Earnings Call Transcript - PB Q1 2022

Operator, Operator

Good day, and welcome to the Prosperity Bancshares First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte Rasche, Executive Vice President and General Counsel

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' first 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 several weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call 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 and 10-K and other reports and statements we have filed. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

David Zalman, Senior Chairman and Chief Executive Officer

Thank you, Charlotte. And everyone, welcome to Prosperity Bancshares' first quarter 2022 conference call. 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 Banks list. Prosperity Bank has been ranked in the top 10 since the list’s inception in 2010. We have twice been ranked number one. We were ranked number two in 2021 and are ranked number six for 2022. It is a testament to Prosperity's performance, culture, vision and consistency and distinguishes us among most banks. I want to congratulate and thank all our customers, associates and directors for helping us achieve this great honor. Let's go on to the financials. On a linked quarter basis, our net income was $122.3 million for the three months ended March 31, 2022, and that's compared with $126.8 million for the three months ended December 31, 2021. The change was primarily due to a decrease in loan interest income. Average warehouse purchase program loans decreased $504 million in the first quarter of 2022 compared with the prior quarter. And PPP loans were lower as loans were repaid. This was partially offset by an increase in securities interest income. Our net income per diluted common share was $1.33 for the three months ending March 31, 2022, compared with $1.38 for the three months ending December 31, 2021. Our annualized return on average assets for the three months ended March 31, 2022 was 1.29%, and our annualized return on average tangible common equity for the three months ended March 31, 2022 was 15.3%, respectively. Prosperity's efficiency ratio was 43.6% for the three months ended March 31, 2022. Going on to the loans, when you compare year-over-year loan totals, excluding the warehouse purchase program and PPP loans, at March 31, 2022 were $16.6 billion compared to $16.2 billion at March 31, 2021, an increase of $409 million or 2.5%. On a linked quarter basis, linked quarter loans decreased $548 million or 2.9% from $18.6 billion at December 31, 2021, primarily due to a decrease in warehouse purchase program loans. The linked quarter loans, excluding the warehouse purchase program and PPP loans, decreased $33 million from $16.7 billion at December 31, 2021. We continue to see and approve a record volume of loans. However, we had significant paydowns during the quarter. Tim will provide specific information on loan production. With regard to deposits, deposits at March 31, 2022 were $31 billion, an increase of $2.3 billion or 8% compared with $28.8 billion at March 31, 2021. The linked quarter deposits increased $296 million or 1%, 3.9% annualized from $30.8 billion at December 31, 2021. Deposits seem to be normalizing. Historically, excluding the last two years, our organic deposit growth rate ran about 4%, with most of the growth in the first quarter, decreasing in the second quarter and increasing in the fourth quarter. If rates continue to rise, we expect that our time deposits will increase as they are currently at only 8% of total deposits right now. Consumer deposits increased over the last several years during the pandemic, but we are now seeing people spend more of their savings. We expect that business deposits will increase over time if the economy stays strong, replacing the excess consumer deposits that are being spent. On asset quality, our asset quality remains sound. Year-over-year nonperforming assets decreased 38%. Our nonperforming assets totaled $27 million at March 31, 2022, compared with $44 million at March 31, 2021, and $28 million at December 31, 2021. On the economy, companies and individuals continue to move to Texas and Oklahoma, primarily because of lower tax rates and a favorable pro-business political environment. The overall economy remains strong despite concerns around higher interest rates, inflation, supply chain issues and the war between Russia and Ukraine. Our bank has sound credit quality, solid core capital and strong earnings. We expect that our earnings will benefit from the higher interest rates. However, as I have previously mentioned, because of a large bond portfolio with an effective duration of 3.6 years, it will generally take us longer to see the full effect of the increase. Our securities portfolio is 97% held to maturity, which will protect the bank from having an unrealized loss in the portfolio that adversely affects our tangible capital in a rising rate environment. With regard to acquisitions, as we've indicated in prior quarters, we continue to have active conversations with other bankers regarding potential acquisition opportunities, although the conversations have slowed somewhat given the war and the decline in the stock prices. Overall, I want to thank our associates for helping create the success we have had. We have a strong team and a deep bench at Prosperity, and we'll continue to work hard to help our customers and associates succeed and to increase shareholder value. 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 Osmonov, Chief Financial Officer

