Prosperity Bancshares Inc Q1 FY2023 Earnings Call

Good day and welcome to the Prosperity Bancshares First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please, go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares first quarter 2023 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Eddie Safady, our Vice Chairman is under the weather and unable to join us today. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov who will review some of our recent financial statistics; and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.

Thank you, Charlotte, and good morning, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality and earnings, as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 since the list's inception in 2010. We have twice been ranked number one, ranked number two in 2021 and ranked number six for 2023. It is a testament to Prosperity's performance, culture, vision and consistency and distinguishes us among most banks. I congratulate and thank all our customers, associates and directors for helping us achieve this honor. On a linked quarter basis, the net income was $124 million for the three months ended March 31, 2023 compared with $122 million for the same period in 2022. The net income per diluted common share was $1.37 for the three months ended March 31, 2023 compared with $1.33 for the three months ended March 31, 2022. For the three months ended March 31, 2023, the annualized return on average assets was 1.31%. The annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%. Loans on a linked quarter basis, excluding warehouse purchase program loans, increased $436 million or 2.4%, representing a 9.6% annualized increase from $18.1 billion at December 31, 2022. Excluding warehouse purchase program loans, loans at March 31, 2023 were $18.5 billion compared with $16.7 billion at March 31, 2022, an increase of $1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue while rates remain at their current levels or increase. Deposits at March 31, 2023 were $27 billion, a decrease of $1.5 billion or 5.4% from $28.5 billion at December 31, 2022. Deposits decreased $4.1 billion or 13% compared with deposits of $31.1 billion at March 31, 2022. The majority of all deposits lost in 2022 were public funds. These investment funds were in interest-bearing transaction accounts at low rates because there was no yield to be found. As rates increase, public funds started investing their money in state funds to obtain higher rates. Of the deposit decrease in the first quarter, $959 million or 63% of the $1.5 billion decrease occurred prior to March 10. Historically, prior to the pandemic in 2017, 2018 and 2019, our deposits decreased seasonally in January at an average rate of 2.2%. We also saw $236 million of deposits flow into our wealth management group. As we are all aware, the market was flooded with excess funds in the last few years during the COVID-19 pandemic, and most people kept their money primarily in checking accounts and low interest-bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant. When we look at pre-COVID deposits at March 31, 2020, we had $23.8 billion in deposits, and at March 31, 2023, we have $27 billion in deposits. This represents a compounded annual growth rate of 4.3%. Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So, we are still averaging deposits on the high end of our historical growth rate. Our average deposit account was $34,000 at March 31, 2023, and $36,000 at December 31, 2022. Our uninsured and pledged deposits are 29.9% of our total deposits. We currently have $11.3 billion of liquidity available to draw on, which represents approximately $4 billion in excess of our uninsured and pledged deposits. With regard to net interest margin, while most banks have experienced some of their best net interest margins recently, because of our large bond portfolio, our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better in 36 months. Our average net interest margin from 2012 to 2022 was 3.37% compared with our current net interest margin of 2.93% as of March 31, 2023. Our asset quality remains sound. Year-over-year non-performing assets decreased 9.9%. Non-performing assets totaled $24.5 million at March 31, 2023 compared with $27.5 million at December 31, 2022 and $27.2 million at March 31, 2022. Texas and Oklahoma continue to do well. Texas population increased by 470,000 in 2022 continuing a steady uptick. From 2002 to 2022, the state gained over 9 million residents, more than any other state and almost 3 million more than Florida, the next largest state. Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 headquartered companies. Texas now has more Fortune 500 companies than any other state, including New York and California. Despite the higher rates and a possible slower economy going forward, we believe the Texas and Oklahoma economies should outperform most other states. With regard to acquisitions, as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bancshares of Texas Inc. and expect that transaction to be effective on May 1, 2023. Our acquisition of Lone Star State Bancshares is pending regulatory approvals and is expected to close during the second quarter of 2023, although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities, although the conversations have slowed given the recent bank failures and the decline in stock prices. Overall, I want to thank all our associates for helping create the success we've had. We have a strong team, and we'll continue to work hard to help our customers and associates succeed and to increase shareholder value. Thank you again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2023 was $243.5 million compared to $239.9 million for the same period in 2022, an increase of $3.5 million, or 1.5%. Loan and secured interest income increased $54.1 million and $18.2 million respectively in the first quarter. Additionally, Fed funds interest income increased $6.2 million. This was partially offset by an increase in interest expense of $74.9 million. Net interest income increased $3.5 million despite having $7.9 million less in combined PPP loan fee income and fair value loan income. The net interest margin on a tax-equivalent basis was 2.93% for the three months ended March 31, 2023 compared to 2.88% for the same period in 2022, and 3.05% for the quarter ended December 31, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2023 was 2.91% compared to 2.81% for the same period in 2022, and 3.04% for the quarter ended December 31, 2022. The current quarter net interest margin was impacted by $3 billion of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3 billion additional cash was funded through FHLB borrowings. Further, at the end of the first quarter, we increased rates on deposits. We expect the full impact of those increases in the second quarter. Non-interest income was $38.3 million for the three months ended March 31, 2023 compared to $35.1 million for the same period in 2022, and $37.7 million for the quarter ended December 31, 2022. Non-interest expense for the three months ended March 31, 2023 was $123 million compared to $119.9 million for the same period in 2022 and $119.2 million for the quarter ended December 31, 2022. The linked-quarter increase was partially attributed to the higher FDIC assessment rate. For the second quarter of 2023, we expect non-interest expense to be in the range of $123 million to $125 million. The expected increase is based on the annual merit increases in the second quarter of 2023. This projection excludes both the impact from one-time merger-related costs, which we estimate to be around $26 million to $28 million, and additional noninterest expense from our pending acquisitions. Additionally, second quarter results will be impacted by day two accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition-related provision expense is $28 million to $31 million. The efficiency ratio was 43.7% for the three months ended March 31, 2023 compared to 43.7% for the same period in 2022 and 40.9% for the three months ended December 31, 2022. The bond portfolio metrics at 3/31 2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus?

