Prosperity Bancshares - Q1 2023
April 26, 2023
Transcript
Operator (participant)
Good day and welcome to the Prosperity Bancshares first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte Rasche (EVP and General Counsel)
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares first 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.E. Tim Timanus Jr., Chairman. Asylbek Osmonov, Chief Financial Officer. Kevin Hanigan, 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 Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. 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 constitute forward-looking statements for the 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 Prosperity Bancshares filings with the Securities and Exchange Commission, including Forms 10-Q, 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
David Zalman (Senior Chairman and CEO)
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 Banks list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010. We have twice been ranked number one, ranked number two in 2021, and ranked number six 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 for helping us achieve this honor.
On a linked quarter basis, the net income was $124 million for the three months ended March 31st, 2023, compared with $122 million for the same period in 2022. The net income per diluted common share was $1.37 for the three months ended March 31st, 2023, compared with $1.33 for the three months ended March 31st, 2022. For the three months ended March 31st, 2023, the annualized return on average assets were 1.31%. The annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%.
Loans on a linked quarter, linked quarter loans excluding Warehouse Purchase Program loans increased $436 million or 2.4%. 9.6% annualized from $18.1 billion at December 31st, 2022. Excluding Warehouse Purchase Program loans at March 31st, 2023, were $18.5 billion, compared with $16.7 billion at March 31st, 2022, an increase of $1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue while rates remain at their current levels or increase. Deposits at March 31st, 2023 were $27 billion. A decrease of $1.5 billion or 5.4% from $28.5 billion at December 31st, 2022.
Deposits decreased $4.1 billion or 13% compared with deposits of $31.1 billion at March 31st, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were an interest-bearing transaction account at low rates because there was no yield to be found. As rates increased, public funds started investing their money in state funds, such as tax pools, to obtain higher rates.
Of the deposit decrease in the first quarter, $959 million, or 63% of the $1.5 billion decrease, occurred prior to March 10th. Historically, prior to the pandemic in 2017, 2018, and 2019, our deposits decreased seasonally in January, an average of 2.2%. We also saw $236 million 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-19 pandemic. Most people kept their money primarily in checking and low interest-bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant. When we look at pre-COVID deposits at March 31st, 2020, we had $23.8 billion in deposits.
At March 31st, 2023, we have $27 billion 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%-4% annually. We are still averaging deposits on the high end of our historical growth rate.
Our average deposit account was $34,000 at March 31st, 2023, and $36,000 at December 31st, 2022. Our uninsured and pledged deposits are 29.9% of our total deposits. We currently have $11.3 billion of liquidity available to draw on, which represents approximately $4 billion in excess of our uninsured and pledged deposits.
With regard to the 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 12-24 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 31st, 2023. Our asset quality remains sound. Year-over-year non-performing assets decreased 9.9%. Non-performing assets totaled $24.5 million at March 31, 2023, compared with $27.5 million at December 31st, 2022, and $27.2 million 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 nine million residents, more than any other state and almost three million 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. 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 1st, 2023.
Our acquisition of Lone Star State Bancshares is pending regulatory approvals and is expected to close during the second quarter of 2023, although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities, 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 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. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?
Asylbek Osmonov (CFO)
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31st, 2023, was $243.5 million, compared to $239.9 million for the same period in 2022, an increase of $3.5 million or 1.5%. Loan and security interest income increased $54.1 million and $18.2 million, respectively, in the first quarter. Additionally, Fed funds interest income increased $6.2 million. This was partially offset by increase in interest expense of $74.9 million. Net interest income increased $3.5 million, despite having $7.9 million less in combined PPP loan fee income and fair value loan income.
The net interest margin on a tax equivalent basis was 2.93% for the three months ended March 31st, 2023, compared to 2.88% for the same period in 2022 and 3.05% for the quarter ended December 31st, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31st, 2023, was 2.91% compared to 2.81% for the same period in 2022 and 3.04% for the quarter ended December 31st, 2022. The current quarter net interest margin was impacted by $3 billion of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3 billion additional cash was funded through FHLB borrowings.
