Prosperity Bancshares Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 15 speakers on the call.

Operator

Good day, and welcome to the Prosperity Bancshares 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares 4th quarter 2023 Earnings Conference Call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasti, 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. Timanus, Jr, Chairman Asobek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Merle Karnes, Chief Credit Officer and Bob Dowdell, Executive Vice President. Mae Stavenport, our Director of Corporate Strategy is ill 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 Asylbek Osmanov, will review some of our recent financial statistics and Tim Kamanas, who will discuss our lending activities, including asset quality.

Speaker 1

Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward looking statements for purposes of the federal securities laws, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward looking statements. Additional information concerning factors that could cause actual results To be materially different than those in the forward looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10Q and 10 ks 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 1

Now, let me turn the call over to David Zalman.

Speaker 2

Thank you, Charlotte. I would like to welcome and thank everyone listening to our Q4 2023 conference call. For the 3 months ending December 31, 2023, our net income was $95,000,000 or $1.02 per diluted common share compared with $112,000,000 or $1.20 per diluted common share for the 3 months ending September 30, 2023 and was impacted by a one time FDIC special assessment of $19,900,000 and merger related expenses. Excluding the FDIC special assessment, net of tax and merger related expenses, net of tax, net income was $111,000,000 or $1.19 per diluted common share for the 3 months ending December 31, 2023. Our annualized return on average assets, average common equity and average tangible common equity excluding the FDIC special net of tax and merger related expenses net of tax for the 3 months ended December 31, 2023 were 1.15% return on average assets, 6.29% return on average common equity and 12.3% return on average tangible common equity.

Speaker 2

Although our earnings excluding the one time FDIC assessment and merger related expenses were strong, They are still lower than last year, primarily because the majority of our earning assets have not yet repriced and our interest bearing liabilities have. This will correct over time and we expect that our operating ratios will be more reflective of our historical returns. Loans were $21,200,000,000 on December 31, 2023, a decrease of $252,000,000 or 1.2 percent from the $21,400,000,000 on September 30, 2023. Loans increased $2,300,000,000 or 12.4 percent compared with $18,800,000,000 on December 31, 2022. When loans excluding the warehouse purchase program loans And loans acquired in the merger of First Bancshares of Texas increased $882,000,000 are 4.9% during 2023.

Speaker 2

We did see a slight decrease in loans in the 4th quarter. However, we grew loans organically for the year as projected. Our deposits were $27,200,000,000 on December 31, 2023, a decrease of $133,000,000 or 1 half of 1 percent compared with $27,300,000,000 on September 30, 2023. Deposits decreased 1.4 I'm sorry, deposits decreased 1,400,000,000 or 4.7% compared with $28,500,000,000 on December 31, 2022. Our deposit outflows have mitigated since last March.

Speaker 2

However, we still have customers moving money into higher paying instruments such as high yielding government bonds or high rate products offered by competitors. When we saw the increase in deposits during the previous 2 years, We knew that some portion of them would leave the bank and that's what's happening now. As the Federal Reserve reduces the money it has put into the economy by reducing its debt, depositors are replacing it buying the higher rate securities it had purchased. Prosperity has one of the best core deposit bases in the business. We have non interest bearing deposits of $9,800,000,000 representing a strong 36% of total deposits and certificates of deposits representing only 13% of total deposits.

Speaker 2

Further, we have not purchased any broker deposits. Our non performing assets totaled 72,700,000 or 21 basis points of quarterly average interest earning assets on December 31, 2023, compared with $69,500,000 or 20 basis points of quarterly average interest earning assets on September 30, 2023 and $27,500,000 or 8 basis points of quarterly average interest earning assets on December 31, 2022. The increase during 2023 was primarily due to the First Bancshares merger. Despite a relatively low non performing asset ratio, it is higher than our historical levels due to the recent merger. This is not unusual for us and we expect to reduce our non performing asset ratio to a more normal level within a reasonable period of time.

Speaker 2

The acquired loans charged off during the Q4 were fully reserved for. Our allowance for credit losses on loans and off balance sheet credit exposure was $369,000,000 on December 31, 2023 compared with $72,700,000 in non performing assets. We look forward to our acquisition of Lone Star State Bancshares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon. We remain interested in M and A and believe our company is in a strong position to participate, especially given our capital, merger and acquisition experience and the relationships we have built over the years.

Speaker 2

Prosperity operates in 2 of the best economies in the U. S. Even with the recent interest rate increases, Economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and future of our company, Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities such as mergers and acquisitions and the repurchase of our stock when appropriate. We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share.

Speaker 2

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

Speaker 3

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended December 31, 2023 was $237,000,000 compared to $239,500,000 for the quarter ended September 30, 2023, and $256,100,000 the same period in 2022. The net interest margin on a tax equivalent basis was 2.75% For the 3 months ended December 31, 2023 compared to 2.72% for the quarter ended September 30, 2023 and 3.05% for the same period in 2022.

Speaker 3

Excluding purchase accounting adjustments, The net interest margin for the 3 months ended December 31, 2023 was 2.71% compared to 2.68% for the quarter ended September 30, 2023 and 3.04% for the same period in 2022. The 4th quarter increase in net interest margin was primarily due to the decrease in borrowings of 525,000,000 during the Q4 of 2023. Non interest income was $36,600,000 For the 3 months ended December 31, 2023 compared to $38,700,000 for the quarter ended September 30, 2020 $37,700,000 for the same period in 2022. Non interest expense for the 3 months ended December 31, 2023 was $152,200,000 compared to $135,700,000 for the quarter ended September 30, 2023 $119,200,000 for the same period in 2022. The linked quarter increase was primarily due to one time FDIC special assessment of 19,900,000 For the Q1 2022, we expect non interest expense to be in the range of $134,000,000 to $136,000,000 The efficiency ratio was 55.6 percent for the 3 months ended December 31, 2023 compared to 48.7% for the quarter ended September 30, 2023, 40.9 percent for the same period in 2022.

Speaker 3

Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the Q4 of 2023. The bond portfolio metrics at Twelvethirty Onetwenty 23 showed a weighted average life of 5 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. Jimenez? Thank you, Asselbeck.