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2022 was $239.9 million compared to $254.6 million for the same period in 2021, a decrease of $14.6 million or 5.7%. The current quarter net interest income includes fair value loan income of $5.2 million, compared to $16.3 million for the same period in 2021, a decrease of $11.1 million. The current quarter also includes PPP loan fee income of $3.3 million compared to $13 million for the same period in 2021, a decrease of $9.7 million. However, the interest income on securities for the first quarter 2022 increased by $16.3 million compared to the same period in 2021. The first quarter 2022 net interest income, excluding the impacts of PPP loans, warehouse purchase program loans and fair value loan income, improved compared to the same result in the fourth quarter 2021. The net interest margin on a tax equivalent basis was 2.88% for the three months ended March 31, 2022, compared to 3.41% for the same period in 2021 and 2.97% for the quarter ended December 31, 2021. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2022 was 2.81% compared to 3.19% for the same period in 2021 and 2.91% for the quarter ended December 31, 2021. The decrease in net interest margin on a linked quarter basis was primarily due to higher liquidity and lower PPP loan fees. Noninterest income was $35.1 million for the three months ended March 31, 2022, compared to $34 million for the same period in 2021, and $35.8 million for the quarter ended December 31, 2021. Noninterest expense for the three months ended March 31, 2022 was $119.9 million compared to $119.1 million for the same period in 2021 and $119.5 million for the quarter ended December 31, 2021. For the second quarter of 2022, we expect noninterest expense to be in the range of $120 million to $122 million. The expected increase in noninterest expense is based on the annual merit increases in the second quarter 2022. The efficiency ratio was 43.7% for the three months ended March 31, 2022, compared to 41.3% for the same period in 2021 and 42.8% for the three months ended December 31, 2021. During the first quarter 2022, we recognized $5.2 million in fair value loan income. This amount includes $1.5 million from anticipated accretion, which is in line with the guidance provided last quarter, and $3.7 million from early payoffs. As of March 31, 2022, the remaining discount balance is $7.8 million. Due to the low remaining discount balance, we estimate the accretion income for the next few quarters to be around $1 million to $2 million. Also, during the first quarter of 2022, we recognized $3.3 million in fee income from PPP loans. As of March 31, 2022, PPP loans had a remaining deferred fee balance of $3.9 million. As the PPP program winds down, we expect PPP fee income to be around $1 million to $2 million for the second quarter 2022. The bond portfolio metrics at March 31, 2022 showed a weighted average life of 5.1 years and projected annual cash flows of approximately $2.2 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality.

Tim Timanus, Chairman

Thank you, Asylbek. Our nonperforming assets at quarter end March 31, 2022 totaled $27.184 million or 15 basis points of loans and other real estate compared to $28.088 million or 15 basis points at December 31, 2021. This represents approximately a 3% decrease in nonperforming assets. The March 31, 2022 nonperforming asset total was made up of $25.460 million in loans, $19,000 in repossessed assets and $1.705 million in other real estate. Of the $27.184 million in nonperforming assets, only $15,000 are energy credits, all of which are service company credits. Since March 31, 2022, $6.356 million in nonperforming assets have been removed or put under contracts for sale, but there is no assurance these contracts will close. This represents 23% of the nonperforming assets at March 31, 2022. Net charge-offs for the three months ended March 31, 2022 were $1.217 million compared to $807,000 for the quarter ended December 31, 2021. No dollars were added to the allowance for credit losses during the quarter ended March 31, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2022 was $632 million. This compares to an average for the entire calendar year of 2021 of $621 million per month. Loans outstanding at March 31, 2022 were approximately $18.068 billion, which includes $86.3 million in PPP loans. The March 31, 2022 loan total is made up of 39% fixed rate loans, 35% floating rate loans and 26% variable rate loans. I'll now turn it over to Charlotte Rasche.

Charlotte Rasche, Executive Vice President and General Counsel

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. And our first question will come from Jennifer Demba with Truist Securities.

Jennifer Demba, Analyst

Thank you. Good morning.

Charlotte Rasche, Executive Vice President and General Counsel

Good morning.

Jennifer Demba, Analyst

Can you give us a little more color on the paydown you had in the quarter and kind of lack of loan growth on a core basis?