Thank you, Asylbek. Our nonperforming assets at quarter end March 31, 2023 totaled $24,485,000 or 13 basis points of loans and other real estate compared to $27,494,000 or 15 basis points at December 31, 2022. This represents approximately an 11% decrease in nonperforming assets. The March 31, 2023 nonperforming assets total was comprised of $22,496,000 in loans, $0 in repossessed assets and $1,989,000 in other real estate. Of the $24,485,000 in nonperforming assets at quarter end, only $217,000 are energy credits. Since March 31, 2023, $328,000 in other real estate have been removed from the nonperforming assets. This represents 1.34% of the nonperforming assets. Net charge-offs for the three months ended March 31, 2023 were negative $615,000, compared to net charge-offs of $603,000 for the quarter ended December 31, 2022. In other words, for the first quarter of 2023, our recoveries exceeded charge-offs by $615,000. No dollars were added to the allowance for credit losses during the quarter ended March 31, 2023, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2023 was $436 million. Loans outstanding at March 31, 2023 were approximately $19.334 billion compared to $18.840 billion at December 31, 2022. This is a 2.62% increase on a linked-quarter basis. The March 31, 2023 loan total is made up of 43% fixed rate loans, 29% floating rate loans and 28% variable rate loans. Charlotte, I will now turn it over to you.

Thank you, Tim. At this time, we are prepared to answer your questions. Asnave, can you please assist us with questions? We'll start the questions in just a minute.

Are we showing that we're attached?

Yes, sir.

Bad timing. We're working to get the questions started. We apologize for the delay.

Can you hear me now?

Yes.

I apologize. We will start the question-and-answer session. The first question comes from Brady Gailey with KBW. Please go ahead.

You guys can hear me right?

Yes.

Good morning.

Thank God, we were wondering.

So I know Asylbek mentioned that you moved deposit rates up near the end of the quarter. I was just wondering the magnitude of that. And I hear your comments on longer term, there's opportunity for the margin to expand. How do you expect the margin to trend in the near-term?

I'll give you an answer on the interest-bearing deposits. Based on the projection of the new rate increases on deposit, we will bump up our interest-bearing deposit rate from 1.10% to about 1.40% to 1.45%. So that's going to be a little headwind, but if you look at short term, on margin, I think it's very hard to pinpoint just because of the two acquisitions upcoming in the second quarter. We're going to bring their loans and their bond portfolio, both of them are going to be repriced at the market rate, that's going to be a tailwind for us. So that will be hard to pinpoint specifically for the near-term, but the information I gave you should provide some insight on Q2.