At the end of the first quarter, we increased rates on deposits. We expect the full impact of those increases into the second quarter. Non-interest income was $38.3 million for the three months ended March 31st, 2023, compared to $35.1 million for the same period in 2022 and $37.7 million for the quarter ended December 31st, 2022. Non-interest expense for the three months ended March 31st, 2023, was $123 million, compared to $119.9 million for the same period in 2022 and $119.2 million for the quarter ended December 31st, 2022. The linked quarter increase was partially attributed to the higher FDIC assessment rate.
For the second quarter 2023, we expect non-interest expense to be in the range of $123 million-$125 million. The expected increase is based on the annual merit increases in the second quarter of 2023. This projection excludes both the impact from one-time merger-related costs, which we estimate to be around $26 million-$28 million, and additional non-interest expense from our pending acquisitions. Additionally, second quarter results will be impacted by Day Two accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition-related provision expense is $28 million-$31 million.
The efficiency ratio was 43.7% for the three months ended March 31st, 2023, compared to 43.7% for the same period in 2022 and 40.9% for the three months ended December 31st, 2022. The bond portfolio metrics at 3/31/2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus?
H.E. Tim Timanus Jr. (Chairman)
Thank you, Asylbek. 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 31st, 2023, non-performing assets total was comprised of $22,496,000 in loans, $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 31st, 2023, $328,000 in other real estate have been removed from the non-performing assets. This represents 1.34% of the non-performing assets. Net charge-offs for the three months ended March 31st, 2023, were -$615,000. Compared to net charge-offs of $603,000 for the quarter ended December 31, 2022. In other words, for the first quarter 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 31st, 2023, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended March 31st, 2023, was $436 million. Loans outstanding at March 31st, 2023, were approximately $19.334 billion compared to $18.840 billion at December 31st, 2022. This is a 2.62% increase on a linked quarter basis. 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.
Charlotte Rasche (EVP and General Counsel)
Thank you, Tim. At this time, we are prepared to answer your questions. Vishnavi, can you please assist us with questions?
Kevin Hanigan (President and CEO)
Seemed we lost our moderator. It shows she's signed in.
Charlotte Rasche (EVP and General Counsel)
We'll start the questions in just a minute.
David Zalman (Senior Chairman and CEO)
Are we showing that we're attached?
Charlotte Rasche (EVP and General Counsel)
Mm-hmm.
Kevin Hanigan (President and CEO)
Mm-hmm. Yes, sir.
David Zalman (Senior Chairman and CEO)
Maybe she had to go to the restroom.
Charlotte Rasche (EVP and General Counsel)
Yeah. Bad timing.
Kevin Hanigan (President and CEO)
Are we on mute here? Nope.
Charlotte Rasche (EVP and General Counsel)
No. We're working to get the questions started. We apologize for the delay.
Operator (participant)
Can you hear me now?
Charlotte Rasche (EVP and General Counsel)
Yes. Thank you.
Operator (participant)
I apologize. We will start the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey (Managing Director of Equity Research)
You guys can hear me, right?
Charlotte Rasche (EVP and General Counsel)
Yes.
Asylbek Osmonov (CFO)
Good morning.
Brady Gailey (Managing Director of Equity Research)
Thank God, we were wondering. I know Asylbek mentioned that you moved deposit rates up near the end of the quarter. I was just wondering the magnitude of that. You know, 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?
Asylbek Osmonov (CFO)
I'll give you answer on the interest-bearing deposit, based on the projection, the new rate increases on deposit, it'll bump up our interest-bearing deposit rate from 1.10, what we have, to about 1.40-1.45. That's going to be a little headwind. If you look at short term on margin, I think it's very hard to pinpoint just because of the two-acquisition upcoming in the second quarter. 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. It will be hard to pinpoint specifically for the near term, but the information I gave you should give you some information on the Q2.
Brett Rabatin (Managing Director and Director of Research for U.S. Regional and Community Bank)
Okay. The $3 billion of FHLB, which turned into cash on your balance sheet, I know that's pretty earnings neutral, how long will those balances stay on the balance sheet?
Asylbek Osmonov (CFO)
We started about the middle of on the 13th or 14th of March, and it stayed almost through end of the month.
