Prosperity Bancshares Inc Q2 FY2023 Earnings Call

Good day and welcome to the Prosperity Bancshares Second Quarter 2023 Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

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

Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2023 conference call. I'm pleased to announce that on May 1, 2023, Prosperity completed the merger with First Bancshares of Texas and its wholly-owned subsidiary, First Capital Bank, headquartered in Midland, Texas. First Capital Bank operated 16 full-service banking offices in 6 different markets in West, North and Central Texas areas including its main office in Midland and banking offices in Midland, Lubbock, Amarillo, Wichita Falls, Burkburnett, Byers, Henrietta, Dallas, Horseshoe Bay, Marble Falls and Fredericksburg, Texas. For the second quarter of 2023, Prosperity's net income was impacted by merger-related charges. Excluding those charges, our earnings remained strong but are lower than previous quarters, primarily because of the timing differences and that our cost of funds has increased faster than our earning assets have repriced. The good news is that based on our models, we show our net interest margin improving in a 12-month and 24-month time period to more normal levels. However, if rates increase more than we anticipate, this could change. Together with our model projections, our strong capital position, our liquidity, earnings, strong cost controls and sound asset quality, we believe opportunities remain for our continued growth and expansion. I would like to welcome our new associates and thank our current associates for all the hard work and integrity they show every day taking care of our customers. On a linked quarter basis, net income was $86.9 million for the 3 months ending June 30, 2023, compared with $124.7 million for the 3 months ended March 31, 2023. The change was primarily due to the merger. Net income per diluted common share was $0.94 for the 3 months ending June 30, 2023, compared with $1.37 for the 3 months ended March 31, 2023. During the second quarter of 2023, Prosperity incurred a merger-related provision for credit losses of $18.5 million and merger-related expenses of $12.9 million. Excluding these charges, earnings per diluted common share was $1.21 for the second quarter of 2023. Excluding the merger-related provision and expenses net of tax, the annualized returns on average assets and average tangible common equity for the 3 months ended June 30, 2023, were 1.14% and 12.43%. Prosperity had strong loan growth for the quarter. Loans at June 30, 2023, were $21.6 billion, an increase of $2.3 billion or 12% from $19.3 billion at March 31, 2023. Excluding the loans from the First Capital acquisition, loans increased $729 million or 3.7%, 15% annualized. Excluding warehouse purchase program loans and First Capital loans, the organic loans increased 8% annualized. Our deposits at June 30, 2023 were $27.4 billion, an increase of $376.7 million or 1.4% compared with $27 billion at March 31, 2023. Excluding the deposits from the First Capital acquisition, deposits decreased $1.1 billion during the quarter ended June 30, 2023, compared with the quarter ended March 31, 2023. Historically, we generally experience a decrease in deposits in the second quarter, primarily due to public fund accounts using their funds. However, this year, we also saw a decrease in core deposits. However, over the last 3 weeks, the decrease in core deposits has stabilized. We have not purchased any broker deposits to offset the deposit loss, and we do not currently intend to do so. Our bankers focus on building core deposits. Our noninterest-bearing deposits represented 37.9% of our total deposits at period end June 30, 2023. Our nonperforming assets totaled $62.7 million or 18 basis points of quarterly average interest-earning assets at June 30, 2023 compared with $22 million or 7 basis points of quarterly average interest-earning assets at June 30, 2022 and $24.5 million or 7 basis points of quarterly average interest-earning assets at March 31, 2023. Over $20 million of the increase was due to the acquisition. In prior transactions, the amount of nonperforming assets that would be reflected as a nonperforming asset was the loan balance, net of the mark. Under the new accounting rules, the full loan balance of all acquired nonperforming assets must be reflected regardless of the amount of the reserve. In this case, we have accrued an approximate 70% reserve for these acquired nonperforming loans. Additionally, there were 2 other loans totaling $14 million placed on nonaccrual status, one of which is under contract for sale. After the merger adjustments, the allowance for credit losses on loans and off-balance sheet credit exposures was $381.7 million at June 30, 2023 compared with $312 million at March 31, 2023. Further, the allowance for credit losses on loans to total loans, excluding the warehouse purchase program loans increased to 1.68%. Our merger with Lone Star State Bancshares is pending regulatory approvals and is expected to close during the third quarter of 2023, although delays could occur. We continue to have conversations with other bankers considering opportunities. We believe that higher technology and staffing costs, funding costs, loan competition, succession planning concerns and increased regulatory burden, all point to continued consolidation. We remain ready to move forward in the event a transaction materializes and will be beneficial to our company's long-term future and will increase shareholder value. Texas and Oklahoma continue to shine as more people and companies move to the states because of their business-friendly political structure and state income tax. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it 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, 2023, was $236.5 million compared to $248.5 million for the same period in 2022, a decrease of $12 million or 4.8%. Loan and security interest income increased $93.9 million and $7.9 million, respectively, in the second quarter 2023 compared to the second quarter 2022. This was offset by an increase in interest expense of $114.7 million and a decrease in PPP loan fee income of $2.4 million. During the second quarter of 2023, we recognized $18.5 million of day-to-accounting provision expense related to the First Capital acquisition. The net interest margin on a tax equivalent basis was 2.73% for the 3 months ended June 30, 2023, compared to 2.97% for the same period in 2022 and 2.93% for the quarter ended March 31, 2023. Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2023, was 2.7% compared to 2.97% for the same period in 2022 and 2.91% for the quarter ended March 31, 2023. The current quarter net interest margin was impacted by an increase in deposit rates at the end of the first quarter 2023 and an increase in borrowings. Noninterest income was $39.7 million for the 3 months ended June 30, 2023 compared to $37.6 million for the same period in 2022 and $38.3 million for the quarter ended March 31, 2023. Noninterest expense for the 3 months ended June 30, 2023, was $145.9 million compared to $122.9 million for the same period in 2022 and $123 million for the quarter ended March 31, 2023. The linked quarter increase was primarily due to merger-related expenses of $12.9 million and $2 million primarily due to merger-related expenses of $12.9 million and 2 months of First Capital Bank's operation. For the third quarter 2023, we expect noninterest expense to be in the range of $134 million to $136 million which includes the additional operating expenses from the First Capital acquisition. However, this projection excludes one-time merger-related costs estimated to be around $10 million to $12 million and additional operating expenses from the pending acquisition of Lone Star Bank. Further, the third quarter results will be impacted by day-to-accounting provision expense related to the expected Lone Star acquisition in the third quarter which is estimated to be $10 million to $13 million. The efficiency ratio was 53.2% for the 3 months ended June 30, 2023 compared to 43.1% for the same period in 2022 and 43.7% for the 3 months ended March 31, 2023. Excluding merger-related expenses, the efficiency ratio was 48.5% for the 3 months ended June 30, 2023. The bond portfolio metrics at 6/30/2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.17 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. So Timanus?

