Prosperity Bancshares Inc (PB) 2022 Q2 法說會逐字稿

Good morning and welcome to the Prosperity Bancshares Second Quarter 2020 Earnings Conference Call. (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 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. 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; 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 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 our 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 (sic) [$128.5 million] for the 3 months ended June 30, 2022. That's compared with $122 million for the 3 months ended March 31, '22, an increase of $6.2 million or 5%. Our net income per diluted common share was $1.40 for the 3 months ended June 30, 22 compared with $1.33 for the 3 months ended March 2022. Our annualized return on average assets for the 3 months ended June 30, 2022 were 1.36% and the annualized return on average tangible common equity for the 3 months ending June 30, 2022, again, was 15.7%.

With regard to loans, 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, 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 like 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 nonperforming 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 nonperforming 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, and 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, 3x its annual average annual 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 3 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 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 3 months ended June 30, 2022 compared to 3.11% for the same period in 2021 and 2.88% for the quarter ended March 31, 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 30, 2022, was 2.97% compared to 2.96% for the same period in 2021 and 2.81% for the quarter ended March 31, 2022.

Noninterest income was $37.6 million for the 3 months ended June 30, 2022 compared to $35.6 million for the same period in 2021 and $35.1 million for the quarter ended March 31, 2022. Noninterest expense for the 3 months ended June 30, 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 31, 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 of 2022, we expect noninterest expense to be in the range of $120 million to $122 million. The efficiency ratio was 43.1% for the 3 months ended June 30, 2022 compared to 41% for the same period in 2021 and 43.7% for the 3 months ended March 31, 2022.

During the second quarter of 2022, we recognized $59,000 in fair value loan income. As of June 30, 2022, the remaining discount balance is $7.7 million. Due to low remaining discount balance, we estimate the accretion income for the next few quarters to be around $1 million. Also during the second quarter of 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.

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 June 30, 2022, totaled $22.187 million or 12 basis points of loans and other real estate compared to $27.184 million or 15 basis points at March 31, 2022. This represents approximately an 18% decrease in nonperforming assets on a linked-quarter basis. The June 30, 2022, nonperforming 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 million in nonperforming assets, only $669,000 are energy credits. Net charge-offs for the 3 months ended June 30, 2022 were $1.204 million compared to $1.217 for the quarter ended March 31, 2022. No dollars were added to the allowance for credit losses during the quarter ended June 30, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended June 30, 2022, was $674 million.

Loans outstanding at June 30, 2022, were approximately $18.2 billion, which includes $27.6 million in PPP loans. The June 30, 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?

(Operator Instructions) Our first question will come from Jennifer Demba with Truist Securities.

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 going to 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 nonperforming and $300 million in reserves. So that's about a 14x coverage. So that may be better than anybody in the industry, maybe. So I don't see unless we see something dramatically changed in the immediate future, really increasing that really.

I would say that obviously, we have to make some hopefully reasonable projections about economic issues going forward. And there's a lot of talk about recessionary activity, maybe that will come to pass, maybe it won't. But 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. But 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.

Yes, I think some people could say. Other people might take the position if you have too much in there. But again, not knowing what's on the horizon and I feel comfortable where we're at, very comfortable where we're at.

Yes. 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. So I don't envision any big change one way or the other anytime soon.

Kevin, do you have any thoughts on it or you...

No, I was going to say we went from concerns about COVID, the concerns about recession. We factored in at the end of the quarter, the possibility of a recession and recessionary impacts on our portfolio in deriving the overall number, which is a little over $300 million and 1%, which is 1.67, 1.670. So any recessionary impact that we have contemplated has been baked into the model at the end of the quarter.

Okay. And my second question is on loan growth. Can you just talk about your outlines and what you're seeing now. And what you think is possible for '22, excluding and including the mortgage warehouse?

Well, let me start off. This quarter ended June 30, was the best quarter in terms of 3 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 '21 was $621 million. And it culminated with a very good number for the month of June, we did over $824 million in the month of June, just that 1 month. So 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. So I think there's a good chance we're going to see excellent loan growth going forward.

Yes, 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. And 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. And going into the last week of the quarter, we were up over $500 million or in that neighborhood, and we got gosh, I think 2 or 3 days before quarter end, $104 million structured CRE deal paid off, paid off early, and we got a nice prepayment fee out of that thing. But -- and we still ended up with pretty good loan growth. This quarter started off better. We hadn't started off in a big hole, and we're tracking along pretty fine.

