Good morning, and welcome to this Prosperity Bancshares' second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star on your telephone keypad. 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' second 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 few 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. 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 operator. 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 the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2022 conference call. For the second quarter of 2022, Prosperity had strong earnings, core loan growth, continued sound asset quality, impressive cost controls, and a return on average tangible common equity of 15.7%. We are optimistic about our company, which is evidenced by a repurchase of 981,000 shares of our stock during the second quarter. With regard to earnings, on a linked quarter basis, our net income was $128 million for the three months ended June 30, 2022. That's compared with $122 million for the three months ended March 31st, 2022, an increase of $6.2 million or 5%.
Our net income per diluted common share was $1.40 for the three months ended June 30, 2022, compared with $1.33 for the three months ended March 2022. Our annualized return on average assets for the three months ended June 30, 2022 were 1.36%, and the annualized return on average tangible common equity for the three months ending June 30, 2022, again, was 15.7%. With regard to loans on June 30, 2022 were $18.2 billion, a decrease of $1 billion or 5.4% compared with $19 billion on June 30, 2021, primarily due to decreases in warehouse purchase program, PPP loans, and structured commercial real estate loans.
Excluding the warehouse purchase program and the PPP loans on June 30, 2022 were $17 billion compared to $16.4 billion on June 30, 2021, an increase of $667 million or 4.1%. Our linked quarter loans, excluding warehouse purchase program and PPP loans, increased $406 million or 2.4%, 9.8% annualized. Bottom line, excluding the warehouse purchase program loans and the PPP loans, we saw a 4.1% growth year- over- year and a 9.8% annualized growth quarter over quarter. Our deposits on June 30, 2022 were $29.9 billion, an increase of $755 million or 2.6% compared with the $29.1 billion on June 30, 2021.
Our linked quarter deposits decreased $1.2 billion or 3.9% from $31.1 billion on March 31, 2022. The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 500 municipal customers such as cities, schools, and counties that use the tax dollars they receive in December and January throughout the year, resulting in declining account balances in the second and third quarters of the year. Also contributing to the decrease was our public fund customers moving their investment funds to other places now offering higher rates that were not available to these customers before the recent interest rate increases.
With regard to asset quality, our non-performing assets totaled $22 million or 7 basis points of quarterly average interest earning assets on June 30, 2022, and that was compared with $33 million or 11 basis points of quarterly average interest earning assets on June 30, 2021, a 34% decrease in non-performing assets. The allowance for credit losses on loans and off balance sheet credit exposure was $313 million on June 30, 2022. With regard to acquisitions, 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. With regard to the economy, overall, Texas and Oklahoma continue to shine as more people and companies move to the States.
For example, according to CNBC, Texas added more jobs over the last year than the 25 lowest job growth states combined. Further, during the last year, the Dallas-Fort Worth area added 295,000 jobs, three times its annual average growth, and the Houston area added 185,000 jobs. Unemployment remains unusually low. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone in our company for helping to make it the success it has become. Thanks again for your support of our company.
Let me turn over 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 June 30, 2022 was $248.5 million compared to $245.4 million for the same period in 2021, an increase of $3.1 million or 1.3%. The current quarter net interest income includes fair value loan income of $59,000 compared to $12.2 million for the same period in 2021, a decrease of $12.1 million. The current quarter also includes PPP loan fee income of $2.3 million compared to $10.3 million for the same period in 2021, a decrease of $8 million.
However, interest income on securities for the second quarter of 2022 increased $20.4 million, and interest expense decreased $6.1 million compared to the same period in 2021. Due to the asset sensitive position of the balance sheet, we are seeing a benefit of increased rates and believe that the expected additional rate increases will benefit the net interest income in the long term as assets reprice. Further, at the end of the second quarter, we increased rates on our deposits. We expect the full impact of these increases on the third quarter interest expense. In summary, for the third quarter, we anticipate that net interest income will continue to improve.
The net interest margin on a tax equivalent basis was 2.97% for the three months ended June 30th, 2022, compared to 3.11% for the same period in 2021 and 2.88% for the quarter ended March 31st, 2022. The decrease in net interest margin year-over-year was primarily due to lower fair value loan income and PPP loan fees. Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30th, 2022 was 2.97% compared to 2.96% for the same period in 2021 and 2.81% for the quarter ended March 31st, 2022.
Non-interest income was $37.6 million for the three months ended June 30th, 2022, compared to $35.6 million for the same period in 2021, and $35.1 million for the quarter ended March 31st, 2022. Non-interest expense for the three months ended June 30th, 2022 was $122.9 million compared to $115.2 million for the same period in 2021, and $119.9 million for the quarter ended March 31st, 2022. The increase in salary and benefits is primarily due to the annual merit increases in the second quarter 2022 and higher discretionary incentives. For the third quarter 2022, we expect non-interest expense to be in the range of $120 million-$122 million.
The efficiency ratio is 43.1% for the three months ended June 30th, 2022, compared to 41% for the same period in 2021, and 43.7% for the three months ended March 31st, 2022. During the second quarter 2022, we recognized $59,000 in fair value loan income. As of June 30th, 2022, the remaining discount balance is $7.7 million. Due to low remaining discount balance, we estimate the accretion income for next few quarters to be around $1 million. Also, during the second quarter 2022, we recognized $2.3 million in PPP fee income.
