Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
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Good day and welcome to the Prosperity Bancshares First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 2023 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks.
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Eddie Safady, our Vice Chairman is under the weather and unable to join us today.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions provided by our call moderator.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now, let me turn the call over to David Zalman.
Thank you, Charlotte, and good morning, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality and earnings, as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010.
We have twice been ranked number one, ranked number two in 2021 and ranked number six for 2023. It is a testament to Prosperity's performance, culture, vision and consistency and distinguishes us among most banks. I congratulate and thank all our customers, associates and directors for helping us achieve this honor.
On a linked quarter basis, the net income was $124 million for the three months ended March 31, 2023 compared with $122 million for the same period in 2022. The net income per diluted common share was $1.37 for the three months ended March 31, 2023 compared with $1.33 for the three months ended March 31, 2022. For the three months ended March 31, 2023, the annualized return on average assets were 1.31%. The annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%.
Loans on a linked quarter -- linked quarter loans excluding warehouse purchase program loans increased $436 million or 2.4%, 9.6% annualized from $18.1 billion at December 31, 2022. Excluding warehouse purchase program loans, loans at March 31, 2023 were $18.5 billion compared with $16.7 billion at March 31, 2022, an increase of $1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue while rates remain at their current levels or increase.
Deposits at March 31, 2023 were $27 billion, a decrease of $1.5 billion or 5.4% from $28.5 billion at December 31, 2022. Deposits decreased $4.1 billion or 13% compared with deposits of $31.1 billion at March 31, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were in interest-bearing transaction accounts at low rates because there was no yield to be found. As rates increase, public funds started investing their money in state funds such as text pool to obtain higher rates.
Of the deposit decrease in the first quarter $959 million or 63% of the $1.5 billion decrease occurred prior to March 10. Historically, prior to the pandemic in 2017 and in 2018 and 2019, our deposits decreased seasonally in January, an average of 2.2%. We also saw $236 million of deposits flow into our wealth management grew.
As we all are aware the market was flooded with excess phones in the last few years during the COVID-19 pandemic. And most people kept their money primarily in checking and low interest-bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant.
When we look at pre-COVID deposits at March 31st, 2020, we had $23.8 billion in deposits. And at March 31st, 2023, we have $27 billion in deposits. This represents a compounded annual growth rate of 4.3% annually.
Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So, we are still averaging deposits on the high end of our historical growth rate.
Our average deposit account was $34,000 at March 31st, 2023 and $36,000 at December 31st, 2022. Our uninsured and pledged deposits are 29.9% of our total deposits. We currently have $11.3 billion of liquidity available to draw on which represents approximately $4 billion in excess of our uninsured and pledged deposits.
With regards to net interest margin while most banks have experienced some of their best net interest margins recently, because of our large bond portfolio, our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better than 36 months.
Our average net interest margin from 2012 to 2022 and was 3.37% compared with our current net interest margin of 2.93% as of March 31st, 2023. Our asset quality remains sound.
Year-over-year non-performing assets decreased 9.9%. Non-performing assets totaled $24.5 million at March 31, 2023 compared with $27.5 million at December 31st, 2022 and $27.2 million at March 31, 2022.
Texas and Oklahoma continue to do well. Texas population increased by 470,000 in 2022 continuing a steady uptick. From 2002 and to 2022, the state gained over 9 million residents, more than any other state and almost 3 million more than Florida, the next largest gaming state.
Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 headquartered companies. Texas now has more Fortune 500 companies than any other state including New York and California. Despite the higher rates and a possible slower economy going forward, we believe the Texas and Oklahoma economies should outperform most other states.
With regard to acquisitions as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bancshares of Texas Inc. and expect that transaction will be effective on May 1st, 2023.
Our acquisition of Lone Star State Bancshares is pending regulatory approvals and is expected to close during the second quarter of 2023 although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities, although the conversations have slowed given the recent bank failures and the decline in stock prices.
