Prosperity Bancshares - Q3 2023
October 25, 2023
Transcript
Charlotte Rasche (EVP and General Counsel)
.....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 purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q 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 to everyone. I would like to welcome and thank everyone listening to our Q3 2023 conference call. I'm pleased to announce that the board of directors approved raising the Q4 2023 dividend to $0.56 per share from $0.55 per share that was paid in the prior four quarters.
The increase reflects the continued confidence the board has in our company and our markets. The compounded annual growth rate in dividends declared from 2003 to 2023 was 11.5%. We continue to share our success with our shareholders through the payment of dividends and opportunistic stock repurchases, while also continuing to grow our capital.
Our tangible capital increased $243 million from September 30, 2022, to September 30, 2023. This is the amount Prosperity retained after paying $203 million in dividends and repurchasing $72 million of our common stock during this period, reflecting Prosperity's stable earnings.
Prosperity reported net income of $112 million for the quarter ended September 30, 2023, compared with $135 million for the same period in 2022. Our net income per diluted common share was $1.20 for the quarter ended September 30, 2023, compared with $1.49 for the same period in 2022. Prosperity's earnings were primarily impacted by a lower than normal net interest margin.
Although our net interest margin is lower than we would like, the good news is that based on our models, we show our net interest margin improving in a 12-month and 24-month time period to our more normal levels as our assets reprice to market rates. However, if rates increase more than we anticipate, this could change.
The net interest margin on a tax equivalent basis was 2.72% for the three months ended September 30, 2023, stable when compared with 2.73% for the three months ended June 30, 2023. Prosperity continues to exhibit solid operating metrics, with annualized returns on tangible equity of 12.58% and on assets of 1.13% for the Q3 of 2023.
Our loans were $21.4 billion on September 30, 2023, a decrease of $221 million, or 1%, from the $21.7 billion at June 30, 2023. Our loans increased $2.9 billion, or 15.8%, compared with $18.5 billion on September 30, 2022. Excluding the loans acquired in the First Capital acquisition and new production by the acquired lending operation since May 1, 2023, and the warehouse purchase program loans, loans on September 30, 2023, grew $111 million or 2.3% annualized, compared with June 30, 2023, and grew $1.4 billion or 8.2% compared with September 30, 2022.
Interest rates have continued to increase, and there are signs of the economy slowing and loan growth moderating, as intended by the Federal Reserve's actions. Deposits were $27.3 billion on September 30, 2023, a decrease of $68 million, or two basis points, compared with $27.4 billion on June 30, 2023.
Deposits decreased $2 billion, or 6.8%, compared with $29.3 billion on September 30, 2022, primarily due to a decrease in business deposits and public funds deposits, partially offset by an increase in merger-acquired deposits. After a more challenging time in the Q1 of the year, due to large bank failures outside of Prosperity's markets, our deposits stabilized during the Q3. Total deposits, excluding public funds, increased $260 million during the quarter.
Importantly, this was achieved without the purchase of any broker deposits. Our non-interest-bearing deposits represented a strong 37.6% of total deposits. Our non-performing assets totaled $69 million, or 20 basis points of quarterly average interest earning assets on September 30, 2023, compared with $62 million, or 18 basis points of quarterly average interest earning assets on June 30, 2023, and $19.9 million, or six basis points of quarterly average interest earning assets on September 30, 2022.
The increase during 2023 was primarily due to the Merger and an increase in other real estate. Our asset quality remains sound, and the allowance for credit losses on loans and off-balance sheet credit exposure was $388 million on September 30, 2023.
As mentioned in our last conference call, the accounting for acquired loans has changed. Under the new accounting rules, the full loan balance of each acquired loan is booked at closing and a reserve as needed is set aside. Our non-performing assets include approximately $23.7 million from the First Capital acquisition.
The bank appropriately reserved for these loans at closing based on day one accounting. However, we are now doing a deeper dive into the collateral values and liquidation alternatives for these loans. If appropriate, charge downs to the allowance for credit losses may occur in the next several quarters. Again, these loans are fully reserved for. Our acquisition of Lone Star Bank shares is pending the receipt of regulatory approvals. We are committed to the transaction and continue to work together with Lone Star in anticipation of the closing.
The parties have extended the termination date in the merger agreement to March 31, 2024, and are prepared to complete the transaction as soon as possible following receipt of regulatory approval. Our operational conversion date is set for Q2 2024. We continue to have conversations with bankers considering opportunities.
We believe that higher technology costs, salary increases, loan competition, funding costs, succession planning concerns, and increased regulatory burden all point to continued consolidation. The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulation. This, combined with people moving to the states, requires additional housing and infrastructure, a driver for loans and increased business opportunities.
All right—although there are signs of the economy slowing and loan growth moderating, I believe our bank is located in two of the best states we can be for future growth and continued prosperity. 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 September 30, 2023, was $239.5 million, compared to $236.5 million for the quarter ended June 30, 2023, an increase of $3.1 million, or 1.3%, and compared to $260.7 million for the same period in 2022, a decrease of $21.2 million or 8.1%.
The net interest margin on a tax equivalent basis was 2.72% for the three months ended September 30, 2023, compared to 2.73% for the quarter ended June 30, 2023, and 3.11% for the same period in 2022. Excluding purchase accounting adjustments, the net interest margin for the three months ended September 30, 2023, was 2.68%, compared to 2.7% for the quarter ended June 30, 2023, and 3.1% for the same period in 2022. Period-end borrowings decreased $550 million during the Q3 of 2023, primarily funded by cash flows from the bond portfolio.
Non-interest income was $38.7 million for the three months ended September 30, 2023, compared to $39.7 million for the quarter ended June 30, 2023, and $34.7 million for the same period in 2022. Non-interest expense for the three months ended September 30, 2023, was $135.7 million, compared to $145.9 million for the quarter ended June 30, 2023, and $122.2 million for the same period in 2022.
The linked quarter decrease was primarily due to the Merger-related expenses in the Q2 related to the First Capital Bank acquisition. For the Q4 of 2023, we expect non-interest expense to be in the range of $134 million-$136 million.
The efficiency ratio was 48.7% for the three months ended September 30, 2023, compared to 53.2% for the quarter ended June 30, 2023, and 41.4% for the same period in 2022. The bond portfolio metrics at 9/30/2023 showed a weighted average life of 5.2 years and projected annual cash flows of approximately $2.1 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality.
H.E. Timanus Jr. (Chairman)
Thank you, Asylbek. Our non-performing assets at quarter end, September thirtieth, 2023, totalled $69,481,000, or 32 basis points of loans and other real estate, compared to $62,727,000, or 29 basis points at June thirtieth, 2023. This represents a $6,754,000 dollar increase. The September thirtieth, 2023, non-performing asset total was comprised of $60,126,000 in loans, $35,000 in repossessed assets, and $9,320,000 in other real estate. Net charge-offs for the three months ended September thirtieth, 2023, were $3,408,000, compared to net charge-offs of $16,065,000 for the quarter ended June thirtieth, 2023.