As of June 30, 2022, PPP loans had a remaining deferred fee balance of $1.6 million, so we don't expect PPP fee income of any significance going forward as the PPP forgiveness winds down. The bond portfolio metrics at 6 /30/ 2022 showed a weighted average life of 5.4 years and projected annual cash flows of approximately $2.2 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus?
Thank you, Asylbek Osmonov. Our non-performing assets at quarter end June 30th, 2022 totaled $22,187,000, or 12 basis points of loans and other real estate, compared to $27,184,000 or 15 basis points at March 31st, 2022. This represents approximately an 18% decrease in non-performing assets on a linked-quarter basis. The June 30th, 2022 non-performing asset total was made up of $20,632,000 in loans, $0 in repossessed assets, and $1,555,000 in other real estate. Of the $22,187,000 in non-performing assets, only $669,000 are energy credits.
Net charge-offs for the three months ended June 30th, 2022 were $1,204,000 compared to $1,217,000 for the quarter ended March 31st, 2022. No dollars were added to the allowance for credit losses during the quarter ended June 30th, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended June 30th, 2022 was $674 million. Loans outstanding at June 30th, 2022 were approximately $18.2 billion, which includes $27.6 million in PPP loans. The June 30th, 2022 loan total is made up of 40% fixed rate loans, 33% floating rate loans, and 27% variable rate loans.
Charlotte, I'll now turn it over to you.
Thank you, Tim. At this time, we are prepared to answer your questions. Anthony, can you please assist us with questions?
Sure thing. 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're 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'll pause momentarily to assemble our roster. Our first question will come from Jennifer Demba with Truist Securities. You may now go ahead.
Thank you. Good morning.
Good morning.
Good morning.
Question on provision. You guys haven't had a provision for the past several quarters. Just wondering what the outlook there is. I know you probably think losses are gonna remain pretty low, but just wondering how you look at provision versus maybe a more challenging economic outlook.
Jennifer, I'll start off. This is David. I mean, I think it's pretty simple math. I mean, you have $22 million in non-performing and $300 million in reserves, so that's about a 14 x coverage. That may be better than anybody in the industry maybe. I don't see unless we see something dramatically change in the immediate future, really increasing that.
I would say that obviously we have to make some hopefully reasonable projections about economic issues going forward. There's a lot of talk about recessionary activity. Maybe that'll come to pass, maybe it won't. We have to take that into consideration, just like we did the issues during the period of COVID. We're past that now. It could come back, I guess. Right now there's some level of concern about recessionary activity.
To what extent that affects Texas and Oklahoma, we'll see. So far, both states are doing great, really.
Yeah. I think some people could say other people may take the position if you have too much in there. Again, not knowing what's on the horizon and I, you know, feel comfortable where we're at, very comfortable where we're at.
Yeah. I mean, we have a model that takes into consideration basically everything I just said, and, it indicates that we are where we should be. I don't envision any big change one way or the other anytime soon.
Kevin, you have any thoughts on it, or you-
No, I was gonna say, we went from concerns about COVID to concerns about recession. We've factored in at the end of the quarter the possibility of a recession and the recessionary impacts on our portfolio in deriving the overall number, which is a little over $300 million, and the percent, which is 1.67%. Any recessionary impact that we have contemplated has been baked into the model at the end of the quarter.
Okay. Thank you. My second question is on loan growth. Can you just talk about your pipelines and what you're seeing now and what you think is possible for 2022, you know, excluding and including the mortgage warehouse?
Well, let me start off. This quarter ended June 30 was the best quarter in terms of three months of loan growth that we've ever had. The $674 million compares very well with the first quarter of this year, which was $632 million. The average for all of 2021 was $621 million. It culminated with a very good number for the month of June. We did over $824 million in the month of June, just that one month. Our loan committee activity since the end of June has been robust. As mentioned just a minute ago, the economies in Texas and Oklahoma appear to be very strong so far.
I think there's a good chance we're gonna see excellent loan growth going forward.
Yeah. Jennifer, this is Kevin. Just a little inside baseball on the quarter. It started off. I think we talked to some of you early in the quarter. The quarter started off. We were $126 million in the hole late in the month of April. So we had a relatively big hole to dig out of. That was a couple of large multifamily projects that paid off early in the quarter. We obviously rebounded from that. Going into the last week of the quarter, we were up over $500 million or in that neighborhood. We got, I think two or three days before quarter end, a $104 million structured CRE deal paid off.
Paid off early, and we got a nice prepayment fee out of that thing. We still ended up with pretty good loan growth. This quarter started off better. We didn't start off in a big hole, and we're tracking along pretty fine. I would say as a company, we're probably gonna stick with, for the year, the 5% mid-single digit kinda loan growth for the year. First quarter, we didn't have much of anything. Second quarter was pretty good. This quarter is feeling pretty good. As Tim said, loan committee activity has been very strong. I think last quarter we talked about hiring the corporate banking group down here in Houston.
We've hired out a team, and those guys have done better than we even expected, and we had high expectations of them. We're feeling pretty good about loan growth, achieving that mid-single digits for the year.
