Prosperity Bancshares - Q2 2024
July 24, 2024
Transcript
Operator (participant)
Good day, and welcome to the Prosperity Bancshares' second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone, and 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 Ms. Charlotte Rasche. Please go ahead, ma'am.
Charlotte Rasche (EVP and General Counsel)
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2024 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 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, Eddie Safady, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. 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. 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 and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
David Zalman (Senior Chairman and CEO)
Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2024 conference call. We want to welcome the customers and associates from Lone Star Bank and are excited about our partnership. As previously announced on April 1, 2024, Prosperity completed the merger of Lone Star State Bancshares, Inc., and its wholly owned subsidiary, Lone Star Bank, headquartered in Lubbock, Texas. Lone Star Bank operated five banking offices in the West Texas area. For the three months ending June 30, 2024, net income was $111 million, or $1.17 per diluted common share, compared with $110 million or $1.18 per diluted common share for the three months ended March 31, 2024.
Net income and net income per diluted common share for the second quarter of 2024 were impacted by an increase in net interest income and a gain on the Visa Class B-1 stock exchange, net of investment security sales of $10.7 million, and partially offset by a merger-related provision for credit losses of $9.1 million, and merger-related expenses of $4.4 million, an FDIC special assessment of $3.6 million, and an increase in non-interest expenses related to 3 months of Lone Star Bank operations.
Excluding the merger-related provision and expenses, the gain on the Visa Class B-1 stock exchange, net of investment security sales, and the FDIC special assessment, each net of tax, net income was $116 million or $1.22 per diluted common share for the three months ending June 30, 2024. Our annualized returns on average assets were 1.17%, and our annualized return on average tangible common equity was 12.34% based on those numbers. We are also pleased that our net interest income before provision for credit losses was $258 million for the three months ended June 30, 2024, compared with $238 million for the three months ended March 31, 2024, an increase of $20.5 million or 8.6%.
In addition, our net interest margin on a tax equivalent basis was 2.94% for the three months ended June 30, 2024, compared with 2.79% for the three months ended March 31, 2024, and 2.73% for the same period in 2023. As mentioned on prior calls, these are the results that we expected, and we anticipate these tailwinds should continue to be positive for the near future....Our loans were $22.3 billion at June 30, 2024, an increase of $666 million, or 3.1%, when compared with $21.6 billion at June 30, 2023.
Our linked core loans increased $1.056 billion, or 5%, from the $21.2 billion at March 31, 2024. Loans increased primarily due to the Lone Star merger. Excluding loans acquired in the Lone Star and First Capital acquisitions and new production at the acquired banking centers since the respective acquisition dates, loans at June 30, 2024, decreased $37 million, or 2 basis points, when compared to last year, June 30, 2023, and increased $63 million, or 3 basis points, compared with March 31, 2024. Excluding these acquisition-related loans and warehouse purchase program loans at June 30, 2024, loans decreased $152 million, or 8 basis points, compared with March 31, 2024. Our deposits were $27.9 million...
I'm sorry, $27.9 billion at June 30, 2024, an increase of $552 million, or 2%, compared with $27.3 billion at June 30, 2023. Our linked core deposits increased $757 million, or 2.8%, from the $27.1 billion at March 31, 2024. The increases were primarily due to the Lone Star merger, excluding deposits assumed in the Lone Star and First Capital acquisitions, and new deposits generated at the acquired banking centers since the respective acquisition dates.
Deposits at June 30, 2024, decreased by $470 million, or 1.8%, when compared to last year, June 30, 2023, and decreased by $298 million, or 1.2%, compared with March 31, 2024. Historically, our deposits are seasonally lower in the second and third quarters and increase again in the fourth quarter. We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so. Our bankers' focus is on building core deposits. Our net interest-bearing deposits represented 34.7% of our total deposits at June 30, 2024.
Our non-performing assets totaled $89 million, or 25 basis points of quarterly average interest earning assets at June 30, 2024, compared with $83 million, or 24 basis points, of quarterly average interest earning assets at March 31, 2024, and $62 million, or 18 basis points, of quarterly average interest earning assets at June 30, 2023, with a significant portion of the balance for each period attributable to the acquired loans. At June 30, 2024, the allowance for credit losses on loans was $359 million, and allowance for credit losses on loans and off-balance sheet credit exposure was $397 million. The allowance for credit losses on loans was 4.02 times the amount of non-performing assets.
With regard to acquisitions, we continue to have conversations with other bankers considering opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns, and increased regulatory burden all point to continued consolidation. We remain ready to move forward in the event a transaction materializes, and we will be beneficial to our company's long-term future and increase shareholder value. We are optimistic about the future and confident in our ability to create meaningful, long-term value for our shareholders. Over the last twelve months, we have returned $284 million to shareholders, $74 million through share repurchases and $209 million through cash dividends. With regard to the economy, CNBC recently announced that Texas was voted the third-best state for business in 2024. However, we believe it should have been—we should have been number one.
Sorry, that's Texas humor. It's just the right trying to correct the wrong. Texas continues to shine as more people and companies move to the state because of the business-friendly political structure and no state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner, while investing in ever-changing technology and product distribution channels. We continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company. Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek Osmonov?
Asylbek Osmonov (CFO)
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2024, was $258.8 million, an increase of $20.5 million compared to $238.2 million for the quarter ended March 31, 2024, an increase of $22.3 million compared to $236.5 million for the same period in 2023. The increase was partially due to operation of Lone Star Bank, acquired on April 1, 2024. During the second quarter of 2024, we recognized purchase accounting provision expense of $9.1 million related to the Lone Star acquisition.
In addition, fair value loan income was $7.2 million for the second quarter, compared to $1.9 million for the first quarter of 2024. The net interest margin on a tax equivalent basis was 2.94% for the three months ended June 30, 2024, compared to 2.79% for the quarter ended March 31, 2024, and 2.73% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended June 30, 2024, was 2.86%, compared to 2.76% for the quarter ended March 31, 2024, and 2.7% for the same period in 2023.