Okay. And the $3 billion of FHLB, which turned into cash on your balance sheet, I know that's pretty earnings-neutral but how long will those balances stay on the balance sheet?

So we started about the middle of the 13th or 14th of March and stayed almost through the end of the month.

Okay. So it's gone now?

Yes, they were gone by end of the quarter before the end of the quarter.

All right. That's helpful. And then I'm just curious I know the unrealized loss in your held-to-maturity bond bucket has been going down over the last couple of quarters? I imagine it went down this quarter. What is that amount of after-tax unrealized losses in the held-to-maturity bond book?

So if you look at it at March 31, the net of tax was about $1.1 billion, that's decreased from $1.3 billion we had at the end of the year. So we have a $200 million decrease in after-tax.

All right. And then, finally, for me, anything specific holding up this Lone Star approval?

I think we're just waiting on the regulatory approval right now. It's just waiting from them.

Yes, it's nothing specific. They've been busy, as you know.

I can imagine, yes. Thank you for the color, guys.

Yes. But we're hoping to get it done in the second quarter.

Yes.

Thank you. And our next question today comes from Peter Winter at D.A. Davidson. Please, go ahead.

Yes. Good morning. I was wondering, could you talk about the outlook for deposit trends and deposit betas beyond the second quarter?

I can address the betas specifically. So if you look at the cumulative beta that we had through March 31, if you look over 12 months, the cumulative beta on deposit was about 12 basis points. With the recent increases on the deposit rate that I mentioned in my speech, it's going to go up to about 16 to 17 basis points on cumulative betas.

Yes. Peter, I think, as far as trends, I still don't know if everything has stabilized. You have money that's in the system that's probably still looking for higher rates. So I think in the long run, if you ask me, we will eventually go back to a point where our bank historically grew 2% to 4% organically every year. And I think that, in our budgeting, once things stabilize and you don't read in the social media or on the headlines, that's kind of what we're hoping to go back to. I am hoping that after five or six months things calm down, I'm hoping that's when we'll get back to.

Okay. If the Fed were to stop raising rates in May, are we at a point where we have nearly finished increasing deposit costs, or since our beta is lower than our competitors, is there still some pressure on deposit costs?

We have adjusted our rates to align with the market. Currently, a 3% return on a money market account with a larger deposit is quite attractive. There might be a slight increase of about 25 basis points, but given the current position of the Fed and potential changes of 25 or 50 basis points, I don't expect significant movements beyond that. Our bond pricing indicates strong net interest margins moving forward, and while the models suggest robust performance, the actual returns may not reflect that strength as we may need to pay more to customers upon repricing. Currently, our net interest margin averages at 3.37%, with peaks at 3.80% and lows like our present situation. For a bank of our size, I believe we fall within that range. Unlike some other banks that have invested in brokered CDs, we have opted not to do so. While circumstances may change, we are not participating in that market at this time.

Yes. Just to add on, I think on the modeling side, we're excited that our model shows very good in 24 to 36 months. And our model has a beta of 36%. Right now, we're running our actual betas on our deposits less than that model shows. So that looks optimistic.

I think it all boils down to our company. I think we have a great company, it's strong. So looking forward, I think we're in a better position than most of our peers simply because of the net interest margin that we see going forward. So I think that if you're a longer-term player and you can see where we're going to be in a year or two years, that's what we're focusing on is more the longer term.

Got it. And just one last question. You had very solid loan growth, loans held for investment this quarter. Is that level sustainable just given the economic backdrop, because Tim did mention the average monthly loan production, which was down a fair amount relative to the fourth quarter?

Yes, this is Kevin. At the beginning of the year, we projected mid to high-single-digit growth, and we achieved the high-single-digit portion in the first quarter. We are noticing some weakness in loan demand, which has been evident over the past few months. A significant factor supporting loan growth is the reduced level of loan payoffs. As a result, we are seeing asset durations extending slightly. For instance, if the average asset duration in real estate was three years, it might now be around 3.5 years, and potentially extend to four years before everything stabilizes. The nature of loan growth has changed over the last three years; while we previously faced headwinds from the runoff of our legacy portfolio, we are now experiencing the opposite effect due to lower payoffs in the industry. I believe we can still expect growth in the mid-single-digit to high-single-digit range. I want to reiterate what we stated in January: if we opt to sell off mortgage loans instead of holding them, we will likely be at the lower end of that growth range rather than the higher end.

