Prosperity Bancshares Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

Key Takeaways

  • Prosperity reported Q1 net income of $124 million, up from $122 million a year ago, delivering a 1.31% ROAA, 14.34% ROTCE and a 43.68% efficiency ratio.
  • Excluding warehouse loans, loans rose 2.4% linked quarter (10.8% year-over-year), while deposits declined 5.4% sequentially—largely seasonal and public fund outflows—but remain up at a 4.3% CAGR since March 2020.
  • The tax-equivalent net interest margin of 2.93% in Q1 is expected to rebound toward its 3.37% 2012–2022 average over the next 12–36 months as held-to-maturity bonds reprice.
  • Asset quality remains sound, with nonperforming assets down 9.9% year-over-year to 13 bps of loans, and $11.3 billion in liquidity affords a $4 billion cushion above uninsured deposits.
  • Regulatory approval closed the First Bancshares of Texas acquisition on May 1, with Lonestar State Bancshares pending in Q2, and the combined deals aim for 25% cost savings.
AI Generated. May Contain Errors.
Earnings Conference Call
Prosperity Bancshares Q1 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Good day, and welcome to the Prosperity Bancshares First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' 1st quarter 2023 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks. 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.

Speaker 1

E. Timpanos Jr, Chairman Asobek Osmanov, Chief Financial Officer Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Merle Karnes, Chief Credit Officer Mays Davenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. Eddie Safady, our Vice Chairman, is under the weather and unable to join us today. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Ozilbek Osmanov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality.

Speaker 1

Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation 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. 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' filings with the Securities and Exchange Commission, including Forms 10Q, 10 ks and other reports and statements we have filed with the SEC.

Speaker 1

All forward looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Speaker 2

Thank you, Charlotte, and good morning, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality and earnings as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 Since the list's inception in 2010, we have twice been ranked number 1, ranked number 2 in 2021 and ranked number 6 for 2023. It is a testament to Prosperity's performance, culture, Vision and consistency and distinguishes us among most banks. I congratulate and thank all our customers, Associates and directors were helping us achieve this honor.

Speaker 2

On a linked quarter basis, the net income was $124,000,000 for the 3 months ended March 31, 2023 compared with $122,000,000 for the same period in 2022. The net income per diluted common share was 1.37 dollars for the 3 months ended March 31, 2023 compared with the $1.33 for the 3 months ended March 31, 2022. For the 3 months ended March 31, 2023, The annualized return on average assets were 1.31%. The annualized return on average tangible common equity was 14.34 percent and the efficiency ratio was 43.68%. Loans on a linked quarter loans excluding warehouse purchase program loans increased $436,000,000 or 2.4 percent, 9.6 percent annualized from $18,100,000,000 at December 31, 2022.

Speaker 2

Excluding warehouse purchase program loans, Loans at March 31, 2023 were $18,500,000,000 compared with $16,700,000,000 at March 31, 2022, an increase of $1,800,000,000 or 10.8%. Loan growth is helped by fewer loans being Deposits at March 31, 2023 were $27,000,000,000 a decrease of $1,500,000,000 or 5.4 percent from $28,500,000,000 at December 31, 2022. Deposits decreased $4,100,000,000 or 13% compared with deposits of $31,100,000,000 at March 31, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were such as textbook to obtain higher rates.

Speaker 2

Of the deposit decrease in the Q1, $959,000,000 or 63 percent of the $1,500,000,000 decrease occurred prior to March 10. Historically, prior to the pandemic in 2017 2018 2019, Our deposits decreased seasonally in January and averaged 2.2%. We also saw $236,000,000 of deposits flow into our wealth management group. As we all are aware, the market was flooded with excess funds the last few years during the COVID-nineteen pandemic and most people kept their money primarily in checking and low interest bearing accounts because no one was paying much more money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant.

Speaker 2

When we look at pre COVID deposits at March 31, 2020, we had $23,800,000,000 in deposits and at March 31, 2023, We have $27,000,000,000 in deposits. This represents a compounded annual growth rate of 4.3% annually. Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So we are still averaging deposits on the high end of our historical growth rate. Our average deposit account was $34,000 at March 31, 2023 $36,000 At December 31, 2022, our uninsured and pledged deposits are 29% 29.9 percent of our total deposits.

Speaker 2

We currently have 11,300,000,000 of liquidity available to draw on, which represents approximately $4,000,000,000 in excess of our uninsured and employee deposits. With regards to Net interest margin, while most banks have experienced some of their best net interest margins recently, because of our large bond portfolio, Our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better in 36 months. Our average net interest margin from 2012 to 2022 was 3.37 compared with our current net interest margin of 2.93 as of March 31, 2023. Our asset quality remains sound.