I would say we would -- as a company, we're probably going to stick with for the year, the 5% mid-single-digit kind of 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 if we had high expectations of them. So we're feeling pretty good about loan growth achieving that mid-single digits for the year.

Our next question will come from Brett Rabatin with Hovde Group.

Can you just talk about deposits? And you mentioned the municipal deposits being some of the source of the decline linked quarter. I was hoping you could just talk about 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?

Correct. This is David. If you've 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 mentioned in my -- if you read, we -- 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 in usually the summertime toward the third quarter is the lowest that they had. So 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 or $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. But when rates have been so low, they had kept not only their operating accounts, more of their investment accounts with us. So 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 or $600 million go not just to the use of funds, but because they could get better investments. But -- again, I think this is a seasonality type of deal, combined with the amount of investment funds or what we normally didn't have. We usually just have their operating accounts.

And really, when you look at it, when you look at our deposits, overall, less the municipal deposits or the -- basically, I think our deposits year-to-date have really grown a little over 2%. So 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 want to 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.

Except for the last previous 2 years, when rates were just -- we were just covered up with deposits from stimulus money.

Well, that's right. And as low as our rates were during that period of time, they were still better than what commercial rates were outside of banking. So 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. So 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 deposit and all that. Again, if you pulled out the last 2 years went back, you would see that this is really -- a really normal occurrence really for us.

Nothing I want to look at the -- but I mean stripping out our deposit franchise, the nonpublic fund side of things, we did pretty darn well. So this was isolated to the public fund side, I think just in non-interest-bearing demand deposits alone that grew $255 million for the quarter. So that the annualized linked quarter to 9.5%. So I think not that public funds is a core competency of ours, but our nonpublic fund deposits are holding up really well.

Okay. That's great color. I figured a lot was just seasonality from taxes and whatnot, but I just wanted to do a little bit of understanding on that. And then secondly, it looks like you did that a little bit to the securities portfolio this quarter. I was just curious on the bond portfolio ads, 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 I was just hoping for a little more color on that.

I'll start off, but somebody else will probably jump in. But again, obviously, what we're getting on securities is much better than we were 3 or 4 months ago. I mean, I think right now, we -- probably a quarter before and the quarter before that, we are probably on our investment securities is probably getting about 1.25% today when we're buying something. I think a week ago, 2 weeks ago was probably 3.8% then. I think right now it's probably dropped in to 3.6%. I saw something we bought yesterday before something at 3.7%. So that's kind of the yield that we're getting right now. And so much better and I think that we'll continue. Asylbek?

Yes. I'd 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 yield. But as you look at our bond portfolio in 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 reprice those at what we just discussed, 3.6% or 3.7%. So it's going to be very beneficial for us from the debt standpoint. .

On the second part of your question, I think you asked about the premium amortization is slowing down, and we can see it. So 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 is going to come down a little bit more. We're estimating to be around $10.5 million assuming the balances of the bond portfolio as is. And I think the plan right now to keep the bond portfolio balance what we saw in the second quarter.

And Asylbek, I would add to that, that our average rate for this prior quarter on the securities portfolio was 1.72%. And 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. So I think we're going to consistently see an increase in the rate of return of the securities portfolio, probably for at least a year.

That's the easy math, 2% extra, $14 billion, $15 billion.

It's fairly...

It really -- 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, 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 would have to say when we do our modeling, it looks extremely good. Again, I'd always be cautious because the supplies in the -- you never know when something could happen, but I mean just doing the modeling, it looks very favorable for us.

Yes. And just to add a little bit more color. If you're just looking at a big picture of the margin or net interest income, you have to just kind of look at the parts that we have in our balance sheet. So we discussed about bond portfolio being repriced $2.2 billion getting repriced. And our loan growth will definitely help, especially putting the loans at higher yielding loans that we had a few months ago. That's going to help. But you're right, I think that the deposit rate increase we did in the second quarter, we had very minimal impact on the second quarter, but we'll see the impact of the deposit increase in the third quarter. But overall, if we're looking at -- 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 we saw second quarter just because of the impact of the deposits.

Yes. I always use the story of the Queen Mary. I hate to keep bringing it up, and it's like trying to turn a 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, probably more floating than ours. It takes us a time to turn the ship around but the captain told me it's going in the right direction and looking really good.

