Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
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Good day and welcome to the Prosperity Bancshares Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note today's 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 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, General Counsel of Prosperity Bancshares. And 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.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now, let me turn the call over to David Zalman.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2023 conference call.
I'm pleased to announce that on May 1, 2023, Prosperity completed the merger with First Bancshares of Texas and its wholly-owned subsidiary, First Capital Bank, headquartered in Midland, Texas. First Capital Bank operated 16 full-service banking offices in 6 different markets in West, North and Central Texas areas including its main office in Midland and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas.
For the second quarter of 2023, Prosperity's net income was impacted by merger-related charges. Excluding those charges, our earnings remained strong but are lower than previous quarters, primarily because of the timing differences and that our cost of funds has increased faster than our earning assets have repriced.
The good news is that based on our models, we show our net interest margin improving in a 12-month and 24-month time period to more normal levels. However, if rates increased more than we anticipate, this could change.
Together with our model projections, our strong capital position, our liquidity, earnings, strong cost controls and sound asset quality, we believe opportunities remain for our continued growth and expansion. I would like to welcome our new associates and thank our current associates for all the hard work and integrity they show every day taking care of our customers.
On a linked quarter basis, net income was $86.9 million for the 3 months ending June 30, 2023, compared with $124.7 million for the 3 months ended March 31, 2023. The change was primarily due to the merger.
Net income per diluted common share was $0.94 for the 3 months ending June 30, 2023, compared with $1.37 for the 3 months ended March 31, 2023. During the second quarter of 2023, Prosperity incurred a merger-related provision for credit losses of $18.5 million and merger-related expenses of $12.9 million. Excluding these charges, earnings per diluted common share was $1.21 for the second quarter of 2023.
Excluding the merger-related provision and expenses net of tax, the annualized returns on average assets and average tangible common equity for the 3 months ended June 30, 2023, were 1.14% and 12.43%.
Prosperity had strong loan growth for the quarter. Loans at June 30, 2023, were $21.6 billion, an increase of $2.3 billion or 12% from $19.3 billion at March 31, 2023 [ph]. Excluding the loans from the First Capital acquisition, loans increased $729 million or 3.7%, 15% annualized. Excluding warehouse purchase program loans and First Capital loans, the organic loans increased 8% annualized.
Our deposits at June 30, 2023 were $27.4 billion, an increase of $376.7 million or 1.4% compared with $27 billion at March 31, 2023. Excluding the deposits from the First Capital acquisition, deposits decreased $1.1 billion during the quarter ended June 30, 2023, compared with the quarter ended March 31, 2023. Historically, we generally experience a decrease in deposits in the second quarter, primarily due to public fund accounts -- using their funds. However, this year, we also saw a decrease in core deposits. However, over the last 3 weeks, the decrease in core deposits has stabilized.
We have not purchased any broker deposits to offset the deposit loss and we do not currently intend to do so. Our bankers, our focus is on building core deposits. Our noninterest-bearing deposits represented 37.9% of our total deposits at period end June 30, 2023.
Our nonperforming assets totaled $62.7 million or 18 basis points of quarterly average interest-earning assets at June 30, 2023 compared with $22 million or 7 basis points of quarterly average interest-earning assets at June 30, 2022 and $24.5 million or 7 basis points of quarterly average interest-earning assets at March 31, 2023. Over $20 million of the increase was due to the acquisition.
In prior transactions, the amount of nonperforming assets that would be reflected as a nonperforming asset was the loan balance, net of the mark. Under the new accounting rules, the full loan balance of all acquired nonperforming assets must be reflected regardless of the amount of the reserve. In this case, we have accrued an approximate 70% reserve for these acquired nonperforming loans. Additionally, there were 2 other loans totaling $14 million placed on nonaccrual status, one of which is under contract for sale.
After the merger adjustments, the allowance for credit losses on loans and off-balance sheet credit exposures was $381.7 million at June 30, 2023 compared with $312 million at March 31, 2023. Further, the allowance for credit losses on loans to total loans, excluding the warehouse purchase program loans increased to 1.68%.
Our merger with Lone Star State Bancshares is pending regulatory approvals and is expected to close during the third quarter of 2023, although delays could occur. We continue to have conversations with other bankers considering opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns and increased regulatory burden, all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value.
Texas and Oklahoma continue to shine as more people and more companies move to the states because of business-friendly political structure and those state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions.