Speaker 2

Year over year non performing assets decreased 9.9%. Non performing assets totaled $24,500,000 at March 31, 2023 compared with $27,500,000 at December 31, 2022, and $27,200,000 at March 31, 2022. Texas and Oklahoma continue to do well. Texas population increased by 470,000 in 2022, Continuing a steady uptick from 2002 to 2022, the state gained over 9,000,000 residents more than any other state and almost $3,000,000 more than Florida, the next largest gaining state. Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 Headquarter Companies.

Speaker 2

Texas now has more Fortune 500 Companies than any other state, including New York and California. Despite the higher rates and a possible slower economy going forward, we believe the Texas and Oklahoma economies should outperform most other states. With regard to acquisitions, as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bancshares of Texas Inc. And expect that transaction will be effective on May 1, 2023. Our acquisition of Lonestar State Bancshares is pending regulatory approvals and is expected to close during the Q2 of 2023, although delays could occur.

Speaker 2

We continue to have active conversations with other bankers regarding potential acquisition Although the conversations have slowed given the recent bank failures and the decline in stock prices. Overall, I want to thank all our associates for helping create the success we have had. We've had a strong team. 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. Thanks again for your support of our company.

Speaker 2

Let me turn over our discussion to Asselbek Osmanov, our Chief Financial Officer, to discuss Some of the specific financial results we achieved. Asselbeck?

Speaker 3

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2023 was $243,500,000 compared to $239,900,000 for the same period in 2022, an increase of $3,500,000 or 1.5 percent. Loan and secured interest income increased $54,100,000 $18,200,000 respectively In the Q1, additionally, Fed Funds interest income increased $6,200,000 This was partially offset by increase in interest expense of $74,900,000 Net interest income increased $3,500,000 despite having $7,900,000 less in combined PPP loan fee income and fair value loan income.

Speaker 3

The net interest margin on a tax equivalent basis was 2.93% for the 3 months ended March 31, 2023 compared to 2.88% for the same period in 2022 and 3.05% for the quarter ended December 31, 2022. Excluding purchase accounting adjustments, The net interest margin for the quarter ended March 31, 2023 was 2.91% compared to 2.81% for the same period in 2022 and 3.04% for the quarter ended December 31, 2022. The current quarter net interest margin was impacted by $3,000,000,000 of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3,000,000,000 additional cash was funded through FHLB borrowings. Further, at the end of the first quarter, We increased rates on deposits.

Speaker 3

We expect the full impact of those increases into the second quarter. Non interest income was $38,300,000 for the 3 months ended March 31, 2023 compared to $35,100,000 for the same period in 20 $22,37,700,000 for the quarter ended December 31, 2022. Non interest expense for the 3 months ended March 31, 2023 was $123,000,000 compared to $119,900,000 for the same period in 2022 $119,200,000 for the quarter ended December 31, 2022. The linked quarter increase was partially attributed to the higher FDIC assessment rate. For the Q2 2023, we expect non interest expense to be in the range of $123,000,000 to $125,000,000 The expected increase is based on the annual merit increases in the Q2 of 2023.

Speaker 3

This projection excludes both the impact from One time merger related costs, which we estimate to be around $26,000,000 to $28,000,000 and additional non interest expense from our pending acquisitions. Additionally, 2nd quarter results will be impacted by day 2 accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition related provision expense is $28,000,000 to 31,000,000 The efficiency ratio was 43.7 percent for the 3 months ended March 31, 2023 compared to 43.7% for the same period in 202240.9 percent for the 3 months ended December 31, 2022. The bond portfolio metrics at threethirtytwenty 23 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2,200,000,000 And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Dimanis?

Speaker 3

Thank you, Asselbeck.

Speaker 4

Our non performing assets at quarter end March 31, 2023 totaled $24,485,000 or 13 basis points of loans and other real estate, compared to $27,494,000 or 15 basis points at December 31, 2022. This represents approximately an 11% decrease in non performing assets. The March 31, 2023 non performing asset total was comprised of $22,496,000 in loans, dollars 0 in repossessed assets and $1,989,000 in other real estate. Of the $24,485,000 in non performing assets at quarter end, Only $217,000 are energy credits. Since March 31, 2023, $328,000 in other real estate have been removed from the non performing assets.