Non-interest income was $46 million for the three months ended June 30, 2024, compared to $38.9 million for the quarter ended March 31, 2024, and $39.7 million for the same period in 2023. Higher non-interest income during the second quarter of 2024 includes a net gain of $10.7 million, resulting from Visa stock conversion, partially offset by the loss on sale of investment securities. Non-interest expense for the three months ended June 30, 2024, was $152.8 million, compared to $135.8 million for the quarter ended March 31, 2024, and $145.9 million for the same period in 2023.
The linked quarter increase was primarily due to merger-related expenses of $4.4 million, three months of Lone Star Bank operation, and FDIC special assessment of $3.6 million. For the third quarter of 2024, we expect non-interest expense to be in the range of $141 million-$143 million. The efficiency ratio was 51.8% for the three months ended June 30, 2024, compared to 49.1% for the quarter ended March 31, 2024, and 53.2% for the same period in 2023. Excluding merger-related expenses, FDIC special assessment, and net gain on sale of securities, the efficiency ratio was 49.1% for the three months ended June 30, 2024.
The bond portfolio metrics at June 30, 2024, have a modified duration of 4.1 and projected annual cash flows of approximately $1.9 billion. With that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality. Timanus?
Tim Timanus (Chairman)
Thank you, Asylbek. Our non-performing assets at quarter end June 30, 2024, totaled $89,570,000, which is 40 basis points of loans and other real estate, compared to $83,811,000, or 39 basis points at March 31, 2024. This represents a 6.87% increase. Since June 30, 2024, $2,517,000 of non-performing assets have been removed or put under contract for sale. The June 30, 2024, non-performing asset total was comprised of $84,497,000 in loans, $113,000 in repossessed assets, and $4,960,000 in other real estate.
Net charge-offs for the three months ended June 30, 2024, were $4,368,000, compared to net charge-offs of $2,143,000 for the quarter ended March 31, 2024. This is a $2,225,000 increase on a linked quarter basis. There was a $9,066,000 addition to the allowance for credit losses during the quarter ended June 30, 2024, resulting from the Lone Star State Bank of West Texas acquisition. No dollars were taken into income from the allowance during the quarter ended June 30, 2024.
The average monthly new loan production for the quarter ended June 30, 2024, was $278 million, compared to $308 million for the quarter ended March 31, 2024. Loans outstanding at June 30, 2024, were approximately $22.321 billion.
... compared to $21.265 billion at March 31, 2024. The June 30, 2024 loan total is made up of 41% fixed rate loans, 30% floating rate loans, and 29% variable rate loans. I'll now turn it over to Charlotte Rasche.
Charlotte Rasche (EVP and General Counsel)
Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, 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. At this time, we'll pause momentarily to assemble our roster. The first question will come from Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter (Managing Director and Senior Research Analyst)
Good morning. Really nice margin expansion this quarter, even if I exclude the purchase accounting accretion. Can you just give an update on that NIM outlook by fourth quarter? It seems like you can do better than the 3% and how you're thinking about the NIM into next year.
Asylbek Osmonov (CFO)
Peter, this is Asylbek. I think we have to look at, our, you know, NIM, what happened in the second quarter. So we had two things happening, right? It was our organic growth on NIM that we expected, plus we had a Lone Star acquisition that helped. So those two combination gave us pretty good lift on the margin. So if we look at our model, I think it's still showing improvement on the margin, continuous improvement on the margin, going forward. And for the fourth quarter, I think we expect being a little bit better, but right now, we say that, you know, our exit margin will be around 3% as we guided, so it has not changed since then. But we expect for better as we hopefully continue to grow loans and, you know, manage our deposits.
David Zalman (Senior Chairman and CEO)
I think, Peter, I could probably give you a little bit more reassurance, or at least I feel like I can. I think the net interest margin, at least from the models that we have, shows that, again, that I think we'll hit what we said. You know, the Queen Mary is turning around in the driveway out there. I think that we're gonna be able to hit what you-- what we have said we'll hit by the end of the year. I think maybe even, like you said, maybe a little bit better. But, you know, our 6-month, 12-month, and 24-month net interest margins really show that we should continue to increase, you know, up, up or down 200 basis points in our model. So I, I think that we're definitely on the right track.
I think in 12 months, we're showing about a 3.2% net interest margin. This is just a model. This is a static model. I mean, loans staying where they're at, deposits staying where they're at. In 24 months, I mean, we start getting back up. Well, I'm not going to put what our model says because I think it looks too high, but I'd say we'll still be maybe back to what our normal net interest margin is. The historical is probably about 3.40% yearly, and that's what we're shooting for right now, and I think that's, you know, that's the way it should get. As far as net interest income, that may be another issue.
I mean, we like seeing the net interest income go up, but again, as interest rates, if interest rates do drop, that would be pressure on the net interest income. But again, it'll take time to reestablish what the interest expense will be and also goes into consideration what's rolling off at the same time that we have and repricing. So all of that goes. So what I'm saying is, there could be some noise in those numbers short term, but long term, I think this model is correct, and I've seen it go when we started talking last year at 2.73 to almost 3, where we're at today, and I think I see it going forward, so.
Peter Winter (Managing Director and Senior Research Analyst)
Got it. Thanks, David. And then just one more question, just loans. Can you just talk about loan demand, maybe provide an update on the competitive landscape for lending? You know, we did see some pressure on period-end loans from legacy Prosperity, and then also just continued runoff from First Capital. Are we getting closer to the bottom there?
Kevin Hanigan (President and COO)
Yeah, this is Kevin. I think we are, Peter, I think it's gonna be aided by the prospect of rate cuts, which I think is gonna both stabilize deposits. In fact, we were talking earlier in the week, that is, with the prospect of rate cuts, that a lot of money that moved off the banking industry's balance sheet into Treasuries will work its way back into the bank. I think we were talking about that on Monday, and lo and behold, yesterday, we had a client move back, in the process of moving back in about $20 million out of Treasuries back into a money market account here at the bank. But it'll also aid in the way people are thinking about growing their business.
So, I think going back through our guidance so far for the year, you know, we started off the year with 3%-5% growth in core loans. Q2, we backed that off a little bit, saying it probably towards the lower end of back-end loaded, and that's where we sit today. It's still very, very competitive out there for almost everything we look at. And so it's still a knife fight when it comes down to rates and things of that nature.