I want to thank everyone involved in our company for helping to make it to 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 3 months ended June 30, 2023, was $236.5 million compared to $248.5 million for the same period in 2022, a decrease of $12 million or 4.8%. Loan and security interest income increased $93.9 million and $7.9 million, respectively, in the second quarter 2023 compared to the second quarter 2022. This was offset by an increase in interest expense of $114.7 million and a decrease in PPP loan fee income of $2.4 million.
During the second quarter of 2023, we recognized $18.5 million of date to accounting provision expense related to the First Capital acquisition. The net interest margin on a tax equivalent basis was 2.73% for the 3 months ended June 30, 2023, compared to 2.97% for the same period in 2022 and 2.93% for the quarter ended March 31, 2023. Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2023, was 2.7% compared to 2.97% for the same period in 2022 and 2.91% for the quarter ended March 31, 2023.
The current quarter net interest margin was impacted by an increase in deposit rates at the end of the first quarter 2023, an increase in borrowings. Noninterest income was $39.7 million for the 3 months ended June 30, 2023 compared to $37.6 million for the same period in 2022 and $38.3 million for the quarter ended March 31, 2023.
Noninterest expense for the 3 months ended June 30, 2023, was $145.9 million compared to $122.9 million for the same period in 2022 and $123 million for the quarter ended March 31, 2023. The linked quarter increase was primarily due to merger-related expenses of $12.9 million and $2 million primarily due to merger-related expenses of $12.9 million and 2 months of First Capital Bank's operation.
For the third quarter 2023, we expect noninterest expense to be in the range of $134 million to $136 million which includes the additional operating expenses from the First Capital acquisition. However, this projection excludes onetime merger-related costs estimated to be around $10 million to $12 million and additional operating expenses from the pending acquisition of Lone Star Bank. Further, the third quarter results will be impacted by date to accounting provision expense related to the expected Lone Star acquisition in the third quarter which is estimated to be $10 million to $13 million.
The efficiency ratio was 53.2% for the 3 months ended June 30, 2023 compared to 43.1% for the same period in 2022 and 43.7% for the 3 months ended March 31, 2023. Excluding merger-related expenses, the efficiency ratio was 48.5% for the 3 months ended June 30, 2023.
The bond portfolio metrics at the 6/30/2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.17 billion.
And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. So Timanus?
Thank you, Asylbek. Our nonperforming assets at quarter end June 30, 2023, totaled $62,727,000 or 29 basis points of loans and other real estate compared to $24,485,000 or 13 basis points at March 31, 2023. This represents a $38,242,000 increase in nonperforming assets, $21,875,000 of which came from First Capital Bank of Texas.
The June 30, 2023, nonperforming asset total was made up of $59,467,000 in loans, $153,000 in repossessed assets and $3,107,000 and other real estate. Of the $62,727,000 in nonperforming assets, $8,294,000 are energy credits; $7,923,000, of which are from First Capital Bank of Texas. Since June 30, 2023, $11,360,000 and nonperforming assets have been removed or under contract to be sold. This represents 18% of the quarter-end nonperforming assets.
Net charge-offs for the 3 months ended June 30, 2023, were $16,065,000 compared to net recoveries of $615,000 for the quarter ended March 31, 2023. $14,976,000 of the net charge-offs were from 1 loan that Legacy Texas Bank had in its portfolio when the bank joined us. $18,540,000 was added to the allowance for credit losses during the quarter ended June 30, 2023. This addition to the allowance resulted from the acquisition of First Capital Bank of Texas.
The average monthly new loan production for the quarter ended June 30, 2023, was $565 million, up from $436 million from the prior quarter for a 30% increase. Loans outstanding at June 30, 2023, were approximately $21.654 billion compared to $19.334 billion at March 31, 2023. This is a 12% increase on a linked-quarter basis.
The June 30, 2023 loan total is made up of 41% fixed rate loans, 29% floating rate and 30% variable rate.
I will now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Rocco, can you please assist us with questions?
[Operator Instructions] Today's first question comes from Michael Rose at Raymond James.
Maybe we could just start on the core margin decline and what the expectations could be? And then, Asylbek, if you can give us some color on what you expect the accretion to be with the First Capital deal going forward and then what the other deal will add in terms of accretable yield as we move forward.