Thanks.
Our next question will come from Brett Rabatin with Hovde Group. You may now go ahead.
Hey, good morning, everyone.
Good morning.
Good morning.
I'm good to talk about deposits, and you mentioned the municipal deposits, you know, being some of the source of the decline linked quarter. Was hoping you could just talk about, you know, those deposits specifically and the decline. Was that just due to lower balances with those customers, or did you elect to not be as competitive on bids or maybe a little more color on those deposits specifically?
Brett, this is David. If you followed us for a long time, historically, just the seasonality, we would always lose a certain amount of deposits in the second quarter and the third quarter because we have, as I think I mentioned, if you read, they get a lot of these municipalities, which are made up of cities, schools, municipalities, counties and stuff. They get their tax dollars at the end of the year, the first of the year, and then they use it. Usually the summertime toward the third quarter is the lowest that they have. You know, technically, we always have a run on those deposits because they've used them. I would say this time.
With $1.2 billion, we really were thinking more it was like $500 million-$600 million that would probably be down in that category. However, what we did see is when rates were so low, we usually have the operating accounts of these municipalities, and their investment funds are usually kept somewhere else. When rates had been so low, they had kept not only their operating accounts, more of their investment accounts with us. As they were able to go out and start getting 1.5% or 1.6%, that's what you probably saw the other $500 million-$600 million go not just to the use of funds, but because they could get better investments.
Again, I think this is a seasonality type of deal combined with the amount of best investment funds or what we normally didn't have. We usually just have their operating accounts. Really, when you look at it, when you look at our deposits overall, less the municipal deposits, basically, I think our deposits here to date have really grown a little over 2%. So, you know, from that standpoint, we knew it was coming. It was just more in the municipal side. I don't know if that adds enough color or not, and somebody else may wanna jump in.
Well, what you said is exactly correct. If you look historically, what happened this quarter is very normal. It happens all the time.
Every year, except for the last previous two years when we were just covered up with deposits from stimulus money.
Well, that's right. As low as our rates were during that period of time, they were still better than what commercial rates were outside of banking. Virtually all these public entities left much more of their money with us during that period of time than they historically have done. They're still our customers. As David said, we typically have the operating accounts in that part of their business. That hasn't changed. This is really something that's normal.
I think what's probably a little bit that you can't see is because this happens every year, but you probably didn't see it the last couple of years because so many deposits were flowing into the banks, it was camouflaged from the stimulus deposits and all that. If you pulled out the last two years and went back, you would see that this is really a normal occurrence, really, for us.
Not that I want to look at deposits, but I mean, stripping out our deposit franchise, the non-public fund side of things, we did pretty darn well. This was isolated to the public fund side. I think just in non-interest-bearing demand deposits alone, we grew $255 million for the quarter. That'd be annualized linked-quarter 9.5%. I think not that public funds is a core competency of ours, but our non-public fund deposits are holding up really well.
Okay, that's a great color. I figured a lot of it was just the seasonality from taxes and what not, but just wanted to get a little better understanding on that. Secondly, it looks like you did add a little bit to the securities portfolio this quarter. You know, I was just curious on the bond portfolio adds, you know, what you added at what rates and what do you think the yield on that portfolio might do. I don't know what the premium amortization was, this quarter, but was just hoping for a little more color on that.
I'll start off, but somebody else will probably jump in. Again, obviously, what we're getting on securities is much better than we were three or four months ago. I mean, I think right now we probably had the quarter before, the quarter before that, we are probably on our investment securities, probably getting about 1.25% today when we're buying something. I think a week ago, two weeks ago, it was probably 3.8%. I think right now it's probably dropped into 3.6s. I saw something where we bought yesterday or something at 3.7%. That's kind of the yield that we're getting right now. Much better and, you know, I think that will continue, Asylbek Osmonov.
Yeah. I'd sort of add a little bit on that because we had a little bit of a liquidity in the end of the first quarter. We utilized that liquidity to buy up some bonds at a higher rate. That's why you see the improvement on the, you know, yield. But as you look at our bond portfolio in the big picture, as I mentioned earlier, that we have about $2.2 billion of annualized cash flow from the bond portfolio. So that sets up pretty well for us to re-price those at what we just discussed, 3.6% or 3.7%. So it's gonna be very beneficial for us from that standpoint. On the second part of your question, I think you asked about the premium amortization. It's slowing down, and we can see it.
In the second quarter, we saw our premium amortization was $11.5 million. If we're projecting for the third quarter, I think premium amortization gonna come down a little bit more. We're estimating to be around $10.5 million, assuming the balances of the bond portfolio stays as is. I think the plan right now to keep the bond portfolio balance what we saw in the second quarter.
Also, Brett, I would add to that our average rate for this prior quarter on the securities portfolio was 1.72%. We appear to be in a period right now where we can invest between 3.6% and 3.8%, and that clearly seems to be going up, not down. I think we're gonna consistently see an increase in the rate of return off the securities portfolio probably for at least a year.
That's easy math, 2% extra on $14 billion-$15 billion.
It's fairly easy.
It looks favorable going forward, let me say.
Correct.