Thank you, Asylbek. Our nonperforming assets at quarter end June 30, 2023, totaled $62,727,000 or 29 basis points of loans and other real estate compared to $24,485,000 or 13 basis points at March 31, 2023. This represents a $38,242,000 increase in nonperforming assets, $21,875,000 of which came from First Capital Bank of Texas. The June 30, 2023, nonperforming asset total was made up of $59,467,000 in loans, $153,000 in repossessed assets and $3,107,000 in other real estate. Of the $62,727,000 in nonperforming assets, $8,294,000 are energy credits; $7,923,000 of which are from First Capital Bank of Texas. Since June 30, 2023, $11,360,000 in nonperforming assets have been removed or are under contract to be sold. This represents 18% of the quarter-end nonperforming assets. Net charge-offs for the 3 months ended June 30, 2023, were $16,065,000 compared to net recoveries of $615,000 for the quarter ended March 31, 2023. $14,976,000 of the net charge-offs were from 1 loan that Legacy Texas Bank had in its portfolio when the bank joined us. $18,540,000 was added to the allowance for credit losses during the quarter ended June 30, 2023. This addition to the allowance resulted from the acquisition of First Capital Bank of Texas. The average monthly new loan production for the quarter ended June 30, 2023, was $565 million, up from $436 million from the prior quarter for a 30% increase. Loans outstanding at June 30, 2023, were approximately $21.654 billion compared to $19.334 billion at March 31, 2023. This is a 12% increase on a linked-quarter basis. The June 30, 2023 loan total is made up of 41% fixed-rate loans, 29% floating rate and 30% variable rate. I will now turn it over to Charlotte Rasche.

