Q4 2024 Prosperity Bancshares Inc Earnings Call
[music]
[music]
[music]
Come over here.
Speaker Change: Good morning, and welcome to the Prosperity Bankshare's 4th Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw your question, please press star, then 2.
Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte Rasche: Thank you. Good morning ladies and gentlemen and welcome to Prosperity Bankshare's fourth quarter 2024 earnings conference call.
Charlotte Rasche: This call is being broadcast live on our website and will be available for replay for the next few weeks. 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 Tomanis, Jr., Chairman, Asylbek Osmonov, Chief Financial Officer.
Eddie Safety, Vice-Chairman
Kevin Hannigan, President and Chief Operating Officer
Maze Davenport: Maze Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer, is unable to join us today.
Maze Davenport: David Zalman will lead off with a review of the highlights for the recent quarter.
Speaker Change: 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 disclaimers.
Speaker Change: Certain of the matters discussed in this presentation may constitute forward-looking statements.
for the purposes of the Federal Securities Laws.
and as such may involve known and unknown risks, uncertainties.
Speaker Change: 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.
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.
Speaker Change: including forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
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 2024 conference call.
David Zalman: Our net income was $130 million for the three months ending December 31st, 2024 compared with $95 million for the same period in 2023, an increase of $34 million, or 36%.
David Zalman: The net income per diluted common share was $1.37 for the three months ended December 31st, 2024 compared with $1.02 for the same period in 2023, an increase of 34%.
David Zalman: The changes were primarily due to an increase in net interest income and a decrease in the FDIC Special Assessment.
David Zalman: Excluding the merger-related expenses and the FDIC's special assessment, each net of tax net income was $111 million or $1.19 per diluted common share for the three months ending December 31, 2023.
David Zalman: So when comparing earnings for the 4th quarter of 2024 with the 4th quarter of 2023,
excluding the merger-related expenses and the FDIC Special Assessment.
the net income increased $18.7 million or 16.8%.
David Zalman: and diluted earnings per share increased 18 cents or 15.1% for 2024.
David Zalman: As previously mentioned, as our assets continue to reprice, earnings and return on assets have increased.
We expect this trend to continue in 2025.
David Zalman: Our annualized return on average assets and average tangible common equity for the three months ending December 31st, 2024 were 1.31% and 13.5% respectively.
David Zalman: Prosperity's efficiency ratio, excluding the net gains and losses on the sale, write-downs, or write-up of assets and securities, was 46% for the three months ending December 31st, 2024.
David Zalman: The net interest margin increased 30 basis points to 3.05% compared with 2.75% for the fourth quarter of 2023.
David Zalman: As previously mentioned, we expect a higher net interest margin for 2025 as our assets reprice, subject to certain assumptions.
David Zalman: On January 21st of 2025, Prosperity Bank shares announced a stock repurchase program.
David Zalman: under which up to 5% or approximately 4.8 million shares of our outstanding common stock may be acquired over a one-year period expiring on January 21, 2026 at the discretion of management.
David Zalman: With regard to loans, the loans were $22.2 billion at December 31, 2024, an increase of $968 million, or 4.6%.
David Zalman: compared with $21.2 billion at December 31, 2023, primarily due to the merger with Lone Star Bank.
David Zalman: Excluding the loans acquired in the merger and new production at the Acquired Banking Center since April 1st, 2024, loans at December 31st, 2024 decreased $88 million compared with December 31st, 2023.
David Zalman: Overall, when excluding the increase in loans due to the merger, loan growth was essentially flat in 2024. However, we did hear positive comments from our customers after the election.
David Zalman: Time will tell, but we should experience organic loan growth in 2025 if our customers follow through with their positive momentum.
David Zalman: We also disposed of or worked through a number of problem loans from the first capital acquisition, which reduced total loans.
David Zalman: With regard to deposits, deposits were $28.4 billion at December 31, 2024, an increase of $1.2 billion, or 4.4%, compared with $27.2 billion at December 31, 2023.
David Zalman: primarily due to the merger. Linked quarter deposits increased $293 million, or 1%, 4.2% annualized from $28.1 billion at September 30, 2024.
David Zalman: Excluding the deposits assumed in the merger and new deposits generated at the Acquired Banking Centers since April 1, 2024, deposits at December 31, 2024 increased by $108 million compared with December 31, 2023.
David Zalman: Deposits started to normalize in 2024 with more deposits coming in than leaving the bank.