But I'd say in the last couple of weeks, we've seen, particularly in our middle market customers, who in the short run are more likely to be borrowing more as construction projects we approve may not fund for six or nine months from now, some renewed optimism in where the economy is going and some inventory builds and some folks in fact expanding plant and equipment. I think the second half is gonna has the prospect of being much better, aided by the general belief that rates are gonna moderate.
David Zalman (Senior Chairman and CEO)
I think it's also, I could say that, you know, we—like, with where the deposits have been and how the competition has been, we have had opportunities to increase our position in some shared credits that we've had. But again, I think our terms and conditions, we've kind of toughened up a little bit to holding it. We really wanna keep—We still wanna build customers that have true relationships with us, and I think that's held us back a little bit, too. But that's by design. We've kind of pulled back ourselves, hoping and waiting till we see the turnaround in deposits and all that stabilize and come back to the bank. Tim, did you see?
Tim Timanus (Chairman)
Yeah, I think everything you guys are saying is absolutely correct. What's been encouraging to me is when we talk to existing customers and potential new customers about prospective future loans, they all have things that they want to do. They have projects that they want to start. So there's a fair amount of enthusiasm about trying to get things moving and do things, and they're all sitting there waiting for a rate cut-
Kevin Hanigan (President and COO)
Right
Tim Timanus (Chairman)
... is the bottom line. And I think any rate cut at all will make them feel better. I think if you get as much as 100 basis points rate cut, which won't happen day one with a cut, I wouldn't think, but maybe it would. I think you'll see some projects coming off the desk and moving forward. So I'm reasonably optimistic that things are gonna be better as we move forward in the year, certainly into next year.
Kevin Hanigan (President and COO)
That's great. Thanks for all the color.
David Zalman (Senior Chairman and CEO)
Mm-hmm.
Operator (participant)
The next question will come from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia (Analyst)
Hi, good morning.
Kevin Hanigan (President and COO)
Good morning.
Manan Gosalia (Analyst)
On either loan yields or NIM, are you able to separate out, you know, how much of the expansion came from the core Prosperity portfolio and how much came from the Lone Star acquisition?
Asylbek Osmonov (CFO)
Yeah, if you look at our margin expansion, and I was gonna talk, the core NIM, you know, improved from 276 to 286. Our organic was a very similar, maybe basis point, better than what we did from Q4 of last year to Q1, and the rest of them came from Lone Star acquisition. So I think if we looked at it, like 50/50 increase was between Lone Star and organic.
Manan Gosalia (Analyst)
Got it. And that organic expansion is coming from the fixed rate asset repricing?
Kevin Hanigan (President and COO)
Yeah, the repricing story continues, and we expect it to continue from here.
Manan Gosalia (Analyst)
Got it. And then maybe if you can just speak to some trends in the deposit side. You know, what are you seeing on NIB, excluding what you got from Lone Star? And, you know, just as you're thinking about downside deposit betas and rate cuts from here, how should we expect the deposit portfolio to behave? Thanks.
Kevin Hanigan (President and COO)
I don't know that I'm the best answer on this, but I'll give it a shot, and you guys can tag in. I think as we look at the month of July, I'd say it's still fierce out there. I mean, we still get some requests for modifications off of rate sheet, but stabilization would be the word I would use. I mean, through Tuesday, anyhow, last time, and I haven't looked at the balance sheet for today, deposit, core deposits outside of public funds are actually up, you know, not very much, but they're up. They're not-- there wasn't brackets around it, and that was encouraging for us to see. So I think stabilization, and to the extent we do have rate cuts, I think that'll improve even more so.
David Zalman (Senior Chairman and CEO)
I think that's exactly right. I mean, that's what I'm seeing, is stabilization. I think that we also will see deposits as we quit competing against the government and the Treasuries and interest rates come down. I think you'll see more people coming back into the bank, so I think we see that. Just, always keep in mind, though, this is a quarter for us where you can go back historically, and we've always lost deposits this quarter and next quarter seasonally, just because of our public funds, so keep that in mind. But I think overall, our overall feeling is that, that deposits are... You know, we never really went out and bought broker deposits. We really wanted to stay where we're at, and, so I think we all feel about the same.
Kevin Hanigan (President and COO)
Yeah, look, we didn't like a lot of banks. You know, banks that had higher loan-to-deposit ratios had the need to go chase deposits with rate. We just never really chased through rate. I think we've maintained our money market stated money market rate at 3% on the high end, and but there's been some exceptions above that. But you could say, well, that decision cost us to lose some deposits over the last couple of years, not a ton, but last couple of quarters. I think I may view it on the other side of it. We found out just how strong the core deposit franchise is with people sticking with us.
If you just look at our overall cost of funds, you guys got it for the universe of banks out there. Our cost of funds is significantly better than most of our peers.
Tim Timanus (Chairman)
I think you hit a high point there when you mentioned people staying with us-
Kevin Hanigan (President and COO)
Yeah...
Tim Timanus (Chairman)
sticking with us. When I talk to customers and potential customers, they're into Treasuries for the obvious reason, the yield, but their preference is to have the money with us.
... and they'll say that. They really prefer not to have all their money with the federal government, for whatever reason. That's their own decision. But it's good to hear that dialogue and how many of them say, you know, "We really wanna start moving money back to you guys." Now, proof's in the pudding, whether they do or they don't. But I think there is a desire to do so, and if the Treasuries weaken some more, I think you'll see more money coming our way.
Manan Gosalia (Analyst)
That's great color. Thank you so much.
Operator (participant)
The next question will come from Dave Rochester with Compass Point. Please go ahead.
Dave Rochester (Managing Director and Director of Research)
Hey, good morning, guys.
Kevin Hanigan (President and COO)
Good morning.
Tim Timanus (Chairman)
Morning
Dave Rochester (Managing Director and Director of Research)
Maybe just to round us out on the loan discussion. It looked like the first bank loans were down maybe almost 25% since the deal closed, but it sounds like that's stabilizing here. How are you thinking about the potential runoff at Lone Star? Is there anything in that book that you wanna get rid of? And then outside the core loans on the warehouse side of things, how are you thinking about that trend from here? It looked like you guys saw some good seasonality this quarter, so it'd be good to hear what you're thinking on that front going forward. And are you still adding clients to that business, or is it steady state right now? Thanks.