Brady Gailey (Managing Director of Equity Research)
Okay. It's gone now?
Asylbek Osmonov (CFO)
Yeah. They were gone by end of the quarter, before the end of the quarter.
Brady Gailey (Managing Director of Equity Research)
All right. That's helpful. Then I'm just curious, I know the unrealized loss in your held maturity bond bucket has been going down over the last couple quarters. I imagine it went down this quarter. What is that amount of after-tax unrealized losses in the held maturity bond book?
Asylbek Osmonov (CFO)
If you look at it, 3/31, the net of tax was about $1.1 billion. That's decreased from $1.3 billion we had end of the year. We have a $200 million decrease in after tax.
Brady Gailey (Managing Director of Equity Research)
Right. Then finally for me, anything specific holding up this Lone Star approval?
Asylbek Osmonov (CFO)
I think we're just waiting on the regulatory approval right now. It's just waiting from them.
Mays Davenport (EVP and Director of Corporate Strategy)
Yeah. It's nothing specific. They've been busy lately, as you know.
Brady Gailey (Managing Director of Equity Research)
I can imagine. Yes. Thank you for the call, guys.
Yeah. We're hoping to get it done in the second quarter.
Mays Davenport (EVP and Director of Corporate Strategy)
Yeah.
Operator (participant)
Thank you. Our next question today comes from Peter Winter at D.A. Davidson. Please go ahead.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning. I was wondering, could you talk about the outlook for deposit trends for here and deposit betas beyond the second quarter?
Asylbek Osmonov (CFO)
I can address the betas, specifically. If you look at... I'll give you the cumulative beta that we had through 3/31. If you look at, over 12 months, the cumulative beta on deposits 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 16-17 basis points on cumulative betas.
David Zalman (Senior Chairman and CEO)
Yeah. Peter, I think as far as trend, I still don't know if everything is, you know, our deals look like they have stabilized. You still have money that's in the system that's probably still looking for higher rates. 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.
I think that, you know, 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 on CNBC or Fox that I think that's kind of what we're hoping to go back to is eventually is a, you know, call it somewhere in between, call it 3%, anywhere. Historically, it's always been 2%-4%, and I think that will happen. I don't know that that's going to happen this month or next month. You know, I am hoping, though, that after five or six months and things calm down, I'm hoping that's where we'll get back to.
Peter Winter (Managing Director and Senior Research Analyst)
Okay. 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, you know, given where the beta is being lower than peers, there's still some pressure on deposit costs.
David Zalman (Senior Chairman and CEO)
You know, I think that we did raise them. What I think is the market, I mean, when you can get 3% on a money market account, you know, with a larger deposit, that's pretty good. You may, you know, it may still go up a quarter of a point from there, but if, you know, 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 reprices and when we look at our models, we really see a very strong net interest margins going forward. I think the models look stronger than I think they really are.
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 as, you know, the real strong. When you look at the models are 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. I still think somewhere in between for a bank ours. You know, we didn't. Where a number of the other banks went out and purchased brokered CDs, we didn't. Again, I don't owe 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. I never put a lot of faith into brokered CDs. In fact, when we look at purchasing a bank, I usually just X all those brokered CDs, and they'll give any credit for that. 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, you know, 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, you know, the acquisitions. That helps us, of course.
We wanted to remain profitable over that period of time and make sure that what we're looking at are truly core relationships and core deposits. That's kind of where we're at today. Long story. I just wanted to give you some color.
Asylbek Osmonov (CFO)
Yeah. Just to add on, I think on the modeling side of it, we're excited. Our model shows very good in 24, 36 months. Our model has beta of 36. Right now, we're running our actual betas on our deposit list than that model show. That's looks optimistic.
David Zalman (Senior Chairman and CEO)
I mean, I think it all boils down to our company. I think we have a great company. It's strong. 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. I think that if you're a longer-term player and you can see where we're going to be in a year, two years, you know, that's what we're focusing on, is more the longer term, really.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. 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 fourth quarter.