Prosperity has a strong core deposit base.
David Zalman: with a low cost of deposits of 1.44% for the fourth quarter of 2024.
compared with 1.53 percent.
for the third quarter.
of 2024, a decrease of nine basis points.
David Zalman: Additionally, we have non-interest bearing deposits of $9.8 billion, representing 34.5% of our total deposits.
David Zalman: With regard to asset quality, our non-performing assets totaled $81.5 million.
David Zalman: are 23 basis points of quarterly average interest earning assets at December 31st, 2024, compared with 72 million, or 21 basis points, of quarterly average interest earning assets at December 31st, 2023.
David Zalman: and 89 million or 25 basis points of quarterly average interest earning assets at September 30, 2024.
David Zalman: The allowance for credit losses on loans and off-balance sheet credit exposure was $389 million at December 31, 2024.
David Zalman: Prosperity continues to be interested in merger and acquisitions and will pursue a partnership when the transaction makes sense for the shareholders and associates of both institutions.
David Zalman: Early indications show that banks are more open to merger transactions with the new administration as it appears that the agencies responsible for transaction approval will be more favorable for entertaining merger proposals.
David Zalman: We're excited about the growth and future of our company, the Texas and Oklahoma economies are some of the best in the country. Texas has no state income tax and both Texas and Oklahoma have a business-friendly political climate.
David Zalman: The Texas population grew more than any other state in 2024, with the addition of 563,000 people, bringing the total population to 31.3 million.
David Zalman: Further, according to Forbes in their July 2024 issue, there have been 209 corporate relocations to Texas since 2018. All of this bodes well for our future growth.
David Zalman: Prosperity has a strong capital position that provides opportunities to participate in mergers and acquisitions, repurchase stock, or fund organic growth without the need for additional capital.
David Zalman: We believe that our net interest margin should continue to expand to a more normal ratio as our assets continue to reprice, thereby increasing our earnings per share. We also have strong core deposits with 34.5% of our deposits in non-interest bearing accounts.
David Zalman: I would like to thank all our customers, associates, directors, and shareholders for helping build such a strong, successful bank.
Speaker Change: 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 achieve. Asylbek. Thank you, Mr. Zalman.
Good morning, everyone.
Asylbek Osmonov: Net interest income before provision for credit losses for the three months ended December 31st, 2024 was $267.8 million.
an increase of $6.1 million.
Asylbek Osmonov: compared to $261.7 million for the quarter-ended September 30, 2024, and increase of $30.8 million compared to $237 million for the same period in 2023.
Asylbek Osmonov: For the full year 2024, net interest income increased $70.1 million from $956.4 million in 2023 to $1.026 billion in 2024.
Asylbek Osmonov: Fair Value Loan Income for the fourth quarter 2024 was $3.6 million compared to $4.8 million for the third quarter 2024.
Asylbek Osmonov: The fair value income for the first quarter of 2025 is expected to be in the range of $2 to $3 million.
Asylbek Osmonov: The net interest margin on a tax-equivalent basis was 3.05% for the 3 months ended December 31st, 2024.
Asylbek Osmonov: This is 10 base point increase compared to 2.95% for the quarter ended September 30, 2024 and 30 base point increase compared to 2.75% for the same period in 2023.
excluding court's accounting adjustments.
Asylbek Osmonov: The net interest margin for the three-month-ended December 31, 2024, was 3%, compared to 2.89% for the quarter-ended September 30, 2024, and 2.71% for the same period in 2023.
Asylbek Osmonov: Non-interest income was $39.8 million for the three months ended December 31, 2024, compared to $41.1 million for the quarter ended September 30, 2024, and $36.6 million for the same period in 2023.
Asylbek Osmonov: Non-interest expense for the three months ended December 31st, 2024 was $141.5 million.
Asylbek Osmonov: Higher non-interest expense during the fourth quarter of 2023 was primarily due to FDIC special assessment of $19.9 million.
Asylbek Osmonov: For the first quarter of 2025, we expect non-interest expense to remain flat and be in the range of $141 to $143 million.
Asylbek Osmonov: The efficiency ratio was 46.1% for the three-month end of December 31st, 2024, compared to 46.9% for the quarter end of September 30th, 2024, and 55.6% for the same period in 2023.
Asylbek Osmonov: The bond portfolio metrics at 12-31-2024 have a modified duration of 4 and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanis for some details on loans and asset quality.
