Prosperity Bancshares, Inc. (NYSE:PB) Q1 2025 Earnings Conference Call April 23, 2025 11:30 AM ET

Company Participants

Charlotte Rasche - EVP and General Counsel
David Zalman - Senior Chairman and CEO
Asylbek Osmonov - CFO
Tim Timanus - Chairman
Kevin Hanigan - President and COO

Conference Call Participants

Manan Gosalia - Morgan Stanley
Catherine Mealor - KBW
Michael Rose - Raymond James
Peter Winter - D.A. Davidson
Jon Arfstrom - RBC Capital
Ebrahim Poonawala - Bank of America

Operator

Good day. And welcome to the Prosperity Bancshares First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode.

To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche.

Please go ahead. Thank you.

Charlotte Rasche

Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares First Quarter 2025 Earnings Conference Call. This call is being broadcast live on our website 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.

Timanus Jr. ., chairman, Asylbek Osmonov, Chief Financial Officer, Edward Safady, Vice Chairman, Kevin Hanigan, president and chief operating officer, Randy Hester, chief lending officer, Mae Stafford, 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 financial statistics, and H. E. Timanus Jr.

., 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.

David Zalman

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2025 conference call. We and others believe that Prosperity is doing the right thing.

Prosperity has been ranked as one of Forbes' best banks since the list inception in 2010 and was ranked in the top 10 for fourteen consecutive years. Additionally, Prosperity was named the best overall bank in Texas by Money for 2024, 2025, and was ranked among America's best regional banks by Newsweek in 2025. Prosperity continues to focus on long-term relationships and our customer success while maintaining strong asset quality, solid earnings, and a fair return to shareholders.

Prosperity maintained a high tangible equity to tangible asset ratio of 11.2% with tangible equity of $3.9% billion.

David Zalman

Our net income was $130 million for the three months ended March 31, 2025, compared with $110 million for the same period in 2024, an increase of $19.8% million or 17.9%. The net income per diluted common share was $1.37% for the three months ended March 31, 2025, compared with $1.18% for the same period in 2024, an increase of 16.1%. For the three months ended March 31, 2025, annualized return on average assets and average tangible common equity were 1.34% on average assets and 13.23% on average tangible common equity, respectively, and the efficiency ratio was 45.7%.

These ratios all show considerable improvement compared with the same period in 2024. Loans were $21.9% billion at March 31, 2025, an increase of $712 million or 3.3% compared with $21.2% billion at March 31, 2024, primarily due to the merger with Lonestar State Bancshares. As of March 31, 2025, loans excluding warehouse purchase program loans, and loans acquired in the Lone Star merger decreased $67.6% million compared with December 31, 2024.

The bank continues to reduce identified loans assumed in recent acquisitions in the amount of $434 million in 2024 and $115 million in February. Our deposits were $28 billion at March 31, 2025, an increase of $851 million or 3.1% compared with $27 billion at March 31, 2024, primarily due to the merger. Linked quarter deposits decreased $354 million from $28.3% billion at December 31, 2024.

The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 500 municipal customers such as cities, schools, and counties that use the tax dollars they receive in December and January throughout the year. Prosperity has strong non-interest-bearing deposits of 34.5% of total deposits as of March 31, 2025, with a cost of funds of 1.66% and a cost of deposits of 1.38%.

The net interest margin on a tax-equivalent basis was 3.14% for the three months ended March 31, 2025, compared with 2.79% for the same period in 2024, and 3.05% for the three months ending December 31, 2024. Based on our models, we believe our net interest margin should continue to improve to a more normalized level as our bond portfolio and loan portfolio reprice. Our nonperforming assets totaled $81.4% million or 24 basis points of quarterly average interest-earning assets at March 31, 2025, compared with $83 million or 24 basis points of quarterly average interest-earning assets as of March 31, 2024, and, again, $81.5% million or 23 basis points of quarterly average interest-earning assets at December 31, 2024. The allowance for credit losses on loans and off-balance sheet credit exposure was $386 million at March 31, 2025, compared with $366 million at March 31, 2024.

Our current nonperforming assets are higher than our historical levels, mainly due to acquired loans and accounting regulations for such loans that mandate we maintain loan balances on our books until they are resolved, despite being reserved for during acquisition. Texas and Oklahoma continue to benefit from strong economies and are home to 58 Fortune 500 headquartered companies. The Texas economy continues to expand.

