Good day, and welcome to the Prosperity Bancshares' first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first quarter 2022 earnings conference call. This call is being broadcast live over the internet at prosperitybankusa.com and will be available for replay for the next several weeks. I'm Charlotte Rasche, executive vice president and general counsel of Prosperity Bancshares. 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, Merle Karnes, chief credit 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. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
Thank you, Charlotte, and welcome everyone to Prosperity Bancshares' first quarter 2022 conference call. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality and earnings, as well as other factors for its America's Best Banks list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010. We have twice been ranked number one. We were ranked number two in 2021 and are ranked number six for 2022. It is a testament to Prosperity's performance, culture, vision and consistency and distinguishes us among most banks. I want to congratulate and thank all our customers, associates and directors for helping us achieve this great honor. Let's go on to the financials.
On a linked quarter basis, our net income was $122.3 million for the three months ended March 31, 2022, and that's compared with $126.8 million for the three months ended December 31, 2021. The change was primarily due to a decrease in loan interest income. Average warehouse purchase program loans decreased $504 million in the first quarter of 2022 compared with the prior quarter, and PPP fees were lower as the loans were repaid. This was partially offset by an increase in securities interest income. Our net income per diluted common share was $1.33 for the three months ending March 31, 2022, compared with $1.38 for the three months ending December 31, 2021.
Our annualized return on average assets for the three months ended March 31, 2022 was 1.29%, and our annualized return on average tangible common equity for the three months ended March 31, 2022 was 15.3%, respectively. Prosperity's efficiency ratio was 43.6% for the three months ended March 31, 2022. Going on to the loans. When you compare year-over-year loan totals, excluding the warehouse purchase program and PPP loans at March 31, 2022 were $16.6 billion compared to $16.2 billion at March 31, 2021, an increase of $409 million or 2.5%.
On a linked quarter basis, linked quarter loans decreased $548 million or 2.9%. From $18.6 billion at December 31, 2021, primarily due to a decrease in warehouse purchase program loans. The linked quarter loans, excluding the warehouse purchase program and the PPP loans, decreased $33 million from $16.7 billion at December 31, 2021. We continue to see and approve a record volume of loans. However, we had a significant paydowns during the quarter. Tim will provide specific information on loan production. With regard to deposits at March 31, 2022 were $31 billion, an increase of $2.3 billion or 8% compared with $28.8 billion at March 31, 2021.
The linked- quarter deposits increased $296 million or 1%, 3.9% annualized from $30.8 billion at December 31, 2021. Deposits seem to be normalizing historically excluding the last two years, our organic deposit growth rate ran about 4% with most of the growth in the first quarter, decreasing in the second quarter and increasing in the fourth quarter. If rates continue to rise, we expect that our time deposits will increase as they are currently at only 8% of total deposits right now. Consumer deposits increased over the last several years during the pandemic, but we are now seeing people spend more of their savings. We expect that business deposits will increase over time if the economy stays strong, replacing the excess consumer deposits that are being spent.
On asset quality, our asset quality remains sound. Year-over-year non-performing assets decreased 38%. Our non-performing assets totaled $27 million at March 31, 2022, compared with $44 million at March 31, 2021, and $28 million at December 31, 2021. On the economy, companies and individuals continue to move to Texas and Oklahoma, primarily because of lower tax rates and a favorable pro-business political environment. The overall economy remains strong despite concerns around higher interest rates, inflation, supply chain issues, and the war between Russia and Ukraine. Our bank has sound credit quality, solid core capital, and strong earnings. We expect that our earnings will benefit from the higher interest rates.
However, as I have previously mentioned, because of large bond portfolio with an effective duration of 3.6 years, it would generally take us longer to see the full effect of the increase. Our securities portfolio is 97% held to maturity, which will protect the bank from having an unrealized loss in the portfolio that adversely affects our tangible capital in a rising rate environment. With regard to acquisitions, as we've indicated in prior quarters, we continue to have active conversations with other bankers regarding potential acquisitions opportunities. Although the conversations have slowed somewhat given the war and the decline in the stock prices. Overall, I want to thank our associates for helping create the success we have had.
We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to help our customers and associates succeed and to increase shareholder value. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek.
