Q4 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.
Benjamin Tyson Gerlinger; Research Analyst; Citigroup Inc., Research Division
Brady Matthew Gailey; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Brandon Thomas King; Associate; Truist Securities, Inc., Research Division
Brett D. Rabatin; Head of Research; Hovde Group, LLC, Research Division
Broderick Dyer Preston; Analyst; UBS Investment Bank, Research Division
David Patrick Rochester; MD, Director of Research & Senior Research Analyst; Compass Point Research & Trading, LLC, Research Division
Jon Glenn Arfstrom; MD of Financial Services Equity Research & Analyst; RBC Capital Markets, Research Division
Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division
Michael Edward Rose; MD of Equity Research; Raymond James & Associates, Inc., Research Division
Stephen Kendall Scouten; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Presentation
Operator
Good day, and welcome to the Prosperity Bancshares' Fourth 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' Fourth Quarter 2023 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. 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; and Bob Dowdell, Executive Vice President.
Mays Davenport, our Director of Corporate Strategy, is ill 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.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for 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 our 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 E. Zalman
Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2023 conference call. For the 3 months ending December 31, 2023, our net income was $95 million or $1.02 per diluted common share compared with $112 million or $1.20 per diluted common share for the 3 months ending September 30, 2023, and was impacted by a onetime FDIC special assessment of $19.9 million and merger-related expenses. Excluding the FDIC special assessment, net of tax and merger-related expenses, net of tax, net income was $111 million or $1.19 per diluted common share for the 3 months ending December 31, 2023.
Our annualized return on average assets, average common equity and average tangible common equity, excluding the FDIC special assessment net of tax and merger-related expenses net of tax for the 3 months ended December 31, 2023 were 1.15% return on average assets, 6.29% return on average common equity and 12.3% return on average tangible common equity.
Although our earnings, excluding the onetime FDIC assessment and merger-related expenses were strong, they are still lower than last year, primarily because the majority of our earning assets have not yet repriced and our interest-bearing liabilities have. This will correct over time, and we expect that our operating ratios will be more reflective of our historical returns.
Loans were $21.2 billion on December 31, 2023, a decrease of $252 million or 1.2% from the $21.4 billion on September 30, 2023. Loans increased $2.3 billion or 12.4% compared with $18.8 billion on December 31, 2022. Loans excluding the warehouse purchase program loans and loans acquired in the merger of First Bancshares of Texas increased $882 million or 4.9% during 2023. We did see a slight decrease in loans in the fourth quarter. However, we grew loans organically for the year as projected.
Our deposits were $27.2 billion on December 31, 2023, a decrease of $133 million or [0.5% of 1.0%] compared with $27.3 billion on September 30, 2023. Deposits decreased $1.4 billion or 4.7% compared with $28.5 billion on December 31, 2022. Our deposit outflows have mitigated since last March. However, we still have customers moving money into higher-paying instruments such as high-yielding government bonds or high rate products offered by competitors. When we saw the increase in deposits during the previous 2 years, we knew that some portion of them would leave the bank, and that's what's happening now.
As the Federal Reserve reduces the money it has put into the economy by reducing its debt, deposits replacing it buying the higher rate securities it had purchased. Prosperity has one of the best core deposit bases in the business. We have noninterest-bearing deposits of $9.8 billion, representing a strong 36% of total deposits, and certificates of deposits representing only 13% of total deposits. Further, we have not purchased any broker deposits.
Our nonperforming assets totaled $72.7 million or 21 basis points of quarterly average interest-earning assets on December 31, 2023, compared with $69.5 million or 20 basis points of quarterly average interest-earning assets on September 30, 2023 and $27.5 million or 8 basis points of quarterly average interest-earning assets on December 31, 2022. The increase during 2023 was primarily due to the First Bancshares merger.
Despite a relatively low nonperforming asset ratio, it is higher than our historical levels due to the recent merger. This is not unusual for us, and we expect to reduce our nonperforming asset ratio to a more normal level within a reasonable period of time. The acquired loans charged off during the fourth quarter were fully reserved for. The allowance for credit losses on loans and off-balance sheet credit exposure was $369 million on December 31, 2023 compared with $72.7 million in nonperforming assets. We look forward to our acquisition of Lone Star State Bancshares, which is pending the receipt of regulatory approvals. We are hopeful that we will receive them soon. We remain interested in M&A and believe our company is in a strong position to participate, especially given our capital, merger and acquisition experience and the relationships we have built over the years.