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

Today's first question comes from Michael Rose at Raymond James.

Maybe we could just start on the core margin decline and what the expectations could be? And then, Asylbek, if you can give us some color on what you expect the accretion to be with the First Capital deal going forward and then what the other deal will add in terms of accretable yield as we move forward.

Yes. In terms of margin, this quarter we experienced a decrease of 20 basis points due to several factors, including the increase in deposit rates that we announced during our first quarter earnings call. This change fully impacted us in the second quarter, and we also had slightly more borrowing compared to the first quarter. These two elements affected our margin because, as mentioned by Mr. Zalman, it takes time to reprice our assets, including our loan portfolio and securities. The average yield on our securities was 2.07%, while our loans yielded 5.48%. As time progresses, those securities will reprice, but currently, we are not acquiring any new securities, which is why the yield remains unchanged. We have about $2.2 billion in cash flow from our securities that we are either using to fund loans or pay down borrowings, depending on the situation. In the second quarter, we had strong loan growth, which utilized those funds. To give you an idea, if we could reprice our securities generating a 2.07% yield and put that towards new loans at around 8%, that would create an almost 6% spread, which would significantly benefit us. However, it does take time. When looking at a 12, 24, or 36-month timeline, the outlook appears positive, but in the near term, we did experience some compression on the net interest margin. I apologize for the broad overview, but that reflects our perspective on the structure of our balance sheet.

Yes, Mike. I mean, I've always referred to we're like the Queen Mary in here. It just takes time. And our models have been pretty good. Our models we've used for the last 30 years, 35 years, and they've always been, I think, very close and very spot on. What our models show is that in a 12-month time frame, our net interest margin hits around the 3% range, maybe a little bit better than that. And then in a 24-month time frame, we go back to the 3.30%, 3.40% net interest margin. But again, it just takes time, and that's just the situation that we're in right now and that's just the amount of time it takes to reprice our assets.

We expect about $3 million from the First Capital Bank on a quarterly basis for the accretable yield.

Okay. That's helpful. And then just following up on the bond rate pricing. I totally understand that. But what about on the loan side? I think if I look at your call reports, I think, if I remember correctly, like 12% of the loans are expected to reprice in the next year. Can you just give us a sense for if that's correct and then what the yield on the nearer-term maturities kind of are and assuming they would reprice somewhere where current yields are, I would expect that you would see some pick up there. I think it would just be helpful if you could provide some greater color there.

I'll let somebody jump in. But your 12% number seems low to me.

I mean the straight-off maturities as opposed to.

Okay. Because our average life in our portfolio is about 3 years. So that seems low. But all new loans we're putting on are certainly somewhere between 7.75 to 8.5, I think, Tim mentioned the other day, we had one at 9%, but somewhere in that range, I think.

That's correct. The basic run on that is about on the low end, 7.75 up to 8.5.

If you examine our cash flow, we anticipate receiving around $5 billion over the next year, which will be used to pay down some of our loan maturities. While our report indicates $6 billion, this figure includes some loans that have variable rates. The expected $5 billion should reprice at an average rate similar to our current rates, indicating that our margin is approximately 5.50%.

Okay, so some potential upside there. Okay, great. And then, maybe just finally for me. The loan growth has been pretty good. I know you guys have talked about previously being not a vendor's last resort but certainly given some of the other competitors have slowed down a little bit because they're full in terms of loan-to-deposit ratio, things like that. It seems like that is good. Any sense for kind of pipeline is just a healthier market? And then, Kevin, if you could just provide some comments on the warehouse just given you've had 2 competitors kind of exit the space and looks like the average balances were a little bit higher than what you guided to.