Thank you, Asylbek.
are non-performing assets.
at quarter end December 31st, 2024.
totaled $81,541,000.
are 37 basis points of loans and other real estate.
Asylbek Osmonov: compared to $89,923,000 or 40 basis points at September 30th, 2024.
This is a 9% reduction in non-performing assets.
Since December 31st, 2024,
Asylbek Osmonov: $2,825,000 of non-performing assets have been put under contract for sale.
Asylbek Osmonov: The December 31st, 2024 non-performing asset total was comprised of $75,836,000 in loans.
$4,000 in repossessed assets.
and $5,701,000 in other real estate.
[inaudible]
Net charge-offs for the three months ended December 31st, 2024.
were $2,592,000.
Asylbek Osmonov: compared to net charge offs of $5,455,000 for the quarter ended September 30, 2024.
[inaudible]
This is a $2,863,000 decrease on a linked quarter basis.
Asylbek Osmonov: There was no addition to the allowance for credit losses during the quarter ended December 31st, 2024.
Asylbek Osmonov: No dollars were taken into income from the allowance during the quarter ended December 31st, 2024.
Thank you.
Asylbek Osmonov: The average monthly new loan production for the quarter ended December 31st, 2024, was $333 million.
Asylbek Osmonov: compared to 259 million dollars for the quarter ended September 30th, 2024.
Asylbek Osmonov: Loans outstanding at December 31st, 2024 were approximately $22.149 billion compared to $22.381 billion at September 30th, 2024.
Asylbek Osmonov: The December 31st, 2024 loan total is made up of 39% fixed rate loans.
31% floating rate loans and 30% variable rate loans.
I will now turn it over to Charlotte Rasche.
Charlotte Rasche: Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Gary, will assist us with questions.
Thank you.
We will now begin the question and answer session.
Charlotte Rasche: To ask a question, you may press star then 1 on your telephone keypad.
Charlotte Rasche: If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
Speaker Change: Our first question today comes from Manan Ghasalia with Morgan Stanley. Please go ahead.
Hi, good morning. Good morning.
Speaker Change: I wanted to touch on the NIM trajectory from here. Can you update us on what your models are telling you? You know, I know we've had a couple of cuts taken out of the forward curve. Long end is higher. So any thoughts on how you're feeling about NIM relative to last quarter?
Speaker Change: I think we're still on track to what we said last quarter.
Asylbek Osmonov: I don't remember exactly what I said in here, but I think we've said somewhere between a year in, we should be around 325-335. Is that right, Asylbek? Yeah, 325-330 on average for 2025, and it'll be a little bit higher at the exit in 2025.
Speaker Change: Yeah, I mean, I think we feel good with the net. I mean, if everything goes, there's no black swan out there. I'll steal some material from John Armstrong this morning in an email where he said, the Queen Mary has turned.
Asylbek Osmonov: the coroner and we got the blinker switch on and we're about to hit the southwest freeway so we feel good about it.
Speaker Change: I appreciate that. And then, you know, maybe to talk about loan growth a little bit.
Speaker Change: Can you expand on your comments that you're hearing more positive sentiment from clients and maybe what that means for loan growth over the next few quarters? I ask because your comments on the Texas market were fairly bullish. At the same time, rates are down, credit's doing well. So what's stopping you from really leaning in here?
Speaker Change: Well, I'm going to let Kevin get in here in a minute, too, but the bottom line a lot of times is it's really hard for you guys to see, too, is that as we buy banks,
Speaker Change: We still, a lot of times, the loans that are in the bank may be not up to the same quality that we have. And so it takes us a while, just for example, over the last acquisition, where you guys see just maybe a small loan increase.
Speaker Change: You don't see that maybe we outsourced or replaced probably $400 million in a previous bank that we bought.
Speaker Change: So that's the other side to it too. On the other hand, there has been a lot of growth in Texas.
Speaker Change: at least from a population standpoint. But overall, you still didn't see massive, massive growth in, I think, from anybody on the loan side. And again, we've never been a bank that's really been...
Speaker Change: I'd say we'd go after double-digit loan growth. That's not our deal. I mean, I think we're close to around a 78% to 80% loan-to-deposit ratio. Again, I don't know that we'd ever want to be 100% loan-to-deposit ratio. So that's just some of the factors there, but Kevin, you may want to jump in.