Congrats on the loan growth.

Our next question will come from Brady Gailey with KBW.

I just had a big picture question on capital levels. Capital just continues to grow quarter after quarter. So I mean absent any sort of M&A that will help deploy that. What do you do with the excess capital? Do you let it just 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 this growing pile of excess capital?

The first question is, there will be M&A. We will -- some of that money will be used in that. It's just going to be for the right thing. And then secondly, I would say that you saw us pick up almost 900 -- I don't have it in front of me, 900-and-something million shares. So I thought that was really showing that we felt that our stock were really undervalued and I think our average price was 67 or something like that. So we were really buying that. So I think that you'll see us if our price -- if our stock price becomes undervalued, again, we'll really jump into there, and we'll do that.

And 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 important to record decision. And we intend to continue growing the assets for the bank. So 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, yes. And it's a high-class problem, let me say that.

Right, right. And David, on the M&A comment, it seems like from the banks on their earnings calls this quarter, it seems like M&A dialogue has really slowed here just with economic uncertainty out there. I know Prosperity's M&A model is sometimes a little different than peers. Would you say you're still 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.

And maybe just update us size-wise, what targets are you interested in? And I know your top focus is there in the state of Texas. But 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. And that would be our first focus. Having said that, we've had some banks from out of state that's really we've talked about. And then we had several banks within the state of Texas also. But 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 Dallas, Houston, Austin wherever we're at, we'll probably look at it, we'll be willing just 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 5, and that's in assets and deposits. So that's just our general rule of thumb.

Right. And then finally for me, just -- I know you're the mark-to-market on your bond portfolio doesn't happen for you guys. I guess all your stuff is held to maturity. What's the unrealized loss up to on that held-to-maturity portfolio as of quarter end.

Thinking after taxes is what -- you might want to correct me about $1.1 billion.

Yes, so I think what we're going to put it in our -- here it's going to show $1.4 billion, that our...

That's before tax.

That's before tax.

The tax deferred asset would be about $1.1 billion.

Yes. So -- but I talked to our treasure of people, and they said that there was so much improvement in the last few weeks. So -- yes. That I think $1.4 billion was the highest we got, but it's so much better now, call $1 billion.

It's probably better because the 10 years come down. On the other hand, that unrealized loss got a bow rather a 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 -- our whole portfolio is only 4 years. So we start seeing results in a reasonable period of time. So I'd still like to see, even though our portfolio dollars may improve. I'd still rather see the 10-year go up quite frankly.

And 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. That's the past. the future is...

Now, 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 probably $4 billion or $5 billion of our loans get repriced and we can borrow $10 billion or $15 billion in a day at Federal Home Loan buy. So like I said before, we'll be eating beans before we're unable to have a liquidity issue going forward.

Our next question will come from Brad Milsaps with Piper Sandler.

Also, 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?

So if you look at the -- I mean, if you look at our deposit, cost of deposits was 11 basis points ended for the quarter and the loans were at -- for loans held for investment was $435 million. So if you're looking at just the deposit costs, that did not include the rate increases that we had at the end of the second quarter.

In terms of betas, we were analyzing betas on those rate increases on deposits. It's about 9 to 10 basis points or 100 basis points on Fed increase on noninterest-bearing deposits. But if you look in total deposits at least like 6 basis points or something. But if you look at back in 2015, when we had our rate increases on deposits, our beta on that time was 21 basis points that time. And we're doing about 9, 10 basis points this time. So we're doing much better than we did back in '15 and '16, '17.

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%. And typically, in loan committee now, we're seeing loans from just under 5% to maybe 5.75%. There's some outliers. There are a few a little lower than that or a few a little higher than that. But basically, it's almost 5% to 5.75%.

Some of those are the current loan on variable rate loans and floating loans. So they will go up as rates go up. I'm not talking about just fixed rate loans.

Got it. And 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 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, but that's true. I mean -- in the past, again, over the last couple of years when interest rates were at 0, and we couldn't get that 81% on our investments. We really didn't do that. But if you look before that, we leverage the bank anywhere between $1 billion to $2 billion bond advance of the bonds that roll off every year, which you can make a pretty good spread off of that. We never really did more than what we have coming up our existing portfolio. But 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. So I think also Dave mentioned the bond portfolio is staying relatively flat, but it sounds like if you kind of pursue that strategy, that could be another use of capital, maybe leverage that a little bit to create some spread.