This is a 79% decline on a linked-quarter basis. There was no addition to the allowance for credit losses during the quarter ended September 30, 2023, compared to an $18.54 million addition to the allowance during the quarter ended June 30, 2023, that resulted from the acquisition of First Capital Bank of Texas. No dollars were taken into income from the allowance during the quarter ended September 30, 2023. The average monthly new loan production for the quarter ended September 30, 2023, was $398 million, compared to $565 million for the quarter ended June 30, 2023.
Loans outstanding at September 30, 2023, were approximately $21.433 billion, compared to $21.654 billion at June 30, 2023. This is a 1% decrease on a linked-quarter basis. The September 30, 2023, loan total is made up of 42% fixed rate loans, 27% floating rate loans, and 31% variable rate loans. I will 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, MJ, will help us with questions.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause briefly to assemble our roster. Today's first question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey (Managing Director of Equity Research)
Hey, thank you. Good morning.
H.E. Timanus Jr. (Chairman)
Good morning, Brady.
Brady Gailey (Managing Director of Equity Research)
I know in the past, we've talked about the dynamic of the asset repricing, pushing the net interest margin higher. I think previously you talked about, you know, a 3% margin within a year and like a 3.30%-3.40% margin within a couple of years. Is that still the right way to frame the amount of NIM upside you're seeing going forward?
H.E. Timanus Jr. (Chairman)
Every time I answer that question, Brady, I get looks in the room from my general counsel that I'm supposed to be cautious on this all the time. But the answer is yes. I mean, our numbers are still showing, again, we're showing we feel like we've kind of bottomed out where we're at. We feel there will be a decent increase in six months, 12 months, and 24 months, based on some of the numbers you just mentioned. And that's and our models, we just ran our models again as of 9/30/2023, and we're still showing that right now.
Brady Gailey (Managing Director of Equity Research)
Okay, you could get there tomorrow if you restructured the bond book. That, that's such a big opportunity, and you guys clearly have the excess capital to consider doing something like that.
Asylbek Osmonov (CFO)
Right.
Brady Gailey (Managing Director of Equity Research)
Yeah, and I know it's gotten more costly just with the tick up in rates that we've seen, but it also would be more EPS accretive if you pull the trigger. So maybe just updated thoughts on how you're thinking about a possible bond restructuring or, or just a partial bond restructuring?
David Zalman (Senior Chairman and CEO)
Well, we've looked at it. I mean, again, you either hold the bonds for three years and you get your money back, or you sell them right now and take your loss, and you get your money back through an accounting accretion. But to me, that's just kind of voodoo accounting, really. It would take our earnings from where we're at next year at $500 million to maybe $600-something million or $650 million. I mean, it would just propel the earnings. But again, those earnings would be propelled primarily from accretion numbers. And more so than that, there, under accounting, you have to put your bonds either in available for sale or HTM.
And since this bank has began, we again, just because we were such an acquisitive bank, we always had to watch our capital, and so we never could take the chances when we didn't have that much capital to have a lot of big changes in our, in our capital account. So we pretty much put probably 90% plus of all of our securities in HTM. So you really couldn't do it from an accounting standpoint, and if you did do it, it would change everything. You couldn't go back to the HTM. So am I saying that right?
Asylbek Osmonov (CFO)
That's correct. I think just to add to his question, where you said partially, no, if you have to take the whole portfolio, you have to do the 100%, so the decision would have to do, do you want to take the whole portfolio or not? I think at that point, with the duration being short and we can get all the cash within 3-4 years, we determined just leave it and let it reprice and use the cash flows for paying off our borrowing.
David Zalman (Senior Chairman and CEO)
Yeah.
Brady Gailey (Managing Director of Equity Research)
Okay. Then finally, for me, just a quick one on the provision. I mean, it looks like you booked, you know, about $3 million of net charge-offs. You built reserve by about $6 million. So that, I would have thought the provision would have been, like, $9 million or $10 million, but it's $0. So there must be something going on there?
Asylbek Osmonov (CFO)
Yeah, on the provision, Brady, we did put additional about $10 million for FCB. As we mentioned in our, you know, comments earlier, we'll kind of dive in a little bit, and we had to put an additional $10 million that's related to FCB. But the charge-off at $3 million was some of them were related to overdraft and loans, so it's only $3 million.
David Zalman (Senior Chairman and CEO)
I think that it's a crazy amount of a lot of times it goes through that category, but probably a majority of a lot of that times is just overdrafts and stuff like that.
Asylbek Osmonov (CFO)
Combination of overdraft and loans, yeah. And $3 million being not material, we determined we don't need to provision anything this quarter. And then our model shows that we are appropriately have allowance balance.
David Zalman (Senior Chairman and CEO)
We have $388 million in allowance for credit losses and $60 million in non-performing, so I'd say we're covered pretty good, probably.
Brady Gailey (Managing Director of Equity Research)
That's pretty strong.
David Zalman (Senior Chairman and CEO)
But we did-
Brady Gailey (Managing Director of Equity Research)
All right, great. Thanks for the call, guys.
David Zalman (Senior Chairman and CEO)
I will say that a lot of that money, I mean, some of that money was First Capital reserves. I mean, we put, again, I don't know the exact numbers, at $85 million or so in reserves for First Capital.
Asylbek Osmonov (CFO)
Including this, yeah, everything's about $95 million.
David Zalman (Senior Chairman and CEO)
Ninety-five million.
Asylbek Osmonov (CFO)
Yeah, including the...
David Zalman (Senior Chairman and CEO)
But no matter how you look at it, $388 million, even if we decided to charge off, not charge off, but relook at some of those things, I think you still have $388 million and $60 million. It's still a very strong position.
Brady Gailey (Managing Director of Equity Research)
Great. Thank you.
Operator (participant)
The next question comes from Dave Rochester with Compass Point. Please go ahead.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Hey, good morning. Nice quarter.
David Zalman (Senior Chairman and CEO)
Good morning, Dave. Thank you.
Operator (participant)
Good morning.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Appreciated the update on the longer-term NIM outlook, and it's good to hear the NIM has bottomed here, and that makes sense, just given the repricing opportunity you guys have on the asset side. What are you guys expecting at this point for NIM in more near term? Any way to put some parameters around that expansion that you're expecting here in 4Q and into next year?
Asylbek Osmonov (CFO)
Yeah. If you look at the, I would say for the Q4, we have probably moderate increase. As we based on what we look at, our balance sheet, we see the Q3, we believe, is bottomed on the NIM perspective. So now we're going to, as we continue to optimize our balance sheet from the standpoint, we're using our bond portfolio cash flow to pay off higher borrowing.
As you saw, we paid off $550 million right now or the, in the Q3. So we'll continue to do that optimization and balance sheet that will be NIM accretive for us. And as we continue to grow the loans that will reprice over time, that should help us from that standpoint.
So I would say moderate increase in the Q4 with the, all the, what I described right now with balance sheet optimization.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Yep. And then Q4 is normally a pretty good quarter for deposit growth, right? I mean, it's—you normally see some seasonal strength there. That should help pay down some more of those borrowings, potentially?
Asylbek Osmonov (CFO)
It will. So we usually see the public fund growing in the Q4 as because of the tax payment. It's usually end of the Q4, like in the end of December and January, but I think more the impact we'll see in the Q1. And what we're also seeing that, you know, public funds, they probably not keep their deposit as longer they used to be because they're moving to some tax pool or other areas, but we'll see the benefit of it in the Q4, but I don't know how much of a significance we'll see. But we'll usually see about $400 million-$500 million deposit increase due to tax collections from the public funds.