Kevin: Sure David, thanks. I appreciate the question given a little bit of shrinkage in earning asset growth in the fourth quarter of the year. As David said,
Kevin: We, on the first capital acquisition alone, and if we go back and just look at the timing of that acquisition, at the time they closed, that bank had $1,640,000, I think.
in loans, and we have...
Kevin: David would say outsourced, chased off, failed to renew, whatever we want to call it. Almost a quarter of that portfolio, right at $400 million, maybe a shade over $400 million. It won't be nearly as bad.
Kevin: in the case of Loan Star, a much better credit quality bank and a smaller...
Kevin: footprint as well. It was $1.8 billion I think at the time we closed. So I think we're at the end of that process as it pertains to those two acquisitions, which gives us a little more...
Kevin: Leeway to show some growth and have it stick onto the balance sheet. I still don't think it's going to be robust. I do think it will be...
low to mid single-digit kind of growth.
Kevin: Things are improving. Customer sentiment is pretty good. It hasn't manifested itself yet, but I feel like it's coming.
Kevin: Yeah, I think all of those are just those are all comments and even even though you're still seeing a lot of growth
at last year.
Business people still didn't feel as comfortable.
witness
Kevin: with the administration and all the regulatory burden that they were getting and they just didn't feel as good, so we'll see. We already see loan committees and what we're seeing, and Tim made a comment on this, we're already seeing some of the loans pick up already, some of the demand, so we'll see. I mean, again, something could change, but it does seem to be the momentum and the people do want to grow and want to do something, and we seem to be at the right place at the right time.
That's all, thanks.
Speaker Change: I was going to add that I've seen a preview of what's coming in for the Loan Committee tomorrow.
Speaker Change: I generally get a preview of what's coming in on a Tuesday, and we've got some nice things Coming in and particularly nice in that they're not all construction loans that take a while to fund up. We do a construction loan
Speaker Change: We require all the equity to go in first so we can approve a deal and may not fund under it for six to nine months until they put their equity in. We do have a couple nice, expected to be highly funded revolvers coming in.
tomorrow, so it's a little more encouraging.
Speaker Change: Yeah, I think all that is accurate. It's obviously very early in the year. We're not even to the end of January yet.
Speaker Change: So the positive sentiment has plenty of time to manifest itself as we go into the year. So we have a lot of conversations with existing borrowers that might want to do more and potential borrowers.
Speaker Change: So I'm optimistic that we should have a pretty decent growth.
Speaker Change: That's all very helpful, Carla. So maybe just to round out the discussion there between NIM and loan growth, to get to that 325, 335 NIM that you have in your model, what kind of loan growth do you need to get there?
Speaker Change: For the model, we kept our balances essentially static, but tailwind would have a few variables that have positive NII and NIM impact for us. First of all, we have about...
Speaker Change: Well, with $5 billion of loans, the principal pay down each year, so we say about 60% is more at a fixed rate.
Speaker Change: and I think the average was around 525 or so. So if we reprise that 525 to 725 to 750 at the current rate, there's a pickup more than 200 base points on that loan alone.
Speaker Change: On the second part of it, our securities, we have about $1.9 billion cash flowing from securities.
The yielding is 2.06.
Speaker Change: for the Q4, so we either will be paying down our borrowing, which would have around 4.5%. There's a pickup
So those things positively impact our NII and margin.
Speaker Change: But the bottom line is, those numbers we're giving you, that's based on static and no growth at all, right? Yeah, but there's a shrinkage in that we're paying down our borrowing as we planned.
Speaker Change: So it includes paying down borrowing, around $2 billion in borrowings by the end of the year. Right.
Great. Thank you so much.
Speaker Change: The next question is from John Armstrong with RBC Capital Markets. Please go ahead.
Thanks, good morning. Morning John.
Yep, I, um...
Speaker Change: Appreciate the shout-out, David. Here's the only guy at 530 that emails me in the morning.
David Zalman: Asylbek, just to follow up on the comments on the Securities Portfolio Yield.
David Zalman: that 2.06, what do you think that looks like in a year? It's kind of been stubborn and stuck around the low twos. Do you expect that to climb over the next year with some of these reinvestments that you're making?
Asylbek Osmonov: Yeah, I think for right now, at least on our projection, we want to pay down, continue to pay down the borrowing a little bit this year. So from $1.9 billion, I think we're going to...
Asylbek Osmonov: Want to use about 900 million to pay down the borrowing to get the borrowing around two billion dollars
Asylbek Osmonov: So we're going to be reinvesting another billion dollars or we're going to put that money to long growth.