And we will. Yes, we will.

Our next question will come from Ebrahim Poonawala with Bank of America.

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. But just outside of seasonality, how do you expect deposit growth to play out as more customers seek higher rates? Net-net, one, talk to us about your assumptions around the mix of moving from noninterest-bearing into interest-bearing. And where do you see the loan-to-deposit ratio going from here?

That's a lot of questions. I'll start off that I mean -- basically, organically, our deposits normally grew about 2% to 4% every year, excluding the previous 2 years. So the previous 2 years, everybody had double-digit expansion in organic deposit growth. This year, I think I mentioned earlier, if you exclude the municipal deposits, our deposits were up about 3% year-to-date.

Normally, I would tell you that we're always going to have that growth of 2% to 4%. It's harder for me to commit my personal feelings. 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 would be -- I think they'll probably be at least flat or up 2% to 4%. I know that sounds crazy because they're down right now. But just looking at year-end, historically, that's what that's happened. But you 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.

So let me say 2%, I'll be conservative next -- at the end of the year, we'll be up 2% overall from the prior year. That's just my -- that's 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. And I would tell you, we were -- usually we have a weekly loan committee and usually, we started at 10:30, and we're through by 2:30 or 3:00. This last week, we started at 9:30 and got through at 5:30 or 6:00. So we've had some really busy long committees. If that stuff really develops, we see some really good -- we see good growth. Having said that, we didn't have any growth in the first quarter. So it was flat. So I think we're still sticking to the mid-single-digit growth for the year. So...

I'll just add something from maybe thinking about this from the other side of the fence. 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. And times like that when you're growing your loans are -- it's tough to fund the beast. You have to pay up to get your deposits. We are in the luxury position 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 going to lose your lenders. So I had to fund that base every day. I sleep really well at night knowing that I'm part of this balance sheet because the optionality it provides us in times like this.

Yes. Really, if you look at the -- if you look at our growth in deposits, what do you say Kevin, earlier, we grew $225 million...

$255 million in just noninterest borrowings.

Noninterest borrowing.

So that's not too bad in an environment where people are worried about deposits and outflows. But I think David is right. Some of this -- we've been saying all along, it would take 3 to 4 years for the stimulus money to start moving its way out of the system, and we're there. And it's going to 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, Brian, is the -- in the earlier days before interest rates went to 0, banks like us had maybe 20%, 20% plus and 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 to probably move into the time deposits. And again, I don't know what percentage that is, but it could be some percentage of our deposits. And I would say that, that you'll probably see time deposits to increase if the rates stay where they're at or go up.

Got it. That's a lot of helpful color. And just one follow-up, David. You mentioned M&A discussions picked up this quarter versus last, what is the big sign 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 2 is a bigger factor for potential sellers?

Easy to hang up is always money. I can be a little bit better than that. So 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. And it's hard for them to recognize that in a mark-to-market world, when you take a -- bank goes with 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. And it's hard sometimes for them to try to have some flexibility to try to mitigate with. If you're dealing with the bank, that's really smaller in size, and I'm going to say $1 billion to $3 billion bank in size. And they're usually lent up. It's not that big of an issue. More of an issue when you're dealing with a bigger bank really.

Our next question will come from Dave Rochester with Compass Point.

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?

And then 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?

Yes. I think the warehouse is an easy one for us, not necessarily easy, but we feel like that is going to average $900 million in Q3, off of an average of $1.256 billion in Q2. So down quite a bit. We did let a client or 2 go this quarter and one of them was a relatively big client, so we might be down a little bit more than the average warehouse bear because of that. But call it, $900 million average for Q3.

The structured CRE book, I mentioned earlier in the loan growth comments that we had $104 million structured CRE deal pay off at the very end of the quarter. It was $178 million total for the quarter. So that book of business ended the quarter at $507 million. And 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. So there's very little runoff left in the book, which should make loan growth a little easier to achieve without the headwinds of that, which we've been experiencing now for 8 to 11 quarters. It's going to be a little easier to grow.

Yes. Maybe just one last one, switching to fee income. Any thoughts on that directionally going forward as you guys are looking at the back half of the year? And then are you guys at all thinking about tweaking overdraft NSF fee policies, anything like that going forward?