Speaker 4

Our non performing assets at quarter end December 31, 2023 totaled $72,667,000 or 34 basis points of loans and other real estate compared to $69,481,000 or 32 basis points at September 30, 2023. This represents a 4.6% increase. Since December 31, 2023, $3,200,000 of non performing assets have been removed or put under contract for sale. The December 31, 2023 non performing asset total was made up of $70,883,000 in loans, dollars 76,000 in repossessed assets and $1,708,000 in other real estate. Net charge offs for the 3 months ended December 31, 2023 were $19,133,000 compared to net charge offs of $3,408,000 for the quarter ended September 30, 2023.

Speaker 4

This is a $15,725,000 increase on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31, 2023. Also, there was no addition to the allowance during the quarter ended September 30, 2023. No dollars were taken into income from the allowance during the quarters ended December 31, 2023 September 30, 2023. The average monthly new loan production for the quarter ended December 31, 2023

Speaker 2

was $300,000,000

Speaker 4

compared to $398,000,000 for the quarter ended September 30, 2023. Loans outstanding at December 31, 2023 were approximately $21,181,000,000 compared to $21,330,000,000 at September 30, 2023. The December 31, 2023 loan total is made up of 42% fixed rate loans, 27% floating rate loans and 31% variable rate loans. I'll now turn it over to Charlotte Rasche.

Speaker 1

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

Operator

We will now begin the question and answer session. The first question comes from Dave Rochester with Compass Point. Please go ahead.

Speaker 5

Hey, good morning guys. Good morning. Good morning. I was hoping to get your outlook for the margin in NII for either 2020 for at least maybe the Q1 and any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near term trends would be great to hear and get your thoughts on.

Speaker 3

So if you look at our margin in the short term, as we discussed that we're still having a lot of tailwind from our repricing of a loan and asset from the standpoint. From our borrowing side of it, as you saw, we decreased our dollars 525,000,000 So we're picking up that margin there from paying off like from the cash flow on the investments paying down on borrowing. So we're picking up about 300 basis points there. So with a combination of loan re pricing and paying down on borrowings, we should see expansion on the margin. And what you saw with had 3 basis points expansion in the 4th quarter and We continue to see that marginal expansion in the Q1 and beyond.

Speaker 3

But if you look at it in the long term, we see really I think on the second half, We see more expansion in the margin than we see in the first half of it just because it takes time for the assets repricing. I think the guidance we gave last quarter that In 24 months, our NIM being like 3.30, 3.40, our model still shows that expansion in 24 months at 3.30, 3.40, so I think it's looking promising.

Speaker 2

I think Dave, I think that what we said is that quarter to quarter before that in 12 months that we'd be at 3%. I think that if you look at the models that we're running again, these are just models and the models take into

Speaker 6

consideration that you have you're not going down on loans, you're

Speaker 2

not going up on loans, You're not going down on loans, you're not going up on loans, you're not going down on deposits, it's not going up. It's a pretty static model. The model reflects that in 6 months we're looking at around 296, 12 months 314, 24 months even better than that. And It also was good even if interest rates go up or down, our models are still showing our net interest margin expanding to really get more normal levels. So we're pretty excited about that.

Speaker 5

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

Speaker 3

Yes. On this, what the numbers we showed, that is The rates staying the same. But if you look at our model being 100 basis points down or 200 basis points, Our margin still holds up. I think it's down to 124 months. Our margin might be a few basis less than what we're projecting on the Flat environment, but it's still expanding in the 24 12 months, 24 months.

Speaker 5

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

Speaker 2

That's probably the $1,000,000 question, Dave. It's just I don't know that anybody really historically, we've always grown the bank organically 2% to 4%. These last several years were kind of crazy. We took in we were growing 10% a year. And so we did something the other day.

Speaker 2

We went back and looked and also back and I looked and said, okay, so after all the deposits we lost recently and we went back 3 years. Before the call. What's really crazy when you even With the amount that we gained, we're still we still got 15% ahead. So that still gave us about a 5% organic growth rate over those years. So Going forward though, it's really hard because again, not trying to make excuses, but one of the main objectives of the Federal Reserve is is to really slow the economy and that comes 2 ways.

Speaker 2

1, reducing increasing interest rates, reducing borrowers and number 2, pulling money out of the system and they pulled $1,000,000,000,000 out of the system in the last year. So when they're pulling money out, That's something that it's going to reduce money in the banks unless you're buying brokered funds. And I would say that We know that some banks do. I'm not saying it's wrong or right. We just elected to keep our cost of money with core deposits and not chase the brokered funds.

Speaker 2

So that's just a position we took. I don't know what's right or wrong and I'm not getting to what you're Really asking what we think. I would think at best, at best is probably a 2% gain in deposits probably. Did you disagree or is that?

Speaker 3

Yes, I think not usually historically, if you look at our deposits, the Q1 because of tax payment usually goes down a little bit historically. But in the long term, I think we should be able to get to a historical rate. But it all depends on the microeconomic conditions and With the quantitative tightening too that will impact as well.

Speaker 2

The main thing is I don't see a 5% organic growth Right or not this year,

Speaker 3

that's for sure. Yes, I agree.

Speaker 5

Okay, great. Thanks guys.

Operator

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

Speaker 7

ahead. Hey, good morning everyone.

Speaker 2

Good morning.

Speaker 7

I wanted to stick with the balance sheet and the margin and just looking at the securities portfolio, it's about $13,000,000,000 I know you've got over $2,000,000,000 in cash flow annually. But if you look at the yield kind of year over year, it's kind of flattish at 207. Does that start to move up in the next quarter or 2? Or can you give us any thoughts on the securities portfolio progression from a yield perspective from here?

Speaker 3

Yes. Since we're not purchasing any new securities, I think yield is going to hold up as what we see at around 205. But I think it also depends how the mortgage rate is going to do, if there will be a lot of The increase in the mortgage or decrease in the mortgage rate that might speed up little bit turnover of those security and maybe we'll pick up yield there. But overall, we're not expecting the secured yield to go up more significantly or come down more.

