Good day, and welcome to the Prosperity Bancshares Third Quarter 2022 Earnings Conference Call. 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 Third 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, 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 moderator. Before we begin, let me make the usual disclaimers. Certain matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q, 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. I'd like to welcome and thank everyone listening to our third quarter 2022 conference call. This is an exciting time for Prosperity. On October 11, we announced the signing of a definitive merger agreement with First Bancshares of Texas Inc., headquartered in Midland, Texas, and Lone Star State Bancshares, Inc., headquartered in Lubbock, Texas. On a pro forma basis, we will have over $6 billion in assets located in our West Texas market and the #1 market share in the combined Midland and Odessa markets and the #3 market share in Lubbock. We also recently announced that the Board of Directors voted to increase the fourth quarter 2022 dividend to $0.55 a share. This represents a 6% increase in dividends declared in 2022 compared with 2021. The increase reflects the confidence the Board has in the continuing success of our company and in the communities we serve. Our earnings recorded net income of $135.8 million for the quarter ended September 30, 2022, compared with $128.6 million for the same period in '21. On a linked quarter basis, third quarter net income increased $7.3 million or 5.7% compared with the second quarter of 2022. Our net income per diluted common share was $1.49 for the quarter ended September 30, 2022, compared with $1.39 for the same period in 2021, a 7.2% increase. Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.4% and return on assets of 1.45% for the third quarter of 2022. The net interest margin on a tax equivalent basis was 3.11% for the 3 months ending September 30, 2022, compared with 3.1% for the same period in 2021 and 2.97% for the 3 months ending June 30, 2022. Excluding the warehouse purchase program and PPP loans, loans on September 30, 2022, were $17.6 billion compared to $16.6 billion on September 30, 2021, an increase of $981 million, or 5.9%. Our linked quarter loans, excluding the warehouse purchase program and PPP loans, increased $531 million, or 3.1%, 12.5% annualized from $17 billion on June 30, 2022. We did not have the loan growth we expected in the first quarter of 2022. However, the loan growth in the second and third quarters has been much stronger. Deposits on September 30, 2022, were $29.3 billion, a decrease of $151 million or 0.5% compared with $29.5 billion on September 30, 2021. Our linked quarter deposits decreased $565 million or 1.9% from $29.9 billion on June 30, 2022. Our linked quarter noninterest-bearing deposits increased by $122 million. On a year-over-year and linked quarter basis, our core deposits are higher, but total deposits decreased slightly primarily due to public fund seasonality. Prosperity generally experiences seasonality with its public fund deposits as public fund customers use the tax dollars they receive in December and January throughout the year, resulting in lower deposit balances in the second and third quarters of the year. In addition to their normal use of funds, public fund customers are moving their investment funds to higher-yielding investments outside of the bank, which are now available as interest rates have increased. With regard to asset quality, our nonperforming assets totaled $19.9 million or 6 basis points of quarterly average interest-earning assets on September 30, 2022, compared with $36 million or 11 basis points of quarterly average earning assets at September 30, 2021, and $22 million or 7 basis points of quarterly average interest-earning assets on June 30, 2022. The reduction in nonperforming assets year-over-year is 45.6%. We are excited about our pending acquisition of First Bancshares of Texas and Lone Star State Bancshares. First Bancshares operates 16 banking offices in West, North and Central Texas, including several new markets for Prosperity, and Lone Star operates 5 banking offices in West Texas. We look forward to partnering with the First Bancshares and Lone Star teams. We continue to believe that due to increases in technology and staffing costs, additional government regulation and succession plan concerns, there will be merger activity. We intend to remain active in M&A, and we continue to have conversations with potential partners. The Texas and Oklahoma economies continue to benefit from companies relocating from states with higher taxes and more regulations. This increase, combined with people moving to the state, requires additional housing and infrastructure, a driver for loans and increased business opportunities. 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.