We tweaked a little bit. I mean, we did some things like the maximum that we would charge for the number of overdrafts that you had in any one given day. And we also -- we tweak some stuff that if your overdraft wasn't over $5 or something. Again, I'm talking they have to verify everything I'm saying that the bottom line is if you wouldn't get an overdraft. So we've done some of those things. But as far as doing away with overdrafts, I don't see us doing that in the near future. I mean, and the reason I can say that is the number of accounts we're opening. And when I'm going to a lobby, sometimes I ask those customers why they're moving to us. And they're actually moving from a bank that are giving everything away.

So if we're still getting those customers. And quite frankly, do we want the customers -- do you want a customer to send the overdraft you're not charging for anything for it? I mean, to me, it doesn't make any sense at all. So there may be some reduction later on, not that I've seen in the foreseeable future. But I think we're good where we're at right now.

Yes, just big picture overall noninterest income. If you look at -- exclude some one-off items, I mean our range around $35 million, $36 million. So I think that's going to continue. But what we see that there's more usage of debit cards and credit cards that's going to be beneficial for us. But I mean, is there going to be any significant change in the noninterest income, probably not. I mean, one opportunity we have is we were discussing maybe potentially selling some mortgage loans.

If you look back several quarters, I don't know, 6, 7 quarters, we would generate $2 million, $2.5 million from sale of mortgage loans but we haven't done it because we were booking those mortgage as we start continuing to grow our loans, there's opportunity to sell those loans and make some extra money. So there's opportunities there, but I haven't done that yet. But if you look at the opportunities there, there will be a good opportunity on that.

Our next question will come from Gary Tenner with D.A. Davidson.

I wanted to ask about loan -- portfolio loan yields. I think in the quarter, ex accounting adjustment is pretty flat. And I appreciate the commentary on the higher-yielding loans now going through committee. But 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 correct itself here in 3Q?

Yes, mostly.

Timing of the (inaudible)

We're through floors, I think, in all cases across the board. There might be 1 or 2 stragglers but we broke through the floors and 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. And the last 75 basis points cracked us moderately through those floors and whatever happens today is going to -- we get the full impact of. So we're lagging a little bit because the vast majority of the portfolio have floored.

Okay. And then on the warehouse, I appreciate the comments, Kevin, in terms of warehouse floors as well. But given the decline in volumes in warehouse nationally, is -- has the pricing competition in that business gotten worse than it's been in terms of having to make more and 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, and 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 disconnect in how we would like the back office operations to work with our back office operations." So they came to us and said, we're going to stop funding for this client. And at the time, that client had $177 million outstanding. That's down to $26 million as of last night. So at the time it would have been our single largest client and they felt uncomfortable. And who are we to question them. They're -- they got unlimited capacity to say no, they just have limiting capacity to say yes. So they let that client go.

Pricing is still competitive, not as much as I would have thought, but there still is competition. I ran some quick numbers this morning of how much -- let's assume the Fed goes up 75 basis points this afternoon and our volumes of 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 spreads, so a higher weighted average coupon. But if we just remain at the $900 billion -- $900 million business versus $1.257 billion, it would cost us about $5 million a year, or $1.5 million a quarter pretax, $1 million after tax, call it a $0.01.

But if you reinvested that money...

Right. We put it in something else.

We put it in something else, you wouldn't see that. In fact, that was the real deal for me in the past that we really needed the warehouse loans because, I mean, if you're getting 1.25 on an investment you were buying, you were still getting maybe close to 3% on the warehouse loan. In today's world, you could probably almost match any rate you're getting on warehouse purchase with an investment.

About about 40 basis points different I didn't factor in that opportunity to reinvest it. So it's -- look, if the team tells us they're uncomfortable with the client, it's a really good thing. We're all proud of it.

Our next question will come from Michael Rose with Raymond James.

Most of my questions have been asked and answered. Just a lot of moving pieces to the balance sheet, rate sensitivity. I think the last disclosure on the plus 100, plus 200 was at December 31, and it was up about 5% and 11%, respectively. Do you have an update to those numbers as of 6/30?

Yes. I don't have an exact update on it, but I think the way we're tracking, it might be a same level but a little bit better. 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. Again, it's not going to happen in 3 months or 6 months. I mean, it really looks really good in the year and looks totally fantastic in 2 years.

