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Q1 2023 Prosperity Bancshares Inc Earnings Call

Participants

Asylbek Osmonov; CFO; Prosperity Bancshares, Inc.

Charlotte M. Rasche; Executive VP & General Counsel; Prosperity Bancshares, Inc.

David E. Zalman; Senior Chairman & CEO; Prosperity Bancshares, Inc.

H. E. Timanus; Chairman of the Board; Prosperity Bancshares, Inc.

Kevin J. Hanigan; President, COO & Director; Prosperity Bancshares, Inc.

Unidentified Company Representative

Bradley Jason Milsaps; MD & Senior Research Analyst; Piper Sandler & Co., Research Division

Brady Matthew Gailey; MD; Keefe, Bruyette, & Woods, Inc., Research Division

Brett D. Rabatin; Head of Research; Hovde Group, LLC, Research Division

Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division

Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division

Michael Edward Rose; MD of Equity Research; Raymond James & Associates, Inc., Research Division

Peter J. Winter; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division

Presentation

Operator

Good day, and welcome to the Prosperity Bancshares First Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte M. Rasche

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

David E. Zalman

Thank you, Charlotte, and good morning, everyone. Each year, Forbes assesses the 100 largest banks in the United States on growth, credit quality and earnings as well as other factors for its America's Best Bank list. Prosperity Bank has been ranked in the top 10 since the list inception in 2010. We have twice been ranked #1, ranked #2 in 2021 and ranked #6 for 2023. It is a testament to Prosperity's performance culture, vision and consistency and distinguishes us among most banks. I congratulate and thank all our customers, associates and directors for helping us achieve this honor.
On a linked quarter basis, the net income was $124 million for the 3 months ended March 31, 2023, and compared with $122 million for the same period in 2022. The net income per diluted common share was $1.37 for the 3 months ended March 31, 2023, compared with $1.33 for the 3 months ended March 31, 2022. For the 3 months ended March 31, 2023, the annualized return on average assets were 1.31%. The annualized return on average tangible common equity was 14.34% and the efficiency ratio was 43.68%.
Loans on a linked quarter -- linked quarter loans, excluding warehouse purchase program loans, increased $436 million or 2.4%, 9.6% annualized from $18.1 billion at December 31, 2022. Excluding warehouse purchase program loans, loans at March 31, 2023, were $18.5 billion compared with $16.7 billion at March 31, 2022, an increase of $1.8 billion or 10.8%. Loan growth is helped by fewer loans being paid off early compared with previous quarters. We expect this to continue, while rates remain at their current levels or increase.
Deposits at March 31, 2023, were $27 billion, a decrease of $1.5 billion or 5.4% from $28.5 billion at December 31, 2022. Deposits decreased $4.1 billion or 13% compared with deposits of $31.1 billion at March 31, 2022. The majority of all deposits lost in 2022 were public firms. These investment firms were in interest-bearing transaction accounts at low rates because there was no yield to be found. As rates increase, public firms started investing their money in state firms, such as TexPool to obtain higher rates.
Of the deposit decrease in the first quarter, $959 million or 63% of the $1.5 billion decrease occurred prior to March 10. Historically, prior to the pandemic in 2017 and% '18 and '19, our deposits decreased seasonally in January an average of 2.2%. We also saw $236 million of deposits flow into our wealth management group.
As we all are aware, the market was flooded with excess funds in the last few years during the COVID-19 pandemic. And most people kept their money primarily in checking and low interest-bearing accounts because no one was paying much for money. Now that the rates are increasing, people are finding the best rate they can for their investment funds that were lying dormant.
When we look at pre-COVID deposits at March 31, 2020, we had $23.8 billion in deposits. And at March 31, 2023, we have $27 billion in deposits. This represents a compounded annual growth rate of 4.3% annually. Historically, before the excess funds in the system, Prosperity had organic deposit growth rates of approximately 2% to 4% annually. So we are still averaging deposits on the high end of our historical growth rate.
Our average deposit account was $34,000 at March 31, 2023, and $36,000 at December 31, 2022. Our uninsured and pledged deposits are 29.9% of our total deposits. We currently have $11.3 billion of liquidity available to draw on, which represents approximately $4 billion in excess of our uninsured and pledged deposits.
With regards to net interest margin, while most banks have experienced some of their best net interest margins recently because of our large bond portfolio, our net interest margin always takes longer to adjust. Our models show our net interest margin improving to more historical levels in the next 12 to 24 months and even better than 36 months. Our average net interest margin from 2012 to 2022 was 3.37% compared with our current net interest margin of 2.93% as of March 31, 2023.
Our asset quality remains sound. Year-over-year nonperforming assets decreased 9.9%. Nonperforming assets totaled $24.5 million at March 31, 2023, compared with $27.5 million at December 31, 2022, and $27.2 million at March 31, 2022.
Texas and Oklahoma continue to do well. Texas population increased by 470,000 in 2022, continuing a steady uptick. From 2002 to 2022, the state gained over 9 million residents, more than any other state and almost 3 million more than Florida, the next largest gaining state. Texas and Oklahoma continue to benefit from strong economies and are home to 56 Fortune 500 headquartered companies. Texas now has more Fortune 500 companies than any other state, including New York and California. Despite the higher rates and a possible slower economy going forward, we believe the Texas and Oklahoma economies should outperform most other states.
With regard to acquisitions, as we recently announced, we received all necessary regulatory approvals for our acquisition of First Bancshares of Texas Inc. and expect that transaction will be effective on May 1, 2023. Our acquisition of Lone Star State Bancshares is pending regulatory approvals and is expected to close during the second quarter of 2023, although delays could occur. We continue to have active conversations with other bankers regarding potential acquisition opportunities, although the conversations have slowed given the recent bank failures and the decline in stock prices.
Overall, I want to thank all our associates for helping create the success we have had. We've had a strong team. 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?