Yes. And I also want to say with the caveat that now that a lot of the banks that have such high loan-to-deposit ratios, really cut back on the loans that they're doing. And we've always said in harder times, those are the kind of customers that we'll probably get and go after so we can get better terms and conditions. So, that’s also helping us at the same time right now. We don't really want to turn those customers away. So, this is really kind of a time where we really perform well.

That's correct. We're actually already starting to see that. We've been able to make some loans to what we believe are very good credits that historically we might not have been able to lend to not because of credit reasons, but because of a very significant competition that really just priced the loans down to the point that you couldn't hardly make any money off of them and you couldn't get any equity in the project or the collateral that you were dealing with. That is changing right now. More and more banks are out of the market and are pulling out of the market. So our opportunities seem to be increasing somewhat. And you have to recognize that we do have loans that got booked that have not funded yet. So the actual loans outstanding will probably continue to grow just simply from funding loans that we have already booked that are in progress.

Got it. Thanks very much.

The next question comes from Brad Milsaps of Piper Sandler.

Good morning.

Good morning Brad.

Thanks for taking my question. Just curious David, how much of the public funds exited this quarter? Do you expect to come back? And then kind of as a follow-up to that, would you expect to utilize some of those funds to pay down to the extent they do come back some of the three or so billion in borrowings you had outstanding at the end of the quarter?

The $2 billion that we lost last year, I don't really see those funds coming back. Those were really investment funds, and unless we're willing to pay a textbook rate of $4.80 or something like that, I don't really see those coming back. You will see public funds go down throughout this quarter and next quarter. But by the end of the year, you will see public funds come up. I would say that could be $300 million to $500 million.

Yeah. Between $400 million to $600 million.

$400 million to $600 million probably.

Okay. So in the interim you mentioned you weren't going to go the brokered CD route. You might just rely more on just cash flows from your bond book or adding some additional Federal Home Loan Bank advances?

I don't want us to keep borrowing from the Federal Home Loan Bank. If you ask me how to stop that, I think we have $2.2 billion in bonds rolling off each year, and we will also have around $434 million in liquidity from banks joining us, like First Capital and Lone Star. With those two factors, it would take us about 15 or 16 months to completely exit the Federal Home Loan Bank, assuming we don't lose more temporary deposits, which can change daily. If things remained stable as of March, we could exit in that timeframe. However, we usually maintain some level of borrowing from the Federal Home Loan Bank, and I expect that to continue even during normal conditions.

I think it's good to point out that the bulk of the money we had borrowed from the Federal Home Loan Bank was not really because we needed it. It's because we felt like it was prudent to have on hand given what was taking place in the overall market. We didn't know whether somebody was going to come in the next two minutes and want to pull all their money out as quickly as things were changing.

You're referring to the additional $3 billion?

The $3 billion, yes, I don't think we were talking about that. I was saying...

I was talking about the core FHLB that you have which was pushed through.

As it turns out, we didn't really need it, but we felt like it was prudent to have it on hand for a while there.

Yes, my comments were all relating to the borrowing.

Yes. Yes, that was my question. Yes, thanks for clearing that up, David. And then finally for me, I think when you guys announced the two deals together, I think you had something in there, 2023 estimated earnings from the combination with 75% cost savings of somewhere around $77 million. Obviously, a lot has changed. Would you mind giving us an update on what you think the banks can contribute to the extent that it has changed? Just kind of wanted to get a sense of kind of contribution from those two organizations once they become a part of Prosperity?

Yes. I think on the cost saves what we announced is that we're going to have combined 25% cost saves on theirs. I think that stays as is and we're pretty optimistic about it. You're right, the timing has shifted. The 75% was based on the Q1 acquisition estimate. Now since the timing shifted to First Capital being May 1 and we're hoping Lone Star being sometime in the second quarter. So it's timing-wise on savings, it does shift a little bit. But on the 25% cost save overall, we expect in the long run that stays as is.

I believe you estimated a contribution of $77 million. Given the recent changes to the hair-cut, does that still make sense? If so, could you provide some insights on the potential amount we should consider?

Yes, there will be some day one, one-time costs and plus the day two provision expense that's going to happen immediately after the merger of the banks. But I did say that they're going to bring in operational expense as they merge. I would expect probably after the merger maybe within not maybe the first quarter but the second quarter right after the acquisition we should utilize the savings.

I think he's referring to the revenue income side.

Yes, yes, exactly Kevin. Okay.