Employment growth was solid, and sales tax revenue increased broadly according to the Federal Reserve Bank of Dallas Texas Economic Indicators, published April 3, 2025. The March 2025 Texas business outlook surveys showed continued expansion in wages and benefits across all sectors. Despite the uncertainty with tariffs, our teams in Texas and Oklahoma are optimistic based on conversations with our customers about their outlook and plans.

We continue to be opportunistic, work hard, stay close to our customers and their needs, and maintain a quality loan portfolio. Although there is market volatility, we continue to have active conversations with other bankers regarding potential acquisition opportunities and remain ready to enter into a transaction when it is right for all parties and is appropriately accretive to our existing shareholders. Overall, I want to thank all the 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, help our customers and associates succeed, and increase shareholder value. Thanks again for your support of our company.

Let me turn over the discussion to Asylbek Osmonov, our chief financial officer, to discuss some of the specific financial results we achieved. Asylbek,.

Asylbek Osmonov

Thank you, Mr. . Zalman. Good morning, everyone.

Net interest income before provision for credit losses for the three months ended March 31, 2025, was $265.4% million, an increase of $27.1% million compared to $238.2% million for the same period in 2024 and a decrease of $2.4% million compared to $267.8% million for the quarter ended December 31, 2024. The linked quarter decrease was primarily due to having two fewer days in February. Fair value loan income for February was $3.3% million compared to $3.6% million for the fourth quarter of 2024. For the second quarter of 2025, the fair value loan income is expected to be in the range of $2 to $3 million.

The net interest margin on a tax-equivalent basis was 3.14% for the three months ended March 31, 2025. An increase of 35 basis points compared to 2.79% for the same period in 2024 and an increase of nine basis points compared to 3.05% for the quarter ended December 31, 2024. Excluding purchase accounting adjustments, the net interest margin for the three months ended March 31, 2025, was 3.1% compared to 2.76% for the same period in 2024 and 3.0% for the quarter ended December 31, 2024. Noninterest income was $41.3% million for the three months ended March 31, 2025, compared to $39.8% million for the quarter ended December 31, 2024, and $38.9% million for the same period in 2024. Noninterest expense for the three months ended March 31, 2025, was $140.3% million compared to $141.5% million for the quarter ended December 31, 2024, and $135.8% million for the same period in 2024.

For the second quarter of 2025, we expect noninterest expense to be in the range of $141 million to $144 million. The efficiency ratio was 45.7% for the three months ended March 31, 2025, compared to 46.1% for the quarter ended December 31, 2024, and 49.1% for the same period in 2024. The bond portfolio metrics at March 31, 2025, have a modified duration of 3.9% and projected annual cash flows of up approximately $1.9% billion.

With that, let me turn over the presentation to H. E. Timanus Jr.

. for some details on loan and asset quality.

H. E. Timanus Jr.

Thank you, Asylbek. Nonperforming assets at quarter-end March 31, 2025, totaled $81.419% million or 37 basis points of loans and other real estate compared to $81.541% million or 37 basis points at December 31, 2024. This is basically flat with some nonperforming assets coming off and others coming on.

Since March 31, 2025, $895,162 of nonperforming have been removed or put under contract for sale. From March 31, 2025, the nonperforming asset total was comprised of $73.378% million in loans, $29,000 in repossessed assets, and $8.012% million in other real estate. Net charge-offs for the three months ended March 31, 2025, were $2.704% million compared to net charge-offs of $2.592% million for the quarter ended December 31, 2024.

This is an increase of $112,000 on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended March 31, 2025. No dollars were taken into income from the allowance.

The quarter ended March 31, 2025. The average monthly new loan production for the quarter ended March 31, 2025, was $317 million compared to $333 million for the quarter ended December 31, 2024, and $295 million for the full year 2024. Loans outstanding at March 31, 2025, were approximately $21.978% billion compared to $22.149% billion at December 31, 2024.

The March 31, 2025, loan total is made up of 38% fixed-rate loans, 32% floating-rate loans, and 30% variable-rate loans. I'll now turn it over to Charlotte Rasche.

Charlotte Rasche

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.

Operator

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. First question comes from Manan Gosalia with Morgan Stanley.