That's great color. One last one, if I could. Given all that you just said, you know, a lot of people are expecting a little higher deposit betas, but it would almost seem like your margin expansion could even be a little higher than it was in the second quarter going forward. Is that a fair assumption you think? Or deposit betas catch up enough that that's not the case?
Well, we do our own modeling, and I'd have to say when we do our modeling, it looks extremely good. Again, I'd always be cautious though because you know, the fly is in the ointment. You never know when something could happen. I mean, just doing the modeling, it looks very favorable for us.
Yeah. Just to add a little bit more color, if you're just looking a big picture of the margin or net interest income, you have to just kind of look at the parts, what we have in our balance sheet. We discussed about bond portfolio being repriced, you know, $2.2 billion getting repriced. Our loan growth will definitely help, especially putting the loans at higher yielding loans that we had it a few months ago. That's going to help. You're right. I think that, you know, deposit rate increase we did in the second quarter, we had very minimal impact on the second quarter. We'll see that the impact of that deposit increase in the third quarter.
Overall, we're going to still see increase in net interest income and margin in the third quarter, but it might be a little bit less than what we saw second quarter just because of the impact of the deposits.
Yeah, I always use the story of the Queen Mary. I hate to keep bringing it up, but it's like trying to turn the Queen Mary around in our parking lot right outside. I mean, where a lot of the other banks saw a real big net interest margin increase as the interest rates went up, they're probably more floating than ours. It takes us a time to turn the ship around. The captain's told me it's going in the right direction and looking really good now.
Okay, that's great color, and congrats on the loan growth.
Thank you.
Our next question will come from Brady Gailey with KBW. You may now go ahead.
Hey, thanks. Good morning, guys.
Good morning.
Good morning.
I just had a big picture question on capital levels. You know, capital just continues to grow quarter after quarter. I mean, absent any sort of M&A that will help deploy that, you know, what do you do with the excess capital? Do you let it just, you know, keep growing? I mean, your deposit payout ratio is still pretty conservative at around 35%. Do you think about more aggressively increasing the dividend? Just how do you think about, you know, this growing pile of excess capital?
The first question is, there will be M&A. Some of that money will be used in that. It's just going to be for the right, you know, for the right thing. Then secondly, I would say that you saw us pick up almost 900 and— I don't have it in front of me— 900-something million shares. I thought that was really showing that we're we felt that our stock was really undervalued, and I think our average price was 67 or something like that. We were real.
Sixty-six.
We were really buying at that. I think that you'll see us if our stock price becomes undervalued again, we'll really jump into there and we'll do that. I think that we've consistently increased our dividends for the I forgot how long, but I don't see it being any different, that you'll probably see some increase in dividends going forward this year. Of course, that's a board of director decision. We intend to continue growing the assets of the bank. I think that you'll use it for the growth of the bank organically and through M&A. You'll probably see increased dividends, and you'll probably see us even buy our stock back if it becomes undervalued.
It's a little of everything.
A little of everything, yeah.
David-
It's a high-class problem, let me say that.
Right. You're right. David, on the M&A comment, you know, it seems like from the banks on their earnings calls this quarter, it seems like M&A dialogue has really slowed here just with, you know, economic uncertainty out there. I know Prosperity's M&A model is sometimes a little different than peers. Would you say you're still, you know, actively engaged in M&A? And is M&A still a possibility for you guys near term?
I would say for us, it's been more active this quarter than probably the previous quarter. I think we've had a pretty active quarter in talking to different banks.
Maybe just update us, you know, size-wise, what targets are you interested in? I know, you know, your top focus is there in the state of Texas, but you know, what other geographies would you potentially be interested in?
Again, I think you said it, we're primarily first focused in the state of Texas and Oklahoma because that's where we're at right now. That would be our first focus. Having said that, we've had some bank from out of state that's really we've talked about, and then we had several banks within the state of Texas also. I think that, again, I mentioned, we'll probably do banks of a smaller size that are within our markets, like if they're in the Dallas, Houston, Austin, wherever we're at, we'll probably look at it. We'll be willing to do a smaller size. If we go to another state, the bank where we go, we wouldn't do it unless we think we could really be in the top five in that state in assets and deposits.
That's just our general rule of thumb.
Yeah. All right. Finally for me, just I know your, you know, the mark to market on your bond portfolio doesn't happen for you guys because all your stuff is held to maturity. You know, what's the unrealized loss up to on that held to maturity portfolio as of quarter end?
Thinking after tax is what it might be, you might want to correct me, about a million, a billion one.
Yes, after tax, I think what we're going to put it in our Q, it's going to show $1.4 billion. That's our.
That's before tax.
That's before tax, yeah.
The tax-deferred asset would be about $1.1 billion.
Yeah, I talked to our treasurer people, and they said that there was so much improvement last few weeks. Yeah, that, I think, $1.4 billion was the highest we got, but it's so much better now. It's close to a billion.
It's probably better because the 10-year comes down. On the other hand, that unrealized loss doesn't bother me. I'd rather the 10-year go up because the future earnings are so much better for the bank than to worry about that aspect of the unrealized. We get our money back in very short term. I think our duration and our whole portfolio is only four years, so we start seeing results in a reasonable period of time. I'd still like to see, even though our portfolio dollars may improve, I still would rather see the 10-year go up, quite frankly.
