities. Please go ahead. Hey, good morning.

Speaker Change: They move money out.

Speaker Change: For fear of insurance not so much for for rates.

Speaker Change: And most of that money went to treasuries.

Speaker Change: And four.

Speaker Change: Really about one or two months now.

Unnamed Speaker: Morning. Good morning. So I had a question on deposits, and you know, we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice? some of your core deposits given that you're already quite low compared to some of your competitors. So if you just look at the cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program, we'll have $3.7 billion, paying around 5%. So any cut we have is going to have a direct impact on that, so we're going to get direct benefit from that standpoint.

Speaker Change: We started to see some of that money come back not a flood of it but we started to see some of that money come back from existing customers.

Speaker Change: So I do think there is.

Speaker Change: Less fear in the market of bank failure.

Speaker Change: And if I'm right about that and then the competition is really rate driven not not fear of failure.

Speaker Change: I think it's more sell rate driven now.

Speaker Change: I haven't looked at it system wide Jamba. If you think about the fed has taken money out of the system <unk> is down. So if you look across the banking system and new just how many deposits had left and subtract it out the amount of them two went down because of fed actions. The rest would have to be rate driven.

Unnamed Speaker: As for the rate, the second part, I would say probably those special CDs we're offering at 5% right now. So if the rate were to cut down, we would cut those down, probably would linger a little bit, but within seven months, we should be able to reprice that. That's TD as well, at a lower rate.

Speaker Change: Okay.

Speaker Change: It could be service levels, but largely retro.

Speaker Change: Okay, and then just a small one.

Speaker Change: It looks like it was a PC demand, but can you touch on the charge off there and is there anything left.

Unnamed Speaker: On other ones, I agree, probably we'll not be able to cut a lot on some money markets because we don't offer high rates for our customers. So there might be a little bit of a delay on that, you know, compared to if you could offer 5% on the money market, you could cut right away when the rate goes down. With us, probably it probably takes time for that. So I think that's the overall composition of our deposit. I would also add to that, Brandon, if rates go down dramatically, which I don't think that they will, quite frankly, but if they do, I think that'll take the strain off of the non-interest-bearing deposits, leaving more people, unless they can get a lot of big interest rates somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also. Got it. Very helpful.

Speaker Change: The first kindle that might be coming through.

Speaker Change: Well number one.

Speaker Change: All of the first capital issues that we're aware of and we believe we are aware of all of them are fully reserved at this time.

Speaker Change: So theres not going to be any surprise loss in there based on what we see right I do.

Speaker Change: Thanks.

Speaker Change: We did I think in some of the first phones that we put on.

Speaker Change: We did.

Speaker Change: We do ask easily anytime we do a deal we go with management and what they say they felt that they that there was even though we're reserved column fully four then we still put them on the books they thought that they could be collected.

Speaker Change: Aren't collected and then you had other loans that came back on.

That we have put back on nonperforming I don't think those loans are like the loans that we first put on we knew these first wells. We've put on were very very challenging we still we're really giving management a chance to believe what they said and again it just it just didn't work out so but again I don't think that the loans that we have in outperforming right now.

Brandon King: And then, could you give us kind of the lowdown on how you're thinking about loan growth this year? And then within that, also kind of talk about what you're seeing in regards to prepayment. Yeah, Brandon, this is Kevin.

Kevin J. Hanigan: I think, as we look at the year, you know, our thoughts as we sit here today are kind of three to 5% loan growth. I would have said more back-end loaded, but we have had a few nice deals approved in the Loan Committee that have yet to be funded this quarter. So I think a couple of those are going to fund here towards the end of the month and early into February, and we'll talk about some fairly meaningful funding. So I think Q1 might be..., you know, pretty good for us. In addition to that, we started off Q3, with a lot of payoffs in July, just a ton of payoffs in July. And we have started off Q1 here with very few payoffs. And I meant Q4 in that previous statement; I'm sorry.

Speaker Change: You Shouldnt see those kind of losses the way we charged off those first ones in my opinion, we should've just charging them off to begin with not only reserve on the charter demand to begin with.

Speaker Change: Okay. Thanks for the help I appreciate it you didn't ask about the Queen Mary.

Speaker Change: I think it's I think you've turned the corner there.

Speaker Change: Queen Mary is selling in the right direction, we should reach our destiny soon on the passengers and crews are good spirits.