David Zalman, Senior Chairman and Chief Executive Officer

Well, I can kind of start, and probably Kevin or Tim can jump in at the same time. But the bottom line is, we just had a lot of projects that were construction projects, multifamily projects and some offices, and the projects basically got completed. The customers either sold them and took them into the secondary market. And that's the way it's supposed to work. Our production was good, but again, we just had a lot of paydowns. And you could put some lipstick on it, I guess, but the bottom line is that we produced a good amount of business, but at the same time, our customers finished their projects and completed them and sold them, so they made money on the deal. So that's about it really.

Tim Timanus, Chairman

That's all correct. The warehouse loans decreased by approximately $430 million on a linked quarter basis, and the structured real estate loans decreased by about $70 million. On top of that, as David says, there were a number of projects that had been completed and had developed an NOI that was sufficient to enable the projects to be sold. So they were successful projects. One was about $84 million that was paid down. There were several in the $6 million to $10 million range. So, when you take all of that into consideration, that's really the main driver and the answer to your question.

Jennifer Demba, Analyst

What's your confidence in net loan growth for the rest of this year? What are you seeing in the pipeline?

David Zalman, Senior Chairman and Chief Executive Officer

I believe our pipelines are strong, and payoffs remain robust. In the first week of April, we experienced around $140 million in paydowns. We have some solid projects in both public storage and industrial sectors. We're still aiming for 5% growth, which may be challenging, but we are fortunate to be in a growing economy with increasing population and business activity. With inflation in mind, our business clients may begin to utilize their lines of credit, leading to more activity. We're still targeting that 5% growth, possibly achieving it more in the third and fourth quarters than in the second, due to paydowns. We have a competent team and I am optimistic about our ability to reach our goals. Kevin, would you like to add to that?

Kevin Hanigan, President and Chief Operating Officer

Yes. Jennifer, I think one of the things we've done that we haven't done a ton of in the past. But in the quarter, we hired six really solid producers in the Houston market alone, all of which have started. These are folks who've been around the market for a considerable period of time and have produced well wherever they've been. Most have worked for me when I was in Houston in the past. So institutionally, I know what they can do. That doesn't mean they're going to do it, but I wouldn't bet against them, which is why we hired them. I think we've added a number of really, really good producers that have portfolios, and we're planning on having them move some of those portfolios over to us.

David Zalman, Senior Chairman and Chief Executive Officer

Probably a little bit of color, Jennifer. I may be able to help. I mean, Austin was on fire and probably our biggest producer on a percentage basis. Historically, Houston had been our biggest producer with 1/4 plus, $100 million plus even after all the paydowns in this quarter, for example, it was kind of neutral or even down a little bit in the Houston market. So they weren't able to jump in because of all the paydowns. So Dallas is still doing good, too. However, we're still reducing the structured commercial real estate loans. If you took that out, they would have still been positive, too. But again, Houston being one of our biggest producers and a lot of the payoffs being in that hurt us this time. But at the same time, that's the way it's supposed to work. Your customers are supposed to get out there and do projects and make them good and sell them. That's what's really happened. It's just, unfortunately for us, we have to get out there and start hustling more and try to get the loans in. But having said that, I would say this, that we're in a market right now where things have really improved for us. We need loans, but at the same time our bank is still made up of extremely core deposits. And we make money both ways. Just to give you an example on the bond portfolio, probably last quarter we talked, we were probably making 1.5% or 1.25% on a bond purchase that we would purchase today, we're probably making more like 3.25% or 3.50%. So we're going to make money both ways. But again, we still want to do loans at the same time. We're focused on that. We still want to get there. But again, our bank is positioned with the core deposits to make money both ways, either loans and bonds.

Tim Timanus, Chairman

I would add to that. Everything that David has said and Kevin has said is correct. The backdrop to it all is that the economy in Texas as well as Oklahoma is still good. Businesses are still moving to both states. People are still moving to both states. I guess the primary unknown right now is what effect, if any, higher interest rates you are going to have on the business climate. To date, it doesn't seem to have had a detrimental effect, but time will tell on that. In addition to the new folks that we've hired in Houston that Kevin mentioned, we've hired a scattering of people throughout the rest of the state of Texas and Oklahoma also. So we're hopeful that we've gotten an increase in good producers. So if the economy holds the way it's been, I think we're optimistic.