Speaker 2

The only way that the yield would go up in the bond is if we elected instead of reducing debt or putting the money in the loans where we prefer putting it, we would buy back securities in that case then it would go up. Otherwise, it's probably going to stay stagnant for the most part of last.

Speaker 7

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

Speaker 3

Okay. From the overall funding, let's talk, we have in the borrowing, we saw we have about $3,700,000,000 around 5%. So we're paying down with the cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposit in time deposits, But that's the special program we introduced paying 5%. We just want to give our customers some way of earning rate rather just leading to Competition, we want to pay up on those.

Speaker 3

And those are only 7 months TDA. So we're keeping them short term. So when rates would come down, we can reprice them quickly and kind of get out of our system within 7 months. So we have about $3,500,000,000 in the CDs and But out of that $3,100,000,000 will be maturing within 12 months and those special CDs about I think $1,800,000,000 Rest of them is money market in non interest bearing deposits.

Speaker 7

Okay. And then any thoughts on municipal deposits and how those trend from here?

Speaker 2

Generally, the municipal Deposits really increased at year end. Again, when we compare this year's municipal deposits to last year, we're down about $500,000,000 It's just They're taking and put it in higher tax pool or something like that. So we didn't get as much in public funds this quarter at the end of year end as we did in the previous end. And I think that was expected.

Speaker 3

Yes. And on the public funds one note, I would say, I think we are down to almost to their operating accounts because all the excess they could earn, they probably moved out to tech spools. So we're kind of maintaining their operating accounts.

Speaker 2

Maybe a little bit higher right now. Yes. People are still paying tax dollars. But again, most of the money that we do is their operating accounts, it's not their investment. Yes, in big picture, correct.

Speaker 7

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

Speaker 2

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

Speaker 8

And you mentioned Justice Department, we're out of the Justice Department. Right.

Speaker 2

We're out of

Speaker 8

the Justice Department. They've cleared us.

Speaker 7

Okay. Okay. Great. Thanks for all the color.

Speaker 2

It's still at the FDIC and they take off most of Christmas for December.

Operator

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

Speaker 9

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

Speaker 9

Thanks.

Speaker 2

You hit one of my hot buttons, Michael. I hope you don't start thinking. Sorry. Yes, it goes through. If it goes through, Really, I think it's in latter part of 2025.

Speaker 2

I'm hoping maybe there will be a new administration that can stop it because It's really a misguided thing to think that to bring this overdraft charges to 0 or $3 or $17 I mean, really it's a behavior I think that you don't want to promote. I mean, think about it on the other end that it's like telling your kids something's wrong, but you're going to reward them for continuing to do it. And I think on the other end, where the person is giving a check is buying a good to the merchant or the retailer And that person on the other end, they're not getting their money. I mean, they've lost the money on the deal where the bank and a lot of times pay that overdraft, You won't see that overdraft. We might not be paying them in the future.

Speaker 2

So the bottom line, I think it's inconceivable. I'm hoping that Rohit Chopra We'll reconsider this deal. I'm hoping he will. I hope we can get to talk to him. And more so than that, if banks have to continue, they need the service charge income.

Speaker 2

I mean, the I mean the regulatory burden is just unbelievable right now. And so banks would have to go to really different type of service hardware here, we're offering free checking accounts right now to really people on the lower end with lower amounts of deposits. I think in the future, if we if this deal does go through, I think the banks will have to say, okay, your minimum balance now may have to be $2,000 or $3,000 you're get a service charge and that would eliminate a lot of the lower end checking accounts that the regulators and the Fed has really wanted us to get those people to have accounts. So I don't think it's completely over yet, but if it does, there's no question it would be impactful to us. The impact would either be whether it's at Are they going to let you charge $17 They're going to let you charge $3 So if that's the case, it could be If it's $17 and you get the charge $17 or $15 it's probably $10,000,000 or $11,000,000 before tax.

Speaker 2

If it's $3 and it's more like again, I think probably more like 16 or 17 before tax something in that category. On the other hand, we would have to find ways to increase service charges in other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire makeup, but you would have to come up with some other charges in some other places. Got it. Okay.

Speaker 2

I gave you too much information, Michael.

Speaker 9

No, that's great. And sorry to hit a hot button topic. Maybe just as a follow-up, you guys announced that new repurchase program the other day and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of Balance or loans balance sheet or loan growth this year, any sort of thoughts around increased usage of the buyback as we move through you're assuming credit remains relatively benign? Thanks.

Speaker 2

Yes. I mean, I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. I think we did use it last year. I think how many shares, Collyn, did we purchase last year? About 1,200,000 shares.

Speaker 2

1,200,000. Again, not a lot, but we still did. I think that we were very cautious Look, last year was a year that we wish would have never happened starting in March with Silicon, Valley Bank and Signature Bank. And so and then you have people who are still being very critical of What kind of bond portfolios you have and what kind of losses there. And so we took all that in consideration.

Speaker 2

The regulators were a little bit antsy about everything too, liquidity in that. So we were more cautious. I think we all feel much better right now. And I think that if we don't use it in another way, our perspective is that we always like to increase dividends, of course, that's kind of our deal. But if we don't we wouldn't use it all there, we would probably look at we don't get an M and A deal, then we will look at purchasing stock if the stock is not appropriately priced.

Speaker 9

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

Speaker 8

Yes. Michael, as you know, I always talk in average balances for the quarter and we did come in a little higher. I think my high side estimate was maybe $750,000,000 and we ended up at $770,000,000 as an average for the quarter. The first quarter is typically the weakest quarter. It hasn't always showed up that way over the last 10 years because we had so many refinance booms and re refinance booms and everything else, but the Q1 is generally pretty weak.

Speaker 8

January of this year has started off a lot like January of last year, week. The average, Michael, through last night has come down from that $770,000,000 for the Q4 down to 704, And last night's balance was maybe $610,000,000 So we're hitting a low point. I expect drift a little lower and get under $600,000,000 here for a few days before it begins to rebound. So January February generally going to be pretty weak March picks back up. My best guesstimate for the average for the quarter, I'm going to say $650,000,000 but could be as low as $625,000,000 But if I had to pick a number, I'd go 650,000,000

Speaker 9

Sounds good. Thanks, Kevin, and thanks for taking all my questions, everyone.

