Q1 2025 Prosperity Bancshares Inc Earnings Call
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Speaker Change: Good day, and welcome to the Prosperity Bancshares First Quarter 2025 Earnings Conference call. All participants will be in listen only mode.
Speaker Change: Should you need assistance, please signate conference specialists 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rache. Please go ahead.
Charlotte Rasche: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first quarter 2025 earnings conference call. This call is being broadcast live on our website and will be available for reply for the next few weeks.
Charlotte Rasche: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, 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 Senator, Senator,
Eddie Safady, Vice Chairman
Kevin Hannigan: Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, May Staff Report, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President.
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 financial statistics and Tim Tamanas who will discuss our lending activities, including asset quality
Finally, we will open the call for questions [inaudible]
Before we begin, let me make the usual disclaimers. [inaudible]
Speaker Change: Certain of the matters discussed in this presentation may constitute forward-looking statement for the purposes of the federal security's laws.
Speaker Change: and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be 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 Prosperity Bancshares
Speaker Change: including forms TENQ and TENK and other reports and statements we have filed in with the FCC.
Speaker Change: All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now, let me turn the call-overs to David Zalman.
David Zalman: Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter
David Zalman: We and others believe that Prosperity is doing the right thing. Prosperity has been ranked as one of Forbes' best banks since the list inception in 2010 and was ranked in the top 10 for 14 consecutive years.
David Zalman: Additionally, Prosperity was named the best overall bank in Texas by money for 2024-2025 and was ranked among America's best regional banks by Newsweek in 2025.
David Zalman: Prosperity continues to focus on long-term relationships and our customer success while maintaining strong asset quality, solid earnings, and a fair return to shareholders.
David Zalman: Prosperity maintains a high tangible equity, detangible asset ratio of 11.2% with tangible equity of $3.9 billion.
David Zalman: Our net income was 130 million for the three months ended March 31st, 2025.
David Zalman: Compared with $110 million for the same period in 2024, an increase of $19.8 million or $17.9%
The net income per diluted common share was $1.37
David Zalman: for the three months ended March 31st, 2025, compared with the $1.18 for the same period in 2024 and increased a 16.1%.
David Zalman: For the three months ended March 31, 2025, annualized return on average assets and average tangible common equity for 1.34% on average assets and 13.23% on average tangible common
David Zalman: respectively, and the efficiency ratio was 45.7%. These ratios are show considerable improvement compared with the same period in 2024.
David Zalman: Loans were $21.9 billion at March 31, 2025, an increase of $712 million, or 3.3%.
David Zalman: compared with $21.2 billion at March 31st, 2024, primarily due to the merger of the bone star state bank shares.
David Zalman: Loans, Excluding Warehouse Purchased Program Loans, and Loans Acquired, and the Loans Star Merger Decreased $67.6 million, compared with December 31, 2024.
David Zalman: The bank continues to reduce identified loans, assumed in recent acquisitions in the amount of $434 million in $2,024, and $115 million in the first quarter of 2025.
An increase of 851 million, or 3.1 percent.
David Zalman: Compared with 27 billion at March 31st, 2024, primarily due to the merger.
David Zalman: Link's Florida deposits decreased $354 million from $28.3 billion at December 31, 2024.
David Zalman: The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 500 new municipal customers, such as cities, schools and counties, they used the tax dollars they received in December and January throughout the year.
David Zalman: with a cost of funds of 1.66%, and a cost of deposits of 1.38% and a cost of funds of 1.66%
David Zalman: The net interest margin on a tax-equivalent basis was 3.14%
for the three months ended March 31st, 2025.
David Zalman: compared with 2.79% for the same period in 2024 and 3.05% for the three months ending December 31st, 2024.
David Zalman: Based on our models, we believe our net interest margin should continue to improve to a more normalized level as our bomb portfolio and loan portfolio reprise.
David Zalman: Our non-performing assets totaled 81.4 million are 24 basis points of quarterly average in for starting assets at March 31, 2025.
David Zalman: Compared with 83 million, are 24 basis points of quarterly average
David Zalman: Interest Erning Assets as March 31, 2024, and again 81.5 million or 23 basis points of quarterly average Interest Erning Assets as December 31, 2024.