I don't believe there has been a significant change in the profiles of these two banks. This might lead people to think changes have occurred. The situation is still ongoing, so we need to monitor it day by day and week by week. However, their balance sheets and profit and loss statements have not changed significantly so far.

Yes, so far. And I think what the estimates we had on other loan markups and all that stays the same. I didn't think there was a significant change. That should bring in the income that we expected. I don't think there was a significant shift in their estimate.

It's just the delay, Brad. That's really the only thing.

Understood. Thank you. Appreciate you guys.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Hi. Good morning, guys. Thanks for taking my questions. Kevin, I would be remiss if I didn't ask about the warehouse. This quarter's average volume was a little bit higher than which is kind of contemplated 90 days ago. Just wanted to get any thoughts as we kind of move forward just given the dynamics out there? Thanks.

Yes. Thank you, Michael. You're right. I think, we said in January we thought we'd average $550 million to $600 million for the quarter. I will tell you in February I was thinking it was not even going to get the $550 million and was worried about it, but we ended up averaging $618 million because it truly rallied from the last 45 days of the quarter ending up at $799 million almost $800 million at quarter end. I'm going to go with $800 million to $850 million for the quarter Michael. I think we're averaging right now about $770 million through the first 26 days of the quarter, and I think it will pick up from there. So if I had to pick a number, $825 million.

Okay. That's very, very helpful. Just one minor question for Asylbek. The other non-interest income was up a couple of million by almost $3 million. Just wanted to see if there was anything specific that was in there and if anything will come out from a run rate perspective? Thanks.

Yes, we had some one-off items. The annual incentives and one-off income that we have, and some of them come annually, some of them were just one-time. So it wasn't anything in particular.

Okay. So maybe a few million bucks in one-timers?

Yes.

Okay. Maybe just finally for me. Just given where the capital ratio is, I mean you guys have lots of capital, you're doing two deals as we kind of go through this and just wanted to get a sense for buyback from here. You guys did buy back a little bit of shares. I assume you pause when everything started to happen, but just given more capital, I just wanted to get your appetite just given where the stock is? And then just wanted to get a sense from an acquisition point of view. I know you said conversations that maybe slowed down a little bit but just wanted to see if you look at any of the banks that have failed or maybe some stress situations if they'd be of interest to you? Thanks.

First, this is David, and I'll talk about the capital issue. We've always used our capital primarily to increase dividends and for mergers and acquisitions. We also use the remaining funds if we believe the stock is undervalued. I don’t expect any changes regarding dividends, as our directors seem to support that approach. We will continue with acquisitions, and I see that continuing. When it comes to buying back our own shares, much of that will depend on any guidance from regulatory bodies. Rather than committing to continual buying, I think we should be cautious and consider regulatory inputs, especially in a challenging environment. Overall, we are still generating good revenue, maintaining dividends, and have additional capital available. I believe that in the long run, things will improve as the HTM losses begin to turn around over the next year or two.

Okay. Thanks guys.

The next question comes from Brett Rabatin with Hovde Group.

Hey, good morning everyone. Wanted to ask on the fee income side. The other bucket obviously had a little bit of noise this quarter. I was just curious Asylbek was there anything that you would call out that would be nonrecurring, or can you give us maybe some color on the other income bucket and how you think that might play out from here?

Yes. I think we had one-off items. If I would have to say that I would say a couple of million dollars was a one-off item that came in and the rest of them will be more continued repetitive from that bucket.

Okay. And then could you give any update on the cash flow on the securities portfolio? What you might have maturing in the next quarter or two?

Our cash flow is $2.2 billion. We expect approximately $550 million per quarter.

Yes, I don't think that's changed. I mean we're around $2.2 billion.

Okay, great. And then just lastly some of the more conservative banks seem like it might be an opportunity for them to maybe take share through this situation. But it seems like some of the conservative players have said no, we're going to wait and see how maybe this plays out. I'm just curious, David or Kevin, this environment as you see it. Is this an opportunity to maybe take share, or do you just stick to your guns and get more conservative? Have you increased your underwriting standards at all or changed them? Any thoughts on that?