David Zalman (Senior Chairman and CEO)
... But again, just cautionary-
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
They left that money with us a lot of times, but now that they can get 5%, 6%-
Asylbek Osmonov (CFO)
Oh, yeah.
David Zalman (Senior Chairman and CEO)
They may move it quicker, too.
Asylbek Osmonov (CFO)
I agree. I think the timing of the keeping is probably very short. They'll be-- once they collect it, they'll be moving out to the higher yielding export.
Dave Rochester (Managing DIrector and Equity Research Analyst)
But that expansion you're talking about in 4Q isn't dependent on, on that kind of growth, it sounds like. That's more from the asset repricing and, and stabilization of the core deposit side.
Asylbek Osmonov (CFO)
That's correct. Especially what we said, you know, in bond portfolio, we have $2.5 billion or $2.1 billion cash flow with paying off our...
Dave Rochester (Managing DIrector and Equity Research Analyst)
Yep.
Asylbek Osmonov (CFO)
If you look at our loan portfolio, we have about $5 billion of cash flow from the loan portfolio. That's going to reprice. But you have to keep in mind on the loan portfolio, that out of $5 billion, about 65% is fixed to variable loans. That probably at 5%-5.5% yielding, so they're going to reprice to 8%-8.5% right now. And but the-... 35 already floating, so we're not going to get a benefit out of that. But yeah, based on what we see, and we see a modest increase in the Q4.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Right. And you're saying new loan yields are still in that 8%-8.5% range?
Asylbek Osmonov (CFO)
That's what we're seeing it is.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Okay. Great. Maybe just one more on capital. You're just about back to 15% in CET1 right now. Was wondering what your thoughts were on the buyback here with the stock near $50. Seems like you've got a lot of excess capital here that you could deploy. I know some of that will go to the deal closing coming up, but 15% gives you a lot of flexibility there. So just wanted to get your updated thoughts.
David Zalman (Senior Chairman and CEO)
We do, we do have a lot of capital. I know a lot of people's questioning why we're not doing more. At the same time, there's a lot going on. I think that, again, I've always said that we like to, we like to use our capital for primarily mergers and acquisitions and also increasing dividends. At the same time, we, we truly are building capital.
You can see that even in not one of our best years, we still retained quite a bit, even after dividends and share repurchases. But, One thing that we're looking at right now is with the regulatory agencies, looking on what their new requirements are. We've been hesitant. I mean, right now would be, like you mentioned, it couldn't be a better time to be buying our stock, at least in my opinion.
This is one of the cheapest things I've ever seen, trading under 10 times next year's earnings. So it would be a time. I think right now we're really trying to see from a regulatory standpoint, what they're going to be, what their new requirements are going to be, how they're going to consider losses in the bond portfolio.
They consider that part of your capital, not part of your capital. However, ours is an HTM right now. It doesn't seem like it's on the block for anything, any change on that. It does look like if you have your bonds in available for sale, that is going to be part of your capital calculation.
At least right now, things could change. But we're just waiting to see that. We do think there's going to be a number of opportunities out there right now with just, with this everything happening. So having excess funds is not a bad place to be. It's a high-class problem right now, so.
Dave Rochester (Managing DIrector and Equity Research Analyst)
Yeah. Great. Agree. Thanks, guys.
Operator (participant)
The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose (Managing DIrector and Equity Research Analyst)
Hey, thanks for taking my questions. A lot have been asked and answered, but, Kevin, while I have you on here, could you just comment on the warehouse? Your guidance last quarter was pretty much spot on, and just wanted to see how your crystal ball is looking as we think about that business-
Asylbek Osmonov (CFO)
Yeah
Michael Rose (Managing DIrector and Equity Research Analyst)
over the next couple of quarters.
Asylbek Osmonov (CFO)
I think 90 days ago, we said we'd probably average about $950 million. We did just a shade better than that. Michael, through last night, the average is down from that $972 million for the quarter. It's down to $816 million, so it's dropped off pretty significantly. We closed yesterday at $740 million, almost exactly, out in the warehouse. So I think for the quarter, not too unlike last year's fourth and Q1, we're probably looking more in the neighborhood of $725 million on average.
So any, any, kind of shortfall we would have gotten out of the public funds in terms of excess liquidity coming in in the Q4, we're going to have $200 million here come off the warehouse that we'll use, if there's loan production, it'll go to loan production. If there's not, it'll go to pay down the, the Federal Home Loan Bank borrowing. So, it'll be down, but we've got some uses for it.
Michael Rose (Managing DIrector and Equity Research Analyst)
Helpful. And then maybe just on the production. You guys have had pretty decent growth, you know, this year. I think some of the dislocations in your Texas markets, especially for some of your competitors, but seems like some of those competitors are starting to get a little bit more aggressive on growth and just wanted to see where that leaves you guys and, you know, should we consider kind of a mid-single-digit growth rate for next year, kind of what you've guided to for this year. Thanks.
Asylbek Osmonov (CFO)
Yeah, I think, Michael, I would tell you low to mid and off from what I said was mid last quarter. And that, you know, just by recapping, you know, part of that is our decision to sell mortgages rather than to portfolio them, and that, that's brought us into that mid-range.
We've seen some relatively weaker loan demand, I'd say, over the last month or so. And there's a lot of things that don't pencil out real well at these rates, or take so much equity into a deal. It's just harder to get deals done. So, look, if it's on the lower side, that'll be more money that can use to pay down the borrowings, and if it's on the mid-side, that's, that'd be great. I'm just looking forward, I'd say, you know, low to mid.
David Zalman (Senior Chairman and CEO)
And a lot of it has-
Michael Rose (Managing DIrector and Equity Research Analyst)
Okay
David Zalman (Senior Chairman and CEO)
Don't you think? You know, when we were just flushed with deposits, we were looking at all kinds of loans, whether people had relationships with us or didn't have relationships with us. And now, with deposits not being in the banks and everybody's trying to reduce their borrowings, we ourselves kind of restricted loans a lot because some loans that we would normally have made six months ago, we won't, we don't make today because we're not getting a complete deposit relationship.
So some of this is by our own making, too. So I guess we were at one end of the spectrum, we went to another end of the spectrum, and I guess it'll depend where we finally, how the dust settles, where we all end up.
Asylbek Osmonov (CFO)
There's a lot of pluses and minuses, right? There's a lot of people really restricted. They basically have shut down, which you think creates opportunity. And I think we're into that period where the market's adjusting and borrowers are getting used to having to pay up. And our requirements of, hey, while you might have done this historically with bank XYZ, if you're coming here, you need to move your deposits from XYZ to us, or we're not interested. So we're going through that adjustment period as we speak, and if people are willing to pay up and move us deposits, we'll be there for them. But,
David Zalman (Senior Chairman and CEO)
I just spoke with yesterday, like, one of the lenders came to us and said that one of the deals that they're in, two or three of the banks that are participating in their line of credit are not willing to participate anymore and ask if we would participate. And I asked what the rate was, and it was still, I think, SOFR plus... Anyway, the total rate was about 7.5. And this guy's always wanted to—a good, good customer. He's always wanted to do business with us, but we've always been about a half a point short. So the lender asked—he said he'd really like to come back, he'd like us to do it.