Overall, I want to thank all our associates for helping create the success, we have we've had a strong team. 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 31, 2023 was $243.5 million compared to $239.9 million for the same period in 2022, an increase of $3.5 million, or 1.5%.
Loan and secured interest income increased $54.1 million and $18.2 million respectively in the first quarter. Additionally, Fed funds interest income increased $6.2 million. This was partially offset by increase in interest expense of $74.9 million. Net interest income increased $3.5 million despite having $7.9 million less in combined PPP loan fee income and fair value loan income.
The net interest margin on a tax equivalent basis was 2.93% for the three months ended March 31, 2023 compared to 2.88% for the same period in 2022, and 3.05% for the quarter ended December 31, 2022.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2023 was 2.91% compared to 2.81% for the same period in 2022, and 3.04% for the quarter ended December 31, 2022. The current quarter net interest margin was impacted by $3 billion of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3 billion additional cash was funded through FHLB borrowings.
Further at the end of the first quarter, we increased rates on deposits. We expect the full impact of those increases in the second quarter. Non-interest income was $38.3 million for the three months ended March 31, 2023 compared to $35.1 million for the same period in 2022, and $37.7 million for the quarter ended December 31, 2022.
Non-interest expense for the three months ended March 31, 2023 was $123 million compared to $119.9 million for the same period in 2022 and $119.2 million for the quarter ended December 31, 2022. The linked-quarter increase was partially attributed to the higher FDIC assessment rate.
For the second quarter of 2023, we expect non-interest expense to be in the range of $123 million to $125 million. The expected increase is based on the annual merit increases in the second quarter 2023. This projection excludes both, the impact from one-time merger-related costs, which we estimate to be around $26 million to $28 million, and additional noninterest expense from our pending acquisitions.
Additionally second quarter results will be impacted by day two accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition-related provision expense is $28 million to $31 million. The efficiency ratio was 43.7% for the three months ended March 31, 2023 compared to 43.7% for the same period in 2022 and 40.9% for the three months ended December 31, 2022. The bond portfolio metrics at 3/31 2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion.
And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus?
Thank you, Asylbek. Our nonperforming assets at quarter end March 31, 2023 totaled $24,485,000 or 13 basis points of loans and other real estate compared to $27,494,000 or 15 basis points at December 31, 2022. This represents approximately an 11% decrease and nonperforming assets. The March 31, 2023 nonperforming assets total was comprised of $22,496,000 in loans, $0 in repossessed assets and $1,989,000 in other real estate.
Of the $24,485,000 in nonperforming assets at quarter end, only $217,000 are energy credits. Since March 31, 2023, $328,000 in other real estate have been removed from the nonperforming assets. This represents 1.34% and of the nonperforming assets. Net charge-offs for the three months ended March 31, 2023 were negative $615,000, compared to net charge-offs of $603,000 for the quarter ended December 31, 2022. In other words, for the first quarter of 2023, our recoveries exceeded charge-offs by $615,000.
No dollars were added to the allowance for credit losses during the quarter ended March 31, 2023, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2023 and was $436 million. Loans outstanding at March 31, 2023 were approximately $19.334 billion compared to $18.840 billion at December 31, 2022. This is a 2.62% increase on a linked-quarter basis. The March 31, 2023 loan total is made up of 43% fixed rate loans, 29% floating rate loans and 28% variable rate loans.
Charlotte, I will now turn it over to you.
Thank you, Tim. At this time, we are prepared to answer your questions. Asnave, can you please assist us with questions? We'll start the questions in just a minute.
Are we showing that we're attached?
Yes, sir.
Bad timing. We're working to get the questions started. We apologize for the delay.
Can you hear me now?
Yes.
I apologize. We will start the question-and-answer session [Operator Instructions] The first question comes from Brady Gailey with KBW. Please go ahead.
You guys can hear me right?
Yes.
Good morning.
Thank God, we were wondering.