Please go ahead.

Manan Gosalia

Hi. Good morning all.

David Zalman

Good morning.

Manan Gosalia

Could you give us some more color on what you're seeing on the loan growth side. I know you noted $115 million of deliberate reduction in acquired loans this quarter. But I guess even when you adjust for that, loans were fairly flat.

So can you talk about what you're seeing there and maybe your updated expectations for loan growth in 2025. I think you had previously spoken about somewhere in the low to mid-single-digit range. Is that still in line with how you're thinking about it.

David Zalman

Yeah. Kevin, you wanna start off on that question.

Kevin Hanigan

Sure. Thanks, David. Yeah.

I think we're still in the camp of low single digits for the year. As David mentioned and as you mentioned, in the last five quarters, we've had $549 million worth of runoff between the Lone Star and the First Capital acquisitions. That runoff is about completed.

I can think of maybe one other small deal that may run off out of the books, and it's not big enough to even talk about. But I think that's about completed. And unlike the last at least three quarters when we were on this call, you know, three or three weeks in the quarters.

Loans were down anywhere from, you know, $25 to $90 million within the first three weeks of the quarter. Loans are actually up modestly the first three weeks of this quarter. And I do know if I just look at the pipelines, we've got some loans, non-construction-related loans that are term loans, fully funded kind of term loans in our pipeline.

So we may squeak out a little bit of growth this quarter and then we're optimistic as we look later into the year despite the tariffs and some other things as we sit down with our bankers across the footprint. So we're gonna keep our guidance where it's been.

David Zalman

Yeah. I'd add too that we usually have quarterly management meetings where our chairman and presidents come from all different parts of the states. Texas and Oklahoma, and they're between Dallas, Houston, West Texas, on and on, Oklahoma.

And I asked that exact question. I said, you know, the loans the total loan dollars were down. But at the end of the meeting, I always ask whether they are optimistic or pessimistic.

And a percentage of all of our chairman and presidents across all of our different areas responded by saying they're still very optimistic, and their customers are still optimistic. Still holding back a little bit because of not knowing what to do, but they all seem to be extremely optimistic. Tim, do you wanna add to that.

Or I think that's accurate. I would describe it as being a little bit sluggish right now.

H. E. Timanus Jr.

The flow of loans that we've been able to look at has been good. Our loan committee meetings have been active. We've good loans to take a look at.

Some of those, I'm sure, will move forward and end up being funded. But with all that's going on in the marketplace for a couple of weeks now, I think it's been a little sluggish. I think some borrowers are just maybe waiting another week to see what happens.

We're not aware of any projects that have actually been taken off the map. They're all still scheduled to move forward. So I think it's a matter of just letting some of these things settle out.

And the good part is I think the customers are still pretty optimistic. Again, they're just uncertain of where things are going. They're still making money and they still see their position improving over time, especially with the regulatory environment like it is.

But, again, as you say, it's still sluggish because not knowing where everything is. Yes. But people contacting us and asking about loans and they tell us and they would like to do, that that continues unabated.

So I think there's reason to believe that all this will break loose a bit here fairly soon and move forward in a normal way.

Kevin Hanigan

Yeah. And since it's an important topic with the tariffs and everything else and you know, we've listened to other calls or looked at other transcripts and folks saying that it could be bumpy for growth with tariffs if we don't get things resolved. The flip side of that is also if that is in fact the case, my expectation is that payoffs that would normally occur could get slowed down well.

Projects that might get sold into a different market or have been built out and somebody's gonna flip it I think that'll slow down as well if the tariffs become an issue.

David Zalman

That would be normal. I think you're right.

Manan Gosalia

That's all really helpful color. Thank you for that. If we think about the balance sheet, I think you have a couple of quarters where the balance sheet has gone down.

Do we opportunity to pay down some of the high-cost borrowings. Should we expect that new year to the extended loan growth space, I guess, for a quarter or two.

David Zalman

Couldn't really understand anything that you said, Manan. It was kinda cutting in or out. I'm sorry.

I don't know if it's on our end or your end.

Manan Gosalia

I'm sorry. Can you hear me now.

David Zalman

We can. Yeah. Better.

Manan Gosalia

Oh, okay. Thanks. I was asking about the balance sheet here.