Yes. If you look at -- talking about margin, this quarter, we were down 20 basis points but it was the impact of several things as we discussed in the announced increase in deposit rate that we announced in our call during the first quarter earnings call. Impact that had full impact in the second quarter and we had a little bit of more borrowing than we had in the first quarter. So those 2 items impacted our margin because as we stated in the comments, Mr. Zalman said, for our assets, it takes time to reprice. It takes time to reprice the -- our loan portfolio in securities.
As you saw in our security, we -- average yield on security was 2.07% on average, our loans were 5.48%. So as we -- time passes and those reprice and right now related to specific security, we're not buying any security, that's why the yield is staying the same. We're using that cash flow. We have about $2.2 billion cash flow from the security with either using towards putting on the loans or paying down on borrowings, depending how it is.
And the second quarter, we had a strong loan growth that which we use that funds towards loan growth. But if you just look at it, Michael, from the -- if we can reprice our security we're generating 207 [ph] right now and putting our new loans, we're getting about 8%. I mean, that's an almost 6% spread that would help us. But again, it's taking a time. And as we mentioned, if you look at 12 months, 24 months or 36 months, those really look good. But near term, yes, we did have some compression on the NIM. I know I kind of talk big picture but that's how we see our balance sheet structure.
Yes, Mike. I mean, it's -- I've always referred to we're like the Queen Mary in here. It just takes time. And our models have been pretty good. Our models we've used for the last 30 years, 35 years and they've always been, I think, very close and very spot on in. What our models show is that in 12-month time frame, our net interest margin hits and around the 3% range, maybe a little bit better than that. And then in a 24-month time range, we go back to the 3.30%, 3.40% net interest margin. But again, it just takes time and that's just the situation that we're in right now and that's just the amount of time it takes to reprice our assets.
The accretable yield for the -- on the -- we expect about $3 million from the First Capital Bank on quarterly basis.
Okay. That's helpful. And then just following up on the bond rate pricing [ph]. I totally understand that. But what about on the loan side? I think if I look at your call reports, I think, if I remember correctly, like 12% of the loans are expected to reprice in the next year. Can you just give us a sense for if that's correct and then what the yield on the nearer-term maturities kind of are and assuming they would reprice somewhere where current yields are, I would expect that you would see some pick up there. I think it would just be helpful if you could provide some greater color there.
I'll let somebody jump in. But your 12% number seems low to me.
I mean the straight off maturities as opposed to.
Okay. Because our average life in our portfolio is about 3 years. So that seems low. But are -- all new loans we're putting on are certainly somewhere between 7.75 to 8.5, I think, Tim mentioned the other day, we had one at 9% but somewhere in that range, I think.
That's correct. The basic run on that is about on the low end, 7.75 up to 8.5.
Right. And if you look at our cash flow, we analyze our annual cash flow. So within the next 12 months, we're going to get about $5 billion, either paying down, paying off a maturity of the loans. And I think our call report shows $6 billion but there was some including loans that's going to be -- have variable rate. But the $5 billion for the next 12 months should reprice an average rate you asked, when we calculate it was very close to what our rates showing our margin is about 550 [ph].
Okay, so some potential upside there. Okay, great. And then, maybe just finally for me. The loan growth has been pretty good. I know you guys have talked about previously being a kind of -- not a vendors last resort but certainly given some of the other competitors have slowed down a little bit because they're full in terms of loan-to-deposit ratio, things like that. It seems like that is good. Any sense for kind of pipeline is just a healthier markets? And then, Kevin, if you could just provide some comments on the warehouse just given you've had 2 competitors kind of exit the space and looks like the average balances were a little bit higher than what you guided to.
Sure, let me do the warehouse first, Michael. There have been a couple of competitors who have exited the space. And I think first reaction might be they would scramble to get capacity elsewhere. But with the shrinkage of the overall business, there haven't been many requests for increases where we had common clients. There might have been 1 or 2 but not to the extent you might otherwise think. I think the increase in volume which was nice for the quarter, I think we had indicated we thought on average, the warehouse might run 800 to 850 [ph] for the quarter. It ran almost 900, ran 899. So it was a little better than we thought but that I would say that's more seasonal.