So I know Asylbek mentioned that you moved deposit rates up near the end of the quarter. I was just wondering the magnitude of that. And I hear your comments on longer term, there's opportunity for the margin to expand. How do you expect the margin to trend in the near-term?
I'll give you an answer on the interest bearing deposits how we – based on the projection of the new rate increases on deposit will bump up our interest-bearing deposit rate from 110 what we have to about 140 to 145. So that's going to be a little headwind but what – if you look at short term on margin, I think it's very hard to pinpoint just because of the two acquisition upcoming in the second quarter.
We're going to bring their loans and their bond portfolio both of them are going to be repriced at the market rate, that's going to be a tailwind for us on that standpoint. So that will be hard to pinpoint specifically for the near-term but the information I gave you should give you some information on the Q2.
Okay. And the $3 billion of FHLB, which turned into cash on your balance sheet, I know that's pretty earnings neutral but how long will those balances stay on the balance sheet?
So we started about the middle of the 13th or 14th of March and stayed almost through end of the month.
Okay. So it's gone now?
Yes they were gone by end of the quarter before the end of the quarter.
All right. That's helpful. And then I'm just curious I know the unrealized loss in your held-to-maturity bond bucket has been going down over the last couple of quarters? I imagine it went down this quarter. What is that amount of after-tax unrealized losses in the held-to-maturity bond book?
So if you look at it 331 million that net of tax was about $1.1 billion that's decreased from $1.3 billion we had at the end of the year. So we have $200 million decrease in after-tax.
All right. And then, finally, for me, anything specific holding up this Lone Star approval?
I think, we're just waiting on the regulatory approval right now. It's just waiting from them.
Yes, it's nothing specific. They've been busy lightly as you know.
I can imagine, yes. Thank you for the color, guys.
Yes. But we're hoping to get it done in the second quarter.
Yes.
Thank you. And our next question today comes from Peter Winter at D.A. Davidson. Please, go ahead.
Yes. Good morning. I was wondering, could you talk about the outlook for deposit trends for here and deposit betas beyond the second quarter?
I can address the betas specifically. So if you look at -- I'll give you the cumulative beta that we had through 3/31. If you look at over 12 months, the cumulative beta on deposit was about 12 basis points. With the recent increases on the deposit rate that I mentioned in my speech, it's going to go up to about 16 to 17 basis points on cumulative betas.
Yes. Peter, I think, as far as trend, I still don't know if everything is -- our deals look like they have stabilized. You have -- but you still have money that's in the system that's probably still looking for higher rates. So I think in the long run -- if you ask me in the long run, things will stabilize and I think you will eventually go back to a point where our bank historically grew 2% to 4% organically every year.
And I think that, in our budgeting what we're looking for, once things stabilize and you don't read in the social media or on the headlines in CNBC or FOX that, I think that that's kind of what we're hoping to go back to, is eventually as a, call it, somewhere in between, call it 3%. But anyway, historically it's always been 2% to 4%.
And I think that will happen. I don't know that that's going to happen this month or next month. I am hoping though that after five or six months the things calm down, I'm hoping that's when we'll get back to.
Okay. And are we -- if the Fed were to stop raising rates in May, are we at a level where you're almost done raising deposit costs, or just given where the beta is being lower than peers, there's still some pressure on deposit costs?
I think that we're -- we did raise them, what I think is the market. I mean, when you can get 3% on a money market account with a larger deposit, that's pretty good. You may -- it may still go up 0.25 point from there or so. But based on where the Fed is right now and them going up 0.25 or 50 basis points, I don't see much more than that there.
I will say that, probably, as our deposits -- as our deposits, probably, our bonds and everything reprices and when we look at our models, we really see a very strong net interest margins going forward. And so, I think the model look stronger than I think they really are. So I think that, what I would suggest is that, as our money reprices, we may, just from a customer standpoint, pay more to that and maybe not show the real strong.
When you look at the models they're extremely strong. And I know in a real world that doesn't happen. I mean, our net interest margin, as I mentioned earlier, in the call earlier, was that our average has been about 3.37%, but we've been as high as 3.80% and we've been as low as where we are today.