Speaker Change: That's good.

Speaker Change: The next question comes from Brady Gailey with <unk>. Please go ahead.

Brady Gailey: Okay. Thanks, guys.

Brady Gailey: I wanted to hit on average, earning assets as I look at the dynamics you have loan growth that is expected to outpace deposit growth youre trying to get borrowings down so bond balances are coming down.

Kevin J. Hanigan: We're actually slightly up for loan growth. It's nominal, but we are slightly positive year to date. And again, we've got a couple of big fundings coming up. So I think we're comfortable with a 3% to 5% kind of number to the extent that the economy rebounds and GDP is higher than anticipated. That number could go up in the latter part of the year if, in fact, there are rate cuts. As David said, we're probably less enthusiastic about our thoughts about rate cuts than many. And to the extent there are any, we think there'll be later in the year. I don't mean to speak for David, but I think we're around this table are not as charged up about it. Prospect.

Brady Gailey: Average, earning assets did shrink on a linked quarter basis. So how should we think about the level of average earning assets and between 2004 do you think we could see some continued shrinkage there or do you think that will be more stable.

Brady Gailey: Again these are questions that are.

Speaker Change: It's we think it has definitely become more stable. There is no question I mean your assets depend on your deposits your liabilities that you have in again.

Speaker Change: I think it's a tougher deal right now over time just like.

David E. Zalman: I'd also comment, Brandon, that I think that, you know, our customers, I'm not saying other banks' customers aren't quality at ours, but we do have real high-quality customers. And a lot of our customers really were borrowing when interest rates were, they left money in their checking accounts. As interest rates, what we saw as interest rates started increasing on their loans, they took money out of their checking accounts and really applied those more to the loans. So I think that's probably mitigated and stabilized also. Yeah, we saw that particularly in our C&I book. Right?

Speaker Change: We just like as assets grew dramatically they came down pretty good over the last year, So things will stabilize again and even though.

Speaker Change: That will probably still grow will still grow the assets just because.

Speaker Change: As mentioned said.

Speaker Change: Thank you.

Speaker Change: Loan growth that is true, but Brady I think about it this way.

Speaker Change: We know we have cash flows coming off the bond book of $2, one $2 2 billion.

Speaker Change: Our intention today is blessed that bond book drift lower.

Kevin J. Hanigan: Just a ton of... deposit declines with the money not going out of the bank; it was going to pay off loans. And even we saw some real estate deals where, you know, they might have been at 5% or so and their rate was going to go to 8 or 8.5, and they just elected to pay off the whole loan. I saw certain, you know, smaller loans like that; customers just had money in their accounts, and they paid those loans off, which is, it's a good time. Great. Thanks for all the commentary. I'll hop back in the queue. The next question comes from Stephen Scouten with Piper Sandler. Please go ahead. Yeah, thanks. Good morning.

Speaker Change: Alright.

Speaker Change: Take the money and pay off the flow alright, we're picking up 300 basis points its margin enhancing its.

Speaker Change: Good and all kinds of ways for us.

Speaker Change: It's.

Speaker Change: NII enhancing.

Speaker Change: And you take 5% loan growth on we don't have $20 billion, but call it $20 billion.

Speaker Change: That would tell you you'd have about a $1 billion worth of total asset shrinkage in the absence of long term rates being high.

Speaker Change: <unk>.

Speaker Change: B back into the buying of the bond book.

Speaker Change: Right would be one alternative or loans growing faster, but outside of that I think just the math would be fulfilled.

Stephen Kendall Scouten: I'm kind of wondering with the Lone Star deal if that gives any kind of trepidation around future deals or, you know, changes maybe how you think about the timeline of approval for future deals? Or is this more just still specific to Lone Star in particular? I can't say it's specific to Lone Star, I mean, because, like I said, it's out of the Justice Department; it's really at the FDIC right

Speaker Change: We could actually shrink the balance sheet of $1 billion.

Speaker Change: In that scenario as I've, just described which is what we <unk>.

Speaker Change: Guided to here today.

Speaker Change: And before.

But grow NII.

Speaker Change: Yes.

Speaker Change: I think thats the real story Brady I think growth in loans and all of that is really important but our real story is the growth in the net income on the bottom line I mean, youre, giving again, if our models awry.