Asylbek Osmonov

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended March 31, 2023, was $243.5 million compared to $239.9 million for the same period in 2022, an increase of $3.5 million or 1.5%. Loan and secured interest income increased $54.1 million and $18.2 million, respectively, in the first quarter. Additionally, Fed funds interest income increased $6.2 million. This was partially offset by increase in interest expense of $74.9 million.
Net interest income increased $3.5 million despite having $7.9 million less in combined PPP loan fee income and fair value loan income. The net interest margin on a tax equivalent basis was 2.93% for the 3 months ended March 31, 2023, compared to 2.88% for the same period in 2022 and 3.05% for the quarter ended December 31, 2022. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31, 2023, was 2.91% compared to 2.81% for the same period in 2022 and 3.04% for the quarter ended December 31, 2022.
The current quarter net interest margin was impacted by $3 billion of additional cash held at the Fed for liquidity insurance purposes during the month of March. This $3 billion additional cash was funded through FHLB borrowings. Further, at the end of the first quarter, we increased rates on deposits. We expect the full impact of those increases in the second quarter.
Noninterest income was $38.3 million for the 3 months ended March 31, 2023, compared to $35.1 million for the same period in 2022 and $37.7 million for the quarter ended December 31, 2022. Noninterest expense for the 3 months ended March 31, 2023, was $123 million compared to $119.9 million for the same period in 2022 and $119.2 million for the quarter ended December 31, 2022. The linked quarter increase was partially attributed to the higher FDIC assessment rate.
For the second quarter of 2023, we expect noninterest expense to be in the range of $123 million to $125 million. The expected increase is based on the annual merit increases in the second quarter 2023. This projection excludes both the impact from onetime merger-related costs which we estimate to be around $26 million to $28 million and additional noninterest expense from our pending acquisitions.
Additionally, second quarter results will be impacted by day 2 accounting provision expense related to the upcoming acquisitions. The estimated range of this acquisition-related provision expense is $28 million to $31 million.
The efficiency ratio was 43.7% for the 3 months ended March 31, 2023, compared to 43.7% for the same period in 2022 and 40.9% for the 3 months ended December 31, 2022. The bond portfolio metrics at 3/31/2023 showed a weighted average life of 5.3 years and projected annual cash flows of approximately $2.2 billion.
And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Timanus?