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended September 30, 2022, was $260.7 million compared to $248.6 million for the same period in 2021, an increase of $12.1 million or 4.9%. The current quarter net interest income includes fair value loan income of $1.2 million compared to $5.4 million for the same period in 2021, a decrease of $4.1 million. Interest income on securities for the third quarter 2022 increased $22.5 million, while interest expense increased $7.1 million compared to the same period in 2021. The net interest margin on a tax equivalent basis was 3.11% for the 3 months ended September 30, 2022, compared to 3.10% for the same period in 2021 and 2.97% for the quarter ended June 30, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended September 30, 2022, was 3.10% compared to 3.03% for the same period in 2021 and 2.97% for the quarter ended June 30, 2022. Noninterest income was $34.7 million for the 3 months ended September 30, 2022, compared to $34.6 million for the same period in 2021 and $37.6 million for the quarter ended June 30, 2022. Noninterest expense for the 3 months ended September 30, 2022, was $122.2 million compared to $119.8 million for the same period in 2021 and $122.9 million for the quarter ended June 30, 2022. For the fourth quarter of 2022, we expect noninterest expense to be in the range of $120 million to $122 million. The efficiency ratio was 41.4% for the 3 months ended September 30, 2022, compared to 42.3% for the same period in 2021 and 43.1% for the 3 months ended June 30, 2022. During the third quarter of 2022, we recognized $1.2 million in fair value loan income. As of September 30, 2022, the remaining discount balance is $6.5 million. Due to the low remaining discount balance, we do not expect fair value income of any significance going forward. The bond portfolio metrics at 9/30, 2022, showed a weighted average life of 5 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 detail on loans and asset quality.

Thank you, Asylbek. Nonperforming assets at quarter end September 30, 2022, totaled $19.878 million or 11 basis points of loans and other real estate compared to $22.187 million or 12 basis points at June 30, 2022. This represents approximately a 10% decrease in nonperforming assets. The September 30, 2022, nonperforming assets total was comprised of $18.107 million in loans, $13,000 in repossessed assets and $1.758 million in other real estate. Of the $19.878 million in nonperforming assets, only $388,000 are energy credits. Net charge-offs for the 3 months ended September 30, 2022, were $1.780 million compared to $1.204 million for the quarter ended June 30, 2022. No dollars were added to the allowance for credit losses during the quarter ended September 30, 2022, nor were any dollars taken into income from the allowance. The average monthly new loan production for the quarter ended September 30, 2022, was $659 million. Loans outstanding at September 30, 2022, were approximately $18.5 billion. The September 30, 2022 loan total is made up of 42% fixed rate, 31% floating rate and 27% variable rate. I will now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we are prepared to answer your questions. Matt, can you please assist us with questions?

Our first question will come from Jennifer Demba with Truist Securities.

Regarding the outlook for net interest margins over the next few quarters, do you believe that the beta for Prosperity will increase? Or do you think we might see slower margin expansion in the coming quarters?

Jennifer, I'm going to let Asylbek discuss the betas, but I want to emphasize the net interest margin. We experienced significant net interest margin expansion this quarter, and we expect to see further expansion over the next 6, 12, and 24 months. We recently increased rates to align more closely with our competitors, which may slightly affect the net interest margin in the fourth quarter. However, historically, our bank has maintained a minimum net interest margin of 3.25% to 3.30% in a normal interest rate market, indicating that we have considerable potential for margin expansion. Nonetheless, you might observe a small decrease in the fourth quarter due to the higher interest rates as we aim to compete with other players. Asylbek, feel free to address the betas now.

Yes. Specific on betas. In the June, the third quarter, our beta on interest-bearing deposits came in about 9 or 10 basis points, that's what we projected. I think with the recent rate that Mr. Zalman just mentioned, our beta will increase a little bit. But if you're looking for the cycle since the rates have started with a new rate sheet that we just disclosed, I think our beta on interest-bearing deposits will be about 12 basis points. That's only based on the Fed increasing 300 basis points on their Fed increase. So it's going to accelerate in the fourth quarter. But again, this should stabilize, hopefully after that.

And your loan growth, as you pointed out, has been really strong in the second and third quarters. Are you expecting it to moderate in the next couple of quarters?

I'll take that. I think that we had a good second quarter. We had a good third quarter. And just looking at where we're at right now, Jennifer, it looks like it's going to be a good fourth quarter. Again, everything being consistent. Having said that, for next year, with how high interest rates go, it's hard to say. I know some banks have said that they still see strong loan demand next year. However, I would still advise to be a little bit cautious with the interest rates going up as much as they are. So it's hard to project for next year, but I would tell you that the fourth quarter looks very good again for us.