So I still think somewhere in between for a bank like ours.
We didn't -- where a number of the other banks went out and purchased brokered CDs. We didn't. Again, I don't know anybody -- I mean I think that's everybody they need to do what they need to do. I didn't -- I've never really put a lot of money. I never put a lot of faith in the brokered CDs. In fact, when we look at purchasing a bank, I usually just ex all those brokered CDs and there will give any credit for that.
So again, it doesn't mean that we won't be there one day, but that's not something that we participate with. And I don't really want to be -- we took the position that we may lose some money. We may not be as big as we always were. It's going to take us time to maybe get back to that point, excluding the acquisitions that helped us of course. But we wanted to remain profitable over that period of time and make sure that what we're looking at are truly core relationships and core deposits. And that's kind of where we're at today. Long story, I just want to give you some color.
Yes. Just to add on, I think on the modeling side of it, I think what we're excited our model shows very good in 24, 36 months. And our model has a beta of 36%. Right now we're running our actual betas on our deposits less than that model show. So that looks optimistic.
I think it all boils down to our company. I think we have a great company. It's strong. So looking forward, I think we're in a better position than most of our peers simply, because of the net interest margin that we see going forward. So I think that if you're a longer-term player and you can see where we're going to be in a year or two years, that's what we're focusing on is more the longer term really.
Got it. And just one last question. You had very solid loan growth, loans held for investment this quarter. Is that level sustainable just given the economic backdrop, because Tim did mention the average monthly loan production, which was down a fair amount relative to the fourth quarter?
Yes, this is Kevin. I think at year-end, our January call, we said mid to high-single-digits and we hit the high-single-digits portion in Q1. I think we all see a little weakness in loan demand and we've experienced that for the last couple of months. And what's really aiding or the tailwind the loan growth is a much reduced level of loan payoffs. So I think we see asset durations extending a bit.
If our typical asset duration in real estate was three years, it might be 3.5 and it may go out to four, before this is all said and done. So, the loan growth is a little different for the last three years as we -- as the legacy portfolio was running off, we kept talking about well, we got the headwinds of the runoff. We have the opposite effect now.
I think the whole industry has the opposite effect the lower payoffs still some loan originations clearly but slower payoffs. So I think we're still good at mid-single-digits to high-single-digits. I'll reiterate again what we said in January that if we choose to start selling off mortgage loans rather than portfolio on those, we'll be at the lower end of that versus the higher end.
Yes. And I also want to say with the caveat that now that a lot of the banks that have such high loan-to-deposit ratios, they really cut back on the loans that they're doing. And we've always said in a time, in harder times, those are the kind of customers that we'll probably get and go after so we can get better terms and conditions. So that's also helping us at the same time right now. We don't really want to turn those customers away. So, that this is really kind of a time where we really perform well.
That's correct. We're actually already starting to see that. We've been able to make some loans to what we believe are very good credits that historically we might not have been able to lend to not because of credit reasons, but because of a very significant competition that really just price the loans down to the point that you couldn't hardly make any money off of them and you couldn't get any equity in the project or the collateral that you were dealing with. That is changing right now. More and more banks are out of the market and are pulling out of the market. So our opportunities seem to be increasing somewhat. And you have to recognize that we do have loans that got booked that have not funded up yet. So the actual loans outstanding will probably continue to grow just simply from funding loans that we have already booked that are in progress so to speak.
Got it. Thanks very much.
The next question we have will come from Brad Milsaps of Piper Sandler.
Good morning.
Good morning Brad.
Thanks for taking my question. Just curious David, how much of the public funds that exited this quarter? Do you expect to come back? And then kind of as a follow-up to that would you expect to utilize some of those funds to pay down to the extent they do come back some of the three or so billion in borrowings you had outstanding at the end of the quarter?