Sure, let me start with the warehouse, Michael. A couple of competitors have exited the market, and one might think there would be a scramble to find capacity elsewhere. However, due to the overall shrinkage of the business, we haven't seen many requests for increases from our common clients. There may have been one or two, but not to the extent one might expect. The volume increase this quarter was positive; we had indicated an average of 800 to 850 for the warehouse, but it actually ran almost 900, at 899. While it was better than anticipated, I would say this increase is more seasonal. May was okay, June was really strong, and April was relatively soft. Looking ahead, July has also been quite good. As of last night, we averaged $1.62 billion in the warehouse, so July has treated us well. I believe August will also be strong, while September tends to see a dip as people return to school and vacations end. For Q3, I anticipate an average between $950 million and $1 billion, considering we're currently at $1.62 billion. I think we might give back a bit, but on the higher end, we may average around $1 billion for the quarter. That summarizes the warehouse situation. As for loan growth, it has been robust. Back in January, we projected high single-digit growth for the year, and we've maintained that for the first six months. However, we caution that if we start selling mortgages in the secondary market instead of holding them, that growth rate would decrease. We decided about a month ago to position ourselves to sell some mortgages in the secondary market and realize gains on those sales, as this seems to be a more advantageous option for us now. There are other ways to utilize the cash, including paying down borrowings, which benefits the organization. Implementing this process takes some time, and currently, about 30% of our origination volume is poised for sale. We are in the process of packaging these mortgages and will begin sales soon. We had to reconnect with our secondary market participants to ensure they were aware of our return to this space. Consequently, I anticipate that loan growth will temper a bit for the rest of the year. We might notice the impact in the latter part of Q3, with the full effects felt in Q4 as we prepare to sell more originated mortgages. Therefore, looking at the second half of the year, what we projected in January might see growth around 5% to 6%, representing mid-single digits rather than the high growth we had been achieving. I think that's a reasonable expectation for the second half of the year.

I would add the rest of the loan portfolio, in other words, other than warehouse and mortgage, it's really interesting to see how reasonably steady the demand has been. What has fallen off seems to be the very large expensive real estate projects. They're not quite what they were. But the rest of the loan market seems to be reasonably steady in spite of higher interest rates and talk about recessions, etcetera. And I guess we attribute that to the economy in Texas and Oklahoma which are 2 economies that David has mentioned have maintained their steady growth. So, so far, we see loan growth being pretty decent.

And our next question today comes from Peter Winter at D.A. Davidson.

I just want to follow up on Michael's question about the loans maturing over the next 12 months, if we exclude the floating rate book; just do you have a sense how much actually will mature in the next 12 months in the fixed rate book and what those yields are?

Yes. When we considered the situation, we found that $5 billion is set to mature in the next 12 months, with more than half of that occurring in the first six months. The average rate on these loans is around 5.5% to 5.6%. I also noted that approximately 41% of our mortgages are fixed, which translates to about 41% maturing in the next 12 months. While I don’t have the details on that at the moment, we can provide the specifics later.

Okay. And it's likely that the Fed will increase rates today and then on hold. What's the outlook for the margin in the second half of the year? And do you see that you'll need to do another kind of deposit rate increase?

We've discussed the current situation regarding interest rates. Currently, the highest rate we offer on our money market account is 3%, applicable for amounts over $250,000, though larger clients may have negotiated different terms. Our CD rates are relatively low, but we have introduced a special 7-month CD rate at 5%. I had expected more money to flow into that account, but it seems to be around $1 billion. Additionally, our total cost of funds, which includes all borrowings and interest on deposits, stands at 1.55%. For our total deposits, the cost is 0.94%, and when focusing solely on the interest for deposits (excluding Federal Home Loan Bank borrowings and noninterest-bearing deposits), it is 1.51%. Overall, our cost of funds remains very low. We have a strong core business, and I've noted that approximately 85% of our business revolves around consumer accounts that likely reflect similar deposit percentages.

About 53% of the total dollar amount is from consumers and 47% is from commercial.