Operator

The next question comes from Brandon King with Truist Securities. Please go ahead.

Speaker 9

Hey, good morning.

Speaker 10

Good morning.

Speaker 9

So I had a question on deposits and we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice some of your core deposits given that you're already quite low compared to some of your competitors?

Speaker 3

So if you just look at cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program, we have 3,700,000,000 paying around 5%. So any cuts we have is going to be direct impact to that. So we're going to get direct benefit from that standpoint. As the rate the second part, I would say probably those special CD we're offering at 5% right now. So if the rate would cut down, we would cut those down Probably will linger a little bit, but within 7 months we should be able to reprice that TD as well lower rate.

Speaker 3

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

Speaker 2

I would say also I'd add to that, Brandon, is that If rates go down dramatically, which I don't think that they will quite frankly, but if they do go down, I think that would take the strain off of the non interest bearing deposits leaving the bank more people unless they can get a lot of big interest rate somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also.

Speaker 3

Got it. Very helpful.

Speaker 9

And then, could you give us kind of the puts and takes on how you're thinking about loan growth this year? And within that also kind of talk about what you're seeing in regards to prepayment activity?

Speaker 8

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

Speaker 8

In addition to that, We started off Q3 with a lot of payoffs in July, just a ton of payoffs in July. And we have started off Q1 here with very few payoffs. So and I meant Q4 on that previous statement, I'm sorry. We're actually slightly up for loan growth. It's nominal, but we are slightly positive year to date.

Speaker 8

And again, we got a couple of big fundings Coming up. So I think we're comfortable with a 3% to 5% kind of number to the extent that Economy rebounds and GDP is higher than anticipated. That number could go up in the latter part of the year if in fact there are rate cuts. As David said, We're probably less enthusiastic on our thoughts about rate cuts than many. And to the extent there are any, we think they'll be later in the year.

Speaker 8

I don't mean to speak for David, but I think we're around this table, we're not as charged up about the prospects as many.

Speaker 2

I'd also comment, Brandon, that I think that our customers, I'm not saying Other banks, but customers aren't quality at ours, but we do have a real high quality customer. And a lot of our customers really were borrowing When interest rates were they left money in their checking accounts and interest rates, what we saw as interest rates started increasing on their loans. They took money out of their checking accounts and really applied those more to the loans. So I think That's probably mitigated and stabilized also.

Speaker 8

Yes, we saw that particularly in our C and I book. Right. Just a ton of Deposit decline with the money not going out of the bank, it was going to pay off one

Speaker 2

of us. And even we saw some real estate deals where They might have been at 5% or so and their rate was going to go to 8% or 8.5% and they just elected to pay off the whole loan. I saw certain smaller loans like that. Customers just had money in their accounts and they paid those loans off, Which is a good time too.

Speaker 9

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

Operator

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

Speaker 10

Yes, thanks. Good morning. Good morning. I'm just kind of wondering with the Lonestar deal, if that gives any kind of Preposition around future deals or changes maybe how you think about the timeline of approval for future deals or is this more just still specific to Lonestar in particular?

Speaker 2

I can't say it's specific to Lonestar because like I said, it's out of the Justice department is really at the FDIC right now. I think all deals are going to take longer. But Again, I think that I still feel certain that we have a good bank and It may take a little bit more work, but that if we make something happen and the regulators like it, they're going to it will get done. It's just but there is no question Getting something done today as compared to a few years ago, it's a whole different horse right now.

Speaker 10

Yes, fair enough. Okay. And just kind of switching

Speaker 2

This particular deal has some more issues than just the normal issues do sometimes. So Hopefully we won't run into some of that stuff. And it wasn't with their bank. Let me just say this, it was just a number of different things that we had to go through.

Speaker 10

Got it. And then just hopping back to the idea that net interest margin, I know you guys said you're not assuming we'll see as many rate cuts Maybe the forward curve would suggest and I agree with you there. But I mean if we get can you guys quantify maybe for each 25 basis point cut, maybe there's a basis point to a NIM downside? Or do you think even with those cuts Over that 24 month period of time that you stated that there really is de minimis kind of downside on a basis point perspective?

Speaker 3

Yes. I think if you just look at our balance sheet and kind of go through what the impact would be, I think the first impact would be on our Funding borrowing side of it, we have $3,700,000,000 that we're paying down. But if there would be rate cut, you would see immediate impact over there. I think with a 25 basis points cut, I don't think the loan rate would kind of change significantly. I think it's just going to reprice at the 8% or whatever we're getting right now.

Speaker 3

So if you look at long term, I mean, our balance sheet is very neutrally positioned. So we benefit in rate cut or increases in this situation in rate cut. And like I said, in 24 months, if we're looking at our model, Our margin, it's yes, it drops a little bit, but not significantly from what the guidance we gave you over 24 months because the power of our re Pricing of assets continues. If you look at our loans, we have about principal pay down about $4,500,000,000 Out of that, 60% is fixed loans, which on the average rate is around 5%. So you're repricing that 5% at 8%, I mean you're picking up 300 basis points there.

Speaker 3

And if rates I mean if the rate goes down, you're picking up and borrowing. So mean, we look good in either way. So,

Speaker 2

I would say also back again, I'm just looking at the model, it doesn't go in 25 basis points increments that we go up 100 or down 100 and even down 100 in 6 months instead of 2.96 net interest margin we're showing 307 In 12 months, we were at 314 flat. If it goes down, we're at 324. And so even in the 24 month, it So I think down 100, we still even do better than over time even with interest rates going down, even 200 basis points. Yes, because of borrowing.

Speaker 10

Okay. That's extremely helpful. Thanks for that color. And then just for me, I mean the loan loss reserve is still 163 alone. Do you think we could continue to see the 0 provision for sometime here in

Speaker 6

the future?

Speaker 2

It's pretty hard to see with $370,000,000 in allowance for loan loss of $72,000,000 in non performing that we would be putting a lot. I know you saw the charge offs this time that almost its entirety was due to the First Capital Bank merger deal. And again, really some of those loans that I think with the new accounting, Some of those loans we I liked it the old way. We would charge those things off and as we collected them, then we would take it in the recovery under the new CECL deal, if you think there's a chance of recovery, you put them on the books and I wish that we wouldn't have put some of those on the books. But again, we had to kind of believed in what some of the guys have told us that we they were collectible, but the truth of the matter is we have they're fully reserved anyway.