Kevin Hanigan (President and CEO)
Yeah. This is Kevin. I think what, you know, at year-end or January call, we said mid to 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. What's really aiding or the tailwind to loan growth is a much-reduced level of loan payoffs. I think we see asset durations extending a bit. If our typical asset duration in real estate was three years, it might be 3.5, but it may go out to four before this is all said and done. The loan growth is a little different.
For the last three years, as the legacy portfolio was running off, 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. I think we're still good at mid-single digits to high single digits. 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 higher end.
David Zalman (Senior Chairman and CEO)
Yeah, 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've really cut back on the loans that they're doing. We've always said in a time, in harder times, those are the kind of customers that we'll probably get and go after so we can get better terms and conditions. That's also helping us at the same time right now. We don't really want to turn those customers away. This is really kind of a time where we really perform well.
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 priced the loans down to the point that you couldn't hardly make any money off of them, and you couldn't get any equity in the project or the collateral that you were dealing with. That is changing right now.
More and more banks are out of the market and are pulling out of the market. Our opportunities seem to be increasing somewhat. You have to recognize that we do have loans that got booked that have not funded up yet. The actual loans outstanding, will probably continue to grow just simply from funding loans that we have already booked, that are, in progress, so to speak.
Brady Gailey (Managing Director of Equity Research)
Got it. Thanks very much.
Operator (participant)
The next question we have will come from Brad Milsaps of Piper Sandler.
Brad Millsaps (Research Analyst)
Hey, good morning.
David Zalman (Senior Chairman and CEO)
Morning, Brad.
Mays Davenport (EVP and Director of Corporate Strategy)
Morning.
Brad Millsaps (Research Analyst)
All right. Thanks for taking my questions. Just curious, David, how much of the public funds that exited this quarter, do you expect to come back? 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 billion or so in borrowings you had outstanding at the end of the quarter?
David Zalman (Senior Chairman and CEO)
The $2 billion that we lost last year, I don't really see those funds coming back. Those were really investment funds. Unless we're willing to pay a textbook rate of, you know, 4.80 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, by the end of the year, you will see public funds come up. I would say that could be $300 million-$500 million.
Asylbek Osmonov (CFO)
Yeah, between $400 million-$600 million.
David Zalman (Senior Chairman and CEO)
$400 million-$600 million, probably.
Brad Millsaps (Research Analyst)
Okay. In the interim, you know, you mentioned you weren't going to go the brokered CD route. You might just rely more on, you know, just cash flows from your bond book or adding some additional Federal Home Loan Bank advances.
David Zalman (Senior Chairman and CEO)
Yeah, 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 it this way. I ask myself, we had three and a half billion dollars in borrowings at the Federal Home Loan Bank at the end of the quarter. In my mind, I ask myself: You know, if you wanted to get out of that, how do you ever get out of that? In my mind, you know, we have $2.2 billion in bond roll-off a year, and we also are going to have about $434 million of liquidity from the banks that are joining us, FirstCapital and Lone Star.
In my mind, if you use just those two, it takes us about 15 or 16 months that we would be out of the Federal Home Loan Bank completely. Unless we lose more deposits for temporary, that changes every day. If everything were stagnant at March, that you could get out in 15 to 16 months. I will say, though, for 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 billion-$2 billion, we leverage that. Not when the yield curve is inverted like it is, but when it's not, we usually leverage that. That would get us out of that.
The next question would be, okay, where are you going to get your money to fund at least 5% of, you know, for your loans? You know, if you're going to use all that money for their Federal Home Loan Bank. My point is, you know, I hope I said this. It's historically, we always have grown 2%-4%, I just use, like, a 3% number where we're at. If it was 3%, ytwoou know, that's still going to get us around $800 million to $1 billion in additional money a year, I think that's the money we would use for the growth in the loans.
I hope I didn't make that too complicated, but that always in the back of my mind, I'm thinking about that myself, so.
H.E. Tim Timanus Jr. (Chairman)
I think it's important to point out that the bulk of the money we had borrowed from the Federal Home Loan Bank. Was not really because we needed it's because we felt like it was prudent to have on hand given what was taking place in the overall market. you know, we didn't know whether somebody was going to come in in the next two minutes and want to pull all their money out, as quickly as things were changing.