We've had a couple of quarters where the balance sheet has been shrinking, and I think you've taken the opportunity to pay down borrowings when loan growth has been weak. To the extent that loan growth remains sluggish over the next couple of quarters, should we continue seeing the balance sheet moving lower.

David Zalman

You know, again, the balance sheet, we borrowed when COVID happened and a lot of deposits went out the bank, I think. What do we borrow up to, like, $3.9% billion. We've reduced that now to about $2.7% billion.

We don't see it reducing a lot more. If you look historically, our normalized times, we've always leveraged the bank by a couple of billion dollars. Plus a little bit because of the because, again, we have so much liquidity coming from the bond portfolio.

And so I think that you're pretty much gonna see the you know, I think we might reduce it maybe $200 million, but that's probably about it.

Asylbek Osmonov

Yeah. And depending also as we discussed on the loan growth and how the deposits So if opportunity presents, we'll continue to pay down the borrowings. And, also, we what we are doing a little bit is buying securities that yielding five and a quarter or so, five and a half percent.

So we'll just see the market is doing and determine how much lower we wanna bring our borrowing.

David Zalman

But historically, the bottom line is we've always leveraged the bank a couple billion dollars and probably still see that. So I would say the answer to your question is yes. I think we're pretty much there.

Manan Gosalia

That's very helpful. Thank you.

Asylbek Osmonov

Mhmm.

Operator

Next question comes from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor

Thanks. Good morning. I know that M&A and really M&A and improved growth, but really M&A is focus for capital deployment.

But curious your thoughts on the buyback. Just given where the stock price is today.

David Zalman

Yeah. Again, if we could have been buying shares back through this recent downside when we started hitting around the $64 and stuff, we would have definitely been in the market. But, again, we couldn't because of the earnings announcement, but we would have been buying back.

No question.

Catherine Mealor

And even, Amanda, we've had a little bit of a rebound since then. So even in the in the high sixties is is that a place where you would be active, or would you wait for another pullback.

David Zalman

Right now, again, we're still saving our money, I'd say, for we really do wanna do some M&A some acquisitions. We have other opportunities that we're looking at. So again, I think I would just pause and say if there if there is another downturn, we will be back in the stock.

But, again, I know it seems like we have a lot of capital, but we do we do have plans to use that. So but we will, again, we will buy when when there's another downturn into the into the stock price.

Kevin Hanigan

Yeah. I think it's safe to say we're watching it daily.

David Zalman

And we'll see. We may buy back. We may not.

Asylbek Osmonov

Mhmm.

Catherine Mealor

K. Great. And then maybe just any additional comments on M&A.

It feels like it's on pause, but, you know, I know you've been active in discussion. So just kinda curious if you think this is an environment where we're able to do M&A and if you have a preference maybe with all of the volatility for maybe more of a small deal versus a large deal. I know your range is, like, two to 20, so it's a big range.

But just kinda curious how you're thinking about that. Thanks.

David Zalman

Yeah. I mean, again, we started off the year with, everybody just being terribly excited with the you know, the regulatory environment really easing up and I think everybody got terribly excited. I think we had three calls.

I think I mentioned even in the December in December, I think things did pause a little bit. We are starting the those same calls are starting to come back again right now. And so I think that I think you will see something. I think I think you will see some M&A coming forward again.

I think people wanted to do something, and I again, you have all these tariffs and that kind of stuff, but for the most part, think that those people that have made the decision to do something they might have paused but it hasn't left their mind, and they are gonna do something. I suspect there's there may be, in their minds, a limited amount of time before the next administration. So I think he will see stuff get done by this year, by the end of the year for sure.

Catherine Mealor

Great. Thank you.

Asylbek Osmonov

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

Michael Rose

Hey, good morning, guys. Thanks for taking my questions. I don't know if you touched on this, but I think previously you talked about kind of a full year margin in the in the three twenty-five to three thirty range and given some some longer-term outlook prior calls, any of that changed just with the rate backdrop at all in your forecast.

David Zalman

No. That's the beautiful part about our company. No matter if somebody wants to say that the world is not round anymore and all these ships are gonna fall off of the planet, our deal is not predicated on the growth.

It's predicated on a repricing, and I think we're still sticking with the deal of the three twenty-five to three thirty.