I think we will take share without having to change our underwriting standards. Brett, there's enough pencils down banks that are loaned up fully at 90%, 100%, or even more with a loan-to-deposit ratio exceeding that, and they are generally speaking their pencils down or maybe a deal pays off; they can do a new deal but they're not active. And I think as Tim said earlier, we're seeing opportunities from really good clients that we historically would not have banked because either the structure was too loose or the pricing was too low. Those clients are now coming to us and we're able to get our structure and our pricing on those transactions. So for us, this is no different than any other time during stress. We tend to do well. We tend to have liquidity and have the money to loan. So, I think on the loan side we're in a position to take market share as we want.

Yes, I would say that throughout my extensive experience in banking, including during loan committee meetings, I have never witnessed the level of funding being requested for commercial projects as I do now. Typically, I would not expect such large amounts to be pursued. This situation seems to stem from the fact that many midsized banks have seen a significant outflow of deposits, leaving them unable to finance these requests. Therefore, I believe there will be opportunities for us, and we should embrace this moment, as it is a time we look forward to.

Yeah. Brett, it's not uncommon for us today to get 50% to 55% equity upfront on a multifamily yield, and all those dollars go in before we fund $1. And as David said, it's been a long time since we've seen that kind of equity. But we're asking for it and we're generally getting it.

And it's real equity.

That's real hard dollar equity.

It's based on cost.

That's pretty low for the multifamily market. Appreciate the color, guys.

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Hi. Thanks for taking my question. I wanted to ask about NIM going into next quarter. You noted that the portfolios that you're acquiring will have an impact on NIM. Presumably, there will be a tailwind because you're acquiring them at end market prices. Any thoughts on what the NIM can get to next quarter with the acquisitions? Would you be able to go over 3% in the next quarter?

I think it will be hard to specifically point that out because we still have to go through the merger process and evaluation. But we're excited about the two acquisitions because of cash they're bringing and our ability to reprice their bond portfolio and their mortgage portfolio. I mean I cannot give you specific guidance, especially because of the fair value income that we have to calculate and that getting amortized based on the duration of loans or the life of the loans. But I am optimistic about where we stand on this.

I think you could say that once we get both closed and in our bank, that should help the net interest margin, I would say.

Yeah, that's for sure.

That's helpful. And then maybe on the loan yields in the core business in the current business, you noted that you have acquired newer customers presumably at better pricing. You have a fixed rate portfolio as well that should reprice higher. So in the event that the Fed stays higher for longer how should we think about your loan yields over the course of the next year or so?

Well, our models show that if interest rates stay higher or even go up, we still perform better from an income standpoint and a net interest margin.

Yes, if you just look at our NIM calculation, because our bond portfolio is generating right now 524, and we're putting new loans that Kevin handles right now. If rates stay the same for the next 12 to 24 months, you can see there's upside of 200 basis points on loans.

Our models are usually really good, and they're correct. And I think that basically, if rates don't change, we still see a substantial improvement in our net interest margin over 12, 24, and 36 months, even more so if interest rates go up.

Yeah, because of the composition of our loan portfolio.

I think if interest rates went down by 100 basis points or so, I don't think that they will. But if they did, that doesn't give us a positive effect, but still we would see a substantial increase in our NIM over time.

Did you say over what time frame that 200 basis points can come in?

I think that your net interest margin looks a lot better in 12 months. It looks better in 24 months and fantastic in 36 months.

Got it. All right. And if I can just round out that discussion, how should we think about the efficiency ratio given what you said on NIM and loan growth and the merit increases coming up?

I believe that regarding the efficiency ratio, it will take time for us to achieve the cost savings following the merger of the two banks. However, I am confident that in the long run, we will return to our typical efficiency ratio of 42% to 44%.

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Hey, good morning. I just wanted to follow up.

Evan, did you change your name?

Hey. This is Ebrahim Poonawala from Bank of America.

I thought it was Evan. I thought you changed it.

Yes, she did say Evan. You're not wrong, David. You're right. I let it fly under the radar.

Sorry about that.

I have a question about the net interest margin. Specifically, do you anticipate the net interest margin, excluding acquisitions, to increase from the 293 reported this quarter as we look ahead to Q2 and the rest of the year?

Yeah. I mean, as we talked about in the long term, it's very positive. I think in the short term the headwind on the interest deposits will be a little bit down, but that’s on the Prosperity Bank itself without acquisition. But with the two acquisitions, things look really good.

It helps us in the short run, but in the long term, it really benefits us. We're discussing a very brief period.

Understood.

I think we have closed our remarks.

Yes. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Thank you. Thank you, ladies and gentlemen for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.