Speaker 4

This represents 1.34% of the non performing assets. Net charge offs for the 3 months ended March 31, 2023, were negative $615,000 compared to net charge offs of $603,000 for the quarter ended December 31, 2022. In other words, for the Q1 of 2023, Our recoveries exceeded charge offs by $615,000 No dollars were added to the allowance for credit losses during the quarter ended March 31, 2023, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2023 was $436,000,000 Loans outstanding at March 31, 2023 were approximately $19,334,000,000 compared to 18.840 $1,000,000,000 at December 31, 2022. This is a 2.62% increase on a linked quarter basis.

Speaker 4

The March 31, 2023 loan total is made up of 43% fixed rate loans, 29% floating rate loans and 28% variable rate loans. Charlotte, I will now turn it over to you.

Speaker 1

Thank you, Tim. At this time, we are prepared to answer your questions. Bishnavi, can you please assist us with questions? Can you please assist us with questions? We'll start the questions in just a minute.

Speaker 4

We're showing that we're attached?

Speaker 5

Yes, sir.

Speaker 2

We should go to the restroom.

Speaker 1

Yes. Bad timing.

Speaker 5

Are we on mute? No.

Speaker 1

We're working to get the questions started. We apologize for the delay.

Operator

Thank you. I apologize. We will start the question and answer session. The first question comes from Brady Gailey with KBW. Please go ahead.

Speaker 6

You guys can hear me, right?

Speaker 5

Good morning. Thank God we were wondering.

Speaker 6

So I know Asselbach mentioned that You moved deposit rates up near the end of the quarter. I was just wondering the magnitude of that. And I hear your comments on longer term, there's opportunity for the margin to expand. How do you expect the margin to trend in the near term?

Speaker 3

I'll give you an answer on the interest bearing deposits. Based on the projection, the new rate increases on deposit, It will bump up our interest bearing deposit rate from 110 what we have to about 140 to 145. So that's going to be a little headwind, but what if you look at short term on margin, I think it's very hard to pinpoint just because of the 2 acquisition upcoming in the We're going to bring their loans and their bond portfolio, both of them going to be repriced at the market rate. That's going to be a Tailwind for us on that standpoint. So I will be hard to pinpoint specifically for the near term, but The information I gave you should give you some information on the Q2.

Speaker 6

Okay. And the $3,000,000,000 of FHLB, which turned into cash on your balance sheet, I know that's pretty earnings neutral, but how long Will those balances stay on the balance sheet?

Speaker 3

So we started about the middle of on 13th or 14th March and stayed almost through end of the month.

Speaker 6

Okay. So it's gone now?

Speaker 3

Yes. They were gone by end of the quarter, before the end of the quarter.

Speaker 6

All right. That's helpful. And then I'm just curious, I know the unrealized Loss in your held maturity bond bucket has been going down over the last couple of quarters. I imagine it went down this quarter. What is that amount of after tax unrealized losses in the held to maturity bond book?

Speaker 3

So if you look at threethirty one, the net of tax was about $1,100,000,000 that's decreased from $1,300,000,000 we had end of the year. So we have $200,000,000 decrease in after tax.

Speaker 6

All right. And then finally for me, anything Specific holding up this Lone Star approval?

Speaker 3

I think we're just waiting on the regulatory approval right now. It's So just waiting from them.

Speaker 1

Yes, nothing specific. They've been busy lately as you know.

Speaker 6

Yes. I can imagine. Yes. Thank you for the color guys.

Speaker 3

Yes. We're hoping to get it done in the Q2. Yes.

Speaker 7

Thank you. And our next question today comes from Peter Winter at D. A. Davidson. Please go ahead.

Speaker 8

Good morning. I was wondering, could you talk about the outlook for deposit trends for here and deposit betas beyond the Q2?

Speaker 3

I can address the betas specifically. So if you look at I'll give you the cumulative beta that we had through threethirty 1. If you look at over 12 months, the cumulative beta on deposit was about 12 basis points With the recent increases on the deposit rate that I mentioned on my speech, it's going to go up to about 16 basis points to 17 basis points on cumulative betas.

Speaker 2

Yes. Peter, I think as far as trend, I still don't know if everything is our deals look They have stabilized, you have but you still have money that's in the system that's probably still looking for higher rates. So I think in the long run, if you ask me in the long run, things will stabilize and I think you will eventually go back to a point where our bank Historically grew 2% to 4% organically every year. And I think that in our budget team what we're looking for once things Stabilize and you don't read in the social media or on the headlines in CNBC or Fox that I think that that's kind of what we're hoping to go Back to eventually is a call it somewhere in between call it 3%. So but anywhere historically it's always been 2% to 4%.

Speaker 2

And I think that will happen. I don't know that that's going to happen this month or next month. I am hoping though that after 5 or 6 months and things Calm down. I'm hoping that's where we'll get back to.