Our next question will come from Brady Gailey with KBW.

I just wanted to start with expenses. I feel like expenses have been in that $120 million to $122 million range for at least the last year or so. So you really kind of block the industry by keeping expenses relatively flat despite seeing a lot of inflationary pressures, especially on wages. As we look to 2023, do you think the expense base has to move a little bit more and ask to feel a little more of the inflationary pressures? Or do you think that you can continue to keep expense creep to a minimum?

Looking ahead to 2023, we typically implement our merit increase in the second quarter each year. I anticipate that we will see a rise similar to this year, where expenses increased from about $120 million to $122 million. We excel at managing our costs, although we are aware of the significant pressures on that front. We are focused on finding efficiencies, so while some expenses may rise, we are also working to improve efficiency in other areas. Overall, yes, we expect an increase due to the merit raise and some inflationary pressures. However, I believe our efficiency ratio should remain stable, roughly in line with our historical range of 42% to 43%, provided we continue to grow our revenue.

All right. And then I think as of the end of June. So last quarter, the unrealized losses in your bonds are about $1.1 billion. I know you guys were held to maturity not available for sale for most of them, so it's not really reflected in your tangible book value. But I'm just curious, where did that unrealized loss move to as of the end of this quarter?

For the end of the quarter, it went up to $1.3 billion net of tax. So we just increased a little bit. It went from $1.1 billion to $1.3 billion.

All right. And then my final question is just on M&A. I know you have these 2 acquisitions pending. It just also feels like, from talking to you all over the last couple of years, you've been interested in doing kind of a larger, more transformational acquisition. If the right additional M&A opportunity came along, do you feel comfortable going ahead and progressing with that? Or do you think with 2 pending, you guys are kind of in a pause mode until you get those closed and integrated?

I'll answer that. These are the 2 that we're doing right now. They're great merger candidates with us, and I think they're fine. However, the combined assets of both of them are just a little over $3 billion. So the answer to your question would be, yes, we would still be interested in more combinations or mergers and acquisitions even with these 2.

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

On the deals, first, congrats on those. I was just curious if you're thinking about running anything off in any of those loan books sort of like what you did with legacy and the structured CRE, any changes coming for either of those things?

I don't think we see any significant issues in either of these portfolios. One portfolio was very straightforward, and we didn't even need a follow-up meeting. With the other bank, we did encounter some problems, but we talked through them, and I don't believe they will be a major concern. Randy, do you notice anything?

No, there's just a nominal number of loans.

There may be a little uptick in nonperforming. But again, it won't be for longer periods of time.

It seems like it's an uptick because we're so low, but if it moves $5 million, you feel it a lot like it's a small deal.

They may have a bit more in nonperforming loans, but it won't be significant.

I think it's safe. There's no piece of what they do that doesn't fit. There may be a loan here and there. But in terms of any major aspect of their lending that doesn't fit, that's not the case.

Okay. Great. And back on the deposit beta discussion, have you guys updated your thoughts on that cycle beta given that acceleration coming up that you mentioned? I think previously, you talked about 36% for the interest-bearing deposit beta that's baked into your asset sensitivity assumptions, something like that? Any updates there?

Yes. We didn't make any updates because, as we mentioned earlier regarding the rate changes, the fourth quarter interest-bearing deposits show a beta of around 30 basis points, which is still below our model's 36 basis points. Therefore, we feel confident maintaining our model at a 36 beta for interest-bearing deposits. We are not planning to change it, but we will need to keep an eye on how the competition is performing and what the overall environment looks like before considering any changes to the model.

Got you. Was that bump up at the end of 3Q or at the beginning of 4Q? I'm just wondering if you guys had the spot rate at the end of 3Q, if that would be helpful for...

That was a combination. We did a little at the end of the third quarter and a little at the beginning of the fourth quarter. So it's a combination.

Okay. And maybe just another one on the margin front. Where are you guys seeing new loan yields and securities yields at this point?

I think we talked about this yesterday. We're seeing probably new loan yields come in between 5.75% and 6.5%.

Great. On the security side for any kind of replacement you're doing?

Yes. The security, of course, the last day or 2, it's been off a little bit, but probably our replacement rate on securities is anywhere between 5.25% and 5.5% right now.