Kevin Hanigan (President and COO)
Yeah, let me. I guess there's two parts to that question. And, as it pertains to Lone Star, very, very different bank than First Capital. Really good credit quality loans we really like, underwritten, you know, the way we like to underwrite them. So I don't expect much runoff out of that portfolio. Really clean. I mean, when we did due diligence, it's not often for Randy Hester to say, "This is a really clean bank." And, you know, he led the due diligence team, and he came back with, "This thing is clean." So, I don't think we'll have a ton of runoff off of that portfolio. It's a really good bank. Really love the people. It's a good deal for us.
Warehouse, let me answer the customer question first. We've actually let a number of customers go over the last 15 months. I think our peak customer count in that business was either 43 or 44 customers, and we're down to, I think, 32. And a lot of that was either rate, and/or more recently, performance, where they might not have been doing as well, and we either reduced our exposure to them or eliminated it. So, it's not that we were losing customers, it's we flat out fired a bunch of them. Now, the customers we've got have been really good to us.
As you said, we're into the seasonal period of this business, which seems to be lost in all the years of refi and echo refi booms and all the other things. We're back to business as usual. And I got to tell you, when I said we'd average $900 million for Q2 at the end of May, I was a little worried we weren't gonna get there. April and May were pretty weak, and then June was very strong. The strength of June has continued into July through last night. The average for July is $1.05 billion. So I expect that to continue through August and maybe moderate just a little bit seasonally in September. And part of that will be what happens with rates.
I'm not saying September may not moderate as much as usual if rates abate a little bit. So if I had to put a number on where I think we average for the quarter, I'd say on the very low side, just to be conservative, $975 million, but more likely in the $1 billion-$1.025 billion range.
Dave Rochester (Managing Director and Director of Research)
Okay.
Tim Timanus (Chairman)
Kevin, I-
Kevin Hanigan (President and COO)
Great, color.
Tim Timanus (Chairman)
I would add-
Kevin Hanigan (President and COO)
Go ahead.
Tim Timanus (Chairman)
When you look at the comparison between Lone Star and First Capital, for example, in our non-performing assets as of June 30th, about $36 million is First Capital, in other words, about 40%. On the Lone Star side, it's about $2 million, about 2%. And I think that's indicative of what Kevin mentioned about the difference in the quality of the portfolios. I would be surprised if we had big drops in loans outstanding from either one of them at this point in time. I think we've pretty well identified the problems at First Capital. There's always surprises down the road, but I wouldn't think they would be overly material. So I think we're seeing some stabilization there.
Dave Rochester (Managing Director and Director of Research)
Great. That's very helpful. Thank you. And maybe switching to M&A. I appreciated all the opening comments there on that front. Was wondering what the conversation level was like at this point. Has that picked up at all with stock prices moving in the right direction here to, you know, levels possibly closer to where sellers, seller expectations would be? And, you know, what do you think the chances are you do get a deal done here over the next year? And then absent a deal, how do you guys think about buybacks going forward with the stock trading where it is, but with capital likely continuing to grow at a fairly decent clip here, over the next year?
David Zalman (Senior Chairman and CEO)
There's no question, I think, I think after you saw the conventions and all the political stuff that's going on right now, there was a lot of optimism, a week or so ago about, you know, if there is a change in the administration or there is a change that would be more favorable to-
... banks, and I think that's true. I think if you saw a change of administration, you would see, you would see more M&A going on. And I think that it even stirred up a lot of people. We do have more calls coming in. I think it's the last week or so, and or the last few days or so, it's kind of mitigated a little bit. Nobody really knows which way it's going. But I think if you do see a change in the administration, you definitely will see a big uptick in the in the M&A, in the M&A market. Can you ask the second-
Dave Rochester (Managing Director and Director of Research)
Okay, great. Yeah, the, on the buybacks?
David Zalman (Senior Chairman and CEO)
Oh, on the buy.
Dave Rochester (Managing Director and Director of Research)
Yeah.
David Zalman (Senior Chairman and CEO)
I think that you're right. We, you know, we seem to be making good money, and, and even if it shows that we're even continue to make more and more money. But when our stock does go down, like it did, that was unfairly, and we felt was an unfair price, we're going to probably always jump in and buy back.
Dave Rochester (Managing Director and Director of Research)
All right, great. Thanks, guys.
Operator (participant)
The next question will come from Catherine Mealor with KBW. Please go ahead.
Catherine Mealor (Managing Director of Equity Research)
Thanks. Good morning. I just wanted to follow up on the margin conversation. You mentioned targeting maybe with some upside, a three percent margin by year-end 2024, and then maybe hitting around three twenty by mid 2025, and that's what you've told us before. How should we think about the kind of initial downside to margin once we start to see cuts? Is there... And you mentioned that there's maybe some volatility. Is there a scenario where the margin declines, or are you - is there still enough back book asset repricing to where the margin still is going to continue to move up throughout 2025, just maybe not at as high of a pace, you know, as we factor in the cuts?
David Zalman (Senior Chairman and CEO)
Again, I don't have exactly what the exact numerics that you're looking for, but I would say that basically it goes back to what I said. There'll probably be noise in it, but I think the numbers that we gave to you should - we should end up there by those periods of time. So it just may be noisy until you can get things readjusted. But... We really feel comfortable with this model. It's been around for 25 years, as long as I've been here.
Catherine Mealor (Managing Director of Equity Research)
Mm.
David Zalman (Senior Chairman and CEO)
So it's, we have a lot of confidence in it, so we think we will get there. But I think, again, I think it could be noisy. We'll try to look more into what you're asking, the actual numerics. There could be short-term changes, like when the prime drops like that, and we don't get to change the interest rates immediately, or it takes time, or there's the asset that's repricing. So I know exactly what you're asking, and it's a good question for us, too, and we'll work more on that.
Asylbek Osmonov (CFO)
Yeah, and just to add to that, our balances has been neutrally positioned when we looked at it, and we ran some models-
David Zalman (Senior Chairman and CEO)
Up and down.