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31st, 2022 was $239.9 million, compared to $254.6 million for the same period in 2021. A decrease of $14.6 million or 5.7%. The current quarter net interest income includes fair value loan income of $5.2 million compared to $16.3 million for the same period in 2021, a decrease of $11.1 million. The current quarter also includes PPP loan fee income of $3.3 million, compared to $13 million for the same period in 2021, a decrease of $9.7 million.
However, interest income on securities for the first quarter of 2022 increased $16.3 million compared to the same period in 2021. The first quarter of 2022 net interest income, excluding the impacts of PPP loans, warehouse purchase program loans, and fair value loan income improved compared to the same result in the fourth quarter, 2021. The net interest margin on a tax-equivalent basis was 2.88% for the three months ended March 31, 2022, compared to 3.41% for the same period in 2021, and 2.97% for the quarter ended December 31, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2022 was 2.81% compared to 3.19% for the same period in 2021 and 2.91% for the quarter ended December 31, 2021. The decrease in net interest margin on a linked quarter basis was primarily due to higher liquidity and lower PPP loan fees. Non-interest income was $35.1 million for the three months ended March 31, 2022, compared to $34 million for the same period in 2021, and $35.8 million for the quarter ended December 31, 2021.
Non-interest expense for the three months ended March 31, 2022 was $119.9 million, compared to $119.1 million for the same period in 2021, and $119.5 million for the quarter ended December 31, 2021. For the second quarter of 2022, we expect non-interest expense to be in the range of $120 million-$122 million. The expected increase in non-interest expense is based on the annual merit increases in the second quarter of 2022. The efficiency ratio was 43.7% for the three months ended March 31, 2022, compared to 41.3% for the same period in 2021, and 42.8% for the three months ended December 31, 2021.
During the first quarter of 2022, we recognized $5.2 million in fair value loan income. This amount includes $1.5 million from anticipated accretion, which is in line with the guidance provided last quarter, and $3.7 million from early payoff. As of March 31, 2022, the remaining discount balance is $7.8 million. Due to the low remaining discount balance, we estimate the accretion income for the next few quarters to be around $1 million-$2 million. Also, during the first quarter of 2022, we recognized $3.3 million in fee income from PPP loans. As of March 31, 2022, PPP loans had a remaining deferred fee balance of $3.9 million.
As the PPP program winds down, we expect PPP fee income to be around $1 million-$2 million for the second quarter of 2022. The bond portfolio metrics at 3/31/2022 showed a weighted average life of 5.1 years and projected annual cash flows of approximately $2.2 billion. With that, let me turn over the presentation to Tim Timanus, Jr. for some details on loan and asset quality. Tim?
Thank you, Asylbek. Our non-performing assets at quarter end, March 31, 2022, total $27,184,000, or 15 basis points of loans and other real estate, compared to $28,088,000 or 15 basis points at December 31, 2021. This represents approximately a 3% decrease in non-performing assets. The March 31, 2022 non-performing asset total was made up of $25,460,000 in loans, $19,000 in repossessed assets, and $1,705,000 in other real estate. Of the $27,184,000 in non-performing assets, only $15,000 are energy credits, all of which are service company credits.
Since March 31, 2022, $6.356 million in non-performing assets have been removed or put under contracts for sale, but there's no assurance these contracts will close. This represents 23% of the non-performing assets at March 31, 2022. Net charge-offs for the three months ended March 31, 2022 were $1.217 million compared to $807,000 for the quarter ended December 31, 2021. Excuse me, twenty twenty-one. No dollars were added to the allowance for credit losses during the quarter ended March 31, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2022 was $632 million.
This compares to an average for the entire calendar year of 2021 of $621 million per month. Loans outstanding at March 31, 2022 were approximately $18.068 billion, which includes $86.3 million in PPP loans. The March 31, 2022 loan total is made up of 39% fixed rate loans, 35% floating rate loans, and 26% variable rate loans. I'll now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Matt, can you please assist us with questions?
Thank you. We will now begin the question- and- answer session. To ask a question, you may press star then one on your touchtone phone. If you are 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 will pause momentarily to assemble our roster. Our first question will come from Jennifer Demba with Truist Securities. Please go ahead.
Thank you. Good morning.
Good morning.
Can you give us a little more color on the paydown you had in the quarter and kind of lack of loan growth on a core basis?