Speaker 8

Okay. And are we if the Fed were to stop raising rates in May, are we at a level where You're almost done raising deposit costs or just given where the beta is being lower than peers, there's still some pressure On deposit costs?

Speaker 2

I think that we're we did raise them. What I think is a market, I mean, when you can get 3% on a money market account With the larger deposit, that's pretty good. It may still go up a quarter of a point from there or so. But Based on where the Fed is right now and them going up a quarter or 50 basis points, I don't see Much more than that there. I will say that probably as our deposits probably Our bonds and everything reprice it and when we look at our models, we really see a very strong net interest margins going forward.

Speaker 2

And so I think the models look stronger than I think they really are. So I think that what I would suggest is that as our money reprices, we may Just from a customer standpoint, pay more to that and maybe not show us that's real strong. When you look at the models, they're extremely strong. And I know In a real world that doesn't happen. I mean our net interest margin as I mentioned earlier in the Call earlier was that our average has been about 3.37, but we've been as high as 3.80 and we've been as low as where we are today.

Speaker 2

So I still think somewhere in between for a bank of ours. We didn't where a number of the other banks went out and purchased brokered CDs, We didn't. Again, I don't know anybody. I mean, I think that's everybody they need to do what they need to do. I've never really put a lot of money.

Speaker 2

I never put a lot of faith into brokered CDs. In fact, when we look at purchasing a bank, I usually just ex all those brokered CDs and there will be any credit for that. So Again, it doesn't mean that we won't be there one day, but that's not something that we participated with and don't really want to be We took the position that we may lose some money. We may not be as big as we always were. It's going to take us time to maybe get back to that point, Excluding the acquisitions that help us of course, but we wanted to remain profitable over that period And make sure that what we're looking at are truly core relationships and core deposits.

Speaker 2

And that's kind of where we're at today. Long story, I just want to give you some color.

Speaker 3

Yes. Just to add on, I think on the modeling side of it, I think we're excited. Our model shows very good in 24, 36 months, and our model has beta of 36. But then Right now, we're running our actual betas on our deposit list and that model shows. So that's looks

Speaker 2

I mean, I think it all boils down to our company. I think we have a great company. It's strong. So looking forward, I think We're in a better position than most of our peers simply because of the net interest margin that we see going forward. So I think that if you're a longer term player, you can see where we're going to be in a year or 2 years.

Speaker 2

That's what we're focusing on is more of the longer term really.

Speaker 8

Got it. And just one last question. You had very solid loan growth, loans held for investment this quarter. Is that level Sustainable just given the economic backdrop because Tim did mention the average Monthly loan production, which was down a fair amount relative to the 4th quarter.

Speaker 5

Yes. This is Kevin. I think at year end our January call, we said mid The high single digits, and we hit the high single digits portion in Q1. I think we all see a little weakness in Loan demand, and we've experienced that for the last couple of months. And what's really aiding The tailwind to loan growth is a much reduced level of loan payoffs.

Speaker 5

So I think we see asset durations extending a bit. If our typical asset duration in real estate was 3 years, it might be 3.5 years, but it may go out to 4 Before this is all said and done, so the loan growth is a little different for the last 3 years as we as the legacy We kept talking about, well, we got the headwinds of the runoff. We have the opposite effect now. I think the whole industry has the opposite effect of slower payoffs, Still some loan originations, clearly, but slower payoffs. So I think we're still good at mid single digits to high single digits.

Speaker 5

I'll reiterate again what we said in January that if we choose to start selling off mortgage loans rather than portfolio on those, We'll be at the lower end of that versus the

Speaker 2

higher end. And I also want to say it with the caveat that now that a lot of the banks that have Such high loan to deposit ratios, they really cut back on the loans that they're doing. And we've always said in a time and harder times, Those are the kind of customers that we'll probably get and go after so we can get better terms and conditions. So that's also helping us at the same time right now. We don't really want Turn those customers away.

Speaker 2

So this is really kind of a time where we really perform well.

Speaker 4

That's correct. We're actually already starting to see that. We've been able to make some loans to what we believe are very good credits That historically, we might not have been able to lend to, not because of credit reasons, but because of Very significant competition that really just priced the loans down to the point that you couldn't hardly Any money off of them and you couldn't get any equity in the project or the collateral that you were dealing Yes. That is changing right now. More and more banks are out of the market and are pulling out of the market.

Speaker 4

So our opportunities seem to be increasing somewhat, and you have to recognize that we do have Loans that got booked that have not funded up yet. So the actual loans outstanding We'll probably continue to grow just simply from funding loans that we have already booked that are in progress, so to speak.

Speaker 8

Thanks very much. The next question we have will come from Brad Milsaps of Piper Sandler.