May was okay. June was really good. April was pretty soft. And I would expect going forward, July has been pretty good. So far to give you an idea through last night, we've averaged $1.62 billion in the warehouse. So July has been pretty good to us. I suspect August will also be pretty good. And then September tends to weaken up a little bit with people returning to school and coming back off of vacations and things moderate down a little bit. So for Q3, Michael, I'm going to say -- on average, $950 million to $1 billion. So we're running $1.62 billion right now. I think net-net; we might give a little bit of that back. And on the top side, maybe average $1 billion for the quarter. So that covers the warehouse. And Dave, you want me to take loan growth?
Loan growth has been strong. If we go back to January when we talked about what we expected for the year, we said high single-digits and we've been running high single-digits for the first 6 months. But we caution that if we elected to begin selling mortgages in the secondary market rather than holding them, that number would go down. We have made a decision. In fact, we made the decision probably a month ago. Maybe a little longer than a month ago to position ourselves to start selling some mortgages in the secondary market and take the gain on sales. And that's strictly just the right.
They're coming on the books at versus the gain on sale. We think the gain on sale is a better proposition for us now and we've got other uses for the cash, even if that's paying down borrowings either way, it's good for the organization. That takes a while to put in place. And I'd say where we sit today is probably 30% of our origination volume is available to be sold. So we're packaging that up and we'll begin the sales process. We had to get back in front of all our secondary market participants and let them know we were back and regrease those skids.
So as a result of that decision, I think loan growth will moderate a little bit for the remainder of the year. We'll feel some of that impact probably in the latter stages of Q3 and the full effect of it in Q4 as we prepare to sell more of those mortgages that we originate. So going forward, maybe second half of the year, what we said in January was if we did that, we might grow at 5%, 6% kind of mid-single digits versus high. So I think that's probably a safe number for the second half of the year.
I would add the rest of the loan portfolio, in other words, other than warehouse and mortgage, it's really interesting to see how reasonably steady the demand has been. What has fallen off seems to be the very large expensive real estate projects. They're not quite what they were. But the rest of the loan market seems to be reasonably steady in spite of higher interest rates and talk about recessions, etcetera. And I guess we attribute that to the economy in Texas and Oklahoma which are 2 economies that David has mentioned have maintained their steady growth. So, so far, we see loan growth being pretty dug on decent.
And our next question today comes from Peter Winter at D.A. Davidson.
I just want to follow up on Michael's question about the loans maturing over the next 12 months, if we exclude the floating rate book; just do you have a sense how much actually will mature in the next 12 months in the fixed rate book and what those yields are?
Yes. I think when we looked at it -- we looked it in general, when I said the $5 billion is going to be maturing in the next 12 months and I think more than half kind of first 6 months and later. And the rate like when we calculate the rate was 5.5%, 5.6% average on those. And I know that we have -- we mentioned about 41% fixed mortgages. So I think I would say around 41% would be fixed that's going to be maturing next 12 months. I don't have any specifics but we can get back with you on the specific on that fix.
Okay. And it's likely that the Fed will increase rates today and then on hold. What's the outlook for the margin in the second half of the year? And do you see that you'll need to do another kind of deposit rate increase?
We've talked about on how increasing rates, right. Right now, probably the highest that we pay on our money market account unless it's -- there's always some bigger customers have a negotiated type of deal. But for the most part, we pay 3% and that's if you have over $250,000.
The rest of our CD rates are pretty low. I think that we have come up with the CD special rate for 7%. That's -- I'm sorry, 7 months, that's 5%. So we do have that. You would think that a lot of money would have flown into that account. I think it's probably about $1 billion. I would have thought that more money would have gone into that. But our cost of funds right now, our total cost of funds when you add everything into it and that's Federal Home Loan Bank borrowings, Federal Reserve borrowings, interest on deposits is 1.55%. And when you look at just our total deposits, our cost of funds are 0.94%. And when you look at just the interest on deposits, not including the Federal Home Loan Bank and not including the noninterest-bearing deposits, it's 1.51%.
So our cost of funds are extremely long. We have a good core business, I think, I heard also back in [indiscernible] a while ago about 85% of our business is consumer and accounts but probably on a percentage basis of deposits also that company.
About 53% of the dollar-wise is -- and then consumer and 47% commercial.