Well, I can kind of start, and probably Kevin or Tim can jump in at the same time. The bottom line is we just had a lot of projects that had been construction projects, multifamily projects and some offices. The projects basically got completed. The customers either sold them and took them into the secondary market, and that's the way it's supposed to work. Our production was good, but again, just had a lot of paydowns. You know, there's you could put some lipstick on it, I guess, but the bottom line is they're just, you know, bottom line is that we produced a good amount of business, but at the same time, our customers finished their projects and completed them and sold them, so they made money on the deal.
That's about it, really.
That's all correct. The warehouse loans decreased by approximately $430 million on a linked quarter basis, and the structured commercial real estate loans decreased by about $70 million. On top of that, as David says, there were a number of projects that had been completed and had developed an NOI that was sufficient to enable the projects to be sold, so they were successful projects. One was about $84 million that was paid down. There were several in the $6 million-$10 million range. When you take all of that into consideration, that's really the main driver and the answer to your question.
What's your confidence in net loan growth for the rest of this year? What are you seeing in the pipeline?
Well, again, I think our pipelines are strong, but having said that, payoffs are still strong. I think in this quarter, in April alone, the first week we had, like, $140 million in pay downs. Again, good projects, some in public storage and some on the industrial side. But again, we're still gonna shoot for the 5% growth. You know, it may be hard to get there, but, you know, we're still living in a very. You know, you couldn't ask to be in a better economy, in a place where the population is growing, business is moving. You know, hopefully with inflation, you know, your business customers should have started drawing down on their lines at the same time, and you just have a lot of people coming in.
I mean, we're still gonna shoot for the 5%. Maybe may have to reach that more in the third and the fourth quarter than the second quarter, but again, because of the pay downs. Again, we have a good group of people and, you know, I think we can do it. Kevin, did you wanna talk a little bit about that?
Yeah, you know, Jennifer, I think one of the things we've done that we haven't done a ton of in the past, but in the quarter, we hired six really solid producers in the Houston market alone, all of which have started. These are folks who've been around the market for a considerable period of time and have produced well wherever they've been. Most have worked for me when I was in Houston in the past, so institutionally I know what they can do, and that doesn't mean they're gonna do it, but I wouldn't bet against them, which is why we hired them.
I think, you know, we've added a number of really good producers and that have portfolios and we're planning on having them move some of those portfolios over to us.
Probably a little bit of color, Jennifer, I may be able to help. I mean, Austin was on fire and probably our biggest producer on a percentage basis. Historically, Houston had been our biggest producer with 25+%, $+100 million , even after all the pay downs. In this quarter, for example, it was kind of neutral or even down a little bit in the Houston market. They weren't able to jump in because of all the pay downs. Dallas is still doing good too. However, we're still reducing the structured commercial real estate loans. If you took that out, they would have still been positive too. Again, Houston being one of our biggest producers, and a lot of the payoffs being in that hurt us this time.
You know, at the same time, you know, that's the way it's supposed to work. Your customers are supposed to get out there, do projects and make them good and sell them. You know, that's what's really happened. It's just unfortunate for us. We have to get out there and start hustling more and try to get the loans in. You know, having said that, I would say this, that we're in a market right now where things have really improved for us. We need loans, but at the same time, you know, our bank is still made up of extremely core deposits. You know, we make money both ways.
Just to give you an example, on the bond portfolio, probably last quarter we talked, we were probably making 1.5% or 1.25% on a bond purchase that we would purchase today. We're probably making more like 3.25% or 3.50%. So we're gonna make money both ways. But again, we still wanna build loans at the same time. We're focused on that. We still wanna get there. But again, our bank is positioned with the core deposits to make money both ways, either loans and bonds.
I would add to that. Everything that David has said and Kevin has said is correct. The backdrop to it all is that the economy in Texas, as well as Oklahoma, is still good. Businesses are still moving to both states. People are still moving to both states. I guess the primary unknown right now is what effect, if any, higher interest rates are gonna have on the business climate. To date, it doesn't seem to have had a detrimental effect, but time will tell on that. In addition to the new folks that we've hired in Houston that Kevin mentioned, we've hired a scattering of people throughout the rest of the state of Texas, and Oklahoma also. We're hopeful that we've gotten an increase in good producers.
If the economy holds the way it's been, I think we're optimistic.
Yeah, I mean, I wouldn't want to be with any other bank, own another bank besides mine, let me say that, or ours. I feel comfortable where we're at.
How much more structured commercial real estate runoff is expected until that portfolio stabilizes? Is it something you want to have zero exposure or?