David Zalman, Senior Chairman and Chief Executive Officer

Yes. I wouldn't want to be with any other bank than mine, let me say that, or ours. So I feel comfortable with where we're at.

Jennifer Demba, Analyst

How much more structured commercial real estate runoff is expected until that portfolio stabilizes? Is it something you want to have zero exposure or?

Kevin Hanigan, President and Chief Operating Officer

No. This is Kevin again, Jennifer. I think there's probably another $150 million to go, maybe $180 million to go out of the portfolio. There are some core customers in there that we've kept and renewed already and extended those loans out for three to seven years. So there's a core group that fits and we've got a little bit more to go. As anticipated, the amount of runoff out of that portfolio continues to come down. I think it was $72 million in the quarter. And I would think Q2 is going to have a similar number, I'd say $60 million to $70 million again.

Jennifer Demba, Analyst

Thanks so much.

Operator, Operator

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

Dave Rochester, Analyst

Hey, good morning guys.

Charlotte Rasche, Executive Vice President and General Counsel

Good morning.

David Zalman, Senior Chairman and Chief Executive Officer

Good morning.

Dave Rochester, Analyst

On that commentary on the structured CRE paydowns, I know you mentioned you had maybe $140 million overall in paydown so far this quarter. How much of that you expected that was coming up that $150 million or so was actually in that $140 million that you've already realized?

Tim Timanus, Chairman

The $140 million I mentioned didn't have anything to do with the structured commercial real estate. Those are projects that were outstanding and completed and sold.

Dave Rochester, Analyst

Okay. I guess going forward, how much in the way of paydowns are you expecting in your core CRE book, outside of that structured book for the rest of the year? Any sense of that?

Tim Timanus, Chairman

Candidly that's very hard to predict. All the projects seem to be on schedule, seem to be doing well. Whether or not the owner decides to sell them or hold on to them, those are decisions that we're not necessarily privy to until it happens. So, I don't know that we can give you a really accurate count of that. Any of them could be held, any of them could be sold.

David Zalman, Senior Chairman and Chief Executive Officer

I think the people that sell the projects were pretty smart. I mean, their cap rates where they were. There's a big public storage who sold his whole portfolio out, a huge multifamily project for a big developer here in Houston, an office deal. So all of them sold to make a good profit based on where interest rates were as interest rates go up. I think they made a smart decision. I would think as interest rates go up, you probably are not going to have as much opportunity to sell going forward, so I think the people that have been selling probably made a good decision really to do it right now.

Tim Timanus, Chairman

Well, it just depends on how high rates go. But there should be some decrease in the sales. That's right.

Dave Rochester, Analyst

Yes. Okay. And then just switching to deposit growth that was nice to see when it's normally not a great quarter for deposit growth. Are you still seeing growth this quarter? And what's your outlook on growth overall for the rest of the year?

David Zalman, Senior Chairman and Chief Executive Officer

Again, I’ve mentioned earlier that before we were growing 10%-plus a year, our organic growth rate was between 2% to 4% organic growth. I still think we'll see that this year. Usually, the second quarter we see a down quarter. Then it starts picking up in the fourth quarter. So I think you'll probably see deposits down next quarter, but probably increase toward the end of the year.

Asylbek Osmonov, Chief Financial Officer

Yes. We have public funds that are growing at the end of the year. When those funds are utilized, we expect a slight decrease in the second and third quarters; however, we anticipate a rebound in public funds at the end of the year. As a result, there may be some overall shrinkage in deposits. However, when considering nonpublic deposits, we expect to see positive trends.

David Zalman, Senior Chairman and Chief Executive Officer

Most of our growth comes from the core deposit, I mean, the core consumer deposits really.

Kevin Hanigan, President and Chief Operating Officer

And I would say also that I think that probably if the economy stays up and we don't go into World War III or something like that and business stays up, businesses are starting to make more money, too. And those deposits should really be coming into the bank to help. They should probably be increasing.