Okay. Maybe just one last one, sorry, go ahead.

I say it's a big difference between our 1.82% that we're yielding on 14 right now. So that's why we talk about net interest margin. I don't want it to get out of perspective because we have so much money that reprices over the next couple of years that we should be in very good shape despite raising interest rates in the short term. Our 6-, 12- and 24-month time horizons look really favorable for us.

And we have loans that continue to fund up, right, that are at these higher interest rate levels.

Our loan portfolio has about one-third of it maturing each year, which means we have significant opportunities for repricing.

There's repricing and additional funding that come into play in a favorable way, obviously.

Appreciate that. Maybe just one last one on the buyback. I know you guys did do anything this quarter and you got the deals announced. I was just curious, if we have a downdraft in the market over the next 3 to 6 months while you're still working on closing these? Is there a plan in place? Is there anything that you guys can do to buy back stock during that period of time? Would you be able to do that while you still have the deals outstanding?

I don't think that we have to have a 10b5-1. If the stock goes down now with this being announced, we can still buy back our stock.

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

David, just wanted to follow up on the bond discussion. Or I guess, are you buying bonds in a big way right now? I did see wholesale borrowings creeping up a little bit. Is that more just sort of a stop gap because of the runoff in public funds? Or is that something we need to think about maybe more as a permanent part of your funding structure? Just kind of wanted to see how you're thinking about that going forward.

Our borrowings are likely due to a mix of funds rolling off, but we are still purchasing bonds, albeit not at an aggressive rate, acquiring around $50 million in blocks occasionally. We have always mentioned that as interest rates rise, we would increase our leverage with the bank. That's what we're currently doing, making these purchases in anticipation of the bonds maturing.

I agree.

I wanted to follow up with Kevin regarding the warehouse, as it seems to be lower than what you anticipated. I'm curious about your outlook on that. Additionally, concerning the yield, I know there’s a floating rate and potential pricing ceilings. The rate appears to have increased more than I expected. Could you provide insight on whether there will be further increases that could counterbalance the decline in volume?

Yes. So just looking back at the quarter, we thought somewhere between $900 million and $950 million, I think, for the average balance that came in at the $939 million. So right in line with what we were thinking. Quarter-to-date, we're averaging right at $838 million, Brad. So it's dipped down a bit. And we've actually seen a couple of days where balances have been in the $755 million to $760 million range. So as I think about the quarter in general, I'm going to say, we probably average between $775 million and $800 million, so down a bit from where we were. That is an entirely floating rate, daily floating rate portfolio. And for the quarter, the weighted average coupon was 4.58%. I did a little back of the envelope this morning on where the weighted average coupon is likely to be today on that portfolio, and it's right at 5.44%. So it's up just under 100 basis points from what the average last quarter.

That's great. And then maybe final one for me, David, a fair amount of your growth this quarter was in the construction category. Just be curious, I mean, is that at a level you don't want to take higher at this point? Or do you have other projects out there that you know that are going to fund up? Just kind of curious how much more growth you're sort of expecting out of that bucket of loans.

I guess the bottom line is we're looking at it carefully. Having said that, there still appears to be reasonably good demand for those projects. It seems to be intuitive that that might be falling off. But just as an example, we approved a $64 million loan last week that we think is a top quality, very good loan, and it's a construction development on a commercial project. So those types of credits are still out there. They're still in play. And if we see a good one, we're going to try to make it and bring those customers in. We're not really backing away from it at this point.

This is kind of an opportunity time for us where a number of the banks, as interest rates have gone up and their liquidity is tight, maybe have some liquidity issues with deposits going out and worrying about asset quality. This is really the time for our bank to shine that we can really go in. We have a tremendous amount of liquidity, we have good asset quality, and we can really cater now to the market and maybe get a little bit better rate and a more competitive rate because it's not so competitive in that field.

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

Just wanted to follow up. I had a couple of quick questions. One, David, you mentioned about the 2023 outlook looks cautious. Is there anything that you're seeing in terms of the customer base that suggest we are losing momentum and the rate hikes that we've had since March are having a role in terms of behavior among your clients, how they're thinking about hiring and investing? Or are you just being cautious because of the unknown?