Brad Millsaps (Research Analyst)
Are you referring to the additional $3 billion?
David Zalman (Senior Chairman and CEO)
Yes. $3 billion.
H.E. Tim Timanus Jr. (Chairman)
Oh, yeah, the $3 billion, yeah, I didn't think we were talking about that.
Brad Millsaps (Research Analyst)
No, I was talking about the core, the kind of the core FHLB that you have, which you hinted at earlier.
David Zalman (Senior Chairman and CEO)
Yeah. I'm talking about the three.
Kevin Hanigan (President and CEO)
Yeah. Okay. Yeah.
H.E. Tim Timanus Jr. (Chairman)
We didn't really-
David Zalman (Senior Chairman and CEO)
Yeah, this is 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.Yeah. My comments were all relating to the core borrowing.
H.E. Tim Timanus Jr. (Chairman)
I'm with you. Yeah, I'm with you.
Brad Millsaps (Research Analyst)
Yeah, that was my question. Thanks for clearing that up, David. Finally for me, I think, you know, when you guys announced the two deals together, I think you had something in there, you know, 2023 estimated earnings from the combination with 75% cost savings of somewhere around $77 million. Obviously, a lot has changed. Would you mind giving us an update on kind of what you think, you know, the banks can contribute to the extent that it has changed? Just kind of wanted to get a sense of, you know, kind of contribution from those two organizations once they become a part of Prosperity.
Asylbek Osmonov (CFO)
I think on the cost save, what we announced that we're going to have a combined 25% cost save on theirs, I think that stays as is. We're pretty optimistic about it. You're right, the timing has shifted. The 75% was based under the Q1 acquisition, the estimated acquisition. Now, since the timing shifted to one, FirstCapital being May 1st, and we're hoping Lone Star being sometime in second quarter. 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.
Brad Millsaps (Research Analyst)
Right. I think also, like, you estimated something, you know, $77 million of contribution. Does it make sense just to, you know, given what's happened, to haircut that to some degree? If so, could you give us any color on maybe, you know, kind of how much to think about?
Asylbek Osmonov (CFO)
Yeah. The Day One, like, you know, one-time cost and plus the, you know, Day Two provision expense, that's going to happen immediately after the merger of the banks. I did say that, you know, they're going to bring in operation expenses as they merge. I would expect probably after merger, maybe within, not maybe the first quarter, but the second quarter, right after the acquisition, we should utilize the savings.
Kevin Hanigan (President and CEO)
I think he's after the revenue and income side.
Brad Millsaps (Research Analyst)
Yeah, yeah. Yeah, exactly, Kevin. okay.
Kevin Hanigan (President and CEO)
Just trying to interpret there for you, Brad.
Michael Rose (Managing Director for Banking Equity Research)
Yeah. Thank you.
Kevin Hanigan (President and CEO)
I don't even know. I don't know.
Asylbek Osmonov (CFO)
On the income-
David Zalman (Senior Chairman and CEO)
It's probably half, right? Well, I don't think there's been really a significant change in the profiles of these two banks.
Asylbek Osmonov (CFO)
It has not, yeah.
David Zalman (Senior Chairman and CEO)
As much as people think might have occurred.
Asylbek Osmonov (CFO)
Mm-hmm.
David Zalman (Senior Chairman and CEO)
The party's not over yet, so to speak. You know, we have to look at it day by day, week by week. Their balance sheets haven't been altered significantly and their P&Ls haven't been altered significantly so far.
Asylbek Osmonov (CFO)
Yeah, so far. 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.
Kevin Hanigan (President and CEO)
It's just the delay factor, Brad. That's really the only thing.
Brad Millsaps (Research Analyst)
Understood. Thank you. I appreciate it, guys.
Operator (participant)
The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose (Managing Director for Banking Equity Research)
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, you know, contemplated, 90 days ago. Just wanted to get any sort of thoughts as we kind of move forward just, yeah, given the dynamics out there. Thanks.