It's important to say that historically, it's never been a problem. We've never had to sell any securities out of our portfolio. You know, that's the past. The future is.
No
Whatever it is.
I don't have the numbers in front of me, but we got to be the most liquid bank around. I think we have the ability to. The amount of the $2.2 billion that comes off our portfolio, I think it's probably $4 billion or $5 billion of our loans get repriced, and we can borrow $10 billion or $15 billion any day at the Federal Home Loan Bank. Like I said before, we'll be eating beans long before we're unable to have a liquidity issue, I think.
Great. Thanks for the call, guys.
Our next question will come from Brad Milsaps with Piper Sandler. You may now go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Osmonov, I was curious just to follow up on the margin discussion if you might have where sort of spot loan and deposit rates were at June 30 kind of relative to where the average was for the quarter.
If you look at our deposit cost of deposit was 11 basis points end of the quarter, and I mean, the loans were at for loan held for investment was 4.35. If you're looking at just, you know, deposit costs, that did not include the rate increases that we had at the end of the second quarter. If in terms of betas, we were analyzing betas on those rate increases on deposits, it's about 9-10 basis points per 100 basis point Fed increase on non-interest-bearing deposits. If you're looking total deposit, it's at least like 6 basis points or something.
If you look back in 2015 when we had our rate increases on deposits, our beta at that time was 21 basis points that time, and we're doing, what? Nine, 10 basis points this time. We're doing much better than we did back in 2015, 2016, 2017.
Okay, maybe ask differently on the loan side of the equation. Where are you seeing sort of new loan yields coming on the books kind of relative to the average yield?
Our average for the quarter was 4.28%. Typically, in loan committee now, we're seeing loans from just under 5% to maybe 5.75%. There are some outliers. There are a few a little lower than that. There are a few a little higher than that. But basically, it's almost 5% to 5.75%.
Okay. Thank you.
And some of them-
Oh, go ahead.
Some of those are the current loan on variable rate loans and floating loans. They will go up, you know, as rates go up. I'm not talking about just fixed rate loans.
Got it. Then just one more for me. I did notice that you added a small amount of Federal Home Loan Bank advances in the quarter. Was that more just to cover kind of the outflow of public funds, and the plan would be to just pay those off or when the public money starts to flow back into the bank? I assume those are just kind of temporary short-term overnight advances.
I don't know necessarily that that's true. I mean, in the past, again, over the last couple of years, when interest rates were at zero and we couldn't get but maybe 1% on our, you know, our investments, you know, we really didn't do that. If you look before that, we leveraged the bank anywhere between $1 billion-$2 billion, bond advance of the bonds that roll off every year, which, you know, you could make a pretty good spread off of that. We never really did more than what we have coming off our existing portfolio. I think as interest rates stay high, you will probably see us leverage the bank a little bit more probably with the yield that's out there.
Okay. That was my next question. I think Asylbek Osmonov mentioned the bond portfolio is staying relatively flat, but it sounds like if you know if you kind of pursue that strategy, that could be another use of capital, you know, maybe leverage that a little bit to create some spread.
We will.
Mm-hmm.
Yeah, we will.
Okay. Okay, great. Thank you.
Our next question will come from Ebrahim Poonawala with Bank of America. You may now go ahead.
Good morning.
Good morning.
Morning.
I just wanted to follow up on a few things, one on deposits. So, I heard you on the seasonal impact this quarter and maybe a little bit in 3Q. Just outside of seasonality, how do you expect deposit growth to play out as more customers seek higher rates, net one? Talk to us about your assumptions around the mix of moving from non-interest bearing into interest bearing. Where do you see the loan to deposit ratio going from here?
That's a lot of questions. I'll start off, but I mean, basically, organically, our deposits normally grew about 2%-4% every year, excluding the previous two years. The previous two years, everybody had double-digit expansion and organic deposit growth. This year, I think I mentioned earlier, if you exclude the municipal deposits, our deposits were up about 2% year- to- date. You know, normally, I would tell you that we're always gonna have that growth of 2%-4%. It's harder for me to commit. My personal feeling, it's harder to commit right now. There was so much money in the banks that the stimulus programs provided, that people had money in their accounts that they never had before, but they're spending it now.
They weren't spending it, they were saving it. Now they're spending it. If you ask me, my gut is that I think that we'll end up, again, excluding the municipal accounts, I think that your deposits will be. I think they'll probably be at least flat or up to the 4%. I know that sounds crazy because they're down right now, but just looking at year-end, historically, that's what has happened. You'd have to deduct some of this money that's in the people's accounts right now. I think that they're using some of that. Let me say 2%. I'll be conservative. At the end of the year, we'll be up 2% overall from the prior year. That's just my thoughts.
With regard to the loan side, I think that, again, to me, and I think that Tim and Kevin have talked before, but our loan growth, it looked really good. I would tell you, usually, we have a weekly loan committee, and usually, we start at 10:30 A.M. and we're through by 2:30 P.M. or 3:00 P.M. This last week, we started at 9:30 A.M. and got through at 5:30 P.M. or 6:00 P.M. We've had some really busy loan committees. If that stuff really develops, we see good growth. Having said that, we didn't have any growth in the first quarter, so it was flat. I think we're still sticking to the mid-single-digit growth for the year.