David Zalman: The allowance for credit losses on loans and off balance sheet credit exposure was 386 million at March 31, 2025, compared with 366 million at March 31, 2024.
David Zalman: Our current non-performing assets are higher than our historical levels, mainly due to acquired loans and accounting regulations for such loans that mandate we maintain loan balances on our books.
Until they are resolved, despite being reserved for during acquisition
David Zalman: Texas and Oklahoma continue to benefit from strong economies and are home to 58 Fortune 500 head core companies.
David Zalman: The Texas economy continues to expand employment growth with solid and self-tax revenue increases broadly, according to the Federal Reserve Bank of Dallas, Texas Economic Indicators, published April 3, 2025 Bye.
David Zalman: The March 2025 Texas Business Outlook Surveys showed continued expansion in wages and benefits all across all sectors
Despite the uncertainty with tariffs [inaudible]
Speaker Change: Our teams in Texas and Oklahoma are optimistic based on conversations with our customers about their outlook and plans. We continue to be opportunistic, work hard, stay close to our customers and their needs and maintain a quality loan portfolio. Thank you very much.
Speaker Change: Although there is market volatility, we continue to have active conversation with other bankers regarding potential acquisition opportunities and remain ready to enter into a transaction when it is right for all parties and is appropriately accreted to our existing shareholders.
Speaker Change: Overall, I want to thank all the associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to help our customers and associates succeed and to increase shareholder value.
Speaker Change: Thanks again for your support of our company. Let me turn over to the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek
Thank you, Mr. Zalman. Good morning, everyone.
Asylbek Osmonov: Net interest income before provision for credit losses for the three month ended March 31, 2025, was 265.4 million, an increase of 27.1 million compared to 238.2 million for the same period in 2024
Asylbek Osmonov: and a decrease of 2.4 million compared to 267.8 million for the quarter ended December 31, 1024. The link quarter decrease was primarily due to having two less days in the first quarter [inaudible]
Asylbek Osmonov: The fair value loan income for the first quarter of 2025 was 3.3 million compared to 3.6 million for the fourth quarter of 2024 For the second quarter of 2025, the fair value loan income is expected to be in the range of 2 to 3 million
Asylbek Osmonov: The net interest margin on a tax equivalent basis was 3.14% for the three months ended March
Asylbek Osmonov: An increase of 35 basis points compared to 2.79% for the same period in 1024. An increase of 9 basis points compared to 3.05% for the quarter-end December 31, 1024
Excluding Portrait Counting Adjustment
Asylbek Osmonov: The net interest margin for the 3MA ended March 31, 2025 was 3.1% compared to 2.76% for the same period in 2024 and 3.0% for the quarter ended December 31, 2024
Asylbek Osmonov: Non-interesting come was 41.3 million for the three month ended March 31, 2025, compared to 39.8 million for the quarter ended December 31, 2024 and 38.9 million for the same period in 2024
Asylbek Osmonov: Nine interest expense for the three month ended March 31, 2025 was 140.3 million compared to 141.5 million for the quarter ended December 31, 2024 and 135.8 million for the same period in 2024
Asylbek Osmonov: For the second quarter of 2025, we expect nine interest expense to be in the range of 141 to 144 million
Asylbek Osmonov: The efficiency ratio was 45.7% for the three months ended March 31, 2025, compared to 46.1% for the quarter ended December 31, 2024, and 49.1% for the same period in 2024
Asylbek Osmonov: The bond portfolio metrics at $331, 2025 have a modified duration of $3.9 in projected annual cash flows of approximately $1.9 billion. And with that, let me turn over to the presentation to Tim Tmanis for some details on loan and asset quality.
Thank you, Asylbek [inaudible]
Non-performing assets .
at quarter end March 31st, 2025, totaled $81,419,000.
Art 37 basis points of loans and other real estate.
Asylbek Osmonov: compared to $81,541,000 or 37 basis points at December 31st, 2024.
Asylbek Osmonov: This is basically flat with some non-performing assets coming off and others coming on.
Since March 31st, 2025, 89,000
Asylbek Osmonov: Excuse me, 895,162 dollars of non-performing assets have been removed or put under contract for sale.
Asylbek Osmonov: The March 31st, 2025, non-performing asset total was comprised of 73 million
$378,000 in loans.