But the commercial represents about 15% of our accounts yes, only 47% of the deal. So our mix of money is good core. We haven't chased the money. I mean, it could have been very easy for us to increase like some of the other banks, $1 billion or $2 billion by going out and buying broker deposits this quarter. We didn't do that. Our true intent is to try to pay down Federal Home Loans to a certain amount. We talked about a while ago reducing maybe the amount of home loans that we're keeping on our books and selling. So it's our goal to really reduce some of the higher-cost money. And our real focus is deposits and that is to go out where the last 2 years all we really hammered in everybody's mind was loans, loans, loans. We're hammering right now our deposits, deposits, deposits. So as this thing turns around, our goal is really to reduce some of our borrowings and to really go after core deposits. It's a long answer around a question. Are you going to raise rates with the 25 basis points increase? And I guess the answer is right now, we probably just would be watching it. I didn't say we wouldn't. But we feel like our deposits have stabilized over the last 3 weeks. We don't see much change; $100 million may be lower at the end of the week and $100 million, $150 million gain at the beginning of the week. So we really don't see a whole lot of changes. So really, a lot of it just depends as long as our deposits stabilize, that's where we're at. We've never really run after higher-cost money. I think it's hard once you do to get out of it. So we really don't want to jump into that. So that's kind of our story.

And just based on that, the outlook for the margin in the second half of the year?

I looked at the model and I looked at 12 months, I can probably pull my notes out and see what it does in 6 months. In 12 months, we do know that it does go more toward a 3% net interest margin. I'd have to look and see in the 6 months what it is.

Yes. It's a bit challenging to provide a specific answer; we have the Lone Star acquisition pending, which will affect their loans as well. As we mentioned, in 12 months, there will definitely be an increase. I would expect it to remain flat in 6 months, possibly seeing a slight decline, but it all hinges on Lone Star. Peter, regarding your question about fixed versus variable rates on my end, slightly over 50% of our $5 billion in fixed-rate loans will reprice, right around 50%. Yes. But out of $5 billion that we said that the cash flowing.

I found some numbers, Peter, on the 6 months. Our 6-month projection is to go to around, again, this probably isn't exactly accurate because this is flat. There's no growth in deposits or loans, or anything like that. This is just straight. It's about a 2.86 in 6 months.

And that's not including Lone Star.

No, that's I'd say 2.86%, 2.90% and Lone Star should improve and help us a little bit.

And our next question today comes from Dave Rochester with Compass Point.

Just to make sure I heard you right. So it's 2.86% in 6 months from now, that includes the rate hike but no Lone Star. Is that right?

Let me see if that includes the rate hike. I think it does.

It does not include Lone Star.

It doesn't include Lone Star but it does include the rate hike.

Got you. And then so this time next year or maybe 3Q of next year, back half of next year, you're thinking 3% plus on the margin. Is that right?

We are. Yes, we are.

Yes. I mean, I think we have enough to ensure we hit that target as it stands right now.

And our next question comes from Rochester with Compass Point.

Just one on expenses real quick. I appreciate all the guidance there. I was first wondering if you thought that 3Q range, the $1.34 million to $1.36 million was good for 4Q as well ex-Lone Star deal? And then what are you guys expecting for the size of that Lone Star expense base that you're going to bring in?

So on the $1.34 million to $1.36 million, I think that's a solid run rate since we'll have three full months of First Capital Bank included. Looking ahead, I believe that will remain consistent for the fourth quarter. It may vary slightly, but I anticipate that the guidance will stay the same for the fourth quarter. Regarding Lone Star, I understand there will be one-time expenses, but I expect Lone Star to contribute additional quarterly expenses, approximately between $7 million to $10 million, before we achieve some savings.

Okay. Great. And then just one on capital. How are you guys thinking about the buyback here at the current stock price which is a little bit higher than where you were buying this past quarter? And then just given your thoughts on M&A and growth going forward, are you thinking this 2Q pace for buybacks is more what you would expect? Or could you accelerate that just given you've got a whole lot of excess capital here?