I'll just add something from maybe thinking about this from the other side of the fence, in that I was a guy who ran a bank that had a 100% loan-to-deposit ratio without the warehouse and 114 loan-to-deposit ratio with the warehouse. You know, times like that when you're growing your loans it's tough to fund the beast. You have to pay up to get your deposits. We're in the luxury position that with a few other banks with a lower loan-to-deposit ratio where we have extreme flexibility in times like this, whereas at Legacy, I had very little flexibility. If I turned off that loan machine, you're gonna lose your lenders, right? I had to fund that beast every day.
I sleep really well at night, knowing that I'm part of this balance sheet because of the optionality it provides us in times like this.
Yeah, really, if you look at our growth in deposits, what did you say, Kevin earlier? We grew $225 million just-
$255 million in just non-interest-bearing in the quarter.
Non-interest-bearing, right.
You know, that's not too bad in an environment where people are worried about deposit outflows. I think David's right. Some of this. We've been saying all along it would take three-four years for the stimulus money to start moving its way out of the system, and we're there. It's gonna move out of the system, but it's a really good time to be running a lower loan-to-deposit ratio bank because of the flexibility it gives us in having to fight for and build up deposits just to fund the bank.
I think one thing you may see, Ebrahim, is the in the earlier days before interest rates went to zero, banks like us had maybe 20%, 20%+ in their certificates and time deposits, where now we're under 10%. I think you may see some of the money that's really been in just a money market account probably move into the time deposits. Again, I don't know what percentage that is, but it could be some percentage of our deposits. I would say that you'll probably see time deposits increase if these rates stay where they're at or go up.
Got it. That's a lot of helpful color. Thank you. Just one follow-up, David. You mentioned M&A discussions picked up this quarter versus last. What is the biggest hang-up when you talk to potential merger partners or sellers? Is it just the macro uncertainty or is it also the regulatory backdrop which has been more impactful on weighing on larger deals, but which of the two is a bigger factor for potential sellers?
Usually, the hang-up's always money. In fact, I can be a little bit better than that, though. I can say that is always the first issue, but also I think with bigger banks, their bond portfolios have such big losses in them. You know, it's hard for them to recognize that, you know, in a mark-to-market world, when you, a bank goes with you no matter what, even though you get the money back over a period of time, you're losing that money until you can reprice it. It's hard sometimes for them to try to have some flexibility to try to mitigate with you.
If you're dealing with a bank that's really smaller in size, and I'm gonna say a $1 billion-$3 billion bank in size, and they're usually lent up, it's not that big of an issue. It's more of an issue when you're dealing with a bigger bank, really.
Got it. Thank you. I guess you need to loosen the purse strings a little bit, David. Thanks for taking my questions.
You bet, buddy.
Our next question will come from Dave Rochester with Compass Point. You may now go ahead.
Hey, good morning, guys.
Just back on the loan growth guide, for the mid-single digits you guys are looking for. I was just wondering what you're assuming for the structured CRE book as a part of that, how much runoff you're baking in there. Separately, just on the warehouse, I know you talked about moving a client out of the book this quarter. How are you guys feeling about the rest of the book at this point? Where do you see that bottoming out in the current rate environment?
Yeah, I think the warehouse is an easy one for us. Or not necessarily easy, but we feel like that is gonna average $900 million in Q3, off of the average of $1.256 billion in Q2. Down quite a bit. We did let a client or two go this quarter and one of them was a relatively big client. We might be down a little bit more than the average warehouse balance because of that. Call it $900 million average for Q3. The structured CRE book, I mentioned earlier in the loan growth comments that we had a $104 million structured CRE deal pay off at the very end of the quarter. It was $178 million total for the quarter.
that book of business ended the quarter at $507 million. I think we've been talking about for the last couple of quarters that we figured there was about $400-ish million in that book that was sticky.
Mm-hmm.
There's very little runoff left in the book.
Okay, great.
Which should make loan growth a little easier to achieve without the headwinds of that which we've been experiencing now for-
Yeah
Eight, 11.
Yeah.
11 quarters.
Yeah. Good to get that behind you guys. It's good.
It's gonna be a little easier to grow.
Yeah, maybe just one last one, just switching to fee income. Any thoughts on that directionally going forward as you guys are looking at the back half of the year? Then, are you guys at all thinking about tweaking overdrafts, NSF fee policies, anything like that going forward?
You know, we tweaked a little bit. I mean, we did some things like, you know, the maximum that we would charge for the number of overdrafts that you had in any one given day. We also tweaked some stuff that if your overdraft wasn't over $5 or something. Again, they'll have to verify everything I'm saying, but that the bottom line is you wouldn't get it, you wouldn't get an overdraft. We've done some of those things. As far as doing away with overdrafts, I don't see us doing that in the near future.
I mean, the reason I can say that is the number of accounts we're opening and when I'm going into a lobby, sometimes I ask those customers why they're moving to us, and they're actually moving from a bank that's giving over everything away. You know, if we're still getting those customers. Quite frankly, do we want the customers? Do you want a customer that's in the overdraft, but you're not charging for anything for it? I mean, that to me, it doesn't make any sense at all. You know, there may be some reduction later on, not that I see in the foreseeable future, but I think we're good where we're at right now.