No. This is Kevin again, Jennifer. I think, you know, there's probably another 150 to go, maybe 180 to go out of the portfolio. There's some core customers in there that we've kept and renewed already and extended those loans out for three to seven years. There's a core group that fits, and we've got a little bit more to go. As anticipated, the amount of runoff out of that portfolio continues to come down. I think it was $72 million for the quarter. I would think Q2 is gonna have a similar number, I'd say $60 million-$70 million again.
Thanks so much.
Thanks.
Our next question will come from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Hey, on that commentary on the structured CRE pay downs, I know you mentioned you had maybe $140 million overall in pay downs so far this quarter. How much of that you expected was coming up, that $150 or so was actually in that $140 that you've already realized?
The $140 I mentioned didn't have anything to do with the structured commercial real estate. Those are just-
Oh, got it.
Projects that were outstanding and completed and sold.
Okay. I guess, you know, going forward, how much in the way of paydowns are you expecting in your core CRE books outside of that structured book for the rest of the year? Any sense of that?
Candidly, that's very hard to predict. You know, all the projects seem to be on schedule, seem to be doing well. Whether or not the owners decide to sell them or hold on to them, those are decisions that we're not necessarily privy to until it happens. So I don't know that we can give you a really accurate count of that. Any of them could be held, any of them could be sold.
Okay.
I think the people that sold the projects were pretty smart. I mean, you know, their cap rates where they were. A big Public Storage sold his whole portfolio out. Huge multifamily project from a big developer here in Houston, so an office deal. All of them sold and made a good profit based where interest rates were. As interest rates go up, I think they made a smart decision. I would think as interest rates go up, you probably are not gonna have as much opportunity to sell going forward. I think the people that have been selling, probably made a good decision really to do it right now.
You have to anticipate that the cap rates will go up, and that may embarrass some sales that wouldn't otherwise be held back.
I just thought it was unusual this time. I just thought it was unusual this time to see some companies that really sold their whole portfolio where we used to see them maybe sell just a position. Some people are really taking some macro views on interest rates, I think, really.
Well, that one in Houston that I think you're referring to, he was offered what I would call an unbelievable amount of money for all of his projects.
Yeah.
He sold every one of them.
Right.
I would have done the same.
Yeah, absolutely.
It was more money than he ever dreamed was possible.
Yeah.
I guess, best way to put it.
If cap rates end up trending up, I mean, you would expect that the paydown activity to subside pretty substantially, I would imagine.
Well, it just depends on how high rates go. There should be.
Yeah
Some decrease in the sales. That's right.
Just switching to the deposit growth, that was nice to see when it's normally, you know, not a great quarter for deposit growth. Are you still seeing growth this quarter? What's your outlook on growth overall for the rest of the year?
You know, again, I mentioned earlier that before we were growing 10% plus a year, our organic growth rate was between 2%-4% organic growth. I still think we'll see that this year. Usually the second quarter, we see a down quarter, and it starts picking up in the, you know, in the fourth quarter. I think probably, you'll probably see deposits down next quarter, but probably increase toward the end of the year.
Yeah. One thing to keep in mind, we also have public funds that, you know, we have an end-of-year growth. Once they start using those p ublic funds, they're gonna go down a little bit in the second and third quarter, but we're gonna pick up back again on the public funds back end of the year. From that dynamics, you might see some shrinkage in the deposits overall. If you look at non-public deposits, then, you know, we should-
Yeah. Most of our growth comes from the core deposits.
Exactly.
The core consumer deposits, really. I would say also that I think that probably, you know, if the economy stays up and we don't go into World War III or something like that, and business stays up, businesses are starting to make more money, too, and those deposits should really be coming into the bank to help. They should probably be increasing.
Interest rates obviously have an impact on deposits. That's something we'll have to deal with. It hasn't happened yet. It hasn't been significant yet, but it's reasonable to assume that that's coming. There are things at play in some of our markets, and I don't know how long it's gonna last, but some of our larger competitors have been closing locations. To what extent they'll continue to do that, I don't know, don't have any idea. We have picked up a fair amount of business from Wells Fargo, from Bank of America, from even Chase, because of dislocation within their banking centers. Once again, I don't have any idea whether that's gonna continue, but if it does, that's gonna supplement our deposits some right there.
Right.
I would at least anticipate it would.