Kevin Hanigan (President and CEO)
Yeah. Thank you, Michael. You're right. I think we said in January, we thought we'd average $550-$600 for the quarter. I will tell you, in February, I was thinking it was not even going to get to $550 and was worried about it. We ended up averaging $618 'cause it truly rallied from in the last 45 days of the quarter, you know, ending up at $799, almost $800 million at quarter end. I'm going to go with $800-$850 for the quarter, Michael. I think it's, we're averaging right now about $770 through the first 26 days of the quarter, 25 days of the quarter. I think it'll tick up from there. If I had to pick a number, $825.
Michael Rose (Managing Director for Banking Equity Research)
That's very, very helpful. Just one minor question for Asylbek. The other non-interest income was up a couple million dollars, almost $3 million. Just wanted to see if there was anything, you know, specific that was in there and, you know, if anything will come out from a run rate perspective. Thanks.
Asylbek Osmonov (CFO)
Yeah. 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. It wasn't anything particular.
Michael Rose (Managing Director for Banking Equity Research)
Okay. Maybe a few million bucks in one-timers?
Asylbek Osmonov (CFO)
Yeah.
Michael Rose (Managing Director for Banking Equity Research)
Okay. maybe just finally for me, just given where the capital ratio is, I mean, you guys have, you know, lots of capital. You're, you know, doing two deals as we kind of go through this and just wanted to get a sense for, buyback, from here. You guys did buy back a little bit of shares. I assume you paused when everything started to happen, but just give more capital. I just want to get your appetite, just given where the stock is. Then just wondering to get a sense from an acquisition point of view.
I know you said, you know, conversations have maybe slowed down a little bit but just wanted to see if you'd looked at any of the banks that had failed or, you know, maybe some stress situations if they'd be of interest to you. Thanks.
David Zalman (Senior Chairman and CEO)
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 use in the M&A gang, and then we use the money extra if we felt the stock was really disproportionate. I don't think that any of that's going to change as far as, you know, as far as the dividends go. I mean, that's first and foremost, that seems like our directors really like that. 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.
Instead of making a commitment that we're going to just continue 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. You know, my general overall feeling is that we could-- You know, we still make good money. We've paid the dividends. We still have quite a bit left. I think that and as your HTM loss goes the other way over the year to two. 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 know, you shouldn't be doing that or something like that.
Michael Rose (Managing Director for Banking Equity Research)
Okay. Thanks, guys.
Operator (participant)
The next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Brett Rabatin (Managing Director and Director of Research for U.S. Regional and Community Bank)
Hey, good morning, everyone. Wanted to ask on the fee income side. You know, the other bucket obviously had a little bit of noise this quarter. Was just curious also, Asylbek, was there anything that you would call out that'd be non-recurring? Can you give us maybe some color on the other income bucket and how you think that might play out from here?
Asylbek Osmonov (CFO)
Yeah, I think, yeah, we've had one-off items. If I would have to, you know, tell that I would say a $2 million was one-off item that did not come in or that came in, and the rest of them will be more of continued repetitive from that bucket.
Brett Rabatin (Managing Director and Director of Research for U.S. Regional and Community Bank)
Okay. Could you give any update on the cash flow on the securities portfolio? You know, what you might have maturing in the next quarter or two?
Asylbek Osmonov (CFO)
I mean, our cash flow is $2.2 billion. The projections, I mean, if you take it at the quarter, I mean, we expect about $550 million or so a quarter.
David Zalman (Senior Chairman and CEO)
Yeah, I don't think that's changed.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
I mean, we're still around $2.2 billion.
Brett Rabatin (Managing Director and Director of Research for U.S. Regional and Community Bank)
Okay. Great. Then just lastly, you know, some of the more conservative banks, you know, it seemed like it might be an opportunity for them to, you know, maybe take share through this situation. 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, you know, this environment as you see it, is this an opportunity to maybe take share? Do you just, you know, stick to your guns and get more conservative? Have you increased your underwriting standards at all or changed them? Any thoughts on that?
Kevin Hanigan (President and CEO)
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, 90%, 100%, 100%+ loan-to-deposit ratio, and they are, generally speaking, their pencil's down or maybe a deal pays off, they can do a new deal. They're not active. 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 the 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. I think this, for us, this is no different than any other time during stress. We tend to do well.We tend to, you know, have liquidity and have the money to loan. I think on the loan side, we're in a position to take market share as we want.