But the commercial represents about 15% of our accounts yes, only 47% of the deal. So our mix of money is good core. We haven't chased the money. I mean, it could have been very easy for us to increase like some of the other banks, $1 billion or $2 billion by going out and buying broker deposits this quarter. We didn't do that. Our true intent is to try to pay down Federal Home Loan Bank to a certain amount. We talked about a while ago reducing maybe the amount of home loans that we're keeping on our books and selling. So it's our goal to really reduce some of the higher cost money. And our real focus is deposits and that is to go out where the last 2 years, all we really hammered in everybody's mind was loans, loans, loans. We're hammering right now our deposits, deposits, deposits. So as this thing turns around, our goal is really to reduce some of our borrowings and to really go after core deposits.
It's a long answer around a question. Are you going to raise rates with the 25 basis points increase? And I guess the answer is right now, we probably just would be watching it. I didn't say we wouldn't. But we feel like our deposits have stabilized over the last 3 weeks. We don't see much change; $100 million may be lower at the end of the week and $100 million, $150 million gain at the beginning of the week. So we really don't see a whole lot of changes. So really, a lot of it just depends as long as our deposits stabilize, that's where we're at. We've never really run after higher cost money. I think it's hard once you do to get out of it. So we really don't want to jump into that. So that's kind of our story.
And just based on that, the outlook for the margin in the second half of the year?
I looked at the model and I looked at 12 months, I can probably pull my notes out and see what it does in 6 months. In 12 months, we do know that it does go more toward a 3% net interest margin. I'd have to look and see in the 6 months what it is.
Yes. And the other thing is kind of hard to answer specifically; we have the Lone -- pending Lone Star acquisition coming in with their loans. So that's going to impact, too. But like I -- we were saying in 12 months, definitely up, I would say, 6 months, flat and maybe half but it all depends on Lone Star as well. And Peter, I know you asked me about the fixed versus variable Feds [ph] on my information. So we have a little bit more than 50% of fixed kind of reprice out of $5 billion fixed rate loans. It's right about 50%, a little bit.
Over the next 12 months?
Yes. But out of $5 billion that we said that the cash flowing.
I found some numbers, Peter, on the 6 months. Our 6-month projection is to go to around -- again, this probably isn't exactly accurate because of the -- because this is flat. That's no growth in deposits or I mean, no growth in loans, deposits or anything like that. This is just straight. It's about a 2.86 in 6 months.
And that's not including Lone Star.
No, that's I'd say 2.86%, 2.90% and Lone Star should improve and help us a little bit.
And our next question today comes from Dave Rochester with Compass Point.
Just to make sure I heard you right. So it's 2.86% in 6 months from now, that includes the rate hike but no Lone Star. Is that right?
Let me see if that includes the rate hike. I think it does.
It does not include Lone Star.
It doesn't include Lone Star but it does include the rate hike.
It does. Okay, just one hike and no cuts or anything like that. That's the only change in Fed funds?
Or 6 months is we're projecting the prime to be 8.5%.
We don't know if it cuts for at least the next 6 months.
Got you. And then so this time next year or maybe 3Q of next year, back half of next year, you're thinking 3% plus on the margin. Is that right?
We are. Yes, we are.
Great. Appreciate that. On expenses real quick. I appreciate all the guidance there. I was first wondering if you thought that 3Q range, the $1.34 million to $1.36 million [ph] was good for 4Q as well ex-Lone Star deal? And then what are you guys expecting for the size of that Lone Star expense base that you're going to bring in?
So on the $1.34 million to $1.36 million [ph]; I think that's a good run rate because we're going to have full 3 months of First Capital Bank in it. And if you look at -- I think that's going to stay the same for the fourth quarter. I mean it might change a little bit but I think that's going to be the same guidance for the fourth quarter. On the first -- I'm sorry, on Lone Star, I know we're going to have onetime expenses. But I think the Lone Star brings additional on the quarterly basis around -- I think, between $7 million to $10 million quarterly expenses before we get some savings.
Okay. Great. And then just one on capital. How are you guys thinking about the buyback here at the current stock price which is a little bit higher than where you were buying this past quarter? And then just given your thoughts on M&A and growth going forward, are you thinking this 2Q pace for buybacks is more what you would expect? Or could you accelerate that just given you've got a whole lot of excess capital here?
Yes. Well, we have to. You saw we have for the last 2 quarters above back how many about 1 million in 1,200,000 shares. So we definitely think the stock is too cheap. At the same time, we're always focused on, we wanted to increase dividends and we still want to do some mergers and acquisitions. So I think a lot of it depends on our activity and M&A. If we don't do the M&A, you'll probably see more of the probably the buybacks if you're seeing M&A that may not be as much.