Asylbek Osmonov: So, either way, it's going to be positive for us. I know what we did purchase a little bit in the Q4, we purchased about $150 million of security because we could get pretty good yield on it. I think we got about 5%.
Thank you.
Perry.
Asylbek Osmonov: Okay, good, fair enough. David, any thoughts on the repurchase appetite? Are you inclined to sit on capital and see what happens on M&A, or do you wanna be more active on the repurchase?
Thank you.
Asylbek Osmonov: I would rather wait. I think this is going to be a, we've been waiting a long time.
Speaker Change: I would like to save the money for the M&A right now.
Speaker Change: There's people out there that banks have been waiting a long time. I think they're interested our stock
Speaker Change: is at a good price too. So I think there's more deals to be made. I think the regulators are out there. They're more apt to approve deals.
Speaker Change: I would like to wait and see now, having said that, of our stock price.
Speaker Change: went the other way, we would definitely jump in and do something. But for the most part, I would like to save it for some M&A.
Okay. And increased dividends also.
Yep, okay.
Speaker Change: And you're saying the sellers are now coming to the table. I know the buyers are pretty excited, probably including you, but you're saying the sellers seem to be a bit more willing to come to the table now?
Speaker Change: Right after the election I had three phone calls, so stuff that we had worked on previously in some cases and in some cases new stuff so you know again you don't know that it's ever going to just jump out there but it does seem it does seem like there's people on both sides that want to do something.
Okay. All right. Thank you. Appreciate it. Thanks, John.
Speaker Change: The next question is from Catherine Miller with KBW. Please go ahead.
Thanks, good morning.
Speaker Change: You've enjoyed a zero provision for the past two years. Is there a level where your reserve gets to where you feel like you need to start provisioning for growth or your credit outlook has been so strong, is this another year where it's feasible to still expect a zero provision in 2025?
Speaker Change: Well, we've got, you can do the math, we have $389 million in the provision and we have $81 million in non-performing. And at those non-performing, over half of that is in one of the poor family residential loans.
Speaker Change: I'd say if things don't change we're pretty reserved for a while to go unless something changes or there's some kind of black swan.
Speaker Change: Okay, great. And then on the margin, just back to deposit costs, is there a way to think about where you ended the quarter in deposit costs, just as a gauge for where we may start the first quarter of 25?
Speaker Change: Yeah, our spot rate, I call it, for the deposit was 140, so it's a full basis point less than our average for the quarter.
Okay, that's great. All right, thank you. Nice quarter, guys.
Speaker Change: The next question is from Peter Winter with D.A. Davidson. Please go ahead.
Speaker Change: Thanks. I was wondering, Kevin, you always provide good guidance for the mortgage warehouse. I was just wondering...
Speaker Change: One, where do you think it comes in in the first quarter? And then just how you're thinking about the outlook for the year versus the industry outlook, which is kind of assuming mid-teen growth.
yeah
Speaker Change: We have been fortunate, I guess, and let's hope I can keep the...
Speaker Change: Keep the trend going and being close to right on the warehouse. Just as a level set for everybody, we averaged in the fourth quarter a billion 137.
Speaker Change: And I think we said on the call somewhere we do somewhere between a billion fifty and billion one So it turned out just slightly better than than
and the upper side of what we thought.
Speaker Change: In further context, I looked at the numbers through last night.
Speaker Change: And so, quarter to date, the average is down to 952 from that billion 137 of last quarter.
Speaker Change: And then last night we closed at $805 million. So it's been a pretty weak January, or latter part of January.
So I think for the quarter
Speaker Change: We may average 825 and if things go well 850. I do know we have a couple of new clients that are
Speaker Change: that are in the pipeline. Again, I looked at one of them on Tuesday.
Speaker Change: So, we're hoping to add a couple of clients this year with some of the dislocations in the market and some of the folks who've gotten out, I think.
Speaker Change: Independent Bank up the road, you know, with their merger closing, I think they've exited the business, so there have been some opportunities to grow it. It's really hard for me to go out much beyond a quarter.
You know, one of the things we do, maybe, that...
Speaker Change: gives us a leg up on how we do it quarter-to-quarter.
Speaker Change: It takes, from application volume, and we can keep track of application volume, from application to closing, these things are generally six or seven weeks.