David Zalman (Senior Chairman and CEO)
Yeah. I'd have to say in 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. I think it's just because they're just as the deposits have flowed out of a lot of these mid-sized banks, they just they don't have they just don't have the deposits to fund that to fund it. I think we will have opportunities. This is a time that we should, and this is a time we actually look forward to.
Kevin Hanigan (President and CEO)
Yeah. Brett, it's not uncommon for us today to get 50%-55% equity upfront on a multifamily deal. All those dollars go in before we fund $1. As David said, it's been a long time since we've seen that kind of equity, but we're asking for it, and we're generally getting it.
David Zalman (Senior Chairman and CEO)
It's real equity.
Kevin Hanigan (President and CEO)
It's real hard dollar equity.
David Zalman (Senior Chairman and CEO)
It's real cash. It costs, not just us, you know, it's real. That is based on cost.
Brett Rabatin (Managing Director and Director of Research for U.S. Regional and Community Bank)
Yep. That's pretty low for the multifamily market. Appreciate the color, guys.
Operator (participant)
The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia (Executive Director and Senior Equity Analyst for Banks Midcap)
Hi. Thanks for taking my question. I wanted to ask about NIM going into next quarter. You know, you noted that, you know, the portfolios that you're acquiring will have an impact on NIM. You know, presumably there'll be a tailwind because you're acquiring them at market price. Any thoughts on, you know, what the NIM can get to next quarter with the acquisitions? Would you be able to go over a 3% NIM next quarter?
Asylbek Osmonov (CFO)
I'll, I think it'll be hard to specifically point out because we still have to go through the merger process and the evaluation. You know, we're excited about this two acquisitions because of cash they're bringing and also ability to reprice their bond portfolio and their mortgage portfolio. I mean, I cannot give you specific guidance, but 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. I mean, we're optimistic what we stand on it.
David Zalman (Senior Chairman and CEO)
I think you could say that once we get both closed and, in our bank, it should help the net interest margin.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
You could say that.
Asylbek Osmonov (CFO)
Yeah. That's for sure.
Manan Gosalia (Executive Director and Senior Equity Analyst for Banks Midcap)
That's helpful. Maybe on the loan yields in the core business, in the current business, you noted that you have acquired newer customers, you know, presumably at better pricing. You have a fixed rate portfolio as well that should reprice higher. In the event that the Fed stays higher for longer, how should we think about your loan yields over the course of the next year or so?
David Zalman (Senior Chairman and CEO)
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, so.
Asylbek Osmonov (CFO)
Yeah. If you just look at our, you know, NIM calculation, because our bond portfolio generating right now 5.24%, and we're putting new loans at seven handles right now. If you just take it and if it stays or rate stays for the next 12, 24 months in this rate, you can see there's upside of 200 basis points on loans. I mean, that's very-
David Zalman (Senior Chairman and CEO)
Our models are usually really good, and I think that basically if rates don't do anything, we still do substantially better in improvement net interest margin over 12, 24 and 36. I mean, substantial. If interest rates go up, our models show that we even do better than that.
Asylbek Osmonov (CFO)
Mm-hmm.
David Zalman (Senior Chairman and CEO)
I think if they go down, if interest rates go down, it probably takes a little bit away from us.
Asylbek Osmonov (CFO)
Yeah. Because of the composition of...
David Zalman (Senior Chairman and CEO)
Right.
Asylbek Osmonov (CFO)
- our loan portfolio with-
David Zalman (Senior Chairman and CEO)
I think if interest rates went down or 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. Still.
Asylbek Osmonov (CFO)
No, it's still increasing.
David Zalman (Senior Chairman and CEO)
even in 100 down, we still have substantial increase in our...
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
-in NIM over time.
Manan Gosalia (Executive Director and Senior Equity Analyst for Banks Midcap)
Sorry, did you say over what timeframe that 200 basis points can come in?
David Zalman (Senior Chairman and CEO)
I think that your net interest margin looks a lot better in 12 months, real good in 24 months and fantastic in 36 months.