H. E. Timanus

Thank you, Asylbek. Our nonperforming assets at quarter end March 31, 2023, totaled $24,485,000 or 13 basis points of loans and other real estate compared to $27,494,000 or 15 basis points at December 31, 2022. This represents approximately an 11% decrease and nonperforming assets.
The March 31, 2023, nonperforming assets total was comprised of $22,496,000 in loans, $0 in repossessed assets and $1,989,000 in other real estate. Of the $24, 485,000 in nonperforming assets at quarter end, only $217,000 are energy credits. Since March 31, 2023, $328,000 in other real estate have been removed from the nonperforming assets. This represents 1.34% of the nonperforming assets.
Net charge-offs for the 3 months ended March 31, 2023, were negative $615,000 compared to net charge-offs of $603,000 for the quarter ended December 31, 2022. In other words, for the first quarter of 2023, our recoveries exceeded charge-offs by $615,000.
No dollars were added to the allowance for credit losses during the quarter ended March 31, 2023, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended March 31, 2023, was $436 million.
Loans outstanding at March 31, 2023, were approximately $19.334 billion, compared to $18.840 billion at December 31, 2022. This is a 2.62% increase on a linked-quarter basis. The March 31, 2023, loan total is made up of 43% fixed rate loans, 29% floating rate loans and 28% variable rate loans.
Charlotte, I will now turn it over to you.

Charlotte M. Rasche

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

Question and Answer Session

Charlotte M. Rasche

We'll start the questions in just a minute.

H. E. Timanus

Are we showing that we're attached?

Unidentified Company Representative

Yes, sir.

Charlotte M. Rasche

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

Operator

Can you hear me now?

Charlotte M. Rasche

Yes.

Operator

I apologize. (Operator Instructions) The first question comes from Brady Gailey with KBW.

Brady Matthew Gailey

You guys can hear me, right?

Kevin J. Hanigan

Thank God, we were wondering.

Brady Matthew Gailey

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

Asylbek Osmonov

I'll give you an answer on the interest bearing deposits, how we -- based on the projection of the new rate increases on deposit, it will bump up our interest-bearing deposit rate from 110 what we have to about 140 to 145. So that's going to be a little headwind, but what -- if you look at short term on margin, I think it's very hard to pinpoint just because of the 2 acquisition upcoming in the second quarter. We're going to bring their loans and their bond portfolio, both of them are going to be repriced at the market rate, that's going to be a tailwind for us on that standpoint. So that will be hard to pinpoint specifically for the near term, but the information I gave you should give you some information on the Q2.

Brady Matthew Gailey

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

Asylbek Osmonov

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

Brady Matthew Gailey

Okay. So it's gone now?

Asylbek Osmonov

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

Brady Matthew Gailey

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

Asylbek Osmonov

So if you look at 3/31, that net of tax was about $1.1 billion, that's decreased from $1.3 billion we had at the end of the year. So we have $200 million decrease in after tax.

Brady Matthew Gailey

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

Asylbek Osmonov

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

Charlotte M. Rasche

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

Brady Matthew Gailey

I can imagine, yes.

Asylbek Osmonov

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

Operator

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

Peter J. Winter

I was wondering, could you talk about the outlook for deposit trends for here and deposit betas beyond the second quarter?

Asylbek Osmonov

I can address the betas specifically. So if you look at I'll give you the cumulative beta that we had through 3/31, if you look at over 12 months, the cumulative beta on depositis were about 12 basis points. With recent increases on the deposit rate that I mentioned in my speech, it's going to go up to about 16 to 17 basis points on cumulative betas.

David E. Zalman

Peter, I think as far as trend. I still don't know if everything is -- our deals look like they have stabilized. You have -- but you still have money that's in the system that's probably still looking for higher rates. So I think in the long run, if you ask me in the long run, things will stabilize, and I think you will eventually go back to a point where our bank historically grew 2% to 4% organically every year.
And I think that in our budget team, what we're looking for, once things stabilize and you don't read in the social media or on the headlines in CNBC or FOX that I think that that's kind of what we're hoping to go back to is eventually as a -- call it -- somewhere in between, call it, 3%. But anyway, historically, it's always been 2% to 4%. And I think that will happen. I don't know that, that's going to happen this month or next month. I am hoping though that after 5 or 6 months of things calm down, I'm hoping that's when we'll get back to.