Tim Timanus, Chairman

And interest rates obviously have an impact on deposits. So that's something we'll have to deal with. It hasn't happened yet. It hasn't been significant yet, but it's reasonable to assume that that's coming. But there are things at play in some of our markets that I don't know how long it's going to last, but some of our larger competitors have been closing locations. And to what extent they'll continue to do that? I don't know. I don't have any idea. But we have picked up a fair amount of business from Wells Fargo, from Bank of America, from even Chase because of the dislocation within their banking centers. So once again, I don't have any idea whether that's going to continue. But if it does, that's going to supplement our deposit some right there, or I would at least anticipate it would.

Dave Rochester, Analyst

Yes. That's good color. Maybe just one last one. How are you guys thinking about super core margins at this point, just within the higher rate backdrop? And are you thinking maybe we've hit bottom here? And on your securities purchases this quarter, what was the average rate on those? And what's your appetite for continuing to grow the book?

Asylbek Osmonov, Chief Financial Officer

Yes, it's Asylbek, I'll address this question. Looking at our balance sheet, we have asset-sensitive positions that position us well in a rising interest rate environment. From this perspective, we expect the super core to continue to grow. We have observed this trend, and based on various models we've run, we anticipate a 50 basis points increase in May. In terms of super core margins, I believe we reached the low point in the first quarter, and I expect the margin to start expanding in the second quarter, provided that conditions remain unchanged, with variables stable and rates increasing. Currently, our models indicate positive expansion. The increase in interest rates should have a favorable impact on our performance.

David Zalman, Senior Chairman and Chief Executive Officer

I don't think there's any question, Dave, that I think we have bottomed out. Again, if interest rates are going to rise as they're predicted to rise, we are sitting very, very pretty with $2.2 billion a year just in bond portfolio rolling off. We have another $1 billion or plus, and that's not even invested yet, plus we have another $5 billion or so in loans. So you're talking, the year looks really good. In two years, we're really looking at a net interest margin that goes back to more kind of historical level where we were and where we really should make a whole lot of money.

Dave Rochester, Analyst

Yes. And you mentioned the cash there, are you're looking to grow the securities book more here given high rates?

David Zalman, Senior Chairman and Chief Executive Officer

We are. Normally, we would buy in every market. Fortunately, we still are buying in every market, but we didn't buy as much, I guess, over the last month or two. But again, we have so much money rolling off all the time, we are continuing to roll to buy. And I would even think before the rates got so low, we actually even leveraged the bank by about $1 billion or so. So I think that may even be a possibility once we get fully invested, and we'll probably even leverage the bank by $1 billion and that will help also at the same time.

Asylbek Osmonov, Chief Financial Officer

And just one question was what the average yield on the bond portfolio was, 1.60% in the first quarter. So if you take $2.2 billion and reinvest at 3.25%, you can see how much upside we have. But it takes time, as we mentioned, right, it takes time to get there, but the upside is there.

David Zalman, Senior Chairman and Chief Executive Officer

These individuals have all created models and numbers. I'm sure you'll be adjusting new rates accordingly. Last month, on the final day of trading, we secured a rate of approximately 3.40% or possibly 3.50%. I believe it dropped by about 10 basis points yesterday. However, you have the model and can run the calculations to see the real outlook. The future appears promising for us, provided everything operates as expected and interest rates rise as forecasted.

Operator, Operator

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

Brady Gailey, Analyst

Hi, good morning. David, maybe I want to start with fee income. A lot of banks have changed the structure of their NSF overdraft programs. Just kind of curious if you could kind of offer us any color on kind of how you guys are thinking about it? Any changes we should think about in that kind of fee line going forward?

David Zalman, Senior Chairman and Chief Executive Officer

I heard that there might be a committee meeting today discussing this, but I honestly don't foresee any changes at the moment. Typically, a change would occur if we were losing business or facing stiff competition. Tim pointed out that we've noticed new accounts coming from certain banks that have reduced their service charges, and those customers are switching to us. For now, I don't believe we need to lower our service charges. In the future, that might change. We do offer products that allow customers to avoid fees by maintaining a minimum balance in their checking accounts. Additionally, each of our 275 banking centers evaluates overdraft decisions daily. While some customers may not appreciate the fees, they value the overdraft protection we provide, which they won't find at other banks. This offers us some competitive advantage. I'm not suggesting we would never lower our fees, but if we start losing business or not growing, we would reconsider. Currently, with new customers coming from banks that have cut fees, we don't feel a need to make any changes.