Asylbek Osmonov (CFO)
Mm-hmm.
Manan Gosalia (Executive Director and Senior Equity Analyst for Banks Midcap)
Got it. All right. If I can just round out that discussion, how should we think about the efficiency ratio given, you know, what you said on NIM and loan growth and the merit increases coming up?
Asylbek Osmonov (CFO)
I think efficiency ratio, if you just look at long-term, it'll take us time once we have two banks merge with us, you know, realize the cost savings. In the long run, I think we're going to be back to our normal 42%, 43%, 44% efficiency ratio in the long term.
Manan Gosalia (Executive Director and Senior Equity Analyst for Banks Midcap)
Great. Thanks so much.
Operator (participant)
The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Good morning.
Asylbek Osmonov (CFO)
Hi.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Also just.
David Zalman (Senior Chairman and CEO)
Ebrahim, did you change your name?
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Hey, this is Ebrahim Poonawala, Bank of America.
David Zalman (Senior Chairman and CEO)
Oh, I thought it was Evan. I thought you changed your-
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Yeah. She did say Evan, so you're not wrong, David. You're right. I let it slide.
David Zalman (Senior Chairman and CEO)
Sorry about that. I just have to-
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
I guess I can't pass off as an Evan, but.
David Zalman (Senior Chairman and CEO)
That's not a bad idea to change. It's easier to pronounce Evan.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Question around the NIM one? 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 2.93% this quarter?
Asylbek Osmonov (CFO)
Yeah. I mean, as we talked about in long term, it's very positive. I think in the short term-
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Right.
Asylbek Osmonov (CFO)
... because of the headwind we have on the interest-bearing deposit a little bit, it'll be a little bit maybe down. That's on the Prosperity Bank itself without acquisition. With the two acquisitions, it looks really good with adding two banks to now our balance sheet.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Understood.
David Zalman (Senior Chairman and CEO)
It helps us in the short run too.
Asylbek Osmonov (CFO)
That's-
David Zalman (Senior Chairman and CEO)
In the long term, it really helps us.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
Yeah.
Asylbek Osmonov (CFO)
We're talking about very short period.
David Zalman (Senior Chairman and CEO)
Very short period.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
Without it wouldn't look as good, you're right.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Just on that point, David, I think you mentioned multiple times around, on the last question, if rates go down 100 or 200 basis points. When you think about when it can look good, or I think you said fantastic over the next two to three years? Is it the Fed funds that matters more than the two to five-year part of the curve? Just remind us. We could see a scenario where the Fed funds drop maybe over the next year or two, but the part, the belly of the curve remains where it is. So, if you can talk to where the sensitivity might be most.
David Zalman (Senior Chairman and CEO)
No, it's ours is just repricing. I mean, you've got your bond portfolio is repricing $2.2 billion a year. Our loans reprice or roll off. Historically, it's been a third, about $6 billion. Just between those two, you have about $8 billion or $9 billion changing and pricing in a year's time, those two.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Got it. 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, et cetera, pulling back. It's good for Prosperity. Overall, like, do you see that adding to an, you know, accelerating our pace of going into a recession? Like how do you think about just the macro outlook as you think about the next 6-12 months?
David Zalman (Senior Chairman and CEO)
Well, I think it does pull back. 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 don't see a hard recession. I don't. That's just me. I think you may see a slowdown, 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 people are still needing houses. You have people moving into the state. I mean, I think Texas is probably in a, in a pretty good position. I don't see a really hard recession. I don't.
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, just my gut feeling is the bank, the way it was going, it was just overblown. Everything was overblown. I still think things need to slow down a little bit more, quite frankly, so that the Fed doesn't raise rates. My gut feeling is that the Fed will raise rates again, this in May for about at least a quarter of a point. I think they probably will hold off. Again, for the most part, you don't see things just crashing. I don't see that. I don't not yet. I mean, I think things still look pretty good and people are still buying, so.
Ebrahim Poonawala (Head Managing Director of American Banks Research for US and Canadian Banks)
Got it. Thank you very much.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Charlotte Rasche (EVP and General Counsel)
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.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.