And he says: "But you're always about a half a point higher." And I said, "Well, we still are." So if they, you know, if we do see the pricing where it becomes better, then that we may take more risk also, I think, at the same time.
Michael Rose (Managing DIrector and Equity Research Analyst)
Totally get it. Great color. Maybe just one final one for me, David. You threw out a lot of, you know, potential drivers for M&A as we move forward. Just broadly speaking, you know, how do you think this all plays out? And then if you could just give us kind of a quick update on the Lone Star deal and maybe what's holding it up. I know you talked about it last quarter. I just want to see if anything has changed. Thanks.
David Zalman (Senior Chairman and CEO)
Well, I was hoping if some of the FDIC people were on the line, maybe they could answer that about the approval on Lone Star . But we are still working with the regulators to get approval on the Lone Star deal. I'm hoping it's just, it just... Times, all I can say is times are a lot different than where they were a year ago, but we're still completely committed to it. We're trying to get it done, and hopefully, we can get that thing done and approved. Hopefully, there will be some more opportunities out there that we're looking at. We'd like to move forward with those also.
Michael Rose (Managing DIrector and Equity Research Analyst)
Great. Thanks for taking my question.
Operator (participant)
The next question comes from Peter Winter with D.A. Davidson. Please go ahead.
Peter Winter (Managing Director and Senior Research Analyst)
Thank you. Tim, I just want to go back to the comment about selling resi mortgages. You had talked about that last quarter, but resi mortgage was a pretty strong quarter for loan growth, this quarter. And I'm just wondering, is that kind of happened towards the end of the quarter, and it'll accelerate from here in terms of originate and sell?
H.E. Timanus Jr. (Chairman)
I think a lot of that growth that you're seeing was already in the pipeline. It's not unusual to take 60-90 days from the date of application to getting a loan actually closed and funded. So a lot of what you've seen for this quarter was really a carryover from the prior quarter, and I think you'll see more moderation going forward, if that makes sense.
Peter Winter (Managing Director and Senior Research Analyst)
Yeah. Now, it does. Thank you. And then can I just ask about what you're seeing in terms of credit quality within commercial real estate, particularly multifamily and office? There, there's been a number of articles talking about office pressure, particularly in the Texas market.
H.E. Timanus Jr. (Chairman)
We have seen very few problems up to this point in time. Really, almost none. I think there are a few obvious reasons for that. If you take office first, we typically have done owner-occupied as opposed to non-owner occupied. The projects that we've been involved in have been reasonably small, 2-3-story type facilities.
So we're really not in the large non-owner occupied office market. Really never have been. So that has insulated us somewhat from the problems that you referred to in office. In terms of multifamily, we've always tried to be very careful, obviously, with any loan, but certainly with multifamily. I think our way of weeding through those opportunities and checking them out-
... has benefited us. So far, the developers that we've done business with have got pretty decent projects and are holding their own. There continues to be growth in our markets in terms of population, so that certainly hasn't hurt the multifamily piece of it. So I think it's stable right now, and I don't see any reason to think that that's gonna change overnight.
Obviously, from a macro standpoint, out there in the world, so to speak, there are a lot of disconcerting things, but most of those really don't directly affect the markets that we're in in Texas and Oklahoma. And we just don't see a big change in that anytime soon. So we think it's pretty stable going forward.
Peter Winter (Managing Director and Senior Research Analyst)
Okay, great. Just one last question. Credit obviously is very strong. You have nice reserve coverage to non-performing loans. But is there—how much longer can you take a zero provision expense, do you think?
H.E. Timanus Jr. (Chairman)
Well, I'll make a quick comment. A lot of that reserve is based on what we call environmental factors. And I mentioned it just a minute ago in what I was saying. There, there is some weakness out there in the world, and there are some things to be concerned about. And do those end up affecting us more than they have to date? Who knows? But that possibility is there. You ask about, and I've mentioned the office market.
It's a pretty good example. If you look at the statistics, they're not good. And does that tend to creep into other segments? We don't know. But we're trying to be prepared for the future in a reasonable way.
We think that, per our models and all of our calculations, we think where we are right now on the reserve is appropriate, and I wouldn't see any significant change anytime real soon on that. So we're not expecting to take money out of the reserve. We don't see any huge additions to the reserve either, based on what we see right now. So I think we feel comfortable with where we are, and we think it's steady as it goes for a little while.
Asylbek Osmonov (CFO)
I think most banks, Peter, probably there's not many banks probably carrying the amount of reserve like us at 1.7% reserve, and compared to the losses that we've had historically. So I think when Tim's referring a lot to the environmental factors, probably, you know, there's probably a big piece and there is a larger piece in our reserves for the environmental factors.
So where a number of banks a year or two ago were pulling money out of the reserve and putting back into income, we never did that. We've left that money. So we really don't like to play with that, you know, taking money in, putting money out at different times. We like to be pretty consistent.
We do feel we're well reserved, and we shouldn't. I don't see putting money in, you know, you know, unless something catastrophic happens. I don't see us putting money in for the next 12 months, such as me.
Peter Winter (Managing Director and Senior Research Analyst)
Great. Thanks, David.
Operator (participant)
The next question comes from Brandon King with Truist Securities. Please go ahead.
Brandon King (Managing Director and Senior Equity Resesarch Analyst)
Hey, good morning.
Asylbek Osmonov (CFO)
Morning.
H.E. Timanus Jr. (Chairman)
Morning.
Brandon King (Managing Director and Senior Equity Resesarch Analyst)
So, you know, industry is experiencing a softer revenue growth outlook next year, although not as much the case for, for Prosperity. But just wanted to get your thoughts on how you're thinking about expense growth next year. I know a lot of other banks are announcing initiatives and, you know, restructurings, but just want to get a sense of what you're thinking, about how you want to manage expenses going forward.
Asylbek Osmonov (CFO)
So, Brandon, if in the short term, I'll talk about the Q4. I think it's gonna be in line with what we had in the Q3. As I mentioned, it's $134-$136. But if you go out for 2024, I think with the inflationary environment we are right now, and we do our, you know, merit increases annually.
So I would expect for next year, probably 2%-3% expense growth, you know, but we have a lot of initiative. We're trying to automate a few things, but nothing significant, you know, that would... But we're trying to mitigate the cost. But if I had to get guidance for next year, that would be a 2%-3% increase, but that's not including the special FDIC assessment that's going to come in in the Q1.
That's excluding that special assessment. So I would say 2%-3%.
H.E. Timanus Jr. (Chairman)
How much is that FDIC?
Asylbek Osmonov (CFO)
I think based on our initial calculations, about gonna be $10 million annually.
H.E. Timanus Jr. (Chairman)
$10 million annually?
Asylbek Osmonov (CFO)
Yeah, on the FDIC special assessment. In addition to that, we already had assessment in 2023, which is costing another $10 million, so.
H.E. Timanus Jr. (Chairman)
So really, you're talking about an extra $2.5 million or so a quarter?
Asylbek Osmonov (CFO)
Yeah, $2 million-$2.5 million, yeah, per quarter expenses. That's on the FDIC assessment.