Peter J. Winter

Okay. And are we -- if the Fed were to stop raising rates in May, are we at a level where you're almost done raising deposit costs? Or just given where the beta is being lower than peers, there's still some pressure on deposit costs?

David E. Zalman

I think that we're -- we did raise the -- what I think is the market. I mean, when you can get 3% on a money market account with a larger deposit, that's pretty good. You may -- it may still go up a quarter of a point from there or so. But based on where the Fed is right now and them going up a quarter or 50 basis points, I don't see much more than that there. I will say that probably as our deposits -- as our deposits probably our bonds and everything reprices and when we look at our models, we really see a very strong net interest margins going forward.
And so I think the model look stronger than I think they really are. So I think that what I would suggest is that as our reprices, we may just from a customer standpoint, pay more to that and maybe not show the real strong. When you look at the models, they're extremely strong. And I know in a real world, that doesn't happen. I mean our net interest margin, as I mentioned earlier, in the call earlier was that our average has been about 3.37% but we've been as high as 3.80%, and we've been as low as where we are today. So I still think somewhere in between for a bank like ours?
We didn't -- where a number of the other banks went out and purchased brokered CDs, we didn't. Again, I don't know anybody -- I mean I think that's everybody they need to do what they need to do. I didn't -- I've never really put a lot of money. I never put a lot of faith in the brokered CDs. In fact, when we look at purchasing a bank, I usually just ex all those brokered CDs and they won't give any credit for that.
So again, it doesn't mean that we won't be there one day, but that's not something that we participated with. And I don't really want to be -- we took the position that we may lose some money. We may not be as big as we always were. It's going to take us time to maybe get back to that point, excluding the acquisitions that helped us, of course. But we wanted to remain profitable over that period of time and make sure that what we're looking at are truly core relationships and core deposits. And that's kind of where we're at today. Long story, I just want to give you some color.

Asylbek Osmonov

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

David E. Zalman

I think it all boils down to our company. I think we have a great company. It's strong. So looking forward, I think we're in a better position than most of our peers simply because of the net interest margin that we see going forward. So I think that if you're a longer-term player and you can see where we're going to be in a year or 2 years, that's what we're focusing on is more the longer term really.

Peter J. Winter

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

Kevin J. Hanigan

Yes, this is Kevin. I think at year-end, our January call, we said mid- to high single digits, and we hit the high single digits portion in Q1. I think we all see a little weakness in loan demand, and we've experienced that for the last couple of months. And what's really aiding or the tailwind, the loan growth is a much reduced level of loan payoffs.
So I think we see asset durations extending a bit. If our typical asset duration in real estate was 3 years, it might be 3.5, and it may go out to 4 before this is all set and done. So the loan growth is a little different for the last 3 years as we -- as the legacy portfolio was running off, we kept talking about well, we got the headwinds and runoff. We have the opposite effect now. I think the whole industry has the opposite effect, the slower payoffs still some loan originations, clearly, but slower payoffs.
So I think we're still good at mid-single digits to high single digits. I'll reiterate again what we said in January that if we choose to start selling off mortgage loans rather than portfolio on those, we'll be at the lower end of that versus the higher end.

David E. Zalman

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

H. E. Timanus

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

Operator

The next question we have will come from Brad Milsaps of Piper Sandler.

Bradley Jason Milsaps

Good morning. Just curious, David, how much of the public funds that exited this quarter? Do you expect to come back? And then kind of as a follow-up to that, would you expect to utilize some of those funds to pay down to the extent they do come back, some of the 3 or so billion in borrowings you had outstanding at the end of the quarter?

David E. Zalman

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

Asylbek Osmonov

Between $400 million to $600 million.

David E. Zalman

$400 million to $600 million probably.