$29,000 in repossessed assets [inaudible]
and $8 million, $12,000 in other real mistakes. Thanks.
Net charge-offs for the three months ended March 31, 2025.
were $2,704,000.
Asylbek Osmonov: This is an increase of a hundred and twelve thousand dollars on a linked quarter basis.
There was no addition to the Alliance for Credit Lawsers.
During the quarter-ended March 31, 2025 in the end of the quarter-ended March 31, 2025.
Asylbek Osmonov: No dollars were taken in to income from the allowance during the quarter ended March 31st, 2025.
was $317 million.
Asylbek Osmonov: Compared to $333 million for the quarter ended December 31st, 2024, and $295 million for the full year, 2024.
Loans Outstanding at March 31st, 2025 for approximately $21.978 billion.
Asylbek Osmonov: Compared to 22.149 billion dollars at December 31, 2024. The March 31, 2025 loan total is made up of 38% fixed rate loans.
32% floating rate loans and 30% variable rate loans.
Speaker Change: Thank you, Tim. 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.
Speaker Change: To ask a question, you may press star then one on your telephone keypad. If you are using to speak your phone, 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. At this time we'll pause momentarily to assemble our roster
Speaker Change: The first question comes from Manan Gosalia with Morgan Stanley . Please go ahead.
Hi, good morning, all. Good morning.
Speaker Change: Can you give us some more color on what you're seeing on the long road side? I know you noted 115 million of deliberate reduction in acquired loans this quarter but...
Speaker Change: I guess even when you adjust for that, loans were fairly flat. So can you talk about what you're seeing there and maybe your updated expectations for loan growth in 2025? I think you'd previously...
Speaker Change: It's spoken about somewhere in the Lord of Myth, single-ditioned arranges that's still in line with how I think you're about it.
Kevin, you want to start off on that question?
Kevin Hannigan: Sure, thanks David. Yeah, I think we're still in the camp of low single digits for the year.
Speaker Change: As David mentioned, as you mentioned, in the last five quarters we've had $549 million worth of runoff between the Loan Star and the first capital acquisitions.
Speaker Change: May run off out of the books and it's not big enough to even talk about, but I think that's about completed.
and I'm like the last...
Speaker Change: At least three quarters when we were on this call, three weeks in the quarters.
Loans were down, anywhere from, you know…
Speaker Change: 25 to 90 million within the first three weeks of the quarter, loans are actually up modestly on the first three weeks of this quarter.
Speaker Change: And I do know, if I just look at the pipelines, we've got some loans, non-constructural related loans that are, that are term loans, fully funded kind of term loans in our pipeline.
Speaker Change: We may squeak out a little bit of growth this quarter, and then, you know, we're optimistic as we look later into the year despite the tariffs and some other things as we sit down with our bankers across the footprint. So we're going to keep our guidance where it's been.
Speaker Change: I'd add to this, we usually have a quarterly management meeting where it's
Speaker Change: Our chairman and president come from all different parts of the state of Texas and Oklahoma and New York.
Between Dallas Houston, West Texas, on and on Oklahoma.
Speaker Change: And I asked that exact question. I said, you know, the loans.
Speaker Change: The total loan dollars were down. At the end of the meeting, I always ask what they're early optimistic or pessimistic. I can't take it.
Speaker Change: 100% of all of our chairman and presidents across all of our different areas responded by saying they're still very optimistic and their customers are still optimistic. Still holding back a little bit because not knowing what to do, but they also seem to be extremely optimistic.
Speaker Change: Tim, do you want to add to that? I think that's accurate. I would describe it as being a little bit sluggish right now. The flow of loans.
Speaker Change: that we've been able to look at has been good. Our loan committee meetings have been acting. What we've had...
Good loans to take a look at.
Um...
Speaker Change: Some of those, I'm sure, will move forward and end up being funded. But with all that's going on in the marketplace for a couple of weeks now, I think it's been a little sluggish. I think
Speaker Change: and some moral words are just maybe waiting another week to see what happens. We're not aware of any projects that have actually been taken off the map. They're all still scheduled to move forward, so I think it's a matter of just letting some of these things.