Okay. And then maybe just on M&A. What do you guys see in terms of conversation levels or activity in the market at this point? I know some folks see purchase accounting mark is a big headwind. You guys list a lot of reasons why banks are going to want to combine. Was curious, what's the opportunity set you're looking at right now? And how active is -- are those banks in conversations and whatnot that you're seeing?
I think M&A activities increased significantly.
And our next question today comes from Brady Gailey with KBW.
I just wanted to ask about credit quality. We saw some noise there in the quarter but all the numbers are still very low. I know a lot of the noise related to acquisitions and your previously acquired loans as well. But when you take a step back and look at credit quality for Prosperity. Are there any concerning trends? Or are you guys still pretty confident on where you stand with credit quality?
I would say we're confident. Most of what deterioration you've seen is a result of loans that joined us. And there may be a bit more of that to go. Not an overwhelming total by any means but there might be a bit more. We've actually been a little bit surprised how well the quality has held up, once again, given the higher interest rates and the earning pressure that puts on borrowers. But we sit as steady right now. We don't see really any red flags.
Yes. Brady, this is Kevin. The loss we took was on a legacy deal. The former structured CRE portfolio that you're pretty familiar with. It was an office building located here in Dallas, a $32 million loan that lost several tenants, a couple within the quarter and we move to foreclose and sell that loan in a hurry, figuring the first loss is the best loss. We ran a process and settled on a buyer that paid $17 million for it. So it was a $15 million loss. That structured CRE portfolio which was at one point above $2 billion in total is now down to $305.7 million. So it's come down materially. The amount of office exposure left out of that portfolio is $126.3 million. So it's not much left in terms of office exposure and the remaining office exposure that we do have is all current and paying. So at this point, it seems like an outlier. That doesn't mean something can't go wrong somewhere. But if I was to just say, if somebody said, where do you think the risk is in this $40 billion balance sheet, I'd look right into that $126.3 million worth of former legacy structured CRE portfolio. Even though it's still performing well, Class B office is not a great place to be. Fortunately, we've worked it down to the $126 million but outside of that and that portfolio is still doing just fine today but I think that's where the risk lies.
I think what Kevin has said is really accurate. And I also say that again, this loan never even hit the past due sheet or...
It's never past due.
Never past due or even on our deal. And I think that probably some other banks would have taken it and held out and maybe tried to sell it over a year or 2 years. And we're just not like that. We took it. We sold it, we got what we thought we could get for it and we usually try to get all of our nonaccrual or nonperforming off of the books, just like the -- we saw a $62 million in nonperforming this time increased significantly. Over $20 million came from first Capital and we intend to get that off. But the other 2 loans of the $18 million that we talked about probably we already have a contract on a deal that's going to take out most of that. The majority of the 2/3 of that, we already have a contract on that. So we sell it and get out of it. And by the way, there won't be that kind of loss -- just [indiscernible] said but we did have a...
Nowhere near that kind of loss. Yes. As David said, this was an intra-quarter event. This went from losing enough tenants to us for closing and us running a process and getting it moved off the books in -- within a 90-day period of time -- inside of the 90-day period of time.
All right, that's helpful. And then Lone Star has been a pending regulatory approval for a while. I think in the press release, you all talk about hoping to close that this quarter in 3Q. What's been the holdup with getting regulatory approval for that deal?
Up until this point, it really had been held up at the Department of Justice. Primarily, it was based on a -- on one of the banking centers or branch banks that they felt like that we -- they didn't know if they were going to let us keep or not. This was really a branch bank in a town of 9,000. So we thought that for the longest time. And we finally got it 2 weeks ago or a week ago, finally got clearance on that that the DOJ let us go through with it. And so really, from that point was at the FDIC, our contacts with the FDIC, we felt that we really would get it done in just a few days. It's taken longer than that because now most everything, even of the size of it and the small size of it, it still has to go to Washington. I don't know, maybe they were dealing with the PacWest deal last night and the week before, I don't know. But we're really hoping to get it. We should get it. We don't know of anything that light shouldn't be, let me say that.
And our next question comes from Manan Gosalia with Morgan Stanley.
I apologize if I missed it but can you talk about what your models assume for terminal deposit beta as well as the mix of NIB deposits?
Yes. Our beta for the interest-bearing deposit is 36 basis points. That's what we use in the model. And -- but if you look at our deposit over this interest rate cycle on interest-bearing deposit was 27 basis points. So we're running below the model what we have for the deposit -- interest-bearing deposit betas.