Michael Rose

Okay. Perfect. And then just for Kevin, I usually ask the warehouse question.

You guys did a little bit better than what you were thinking, at this time, last quarter. Kevin. Any thoughts just based on where rates are and what you've seen so far in the in the second quarter.

Kevin Hanigan

Thanks. Yeah, Michael. Thank you. You're right.

This quarter, we did I think we averaged eight seventy and our guidance was in the $8.50% range. So it was just was just slightly better than we had anticipated. Just as a catch-up quarter to date, we ended last night with the average that was $8.76% up to a billion o 88. Average so far for the quarter and we closed the book out last night at a billion $1.48%.

So it's looking like, you know, typically, the second, third second quarter is good. The sec third quarter is usually our best quarter, and then q one and four q one and four tend to be weaker quarters. So we're moving into a better time.

I am a little bit concerned with where the rate environment is. So I think conservatively, I'd say a 50 to a billion one for this quarter. Okay.

Just other color. Other color, Michael, we have we actually got two new clients. One, we boarded and started funding loans on for this month.

It's a $75 million commitment that's been funding up. The other new client we have is a $40 million client that hasn't started funding up yet. I think they'll probably start funding up in the next several weeks.

So those are gonna be slightly helpful to whatever whatever we've got going on. And then as we look in the next quarter, and then when I that far out yet. We've got a client that's got itself for sale, and I think they'll sell that business and will have some impact in on third quarter, but we'll talk about that in July.

Michael Rose

Very helpful. And if I could just squeeze one last one in. Looked like there's a bigger step down in in NSF and and debit card income that I might have expected, understanding that fourth quarter was was pretty strong in NSF.

Anything to read into that at all. Or just activity levels or just any color would be helpful.

Asylbek Osmonov

So, Michael, I think there's just a seasonality if you look at the back in Q1 as a slower quarter for us from the standpoint. So it wasn't anything unusual. It's just the seasonality of first quarter.

Michael Rose

Alright. Thanks for taking my questions.

Operator

Your next question comes from Peter Winter with D. A. Davidson.

Please go ahead.

Peter Winter

Thanks. You guys obviously have a very strong deposit franchise. You've done a great job managing the deposit cost when rates were moving higher.

But the question is, if the Fed were to stop lowering rates, is there much room for you to further lower deposit cost. Because it's you're already at the low near the low end up here. 2.08%.

David Zalman

I'm sorry. I didn't hear the last part, Peter. He said if the Fed stops going rates, what was the.

Peter Winter

If there's still room to lower your deposit cost.

David Zalman

I would say yes. Again, we didn't go up much as everybody else. I mean, we're I think our total cost of funds total cost of deposits by one point three eight.

So about sometimes a hundred percentage basis points unless it's some of our peer group. But I we would like to keep them. A lot of times, we reward our customers when rates come down.

We still try to keep them. But I think it depends on the timing of that. And so if the repricing is if we get enough repricing in, in the in the bond portfolio and the loan portfolio, we probably won't be as aggressive as bringing down rates.

If they can't they start lowering rates, really quick. We would have to be a little bit more aggressive. I don't know if that's a good answer or not.

Yeah. I'll just go up here. I'll give you a little bit of additional information on that.

When we had a hundred basis point cut since end of last year to we did not decrease significantly our rates. What we did cut is our special CDs that we pretty much cut one to one on the special CDs. And there's or some customer, we gave them exception rates, so we cut those.

Exception rates. But overall, if you're looking bigger based on our customer, we did not decrease the rates. If you look at, you know, interest-bearing demand deposits, we have 70 basis points.

We were in q four and q one and even same rate on the q one of last year. So I think there's opportunity to cut some of those rates if Fed did come cut the rate. So we hadn't touched those.

So But overall, that's probably because been slower than everybody anticipated with the rate cuts. Mhmm. Really not had to cut our rates, and we still have done better because of the repricing.

Is that a good analogy. That's right. So there's opportunity to cut it.

So the real question is will the Fed lower rates. Or will they lower them one time, two times, or three times, or will they lower them at all. That's the whole question.

We actually you know, they didn't lower them at any at all for the rest of the year, it would be better for us. If they lowered them, you know, even three times, we would still hit the net interest margin that that we've described to you. Earlier.

Peter Winter

Got it. Got it. That's really helpful.