Speaker Change: Relatory Environment like it is, but again, as you say, it's still so obvious because it's not knowing where everything is but the people contacting us and asking about loans and the talents.
Speaker Change: What they would like to do, that continues, unabated. So I think there's reason to believe that all this will break loose a bit here fairly soon and move forward in a normal way.
Speaker Change: Yeah, and since it's an important topic for the tariffs and everything else.
Speaker Change: We've listened to other calls or looked at other transcripts and folks saying that it could be bumpy for growth with tariffs if we don't get things resolved. The flip side of that is also, if that is, in fact, the case.
Speaker Change: My expectation is that payoffs that would normally occur could get slowed down as well. Projects that might get sold into a different market or have been built out and somebody's going to flip it, I think that'll slow down as well if the terrorists become an issue. [inaudible]
That would be normal, I think you're right [inaudible]
David Zalman
That's a really helpful color. Thank you for that.
Speaker Change: If we think about the challenge, it's all right, give us a couple of words where the challenge is going down on
Speaker Change: to be the opportunity to pay down some of the high possible drawings. Should we expect that the new
Speaker Change: We couldn't really understand anything if you said Manan it was kind of cutting in or out I'm sorry, I don't know if it's on our end or your end.
Speaker Change: Sorry, can you hear me now? We can. Yeah.
Speaker Change: To the extent that Longworth remains sluggish over the next couple of quarters, I should be continuing the balance sheet moving lower.
Speaker Change: You know, we're, again, the balance sheet, we borrowed when COVID happened and a lot of the policies from out of the bank, I think.
Speaker Change: What do we borrow up to, what, 3.9 million, or 3.9 billion? We reduce that now to about 2.7 billion. We don't see it reducing a lot more if you look.
Speaker Change: Historically, our normalized times, we've always leveraged the bank by a couple of billion dollars plus a little bit because of the, because again we have so much liquidity coming from the bond portfolio. And so I think that you're, I think you're pretty much going to see the, you know, I think we might reduce it maybe 200 million, but that's probably about it. Yeah.
Speaker Change: So if opportunity presents, we'll continue to pay down the borrowings
Speaker Change: David Zalman, Asylbek Osmonov, David Zalman, David Zalman, Asylbek Osmonov, David Zalman,
It was very helpful. Thank you.
Uh-huh.
Speaker Change: The next question comes from Katherine Mueller with KBW. Please go ahead.
Katherine Mueller: Thanks good morning. I know that M&A and really M&A and improved growth but really M&A is a focus for capital deployment but curious your thoughts on the buyback just given the or the stock prices today
Speaker Change: Yeah, again, if we could have been buying shares back through this recent downside when we started hitting around the $64 and stuff, we would have definitely been in the market, but again, we couldn't because of the earnings announcement, but we would have been buying back no questions.
Right now, again. And...
Speaker Change: We're still saving our money, I'd say, for we really do want to do some M&A, some acquisitions. We have other opportunities that we're looking at, so
Speaker Change: Again, I think I would just pause and say, if there is another downturn, we will be back in the stock. But again, I know it seems like we have a lot of capital but...
Speaker Change: We do have plans to use that, so we will, again, we will buy when there's another downturn into the stock price.
Speaker Change: Yeah, I think it's safe to say we're watching it daily and we'll see if we made that back, we may not Yeah, yeah.
Speaker Change: Great, and then maybe just any additional comments on M&A. It feels like it's on pause, but
Speaker Change: Yeah, I mean, I, again, we started off the year with everybody just being terribly excited with the, you know, the regulatory environment really easing up and I think everybody got terribly excited. I think we had three calls. I think I mentioned Steven in the December in December .
I think that you did pause a little bit.
We are starting the same calls.
Speaker Change: are starting to come back again right now, and so I think that you will see something, I think you will see some M&A coming forward again.
Um...
Speaker Change: I think people want to do something and again you have all these tariffs and that kind of stuff but for the most part I think that those people that have made the decision to do something they might have paused but it hasn't left their mind and they are going to do something I suspect.
Speaker Change: There may be in their minds a limited amount of time before the next administration, so I think he will see stuff get done by this year by the end of the year for sure Sure.
Great. Thank you.
Uh-huh.