Yes. Well, we have to. You saw we have for the last 2 quarters above back how many about 1 million in 1,200,000 shares. So we definitely think the stock is too cheap. At the same time, we're always focused on wanting to increase dividends and we still want to do some mergers and acquisitions. So I think a lot of it depends on our activity and M&A. If we don't do the M&A, you'll probably see more of the probably the buybacks if you're seeing M&A that may not be as much. I think M&A activities increased significantly.

And our next question today comes from Brady Gailey with KBW.

I just wanted to ask about credit quality. We saw some noise there in the quarter but all the numbers are still very low. I know a lot of the noise related to acquisitions and your previously acquired loans as well. But when you take a step back and look at credit quality for Prosperity. Are there any concerning trends? Or are you guys still pretty confident on where you stand with credit quality?

I would say we're confident. Most of what deterioration you've seen is a result of loans that joined us. And there may be a bit more of that to go—not an overwhelming total by any means—but there might be a bit more. We've actually been a little bit surprised how well the quality has held up, once again, given the higher interest rates and the earning pressure that puts on borrowers. But we sit as steady right now. We don't see really any red flags.

Yes. Brady, this is Kevin. The loss we took was on a legacy deal. The former structured CRE portfolio that you're pretty familiar with. It was an office building located here in Dallas, a $32 million loan that lost several tenants, a couple within the quarter and we moved to foreclose and sell that loan in a hurry, figuring the first loss is the best loss. We ran a process and settled on a buyer that paid $17 million for it. So it was a $15 million loss. That structured CRE portfolio which was at one point above $2 billion in total is now down to $305.7 million. So it's come down materially. The amount of office exposure left out of that portfolio is $126.3 million. So it's not much left in terms of office exposure and the remaining office exposure that we do have is all current and paying. So at this point, it seems like an outlier. That doesn't mean something can't go wrong somewhere. But if I was to just say, if somebody said, where do you think the risk is in this $40 billion balance sheet, I'd look right into that $126.3 million worth of former legacy structured CRE portfolio. Even though it's still performing well, Class B office is not a great place to be. Fortunately, we've worked it down to the $126 million but outside of that and that portfolio is still doing just fine today but I think that's where the risk lies.

I think what Kevin has said is really accurate. And I also say that again, this loan never even hit the past-due sheet or...

It's never past due.

We have never had this deal past due. Many other banks might have held onto it for a year or two before trying to sell, but that's not our approach. We sold it right away and accepted what we believed was a reasonable return. We typically aim to remove all of our nonaccrual or nonperforming loans from our books. This period, we noted a significant rise to $62 million in nonperforming assets, with over $20 million stemming from First Capital, and we plan to address that. For the other two loans totaling $18 million that we mentioned, we already have a contract in place that will cover most of that amount. We have a deal lined up for about two-thirds of it, allowing us to exit those positions. Additionally, we do not expect to incur significant losses in this scenario.

Nowhere near that kind of loss. Yes. As David said, this was an intra-quarter event. This went from losing enough tenants to us foreclosing and us running a process and getting it moved off the books within a 90-day period of time—inside of the 90-day period of time.

All right, that's helpful. And then Lone Star has been pending regulatory approval for a while. I think in the press release you all talk about hoping to close that this quarter in 3Q. What's been the holdup with getting regulatory approval for that deal?

Up until this point, it really had been held up at the Department of Justice. Primarily, it was based on a branch bank that they felt like we—they didn't know if they were going to let us keep or not. This was really a branch bank in a town of 9,000. So we thought that for the longest time. And we finally got it 2 weeks ago or a week ago, finally got clearance on that that the DOJ let us go through with it. And so really, from that point, it was at the FDIC; our contacts with the FDIC, we felt that we really would get it done in just a few days. It's taken longer than that because now most everything, even of the size of it and the small size of it, it still has to go to Washington. I don't know, maybe they were dealing with the PacWest deal last night and the week before, I don't know. But we're really hoping to get it. We should get it. We don't know of anything that light shouldn't be, let me say that.

And our next question comes from Manan Gosalia with Morgan Stanley.

I apologize if I missed it but can you talk about what your models assume for terminal deposit beta as well as the mix of NIB deposits?