And then just on credit, it's obviously excellent. Reserve coverage to the nonperforming assets very strong over four times, but with a more uncertain economic environment, do you still expect to take a zero provision throughout the year.

David Zalman

Well, we have we have not what. $81 million in nonperforming and $386 million or something like that in reserve. So I think that we're think that we're in a good position.

You know, we have to do these testing all the time to tell if they're adequate or not adequate. We've always been able to keep a little bit more because just because of times like this. Because of what's going on, and we can we can justify having the money in the account, I think.

Right now, do you wanna comment on that.

Asylbek Osmonov

Yeah. And I'll add that, you know, when we calculate or estimate our provision, we have a baseline that we layer on the recessionary scenario. So our model already anticipates some recessionary scenario in it where we stress certain variables on our loans.

So with that anticipation in the model, I think even the, you know, economy goes a little bit worse than we are right now. I think we're covered there. So What do we have about an extra hundred million for the recession.

Part of it. Around there. Yes.

It's close to that. Yeah. So, I mean, we're we're already again, we're already reserved for a recession if that happens.

Yeah. So from that standpoint, to answer specifically, unless the economy really gets worse than we are, then I don't think we'll be putting much of a reserve, in near future. And actually, the reserve, if you look at it, it ain't you look at it March 2024 compared to 2025, you have about $20 million more in the reserve than you did back in '24.

Peter Winter

Correct. Thanks a lot. Very helpful.

Operator

And your next question comes from Jon Arfstrom. With RBC Capital. Please go ahead.

Jon Arfstrom

Thanks. Good morning, everyone.

David Zalman

Good morning, Jon.

Jon Arfstrom

Asylbek, maybe for you, give us a profile of what you're buying in the securities portfolio. Kinda, you know, yield type duration, And then remind us of the $1 billion that what that's rolling off at.

Asylbek Osmonov

Yeah. I mean, we're not buying a lot when I say, you know, not doing one to one, so we still have cash flow coming in. What's the rolling off with our you know, we have MBS year MBS that's rolling off, and that's what we're essentially buying, just replacing those.

I think on the depending on the day when we buy I think we're buying yielding around $5.25%, $5.50%. That's what we're replacing. You replaced the 2% with the 5%.

David Zalman

Yeah. Basically. Exactly.

So that's where the spread comes in.

Asylbek Osmonov

I think on the duration, I think it's around maybe a new one putting four. Four to five. Yeah.

Four to five.

David Zalman

Yeah. The duration. So fifteen-year mortgage-backed security with an average duration probably probably four anywhere from three to five.

I mean, depending on the coupon, basically, where you're gonna be at. Yep. We haven't John, they're probably the know, we haven't bought a bunch of security.

We have been buying some. A lot of this stuff a number of the stuff that we did buy was primarily for CRA purposes. And stuff like that.

Having having said that, we did buy a couple hundred million dollars here recently because we did you know, we had excess funds and we've gotten through paying down the 3.9%. It's down to 2.7%. So we we are buying some.

We are starting to buy back some now, but a lot of our excess money had been going just to reduce that debt at the Fed and borrowings, which we were paying how much on. About 4.4%. So we're paying So even that, I mean, that that was really a net interest margin improvement if you're getting two on your bond portfolio.

We we were still might have not gotten to five, but we still had a good margin in reducing the four point four. That's correct.

Jon Arfstrom

Okay. Good. That's helpful.

And then, David, back on capital, you're you're doing a return on tangible 13% with 11% tangible equity. Which is incredible. I've seen you run with much lower TCE.

Over the years that I've covered you, but but what what's what's optimal TCE for you. How do you think about optimal capital. Because it it just feels like it's incredibly high at this point.

David Zalman

It's high. I remember the days when we started, we had 3% tangible capital ratio. So this is extremely high.

But you know, it's it's a high-class problem, I guess, I would say. On the other hand, there's no doubt in my mind that we're gonna use that money. So you know, I think if we do a deal, it'll probably be there'll be a combination of cash and stock.

And right now, if the market gets crazy, the good thing is we have enough to do an all-cash deal, but it's a small deal. So I think it just gives us a lot of optionality. I would wanna just say here's a special dividend for something like that because I do feel that we're gonna be able to use it.