Prosperity operates in 2 of the best economies in the U.S. Even with the recent interest rate increases, economic activity and job growth in Texas and Oklahoma remain solid. We are excited about our growth and future of our company. Prosperity has a strong capital position that provides us with flexibility in pursuing strategic opportunities such as mergers and acquisitions and the repurchase of our stock when appropriate. We expect that our net interest margin will continue to expand to our historically normal levels as our assets reprice over the next several years, increasing our earnings per share.
Further, we have a strong core deposit base with 36% of our deposits in noninterest-bearing accounts. I would like to thank all of our customers, associates, directors and shareholders for helping build such a successful bank. 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
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the 3 months ended December 31, 2023 was $237 million compared to $239.5 million for the quarter ended September 30, 2023 and $256.1 million for the same period in 2022. The net interest margin on a tax equivalent basis was 2.75% for the 3 months ended December 31, 2023 compared to 2.72% for the quarter ended September 30, 2023 and 3.05% for the same period in 2022. Excluding purchase accounting adjustments, the net interest margin for the 3 months ended December 31, 2023 was 2.71% compared to 2.68% for the quarter ended September 30, 2023 and 3.04% for the same period in 2022. The fourth quarter increase in net interest margin was primarily due to the decrease in borrowings of $525 million during the fourth quarter of 2023.
Noninterest income was $36.6 million for the 3 months ended December 31, 2023 compared to $38.7 million for the quarter ended September 30, 2023 and $37.7 million for the same period in 2022. Noninterest expense for the 3 months ended December 31, 2023 was $152.2 million compared to $135.7 million for the quarter ended September 30, 2023 and $119.2 million for the same period in 2022. The linked quarter increase was primarily due to onetime FDIC special assessment of $19.9 million.
For the first quarter 2022, we expect noninterest expense to be in the range of $134 million to $136 million. The efficiency ratio was 55.6% for the 3 months ended December 31, 2023 compared to 48.7% for the quarter ended September 30, 2023 and 40.9% for the same period in 2022. Excluding the FDIC special assessment, the efficiency ratio was 48.3% for the fourth quarter of 2023. The bond portfolio metrics at 12/31/2023 showed a weighted average life of 5 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 December 31, 2023, totaled $72,667,000 or 34 basis points of loans and other real estate compared to $69,481,000 or 32 basis points at September 30, 2023. This represents a 4.6% increase. Since December 31, 2023, $3.2 million of nonperforming assets have been removed or put under contract for sale. The December 31, 2023 nonperforming asset total was made up of $70,883,000 in loans, $76,000 in repossessed assets and $1,708,000 in other real estate. Net charge-offs for the 3 months ended December 31, 2023, were $19,133,000 compared to net charge-offs of $3,408,000 for the quarter ended September 30, 2023. This is a $15,725,000 increase on a linked quarter basis.
There was no addition to the allowance for credit losses during the quarter ended December 31, 2023. Also, there was no addition to the allowance during the quarter ended September 30, 2023. No dollars were taken into income from the allowance during the quarters ended December 31, 2023 and September 30, 2023. The average monthly new loan production for the quarter ended December 31, 2023 was $300 million compared to $398 million for the quarter ended September 30, 2023. Loans outstanding at December 31, 2023 were approximately $21.181 billion compared to $21.33 billion at September 30, 2023. The December 31, 2023 loan total is made up of 42% fixed rate loans, 27% floating rate loans and 31% variable rate loans.
I'll now turn it over to Charlotte Rasche.
Charlotte M. Rasche
Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator will assist us with questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Dave Rochester with Compass Point.
David Patrick Rochester
Was hoping to get your outlook for the margin and NII for either 2024 or at least maybe the first quarter? And any comments on the trajectory from there through the year would be great, specifically where you see the bottom in NII. And I know your outlook is pretty positive over the next few years, but just more near-term trends would be great to hear and get your thoughts on.
Asylbek Osmonov
So if you look at our margin in the short term, as we discussed that we're still having a lot of tailwind from our repricing of the loan and asset from the standpoint. From our borrowing side of it, as you saw, we decreased our borrowing $525 million. So we're picking up that margin there from paying off from the cash flow on the investments, paying down the borrowings. So we're picking up about 300 basis points there.
So with the combination of loan repricing and paying down on borrowings, we should see expansion on the margin. And what you saw, we had 3 basis points expansion in the fourth quarter and we continue to see that marginal expansion in the first quarter and beyond. But if you look at it in the long term, we see really -- I think in the second half, we see more expense on the margin than we see in the first half of it just because it takes time for the assets repricing. I think the guidance we gave last quarter that in 24 months, our NIM being like 3.30, 3.40, our model still shows that expansion in 24 months at 3.30, 3.40. So I think it's looking promising.