The $2 billion that we lost last year I don't really see those funds coming back. Those were really investment funds and unless we're willing to pay a textbook rate of $4.80 or something like that. I don't really see those coming back. You will see you will see public funds go down throughout this quarter and next quarter. But you will by the end of the year you will see public funds to come up. And I would say that could be $300 million to $500 million…
Yeah. Between $400 million to $600 million.
$400 million to $600 million probably.
Okay. So in the interim you mentioned you weren't going to go the brokered CD route. You might just rely more on just cash flows from your bond book or adding some additional Federal Home Loan Bank advances?
Yeah. I mean, I don't want us to continue to borrow money from the Federal Home Loan Bank. I mean, I guess I look at it this way I ask myself we had $3.5 billion in borrowing at the Federal Home Loan Bank at the end of the quarter. And so in my mind I ask myself how do you -- if you wanted to get out of that, how do you ever get out of that? And in my mind we have $2.2 billion in bond roll off a year. And we also are going to have about $434 million of liquidity from the banks that are joining us First Capital and Lone Star.
So in my mind if you use just those two, it takes us about 15 or 16 months that we would be out of the Federal Home Loan Bank completely. Again, unless we lose more deposits were temporary that changes every day. But if everything were stagnant at March that you could get out of 15 to 16 months. I will say though for the most of the time we always do have some portion borrowed at the Federal Loan Bank and probably always will even in a normal time, we would probably have anywhere from $1 billion to $2 billion and we leverage that. But not when the yield curve is inverted like it is. But when it's not we usually leverage that. And so that would get us out of that.
So then the next question would be, okay, so where are you going to get your money to fund at least 5% for your loans if you're going to use all that money for their Federal Home Loan Bank. And my point is really -- I hope, I said this, historically, we always have grown 2% to 4%, and I guess use like a 3% number where we're at with 3%. That's still going to get us around $800 million to $1 billion in additional money here and I think that's the money we would use for the growth in the loans. I hope I didn't make that too complicated, but that's always in the back of my mind I'm thinking about that myself.
I think it's good to point out that the bulk of the money we had borrowed from the Federal Home Loan Bank was not really, because we needed it. It's because we felt like it was prudent to have on hand given what was taking place in the overall market. We didn't know whether somebody was going to come in the next two minutes and want to pull all their money out as quickly as things were changing.
You're referring to the additional $3 billion?
The $3 billion, yes, I don't think we were talking about that. I was saying…
I was talking about the core -- the kind of the core FHLB that you have which if that pushed through.
As it turns out we didn't really need it, but we felt like it was prudent to have it on hand for a while there.
Yes. My comments were all relating to the borrowing.
Yes. Yes that was my question. Yes, thanks for clear that up David. And then finally for me, I think when you guys announced the two deals together, I think you had something in there 2023 estimated earnings from the combination with 75% cost savings of somewhere around $77 million. Obviously, a lot has changed. Would you mind giving us an update on kind of what you think the banks can contribute to the extent that it has changed? Just kind of wanted to get a sense of kind of contribution from those two organizations once they become a part of Prosperity?
Yes. I think on the cost saves what we announced that we're going to have a combined 25% cost saves on theirs. I think that stays as is and we're pretty optimistic about it. You're right the timing has shifted. The 75% was based on the Q1 acquisition the estimated acquisition. Now since the timing shifted to one First Capital being May 1 and we're hoping Lone Star being sometime in the second quarter. So it's timing-wise on savings it does shift a little bit. But on the 25% cost save overall we expect in the long run that stays as is.
Right. And I think also like you estimated something $77 million of contribution. Does it make sense just given what's happened to haircut that to some degree? And if so would you -- could you give us any color on maybe kind of how much to think about?
Yes, the day one onetime costs and plus the day two provision expense that's going to happen immediately after the merger of the banks. But I did say that they're going to bring in operational expense as they merge. I would expect probably after merger maybe within not maybe the first quarter, but the second quarter right after the acquisition we should utilize the savings.
I think he's after the revenue income side.