Bradley Jason Milsaps

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

David E. Zalman

Yes. I mean I don't want us to continue to borrow money from the Federal Home Loan Bank. I mean I guess I look at it this way, I ask myself, we had $3.5 billion in borrowing at the Federal Home Loan Bank at the end of the quarter. And so in my mind, I ask myself, how do you -- if you wanted to get out of that, how do you ever get out of that? And in my mind, we have $2.2 billion in bond roll off a year. And we also are going to have about $434 million of liquidity from the banks that are joining us, First Capital and Lone Star.
So in my mind, if you use just those 2, it takes us about 15 or 16 months that we would be out of the Federal Home Loan Bank completely. Again, unless we lose more deposits, were temporary, that changes every day. But if everything were stagnant at March, that you could get out of 15 to 16 months. I will say, though, for the most of the time, we always do have some portion borrowed at the Federal Loan Bank and probably always will, even in a normal time, we would probably have anywhere from $1 billion to $2 billion, and we leverage that. But not when the yield curve is inverted like it is. But when it's not, we usually leverage that.
And so that would get us out of that. So then the next question would be, okay, so where are you going to get your money to fund at least 5% for your loans if you're going to use all that money for their Federal Home Loan Bank. And my point is really -- I hope I said this historically, we always have grown 2% to 4%, and I guess its like a 3% number where we're at with 3%. That's still going to get us around $800 million to $1 billion and additional money here, and I think that's the money we would use for the growth in the loans. I hope I didn't make that too complicated, but that's always in the back of my mind, I'm thinking about that myself.

H. E. Timanus

I think it's good to point out that the bulk of the money we had borrowed from the Federal Home Loan Bank was not really because we needed it. It's because we felt like it was prudent to have on hand given what was taking place in the overall market. We didn't know whether somebody was going to come in, in the next 2 minutes and want to pull all their money out as quickly as things were changing.

Asylbek Osmonov

You're referring to the additional $3 billion?

David E. Zalman

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

Bradley Jason Milsaps

I was talking about the core -- the kind of the core FHLB that you have, which if that pushed through.

H. E. Timanus

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

David E. Zalman

Yes. My comments were all relating to the borrowing.

Bradley Jason Milsaps

Yes, that was my question. Yes, thanks for clearing that up David, and then finally for me, I think when you guys announced the 2 deals together, I think you had something in there, 2023 estimated earnings from the combination with 75% cost savings of somewhere around $77 million. Obviously, a lot has changed. Would you mind giving us an update on kind of what you think the banks can contribute to the extent that it has changed? Just kind of wanted to get a sense of kind of contribution from those 2 organizations once they become a part of Prosperity?

Asylbek Osmonov

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

Bradley Jason Milsaps

Right. And I think also, like you estimated something $77 million of contribution. Does it make sense just given what's happened to haircut that to some degree? And if so, would you -- could you give us any color on maybe kind of how much to think about?

Asylbek Osmonov

Yes, the day 1 onetime costs and plus the day 2 provision expense, that's going to happen immediately after the merger of the banks. But I did say that they're going to bring in operational expense as they merge. I would expect probably after merger, maybe within -- not maybe the first quarter, but the second quarter right after the acquisition, we should utilize the savings.

Kevin J. Hanigan

I think he's after the revenue income side.

Bradley Jason Milsaps

Yes, yes. Exactly, Kevin.

Kevin J. Hanigan

Just trying to interpret there for you, Brad.

H. E. Timanus

Well, I think -- I don't think there's been really a significant change in the profiles of these 2 banks. It makes people think it might have occurred. The party is not over yet, so to speak. So we have to look at it day by day, week by week. But their balance sheets haven't been altered significantly and their P&Ls haven't been altered significantly so far.

Asylbek Osmonov

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

Kevin J. Hanigan

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

Operator

The next question comes from Michael Rose with Raymond James.

Michael Edward Rose

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

Kevin J. Hanigan

Yes. Thank you, Michael. You're right. I think we said in January, we thought we'd average $550 million to $600 million for the quarter. I will tell you in February, I was thinking it was not even going to get the $550 million and was worried about it, but we ended up average in $618 million because it truly rallied from in the last 45 days of the quarter, ending up at $799 million, almost $800 million at quarter end. I'm going to go with $800 million to $850 million for the quarter, Michael. I think it's -- we're averaging right now about $770 million through the first 26 days of the quarter, 25 days of the quarter. And I think it will pick up from there. So if I had to pick a number, $825 million.

Michael Edward Rose

Okay. That's very, very helpful. Just one minor question for Asylbek. The other noninterest income was up $2 million, almost $3 million. Just wanted to see if there was anything specific that was in there and if anything, will come out from a run rate perspective?