Speaker 2

Just a different way of accounting for them. I think we reserve between the allowance for loan loss that we brought over and our allowance that we put in, I mean it was like $80,000,000 or something like that $80,000,000 or $90,000,000 So again, I think that we're good. We do have some loans on the that increase right now, the $72,000,000 nonperforming again the majority of those were from the merger. Again, I don't see full losses in those loans like we had in those first charge offs, there may be a little bit of loss, but there shouldn't be a whole lot. I think in most of the deals we have dealers working on them Now it's just going to take us a little bit longer to work out of them.

Speaker 2

I'd say probably it takes 6 months for a year to work out of those credits. And then I think that our non performing should be back down to more historical levels.

Speaker 3

Yes. And just to add to that, I mean, we run the model and Based on the model, what we see, how much provision needed. But since we had full reserve for those acquired loans, we didn't need to put any provision based on the model, but we'll be running the model with the economic variables there and see if it requires any provision or not.

Speaker 2

Our models are still showing that we have Plenty in the account. Yes. We have

Speaker 3

a little bit of recession in this side.

Speaker 6

Okay. Super. That's great color. Appreciate all the time, guys.

Operator

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

Speaker 11

Hi, good afternoon. Maybe a big picture question on loan growth. It looks like we're going to get a soft landing. Many of your peers are talking about loan growth reaccelerating in the back half And it sounds like you're saying that too, but you still have all this capital on the books. So why not lean in a little bit more now and get that loan repricing and NIM benefit faster right now, especially if you can put it in some longer dated launch and lock in some rate?

Speaker 8

I think we're thinking about the exact opposite way. We all are still hopeful of a soft landing. I believe that's At today's rates, it's really hard to make a lot of things work. By way of example, Go back 2 years ago when we had lower rates. If we were looking at a multifamily construction project, we might have done it at a low-70s loan to hard cost kind of number.

Speaker 8

And that would produce, call it, a very comfortable 125 debt service coverage ratio even under a little bit of stress. Today, that same exact loan will require somewhere between 50% 52% equity to get that same kind of comfort at your debt service coverage ratio level. So we could lean into that, but there's not many equity players who want to lean into that with us. They're just going to wait for a better time and lower rates to do some of these projects. So we're being cautious, And I think we're being prudent and cautious at the same time.

Speaker 8

I think we'll get our fair share and I believe we'll grow at or slightly above the GDP rates, and it just may be a little back end loaded. As I say, I think that we have some fortune here in the Q1. Things can always not close for various reasons, but we've got some pretty nice deals that are teed up To close that, we're pretty optimistic the Q1 is going to be pretty good.

Speaker 2

I think a lot go ahead, Tim.

Speaker 4

Well, I think The good news is that virtually all of our customers are doing okay. They're not in financial difficulty. The reason they're not doing more in the market place is they're waiting to see if rates do go down and they're waiting to get a little better handle on exactly where the overall economy is headed. But they as entities are in good positions, almost all of them. So if and when The picture is brighter and the cost of doing something is less.

Speaker 4

I think we have an excellent chance and seeing a lot of good loans come our way.

Speaker 8

Yes. I think to your lean in point, the things that we would lean in on are Not to name any names, but thanks for the really high loan to deposit ratio that may have a customer request for a good long time customer that they would love to do, but maybe they just don't have the capacity to do as well or as much anymore. We would like to lean into those where we get a full blown, hey, we're going to help you out on this, but we want a full relationship here. We want your deposits and we want a full relationship. I see ourselves leaning into some of those situations when they come up.

Speaker 8

Those banks, They can raise money and they are raising money, broker deposits, which we've chosen not to do. But if you go get a broker deposit at 5% or 5 point percent these days and try to make a loan to a good customer at 8.25 percent or 8.5 percent, there's just not there's not much in it once you put up some operating costs and the provision against it. So those are the opportunities we would lean into.

Speaker 4

I think that's absolutely right. I mean from a competitive standpoint, Some banks are just not able to move forward on the loan front in a very aggressive way. We have more flexibility than a lot of banks do in that regard. So if the bank is dragging its feet so to speak and giving an approval, we don't have that problem. We can look at a deal and give somebody an answer move forward

Speaker 2

with it. But also we you'd have to admit that last year was kind of a strange year. We were cautious deposits were leaving the bank where We probably cut our own loan growth down because we were trying to set a financing dryer relationships. We really went back to looking just at customers that were customers that could be a deposit customer in a total relationship. So we probably cut ourselves off from a number of deals last year.

Speaker 2

I think your point is well taken. Maybe banks do look better. But again, you want to make sure I don't think we're a bank that wants to end up with a 90% loan to deposit ratio, we want to have liquidity in the bank. And so you have to grow deposits and loans at the same time Just to think you can grow deposits and not grow just to think you can grow the loans and not grow deposits would be a mistake. I know lot of people don't see that, but you need to keep liquidity.

Speaker 2

If there's anything we should have learned this last year that is to have liquidity in the bank. And I don't believe again, I'm not judging other bankers. I just don't believe that broker deposits is true liquidity. That's not core deposits. And We'll keep an eye on both of those things.

Speaker 8

Yes. Look, it served us pretty well. Not chasing the deposit side, but we are starting to inflect that our loan to deposit ratio limits. I think we have policy limits at 85%. We're not there yet.

Speaker 8

But we have stuck to our core deposit franchise. And as I if you look at way more banks than I do, but I look actively at a number of banks, C2 to 65 percent loan to deposit ratio, we didn't have to chase deposits to fund loans. We could let some deposits run off and let our loan to deposit ratio go up and maintain the core deposit franchise underneath it all. And as a result, we come through a quarter where our total funding cost goes up only 4 basis points And now is that for interest bearing liabilities that includes the debt 2.58%. I don't need to tell you where some of the other banks are reporting, but we're seeing numbers above 3.25.