Yes. Our beta for the interest-bearing deposit is 36 basis points. That's what we use in the model. And, but if you look at our deposit over this interest rate cycle on interest-bearing deposit was 27 basis points. So we're running below the model what we have for the deposit—interest-bearing deposit betas.

Got it. And the NIB mix?

I think it's the same.

I don't think we show a decrease in it probably on the model on. It's just flat where it is. In fact, really, our noninterest-bearing as a percentage of deposits is really going up or hasn't it?

Yes. Compared to the first quarter, yes, it went up to 37.9%.

So actually, our noninterest-bearing has really held up better than most of our other accounts.

All right. Perfect. And then maybe just to approach some of the prior questions in a different way. On deposit betas, I think you've always had a significantly lower deposit beta than your peers and maybe you can talk about if rates stay higher for longer, what do you think about your ability to keep that spread relative to your peers? Or as rates stay higher for longer and loan growth continues, do you see that spread compressing?

I don't think so. I mean this—we've been pretty consistent. If anything, our model is really after 12 months or after 24 months or so, really some crazy stuff. Some really high net interest margins, I would say, if that becomes true, we may give more of that back to the customer. And so it's just—but basically, from what we're seeing in the time horizon of 12 and 24 months, I pretty much think we are where we are.

Yes. I mean, other way of saying it as we reprice our loans and reprice—especially reprice our loan portfolio at $13 billion, generating 2.07%, that would help us from the assets—interest-earning assets. So we could increase the—our cost of deposit but save the margin, protect the margin. It's just this timing issue for us. And as we improve on the asset side, we could give a little bit on the deposit side but still protect the margin. We need a Fed pause.

Got it. Got it. Makes sense. And maybe last question. Just as we think about the securities book. Should we think about that yield remaining flat as you repurpose those securities into loans? Or as more of the back book sort of runs off at a lower rate, should we still see that weighted average rate on those securities rise in the coming quarters?

Yes. I think if you look at security, we're not buying any new securities. So we're not repricing those securities to higher yield. All what we've discussed. So we're using that cash flow, first of all, getting higher-yielding loans or if we have any fund available, we're going to be paying down—both of them very accretive to the net income and the margin from our standpoint. So from the rate on the security, I don't think it's going to be a significant change from what we see right now.

All the repricing when you look at what our yield is on securities and look at what our yield is in loans and you look at what the yield—what we're getting today, you can see how significant that is. It just takes us time to turn the ship around a little bit.

Yes. I mean, the spread we're getting on every dollar we get from the security on the loans we're getting 5%, 6% spread on if we put on new loans.

But you could just pay your Federal Home Loan by getting it over 3%, right? Yes.

3.5%.

And our next question comes from Brandon King at Truist.

So, yes, could you give us some commentary on what you're seeing in regards to prepayments in your CRE book? It seems like with this interest rate environment, is the interest rate environment, though average LIFO loans could be extended just given the dynamics around that.

Well, I think that's right. We're not seeing excessive prepayments on loans.

Yes. I think what we'll continue to see is multifamily deals that stabilize because the inversion of the curve can go out to the agencies and get a lower—longer-term fixed rate loan than they might have had from our floating rate perspective. So we'll continue to see some pay down there. But Tim is absolutely right as we look across the entire book, it's a slowdown of the more traditional kind of deals. These big multifamily deals have an option to go out and lock up nonrecourse debt off the inverted curve.

Correct.

I still think once all these rates quit rising, it always comes back around. There always becomes competition, and everybody starts trying to undercut you and trying to get better rates from different—maybe even nonbanks. And so I think you'll see that in the future as rates stabilize and maybe even consider coming down next year or year. I don't think rates are going to go down as much as everybody else thinks are going to go down. I think rates are going to stay higher for longer. However, there's always competition and things always turn around. It's just—that's just the way it is.

Got it. And do you think that potentially limits the benefit of the fixed rate repricing just given how we have the contractual maturities in place but obviously, you assume a certain weighted average life for those loans. But I think that dynamic could kind of limit that benefit at least over the next year?

Now the maturities are still the maturities; it's an opportunity for a rate increase.

I think so, yes.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for closing remarks.

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.