Yeah. No, that's great color. Maybe just one last one. How are you guys thinking about super core margins at this point just with you know the higher rate backdrop? And are you thinking maybe we've hit a bottom here? And on your securities purchases this quarter, what was the average rate on those, and what's your appetite for continuing to grow the book?
Yeah. This last one, I'll take this question. If you look at our balance sheet, you know, we're asset sensitive position, we're positioned well in the interest rate rising environment. From that standpoint, when we analyze super core, we expect the super core to continue to expand. We've seen it. Based on our models, we ran several versions of models, you know, we anticipate with 50 basis points increase in May. I think from the super core margin standpoint, we hit the bottom the first quarter. I think the margin gonna be expanding starting the second quarter. Assuming everything stays the same, with variables stay the same and with the increasing rate environment, we see expansion in our models right now. It'll be positive. The interest rate increase will be positive on our bottom line.
I don't think there's any question, Dave, that I think we have bottomed out. Again, if interest rates are gonna rise as they're predicted to rise. We are sitting very, very pretty with $2.2 billion a year just in bond portfolio rolling off. We have another $1 billion or plus, and that's not even invested yet. Plus, you have another $5 billion or so in loans. You're talking, a year looks really good. In two years, you're really looking at a net interest margin that goes back to more an historical level where we were and where we really should make a whole lot of money.
Yeah. You mentioned the cash there. Are you looking to grow the securities book more here given high rates?
We are. Normally, we would buy in every market. Fortunately, we still were buying in every market, but, you know, we didn't buy as much, I guess, over the last month or two. Again, we have so much money rolling off all the time. We are continuing to buy, and I would even think, you know, and before the rates got so low, we actually even leveraged the bank by about $1 billion or so. I think that may even be a possibility once we get fully invested, and we'll probably even leverage the bank by $1 billion and that'll help also at the same time.
One question was what the average yield on the bond portfolio was 1.60% in the first quarter. If you take $2.2 billion and reinvest at 3.25%, you can see how much upside we have. This takes time, as we mentioned, right? It takes time to get there, but upside is there.
These guys, they've all got models and numbers. I'm sure you're gonna be plugging all the new rates in and taking it. I think last month we bought them at, I think the last day we bought was Friday at 3.40% or something like that. 3.50%. I think it was down yesterday, maybe about 10 basis points. You guys have the model. You can do the numbers. You can see what it really looks like. It's really nice. It looks bright for us in the future if everything works like it's supposed to do and interest rates go up to what they're saying.
Yeah. All right. That sounds good. Thanks, guys.
Mm-hmm.
Our next question will come from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Good morning.
David, maybe want to start with fee income. You know, a lot of banks have changed the structure of their NSF overdraft programs. Just kind of curious if you could kind of offer us any color on kind of how you guys are thinking about it. You know, any changes we should think about in that, you know, kind of fee line going forward?
Well, I think somebody told me that I'm supposed to be looking at a committee meeting today where they're talking about it. I'd have to tell you that really, I don't see us changing at least right now. You know, the reason you would change is because you're losing business or it's a competitive basis. Tim mentioned a while ago, if you saw our lobbies for the new accounts that are coming in from the number of banks that he mentioned, those are the banks that have actually lowered their service charges, and those customers are coming over to us. I don't see lowering our service charges right now. Maybe in the future it will.
I think that we offer some products that really. Some customers, if they really don't want charges, you keep a certain amount in your checking account and stuff like that. I think we offer a service where maybe some of the other, each banking center we have, 275, they make a decision every day about their overdrafts. Those customers, where sometimes they may not like paying the fee, they do like us carrying them in the overdraft and paying them, where they're never gonna find that at one of the other banks. That has some value to me, that has some value, how much value that is. Again, I'm not saying we'll never do it.
If things ever got competitive where we were losing business and not growing, we would have to do it. But right now, when I see our lobbies and when those customers are coming from the other banks, we don't have to do it right now. They're still coming to us, and those are the banks that have lowered their fees. I don't see why we would do it.
Oh, great. Thanks. That's very helpful. Thanks for that color. Then just maybe as my follow-up, Kevin, could you talk maybe a little bit about the mortgage warehouse business, you know, kind of your crystal ball for balances and also what you're seeing from a yield and rate standpoint, for borrowers in that business?