Speaker Change: The next question comes from Michael Rose with Raymond James, please go ahead
Michael Rose: Good morning guys, thanks for taking my questions. I don't know if he touched on this, but I think previously he talked about kind of a full year.
David Zalman: Margin in the 3.25 to 3.30 range and given some longer term outlook in prior calls, is any of that change just with the rate backdrop at all in your forecast?
Speaker Change: No, that's the beautiful part about our company, no matter if somebody wants to say that the world is not round anymore and all these ships are going to fall off of the planet.
David Zalman: Our deal is not predicated on the growth, it's predicated on repricing and I think we're still sticking with the deal of the 225-330.
David Zalman
Speaker Change: Okay, perfect. And then just for Kevin, I usually have to warehouse question. You guys did a little bit better than what you were thinking at this time last quarter, Kevin. Any thoughts? Just, you know, based on where rates are and what you've seen so far in the second quarter. Thanks.
Yeah, Michael. Thank you.
Speaker Change: You're right, this quarter we did. I think we averaged 8.76 and our guidance was in the 8.50 rain, so it was just it was just slightly better than we had anticipated Just as a catch-up quarter to date we ended last night with
The average that was $876 up to $1,088.
Speaker Change: Average so far for the quarter, and we closed the book out last night of the billion 148.
Speaker Change: So it's looking like, you know, typically the second, third, second quarter is good, the second, third quarter is usually at best quarter and then...
Speaker Change: Q1 and 4, 10 to be week or quarter. So we're moving into a better time. I am a little bit concerned with where the rate environment is.
Speaker Change: So I think conservatively I'd say a billion fifty to a billion one for this quarter [inaudible]
Michael Rose: Okay, last other color, Michael, we have, we actually got two new clients, one we boarded.
Michael Rose: and started funding loans on for this month. It's a $75 million commitment that's been funding up. The other new client we have is a $40 million client that hasn't started funding up yet. I think they'll probably start funding up in the next several weeks.
Michael Rose: So those are going to be slightly helpful to whatever whatever we've got going on.
Michael Rose: And then as we look in the next quarter, when I've that far out yet we've got a client that's got itself for sale and I think they'll sell that business and we'll have some impact on the third quarter but we'll talk about that in July .
Speaker Change: Very helpful, and if I could just squeeze one last one in, look like there was a bigger step down in NSF and debit card income than I might have expected. Understanding that fourth quarter was pretty strong in NSF, anything to read into that at all or just activity levels or just any color would be helpful.
Michael Rose: Michael, I think it's just a seasonality if you look at the back and Q1 as a slower quarter for us from the spend point so it wasn't anything unusual, it's just a seasonality of the first quarter. .
Thank you.
All right, thanks for taking my questions [inaudible]
Speaker Change: In your next question comes from Peter Winter with the A. Davidson. Please go ahead.
Thanks.
Speaker Change: You guys obviously have a very strong deposit franchise. You've done a great job mentioning the deposit cost when rates were moving higher. But the question is, if the Fed were to stop lowering rates, is there much room for you to further lower the deposit cost? Because it's already at the low end, near the low end appears at 2.08%.
Speaker Change: I'm starting to hear the last part, Peter. He said if the Fed stopped showing Rachel was a question.
I would say yes.
Speaker Change: Peer Group, but we would like to keep a lot of time as we reward our customers.
Speaker Change: with rights come down, and we still try to keep them, but I think it depends on the timing of that.
Speaker Change: and so if the repricing is, if we get enough repricing in…
Speaker Change: in the bomb portfolio and the loan portfolio, we probably won't be as aggressive as bringing down rights. If they can't, they start lowering rights.
Speaker Change: Really quick. We would have to be a little bit more aggressive. I don't know if that's a good answer or not. Yeah, I'll just give you a little bit of additional information on that. When we had a 100-based point cut since the end of last year, to...
Speaker Change: And there was some customer who gave them exception rates, so we cut those exception rates, but overall, if you're looking bigger based on our customer, we did not decrease the rates. If you look at interest variant demand deposits, we have 70 based points, we were in Q4 and Q1 and even same rate on the Q1 of last year. So I think there's opportunity to cut some of those rates if they come cut the rates, so we hadn't touched those. So overall, that's probably because it's been slowly
The press conference was under way over 2 weeks.