Asylbek Osmonov (CFO)
Yeah, up and down. So, when we run some models down 50 basis points, our model still shows that at the end of the quarter or end of the year, at the exit, net interest margin still holds up around 3%. So even with that, we feel confident where we are. And I think,
David Zalman (Senior Chairman and CEO)
That's a good point. I see that list this week. He even had 50 basis points going down.
Asylbek Osmonov (CFO)
Yeah, the analysis was-
David Zalman (Senior Chairman and CEO)
We still end up with 3 basis.
Asylbek Osmonov (CFO)
Yeah, because it's neutrally positioned, and we still have a tailwind of our security repricing from 2%. We have, you know, repricing at 5%+. That's our tailwind that's helping us. So with that, I don't think that there's much change even with 50 basis points, but personally, I believe we're going to have maybe one cut rather than two cuts.
David Zalman (Senior Chairman and CEO)
Well, and a caveat, this is a static balance sheet.
Asylbek Osmonov (CFO)
Mm-hmm.
David Zalman (Senior Chairman and CEO)
I mean, the loans drop dramatically or deposits drop dramatically or increase either one way.
Asylbek Osmonov (CFO)
Mm-hmm.
David Zalman (Senior Chairman and CEO)
That all affects this.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
When we talk, we're talking really a static-
Asylbek Osmonov (CFO)
Static balance sheet, analysis.
Catherine Mealor (Managing Director of Equity Research)
Okay. Yeah, that, that's helpful. And, can you remind us, do you have the dollar amount of fixed rate repricing, maybe the back half of this year and then into next?
David Zalman (Senior Chairman and CEO)
I don't know, we have it with the, the next year. Historically, we've said we have about $2 billion in bonds that are repricing, and on the loan side, we had how much for it?
Asylbek Osmonov (CFO)
So loans are cash flow, we'd say about $5 billion, but out of $5 billion, $6 billion is about 40%, and so that's going to be repricing on the loan side and $2 billion of securities. That is the-
Dave Rochester (Managing Director and Director of Research)
Yeah, I think the fixed is closer to 66 or 60. The fixed and variable is closer to 60.
Asylbek Osmonov (CFO)
Okay, yeah, maybe I mixed up on the-
Dave Rochester (Managing Director and Director of Research)
Yeah.
Asylbek Osmonov (CFO)
- at 60% on the fixed on the loan side, and-
Dave Rochester (Managing Director and Director of Research)
So, $3 billion a year, $1.5 billion in the back half of the year.
Asylbek Osmonov (CFO)
Mm-hmm. And billion from the security in six months. So there.
Catherine Mealor (Managing Director of Equity Research)
Got it. Okay, that's helpful. All right, great. And then maybe just one more margin question. You had talked about excess cash building to $1.5 billion-$2 billion. Is that still your plan for the back half of the year, or, are we kind of coming back on the lower end of that, of that range?
David Zalman (Senior Chairman and CEO)
That would be a yes, unless I can convince the Federal Reserve to change their opinion of what's liquidity. You know, we-again, I talk with them, it's really crazy because we have $15 billion of lines of credit between the Federal Home Loan Bank and the Federal Reserve, and we really consider that a phone call, and it can drop this. So we used to run, we used to run with not a lot of liquidity because we could just draw on our lines. But again, after the Silicon Valley deal and Signature and all that, I mean, everything changed, and they came up with this deal. But the truth of the matter is you had $1.5 billion on hand, and there was truly a real run, that wouldn't be enough.
You have to draw on these lines, and we probably have more liquidity. We have probably more lines available than anybody, and our average account's like $30,000. So I'm hoping we can convince them to change. It probably will over time. It just probably won't be right away.
Catherine Mealor (Managing Director of Equity Research)
Okay. And especially if you're considering M&A, maybe to be on the high end, you know, is a safer place to be.
David Zalman (Senior Chairman and CEO)
... Say that again?
Kevin Hanigan (President and COO)
The high end of
Catherine Mealor (Managing Director of Equity Research)
Especially if you're considering M&A, having excess liquidity is probably a safe place to be.
Kevin Hanigan (President and COO)
Right. Yeah, we've come a long way in building the cash already. I mean, it's part of this was the security sale in the quarter. That helped.
David Zalman (Senior Chairman and CEO)
The cash flow from our investment portfolio.
Kevin Hanigan (President and COO)
Yeah.
Catherine Mealor (Managing Director of Equity Research)
For sure. All right, great. That's all I got. Thank you very much.
Operator (participant)
The next question will come from Brett Rabatin with Hovde Group. Please go ahead, sir.
Brett Rabatin (Director of Research)
Hey, guys. Good morning.
Kevin Hanigan (President and COO)
Good morning.
David Zalman (Senior Chairman and CEO)
Morning.
Brett Rabatin (Director of Research)
Wanted to ask the M&A question a different way. I feel like the regulators have some idea they'd like to see deals announced that are out of market, low branch closures. And so I wanted to ask, you know, if you're thinking about M&A, do you have to get on a plane to have talks, or can you still drive a car, i.e., in Texas? You know, any comments, David, you have on whether in-state or out-of-state might be more likely for you?
David Zalman (Senior Chairman and CEO)
Well, I think it goes back to my conversation. There's a change in administration. I don't think it's going to matter if it's in Texas or another state. Right now, I think that you're probably right. They'd like to see something. I mean, their whole philosophy, and again, this is coming down from the upper administration, not just the heads of the FDIC or you know, the OCC. That's really coming back from their bosses upstairs. FTC and everybody, they'd rather see stuff that, you know, you're not, you're not closing down something. But again, I think if there's a change of admin. I can even tell the tone, I probably have some of them listening. They'll probably call me in a minute after y'all get through, but I think the tone is changing.
I think that they are looking to know that we do have to have some M&A, and, you know, my gut feeling is it will. Unless the administration doesn't change, then, I think we're back to where we were. I could say we're back to where we were, but even I don't even know that I would go that far. I do think that the tone of the regulators is changing. I think when you had Silicon Valley Bank close, you had Signature, Republic, I mean, all of that, it made all the regulatory agencies unnerved, and I think it's taken them a little bit of a while just to get a handle on where all the banks are and where they're comfortable. I think that is happening.