Brad Milsaps, Analyst

Great. Thanks. That's very helpful. Thanks for that color. And then just maybe as my follow-up. Kevin, could you talk maybe a little bit about the mortgage warehouse business, kind of your crystal ball for balances and also what you're seeing from a yield and rate standpoint for borrowers in that business?

Kevin Hanigan, President and Chief Operating Officer

Yes, Brad. The first quarter came in pretty much as we expected. In January, we anticipated results between $1.250 billion and $1.3 billion, and we finished at $1.269 billion, which is almost right in the middle of that range. Interestingly, our weighted average coupon for the quarter was 3.18%, up a couple of basis points from Q4 last year. However, the pricing environment remains quite competitive, and I haven't noticed any opportunities to raise rates; in fact, we've received requests to lower them. The impact of rising rates on volumes is still pending, as there tends to be a six-week delay from application to loans appearing in the warehouse. If I had to provide an estimate, I believe we'll average between $1.350 billion and $1.4 billion in the second quarter. Volumes have increased in April compared to March, which is typical for this season, and we seem to be capturing at least our fair share, if not a bit more, from our clients. So, I would project an average of $1.350 billion to $1.4 billion in Q2.

Brady Gailey, Analyst

Great, thank you guys. I appreciate it.

Operator, Operator

Our next question will come from Brady Gailey with KBW. Please go ahead.

Brady Gailey, Analyst

Hey thanks. Good morning guys. I wanted to circle back on the topic of loan growth. I know balances this quarter were somewhat stable just due to payoffs. But when I think about bigger picture, you're in a great market there in Texas. You have a lot of your peers that are growing just at a lot faster pace. I mean, Frost is around 10%. Even FFIN is around 10% now. You have Veritex and IBTX that are growing 10% to 20%. It's such a great market, but your growth, I know you guys are just consistent and kind of mid-single-digit is kind of what you've always done. It seems like the opportunity could be a lot higher than that. So what makes Prosperity's growth profile a little less? Is it your markets? Is it the fact that you guys are just more disciplined on the credit underwriting? What pulls down kind of the growth profile, especially nowadays relative to your Texas peers?

David Zalman, Senior Chairman and Chief Executive Officer

Let me start, if I can. I think there's probably a lot of answers to your question. There's a number of answers to it. I think when you look at Frost, I mean, their loan-to-deposit ratio is, what, 38% or something like that, 40%. I don't have it off the top of my head. It's a lot lower than ours. So their growth is good for them. They do need to grow. You look at banks like Veritex and some of the smaller banks, on a percentage basis, they're hiring a bunch of people. They're probably taking more risk than we are and are probably charging lower rates. So there's reasons for everything. But no matter how you cut it, I think what you did say, we should be doing better. I've seen the bank, I’ve been with the bank for 25 or 30 years. So I've seen our bank sometimes when somebody else is doing better than we are and sometimes we do less than what they are, but overall, our consistency in our growth seems to outshine the other guys. And our asset quality always prevails especially in a harder time, which we may see. But having said that, we should be doing better, the growth rates that you're seeing, I would tell you that, and just this is my opinion, a 20% growth rate in loans historically is not where you really want to be. The outcome wasn't that great in the future. So again, there are reasons for it, and they may have certain reasons, and they hire people for what it is. But historically, the banks going through, my lifetime in banking, any banks growing superfast like that, there is usually some type of issues down the road. Not saying it's wrong. It's not what we take. Our position has been is to grow, in my opinion, this is just my opinion, but the mother's milk of a bank is the deposits, but you have to grow the loans at the same time. But we've tried to have consistent growth in the overall of the company. But more importantly, just to say that you want loans right now, we're probably more interested or as interested in earnings per share. Well, let's just use some of the examples that you had. I mean, Veritex who has 20% loan growth and you look at their stock price has really gone the other way. So, I mean, I don't know that loan growth in and by itself is going to make your stock price go up. I think there has to be the faith in the consistency in what you've done in the past to where you're going into the future. So it's, I think it's more total than that. Tim, do you want to?