Speaker Change: Well, they lower them one time, two times, or three times, or where they lower them at all, that's the whole question. We actually, you know, if they didn't lower them at any and all for the rest of the year, it would be better for us.
Speaker Change: If they lord them, you know, even three times, we would still hit the net interest margin that we described to you earlier.
Speaker Change: Got it. Got it. Got it. That's really helpful. And then, you know, just think about it. It's obviously excellent. Reserve coverage to the non-performing assets. Very strong over four times, but...
Speaker Change: With a more uncertain economic environment, do you still expect to take a zero provision throughout the year?
Speaker Change: Well, we have not what 81 million in on-performing in 386 million or something like that in reserve. So I think that we are in a good position. We have to do these testing all the time to tell if they are adequate or not adequate.
Speaker Change: We've always been able to keep a little bit more because just because of times like this [inaudible]
Speaker Change: because of what's going on. We can justify having the extra money and the account, I think, right now, do you want to comment on that? Yeah, and I'll add that, you know, when we...
Speaker Change: So with that anticipation in the model, I think even the economy goes a little bit worse than we are right now, I think we covered there, so... What do we have about an act of 100 million for the recessionary part of it? Around there, yeah, something close to that, yeah. So, I mean, we're already...
Speaker Change: Again, we're ready to reserve for a recession if that happens. Yeah, so from that standpoint to answer specifically, unless the economy really gets worse than we are, then I don't think we'll put in much of a reserve in the near future. And actually the reserve, if you look at it, if you look at it March 2024, compared to 2025, you have about $20 million more in reserve than you did back in 2024.
Peter, Peter
Great. Thanks a lot. Very helpful.
Thank you.
. . .
Speaker Change: And your next question comes from Jon Arfstrom with RBC Capital. Please go ahead.
All right, thanks. Good morning, everyone. Good morning, Jon Arfstrom, Asylbek, maybe for you.
Speaker Change: Give us a profile of what you're buying in the security portfolio, kind of yield type duration, and then remind us of the billion nine that what that's rolling off that.
Speaker Change: Yeah, I mean, we're not buying a lot when I say, you know, we're not doing one, two, one, so we still have cash for coming in.
Speaker Change: What's the rolling off? It's our, you know, we have MBS, 15-year MBS, that's rolling off and that's what we're essentially buying, just replacing those. I think on the, depending on the day when we buy, I think we're buying yielding around 525, 550, that's what we're replacing.
David Zalman: You're replacing a 2% with a 5%? Yeah, basically. Exactly, so that's where spread comes in. I think on the duration, I think it's around...
Speaker Change: Maybe a new one's putting four four to five. Yeah four to five. Yeah, the duration so 15 year more week back security with an average duration probably
Speaker Change: Holly Ford, Anymore from 3 to 5, I mean depending on...
The coupon, basically, of where you're going to be at. We haven't. Jon, they're probably the...
Speaker Change: You know, we haven't bought a bunch of security, we have been buying some, a lot of the stuff, a number of the stuff that we did buy was primarily for CRA purposes.
Speaker Change: and stuff like that. We did buy-up. We did buy-up. We did buy-up. We did buy-up. [inaudible]
Speaker Change: We had excess funds and we had gotten through paying down to 3.9s, down to 2.7, so we are buying some, we are starting to buy back some now, but a lot of our excess money had been going just to reduce
David Zalman: David Zalman, Asylbek Osmonov, David Zalman, David Zalman, David Zalman, David Zalman,
David Zalman: Okay, good, that's helpful. And then David, back on Capitol, you're, you know, you're doing a return on tangible 13%
with 11% tangible equity, which is incredible. Um.
David Zalman: I've seen you run with much lower TCE over the years I've covered you, but what's optimal?
David Zalman: TCE for you. How do you think about optimal capital because it just feels like it's incredibly high at this point?
David Zalman: It's high, I remember the days when we started, we had a 3% tangible capital rate, so this is extremely hot, but, uh, hi.
and
David Zalman: You know, it's a high-class problem, I guess, I would say. On the other hand, there's no doubt in my mind that we're going to use that money. So, come.
David Zalman: You know, I think if we do a deal, it'll probably be, there'll be a combination of cash [inaudible]
Anne Stock, Anne
Right now, if the market gets crazy...