David E. Zalman: I think all deals are going to take longer. But again, I think that, You know, I still feel certain that we have a good bank. It may take a little bit more work, but if we make something happen and the regulators like it, they're going to, it'll get done. It's just, there's no question, getting something done today as compared to a few years ago is a whole different animal, right? Yeah, fair enough. Okay. And just kind of switching between them.

Speaker Change: Whereas steel this should be a dramatic opportunity for somebody to come in I mean, youre looking at the income that we're making today compared to where we will be making in.

Speaker Change: It wont change dramatically and real big in 12 months or 24 months, it's a dramatic change and I think that's the real story really and Thats, where we all need to be focusing on not just trying to go and build a bunch of broker deposits into the bank, but focused on what we have our good core deposits make good loans have some growth in there and really <unk>.

Unnamed Speaker: This particular deal has some more issues than just the normal issues. Hopefully, we won't run into some of that stuff. And it wasn't with their bank, let me just say this, it was just a number of different things that we had to go through. Okay. And then just hopping back to the idea of the net interest margin, I know you guys said you're not assuming we'll see as many rate cuts as maybe the forward curve would suggest, and I agree with you there.

Kris the earnings to what we think they will be.

Kris: I agree and I have a few.

Kris: Take a pure mass estimate I know it takes time to pay down borrowings, but if you take a pure math of $2 billion spread of.

Kris: 3% youre going to get from paying down the borrowings.

Kris: $660 million annualized and if you have that fixed loans that prints.

Kris: Principal Paydown and reprice that we'll have our $2 5 million or 1 billion I'm, sorry that is at 3% spread is in either.

Unnamed Speaker: But I mean, if we get you know, can you guys quantify maybe for each 25 basis point cut, maybe there's a basis point to a NIM downside? Or do you think even with those cuts, you know, over that 24 month period of time that you stated that there really is a de minimis kind of downside on a basis point perspective? Yeah, I think if you just look at our balance sheet and kind of go through what the impact would be, I think the first impact would be on our funding borrowing side of it. We have $3.7 billion that we're paying down, but if there were a rate cut, you would see an immediate impact over there. I think with a 25 base points cut, I don't think the loan rate would change significantly.

Kris: 75 million I mean, if you look at there Thats why we strongly believe that our margin going to improve in our NII going to improve.

Kris: We said that maybe the first half is going to be a little bit slower, but the second half in <unk> and.

Kris: In 'twenty it looks very strong it's common.

Kris: Sure.

Speaker Change: Okay. All right that's good color and then on M&A.

Speaker Change: Assuming loans targets approved here near term.

Speaker Change: And you start to look at new M&A opportunities.

Speaker Change: David What do you think will be the.

David E. Zalman: Primary focus and you did kind of two smaller deals here recently with low sort of first capital.

Unnamed Speaker: I think it's just going to reprice at 8% or whatever we're getting right now. So if you look at the long-term, our balance sheet is very neutrally positioned, so we benefit in rate cuts or increases in this situation. And like I said, in 24 months, if we're looking at our model, our margin, yeah, it drops a little bit, but not significantly from the guidance we gave you over 24 months because the power of our repricing of assets continues. If you look at our loans, we have principal pay down about four and a half.

David E. Zalman: Before that you've got a bigger deal with legacy, Texas, and Kevin trucks or are you looking for bigger in size opportunities are smaller or.

David E. Zalman: Both.

Speaker Change: I would say, we're looking for banks like we are with good core deposits.

Speaker Change: Good people that run them that can help us build our bank until the future whether that's a.

Speaker Change: A $2 billion bank or at $30 billion Bank.

Speaker Change: I know thats, a big wide range, but a lot of it to me.

Speaker Change: To me really is it's really trying to find banks that are like us that can really help us.

Speaker Change: They have a good core deposit base likely days are that can help us get there if they're not right now making sure that direction.

Speaker Change: I guess I just think that's the way to go and really management is very important that they can help us grow at the same time too, but I think we're going to stick to what we've always stuck to.

Speaker Change: Yes.

Speaker Change: We really need to know that other bank are the other people you need to have that relationship. We've developed these relationships over the years.

Speaker Change: Right now I think that they are out there if you look at the regulatory burden on I've said this before and this rent. It's just unbelievable right now we probably have over 200 people in this bank.

Speaker Change: That really work from a regulatory standpoint, not for us, but BSA fair lending compliance.