Michael, I can get back with you and give those information.

Yes, it's on our -- it's something we're talking about this afternoon, Michael. And one of the factors is those public disclosures are usually parallel chips, and we're really not experiencing a parallel shift, right? But the long end of the curve it's gone from, I don't know, the 10-year hit maybe 3.6 per day or 2, and we're at 2.75, 2.76 today or precall, don't know where it's moved in the last 45 minutes. But we need to look at more of a twist scenario rather than a parallel scenario to be more realistic.

And balance sheet has shifted differently to what we had at the end of the year.

But the parallel shift looks pretty spectacular.

Yes. I think that looks really good. Again, it just takes time. It doesn't happen in the half year. Our year looks real good and 2 years is fantastic.

(Operator Instructions) Our next question will come from Jon Arfstrom with RBC Capital Markets.

Michael Rose just stole my question. He's a really smart guy.

That's like him late in the day or late in the call, there's only one thing left to ask and he got a question.

Yes, he got it. He got it. But just different way to ask it on the Queen Mary comment. By the way, that parking lot is narrow.

Very narrow.

When I look at Slide 8 and you have the kind of the core net interest margin there that goes to -- it peaks out at 3.30, 3.35 and I went way, way back in my model. And before that, it was even higher. And David, you just alluded to it 12 months, 18 months out, it's a lot better. 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 and were mid-3% Fed funds, where could this margin go over the long term?

I would say that your -- you're spot on, you watch it for so many years. But yes, I think that a year down the road or 2 years, we will probably be breaking some of our net interest margins, no question about it. And that feels good compared to where we were at the lowest. But even if you use something just moderate I know some of these -- you saw back in 2011, 3.98, 2014, 3.80. Some of these figures have that [boot] to accounting in them, too. So it'd be interesting, which one takes the boot to accounting that if it does any of them which one, the blue. Yes. So if you take the boot of accounting out of it, I think that -- I think even the 3.35, 3.25, 3.30 looks good, but I think you could do better than that. Yes.

I agree. If you look at the long term, definitely, it will be beneficial.

I don't think you're going to see 3.98, 3.80, but being in around 35.0 range is definitely cost I think.

Assuming the rates stay the same, you know because now you're hearing that there might be interest decreases in coming maybe later next year. So that could impact too. But based on what we see right now, assuming everything stays the same, that definitely we could get to that point.

Yes, it's hard to keep track with all the movement in the financial moves, I guess. That's helpful. And then 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 than you've heard recently.

Everybody talks about recession, and I want to be very careful about this, but really -- when you look -- I always look at what -- in the state of Texas, they have a city sales tax rebates to the cities where usually your city charges, if you buy something they charge anywhere from 7.5% to 10% sales tax. And then the state gives you back -- gives back the city 2% of that anywhere, but 2% or some depending on what you're charging on your sales tax. And so when I look at that even in the small town, I mean, I look at Dallas, Austin, Houston throughout the state, we're still seeing double-digit growth in sales tax rebates.

So people are still spending a lot of money. And so having said that, you are seeing our people are saying that we're seeing our real estate construction loans coming for you down a little bit and people trying to buy houses are down a little bit. But 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 5 months to get a washer dryer. I mean I think really what we're doing, everything that's happening right now is really just coming back to normalization. You may want to 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 the 0% interest rates and the amount of stimulus that was poured in to the economy was just -- it's unrealistic.

So 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 a 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.

And 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 they're getting ready to be a big problem. Now they may be thinking in that, but they haven't told us that I'm aware of.

And maybe we're not. But when I look at our loans, yes, I see the consumer may be pulling back a little bit in the housing market in there. But when you look at our commercial loans, they're probably stronger than ever right now.

Certainly as strong.

Yes.

Again, job growth fuels a lot of stuff, and we've had a ton of it here in Texas.

Yes. I mean I think that's the thing about Texas. And so when I talk about recession, that could be maybe more -- it's probably more regionalized, but in Texas, when you have -- how many people that I have it written down some where the amount of -- I think they're anticipating -- the Fed is anticipating about 595,000 jobs for this year. I think we're at about 381,000 so far. And so they'll look at that.

But the amount of people moving into the state of Texas, the number of companies that are moving into the state of Texas. So maybe when you talk nationally on more to regionalize, it's more regional, but 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 you, anything right there.

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 now disconnect.