Speaker 8

That gives us a 50 to 75 basis points spread to them in this kind of environment because we haven't chased it. And as I just do look at our overall cost of funds, it's driven largely now 37%, almost 38% of our Interest bearing cost is in our debt. And as you know, we're all we're paying down that debt as the bonds cash flow to us. So we expect $2,000,000,000 worth of pay downs in the debt roughly and That's meaningful. That was $52,000,000 worth of cost in the Q1 or in the 4th quarter out of $139,000,000 worth of deposit costs.

Speaker 8

So we've got that to look forward to, which is why we're so enthusiastic about our prospects for NIM improvement.

Speaker 2

I think we're at a point in time where we were all locking into longer term assets when rates were so low. I think now I think your actions that you do right now by buying money and not having core deposits and increasing your rates on your deposits could be the next mistake. So I think what may not look so good right now may be prudent going into the future.

Speaker 11

Got it. I really appreciate the full sum answer here. Maybe on the core deposits point, I think You said a little bit earlier that for NIB growth, you could see some more customers leave more deposits here if rates go down. How quickly do you think that can happen? Do you think that can happen as soon as you get 3 or 4 rate cuts?

Speaker 11

Or do you need to see rates go down closer to the maybe 3%, 3.5% range before you see that happen?

Speaker 2

I think you will see. I don't think it will be they're not going to rush to bring it back in, but every time the rates go down and I think if you get 3 or 4 rate cuts, you're talking 100 basis points. That would be meaningful. Yes. I mean, I think it would.

Speaker 2

And I think again, I think you'll start seeing people moving money back in. I don't think that you're ever going to go back to 0 deposits. Shouldn't say never, I should learn that in my lifetime. But I think what you're going to see is interest rates probably Again, I don't think I don't even think in the Q1 or the Q2. Having said this, it changes so fast from quarter to quarter.

Speaker 2

I think you'll see probably interest rates go down, the short term interest rates. But again, your 5 year 10 year, I think these are rates that are going to be this is normalization and you're going to probably see those rates where they're at or maybe even go up a little bit.

Speaker 8

Last point is, I think this is playing out pretty much the way we thought. Exactly. Let's just go back to last quarter. I haven't reread transcript and I should probably do that before I come into these calls. But I do recall us talking about when rates pause, It is not unusual.

Speaker 8

In fact, it's expected that deposit funding costs and mix changes continue for about 6 months thereafter. And I think we're all into that process right now. So some of this mix change could go on as Another quarter.

Speaker 2

Yes, I think I think

Speaker 8

that's But it's coming at lower and lower levels. I mean our total cost of funds went up a whopping 4 basis points last quarter. And so it's abating, but it's playing about how it's played out in prior cycles. The Fed pauses and rates continue to go up in the banking system for 6 months.

Speaker 2

I mean your point is what I'm thinking in previous quarters, We actually said that historically banks had 20% or 30% of their money in certificates of deposits and as rates go up we would see money leave where we're at and going to some of these higher rates deals and that's exactly what's happening, vice versa will happen if rates go back.

Speaker 8

Well, we're halfway through it. Let's hope we're right about The second half being the next quarter being the end of it.

Speaker 11

Really appreciate it. Thank you.

Operator

The next question comes from Jon

Speaker 12

Just to follow-up on that, you think that within the next couple of quarters deposit costs really stopped going up for you. Is that fair?

Speaker 2

I would say absolutely.

Speaker 3

Yes. If you look at let's just look at

Speaker 8

the Certainly overall funding costs.

Speaker 3

Yes, exactly. If you look at the cost of fund, John, I mean, we'll just kind of look at the trends from the Q4 averages to Q1 increased like 41 basis points increase on the from second from 1st to second like 46 basis points and then it's increased only 18 basis points and this time we only had 3 basis points increase cost of funds. So you can see it's coming down. Yes, we had significant increases in the 1st few quarters, but pace of increases is slowing down, especially if you have some rate cut that should slow down or completely go maybe reversed?

Speaker 8

Obviously, it's a big part, John, of our feelings about our strength of the feelings about our NIM improving.

Speaker 13

It's a

Speaker 8

big component of it obviously.

Speaker 12

I'll just one more on deposits. The decline in deposits from a year ago. Would you say that's all rate driven? And is that stuff gone forever? Or can that start to come back as assuming rates are stable?

Speaker 2

I mean, I think that rates I do think that I don't know that it's all rate driven. I think for the most part it is. I think it is. There's some portion of it, I don't know what where we have big accounts that have $20,000,000 $30,000,000 in the account. And even though the CFO may like us, they have a Board of Directors and the CFO says, well, Why take any chance if you can go to JPMorgan Chase or Wells Fargo?

Speaker 2

So that certainly adds to some impact. But I have noticed As things become more normalized, people aren't as fearful, I think you will get a good chunk of the money back. Yes, I do. I do believe that.

Speaker 4

I think we're already seeing that, David. We've had a number of customers That initially moved money out 9 months to a year ago, really 9 months ago When the bank started to fail, they moved money out for fear of insurance, not so much for rates. And most of that money went to treasuries. And for really about 1 or 2 months now, We started to see some of that money come back, not a flood of it, but we started to see some of that money come back from existing customers. So I do think there's less fear in the market of bank failure.

Speaker 4

And if I'm right about that, then the competition is really rate driven, not fear of failure. And I think it's more so rate driven now.

Speaker 8

Yes. I haven't looked at it system wide, John, but if you think about it, the Fed has taken money out of the system. M2 is down. So If you looked across the banking system and knew just how many deposits had left and subtracted out the amount that M2 went down because Fed actions, the rest would have to

Speaker 4

be rate driven.

Speaker 13

Right.

Speaker 6

It wouldn't

Speaker 3

have to

Speaker 8

be, it could be service levels, but largely right to it.

Speaker 12

And then just a small one, like it was a PCD loan, but can you touch on the charge off there? And is there anything left, 1st Capital that might be coming through?

Speaker 4

Well, number 1, all of the first capital issues that we're aware of and we believe we are aware of all of them are fully reserved at this time. So there's not going to be any surprise loss in there based on what we see.