Brandon King (Managing Director and Senior Equity Resesarch Analyst)
Okay, that's very helpful. And then lastly, for me, I'm sorry if I, I missed it already, but what are you expecting for securities cash flows and maturities over the next 12 months?
Asylbek Osmonov (CFO)
So our cash flow, it's about $2.1 billion, next twelve months.
H.E. Timanus Jr. (Chairman)
That's on the securities.
Asylbek Osmonov (CFO)
On the securities.
H.E. Timanus Jr. (Chairman)
On the loans-
Asylbek Osmonov (CFO)
I'm sorry. On the loans, it's about $5 billion.
H.E. Timanus Jr. (Chairman)
But again, some portion of that will-
Brandon King (Managing Director and Senior Equity Resesarch Analyst)
Okay. Sounds good. Thanks for taking my questions.
Operator (participant)
The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Hey, good morning. Thanks for taking my question.
... Can you give us some more detail on the fixed rate loan repricing dynamics that you're expecting from ER? You know, I know you mentioned 65% is fixed to variable rate loans repricing about three-ish percentage points higher. But how much of the loans are in dollars or in percentage set to repay between now and the end of next year? And how does the increase in duration as a result of higher long-end rates impact that repricing dynamic?
Asylbek Osmonov (CFO)
So then, when we looked at the $5 billion, that is including all the duration we have already in the, in our loan portfolio. And from the, you know, the cash flow, I would say maybe a little bit higher in the first half than second half, but essentially the cash flow, or the, cash flow would be evenly. If you look back in the, I would just give you numbers, what happened last 3 quarters, and maybe that gives you some information on.
It's like in the Q1, we had $1.3 billion; in Q2, we had $1.5 billion, and in Q3, we had $1.4 billion. So based on that cash flow, you can see, that's actual cash flows, you can see that that's, that's gonna be evenly distributed over 12 months.
Manan Gosalia (Executive Director and Senior Equity Analyst)
That's loans repricing about three percentage points higher?
Asylbek Osmonov (CFO)
On the fixed and variable loans, yeah, that's at the out of that 65% out of $5 billion, that's, they're repricing by an additional 3%, but floating is floating, so it's at the market rate.
David Zalman (Senior Chairman and CEO)
It's already repriced.
Asylbek Osmonov (CFO)
Yeah, it's already repriced.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Sorry, I meant the numbers you gave for the last 3 quarters. Were all of those repricing 3 percentage points higher, or was it only half of that? Or can you help us think through that?
Asylbek Osmonov (CFO)
I think that's the same percentage as well.
David Zalman (Senior Chairman and CEO)
65% of that $1.4 billion or $1.5 billion is fixed or variable that is repricing higher. The other 35%,
Asylbek Osmonov (CFO)
Floating.
David Zalman (Senior Chairman and CEO)
Is floating.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
So.
Asylbek Osmonov (CFO)
The composition is very similar to that, what we had experienced cash flows and what we expect.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Got it. As we think through your model for NIM to improve over a 6, 12, and 24 month time frame, how much of that improvement is coming from the securities maturing and paydowns in higher cost funding versus repricing in loans?
Asylbek Osmonov (CFO)
I would say this, Manan, on the model that we disclosed, that's a fixed balance sheet.
David Zalman (Senior Chairman and CEO)
Static, yeah.
Asylbek Osmonov (CFO)
Static balance sheet, what we have. That, that's getting -- you know, we have $2.1 billion on the bond portfolio and $5 billion on the loans. So -- and that's assuming also just make sure the model assumes that, you know, deposit static stay flat, and there's no significant repricing in the bond -- I'm sorry, in the deposit cost. But, you know, with the competition and all that, you don't know where we're gonna be, but that's our model, so that's the variable we use.
David Zalman (Senior Chairman and CEO)
I mean, basically what we're saying is everything's static, the amount of money in Federal Home Loan Bank, amount of loans, amount of deposits.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
This is just repricing and duration changes that bring this net interest margin up.
Asylbek Osmonov (CFO)
That's correct.
Manan Gosalia (Executive Director and Senior Equity Analyst)
Got it. That is very helpful. And if I could just get a clarification, I think in the prepared comments, you mentioned that if rates increase more than you anticipate, that NIM trajectory could change. Does that mean that if rates are higher than you anticipate, then the NIM would be higher because of the repricing dynamic? Or would it imply it would be lower, either because of duration or because of deposit repricing?
Asylbek Osmonov (CFO)
I mean, our balance sheet, we are pretty neutral on that standpoint. So if longer rates stays higher, it's benefit for us because it's longer time for our balance or assets to reprice. But on the deposit, I think we assumed what we have right now with a little bit just repricing of maturity CDs, but other than that, we don't have any additional increases in the deposits.
David Zalman (Senior Chairman and CEO)
I can, I can make an overall statement that higher rates or lower rates, we still, we still have the, the three - the, there's still significant increase in net margin. Where it does affect you, at least what I'm looking at in the model, is more in the short term on the 6- and 12-month time horizons. So if you look at a 12-month, you actually might do better. You might do better, interest down 100 than you are if they stay the same. On the other hand, over 24 months, we still do better, interest rates going up or down 300 basis points.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
I know it gets kind of complicated, but...
Asylbek Osmonov (CFO)
Yeah, it is. I mean, if Fed cuts the rates tomorrow, it will benefit because our overnight borrowing is gonna be repriced lower.
David Zalman (Senior Chairman and CEO)
We actually do better, it looks like, if they do cut—if, if interest rates went down 100 basis points, we actually do better. A little bit better.
Manan Gosalia (Executive Director and Senior Equity Analyst)
It's very helpful.
David Zalman (Senior Chairman and CEO)
Not much.
Manan Gosalia (Executive Director and Senior Equity Analyst)
It's very helpful. Thank you.
Operator (participant)
The next question comes from Bill Carcache with Wolfe Research. Please go ahead.
Bill Carcache (Equity Research Analyst)
Hi, thank you for taking my questions. As the debate continues around how long the Fed will keep rates higher for longer, do you think you have a good handle on which of your customers put on swaps a couple, say, 2-3 years ago when we were still under ZIRP and have so far been isolated from the impact of higher rates? You know, or are your customers not using swaps? Just curious how, how you're thinking about that sort of interest rate reset risk across your commercial customer base.
Kevin Hanigan (President & COO)
... Yeah, this is Kevin. We don't have a ton of swaps on the books. In the early days when people were talking about swaps, we offered them a fixed rate just straight out for five years or seven years. And we can question the wisdom of that. Those are our repricing opportunities today. So, you know, the amount of swaps we have in the book is pretty negligible.
Most of the client base we have is generally, in our opinion, not sophisticated enough for swaps. We tend to do smaller middle market clients, where you're educating them on swaps. The ones we have are larger companies, but there's just not a we don't have a lot of swaps on the books.
David Zalman (Senior Chairman and CEO)
There's really... I mean, you have some smaller ones, but most of our swaps are in the middle market lending, really, our larger customers.
Kevin Hanigan (President & COO)
Larger middle market clientele, but it's notionally $200 million.
David Zalman (Senior Chairman and CEO)
I think it's actually lower than that now.
Kevin Hanigan (President & COO)
Yeah.