Asylbek Osmonov

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

Michael Edward Rose

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

Asylbek Osmonov

Yes.

Michael Edward Rose

Okay. Maybe just finally for me. Just given where the capital ratio is, I mean you guys have lots of capital, you're doing 2 deals as we kind of go through this and just wanted to get a sense for buyback from here. You guys did buy back a little bit of shares. I assume you pause when everything started to happen, but just given more capital, I just wanted to get your appetite just given where the stock is? And then just wanted to get a sense from an acquisition point of view. I know you said conversations that maybe slowed down a little bit, but just wanted to see if you look at any of the banks that have failed or maybe some stress situations, if they'd be of interest to you?

David E. Zalman

First, this is David. I'll address the capital issue. As you know, we've always -- again, we've always used our capital really to try to increase dividends and really use in the M&A game. And then we use the rest of the money if we use the money extra, we felt the stock was really disproportionate. I don't think that any of that's going to change as far as the dividends go. I mean, that's first and foremost, that seems like our directors really like that.
Acquisitions, we'll continue to do that. I don't see that stopping. As far as buying a stock or a lot of our own stock, a lot of it. I think some of that's going to depend on regulations or regulatory bodies if they ever say anything. So instead of making a commitment that we're going to just continue to buy and buy, I don't want to do that. I think in a stressful -- more stressful time like this, I think we have to look from the regulatory bodies, what they're going to say about it.
But my general overall feeling is that we still make good money. We still have -- we pay the dividends, and we still have quite a bit left. So I think that and as your HTM loss goes the other way over the year to 2, in the long run -- I guess in the long run, I would say, I don't see it changing a whole lot unless regulatory agencies come in and say, you shouldn't be doing that or something like that.

Operator

The next question comes from Brett Rabatin with Hovde Group.

Brett D. Rabatin

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

Asylbek Osmonov

Yes. I think -- yes, we had one-off items. If I would have to tell that, I would say, a couple of million dollars was a one-off item that did not come in or that came in and the rest of them will be more continued, repetitive from that bucket.

Brett D. Rabatin

Okay. And then could you give any update on the cash flow on the securities portfolio? What you might have maturing in the next quarter or 2?

Asylbek Osmonov

I mean our cash flow is $2.2 billion. So if you -- the projections, I mean, if you take it at the quarter, I mean, we expect about what $550 million or so a quarter.

David E. Zalman

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

Brett D. Rabatin

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

Kevin J. Hanigan

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

David E. Zalman

Yes, I'd have to say in my long time in banking, even when I sit in loan committee, and I see what's being asked down on some of these projects, commercial projects, I've never seen that in my career that you could get that much down and people would still do it. And I think it's just because they're just -- as the deposits have flowed out of a lot of these midsized banks, they just don't have the deposits to fund it. So I think we will have opportunities. This is the time that we should and this is the time we actually look forward to.

Kevin J. Hanigan

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

David E. Zalman

And it's real equity.

Kevin J. Hanigan

That's real hard dollar.

David E. Zalman

It's the cost, not -- it's real based on cost.

Brett D. Rabatin

That's pretty low for the multifamily market.

Operator

The next question comes from Manan Gosalia with Morgan Stanley.

Manan Gosalia

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

Asylbek Osmonov

I think it will be hard to specifically point out because we still have to go through the merger process and evaluation. But we're excited about the 2 acquisition because of cash they're bringing and a vast ability to reprice their bond portfolio and their mortgage portfolio. So I mean, I cannot give you specific guidance, especially because of the fair value income that we have to calculate and that is getting amortized based on the duration of loans or the life of the loans. So -- but we're optimistic where we stand on it.

David E. Zalman

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

Asylbek Osmonov

Yes, that's for sure.

Manan Gosalia

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

David E. Zalman

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

Asylbek Osmonov

Yes. If you just look at our NIM calculation, because our bond portfolio is generating right now $524 million and we're putting new loans that Kevin handles right now. If you just take it and if rate stays for the next 12, 24 months in this rate, you can see there's upside of 200 basis points on loans. I mean that's --

David E. Zalman

Our models are usually really good and they're correct. And I think that basically, if rates don't do anything, we still do substantially better and improvement in net interest margin over 12, 24 and 36, I mean substantial -- and if interest rates go up, our models show that we even do better than that. I think if they go down, if interest rates go down, it probably takes a little bit away from us.