Speaker 9

Hey, good morning.

Speaker 1

Good morning, Brad. Good morning.

Speaker 9

Thanks for taking my questions. Just curious, David, how much of the public funds that exited this quarter Do you expect to come back? And then kind of as a follow-up to that, would you expect to utilize some of those funds to pay down to the extent they do come back Some of the $3,000,000,000 or so in borrowings you had outstanding at the end of the quarter?

Speaker 2

The $2,000,000,000 that we lost last year, I don't really see those funds coming back. Those are really investment funds. And unless we're willing to pay a textbook rate of $480,000,000 or something like that. I don't really see those coming back. You will see public funds go down throughout this quarter And next quarter, but you will by the end of the year, you will see public funds come up.

Speaker 2

And I would say that could be $300,000,000 to $500,000,000 Between $400,000,000 to $600,000,000 $400,000,000 to $600,000,000 probably.

Speaker 9

Okay. So in the interim, you mentioned you weren't going to go the brokered You might just rely more on just cash flows from your bond book or adding some additional Federal Home Loan Bank advances?

Speaker 2

Yes. I mean, I don't want us to continue to borrow money from the Federal Home Loan Bank. I mean, I guess, I look at This way I asked myself, we had $3,500,000,000 in borrowing at the Federal Home Loan Bank at the end of the quarter. And so in my mind, I asked myself how do you if you wanted to get out of that, how do you ever get out of that? And in my mind, We have $2,200,000,000 in bond roll off a year and we also are going to have about $434,000,000 of liquidity from the banks that Are joining us, First Capital and Lone Star.

Speaker 2

So in my mind, if you use just those 2, it takes us about 15 or 16 months that we would be out of Home Loan Bank completely. Again, unless we lose more deposits for temporary that changes everything. But if everything were stagnant at March that you could get 15 months to 16 months. I will say though for most of our most of the time we always do have some portion Borrowed at the Federal Home Loan Bank and probably always will even in a normal time, we would probably have anywhere from $1,000,000,000 to $2,000,000,000 and we leverage that. But not when the yield curve is inverted like it is, but when it's not, we usually leverage that.

Speaker 2

And so that would get us out of that. So then the next question would be, Okay. So where are you going to get your money to fund at least 5% for your loans, if you're going to use all that money for My point is, I really I hope I said this, historically we always have grown 2% to 4% And I just use like a 3% number where we're at. It would be 3%. That's still going to get us around $800,000,000 to $1,000,000,000 And additional money here and I think that's the money we would use for the growth in the loans.

Speaker 2

I hope I didn't make that too complicated, but I've always in the back of my mind, I'm thinking about that

Speaker 4

I think it's important to point out that the bulk of the money we had borrowed from Federal Home Loan Bank was not really because we needed it, it's because we felt like it was prudent to have on hand given what Was taking place in the overall market. We didn't know whether somebody was going to come in, in the next 2 minutes and want to pull all their money out As quickly as things were changing.

Speaker 3

You're referring to the additional $3,000,000,000 as we

Speaker 2

Yes, dollars 3,000,000,000 yes, I didn't think we were talking

Speaker 9

I was talking about the core, the kind of the core FHLB that you have, which you Yes. I'm talking about for 3.

Speaker 4

Yes. We didn't really It's gone. As it turns out, we didn't really need it, but we felt like it was prudent to have it on hand for a while there.

Speaker 2

Yes. My comments were all relating to I'm with

Speaker 9

you. Yes. That was my question. Yes. Thanks for clearing that up, David.

Speaker 9

And then finally for me, I think When you guys announced the 2 deals together, I think you had something in there 2023 estimated Earnings from the combination with 75% cost savings of somewhere around $77,000,000 Obviously, a lot has changed. Would you mind giving us an update on kind of what you think the banks can contribute to the extent that it has changed? Just kind of wanted to Get a sense of kind of contribution from those 2 organizations once they become a part of Prosperity? Yes.

Speaker 3

I think on the cost saves, what we announced that we're going to have a combined 25% cost saves on theirs. I think that stays as is and we're pretty optimistic about it. You're right, the timing has shifted. The 75% was based on the Q1 acquisition, the estimate acquisition. Now since the timing shifted to 1, 1st Capital being May 1st and we're hoping Lone Star being sometime in the Q2.

Speaker 3

So it's timing wise on savings it does shift a little bit. But on the 25% cost save overall, we expect in the long run that stays as is. Right.

Speaker 9

And I think also, you estimated something $77,000,000 of contribution. Does it make sense just given what's happened To haircut that to some degree? And if so, would you could you give us any color on maybe kind of how much to think about?