Yes, yes. Exactly Kevin. Okay.
Just trying to interpret there for you, Brad.
It’s probably have, right?
Well, I think -- I don't think there's been really a significant change in the profiles of these two banks. It makes people think it might have occurred. The party is not over yet so to speak. So we have to look at it day by day, week by week. But their balance sheets haven't been altered significantly and their P&Ls haven't been altered significantly so far.
Yes, so far. And I think what the estimates we had on other loan markups and all that stays the same. I didn't think there was a significant change. That should bring in the income that we expected. I don't think there was a significant shift in their estimate.
It's just the delay, Brad. That's really the only thing.
Understood. Thank you. Appreciate you guys.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hi. Good morning, guys. Thanks for taking my questions. Kevin, I would be remiss if I didn't ask about the warehouse. This quarter's average volume was a little bit higher than which is kind of contemplated 90 days ago. Just wanted to get any, sort of, thoughts as we kind of move forward just given the dynamics out there? Thanks.
Yes. Thank you, Michael. You're right. I think, we said in January we thought we'd average $550 million to $600 million for the quarter. I will tell you in February I was thinking it was not even going to get the $550 million and was worried about it, but we ended up average in $618 million because it truly rallied from in the last 45 days of the quarter ending up at $799 million almost $800 million at quarter end. I'm going to go with $800 million to $850 million for the quarter Michael. I think it's -- we're averaging right now about $770 million through the first 26 days of the quarter 25 days of the quarter. And I think it will pick up from there. So if I had to pick a number $825 million.
Okay. That's very, very helpful. Just one minor question for Asylbek. The other non-interest income was up a couple of million by almost $3 million. Just wanted to see if there was anything specific that was in there and if anything will come out from a run rate perspective? Thanks.
Yes, we had some one-off items. The annual incentives and one-off income that we have and some of them comes annually, some of them was just one time. So it wasn't anything in particular.
Okay. So maybe a few million bucks in one-timers?
Yes.
Okay. Maybe just finally for me. Just given where the capital ratio is I mean you guys have lots of capital, you're doing two deals as we kind of go through this and just wanted to get a sense for buyback from here. You guys did buy back a little bit of shares. I assume you pause when everything started to happen, but just given more capital I just wanted to get your appetite just given where the stock is? And then just wanted to get a sense from an acquisition point of view. I know you said conversations that maybe slowed down a little bit but just wanted to see if you look at any of the banks that have failed or maybe some stress situations if they'd be of interest to you? Thanks.
First -- this is David, I'll address the capital issue. As you know we've always -- again we've always used our capital really to try to increase dividends and really use in the M&A game. And then we use the rest of the money if we use the money extra we felt the stock was really disproportionate. I don't think that any of that's going to change as far as the dividends go. I mean that's first and foremost that seems like our directors really like that.
Acquisitions we'll continue to do that. I don't see that stopping. As far as buying a stock or a lot of our own stock a lot of it. I think some of that's going to depend on regulations or regulatory bodies if they ever say anything. So instead of making a commitment that we're going to just continue to buy and buy. I don't want to do that. I think in a stressful more stressful time like this I think we have to look at from the regulatory bodies what they're going to say about it.
But my general overall feeling is that we still make good money. We still have -- we pay the dividends and we still have quite a bit left.
So, I think that and as your HTM loss goes the other way over the year to two in the long run -- I guess in the long run, I would say, I don't see it changing a whole lot unless regulatory agencies come in and say you shouldn't be doing that or something like that.
Okay. Thanks guys.
The next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning everyone. Wanted to ask on the fee income side. The other bucket obviously had a little bit of noise this quarter. I was just curious Asylbek was there anything that you would call out that would be nonrecurring, or can you give us maybe some color on the other income bucket and how you think that might play out from here?
Yes. I think -- yes, we had one-off items. If I would have to tell that I would say a couple of million dollars was a one-off item that did not come in or that came in and the rest of them will be more continued repetitive from that bucket.