David E. Zalman
Dave, I think that what we said is that quarter to the quarter before that -- in 12 months that we'd be at 3%, I think that if you look at the models that we're running, again, these are just models and the models take into consideration that you have -- you're not going down on loans, you're not going up on loans, you're not going down a deposit, not going up. It's a pretty static model. So the model reflects that in 6 months, we're looking at around [2.96], and 12 months, [3.14], and 24 months, even better than that. And also, what's good, even if interest rates go up or down, our models as to in our net interest margin expanding to really get more normal levels. So we're pretty excited about that.
David Patrick Rochester
Great. And so are you assuming the forward curve in that analysis at all, even though you're keeping the balance sheet static?
Asylbek Osmonov
Yes. On this, what the numbers we showed, that is the rates staying the same. But if you look at our model being 100 basis points down or 200 basis points, our margin still holds up. I think it -- down 200 in 24 months, our margin might be a few basis less than what we're projecting on the flat environment, but it's still expanding in the 24 -- 12, 24 months.
David Patrick Rochester
Okay. Great. And what are you guys including in that expectation? I guess it excludes balance sheet changes, but what are you thinking in terms of deposit growth for the year?
David E. Zalman
That's probably the $1 million question, Dave. It's just -- I don't know that anybody really -- historically, we've always grown the bank organically 2% to 4%. These last several years were kind of crazy. We took in -- we were growing 10% a year. And so we did something the other day. We went back and looked -- and also back and I looked and said, "Okay." So after all the deposits we lost recently -- and we went back 3 years...
Asylbek Osmonov
Before the COVID.
David E. Zalman
What's really crazy when you even -- with the amount that we gained, we're still about 15% ahead. So that still gave us about a 5% organic growth rate over those years. So going forward, though, it's really hard because, again, not trying to make excuses, but one of the main objectives of the Fed Reserve is to really slow the economy, and that comes 2 ways. One, reducing increasing interest rates, reducing borrowers; and number two, pulling money out of the system, and they pulled $1 trillion out of the system in the last year. So when they're pulling money out, that's something that it's going to reduce money in the banks unless you're buying brokered funds.
And I would say that we know that some banks do -- I'm not saying it's wrong or right. We just elected to keep our cost of money with core deposits and not chase the brokered funds. So that's just a position we took. I don't know if it's right or wrong and I'm not getting to what you're really asking what we think. I would think its best -- at best is probably a 2% gain in deposits, probably you just agree or is that.
Asylbek Osmonov
Yes. I think not -- usually, historically, if you look at our deposits, the first quarter because of tax payment usually goes down a little bit historically. But in the long term, I think we should be able to get to historical rates. But it all depends on the macroeconomic conditions and with the quantitative tightening too that will impact as well.
David E. Zalman
The main thing is I don't see a 5% organic growth rate or that -- not this year. That's for sure.
Asylbek Osmonov
Yes, I agree.
Operator
The next question comes from Brett Rabatin with Hovde Group.
Brett D. Rabatin
Wanted to stick with the balance sheet and the margin. And just looking at the securities portfolio, it's about $13 billion, and I know you've got over $2 billion in cash flow annually. But if you look at the yield kind of year-over-year, it's kind of flattish at [2.07%]. Does that start to move up in the next quarter or 2? Or can you give us any thoughts on the securities portfolio progression from a yield perspective from here?
Asylbek Osmonov
Yes. Since we're not purchasing any new securities, I think yield is going to hold up as what we see at around [2.05%]. But I think it also depends how the mortgage rate is going to do, if there will be a lot of increase in mortgage or -- decrease in the mortgage rate, they might speed up a little bit turnover of those security and maybe we'll pick up yield there. But overall, we're not expecting the security yield to go up more significantly or come down more.
David E. Zalman
The only way that the yield would go up in the bond portfolio is if we elected instead of reducing debt or putting the money in the loans where we prefer putting it, we would buy back securities. In that case, then it would go up.
Asylbek Osmonov
Exactly.
David E. Zalman
Otherwise, it's probably going to stay stagnant for the most part or flat.
Brett D. Rabatin
Okay. And then on the funding side, can you give us a refresher on how much you guys have in index deposits? And then just thinking about the -- the usual seasonality for municipal deposits? How much you guys having that and how you see the next quarter or 2 playing out from that perspective?
Asylbek Osmonov
Okay. From the overall funding, let's talk, we have -- in the borrowing, where you saw we have about $3.7 billion, around 5%. So we're paying down with the cash flow from the investment portfolio. Related to time deposits, we have 13% of our deposit in time deposits. But that's the special program we introduced paying 5%. We just want to give our customers some way of earning rate rather just leading to competition, we want to pay up on those. And those are only 7 months CDs. So we're keeping them short term. So when rates would come down, we can reprice them quickly and kind of get out of our system within 7 months. So we have about $3.5 billion in the CDs. And -- but out of that, $3.1 billion will be maturing within 12 months, and those special CDs, about, I think, $1.8 billion. Rest of them is money market in noninterest-bearing deposits.