Speaker Change: So you know where you stand and it's pretty easy to project out six or seven weeks from now The r-squared on that is is really high based upon what we do so
Outlonger, it really depends on
Speaker Change: rates, when mortgage rates are, they're a little high, and I'd say if we look across our mortgage portfolio, and Eddie's on the call too.
Speaker Change: You know he might talk about how we're doing with our own single-family whole loan book It's been tougher out there, so it's a expected to be a relatively weak quarter But that's not atypical for q1. It's matter of fact. That's more the
Speaker Change: The natural thing than anything else, but in general the business has been a little weak.
Speaker Change: Eddie, would you like to say anything? No, I agree with what Kevin says. Mortgage rates have stayed higher for longer than some people had assumed. I think anticipation of refinancing
Speaker Change: has been pushed out a bit more. But what we actually do see is a little bit of an increase in the cash-out refi, which seems a little counterintuitive.
Speaker Change: But, as people are looking to consolidate debt, it's cheaper to go into the new mortgage than continue paying the credit card rates and the like. So I think this is the slow season, of course, and we'll have a better gauge of what's happening towards the end of the first quarter.
Speaker Change: In general, I've always said in this business, and I've been around it for a really long time,
Speaker Change: You know Thanksgiving and the Super Bowl and then after the Super Bowl it starts picking up again
Speaker Change: So, that's why I think it's going to continue to be weak for the next couple of weeks.
Speaker Change: And then we'll see if we get a little pickup in March, which would be pretty typical of the way the business is operated forever.
I appreciate all the color.
Speaker Change: As a follow-up question, can you just talk about the outlook for
Speaker Change: deposit growth this year, and then secondly, if the Fed were to stop lowering rates, is there much more room to lower deposit costs? I mean, you guys did a very good job managing deposit costs on the way up.
Thanks.
We never
where a lot of banks really went.
really, real far started paying higher rates. We never really.
Speaker Change: We never really went and paid really, really high rates. We paid what was a competitive rate, but we never did pay more than the market. So I would say from that standpoint, we really controlled our costs. We probably had one of the lowest cost of funds of any bank that record deposits. At the same time,
Speaker Change: A number of other banks were going out and buying broker deposits and even paying 5% for money. We never did that, so probably we lost some of that money that might have stayed with us. But I think what we have right now is a real good...
core book we have
We have good core customers.
I would say...
Speaker Change: that we probably couldn't go down as much as some of the other people could go down. But having said that, if rates do go down, we do have some room on the money market account, and we also offered a special CD, four-month CD that's at 4%. And so, I think we have a couple of categories that we could cut. We just may not be able to cut as much as everybody else.
Speaker Change: Again, we're just excited that rate that the deposits aren't going out of the bank like they were that they actually came back positive I I think this year we're using in our budget what two percent or two and a half percent and a half percent two and a half percent so Again, I I'm hoping that we'll get there. I
Speaker Change: We should. I'm hoping to get back to a more normalized deposit growth rate, and so that's kind of what we're looking for right there.
Speaker Change: But we do have a special CD rate that we did to cut the rates. We pretty much did 100 base point beta on that for each 100.
Speaker Change: Fed cut, we did 100 cuts. So those are going to be repricing over time. So we just saw some repricing happen in the fourth quarter. We'll continue to see that in the first quarter. But if you look at just for numbers purposes, we have about 77% of our CD going to mature within six months.
Speaker Change: and 92% of our city is going to mature within 12 months.
Speaker Change: So you can see there's still an opportunity to reprice those special CDs at a lower rate because we did decrease it. So we're going to benefit our NII as well, even if we don't see any FedRAT cut. We've kept the CD product short. We've not really offered rewrites on the real long term, so that should help us.
Got it. Thanks for taking the questions.
Speaker Change: The next question is from Matt Oney with Stevens. Please go ahead.
The End
Hey, thanks for taking the question guys.
Speaker Change: On the investment securities portfolio, David or Asylbek, I think you mentioned earlier that the bank has been buying or is close to buying some newer investment securities. Any more color on those products that you're looking at with respect to yields and duration?
Speaker Change: Historically our portfolio we've tried to you know as long as I've been here for 25 years or so we've always the primary product that we buy
Speaker Change: is a 15-year, fully amortized mortgage-backed security that has anywhere... It used to have about a three-and-a-half-year life that extended to five as interest rates went up.
and Ryan Mendte.