Speaker 3

Yes. The day 1 onetime cost and plus the day 2 Provision expense, that's going to happen immediately after the merger of the banks. But I did say that they're going to bring in operation expenses as they merge. I would expect probably after merger maybe within Not maybe the Q1, but the Q2 right after the acquisition, we should utilize the savings.

Speaker 5

I think he's after the revenue and income side.

Speaker 9

Yes, exactly, Kevin. Okay.

Speaker 5

Just trying to interpret there for you, Brad.

Speaker 3

Thank you. Yes. On the income that we have, right?

Speaker 4

Well, I think I don't think there's been really A significant change in the profiles of these two banks. It has not. Yes. As much as people think might have occurred. Now The party is not over yet, so to speak.

Speaker 4

So we have to look at it day by day, week by week. But they their balance sheets have Been altered significantly and their P and Ls haven't been altered significantly so far.

Speaker 3

Yes, so far. And I I think what the estimates we had on other, the loan markups and all that stays the same. I didn't think there was a significant change that should bring in The income that we expected. I don't think there was significant shift in their estimate.

Speaker 5

It's just the delay that factor, Brad. That's really the only thing.

Speaker 9

Understood. Thank you. Appreciate it guys.

Operator

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

Speaker 10

Hey, good morning guys. Thanks for taking my questions. Kevin would be remiss if I didn't ask about the warehouse. This quarter's average volume was a little bit higher than what you kind of contemplated 90 days ago. Just wanted to get any sort of thoughts as we kind of move forward just given the dynamics out there.

Speaker 10

Thanks.

Speaker 5

Yes. Thank you, Michael. You're right. I think we said in January, we thought we'd average $550,000,000 to $600,000,000 for the quarter. I will tell you in February, I was thinking it was not even going to get At $550,000,000 and was worried about it, but we ended up averaging $6.18 because it truly rallied from in the last 45 days of the quarter, Ending up at $799,000,000 almost $800,000,000 at quarter end.

Speaker 5

I'm going to go with $800,000,000 to $850,000,000 For the quarter, Michael, I think it's we're averaging right now about $770,000,000 through the 1st 26 days of the quarter, 25 days of the quarter. And I think it will tick up from there. So if I had to pick a number, 825.

Speaker 10

Okay. That's very, very helpful. Just one minor question for Asselbach. The other Non interest income was up a couple of $1,000,000 almost $3,000,000 Just wanted to see if there was anything specific That was in there and if anything will come out from a run rate perspective? Thanks.

Speaker 3

Yes. We had some one off items like Annual incentives and one off income that we have and some of them comes annually, some of them was just one time. So it wasn't anything particular.

Speaker 10

Okay. So maybe a few $1,000,000 in one timers?

Speaker 5

Yes.

Speaker 10

Okay. Maybe just finally for me, just given where the capital ratio is, I mean, you guys have lots of capital, you're Doing 2 deals as we kind of go through this and just wanted to get a sense for buyback from here. You guys did buyback a little bit of shares. I assume you paused when everything started to happen, but just given where capital, I just wanted to get your appetite, just given where the stock is. And then Just wondering to get a sense from an acquisition point of view.

Speaker 10

I know you said conversations that maybe slowed down a little bit, but Wanted to see if you'd looked at any of the banks that have failed or maybe some stress situations, if they'd be of interest to you? Thanks.

Speaker 2

First, this is David. I'll address the capital issue. As you know, we've always again, we've always used our capital really to try to increase dividends And really used in the M and A gang and then we use the rest of the money, if we use money extra, we felt the stop was really disproportionate. I don't think that any of that's going to change as far as the dividends go. I mean that's 1st and foremost, that seems like our directors really like that.

Speaker 2

Acquisitions, we'll continue to do that. I don't see that stopping. As far as buying a stock or a lot of our own stock, a lot of it I think some of that's going to depend on Regulations or regulatory bodies if they ever say anything. So instead of making a commitment that we're going to discontinue to buy and buy, I don't want to do that. I think in a stressful more stressful time like this, I think we have to look from the regulatory bodies what they're going to say about it.

Speaker 2

But my General overall feeling is that we could we still make good money. We still have we paid the dividends and we still have quite a bit left. So I think that and as your HTM loss goes the other way over the year to 2, In the long run, I guess in the long run, I would say, I don't see it changing a whole lot unless the regulatory agencies come in and say, you Shouldn't be doing that or something like that.

Speaker 10

Okay. Thanks guys.

Operator

The next question comes from Brett Rabatin with Hardee Group. Please go ahead.

Speaker 11

Hey, good morning, everyone.