David Zalman (Senior Chairman and CEO)
I think it's-
Kevin Hanigan (President & COO)
Oh, you're right. One of them is recently paid off.
David Zalman (Senior Chairman and CEO)
Yeah, I, I think it's down below $100 million now.
Kevin Hanigan (President & COO)
Yeah. So it's pretty nominal.
Bill Carcache (Equity Research Analyst)
Okay, understood. That's really helpful. And then following up on your comments that you made around the deposit base, maybe if you could just speak to whether you see any risk that you—maybe terminal beta expectations could have to, you know, drift a little bit higher next year if rates were to hold just at these current levels?
Asylbek Osmonov (CFO)
Yeah, I think you have to look at, you know, what the competition doing. I think that's the main, you know, driver. I mean, if you stay rates for longer, it might impact it. But what we've seen. I'll look at last few quarters, we had a, you know, if you just look at cost of our deposit, has increased in the Q1 because of the rate environment. We had significant increase in the Q2 on the, our cost deposits. But in the Q3, we actually saw the increase being less than what we had in the Q2.
So I think that we're optimistic that, you know, the increase in the deposit is gonna slow down, then we'll go further, because I think, everyone who want to reprice, they already took opportunity to reprice, then there is a, we believe it's gonna slow down a little bit on the increase on the deposit, level of increase going forward.
Kevin Hanigan (President & COO)
I completely agree with what Asylbek Osmonov, I said, if we use history as a guide, once the Fed pauses, it's not atypical for betas to continue to rise, but it vastly reduced rates. And they may rise for up to six months post-pause, again, at nominal levels, but it's not an immediate, you know, freeze when the Fed pauses.
Bill Carcache (Equity Research Analyst)
Got it. That's helpful. And then lastly, we heard of-
Kevin Hanigan (President & COO)
Just one last point.
Bill Carcache (Equity Research Analyst)
Yeah.
Kevin Hanigan (President & COO)
Just one last point. We have a really unlike a lot of banks of our size, we have a really pretty significant, what I would call smaller, smaller town retail deposits that seem to be a lot less sensitive to rates.
Bill Carcache (Equity Research Analyst)
Understood. Yep, that, that makes a lot of sense. Finally, if I could squeeze in one last one. We've heard other banks talk about how positive operating leverage is going to be difficult to achieve next year. You know, maybe if you could just help us understand how you're thinking about positive operating leverage as you look to the new year, given all the moving parts.
David Zalman (Senior Chairman and CEO)
What do you mean by positive operating leverage?
Bill Carcache (Equity Research Analyst)
By the ability to grow your revenues faster than your expenses and effectively manage expenses for the revenue environment. So potentially, you know, cut expenses if revenues were to, you know, slow or, you know, have a little bit more room to invest if revenue growth was stronger. Just the idea of managing expenses so that revenue growth outpaces expense growth.
David Zalman (Senior Chairman and CEO)
I think that's the beauty of our whole bank. I mean, that's the whole story, where everybody else is there, almost maxed out because they're flying, their rates have already, already taken advantage of higher rates. We're just gonna hit it.
We will just be going into our stride. So even though we'll have higher expenses, and we, we probably manage expenses better than anybody, and we will continue to do that. But the beauty of this whole bank, really, is if the models work and everything goes, where everybody else is gonna have that challenge, we should be doing much better.
Kevin Hanigan (President & COO)
Yeah, we're expecting some positive operating leverage. You know, our efficiency ratio, because of the NIM declines, largely have gone from what, 42-48. You know, as NIM returns and NII improves because of it, our efficiency ratio is going to drop back down to where our normal level is low 40s, where we normally play.
David Zalman (Senior Chairman and CEO)
Probably.
Kevin Hanigan (President & COO)
And that's just, that's really just a function of this, you know, kind of late, late-stage asset repricing that we have.
David Zalman (Senior Chairman and CEO)
Once the Queen Mary turns, we'll be doing better.
Bill Carcache (Equity Research Analyst)
Understood. That is super helpful. Thank you so much. Appreciate it.
Operator (participant)
The next question comes from Brodie Preston with UBS. Please go ahead.
Brody Preston (Equity Research Analyst)
Hey, good morning, everyone.
Kevin Hanigan (President & COO)
Good morning.
David Zalman (Senior Chairman and CEO)
Good morning.
Asylbek Osmonov (CFO)
Good morning.
Brody Preston (Equity Research Analyst)
I just wanted to clarify something on the expense guidance. I think you said 2%-3% for next year, excluding the special assessment. Is that inclusive of Lone Star , or would Lone Star be additive to that expense guide?
Asylbek Osmonov (CFO)
That was a core number I was giving. Lone Star will be added on top of it.
Brody Preston (Equity Research Analyst)
Got it. Thank you for that. And I know it's challenging, but, you know, if you had to kind of hazard a guess, you know, for our modelling purposes, when do you think we should layer Lone Star in, from a closing timing perspective?
Kevin Hanigan (President & COO)
I'd say it's hard to say. We're hoping sooner rather than later. Our latest extension with them is through March thirty-first.
Brody Preston (Equity Research Analyst)
Right.
David Zalman (Senior Chairman and CEO)
I think both companies are focused on getting it done before then.
Brody Preston (Equity Research Analyst)
Got it. Thank you for that. I did just want to clarify on the timing of the cash flow from the securities book. Is that pretty even as well, so about $500 million a quarter moving forward?
David Zalman (Senior Chairman and CEO)
Yep, that's even.
Brody Preston (Equity Research Analyst)
Got it. And just given that you have seasonal muni strength through the Q4 and the Q1, typically, you know, I think it was said earlier, you could pay down more deposits. Is there any thought to maybe just keeping a little bit of that left over in cash, you know, just for the eventual Q3 kind of run off a little bit next year, so you don't have to take up borrowings next year, in case you do get that 3Q runoff of muni?
Randy Hester (EVP and Chief Lending Officer)
Yeah, I think we'll, you know, definitely, the cash coming in from the public funds will probably keep it, but the, we don't know how long they're gonna keep it, probably not long term. So from that standpoint, we're not gonna be investing, but, yeah, I think we'll keep it ballpark same. I don't think we're gonna increase significant or increase significant our cash.
David Zalman (Senior Chairman and CEO)
We don't... I mean, the bottom line is, we don't wanna be borrowing-
Randy Hester (EVP and Chief Lending Officer)
Yeah.
David Zalman (Senior Chairman and CEO)
$4 billion.
Randy Hester (EVP and Chief Lending Officer)
That's exactly. That's the way-
David Zalman (Senior Chairman and CEO)
Well, our bank, historically, we've never... I, I guess if you go back, we—it's not uncommon to see $1 billion or $2 billion.
Randy Hester (EVP and Chief Lending Officer)
$1 billion, yes.
David Zalman (Senior Chairman and CEO)
But, we don't like being $4 billion or $5 billion.
Randy Hester (EVP and Chief Lending Officer)
Mm-hmm.
Brody Preston (Equity Research Analyst)
Got it. Understood. I appreciate that. And so at what point, I guess, from the securities roll-off perspective, would you think about maybe reinvesting some of those cash flows? Is it kind of once borrowings gets back down close to zero? Just trying to think about when the yield on that portfolio could start to pick up again.