So I think either way, it'll be, it'll be somewhat better, the tone will be somewhat better, but if the administration changes, then I, I think you're going to have, like, a, a little mini boom, probably.
Kevin Hanigan (President and COO)
Brett, you know, keep in mind, it’s a 10-hour car drive from Houston to far West Texas.
Brett Rabatin (Director of Research)
Fair enough. The other question I wanted to ask was, you know, this quarter you had a provision, you know, last, last year you had one quarter with a provision. How should we think about, you know, any, any thoughts on thinking about provisioning from here? And I know that obviously depends on if loan growth, you know, reaccelerates, what have you, but-
David Zalman (Senior Chairman and CEO)
Also, I can answer in a minute, but the provision this time was just solely based on our CECL calculation and-
Brett Rabatin (Director of Research)
Yeah
David Zalman (Senior Chairman and CEO)
And because of the merger. But I mean, really, we have 350, I'm talking from the top of my, 359 million in reserve, 397 million, if you count what's in our other reserve for unfunded loans, and we have $80-something million a month. So we have over four times the amount of, we have over four times the amount of reserves as what we have as non-performing.
Brett Rabatin (Director of Research)
Yeah.
David Zalman (Senior Chairman and CEO)
I think we're pretty good right there.
Kevin Hanigan (President and COO)
Yeah, but the only reserves we've put up in the last couple of years have been acquisition-related, the day one CECL numbers. So, the two points in time you're referencing were both acquisition-related.
Asylbek Osmonov (CFO)
Yeah. It was second quarter of last year and second quarter, both related. First, last year was the First Capital Bank acquisition. This quarter's Lone Star. Per CECL rules and GAAP rules, you have to put provision expense on the loans you're bringing over. That's a rule change, and that, but there was no provision on ourselves.
Kevin Hanigan (President and COO)
Yeah, I think it's safe to say, unless something changes materially, and we look at this every quarter and we run our models, but in our minds, things would have to change pretty materially for us to be thinking about posting a provision this year.
Brett Rabatin (Director of Research)
Right.
Kevin Hanigan (President and COO)
Outside of the-
Brett Rabatin (Director of Research)
Okay
Kevin Hanigan (President and COO)
- acquisition.
Brett Rabatin (Director of Research)
Okay, great. And maybe just lastly on the expense guidance, $141-$143 in the third quarter, is that, you know, net of expense savings? Can you maybe give us a little more color on how you get to that number in 3Q?
David Zalman (Senior Chairman and CEO)
Yeah, just this quarter, we had a little bit higher because of extraordinary items and we had some projects we had, so that's why we came a little bit higher. But 141, 143 is including the Lone Star operation we're going to have. And that's in combination. We're going to still continue to have some savings from the Lone Star acquisition, but we're working on some project that's going to run up the expenses. So in the net, net, it's kind of offset each other. That's why our guidance did not change from 141 to 143, and we feel pretty confident about that on the third quarter.
Brett Rabatin (Director of Research)
Okay, great. Appreciate all the color.
Operator (participant)
The next question will come from Michael Rose with Raymond James. Please go ahead.
Michael Rose (Managing Director)
Hey, thanks for taking my questions. Just wanted to clarify on the margin, sorry to go back to the margin, but the exit rate for the fourth quarter... Can you guys hear me?
Operator (participant)
Yes, we can.
Michael Rose (Managing Director)
Okay, sorry about that. So the exit rate for the fourth quarter, is that on a core basis, or would that, would that include the, the accretion income? Just separately, Asylbek, what, what would you expect to-- what's the scheduled accretion for the next, you know, couple quarters? Thanks.
Asylbek Osmonov (CFO)
... Okay, I'll answer the first, the second question first. So our expectation that normalized accretion for the third quarter will be $4.5 million for third quarter. And, so when we gave guidance of being at 3% at exit, that's including the normalized, I would say, run rate of fair value income.
Michael Rose (Managing Director)
Okay, so that's inclusive of, the Purchase Accounting accretion?
Asylbek Osmonov (CFO)
Okay. That's perfect.
Michael Rose (Managing Director)
And then separately, just, I noticed that the trust fees were down this quarter. I just wanted to see if there's anything in there. I think most banks have actually seen that up a little bit, so any color would be great. Thanks.
Asylbek Osmonov (CFO)
Yeah, I think our trust income kind of stayed the same as we did not lose any customers. What happened in the second quarter, we had some one-off ordinary income in the second-- I'm sorry, on the first quarter, we had some extraordinary income came in. There was a trust, I think sale or not sale, it was some-
Kevin Hanigan (President and COO)
estate fee.
Asylbek Osmonov (CFO)
Yeah, estate fee came in. That's why it was unusual in the first quarter. But what we have, $3.6 million, that's a normal run rate. And if you look at, Michael, from the last year to this year, in six months, our trust income up by more than $1 million. So, it just looks like it went down, but there was unusual event happened in Q1.
David Zalman (Senior Chairman and CEO)
In fact, our trust assets continue to grow year over year. In fact, a lot of the, a lot of the deposits that were in the bank are in the trust department now.
Asylbek Osmonov (CFO)
That's correct.
Michael Rose (Managing Director)
Yeah, that's what, that's what I was asking. Also just last for me, just, any other expense or other income that was down about, you know, $2.2 million Q-on-Q? Any... I know it bumps around a little bit, but that's the lowest level we've seen in a while. Anything, you know, happen this quarter or offsets or anything we should consider? Thanks.
Asylbek Osmonov (CFO)
Yeah, there was nothing unusual. What we usually have one-off income every quarter here and there, and we had a significant one-off income happen in the Q1, which we did not see this one. But I think the run rate, what we had of, I thought, 36-38, that will be normal run rate, and we should be expecting that in the Q3 and four.
Michael Rose (Managing Director)
All right. Thanks for taking my questions.
David Zalman (Senior Chairman and CEO)
Thanks, Michael.
Operator (participant)
The next question will come from Brandon King with Truist Securities. Please go ahead.
Brandon King (Treasury Sales Analyst)
Hey, good morning.
Kevin Hanigan (President and COO)
Good morning.