Speaker 2

I do think the we did I think in some of the first loans that we put on, we did We do ask usually anytime we do a deal, we go with management and what they say. They thought that they that there was even though we reserve full them fully for them, We still put them on the books. They thought that they could be collected. They weren't collected. And then you had other loans that came back on that we have put back on non performing.

Speaker 2

I don't think those loans are like the loans that we first put on. We knew these first loans we put on were very, very challenged. We still we're really giving management a chance to believe what they said. And again, it just didn't work out. So but again, I don't think The loans that we have in our performing right now, you shouldn't see those kind of losses the way we charged off those first ones.

Speaker 2

In my opinion, We should have just charged them off to begin with not only reserve, but we charged them off to begin with.

Speaker 12

Okay. Thanks for the help.

Speaker 2

I appreciate it. Didn't ask about the Queen Mary.

Speaker 4

I think you've turned the corner. The Queen Mary is

Operator

with KBW. Please go ahead.

Speaker 13

Hey, thanks guys. I just wanted to hit on Average earning assets, as I look at the dynamics, you have loan growth that's expected to outpace deposit growth. You're trying to get borrowings down, so bond balances are coming down. And your average earning assets did shrink on a linked quarter basis. So how should we think about the level of average earning assets into 2024?

Speaker 13

Do you think we could see Some continued shrinkage there or do you think that will be more stable?

Speaker 2

Again, these are questions that are we think it has definitely become more stable. There's no question. I mean, Your assets depend on your deposits, your liabilities that you have in. Again, I don't I think it's a tougher deal right now. Over time, Just like as assets grew dramatically, they came down pretty good over the last year.

Speaker 2

So things will stabilize again. And even though I would think that we'll probably still grow. We'll still grow the assets just because as mentioned said, we Yes, I

Speaker 8

think you're thinking As I think about it, loan growth that is true, but Brady I think about it this way. We know we have cash flows coming off the bond book of $2,100,000,000 $2,200,000,000 And our intention today is to let that bond book drift lower, right? And take the money and pay off the flap, right? We're picking up 300 basis points. It's margin enhancing.

Speaker 6

It's

Speaker 8

good in all kinds of ways for us. It's NII enhancing. And you take 5% loan growth on we don't have $20,000,000,000 but call it $20,000,000,000 that would tell you you'd have about $1,000,000,000 worth of total asset Trinkage in the absence of long term rates being high and us electing to be back into the buying of the bond book, right, would be one alternative or loans growing faster. But outside of that, I think just the math would be We could actually shrink the balance sheet $1,000,000,000 in that scenario that I've just described, which is what we've guided to here today and before, but grow NII.

Speaker 2

Yes. I mean, I think that's the real story, Brady. I think growth in loans and all that's really important. But our real story is the growth In the net income on the bottom line, I mean, again if our models are right, we're a steel, this should be a dramatic opportunity for somebody to come in. I mean, you're looking at the income that we're making today compared to what we'll be making and It won't change dramatically real big in 12 months, but in 24 months it's a dramatic change and I think that's the real story really and that's where we all need to be focusing on Not just trying to go and build a bunch of broker deposits into the bank, but focused on what we have, our good core deposits, make good loans, have some growth in there and really increase the earnings to what we think they will be.

Speaker 3

I agree. And I mean if you just take a pure math assuming I know it takes time to pay down borrowings, but if you take a pure math, a $2,000,000,000 spread of 3% you're going to get from paying down the borrowing, that's a $60,000,000 annualized. And if you have that fixed loans that would principal pay down and reprice that, we have about $2,500,000 or $1,000,000,000 I'm sorry, that is at 3% spread, that's another $75,000,000 I mean if you look at there, that's why we Very strongly believe that our margin is going to improve and our NII is going to improve. As we said, maybe the first is going to be a little bit slower, but second half and beyond in 2025, it looks very strong. It's coming.

Speaker 13

Okay. All right. That's good color. And then on M and A, assuming loan starts approved here near term and you start to look at new M and A opportunities, David, what do you think will be the primary focus? You did Got 2 smaller deals here recently with Lone Star First Capital.

Speaker 13

Before that, you did a bigger deal with Legacy Texas and Kevin. So Are you looking for bigger in size opportunities or smaller or both?

Speaker 2

I would say we're looking for banks like we are with good core deposits, good people that run them that can help us build our bank into the future, whether that's a $2,000,000,000 bank or $30,000,000,000 bank. I know that's a big wide range, but a lot of it To me, really, it's really trying to find banks that are like us that can really help us. They have a good core deposit base like we do or that can help us get there if they're not right now, make you show us that direction. I just think that's way to go. And really management is very important that they can help us grow at the same time too.

Speaker 2

But I think we're going to stick to what we've always stuck to. I think we really need to know the other bank or the other people. You need to have the relationship. We've developed these relationships over the years. Right now, I think that they're out there.

Speaker 2

If you look at the regulatory burden, I've said this before in this room, It's just unbelievable. Right now, we probably have over 200 people in this bank that really work from a regulatory standpoint, not for us, but BSA, Fair Lending Compliance, is that kind of stuff. And most and technology is you don't even need to go there. The expense for technology, what everybody's having to go through is unbelievable. And then they're talking about cutting income from overdrafts and stuff like that.

Speaker 2

So there's going to be a tremendous amount of opportunity and I think that we have a we do have a large amount of capital. We haven't just gone and spent And I think that we have that opportunity and I think we have a reputation that people will want to join us.

Speaker 8

Yes. Brady, again, I've said this several times, but I can speak as a seller to David. And as you know, because you've said in many conferences with me, I said for 3 or 4 years, I would never sell to David until the day I thought about selling. And I made one phone call and only one phone call. I called David, because I wanted his currency, not somebody else's.

Speaker 8

And I truly made one 6:30 in the morning phone call. I didn't know David was such a later riser than I was. He works a whole lot later than I do,

Speaker 2

but My happy hour doesn't start today.

Speaker 8

That's right. I start happy hour sooner. But I made one phone call and it was to David. And even at that, and we've known each other forever. It took us 2 years of really getting to know each other.