Speaker Change: Is that kind of stuff it and most back in technology as you don't even need to go there the expense per technology, where everybody is having to go through this is unbelievable and then theyre talking about cutting.

Speaker Change: K income from overdrafts and stuff like that so there is going to be a tremendous amount of opportunity and I think that we have we do have a large amount of capital. We havent just gone and spent it and I think that we have that opportunity and I think we have a reputation that people will want to join us.

Speaker Change: Again, I've said this several times.

Speaker Change: I can speak as a.

As a seller.

Speaker Change: David.

Speaker Change: As you know because you said in many conferences with me Ive said for three or four years I would never sell the David until the day I thought about selling and I made one phone call and only one phone call I call David.

Speaker Change: Because I wanted his currency not somebody else's.

Speaker Change: I truly made 166 30 in the morning phone call I didn't know David was such a later riser than I was worth later, though.

Speaker Change: He works a whole lot later than I do but.

Speaker Change: My happy hour doesn't start to age that's right.

Speaker Change: Let's start IPR sooner, but I made one phone call and was to David and even with that and we've known each other forever.

Speaker Change: It took us two years of really getting to know each other I mean.

Speaker Change: Open it up the books and thinking about how you put this together and how it works afterwards.

Speaker Change: I don't want to tell you because <unk> seen it for years.

Speaker Change: Prosperity is it's a machine on the M&A side, there is there's no surprises.

Speaker Change: And I would say, we still have those opportunities right now.

Speaker Change: It's just a question getting the FDIC onboard and the regulatory.

Speaker Change: People onboard.

Think we're getting there.

Speaker Change: Alright, that's helpful. And then finally for me just a real quick one I'm guessing the unrealized loss in the held to maturity bond book improve.

Speaker Change: Improved at year end versus linked quarter, what was that number that one unrealized loss. So unrealized loss at the end of December was $1 1 billion net of tax so it came down from one six.

Speaker Change: 6 billion to $1 1 billion or around $1 5 billion from <unk>.

Speaker Change: Decreased by <unk>, 4% to $500 million.

Okay got it thanks guys.

Speaker Change: The next question comes from Ben Garlinger with Citi. Please go ahead.

Hi, good morning.

Ben Garlinger: Kind of reap the margin.

Speaker Change: But.

Speaker Change: David I just had one quick question you said 196 six months from now to require basically 20 basis points of upside on the Tam over the next six months.

Speaker Change: On Friday, and here's a question going up upsizing.

Speaker Change: Our model shows six months to be around 296.

Speaker Change: The static balance sheet static balance sheet, yes.

Speaker Change: Yes got it.

Speaker Change: We've thrown out a lot of numbers just want to make sure I have that one right.

Speaker Change: I think a little bit of a cleanup question.

Speaker Change: So like you said.

Speaker Change: For the expense base.

Speaker Change: 34% to $1 36.

Speaker Change: We look towards the back half of the year is that a good starting point on an organic basis I E not including the geopolitics.

Speaker Change: I agree I think 134 136 is a good starting point and I think that's going to be.

That range, probably first half of the year and probably increase a little bit in the second half of year and I think I gave the guidance last quarter being around 2% maybe from the starting point of 134 136 for the second half what I think is still good guidance about 2% increase because a few dollars merit increases and what we talked to.

Speaker Change: There's a lot of technology expenses coming due with that so.

134, 136 is a good starting point not including onetime items.

Speaker Change: Right right right got you, Okay, and then if loan growth is better than expected. We're assume that's probably on the higher end of the range reflects payout commission kind of things Yeah. I mean, if you have the loan growth that would be some pick up there.

Speaker Change: Okay.

Speaker Change: It's a good comps okay I appreciate.

Speaker Change: Et cetera.

Speaker Change: The next question comes from Brody Preston with UBS. Please go ahead.

Brad Milsaps: Hey, good morning, everyone.

Hi.

Brad Milsaps: I just wanted to ask a few questions.

Brad Milsaps: The first one was a little tricky tact, but I noticed that the borrowing rate ticked down this quarter.

Speaker Change: Wanted to ask could you maybe substitute any any borrowings for bts usage at all.

Speaker Change: We have we'll have subsequent and it pretty much 100% of it. So we owned the DTF right now.

Speaker Change: That's why and without the rate decrease we were able to reprice those.