Okay. And then could you give any update on the cash flow on the securities portfolio, what you might have maturing in the next quarter or two?
I mean our cash flow is $2.2 billion. So, if you -- the projections I mean if you take it at the quarter, I mean we expect about what $550 million or so a quarter.
Yes, I don't think that's changed. I mean we're around $2.2 billion.
Okay, great. And then just lastly some of the more conservative banks seem like it might be an opportunity for them to maybe take share through this situation. But it seems like some of the conservative players have said no we're going to we're going to wait and see how maybe this plays out.
I'm just curious David or Kevin this environment as you see it. Is this an opportunity to maybe take share, or do you just stick to your guns and get more conservative? Have you increased your underwriting standards at all or change them? Any thoughts on that?
I think we will take share without having to change our underwriting standards. Brett there's enough pencils down banks that are loaned up fully loaned up 90%, 100%, 100%-plus loan-to-deposit ratio and they are generally speaking their pencils down or maybe a deal pays off they can do a new deal but if they're not active.
And I think as Tim said a little earlier we're seeing opportunities from really good clients that we historically would not have banked because either the structure was too loose or the pricing was too low. Those clients are now coming to us and we're able to get our structure and our pricing on those transactions.
So, I think this -- for us this is no different than any other time during stress. We tend to do well. We tend to have liquidity and have the money to a loan. So, I think on the loan side we're in a position to take market share as we want.
Yes, I'd have to say in my long time in banking even when I sit in loan committee and I see what's being asked down on some of these projects -- commercial projects, I've never seen that in my career that you could get that much down and people would still do it. And I think it's just because they're just -- as the deposits have flowed out of a lot of these midsized banks they just -- they don't have -- they just don't have the deposits to fund that fund it. So I think we will have opportunities. And this is the time that we should and this is the time we actually look forward to.
Yeah. Brett, it's not uncommon for us today to get 50% to 55% equity upfront on a multifamily yield. And all those dollars go in before we fund $1. And as David said a long time since we've seen that kind of equity. But we're asking for it and we're generally getting it.
And it's real equity.
That's real hard dollar equity.
It's the cost not -- it's real based on cost.
That's pretty low for the multifamily market. Appreciate the color guys.
The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.
Hi. Thanks for taking my question. I wanted to ask about NIM going into next quarter. You noted that the portfolios that you're acquiring will have an impact on NIM. Presumably there will be a tailwind because you're acquiring them at end market price. Any thoughts on what the NIM can get to next quarter with the acquisitions? Would you be able to go over 3% in the next quarter?
I think it will be hard to specifically point out because we still have to go through the merger process and evaluation. But we're excited about the two acquisition because of cash they're bringing and us ability to reprice their bond portfolio and their mortgage portfolio. So I mean I cannot give you specific guidance, especially because of the fair value income that we have to calculate and that getting amortized based on the duration of loans or the life of the loans. So -- but I mean -- but we're optimistic where we stand on it.
I think you could say that once we get both closed and in our bank that should help the net interest margin I would say that.
Yeah, that's for sure.
That's helpful. And then maybe on the loan yields in the core business in the current business, you noted that you have acquired newer customers presumably at better pricing. You have a fixed rate portfolio as well that should reprice higher. So in the event that the Fed stays higher for longer how should we think about your loan yields over the course of the next year or so?
Well, our models show that if interest rates stay higher or even go up, we still perform better from an income standpoint and a net interest margin.
Yeah. If you just look at our NIM calculation because our bond portfolio is generating right now 524 and we're putting new loans that Kevin handles right now. If you just take it and if it stays rate stays for the next 12, 24 months in this rate, you can see there's upside of 200 basis points on loans. I mean that's…
Our models are usually really good and they're correct. And I think that basically, if rates don't do anything we still do substantially better and improvement in net interest margin over 12, 24 and 36 I mean substantial -- and if interest rates go up, our models show that we even do better than that. I think if they go down if interest rates go down, it probably takes a little bit away from.