Speaker 8

I mean, opening up the books and thinking about how you put this together and how it works afterwards. And I don't need to tell you because you've seen it for years. Prosperity is it's a machine on the M and A side.

Speaker 2

There is no surprises. And I would say we still have those opportunities right now. It's just a question getting the FDIC on board and the regulatory people on board. And I think we're getting there.

Speaker 13

Yes. All right. That's helpful. Then finally for me, just a real quick one. I'm guessing the unrealized loss and the held to maturity bond book improved at year end versus linked quarter.

Speaker 13

What was that number, the unrealized loss?

Speaker 3

So unrealized loss at end of December was $1,100,000,000 net of tax. So it came down from $1,600,000,000 to $1,100,000,000 or around $1,500,000,000 from So we decreased by $400,000,000 to $500,000,000

Speaker 13

Okay, got it. Thanks guys.

Operator

The next question comes from Ben Gurlinger with Citi. Please go ahead.

Speaker 14

Hi, good morning. I know we've kind of beat the margin horse dead here, but David, I just had one quick question. You said 296, 6 months from now, so you're applying basically 20 basis points of upside on the NIM over the next 6 months?

Speaker 2

I'm sorry to hear the question. Going up to 2.96. Our model shows in 6 months to be around 2.96. It was a static balance sheet, yes.

Speaker 8

Yes, got you. I just we've thrown out a

Speaker 14

lot of numbers. Just want to make sure I had that one right. And then a little bit of a cleanup question, Alstovec, you said, for the expense base, 100 and 34 to 136. When you look towards the back half of the year, is that a good starting point on an organic basis, I. E.

Speaker 14

Not including the deal closings?

Speaker 3

Yes, I agree. I think $134,000,000 $136,000,000 is a good starting point and I think this is going to be That range probably first half of the year and probably increased a little bit in the second half of the year. And I think I gave the guidance last being around 2% maybe from the starting point of $1.34,000 $1.36 For second half of it, I think it's still good guidance about 2% increase because due to our merit increases and what we talked about, there's a lot of technology expenses coming to you with that. So $134,000,000 $136,000,000 is good starting point, not including one time off items.

Speaker 14

Right, right, right. Got you. Okay. And then if loan growth is better than expected, should we assume that's probably on the higher end of the range with like payout commission kind of things?

Speaker 3

Yes. I mean, if you have a loan growth, there will be some pickup there.

Speaker 14

Yes. It's a good cost. Okay. Well, I appreciate that guys.

Operator

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

Speaker 6

Hey, good morning everyone.

Speaker 10

Good morning. Good morning.

Speaker 6

I just wanted to ask a few questions. The first one was it's a little ticky tack, but I noticed that the borrowing rate ticked down this quarter. I wanted to ask, did you Maybe substitute any borrowings for BTFP usage at all?

Speaker 3

We have. We have substituted pretty much 100% of it. So we own the BTF right now. That's why and without the rate decrease, we were able to reprice those.

Speaker 6

Okay. And did that all happen did that happen early in the quarter or did that happen late in the quarter? I'm just trying to think about the spot rate on the borrowings?

Speaker 3

Yes. It was later in the Year and a spot rate was 4.80. Got it. All right, cool.

Speaker 6

On the loan yields, I just wanted to better understand the trajectory of the core loan yields that you're expecting within the margin modeling that you all are doing on a quarterly basis through 2024?

Speaker 3

Yes. On that loan margin, I mean, It's just based on the model we've model shows that like I said, we have about $4,500,000,000 coming due, which is 60% fixed, 40% is all variable, so that rate already baked in. So we're repricing about 60% of it In the market, repricing of the loans, I think the average loans rate on those fixed loans about 5%, so we're repricing around 8% in the model.

Speaker 6

Okay. And then the last one was, I do just want to circle back to the buyback. I know you said That you do it, you've never not done it if you had the authorization. But it seems like capital returns are becoming a bigger theme amongst your mid cap peers. And so just given the capital advantage that you all have and given the fact that this Lone Is there anything is Lone Star stopping you from wanting to be aggressive on the buyback?

Speaker 6

I'm just trying to better understand what's the hold up as it relates to it just given the stock price?

Speaker 2

I think historically we've really buying our stock back we have when the price didn't seem appropriate, when it went kind of crazy, that's really what we always used our buyback money for. But Our machine really has always been to take our earnings and increase dividends and also to do mergers and acquisitions. And I think That's our focus. This last year, I would have to tell you that I mean, we're almost forgetting that what we went through in March through December, I mean, the regulators and everybody just got really nervous. So we were really trying to build capital at the same time too.

Speaker 2

We didn't care that we had so much capital. In was a good position to be in. And I think it's a good position to be right now. But when it's appropriate, we will buy stock back if it's an appropriate time. There's no question.

Speaker 2

But again, we're focused on M and A and increasing dividends.

Speaker 4

And I think it's important to emphasize that the potential for M and A right now is very significant. Right. It may or may not happen, but it's out there.

Speaker 13

What's the what's like yes,

Speaker 6

go ahead, David. I'm sorry.

Speaker 2

We think we in the past think that you can really make more money through if you make a good M and A deal and you can see more accretion there then you can just buying back your stock. But again, that's not always true. And so we'll have to look at each deal on its own at the same time.

Speaker 6

Got it. Is there a minimum threshold on CET1 that you wouldn't want to go below or Is there like kind of like a medium term or longer term level of CET1 that you think is appropriate for the bank, just given the relatively lower risk profile of it?

Speaker 2

I'm more of a leverage ratio guy. I understand that really. You just take your goodwill out divided by Your assets and that's your leverage ratio, and I think we're probably at around 10% right now. And gosh, I remember in the old days, if you had 5% or 6%, that was pretty good. So I think the regulators want you to get to where this double digit is.

Speaker 2

I don't think you have to be, but I think they like us that we are right there. I'd like to maintain it. If we do a deal or I don't think I'd ever want to drop below 8% on a leverage ratio. That's just my gut feeling right now.

Speaker 6

Got it. Thank you very much for taking my questions.

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 participate in our call today. We appreciate your support of our company and we will continue to work on building shareholder value.

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Earnings Conference Call
Prosperity Bancshares Q4 2023
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