David Zalman (Senior Chairman and CEO)
Right now, I see all the payments being going to reduce our debt, so I don't see... Ask me in a couple of quarters, maybe. Because I think we, the money's probably spoken for for a while here-
Randy Hester (EVP and Chief Lending Officer)
Yeah
David Zalman (Senior Chairman and CEO)
I think, instead of reinvesting.
Randy Hester (EVP and Chief Lending Officer)
Yeah, I think we're gonna continue just paying down the borrowing at this moment.
David Zalman (Senior Chairman and CEO)
And loan demand is gonna be a factor in that too.
Well, that's true. Yeah, that's true. I mean, the loan demand, even though we've tried to moderate it and we've tried to cut it down, you know, we may decide if things, the pricing does get good and we're finally getting terms and conditions that we like, we may want to increase that. So that's a good point, too.
Brody Preston (Equity Research Analyst)
Got it. Okay, and sorry to stay kinda in the weeds here, but, you know, any thought given to when you do decide to start reinvesting, maybe putting some of those securities on as AFS, just to give you more flexibility in the future than, than the HTM book gives you?
David Zalman (Senior Chairman and CEO)
No.
Brody Preston (Equity Research Analyst)
Got it. Thank you. I did also just want to ask, you know, I noticed that there was some strength from First Capital on the deposit side, you know, when I was looking at the press release. Anything specific that drove that?
David Zalman (Senior Chairman and CEO)
I think right at quarter end, they had a customer that sold his business, and was pretty good size chunk of money. Most of that money has subsequently moved off the balance sheet.
Brody Preston (Equity Research Analyst)
Got it. Then this is my last one. I just wanted to try the buyback question a little bit differently. You know, David, I just pulled up, you know, the price to tangible book chart on SNL and, you know, hit Max just to get a long-term view. And this is at least per SNL's history, the cheapest your stock has ever been on price to tangible book value.
And so if you do get the clarity that you're looking for in terms of whether or not HTM is gonna be included in, you know, in capital, and as you noted, it doesn't feel like the winds are blowing that way right now, how aggressive would you be on the buyback? I think you've got, you know, 3.4 million shares left in the existing authorization. That expires in January.
I assume you'd re-up that, but, you know, you just got a lot of capital. The stock's very cheap. And so once we get that clarity, would you, would you look to be more aggressive than even perhaps you've, you've typically been in the past?
David Zalman (Senior Chairman and CEO)
I mentioned earlier, I think this is the best price and that we've ever had that anybody could buy in right now into our stock. So I think we would be interested in purchasing more. On the other hand, a lot of it depends on possible mergers and acquisitions at the same time, too. So we have to keep both of those in a consideration, I think.
You know, do we really think, is it better to buy our stock back, or can we make more money by buying or acquiring another bank? And so I know that's hard, it's not giving you what you need, but those are really truthfully, both of those go hand in hand of how much stock we can buy back and how much we...
I really don't think that we're gonna be impacted by the HTM number. I don't think. I mean, the Fed themselves have a $1 trillion 200 million loss on their balance sheet, so it'd be hard to spank somebody else when we've got such a, when the Fed's got such a big loss, but they know that time will work that out.
So I don't think that's gonna be an issue. So I think, I think once we do find out really where regulatory is gonna be, it'll, we would be more interested in buying our stock, especially at these prices. But again, we still, we're constantly in talks with other banks at the same time, too, and that, that would impact that.
Randy Hester (EVP and Chief Lending Officer)
It'd be a fair statement to say that when we look at buying another bank, particularly a bank of size, we look at tangible book value earn back on that transaction versus a buyback.
David Zalman (Senior Chairman and CEO)
Right.
Randy Hester (EVP and Chief Lending Officer)
And we do realize there's not much integration risk on doing a buyback, so it's a safer bet, so you'd be willing to suffer you know, more dilution on your own deal than you would on buying another bank.
David Zalman (Senior Chairman and CEO)
And what's different this time, I think, in M&A than it's ever been before, when you're looking at acquiring or merging with a bank, banks have losses in their portfolio. So instead of being net capital positive, and just what somebody recommended at the beginning of the call, why don't y'all take some of your capital and re-redo your bond portfolio?
We're not willing to do that. But in a merger and acquisition, you got to mark to market. So you're going to mark their capital down, which would bring the overall capital down, although we will get that, we will get that money back really quickly. So those are just the considerations.
Randy Hester (EVP and Chief Lending Officer)
Yeah, I would, I would just think that just given the experience with Lone Star , you know, for a relatively simple deal, and it's been extended, you know, due to factors that, you know, are outside of your control and, and, and may not be warranted. You know, it just seems like the buyback, you know, which is something that I know your shareholders would like, would be the, the, the safest and easiest route, so you're not kind of tied up with, you know, with a merger. But I appreciate the-
David Zalman (Senior Chairman and CEO)
If there's nothing else, we'll buy back our stock, let me say that.
Brody Preston (Equity Research Analyst)
Got it. Thanks, guys.
Operator (participant)
The next question comes from Matt Olney with Stephens. Please go ahead.
Matt Olney (Managing Director and Senior Research Analyst)
Hey, thanks, guys. Just following up on the time deposits. Asylbeck, do you have any color on those time deposits being rolled over here in the near term, just the dollar amounts and the prices, those yields coming off that?
Asylbek Osmonov (CFO)
Yeah, I mean, we introduced our seven-month special CD program seven months ago. So we see those rolling over, and we see good level of renewal on that one. And, I mean, but from the growth, we don't see as much of an increase in the growth what we saw in the first two months of it. From dollar-wise, Matt, I think I need to get back with you. I don't have specifics on the-
Matt Olney (Managing Director and Senior Research Analyst)
How much is in that we sold in that product?
Randy Hester (EVP and Chief Lending Officer)
About 1.5.
David Zalman (Senior Chairman and CEO)
I think about $1.5 billion.
Randy Hester (EVP and Chief Lending Officer)
$1.5 billion, $1.7 billion, something like that. Yeah.
Asylbek Osmonov (CFO)
Yeah.
David Zalman (Senior Chairman and CEO)
We don't have hardly any CDs that go beyond two years.
Asylbek Osmonov (CFO)
No.
David Zalman (Senior Chairman and CEO)
Well, our total CDs are what right now? I doubt that they're under 10% of our-
Asylbek Osmonov (CFO)
It's about 12%, higher than 10%, but that only grows, so we see that is in that, you know, 7-month special program, and they're just renewing it from-
David Zalman (Senior Chairman and CEO)
Over time, if rates stay higher, I think you will see the percentage of CDs to other deposits continue to grow. I remember before rates went to zero, it wasn't uncommon for a bank like us to have 20% or 30% of their money in certificates of deposit. So over time, I think you could see that change for sure.
Asylbek Osmonov (CFO)
Yeah, Matt, I did confirm it's $1.5 billion on the seven-month special CD.
David Zalman (Senior Chairman and CEO)
Right.
Matt Olney (Managing Director and Senior Research Analyst)
Okay. Thanks for that. And then on the $4 billion borrowing position, any color on the duration here? I, I assume most, if not all, these are eligible to be paid down in the near term.
Asylbek Osmonov (CFO)
Yeah, we, essentially, we have $3 billion from the Fed that we can pay off any time, and rest of them with FHL overnight, pretty much. So all $4 billion can be paid off in a day if we need to.