Mm-hmm.
Anything else?
Yeah. Just big picture overall non-interest income. If you look at just exclusive some one-off items, I mean, our range around, you know, $35 million-$36 million. I think that's gonna continue. What we see that there's more usage of debit cards and credit cards, that's gonna be beneficial for us. I mean, is there gonna be any significant change in the non-interest income? Probably not. I mean, one opportunity we have is we were discussing, you know, maybe potential selling some mortgage loans. If you look back several quarters, I don't know, six, seven quarters, we would generate $2 million-$2.5 million from sale of mortgage loans, but we haven't done it because we are booking those mortgage. As we start continuing to grow our loans, there's opportunity to sell those loans and make some extra money.
There's opportunities there, but I haven't done that yet. If you look at the opportunities there would be good opportunity on that.
Okay, great. Thanks, guys.
Okay.
Our next question will come from Gary Tenner with D.A. Davidson. You may now go ahead.
Thanks. Good morning.
Good morning.
I wanted to ask about loan portfolio yields. You know, I think in the quarter, purchase accounting adjustments pretty flat and, you know, I appreciate the commentary on, you know, the higher yielding loans now going through committee. In terms of repricing of the existing portfolio, was there any sort of lag to be thinking of that kind of held those yields flat in the second quarter that would, you know, correct itself here in 3Q?
Yeah, mostly floors.
What's the timing of the rate?
Very-
We through effectively floors?
We're through floors, I think, in all cases across the board. There might be one or two stragglers, but we broke through the floors in everything that we've talked about in the past. We had a 1% LIBOR floor for all the warehouse clients, so it took a while to break through that. But we're through all the floors now. The last 75 basis points cracked us moderately through those floors. Whatever happens today, we'll get the full impact of. We're lagging a little bit because the vast majority of the portfolio had a floor in it.
Okay. On the warehouse, and I appreciate the comments, Kevin, in terms of warehouse loans as well. Given the, you know, decline in volumes in warehouse, you know, nationally, has the pricing competition in that business gotten worse than it's been, in terms of, you know, having to make more concessions on pricing? Or did that factor at all into your exiting a couple of those larger relationships?
It was less pricing and more operational. It was our team that came to us saying, "Hey, this customer is just not cooperating with some information that we normally would get. They're a little slow on some things, a little maybe a disconnect on how we would like the back-office operations to work with our back-office operations. So they came to us and said, "We're gonna stop funding for this client." At the time, that client had $177 million outstanding. That's down to $26 million as of last night. At the time, it would've been our single largest client, and they felt uncomfortable, who are we to question them? They're you know.
They got unlimited capacity to say no, they just have limited capacity to say yes. They let that client go. Pricing's still competitive, not as much as I would've thought, but there still is competition. I ran some quick numbers this morning. Let's assume the Fed goes up 75 basis points this afternoon, and our volume's off roughly $300 million quarter-over-quarter. What does that hurt us? We pick up a little bit of that hurt by the extra 75 basis points in spread, so higher weighted average coupon.
If we just remained at a $900 million business versus a $1.257 billion, it would cost us about $5 million a year or $1 million a quarter pre-tax, $1 million after tax, call it a penny.
If you reinvested that money.
Right. We put it in something else.
You put it in something else, you wouldn't see that. In fact, that was the real hard deal for me in the past. You know, we really needed the warehouse loans because, I mean, if you were getting 1.25% on an investment you were buying, you were still getting maybe close to 3% on the warehouse loan.
Yeah.
In today's world, you could probably almost match any rate you're getting on warehouse purchase with an investment.
You're about 40 basis points different. No, I didn't factor in that opportunity to-
Right
Reinvest it.
Right
Look, if the team tells us they're uncomfortable with a client.
Yeah
It's a really good thing. We're all proud of them.
Great color. Thank you.
Our next question will come from Michael Rose with Raymond James. You may now go ahead.
Hey, guys. Most of my questions have been asked and answered. Just, you know, a lot of moving pieces to the balance sheet and rate sensitivity. I think the last disclosure on the +100, +200 was at December 31st, and it was up about 5% and 11% respectively. Do you have an update to those numbers as of June 30? Thanks.
Yeah, I don't have the exact update on it, but I think, you know, the way we're tracking it might be same level, a bit, little bit better.
On what's that, the, uh-
Up 100 on the-
Well, I'd say it's better. It's probably quite a bit better, but it's quite a bit better over a period of time.
Mm-hmm.
Again, it's not gonna happen in three months or six months. I mean, it really looks really good in a year. It looks utterly fantastic in two years. Yeah, Michael, I can get back with you and give those information.
Yeah. It's something we're talking about this afternoon, Michael. You know, one of the factors is those public disclosures are usually parallel shifts, and we're really not experiencing a parallel shift, right? The long end of the curve.
Yeah
Has gone from, I don't know, the 10-year hit maybe 3.6% for a day or two, and we're at 2.75%, 2.76%, today. Or pre-call, I don't know where it's moved in the last 45 minutes. You know, we need to look at more of a twist.