Yeah, sure, Brad. Obviously, the first quarter ended up just about where we thought it would. You know, in January, we talked about it being $1.25 billion-$1.3 billion, and I think it ended up at $1.269 billion, so almost right in the middle of that range. Interesting enough, our weighted average coupon in the quarter was 3.18, so it was up a couple of basis points from where it was in Q4 last year. That said, it's still a pretty competitive pricing environment out there. Certainly haven't seen anybody coming in where we could increase rates on anybody, and we do get some requests for decreases. So it still remains competitive.
My crystal ball, you know, is more difficult in this rising rate environment because we haven't seen the impact where rates hit the volumes yet. There's usually about a six-week lag from application to a loan showing up on the warehouse, so that's yet to come. But if I was to pick a number, Brad, I think in the second quarter, we will average somewhere between $1.35 billion and $1.4 billion on the high side. Volumes have ticked up in April from where they were in March, which is typical seasonal nature of what we're doing. We seem to be getting at least our fair share or a bit more than our fair share from our client base.
Let's go with $1.35 billion-$1.4 billion on average in Q2.
Great. Thank you, guys. I appreciate it.
Our next question will come from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good morning, guys.
Good morning.
Morning.
I wanted to circle back on the topic of loan growth. You know, I know balances this quarter were somewhat stable just due to payoffs. When I think about, you know, bigger picture, you're in a great market there in Texas. You have a lot of your peers that are growing just at a lot faster pace. I mean, Frost is around 10%. Even FFIN's around 10% now. You have Veritex and IBTX that are growing, you know, 10%-20%. It's such a great market. You know, your growth, I know you guys are just consistent and kind of mid-single digit is kind of what you've always done, but it seems like the opportunity could be a lot higher than that. What makes Prosperity's growth profile a little less?
Is it your markets? Is it the fact that you guys are just more disciplined on the credit underwriting? What pulls down kind of the growth profile, especially nowadays, relative to your Texas peers?
Let me start, if I can. I think there's probably a lot of answers to your question. There's a number of answers to it. I think when you look at Frost, I mean, their loan-to-deposit ratio is what, 38% or something like that, 40%? I don't have it off the top of my head. It's a lot lower than ours, so their growth is good for them. They do need the growth. You look at banks like Veritex and some of the smaller banks on a percentage basis, they're hiring a bunch of people, they're probably taking more risk than we are and are probably charging them lower rates. So there's reasons for everything. No matter how you cut it, I think what you did say, we should be doing better. I've seen the bank.
I've been with the bank for 25 or 30 years, so I've seen our bank sometimes when somebody else is doing better than we are, and sometimes we do less than what they are. Overall, our consistency and our growth seems to outshine the other guys, and our asset quality always prevails, especially in the harder times, which we may see. Having said that, we should be doing better. The growth rates that you're seeing, I would tell you that, and just this is my opinion, a 20% growth rate in loans is, historically is not where you really wanna be. It's. The outcome wasn't that great in the future.
Again, there are reasons for it, and they may have certain reasons, and they hire people for it, and it is. Historically, the banks going through my lifetime in banking, any banks growing super fast like that, there's usually some type of, you know, issues down the road. Not saying it's wrong, it's just it's not what we've taken. Our position has been to grow. In my opinion, this is just my opinion, but the, you know, the mother's milk of a bank is the deposits, but you have to grow the loans at the same time. We try to have consistent growth in the overall of the company. More importantly, just to say that you want loans right now, you know, we're probably more interested or as interested in earnings per share.
You know, well, let's just use some of the examples that you had. I mean, Veritex, who had 20% loan growth, and you looked at their stock price, has really gone the other way. You know, I mean, I don't know that loan growth in and by itself is gonna make your stock price go up. I think there has to be the faith in, you know, the consistency in what you've done in the past and where you're going into the future. I think it's more total than that. Tim, you wanna?
Well, I would just say that one of the things that accounts for the differences that you're speaking of, is the structure of the loans. While we're certainly not knowledgeable about the structure of every loan that these other banks put on, in many cases, we are, because we compete for the same loan, and we find out what actually happened. Once again, we don't know about all of them, but it comes down to the structure, whether or not the borrower is required to have any of its money in the transaction. Often the equity that the borrower has to put in is very minimal. It depends on whether there's any recourse to a person or another entity. A lot of times there's no recourse backing the loan. It depends on the amortization of the loan.