Matt Olney (Managing Director and Senior Research Analyst)
Okay, perfect. And then on those cash flows you mentioned also, Beck, the $2.1 billion that you expect over the next twelve months, any color or commentary you can give us as far as the yields on those maturities?
David Zalman (Senior Chairman and CEO)
Like 2%.
Asylbek Osmonov (CFO)
Yeah, exactly. It's exactly pretty much the same what our portfolio shows, around 2%.
Matt Olney (Managing Director and Senior Research Analyst)
Okay, got it. Okay, that's all for me. Thanks, guys.
Operator (participant)
The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Jon Arfstrom (Equity Research Analyst)
Thanks. I hope I'm last. I hope I'm the last one.
David Zalman (Senior Chairman and CEO)
We ain't heard from you for a while. We thought you quit loving us, so...
Jon Arfstrom (Equity Research Analyst)
No, no. There's, there's love, David. 20 year, 20-year love.
David Zalman (Senior Chairman and CEO)
Twenty years.
Jon Arfstrom (Equity Research Analyst)
Yeah, real quick, the $10 billion, a little over $10 billion in non-interest bearing deposits, do you feel like... Is that a floor? Is it over in terms of the non-interest bearing outflows?
David Zalman (Senior Chairman and CEO)
You know, the first—anybody would like to say yes, that it is, but it, it—we really don't know that. I think that if interest rates stay high, you know, when I see money moving, you know, normally you would think it's because our money market rate, we're paying about 3%. That's if you have over, what, $1 million in it or something, or $100,000.
Asylbek Osmonov (CFO)
For the 3%, yes, the-
David Zalman (Senior Chairman and CEO)
A million?
Asylbek Osmonov (CFO)
500, yeah.
David Zalman (Senior Chairman and CEO)
$500,000, okay. So you would think that maybe that's where the money would be leaving from to go to buying these Treasuries now. But when I really look at it, you know, we have another, not only the $10 billion that we have in non-interest bearing, we have another, how much in the interest-bearing checking that is paying 15 or 25 basis points?
A huge amount of money. But those are the two categories that I actually see go. The people are, you know, they're just starting to work their money more. So I guess the answer to the question is, in and by itself, I, I think you probably will see—we will see money come out of those accounts buying either higher rate CDs or going to buy treasuries.
At the same time, hopefully, you know, our bank, historically, John, has grown the bank 2%-4% a year organically in deposits. And of course, you haven't seen that at all. So I'm hoping, this is just a gut feel, is that, you know, we will start—maybe, maybe at some point we'll turn around and start building that bank again to offset what's really going out. But people—the bottom line, people are working their money.
This is interesting because I asked also Beck to look into it. You know, our bank, historically, before you had all the helicopter money, we would grow the bank 2%-4% organically every year on deposit side. And then, of course, you had 10% and 20% gains with helicopter money. But also, went back and took all the money that we've lost and taken out the money that came from the acquisition of First Capital. And believe it or not, today, if you would have never had the helicopter money, we're kind of out in the same place. We're still have grown about 2%-4%.
Jon Arfstrom (Equity Research Analyst)
That's right, yeah.
David Zalman (Senior Chairman and CEO)
So whether it looks like a lot of the money has left the bank, if you wouldn't had it to begin with, all the helicopter money, we're probably right where we would have been to begin with. I know that's getting kind of esoteric, but we really wanted to look at that. So that ain't what, you know, what's-- So I think the future is, we'll still get back to that other category, too. You will see banks in the future start growing deposits again, organically, I think, at some point in time.
Jon Arfstrom (Equity Research Analyst)
Okay. Just two more random ones. FTEs were up 140 employees. I normally wouldn't ask about it, but that's more than normal. Is it any acquisition related, or what's driving that?
Charlotte Rasche (EVP and General Counsel)
Yeah, I think because the acquisition had an impact on it, because FTE is kind of on average, so that's had three months of people from the FCB acquisition that's impacting -
David Zalman (Senior Chairman and CEO)
I think you have that, but you also have... the regulators are pushing harder for data governance. They're pushing harder in BSA, they're pushing harder in compliance. I think you're seeing all of that.
Charlotte Rasche (EVP and General Counsel)
Yeah.
David Zalman (Senior Chairman and CEO)
Now, some of that can probably be offset by the mortgage department. The mortgage, I think we're letting people go or reassessing them in the mortgage department. So, you know, we might be able to offset that. But part of that is just regulatory burden, too. As you get bigger and bigger, the regulatory burden, nobody would believe it. It's just, it's crazy.
Jon Arfstrom (Equity Research Analyst)
Yeah. Yeah, that, that's what I was getting at. That's what I was wondering. I remember you saying once, David, you had, after the financial crisis, 20 new employees working for the government, but they were on your payroll instead of the government, something like that?
David Zalman (Senior Chairman and CEO)
Yeah.
Charlotte Rasche (EVP and General Counsel)
Bet you it's just 20 now.
David Zalman (Senior Chairman and CEO)
Yeah. Probably over 200 now, probably.
Jon Arfstrom (Equity Research Analyst)
Yeah. Yeah. Okay, and just one more, and this can be quick, but on credit, it sounds like you're not seeing anything. But I'm curious, do you guys expect a credit cycle for the industry? When you look around and you look at your peers and you look at some of the loan proposals that you're making, you know, to take loans from other banks, do you guys expect a credit cycle?
David Zalman (Senior Chairman and CEO)
To me, I mean, I'll be the first to answer. The other guys can answer, too. But I, I think the credit cycle is probably going to be more regional in nature. I think that if, you know, I think if you're in San Francisco or New York and you have populations that are moving out, I think those are going to probably be impacted, especially from the office space and, and more so than... I think you-- what we're seeing in Texas and Oklahoma, A properties don't seem to be affected at all. In fact, if anything, more people are moving to the A properties. It's really the B and C properties that are impacted.
And the bigger charge-off that we had last quarter or so really came from a three, three-deal office deal that we had that really never was past due, and maybe we jumped the gun and just sold it too quick, but we always like to get rid of our problems right away, but... So I think you do see that seasonally popping up. I do think that from the First Capital Bank that we acquired, we do see some problems. They're not really commercial real estate office problems; they're more in, what, nursing home, Randy? A couple of nursing homes and stuff.
Randy Hester (EVP and Chief Lending Officer)
Yeah, some acute care and some spotty, you know, retail.
David Zalman (Senior Chairman and CEO)
So I think a lot of it, I think a lot of it has to do with the underwriting and the risk that the banks took, too. But it also comes from where you're located. I think your circumstances around you add a lot to it. So I think the banks that had good underwriting are even located in growth states are going to be fine.
The banks that have good underwriting in states where they're seeing outflow, they probably will be fine, too. But the banks that historically have had bad underwriting, they're going to be bad in both of those scenarios, regional and I think it's just going to always go back... I think it's going to go back to your underwriting, really. That's just me.
Jon Arfstrom (Equity Research Analyst)
All right. Thanks for the time. I appreciate it.
Operator (participant)
This concludes our question and answer session. I would now like to hand the call back to Charlotte Rasche for 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 is now concluded. Thank you for your participation.