Mm-hmm
Scenario rather than a parallel scenario, to be more realistic.
Balance sheet is shifted differently.
Yeah
To what we had at end of the year.
The parallel shift looks pretty spectacular.
Yeah, I think so. It looks really good. Again, it just takes time. It doesn't happen in half a year or a year. It looks real good. In two years, it looks fantastic.
Totally get it. Thanks for answering my question.
Again, if you have a question, please press star then one. Our next question will come from Jon Arfstrom with RBC Capital Markets. You may now go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Michael Rose just stole my question. He's a really smart guy.
You know, that's like him. Late in the day or late in the call. You know, there's only one thing left to ask, and he got it from you.
He got it. Just a different way to ask it on the Queen Mary comment. By the way, that parking lot is narrow.
Very narrow. Very narrow.
Very narrow. When I look at slide eight, and you have the kind of the core net interest margin there that goes to, you know, it peaks out at 3.30%, 3.35%, and I went way back in my model, and before that it was even higher. David, you just alluded to it, you know, 12 months, 18 months out, it's a lot better.
Right.
It feels like you guys could start punching through some of the highest margins you guys have seen in the last 10 years. Just curious on that.
Yes
We're at mid-3% Fed funds, you know, where could this margin go over the long term?
I would say that you're, you know, you're spot on. You've watched it for so many years. Yes, I think that a year down the road or two years, we would probably be breaking some of our net interest margins, no question about it. That feels good compared to where we were at the lowest. I like it. Even if you use something just moderate, you know, I know some of these you saw back in 2011, 3.98%, 2014, 3.80%. Some of these figures have that voodoo accounting in them too. It'd be interesting, which one takes the voodoo accounting out of it? Does any of them? Which one? The blue? Yeah.
If you take the voodoo accounting out of it, I think even the $3.35, $3.25, $3.30 looks good, but I think you could do better than that, yeah.
Yeah, I agree. If you look at the long term, definitely it will be beneficial.
I don't think you're gonna see 3.98% and 3.80%, but being in around the 3.50% range is definitely possible, I think.
Yeah. Assuming the rates stay the same, you know, you never know because now you're hearing that there might be interest decreases in coming maybe later next year. That could impact too. Based what we see right now, assuming everything stays the same, then definitely we could get to that point.
Yeah. It's hard to keep track with all the movement in the financial news, I guess.
Right.
Mm-hmm. That's helpful. I guess, you alluded to it a little bit earlier, but any changes in the economic outlook that you're seeing and hearing from clients? I mean, obviously, your numbers are very clean, and you've got good growth outlook, but any feedback from clients that maybe is a little less bullish that you've heard recently?
You know, everybody talks about recession, and I wanna be very careful about this. Really, when you look, I always look at what in the state of Texas they have a city sales tax rebate to the cities where usually your city charges if you buy something, they charge you anywhere from 7.5%-10% sales tax. The state gives back the city 2% of that. Anywhere from 2% or so, depending on what you're charging on your sales tax. When I look at that, even in the small town that I live in, and I look at Dallas, Austin, Houston, throughout the state, we're still seeing double-digit growth in sales tax rebates. People are still spending a lot of money.
Having said that, you are seeing our people are saying that we're seeing, you know, our real estate construction loans, the inventory is down a little bit, and people trying to buy houses are down a little bit. I wouldn't call it a recession as much as I would call this normalization. I mean, who wants to live with 20% increases in home sales every year? Who wants to live with 8% and 10% inflation? Who wants to wait five months to get a washer or dryer? I mean, I think really what we're doing, everything that's happening right now is really just coming back to a normalization.
You may wanna call that a recession because it's lower than where it had been, but I think we were living in a really unrealistic world where we were with these zero percent interest rates and the amount of stimulus that was poured into the economy was just, it's unrealistic. I'd like to say that really, I don't see the recession as much as I see more of a normalization. Now, probably my professor would be taking great issue with me right there, but I do think it's more of a normalization more than a recession. That's just my gut feeling.
I would personally say that I'm not aware of any customers that have told us that they are abandoning projects or doing something materially different because they're absolutely convinced there's getting ready to be a big problem. Now, they may be thinking that, but they haven't told us that I'm aware of.
Maybe we're naive, but when I look at our loans, again, I see the consumer maybe pulling back a little bit in the housing market and there. When you look at our commercial loans, they're probably stronger than ever right now.
Certainly as strong. Yes.
Yeah.
Again, job growth fuels a lot of stuff, and we've had a ton of it here in Texas.
I mean, I think that's the thing about Texas. When they talk about recession, that could be maybe more. It's probably more regionalized. In Texas, I have it written down somewhere, the amount of. I think they're anticipating, the Fed's anticipating about 595,000 jobs for this year. I think we're at about 381,000 so far. They'll look at that. The amount of people moving into the state of Texas, the number of companies that are moving into the state of Texas. Maybe when you talk nationally or more regionalized, it's more regionalized. I think Texas and Oklahoma still has a whole lot going for it right now just because of the people moving, the job growth, and everything else that we have.
I don't know if that helps or anything right there.
Yep. No, that helps. That helps. Appreciate it. Thanks for all the color.
This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
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.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.