Speaker 6

Good morning, Eric.

Speaker 11

I wanted to ask on the fee income side. The other bucket obviously had a little bit of noise this quarter. Was just curious also Buck, was there anything that you would call out that'd be non recurring? Or can you give us maybe Some color on the other income bucket and how you think that might play out from here?

Speaker 3

Yes, I think, yes, we've had one off items. If I would have So, Tal, I would say a couple of $1,000,000 was one off item that did not come in or that came in and the rest of them will be more Continue repetitive from that bucket.

Speaker 9

Okay.

Speaker 11

And then Could you give any update on the cash flow on the securities portfolio? What you might have maturing in the next quarter or 2?

Speaker 3

I mean, our cash flow is $2,200,000,000 So if you the projections, I mean, if you take it at the quarter, I mean, we expect About what $550,000,000 or so a quarter?

Speaker 2

Yes, I don't think that's changed. I mean we're still around 2,200,000,000

Speaker 11

Okay, great. And then just lastly, some of the more conservative banks, it Seem like it might be an opportunity for them to maybe take share through this situation, but it seems like Some of the conservative players have said no, we're going to wait and see how maybe this plays out. I'm just curious, David or Kevin, This environment as you see it, is this an opportunity to maybe take share or do you Stick to your guns and get more conservative, have you increased your underwriting standards at all or change them? Any thoughts on that?

Speaker 5

I think we will take share without having to change our underwriting standards. Brett, there's enough pencils down Banks that are loaned up, fully loaned up, 100 percent 90%, 100%, 100% plus loan to deposit ratio and they are, Generally speaking, their pencil is down or maybe a deal pays off, they can do a new deal, but if they're not active and I think as Tim said A little earlier, we're seeing opportunities from really good clients that we historically would not have banked because either Structure was too loose or the pricing was too low. Those clients are now coming to us and we're able to get our structure And our pricing on those transactions. So I think this for us, this is no different than any other time during stress. We tend to do well.

Speaker 5

We tend to have liquidity and have the money to loan. So I think on the loan side, we're in a position To take market share as we want. Yes, I have to say in

Speaker 2

my long time in banking, even when I sit in loan committee And I see what's being asked down on some of these projects, commercial projects. I've never seen that in my career that You could get that much down and people would still do it. And I think it's just because they're just as the deposits have flowed out of a lot of these midsized banks, They just don't have the deposits to fund that to fund it. So I think we will have opportunities. And This is the time that we should and this is the time we actually look forward to.

Speaker 5

Brett, it's not uncommon for us today to get 50% To 55 percent equity upfront on a multifamily deal. And all those dollars go in before we fund the dollar. And as David said, A long time since we've seen that kind of equity, but we're asking for it and we're generally getting That's real hard dollar action.

Speaker 2

It's real based on cost.

Speaker 11

Yes. That's pretty low for the multi penny market. Appreciate the color guys.

Operator

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Speaker 12

Hi, thanks for taking my question. I wanted to ask about NIM going into next quarter, you noted that the portfolios that you're acquiring will have an impact On NIM, presumably there'll be a tailwind because you're acquiring them at market price. Any thoughts on what And then can get to next quarter with the acquisitions, would you be able to go over a 3% in next quarter?

Speaker 3

I think it will be hard to specifically point out because we still have to go through the merger process and evaluation. But we're excited about the 2 acquisition because of the cash they're bringing and our ability to reprise their bond portfolio and their Mortgage portfolio. So I mean, I cannot give you specific guidance, especially because of the fair value income that we have to calculate and that Getting amortized based on the duration of loans or the life of the loans. So but I mean but we're optimistic where we stand on it.

Speaker 2

I think you could say that Once we get both closed and in our bank, it should help the net interest margin, I would say that.

Speaker 3

Yes, that's for sure.

Speaker 12

That's helpful. And then maybe on the loan yields In the core business, in the current business, you noted that you have acquired Newer customers presumably at better pricing. You have a fixed rate portfolio as well that should reprice higher. So in the event that the Fed stays higher for longer, how should we think about your loan yields over

Speaker 2

the course of the next year or so? Well, our models show that if interest rates stay higher Or even go up, we still perform better from an income standpoint and a net interest margin. Yes.

Speaker 3

If you just look at our NIM calculation, because our bond portfolio is generating right now $524,000,000 and we're putting new loans that 7 handle right now. If you just take it and if it stays rate stays for the next 12, 24 months in this rate, you can see there's upside of 200 basis points on So I mean that's Our

Speaker 2

models are usually really good and they're correct. And I think that basically if rates don't do anything, We still do substantially better and improvement in net interest margin over $12,000,000 $24,000,000 $26,000,000 I mean substantial. And if interest rates go up, our model show that we even did better than that. I think if they go down, if interest rates go down, it probably takes a Little bit away from us.