Tim Timanus, Chairman

Well, I would just say that one of the things that accounts for the differences that you're speaking of is the structure of the loans. And while we're certainly not knowledgeable about the structure of every loan that these other banks put on, in many cases, we are because we compete for the same loan and we find out what actually happened. And once again, we don't know about all of them, but it comes down to the structure, whether or not the borrower is required to have any of its money in the transaction. Often, the equity that the borrower has to put in is very minimal. It depends on whether there's any recourse to a person or another entity. A lot of times, there's no recourse backing the loan. It depends on the amortization of the loan. Sometimes they are a lot longer than the useful life of the collateral that supports the loan justifies. So, all those things are risk factors. And you have to look at each one on its own merit and evaluate it. But we're trying to grow loans, but at the same time, not put our bank in jeopardy.

David Zalman, Senior Chairman and Chief Executive Officer

I'll just use an example. What comes to mind is, mortgage warehouse. We probably lost a customer there, $100 million, $150 million line because we were charging what we felt was a fair rate. And another bank came in and charged them 1.8%. Well, for us, to me, it wasn't enough of a return for the risk that you're taking and what we could reinvest the money in. So I think there's a number of deals. I think you have to consider profitability, asset quality and all of those things that come into it. But not to make light of it, we should be doing better. Kevin, do you want to jump in on the deal?

Kevin Hanigan, President and Chief Operating Officer

No. The only thing I would add there or modify is the warehouse customer Dave was talking about we lost several quarters ago. It doesn't impact my crystal ball for Q2.

David Zalman, Senior Chairman and Chief Executive Officer

Right. But we've had a number of customers that the rates that they've been given is just not something that we could live with. I mean, pricing has just been so cheap on some of these deals, the terms and conditions, you'd have to ask the question why do we want? Just to have a loan on the books didn't make a whole lot of sense.

Tim Timanus, Chairman

Yes. For example, when prime was at 3.25%, which was not that long ago, it wasn't uncommon to see somebody approve a loan at 2%, maybe even a little lower than that or barely above that. Well, that works a little bit on occasion. But too much of that you're in trouble.

David Zalman, Senior Chairman and Chief Executive Officer

So we've seen. We saw a number of loans, even commercial loans that wanted to be priced at 2.5%. It just didn't make a whole lot of sense really. So we're trying to be as balanced as we can.

Brady Gailey, Analyst

That's all great color. And then just finally for me, I wanted to ask about M&A. It's been a while since you partnered with Kevin. So I think the market is looking for kind of what is Prosperity's next deal. But your currency trades at 10 times to 11 times earnings, which doesn't give you a ton of power there, especially in a state like Texas where things are relatively expensive. There's talk about the nation slipping into a recession. So I mean, to me, it seems like M&A would be a lot less likely for you guys right now. Is that the right way to think about it near term?

David Zalman, Senior Chairman and Chief Executive Officer

I would say that before you had the Ukraine-Russian war, our stock was trading about $75, $76 a share. And we had negotiations and talks with several banks. We've continued those talks with the banks. However, the stock price where it's at, it doesn't make a whole lot of sense. So, I would never say never. You never know, but we're staying in contact with the banks that we have had talks with. We'll continue to do that. And if it works, it works. I mean, but again, just to grow to grow doesn't make a whole lot of sense. I mean, when you own a lot of the shares or number of shares yourself, you really want to make sure that you're increasing the earnings per share and the book value and the tangible book value of our bank at the same time.

Brady Gailey, Analyst

Okay, great. Thanks guys.

Operator, Operator

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

Brett Rabatin, Analyst

Hey, good morning everyone. Wanted to ask, a lot of stuff, I wanted to talk about has been covered. But one of the things that there's obviously the talk about recession, and I think everyone is fully aware that you guys have superior credit quality to most institutions. And so, I was just hoping to get a flavor for what you view as credit risk in this environment or as rates move higher, if not, in your portfolio, just as you see it across the landscape, what loan categories, what types of businesses or real estate you kind of worry about more as we move into higher cap rates and potentially slower economic growth.