Sometimes they're a lot longer than the useful life of the collateral that supports the loan justifies. All those things are risk factors, and you have to look at each one, on its own merit and evaluate it. We're trying to grow loans, but at the same time, not put our bank in jeopardy.
I'll just use an example. You know, what comes to mind is, you know, Mortgage Warehouse, which we probably lost a customer that had a $100 million-$150 million line because we were charging what we felt was a fair rate, and another bank came in and charged them 1.8%. For us, to me, that wasn't, you know, it wasn't enough of a return for the risk that you're taking and what we could reinvest the money in. I think there's a number of deals. I think you have to consider profitability, asset quality, and all of those things that come into it. Not to make light of it, we should be doing better. You know, Kevin, you wanna jump in on the deal?
No, the only thing I would add there or modify is the warehouse customer Dave was talking about we lost several quarters ago.
Right.
It doesn't impact my crystal ball for Q2.
Right. That's right. We've had a number of customers that the rates that they've been given is just not something that we could live with. I mean.
That's correct.
The pricing has just been so cheap on some of these deals, the terms and conditions. You'd have to ask the question, why do we want? Just to have a loan on the books didn't make a whole lot of sense. Just have a loan if you couldn't make money out of it.
Yeah. For example, when Prime was at 3.25, which was not that long ago, it wasn't uncommon to see somebody approve a loan at 2%, maybe even a little lower than that or barely above that. Well, that works a little bit on occasion, but too much of that, you're in trouble.
We saw a number of loans, even commercial loans, that wouldn't be priced at, you know, 2.5%. It just didn't make a whole lot of sense, really.
Right.
We're trying to be as balanced as we can.
All right. That's all great color. Just finally for me, I wanted to ask about M&A. You know, it's been a while since you partnered with Kevin, so I think the market's looking for, you know, kind of what is Prosperity's next deal. You know, your currency trades at 10x-11x earnings, which doesn't give you a ton of power there, especially in a state like Texas, where things are relatively expensive. You know, there's talk about the nation slipping into a recession. I mean, to me, it seems like M&A would be a lot less likely for you guys right now. Is that the right way to think about it near term?
I would say that before you had the Ukraine-Russia war, our stock was trading about $75-$76 a share, and we had negotiations and talks with several banks. We've continued those talks with the banks. However, the stock price where it's at doesn't make a whole lot of sense. I would never say never, you never know, but we're staying in contact with the banks that we have had talks with. We'll continue to do that, and if it works, it works. I mean, but again, we have just to grow doesn't make a whole lot of sense.
I mean, when you own a lot of the shares or a number of shares yourself, you really wanna make sure that you're increasing the earnings per share and the book value and the tangible book value of our bank at the same time.
Okay, great. Thanks, guys.
Our next question will come from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning, everyone.
Good morning.
Good morning.
Wanted to ask, you know, a lot of the stuff I wanted to talk about has been covered. But one of the things that, you know, there's obviously the talk about recession, and I think everyone's fully aware that you guys have, you know, superior credit quality to most institutions. Just hoping to get a flavor for what you view as credit risk in this environment, or as rates move higher, if not in your portfolio, just as you see it across the landscape. You know, what types of businesses or commercial or real estate do you kind of worry about more as we move into higher cap rates and potentially slower economic growth?
Well, I would think higher interest rates, that's what they're intended to do, is to cause a downturn or a recession in probably land values and stock prices. That's the whole intent to bring inflation down. Having said that, I don't know that you will exactly have a recession this time. This is just an opinion. There's so much money and so much stimulus in people's deposit accounts that it may be maybe we won't. But having said that, if there is a recession, I don't think there's any other bank that you would rather be with. As somebody asked about the loans a while ago, I don't think. Maybe we could have taken more risks, we could have made more money.
Again, I don't think there's any other bank that you would rather be with in a recessionary period of time. Generally, my favorite comment is you like us in the good times and you love us in the bad times, and I think that's still true today. I think. Or if you're talking about recession and inflation, if you do have a recession, I think you're gonna see it's gonna be different on the West Coast and the East Coast maybe than in Texas, because Texas still is enjoying a terrific amount of growth. You're seeing companies still come, population growth. Where it may affect it, I think different parts of the country may be affected differently.
I think your growth rates are probably gonna be affected differently if there is a downturn, so I think Texas is a good place to be. Anybody else can go.