Speaker 3

Yes, because of the composition of our loan portfolio with

Speaker 2

I think if interest rates went down, I forgot 100 basis points or so. I don't think that they will, but if they did that doesn't give us a positive effect. But still in 100 down, We still have substantial increase in NIM over time.

Speaker 12

Did you say over what timeframe that 200 basis points can come in.

Speaker 2

I think that your net interest margin looks a lot better in 12 months. It looks better in 20 Real good in 24 months and fantastic in 36 months.

Speaker 12

Got it. All right. And If I can just round out that discussion, how should we think about the efficiency ratio given what you said on NIM and loan growth and the merit increase is coming up.

Speaker 3

So I think efficiency ratio, if you just look at long term, it will take us time to once we have 2 banks merge with us, Realize the cost savings, but in the long run, I think we're going to be back to our normal 42%, 43%, 44% efficiency ratio in the long term.

Speaker 12

Great. Thanks so much.

Operator

The next question comes from Evan Poonawala with Bank of America. Please go ahead.

Speaker 13

Hey, this is Ebrahim Poonawala, Bank of America.

Speaker 2

Well, I thought it was Evan. I thought you changed it.

Speaker 13

Yes. She did say Evan, but you're not wrong, David. You're right. But I let it fly.

Speaker 2

Sorry about that.

Speaker 13

I guess I can't pass off as an Evan.

Speaker 4

That's not a bad idea to

Speaker 2

change it, easier to pronounce that.

Speaker 13

So question around the NIM. 1, Did you talk about and sorry if I missed it around the core ex the acquisitions, do you see the NIM going drifting higher from here when we think about 2Q And rest of the year from the $293,000,000 this quarter?

Speaker 3

Yes. I mean, as we talked about in long term, it's very positive. I think in the short term, Headwind we have on the Internet bearing deposit little bit, it will be a little bit maybe down, but that's on the Prosperity Bank itself without acquisition. With the 2 acquisitions, it looks really good with adding 2 banks to our balance sheet.

Speaker 2

It helps in the it really takes it helps us in the short run too. But in the long term it really helps us. Yes.

Speaker 3

We're talking about very short period.

Speaker 2

Very short period. Without it, it wouldn't look as good, you're right.

Speaker 13

And just on that point, David, I think you mentioned multiple times around on the last question, If rates go down 100 basis points or 200 basis points, when you think about when it can look good or I think you said fantastic over the next 2 to 3 years, Are you is it the Fed funds that matters more than the 2 to 5 year part of the curve? Just remind us, we could see a scenario where the Fed funds drops maybe over the next year or 2, But the belly of the curve remains where it is. So if you can talk to where the sensitivity might be most?

Speaker 2

No, ours is just repricing. It's just I mean you've got your bond portfolios repricing $2,200,000,000 a year. Our loans reprice or roll off historically has been a third about $6,000,000,000 So just between those two, You have about $8,000,000,000 or $9,000,000,000 changing in pricing in a year's time, those 2.

Speaker 13

Got it. And one last question, when you think about more big picture in terms of the economic outlook, you mentioned Some of these other banks that are tight on loan to deposit ratios, etcetera, pulling back, it's good for Prosperity. But Overall, like do you see that adding to and accelerating our pace of going into a recession? Like how do you think about just the macro outlook as you think about the next

Speaker 2

Well, I think it does pull back. But again, when I look at The Texas economy, and I guess, I think Texas may be more regional in perspective compared to the rest of the economy. I really don't see a hard recession. I don't. That's just me.

Speaker 2

I think you may see a slowdown. But when you look at people, The customers are still spending money out there. Housing, they're still buying housing. Some of the markets, even in house, Some markets have gone down a little bit in value, but you're still people still needing houses, you have people moving into the state. I mean, I think Texas is probably in a pretty good position.

Speaker 2

I don't see a really hard recession. I don't know. I may be wrong. And I don't have anything in the back of my name to say I know what I'm saying, but just my gut feeling is the thing The way it was going, it was just overblown. Everything was overblown.

Speaker 2

I still think things need to slow down a little bit more quite frankly, so that the That doesn't raise rates, but my gut feeling is that the Fed will raise rates again in May, so by at least a quarter of a point. But then I think they probably will hold off. But again, for the most part, you don't see things just crashing. I don't see that. I don't not yet.

Speaker 2

I mean, I think

Operator

This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Speaker 1

Thank you. Thank you, ladies and gentlemen, for taking the time to

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