David Zalman (Senior Chairman and CEO)
Good morning.
Brandon King (Treasury Sales Analyst)
So, I wanted to follow up on expenses. I think you mentioned how there are some investments being made. So just how are you thinking about expense growth beyond the third quarter, and what are you expecting also from an inflationary standpoint in your expense base?
Asylbek Osmonov (CFO)
So I think, looking like fourth quarter, I think, say, expenses should stay stable. I don't think—I don't see anything increasing significantly in the fourth quarter. And going beyond, I mean, it's kind of hard to say, but we don't see anything significant. I know we worked on some projects that will have, increase in expenses for maybe 2025, but I don't see anything significant, let's say that.
David Zalman (Senior Chairman and CEO)
And you've been accruing for some of those additional expenses, haven't you, a little bit, that we'll, we'll be facing later on in the year?
Asylbek Osmonov (CFO)
Incurred, yeah. The incurred expenses we had not paid that we accrued in the... That was the second quarter on additional expenses. But, I would—I think I gave guidance, so maybe like, you know, 2%-3% increase in year two or three. So that's, that's probably happens, but right now I can't think of anything.
David Zalman (Senior Chairman and CEO)
Brandon, it's always hard to come up with something like that. But again, if we don't... If we've been very good at bringing our costs down and finding a way to cut the cost, if we don't have the income to come in to increase the expense.
Brandon King (Treasury Sales Analyst)
Mm-hmm.
David Zalman (Senior Chairman and CEO)
So historically, we've found ways to keep it where it's at.
Asylbek Osmonov (CFO)
Yeah.
Brandon King (Treasury Sales Analyst)
Okay. And then a question on loan growth. I know before you mentioned how you've been holding more resi loans production on the balance sheet instead of selling it. But any updated thoughts there in how you're thinking about, you know, whether keeping more residential production on the balance sheet or maybe being more opportunistic in the secondary markets?
Kevin Hanigan (President and COO)
I'd say more opportunistic in the secondary markets. We have largely curtailed the growth in that portfolio. We do have... I mean, we do take care of our core customers. We do have some one-time close products that continue to fund up and complete, but in terms of new originations, they're down. And it was more a matter of balance sheet size in our case. You know, the category got to be 33%-34%?
Asylbek Osmonov (CFO)
Correct.
Kevin Hanigan (President and COO)
Off the balance sheet. We just think that's a comfortable level for us and a high end of the comfortable level. So, we've set pricing in that category to get paid for what we are going to produce and what we will produce. We hope in many cases, it'll be available in the secondary market, and we can generate some fee income through loan sales.
Brandon King (Treasury Sales Analyst)
Got it. Got it. And then lastly, also by going back to your comment on, I think, purchase accounting accretion being $4.5 million, is that just for Lone Star, or is that total purchase accounting accretion for-
Asylbek Osmonov (CFO)
That is total, including the Lone Star, FCB and other acquisitions. So it's in total.
Brandon King (Treasury Sales Analyst)
Okay. Thanks for taking my questions.
Operator (participant)
The next question will come from Jared Shaw with Barclays. Please go ahead.
Jared Shaw (Managing Director)
Hi, good morning. Thanks. And just looking at the discussion around loan growth, as well as the cash and securities, where do you think a good exit rate for average earning assets is for the end of 2024?
David Zalman (Senior Chairman and CEO)
... what's it, the exit rate?
Kevin Hanigan (President and COO)
What would the average earning yield be?
Jared Shaw (Managing Director)
Yeah, average earning assets at the end of the year.
Asylbek Osmonov (CFO)
Yeah, I think as we, you know, look at our model, we've continued to grow, see growth in that area. I mean, I don't know if I can pinpoint exactly what it's gonna be. I mean, right now in the, you know, second quarter, we're at 468. I think it's gonna be continuing to increase, but,
David Zalman (Senior Chairman and CEO)
Well, it's hard because, I mean, if interest, you know, the Fed does come down on rates-
Kevin Hanigan (President and COO)
It's rate correlated.
David Zalman (Senior Chairman and CEO)
It's, I mean, on a static basis, there's no question it would continue to go up. I think that would change-
Asylbek Osmonov (CFO)
Yeah
David Zalman (Senior Chairman and CEO)
... if the rates are low. That's just a really hard question, I think.
Asylbek Osmonov (CFO)
Mm-hmm.
Jared Shaw (Managing Director)
Okay. Yeah, you know, just in terms of, you know, using cash flow from securities to fund loan growth versus deposits, just trying to see where an exit rate could be, given the loan growth expectation.
David Zalman (Senior Chairman and CEO)
Not bad to ask on something like that, but again, it's gonna be a lot really theoretical, I think. But we can, we can look at it.
Kevin Hanigan (President and COO)
Yeah, and even the runoff of the securities, even to the extent we put it in cash, we're getting overnight-
Asylbek Osmonov (CFO)
Five forty.
Kevin Hanigan (President and COO)
5.40, so we're going from 2 to 5.40, even if, even in those cash holdings. So it's... Well, well, it's a lost opportunity to the extent that it could have gone in the loans at something higher. It's still we're picking up 340 basis points.
Jared Shaw (Managing Director)
Yep, yep. Okay, and then just the last for me, just circling back to something, David, you had said in your comments. You know, if we look at lower rates, I think you'd said, you know, margin should still be neutral, but that could spur deposits coming onto the balance sheet as well as some loan growth, but that NII could be under pressure. I guess I'm just trying to square that, how, you know, still seeing good growth with stable margins, you would think that that would be driving better NII.
David Zalman (Senior Chairman and CEO)
Yeah. Well, again, this is just me. Again, I, I'm not—I don't have the model in front of me. Just, you would think that the net interest, net interest income would be harder to grow because interest rates are coming down. So, to look at continued really increases in net interest income may be tougher to do, but our net interest margin does show us, with interest rates coming up or down 200 basis points, still increasing over the next 6, 12, and 24-month timeframe. And that has to do with that even though net interest is coming down, that's because of the repricing of the existing assets that we have, as well as lowering the deposit expense that we have, too.
So you have a lot of moving parts in there, and I agree with you. If you don't have these damn models, trying to square something like this in your head is pretty hard, but I do feel very comfortable where we're at with these models.