Got it. And the NIB mix?
I think it's the same.
I don't think we show a decrease in it probably on the model on. It's just flat where it is. In fact, really, our noninterest-bearing as a percentage of deposits is really going up or hasn't it?
Yes. Compared to the first quarter, yes, it went up to 37.9%.
So actually, our noninterest-bearing has really held up better than most of our other accounts.
All right. Perfect. And then maybe just to approach some of the prior questions in a different way. On deposit betas, I think you've always had a significantly lower deposit beta than your peers and maybe you can talk about if rates stay higher for longer, what do you think about your ability to keep that spread relative to your peers? Or as rates stay higher for longer and loan growth continues, do you see that spread compressing?
I don't think so. I mean this -- we've been pretty consistent. If anything, our model is really after 12 months or after 24 months or so, really some crazy stuff. Some really high net interest margins, I would say, if that becomes true, we may give more of that back to the customer. And so it's just -- but basically, from what we're seeing in the time horizon of 12 and 24 months, I pretty much think we are where we are.
Yes. I mean other way of saying it as we reprice our loans and reprice -- especially reprice our loan portfolio at $13 billion, generating 2.07%, that would help us from the assets -- interest-earning assets. So we could increase the -- our cost of deposit but save the margin, protect the margin. It's just this timing issue for us. And as we improve on the asset side, we could give a little bit on the deposit side but still protect the margin. We need a Fed pause.
Got it. Got it. Makes sense. And maybe last question. Just as we think about the securities book. Should we think about that yield remaining flat as you repurpose those securities into loans? Or as more of the back book sort of runs off at a lower rate, should we still see that weighted average rate on those securities rise in the coming quarters?
Yes. I think if you look at security, we're not buying any new securities. So we're not repricing those securities to higher yield. All what we've discussed. So we're using that cash flow, first of all, getting higher-yielding loans or if we have any fund available, we're going to be paying down. Both of them very accretive to the net income and the margin from our standpoint. So from the rate on the security, I don't think it's going to be significant change what we see right now.
All the repricing when you look at what our yield is on securities and look at what our yield is in loans and you look at what the yield -- what we're getting today, you can see how significant that is. It just takes us time to turn the ship around a little bit.
Yes. I mean the spread we're getting on every dollar we get from the security on the loans we're getting 5%, 6% spread on if we put on new loans.
But you could just pay your federal home loan by [indiscernible] getting it over 3%, right? Yes.
3.5%.
And our next question comes from Brandon King at Truist.
So. Yes, could you give us some commentary on what you're seeing in regards to prepayments in your CRE book? It seems like with this interest rate environment, is the interest rate environment, though average LIFO loans could be extended just given the dynamics around that.
Well, I think that's right. We're not seeing excessive prepayments on loans.
Yes. I think what we'll continue to see is multifamily deals that stabilize because the inversion of the curve can go out to the agencies and get a lower -- longer-term fixed rate loan than they might have had from our floating rate perspective. So we'll continue to see some pay down there. But Tim is absolutely right as we look across the entire book, it's a slowdown of the more traditional kind of deals. These big multifamily deals have an option to go out and lock up nonrecourse debt off the inverted curve.
Correct.
I still think once all these rates quit rising, it always comes back around. There always becomes competition and everybody starts trying to undercatch you and trying to get better rates from different -- maybe even nonbanks. And so I think you'll see that in the future as rates stabilize and maybe even consider coming down next year or year. I don't think rates are going to go down what Eric -- but as much as everybody else thinks are going to go down. I think rates are going to stay higher for longer. However, there's always that competition and things always turn around. It's just -- that's just the way it is.
Got it. And do you think that potentially limits the benefit of the fixed rate repricing just given how we have the contractual maturities in place but obviously, you assume a certain weighted average life for those loans. But I think that dynamic could kind of limit that benefit at least over the next year?
Now the maturities are still the maturities, it's an opportunity for a rate increase.
I think so, yes.
Okay. Okay. And then going back to the NIM guidance, I believe you said 2.86 to 2.90 [ph] in 6 months, what are you assuming as far as paying down borrowings within that math?
I think in the our guidance -- is our borrowing stays flat in our model.
Okay. So no benefit there is current what you're thinking about it right?
Yes.
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for 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.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.