And we'll you know, our our return on tangible capital usually has been around 16%. It's been again, we had two things that affected that. One, the net interest margin falling to two point seven five.

That in and of itself reduced that return. But now that you've got 11.2% tangible capital, that's that's a little bit of a stress on it itself. But I can promise you we're gonna use it. We're gonna use it whether it's through the buyback, a stock, or through the act through the mergers and acquisition.

We will use the money. I think the really nice thing about it is it flexibility that it gives us to to look at acquisitions. To look at buybacks, to look at dividends.

I mean, we can look at all three.

Jon Arfstrom

Right. Maybe do a little of each. Right.

I mean, it's it's it's a good place to be.

David Zalman

Yep. Okay. I remember the 4% days.

I do. But, yeah. Is there a minimum in in your mind that you wouldn't go below.

David Zalman

Just just from the from my mind, if if again, I'd like to not go below 8% but if we had if we bought if we did a bigger deal, and it fell to seven and a half or $7.75%, And it took us end of the year to get back to eight, that's probably acceptable.

Jon Arfstrom

Okay. Thank you very much.

Operator

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

Ebrahim Poonawala

Hey. Good morning. Morning, Martin.

David wanted to follow-up on M&A. We've seen public stocks down 20, 30% in the last couple of months. You know, as much as about M&A and psychology of CEOs and boards, do you think we need a significant recovery in public stock prices for a deal to pan out where you don't have to pay a massive premium.

Like, how do you think that plays itself out. And also remind us, are they private bank M&A opportunities in or out of Texas that you're looking at which are realistic and meaningful.

David Zalman

I guess the first I'll answer the first question. I think I understood that. It's it's basically based on the stock prices where they're at today.

Do they have to go up to get more deals or and I would say that, basically, if if if if what's happened in the last few days and the trend is where it's at right now, we're seeing that I think that we'll we'll still be able to do deals because people have seen the volatility, especially in our price, where we were at $80 and then probably average $75, and now you're 67. But we were dealing with some of the same people a few years ago our stock price dropped to 55. And so they now they they've seen us. They've watched us.

And I think that they feel comfortable that if they take our price based on our stock price where it is today, they'll be fine. They've seen tremendous black swan. Activities over the last couple of years, and I think they have the confidence in us.

But the good part is if they don't if you know, even if you have some private deals, and with the amount of capital that we have, I think it just really gives us the advantage for somebody that may want maybe not the whole thing in cash, a certain percentage of cash. We we have that ability to provide that with the excess capital that we have. So I very confident where we're at.

Ebrahim Poonawala

Got it. That's helpful. And I guess maybe one, Kevin, for you, on the mortgage warehouse.

So you talked about the new commitments. I'm just wondering how do you think about the interplay between where mortgage interest rates are, what that warehouse balance could look like, in the summer or over the next year, Is is there a certain point where the warehouse activity picks up meaningful. It just feels like we might be in a decade of very low refi activity.

And would love to hear how you think about that and what that means for if there is an upper end to what your warehouse balances could look like.

Kevin Hanigan

Yeah. It is rate dependent. You know, believe it or not, it wasn't that long ago we were talking about refi know, do people doing refis.

When rates were low. And and now know, we're we're looking at in my mind, as I said in my comments, at this level of rates, I'm a little bit worried about the tail end of this quarter if we stay at these levels. So think rates are gonna play an impact on the tail end of this quarter.

Because a lot of this stuff is baked in. You know, you take an application and it generally, six months or six weeks after that, you're closing the loan. So so I've always said we've got really, really good vision over the next six weeks and then it then it becomes more rate dependent.

So I think that rate dependency will hit the tail end of this quarter to the extent rates stay high and could bleed into the what is normally the very strong third quarter. So that that's just how I think about it. We'll we'll see where rates go and we'll take it from there.

If I could just go back to your M&A question, I agree with everything David said. There is some psychological impact for all of us. When rates are high, everything feels good.

Right. And and it feels like more deals out of ought to happen. But as you know, and I and as we try to convince people to the extent we've all moved in concert with each other as a as a group, exchange ratio map doesn't change.

It's all it's just relative math. And most really knowledgeable CEOs end up getting there over the psychology of it all.

Ebrahim Poonawala

That's helpful color. Thank you both.

Operator

Seeing no further 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

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.

Operator

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