No, I think when I look at it today, I see the consumer really holding up stronger than anyone could have imagined. This may be due to the higher wages that people are receiving, which is keeping them spending. My caution comes from the fact that interest rates are continuing to rise significantly. Depending on what the Federal Reserve does, we could face either a hard landing or a soft landing. If we can limit the rate increases and assess the situation from there, we might achieve a soft landing. However, it seems that some of the smaller customers are not borrowing as much, while our middle-market customers appear to be borrowing more. The housing market is definitely affected; for example, someone paying 6% or 7% compared to 2% or 3% will likely be kept out of the market. That's why I believe we need to exercise some caution. That said, this is what the Fed aimed for; they intended to increase unemployment and reduce inflation. I hope we can navigate this with a soft landing.

I'd say be cautious in a particular area, it would be lot development loans that would be sold to homebuilders. We're thinking this is the time to slow that down a bit. Most of our homebuilding clients, I'd say their month-to-month sales are off, 15% to 20%. So we're cautious on that, particularly in the first-time buyer and move-up price points.

Yes, anyone can observe it. I was speaking with my brother, who works in real estate, and he mentioned that about a month or two ago, you would just pick up the phone for calls you were interested in. Now, there has been a decline of approximately 30% to 40% in phone calls. This market is certainly going to be impacted, so it's important to keep that in mind.

Got it. That's helpful. And I guess just one other and sorry if I missed it. In terms of the deposit mix, when we look at sort of noninterest-bearing deposits, like, one, do you expect deposit balances to grow from here? And how do you think that mix evolves as we think about maybe some of the noninterest-bearing deposits moving into interest-bearing?

Our noninterest-bearing deposits actually increased by $122 million this quarter. Looking ahead to next quarter, we expect increased competition from various banks. This is partly why we raised our rates. We increased our money market account rate from about 1% to 2%, and we also introduced a one-time certificate of deposit that doesn't significantly impact our costs until potentially many people opt for the 3% rate. Even though we offer good rates, consumers still have the option to invest in treasury markets, where one can expect to receive around $440 million for a 2-year option or $430 million in just 6 months. There is considerable interest in that avenue. So, in response to the question, we typically see organic deposit growth between 2% to 4%. However, I am uncertain if we will experience that level of growth next year. It may be more realistic to adjust that expectation down to around 2%. Asylbek, what's your perspective on this? That’s what we’re aiming for.

Yes, it's very hard to predict what is especially coming off from the pandemic years when they have so much liquidity and what government is trying to do with quantitative tightening. It will be hard to predict. But I'll just add a little bit more detail related to the fourth quarter. If you look at our public funds, it usually goes up at the end of the year because of the tax collection. So we expect that coming in, in the end of December and benefiting us in the first quarter. But yes, I think for the budget purposes right now, we are thinking about 2% on the core deposit for next year.

I think through the third quarter, we really didn't see any core deposits. We didn't grow that much. I think we grew about $80 million for the quarter, which is about 1.2%. However, in the fourth quarter, we are starting to see core deposits. Some of those people are moving into some of those different investments and stuff like that. So not really knowing the exact answer to your question, but I think we have to be aware of that.

Our next question will come from Matt Olney with Stephens Inc.

I want to revisit the changes to some of the deposit rates you mentioned. I would like to clarify that you indicated the initial changes occurred earlier in the third quarter, which affected those results. However, it seems the more significant changes happened at the end of the quarter, meaning the fourth quarter will reflect all those adjustments. Did I understand that correctly?

You'll see some of the third quarter captured some of it, but it was towards the end of the quarter. But the bigger increases that we started paying were probably going to be impacted in the fourth quarter for the most part.

That's right. Yes, the rate increase we did, it was the end of the second quarter that we mentioned in our call, and we did increase at the end of the third quarter and additional increase at the beginning of the month. So yes, the full impact of well, we'll see in the fourth quarter.

Okay. And so as that relates to the net interest margin, it sounds like you expect some positive migration upwards in the next few quarters, although the fourth quarter, it sounds like that could be somewhat delayed a little bit given some of these movements here. Is that fair?