Well, I think that's right. You could maybe make a reasonable assumption that home building and home sales might slow down. That hasn't happened yet in any of our markets. That's a possibility. We don't think it would be terribly drastic, so to speak. That's something that we'll watch. We've mentioned earlier in this call commercial properties. That may slow the sale of some of those down. It doesn't necessarily mean that the cash flow that's being derived from those projects would suffer significantly. You know, it's a little here or a little there. I don't know that there's one category that we feel that we just absolutely would need to stay away from. Obviously, oil and gas right now is running contrary to all these fears.
How long that lasts, we don't know. At $90-$100 a barrel, things are pretty good in the oil field right now. You saw that in my comment on our non-performing assets, with only $15,000 in the oil patch.
Sometimes our bank runs contrary to other banks, too. Just was talking to Eddie a while ago, he may wanna jump in, but where you read that mortgage companies, their business is down 30% or 40%, our mortgage business, we have more applications than we've ever had. Eddie, you wanna comment on that? I mean
Yeah, that's right. We've not seen any slowdown in our application volume. In fact, last week was our highest application volume in the bank's history, and primarily on the purchase side.
I think that's primarily 'cause we never really went after the refinances. These were purchases. Over half of our business comes from our own bank, you know?
Right.
Our own customers. Yeah.
Yep.
Brett, I would say, and you asked it on a larger scale, maybe not pertaining just to us, but across the nation. In times like these, I would say raw, undeveloped land is at the highest risk. Developed land without anything vertical on it is next. Those things just eat cash instead of throw off cash, so you better have a strong guarantor in tough times. Home building would be next. In all three of those categories, I'd say it's gonna be more severe in states that have less population growth. Then beyond that category, you go to various categories of commercial real estate and anything that supports commercial real estate in terms of contractors and things of that nature.
The unique thing about most of the markets we're in, and it's not just for us, but it's for Texas in general, is when you think about those categories, we're in markets where housing, you might have a one- or two-month supply of housing, whereas a more normal time for that is six or seven months of supply. That's a combination of people still moving here and not getting houses out of the ground fast enough. In those higher risk categories, Texas is probably a little better insulated than most because of population growth. If you start thinking about it in terms of markets that have less in the way of population growth and tougher times come, those are gonna be the categories that get hit first.
Probably on the commercial side, you'd probably see not A properties as much, but B properties or C properties.
B and C properties.
Vacant office space.
Yeah
Because people not going back to work. Hopefully, you don't have any malls that you're financing.
That's all. Great call. Appreciate all that. You know, you just mentioned that you probably, you know, with the stock where it was, M&A seemed less likely. Would you do more in the buyback, or how do you use excess capital going forward?
Well, first, I would not rule out a deal. You know, I think that just because our stock price is down, you know, there would have to be adjustment on both sides if we did a deal just because we couldn't pay the same as we might have been talking before with it. They have to accept the fact that our stock is trading at an underappreciated value right now. Having said that, I think right now where our stock price is, you could count on us buying stock back right now. We couldn't right now before the earnings announcement, but based on where the price is today, we definitely think it's underappreciated, and we'll probably buy back stock.
Okay. Great. Appreciate all the time.
Our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning.
Morning.
I was wondering, given the, you know, moving rates and the, you know, $2 billion or so added to the securities portfolio this quarter, if you could provide a kind of period-end, you know, investment yield in that portfolio. Give us an idea of a jumping off point for second quarter.
I think that the period end was about 1.80%-1.85%, if I'm recalling correctly. That was period end, I think our loan portfolio yield.
Does that include sort of a normalized level of bond premium amortization? It was down in the first quarter. Would you expect to move down further here in 2Q?
Yeah. Regarding the premium amortization, I know we had $18 million or $12.8 million in the first quarter. I think it is normalized. I project to be about $11 million-$12 million for the second quarter, because we already seen the normalization rate and the CPR, it's slowed down. $11 million-$12 million I expect for the second quarter.
Okay. Thank you. Last question. In terms of just the floating rate portfolio, can you just remind us of any impact of floors that need to be cleared for a portion of the portfolio?
Yeah. If you look at our presentation, we show about what? 34%-35% on the floating. The first 25 basis points we did have some floors to clear, and I think next 25 will have some floors, but it's much less than. I think at 50 we should be over the floors by that time.
That's probably right. Yes.
All right. Perfect. Thank you.
Again, if you have a question, please press star then one. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Excuse me. Thank you, Matt. 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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.