Speaker Change: You know, we never tried to call rates. We just tried to put the money that we didn't have in loans into the portfolio. And so, we made money as rates went down. When we had the mortgage, as rates gone up, we kind of sucked wind for the last couple of years. But now...
Speaker Change: You know, finally that's turning, and that's what you're seeing right now, we'll probably still keep that same strategy.
Speaker Change: It never looked good when rates went up and you had this loss in the portfolio, but we've been to two or three of these deals right now, and it is nice to see.
Speaker Change: that it does work and it does come out over time. So if you stick with that strategy, you may not hit a home run, but you'll always be in the right place. That's right, Matt. So we did by $150 million in the fourth quarter. I think yield end up being average about $5.05. $5.05.
Thank you.
Okay, that's helpful. Thank you for that, Keller.
Speaker Change: Going back to the expense commentary, I think, Asylbek, you gave us the number for the...
for the first quarter to expect.
Speaker Change: Just beyond the first quarter, are there any other initiatives, technology upgrades or any other projects that could add some incremental pressure to that beyond the first quarter? Or should we just continue to assume that low single-digit range we've seen now for a while?
Speaker Change: Yeah, I think so if you look at beyond first quarter on the during the In second quarter, we usually have our annual merit increase That's where you see some pick up on expenses, but we do constantly work on different project You know technology is always evolving and improving so it costs money to that so I do see some expenses increase on the
Speaker Change: starting the second quarter and maybe second half, I would say, of the year. And if I had to guess right now, based on our analysis, I think that on the second half, expenses are going to go up about 1 to 2 percent, maybe 1 to 1.5 percent in the second half. When I say that based on that 141 to 143 range that I'm providing, that you can see 1 or 1.5, up to 2 percent increase on the quarterly basis.
More like on the second half of the year
Understood. Okay. All right. Thank you, guys.
Thank you.
Speaker Change: The next question is from Jared Shaw with Barclays. Please go ahead.
Hi, this is John Rowe. I'm for Jared. Good morning.
I don't know why.
Just digging into loan growth a little bit more.
seeing some pickup and demand and activity.
Speaker Change: Buckets of loan growth, is that in? Is that commercial customers? Are there any any pickup in CRE activity? And then just resident mortgage too. How's that doing with rates moving higher?
Kevin, you want to take that?
Kevin: Yeah, I'd say a lot of the current fundings, where you can count on approving a loan and getting funding, that's usually going to be in the CNI or the mortgage buckets, right? Whereas the construction buckets take a while to fund up.
Kevin: So, in terms of the activity level, I'd say it's across the board, but we've been...
Kevin: much more cautious about adding on the single-family book. That book got to be a pretty good size relative to our balance sheet and strategically we kind of...
Kevin: said we ought to slow that down, you know, it's got above 8 billion, I don't know what's
Kevin: I didn't look at last night's number, but it's probably 8.2 or 8.3 billion. So we did kind of slow that down. You don't ever stop it. It's not a business you can...
You can turn the spigot fully on or fully off.
Kevin: But I think in terms of the volume we add this year, it will be less single family related.
Speaker Change: I don't know if Tim or Eddie want to add to that thought.
Speaker Change: You're exactly correct at least that's our that's our attitude and our forecast at this point in time and I don't see that changing.
Okay, perfect. That's good color. And then just back on...
M&A, what are some...
Speaker Change: Hallmarks, I guess, of what you would be interested in, in terms of like the size, location, whether it's like balance sheet metrics, like capital levels or loan-to-deposits of potential targets that you're considering.
Speaker Change: I guess I could get an email and give you a list of them, I guess. But, you know, we really don't look at it like that. I mean, we look at a bank or a potential M&A.
Speaker Change: First of all, we look at the bank. Is it a core bank? We look at the people. Are the people going to be with us? Are they going to stay with us?
Speaker Change: and you know can we make a deal that really is accretive so that we're not just building a we're not just building size that we're really that it's going to be accretive for us and it'll be good for the people joining us at the same time so
Speaker Change: Again, I've always said that we always like Texas, you know, we're here, so we'll always like that the most. But again, we'll still look in other places.
Speaker Change: We'll still look in other places. Again, I mentioned this before, we probably won't go to another state and buy a billion dollar bank. If we go to another state, it has to be something where they're, I've always said, at least in the top five market share that they own in that state. Because you just need that for advertising dollars and everything else.
Speaker Change: We really look at the bank and the people and the core deposits more than anything else, in our opinion.