Kevin Hanigan (President and COO)
Yeah, I think what Dave... Let me try to put another cut on what, maybe what David was saying, because I do think NII is gonna continue to grow. But there will be a period of time when, when our floating rate book moves down with rates-
David Zalman (Senior Chairman and CEO)
Right
Kevin Hanigan (President and COO)
- overnight, and deposits won't move as fast.
David Zalman (Senior Chairman and CEO)
Exactly.
Kevin Hanigan (President and COO)
So when he talks about some little blip in the short run-
Jared Shaw (Managing Director)
Mm-hmm.
Kevin Hanigan (President and COO)
Like over a six-month period of time, it'll be dampened a little bit because the deposit rates won't move down as fast as our floating rate loans move.
David Zalman (Senior Chairman and CEO)
That's exactly what I'm trying to say. That's the noise that I make.
Kevin Hanigan (President and COO)
That's his version of the noise.
Jared Shaw (Managing Director)
Got it. Got it. Okay, great. Thank you very much.
Operator (participant)
The next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Hey, thanks. Hi, everyone. Hey, David, maybe another way to ask some of these margin questions. What do you think a normalized margin is for Prosperity? I know it's a tough question, but you talked about 340. We're trying to get all these little nuances about what happens if rates go up or down. But what do you think, you know, given-
David Zalman (Senior Chairman and CEO)
It's a good question.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Yeah.
David Zalman (Senior Chairman and CEO)
I think historically, we went back and looked in our historical net interest margin. I'm looking at Cullen because he did this for me. He has – so if I'm wrong, jump in. But normally, a normal net interest margin for us historically has been around 3.40.
Dave Rochester (Managing Director and Director of Research)
I think that's right. 3.30, 3.40.
David Zalman (Senior Chairman and CEO)
3.30, 3.40. There's been some highs and there's been some lows, but historically, that's where we would end up at.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Okay. And do you think, you know, we had these liquidity discussions a quarter or two ago. Do you think... Is the balance sheet any different, or do you think that we can eventually get there?
David Zalman (Senior Chairman and CEO)
Okay. Absolutely. Yeah. I mean, I think that we're, again, I feel very comfortable with these numbers. You know, they're not just made up. This is a model that we've used for the last 25 or 30 years, and I really do believe in them. I mean, again, the only caveat I would say is, like, if there's a big change in loans up or down or a big change in deposits up or down. So I-
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Yeah
David Zalman (Senior Chairman and CEO)
... I see both of those as positive. I think that we've gone, you know, after COVID and the money dropped into the banks, we just had so much money come in, we really didn't even pay much attention to it. Then the last year and a half or two, I mean, we've really been sucking wind with, you know, interest rates going up and deposits going out the other way. I really think that if what happens is supposed to happen, I think that we're, you know, it's moving in our favor. I think that as interest rates come down, we do think that money that was outside the bank will come back in, that's from Treasuries and people feeling better about it.
And so, that'll also provide more money for loans because people will do more loans because interest rates are going down, that they've put on hold right now, that Tim mentioned a while ago. So I, I think it's, I think it's all positive. But having said that, you know, this, it's a crazy world. Things could go the other way. You never know. But just looking at it from common sense, it, it should, we should be in a positive mode over the next two years for sure.
Kevin Hanigan (President and COO)
Yeah, I don't know if this will make any sense to you or not… But I'd say we were always confident in these NIM numbers we've been giving you, and we've hit them consistently throughout the year. No delays, nothing else. We've been right on the mark. If anything, we've become increasingly confident.
David Zalman (Senior Chairman and CEO)
Yeah, I think so, I mean.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Okay. Okay, that's, that's helpful. How about a return on tangible normalization? I mean, you can see it in the charts, right? I mean, obviously, it's a margin issue, and you alluded to it, David, but what do you think is an appropriate return on tangible for your company?
David Zalman (Senior Chairman and CEO)
I, I think before, again, before the loss in earnings, because of the net interest margin and the spread, I think we used to hit it. Again, jump in, Cullen, if you want to, or also, but I think we said about 15% or 16% return on tangible capital. And I, and I think that that's. I think that's fair, and I think that's where we want to go again. But keep in mind, too, that we have a higher, we have higher tangible capital than most banks. I mean, we're, a lot of banks are 7% and 8%. We're over. Our leverage ratio is over 10%. So again, we've, we could probably be criticized for keeping so much capital, but again, it's been nice to have when we've been able to buy stock back.
It's been nice to have in pursuit of an acquisition. So we could make that number even a lot higher right now, but we've elected to keep that capital high. So I think, you know, it is, it's just we run that kind of bank. I mean, we try to always-- we're always covered. It's like my wife said, "You always have pairs of socks and underwear that you haven't used. Why don't you keep buying them?" But that's why we have extra capital right now.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
That's good. That's good.
David Zalman (Senior Chairman and CEO)
We have enough.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Yeah.
Kevin Hanigan (President and COO)
That's a new one for me, David.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Yeah. I, I have a follow-up story for you, David, off the call, but,
David Zalman (Senior Chairman and CEO)
TMI right there.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Yeah. Just one more, last one. Not a big deal, and credit obviously looks good, but you guys show your non-owner-occupied commercial real estate. Can you just talk a little bit about what you're seeing there when things come up for renewal and maybe the overall health of that book? Thank you.
Kevin Hanigan (President and COO)
I'd say that book's really strong, competitive. We were looking at something the other day, and our lender, who brought in a relatively, for us, lower rate than we would have liked, I think he was talking 7.99 or something. He was highlighting all the banks, on owner-occupied, who have special deals going that are somewhere between 7 and 7.50. So it's a competitive side of the market right now. It's because you usually-- it usually comes with a full wallet. You end up getting the company's revolver, you get the treasury management business, and it's been competitive. But in terms of credit quality, it's holding up very well.
Jon Arfstrom (Managing Director of Financial Services Equity Research)
Okay, thanks. Appreciate it.
David Zalman (Senior Chairman and CEO)
Thanks.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Ms. Charlotte Rasche for any closing remarks. Please go ahead, ma'am.
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.