David Zalman, Senior Chairman and Chief Executive Officer

I would say higher interest rates, that's what they're intended to do is to cause a downturn or a recession in probably land values and stock prices. That's the whole intent, to bring inflation down. Having said that, I don't know that you will exactly have a recession this time. This is just an opinion. There's so much money and so much stimulus in people's deposit accounts that it may be, maybe we won't. But having said that, if there is a recession, I don't think there's any other bank that you would rather be with. Somebody asked about the loans a while ago. I don't think, and maybe we could have taken more risk. We could have made even more money. But again, I don't think there's any other bank that you would rather be with in a recessionary period of time. And generally, my favorite comment is you like us in the good times and you love us in the bad times. And I think that's still true today. I think that if you're talking about recession and inflation, if we do have a recession, I think you're going to see, it's going to be different on the West Coast and the East Coast maybe than in Texas, because Texas still is enjoying a terrific amount of growth. You're seeing companies still come, population growth. And so, where it may affect us, I think different parts of the country may be affected differently. I think growth states are probably going to be affected differently if there is a downturn. So I think Texas is a good place to be. Anyone else want to?

Tim Timanus, Chairman

Well, I think that's right. You could maybe make a reasonable assumption that homebuilding and home sales might slow down. That hasn't happened yet in any of our markets. But that's a possibility. But we don't think it would be terribly drastic, so to speak. But that's something that we'll watch. We've mentioned earlier in this call the commercial properties. That may slow the sale of some of those down. It doesn't necessarily mean that the cash flow has been derived from those projects would suffer significantly. So it's a little here or a little there. I don't know that there's one category that we feel that we just absolutely would need to stay away from. Obviously, oil and gas right now is running contrary with all these fears. How long that lasts, we don't know. But at $90 to $100 a barrel, things are pretty good in the oilfield right now. And you saw that in my comment on our nonperforming assets was only $15,000 in the oil patch.

David Zalman, Senior Chairman and Chief Executive Officer

Sometimes our bank runs contrary to other banks, too. I just was talking to Eddie a while ago. He may want to jump in. But where you read that mortgage companies, their business is down 30% or 40%. In our mortgage business, we have more applications than we've ever had. And so Eddie, you want to comment on that? I mean...

Eddie Safady, Vice Chairman

That's right. We've not seen any slowdown in our application volume. In fact, last week was our highest application volume in the bank's history, and primarily on the purchase side.

David Zalman, Senior Chairman and Chief Executive Officer

And I think that's primarily because we never really went after the refinances. These were purchases. Over half of our business comes from our own bank customers, yes.

Kevin Hanigan, President and Chief Operating Officer

Brett, I would say on the, and you asked about on a larger scale, maybe not pertaining just to us, but across the nation. In times like these, I would say, raw undeveloped land is at the highest risk. Developed land without anything vertical on it is next. Those things just eat cash instead of throw off cash, so you better have a strong guarantor in tough times. Homebuilding would be next. And in all three of those categories, I'd say it's going to be more severe in states that have less population growth. And then beyond that category, you go to various categories of commercial real estate and anything that supports commercial real estate in terms of contractors and things of that nature. The unique thing about most of the markets we're in, and it's not just for us, but it's for Texas in general, is, when you think about those categories, we're in markets where housing, you might have a one or two month supply of housing. Whereas a more normal time for that is six or seven months of supply and that's a combination of people still moving here and not getting houses out of the ground fast enough. So in those higher-risk categories, Texas is probably a little better insulated than most because of population growth. But if you start thinking about it in terms of markets that have less in the way of population growth and tougher times come, those are going to be the categories that get hit first.

Eddie Safady, Vice Chairman

On the commercial side, you might not see A properties as much, but there could be more demand for B or C properties, especially office space, since people are not returning to work. Ideally, there shouldn't be any malls that you're encountering.

Brett Rabatin, Analyst

That's all great information, and I appreciate it. You mentioned that with the stock where it was, M&A seemed less likely. Would you consider doing more in the buyback, or how will you utilize excess capital going forward?

David Zalman, Senior Chairman and Chief Executive Officer

Well, first, I would not rule out a deal. I think that just because our stock price is down, there would have to be adjustment on both sides if we did a deal because we couldn't pay the same as we might have been talking before with. They have to accept the fact that our stock is trading at an underappreciated value right now. But having said that, I think right now where our stock price is, you could count on us buying stock back right now. We couldn't right now before the earnings announcement, but based on where the price is today, we definitely think it's underappreciated. We'll probably buy back stock.

Brett Rabatin, Analyst

Okay, great. Appreciate all the color.

Operator, Operator

As there are no more questions, this concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Charlotte Rasche, Executive Vice President and General Counsel

Thank you, Matt. 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.

Operator, Operator

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