I think you're correct. When we examine our models, we have a substantial amount of money that will reprice. Our bond portfolio, which is valued at $14 billion, is currently yielding about 1.82%. As this reprices, we're looking at an increase to around 5.25%. However, for the fourth quarter, I anticipate there could be a slight decline in the net interest margin for that quarter. That's just my intuition. It may or may not occur, as it will depend on the volume of loans and the influx of public funds. There are many factors at play, but raising those rates seems like a possibility.

Sure. Okay. And then just to clarify, the premium amortization expense on the bond portfolio declined by a healthy amount in the third quarter. Also back, you may have mentioned this and I missed it, but what's the outlook for that in the near term?

Yes. When we looked at our bond portfolio for the fourth quarter, we expect about $8.5 million and $9 million on premium amortization in the fourth quarter, which will be down from $10 million we had in the third quarter.

Our next question will come from Bill Carcache with Wolfe Research.

David, you discussed in your opening remarks, clients that are moving their funds off balance sheet. Can you give a bit more color on how that process has gone? Are you typically having a conversation with your corporate clients, for example, before making the decision to let them go? Any color on that would be helpful.

I can't provide much detail, but regarding public funds, we've established relationships primarily to manage their operating accounts rather than their investment funds, as those are driven by interest rates. As interest rates increased, we didn't attempt to compete for those investment funds because other options offer much higher rates. We have between 5 to 15 clients who have asked for rate adjustments due to our strong relationships, and we accommodated some of these requests. However, we are noticing that clients are starting to explore their options more actively. It's more competitive now, especially as everyone seems to be advertising their rates. If we don't adjust our rates accordingly, clients might consider moving their funds elsewhere. That's my perspective. Even with the increase in bank rates, not many financial institutions match the treasury rates.

No, that's great. Yes, that's super helpful. Yes, I appreciate that. And maybe just to follow up on that, are there any cases where you've been able to retain the relationship with accounts that have moved off balance sheet? So you still have the ability to bring them back on balance sheet later, if necessary, even if at a higher rate? Or is there generally no longer once they've moved off balance sheet?

Let me address both sides of that. Firstly, it's definitely not the case that we hear from every major customer, but usually, if they're considering moving their money due to rates, they will reach out to us. It’s uncommon for them to make a move without contacting us to discuss our position. While not every customer will do this, most will give us the chance to either meet their needs or indicate that their requests aren't in our best interest. After the transfer, if the funds are moved, we often have an opportunity to bring those funds back. Our customers maintain contact with us over time, inquiring about our rates and our willingness to accept additional funds. Some may leave without returning, but generally, we have the chance to stay in touch and potentially bring back at least some, if not all, of their money at different points. However, we’re not a bank where customers solely come for rates. Most of our relationships are tied to operating accounts and similar engagements, and this situation mainly involves excess funds. So the answer is yes, if you want to pay or match rates, you can definitely bring the funds back because the relationships we have go beyond just rates.

That's exactly right. They don't typically move all their money. They move a portion of it that typically is excess for them into a higher rate and they keep their operating funds with us.

Last week, we received a call from a very large client. Tim, David, and I were already on the phone together during a committee meeting when one of our bankers interrupted to share that this client decided to keep everything with us despite being offered less than half of what they could have received in the treasury market. They valued us for the minimal friction cost and the liquidity we provide, and I'm referring to a significantly large depositor. They appreciated our swift decision-making, as it took us just 6 or 7 minutes to provide them with an offer, and they chose to leave all their funds with us.

Exactly. That happens more often than not. It's not 100%, but it is more often.

Our bankers can get to us if something like that pops up. Tim is always around and answers his phone immediately. If it's customer-related, we make sure we're available.

I wanted to ask about the increase in other borrowings. Are those FHLB advances? Can you explain how you decide to draw on your FHLB lines instead of simply increasing rates to retain deposits that might be moving elsewhere? Any insights on that would be appreciated. Additionally, if there's any further information you could share about your approach to exception pricing at this point in the rate cycle, it would be very helpful.

I'll address the first part. Regarding Federal Home Loan Bank borrowings, we typically avoid leveraging the bank when rates normalize and are low. However, we do utilize the bank to some extent most of the time. Additionally, some public funds are leaving, but they are expected to return by year-end, which should reduce those borrowings. At the same time, we are actively purchasing securities. Since we have over $2 billion in securities maturing each year, we sometimes buy in advance and leverage the bank accordingly.

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.