Asylbek Osmonov

Yes, because of the composition of our loan portfolio.

David E. Zalman

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

Manan Gosalia

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

David E. Zalman

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

Manan Gosalia

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

Asylbek Osmonov

So I think efficiency ratio, if you just look at the long term, it will take us time to -- once we have 2 banks merger with us, realize the cost savings. But in the long run, I think we're going to be back to our normal 42%, 43%, 44% efficiency ratio in the long term.

Operator

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

Ebrahim Huseini Poonawala

I was just following up --

David E. Zalman

Evan, did you change your name?

Ebrahim Huseini Poonawala

This is Ebrahim Poonawala, Bank of America.

David E. Zalman

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

Ebrahim Huseini Poonawala

Yes, she did say Evan. You're not wrong, David. You're right. I let it flying.

David E. Zalman

Sorry about that.

Ebrahim Huseini Poonawala

I guess I can't pass off as an Evan.

David E. Zalman

That's not a bad idea. You got to change it. It's easier to pronounce Evan.

Ebrahim Huseini Poonawala

So a question around the NIM. One, did you talk about -- and sorry if I missed it around the core -- ex the acquisitions, do you see the NIM going -- drifting higher from here when we think about 2Q and rest of the year from the 293 this quarter?

Asylbek Osmonov

Yes. I mean as we talked about in the long term, it's very positive. I think in the short term, the headwind we have on the interest-bearing deposit a little bit, it will be a little bit maybe down but that's on the Prosperity Bank itself without acquisition. But with the 2 acquisitions, looks really good with adding 2 banks to our balance sheet.

David E. Zalman

It helps. It still -- it helps us in the short run to that and in the long term, it really helps us. We're talking about very short period. Without it, it wouldn't look as good your like.

Ebrahim Huseini Poonawala

And just on that point, David, I think you mentioned multiple times around -- on the last question, if rates go down 100 or 200 basis points, when you think about when it can look good or I think you said fantastic over the next 2 to 3 years, are you -- is it the Fed funds that matters more than the 2- to 5-year part of the curve? Just remind us, we could see a scenario where the Fed funds drops maybe over the next year or 2, but the value of the curve remains where it is. So if you can talk to where the sensitivity might be most?

David E. Zalman

Ours is just repricing. It's just -- I mean, you've got your bond portfolio is repricing $2.2 billion a year. Our loans reprice or roll off, historically, it's been 1/3 about $6 billion. So just between those 2 you have about $8 billion or $9 billion changing in pricing in a year's time.

Ebrahim Huseini Poonawala

Got it. And one last question. When you think about more big picture in terms of the economic outlook, you mentioned some of these other banks that are tight on loan-to-deposit ratios, et cetera, pulling back it's good for Prosperity. But overall, like do you see that adding to accelerating our pace of going into a recession? Like how do you think about just the macro outlook as you think about the next 6 to 12 months?

David E. Zalman

Well, I'd say it does pull back. But again, when I look at the Texas economy, and I guess I think Texas may be more regional in perspective compared to the rest of the economy. I don't see a hard recession. I don't. That's just me. I think you may see a slowdown. But when you look at people, the customers are still spending money out there. Housing, they're still buying housing. Some of the markets, even in house. Some markets have gone down a little bit in value, but still -- people still needing houses. You have people moving into the state. I mean I think Texas is probably in a pretty good position. I don't see a really hard recession. I don't. I may be wrong. And I don't have anything in the back of my name to say I know what I'm saying, but just my gut feeling, just my gut feeling is.
The bank -- the way it was going, it was just overblown, everything was overblown. I still think things need to slow down a little bit more, quite frankly, so that the Fed doesn't raise rates. But my gut feeling is that the Fed will raise rates again in May by at least a quarter of a point. But then I think they probably will hold off. But again, for the most part, you don't see things just crashing, I don't see that. I don't -- not yet. I mean, I think things still look pretty good and people are still buying.

Operator

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

Charlotte M. 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 all now disconnect.

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