Speaker Change: Yeah.

Speaker Change: And that all happened to that happened early in the quarter or did that happened late in the quarter I'm just trying to think about the spot rate on the borrowings yeah. It was later in the.

Speaker Change: Year, and a spot rate was $4 80.

Speaker Change #100: Got it alright coal.

Speaker Change #100: On the loan yields.

Speaker Change #100: Wanted to better understand the trajectory of the core loan yields that youre expecting within the within the margin modeling that you all are doing.

Speaker Change #100: On a quarterly basis through 2024.

Speaker Change #101: Yes on that.

Speaker Change #101: Low margin.

Speaker Change #101: It's just based on our model.

Speaker Change #101: Our model shows that like I said would have what $4 5 billion coming due which is.

Speaker Change #101: 60% fixed 40% is all of the variables so that.

Speaker Change #101: <unk> already baked in so we're repricing about 60% of it in the market.

Speaker Change #101: Repricing on the loans I think the average loan rate on those fixed loans of about 5%. So we're repricing around 8% in the model.

Speaker Change #101: Okay.

Speaker Change #101: And then the last one was I do just want to circle back to the buyback.

I know you said.

Speaker Change #101: But you do it.

You've never not done it if you have the authorization.

Speaker Change #101: But it seems like capital returns are becoming a bigger theme amongst.

Your mid cap peers.

Speaker Change #101: And so just given the capital advantage that you all have and given the fact that this lone star deal is taking longer.

Speaker Change #101: Is there any reason to think that you might not look to be aggressive at all and I guess I'm asking.

Speaker Change #101: Is there anything in as Lonestar stopping you from wanting to be aggressive on the buyback.

Speaker Change #101: I'm, just trying to better understand what's the holdup.

Speaker Change #101: As it relates to it just given the stock price.

Speaker Change #101: I think historically, we've really.

Speaker Change #101: Buying our stock back we have when the price didn't seem appropriate when it went kind of crazy Thats really what we always use our buyback noncore, but army seen really has always been to take our earnings and increased dividends and also to do mergers and acquisitions and I think that.

Speaker Change #101: That's our focus this last year I would have to tell you that.

Speaker Change #101: I mean, we're almost forgetting that what we went through in March through December I mean, the regulators and everybody just got really nervous. So we we were really trying to build capital at the same time till we didn't care that we have so much capital in fact, it was a good position to be in and I think it's a good position to be right now but.

Speaker Change #101: When it's appropriate we will buy stock back if it's an appropriate time theres no question, but again, we're focused on M&A and and increasing dividends and I think it's important to emphasize that that potential.

Speaker Change #101: Our M&A right now is very significant right.

Speaker Change #101: May or may not happen, but its out there.

Speaker Change #102: What's the what's like Yeah go ahead, David I'm sorry.

David E. Zalman: Thank you.

David E. Zalman: We in the past that you can really make.

David E. Zalman: More money.

David E. Zalman: If you make a good M&A deal and you can see more accretion. There then you can't just buying back your stock, but again, that's not always true and so we'll have to look at each deal on its own at the same time.

Speaker Change #103: Got it is there a is there a minimum threshold on CET. One that you wouldn't want to go below or is there like kind of like a medium term or longer term level of CET. One you think is appropriate for the bank.

Speaker Change #103: Just given the relatively lower risk profile of it.

Speaker Change #103: I'm more of a leverage ratio guy.

Speaker Change #103: No I understand that really you just take your goodwill out divided by your <unk>.

Speaker Change #103: Their assets and achieve your leverage ratio and I think we're probably at around 10% right now and.

Speaker Change #103: Gosh.

Speaker Change #103: I remember in the old days, if you had 5% or 6% that was pretty good. So I think the regulators want you to get to where there's double digit is I don't think you have to be but I think they like us that we are right there.

Speaker Change #103: Like to maintain it if we did a deal or I don't think that ever want to drop below 8% on a leverage ratio. That's just my gut feeling right now.

Speaker Change #104: Got it. Thank you very much for taking my questions.

Speaker Change #104: <unk>.

Speaker Change #105: This concludes our question and answer session I would like to turn the conference back over to Charlotte Rashi for any closing remarks.

Charlotte M. Rasche: 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.

Charlotte M. Rasche: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Charlotte M. Rasche: [music].

Charlotte M. Rasche: Okay.