Speaker Change: You can always get loans, you can always hire some donors, and you can go build as many loans as you really want. What we really like to see is a bank that's been around for some time, that has core deposits, and the people are willing to grow with us.
Thank you. Thank you.
Did we lose you, Dylan?
Oh, sorry. Just one other quick one for me.
Speaker Change: The fee income guidance for $38 to $38 million range recently is that
Speaker Change: Any upside to that in 2025, or should we expect a similar level?
Speaker Change: I think it's going to stay the same. There might be one-off stuff happen during the quarter that we don't know.
Speaker Change: But while we try to continue to grow our trust and brokerage fee, as you saw the past couple of years, you saw the increase there. So we are focused on the trust fee. We like our trust business, so hopefully we'll continue to grow our trust department and the fee on that.
Thank you.
Okay, great. Thank you so much.
Speaker Change: The next question is from Bill Karkatchy with Wolf Research. Please go ahead.
Bill Karkatchy: Hi there. Thank you for taking my questions. First, I wanted to follow up on your loan growth comments. Some of the bigger banks have suggested that tight credit spreads have been a constraint to loan growth.
Bill Karkatchy: Many borrowers have been accessing funding via debt capital markets, and I think there's a suggestion that loan growth could remain a little bit soft as long as capital markets remain this open. Can you give some color around what percentage of your customer base has been able to tap debt capital markets for funding versus those that are largely reliant on bank?
lending and really have simply just not been borrowing.
Speaker Change: I'll take this one. It's pretty rare for our customer base to be even thinking about accessing debt funds or other things. Now, there is a segment in the upper end of what I would call our middle market group.
Speaker Change: You know, you might call that triple B minus kind of like your larger credits and some smaller than that that do have access to debt funds.
Speaker Change: And that's a relatively small portion of our overall book of business, so they are active
Speaker Change: We see and hear about how active they are, particularly from those larger clients we have, but it just isn't, it really isn't in the wheelhouse of most of our customers.
Speaker Change: I would also say, Kevin, I mean a lot of people talk about capital markets and non-traditional banks getting into lending, but I don't think that we've ever lost a customer to a non-bank lender that we didn't want to. I may be wrong on that. We've lost a few that we wanted to.
Okay. Thank you.
Speaker Change: Yeah, that's really helpful and so then essentially they just haven't been borrowing and maybe could you, would you characterize...
Speaker Change: Like, you know, how much is essentially pent up? You talked about, like, the optimism that you sense, and, like, expectations maybe after, kind of, the Super Bowl later in the year we'll get a little bit, perhaps, bounce and growth. Is much of that, would you say...
pent up from sort of deferred or delayed borrowing
Speaker Change: Now, I don't think it's panned out, and just to be clear, the Super Bowl was related just to single family mortgage and the mortgage warehouse business, not to other lines of business. But what we're seeing is people...
Speaker Change: Really, ever since COVID, it's been more paying down than advancing up on lines of credit. And I think that's starting to shift around where we're seeing some inventory builds and some receivable builds.
Speaker Change: And so I think it's just good old blocking and tackling businesses is coming back.
Speaker Change: Got it, that's helpful. Yeah, I couldn't have termed it better. Blocking and tackling business, that's what we're looking at.
Speaker Change: Yeah that's great helpful color and then finally if I can squeeze in one last one given the debt pay down and other moving parts that impact NIM and you know make it harder to kind of tell exactly what's happening from a revenue perspective could you frame how to think about that 325 to 335 NIM range that you're expecting in terms of NII?
Speaker Change: Yeah, I think we continue to see an increase in NII, you know, common quarters, and I think the variables which I was describing earlier on, repricing our securities from...
Speaker Change: 206 to around 4.5% to 5%. Our fixed loans that we're going to be maturing this year...
Speaker Change: for prepayment or just maturity, they're going to be repriced 200 base points. So all of those are going to continue to help us with NII standpoint.
Speaker Change: Even our margin, including margin, but that's a that's a tailwind. And the last piece is a CD repricing we talked about.
Speaker Change: special CD that, you know, 77% of it's maturing in six months. They're going to be repricing lower on the CDs. So all of those are going to help with NII specifically.
Speaker Change: Got it. Very helpful. Thank you for your thoughts. Appreciate it.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Charlotte 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 Rasche: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
The Turn of the Wally
Vaughan Williams, Smallwood County, Chattanooga
junto conmigo It's pretty good