Yeah, because of the composition of our loan portfolio.
I think if interest rates went down and forgot 100 basis points or so. I don't think that they will. But if they did that doesn't give us a positive effect, but still in 100. We still have a substantial increase in our NIM over time.
Did you say over what time frame that 200 basis points can come in?
I think that your net interest margin looks a lot better in 12 months. It looks better in real good in 24 months and fantastic in 36 months.
Got it. All right. And if I can just round out that discussion, how should we think about the efficiency ratio given what you said on NIM and loan growth and the merit increases coming up?
So I think efficiency ratio, if you just look at the long term it will take us time to -- once we have two banks merger with us realize the cost savings. But in the long run, I think we're going to be back to our normal 42%, 43%, 44% efficiency ratio in the long term.
Great. Thanks so much.
The next question comes from Evan [ph] Poonawala with Bank of America. Please go ahead.
Hey, good morning. I just following up --
Evan, did you change your name?
Hey. This is Ebrahim Poonawala Bank of America.
I thought it was Evan. I thought you changed it.
Yes, she did say Evan. You're not wrong David. You're right. I let it flying.
Sorry about that.
I guess I can't pass off with Evan.
That's not a bad idea. You got to change it. It's easier to pronounce Evan.
So a question around the NIM. One, you talk about and sorry if I missed it around the core -- ex the acquisitions do you see the NIM going drifting higher from here when we think about 2Q and rest of the year from the 293 this quarter?
Yeah. I mean, as we talked about in the long term it's very positive. I think in the short term the headwind we have on the Internet deposit a little bit it will be a little bit maybe down, but that's on the Prosperity Bank itself without acquisition. But with the two acquisitions looks really good with adding two banks to our balance sheet.
Understood.
It helps. It still -- it helps us in the short run to that in the long term it really helps us. We're talking about very short period. Without it - it wouldn't look as good your love it.
And just on that point David, I think you mentioned multiple times around -- on the last question, if rates go down 100 or 200 basis points when you think about when it can look good or I think you said fantastic over the next two to three years are you -- is it the Fed funds that matters more than the two to five year part of the curve? Just remind us we could see a scenario where the Fed funds drops maybe over the next year or two, but the value of the curve remains where it is. So, if you can talk to where the sensitivity might be most?
Ours is just repricing. It's just -- I mean you've got your bond portfolio is repricing $2.2 billion a year. Our loans reprice or roll off historically it's been one-third about $6 billion. So just between those two, you have about $8 billion or $9 billion changing in pricing in a year's time those two.
Got it. And one last question. When you think about more big picture in terms of the economic outlook, you mentioned some of these other banks that are tight on loan-to-deposit ratios et cetera, pulling back it's good for prosperity. But overall, like do you see that adding to accelerating our pace of going into a recession? Like, how do you think about just the macro outlook as you think about the next six to 12 months?
Well, I'd say it does pull back. But again, when I look at the Texas economy and I guess I think Texas may be more regional perspective compared to the rest of the economy. I don't see a hard recession. I don't. That's just me. I think you may see a slowdown. But when you look at people, the customers are still spending money out there housing. They're still buying housing. Some of the markets even in house. Some markets have gone down a little bit in value, but still people still needing houses. You have people moving into the state. I mean I think Texas is probably in a pretty good position. I don't see a really hard recession. I don't. I may be wrong. And I don't have anything in the back of my name to say, I know what I'm saying, but just my gut feeling just my gut feeling is. The bank -- the way it was going it was just overblown everything was overblown. I still think things need to slow down a little bit more quite frankly, so that the Fed doesn't raise rates. But my gut feeling is that the Fed will raise rates again in May by at least 0.25 point. But then I think they probably will hold off. But again for the most part, you don't see things just crashing I don't see that. I don't -- not yet. I mean I think things still look pretty good. And people are still buying.
Got it. Thank you, very much.
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 has now concluded. Thank you for attending today's presentation. You may all now disconnect.