David Zalman: The good thing is, we have enough to do an all cashew, it's a small deal [inaudible]
David Zalman: So, I think it just gives us a lot of optionality.
David Zalman: I wouldn't want to just say here's a special dividend for something like that because I do feel that we're going to be able to use it and we'll, you know, our our return on tangible capital usually has been around 16%
David Zalman: It's been hard. Again, we had two things that affected that. One, the net interest margin falling to 2.75. That in and of itself reduced that return. But now that you've got 11.2% tangible capital, that's a little bit of a stress on itself. But I can promise you we're going to use it.
David Zalman: We're going to use it, whether it's through the buyback of staff or through the accuracy of the mergers and acquisition we will use the money.
David Zalman: I think a really nice thing about it is the flexibility that it gives us to look at acquisitions, to look at buybacks, to look at dividends in the end.
David Zalman: I mean, we're gonna look at all three, bro, maybe do a little of each, right? I mean, it's a good place to be.
Speaker Change: I remember the 4% days I do, but is there a minimum in your mind that you wouldn't go below?
Speaker Change: Just from my mind, if again, I'd like to not go below 8%, but if we did a bigger deal and it fell to 7.5 or 7.75, it took us the end of the year to get back to 8, that's probably acceptable.
Okay, thank you very much.
Thank you. Bye-bye.
Speaker Change: In the next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Hey, good morning.
Speaker Change: I guess David wanted to follow up on M&A, we've seen public stocks down 20-30% in the last couple of months
Speaker Change: A deal to pan out where you don't have to pay a massive premium, like how do you think that plays itself out and also remind us are they private bank and many opportunities in or out of Texas that you're looking at which are real estate and meaningful? So
Speaker Change: based on the stop prices where they're at today, do they have to go up to get more deals? And I would say that basically, if it's...
Speaker Change: If what's happened the last few days and the trend is worse at right now, we're seeing that I think that we'll still be able to do deals because...
Speaker Change: People have seen the volatility, especially in our price, where we were at $80, and then probably averaged $75, and now you're 67, but we were dealing with some of the same people.
A few years ago were a five-price trial of the 55. And so they now, they've seen as they've watched us.
Speaker Change: I think that they feel comfortable that if they take our product based on our stock price where it is today, they'll be fine. They seem tremendous black swan activities over the last couple of years and I think they have the confidence in us. But the good part is if they don't, you know, even if you have some private deals, and...
Speaker Change: with the amount of capital that we have, I think it just really gives us the advantage for somebody that may want, maybe not the whole thing in cash, but a certain percentage of cash. We have that ability to provide that with the excess capital that we have. So, I'm very confident where we're at. Thank you very much.
Speaker Change: in the summer or the next year, is there a certain point where...
Speaker Change: The warehouse activity picks up meaningful. It just feels like you might be in a decade of real or refi activity and would love to hear how you think about that and what that means for if there is an upper end to what your warehouse balances could look like.
Speaker Change: I believe it wasn't that long ago, we were talking about people doing refives when rights were low. And now we're looking at it in my mind
Speaker Change: As I said in my comments, at this level of rights I'm a little bit worried about the tail end of this quarter if we stay at these levels
Speaker Change: So, I think rates are going to play an impact on...
Speaker Change: The tail end of this quarter, because a lot of this stuff is baked in. You know, you take an application and it generally six months or six weeks after that you're closing them on on.
Um...
Speaker Change: So I've always said we've got really, really good vision over the next six weeks.
Speaker Change: and then it becomes more rate dependence. So I think that rate dependency will hit the tail end of this quarter to the extent rates stay high and could bleed into what is normally the very strong third quarter.
David Zalman: So that's just how I think about it. We'll see where rates go and we'll take it from there. If I could just go back to your M&A question, I agree with everything David said.
David Zalman: There is some psychological impact for all of us when rates are high, everything feels good, right? And it feels like more deals ought to happen.
Speaker Change: Most really knowledgeable CEOs end up getting there over the psychology of it all.
Thank you.
Let's have food colour. Thank you both.
. . . .
Speaker Change: Seeing no further questions, 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.
Thank you.
Charlotte Rasche: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.