Brett D. Rabatin
Okay. And then any thoughts on municipal deposits and how those trend from here?
David E. Zalman
Generally, the municipal deposits really increase at year-end. Again, when we compare this year's municipal deposits to last year, we're down about $500 million. It's just -- they're taking it and putting it in higher tax pool or something like that. So we didn't get as much in public funds this quarter at the end of year-end as we did in the previous and I think that was expected.
Asylbek Osmonov
Yes. And on the public funds note, I would say, I think we are down to almost to their operating accounts because all the excess they could earn, they probably moved out to tax pools. So we're kind of maintaining their operating accounts.
David E. Zalman
Maybe a little bit higher right now, people are still paying tax dollars. But again, most of the money that we do is their operating accounts, it's not their investment [funds].
Asylbek Osmonov
I mean big picture, correct.
Brett D. Rabatin
Okay. That's helpful. If I could sneak in one last one, just around the Lone Star transaction. Any update there? I know that Justice Department, it's reviewing that one, so it's taking longer, but have you guys heard anything or any update on from a time line perspective when that might close?
David E. Zalman
We were really hoping to be able to say something at this meeting. Unfortunately, we're not. But we're still very hopeful that we're going to get the deal done. And hopefully, we'll hear about it soon.
Kevin J. Hanigan
Yes. And you mentioned Justice Department, we're out of the Justice Department.
David E. Zalman
Right. Rather than Justice Department...
Kevin J. Hanigan
They've cleared us.
Brett D. Rabatin
Great. Thanks for all the color.
David E. Zalman
Still at the FDIC, and they take off most of Christmas for December, so...
Operator
The next question comes from Michael Rose with Raymond James.
Michael Edward Rose
I wanted to start on some of the proposals that are out there as it relates to interchange and overdraft. And I know these won't hit until later this year or next year for that matter. But have you guys looked at those? And what could the potential impact be for Prosperity?
David E. Zalman
You've hit one of my hot buttons, Michael. I hope you don't start...
Michael Edward Rose
Sorry.
David E. Zalman
Yes, if it goes through -- if it goes through -- really, I think it's in the latter part of 2025. I'm hoping maybe there will be a new administration that can stop it because it's really a misguided thing to think that to bring the overdraft charges to $0 or $3 or $17, I mean, really, it's a behavior, I think, that you don't want to promote. I mean think about it on the other end that -- that it's like telling your kids, something is wrong, but you're going to reward them for continuing to do it.
And I think on the other end, where the person who's given a [cheque] and he is buying a good to the merchant or the retailer, and that person on the other end, they're not getting their money. I mean they've lost some money on the deal where the bank in a lot of times pays that overdraft, you won't see that overdraft. We might not be paying them in the future.
So the bottom line, I think it's -- I'm hoping that [Rohit Chopra] will reconsider this deal. I'm hoping he will, I hope we can get to talk to him. And more so than that, if banks have to continue, they need the service charge income. I mean the regulatory burden is just unbelievable right now.
And so banks would have to go to really a different type of service charge where we're offering free checking accounts right now to [relate] people on the lower end with lower amounts of deposits. I think in the future, if we -- if this deal does go through, I think the banks will have to say, okay, your minimum balance now may have to be $2,000 or $3,000, you're going to get a service charge, and that would eliminate a lot of the lower-end checking accounts that we -- that the regulators and the Fed is really wanted us to get those people to have accounts.
So I don't think it's completely over yet, but if it does, there's no question it would be impactful to us. The impact would either be whether it's a -- are they going to let you charge $17, they're going to let you charge $3? So if that's the case, it could be -- if it's $17 and you get to charge $17 or $15, it's probably $10 million or $11 million before tax. If it's $3 and it's more like, again, I think probably more like $16 or $17 before tax, something in that category. The -- on the other hand, we would have to find ways to increase service charges in other areas to cover and compensate for that. I don't know that you would cover and compensate for the entire makeup, but you would have to come up with some other charges in some other places.
Michael Edward Rose
Got it. Okay.
David E. Zalman
I gave you too much information, Michael?
Michael Edward Rose
No, that's great. And sorry to hit a hot button topic. Maybe just as a follow-up, you guys announced a new share repurchase program the other day, and you guys haven't been very active, but capital levels are really high. I don't think you're expecting a ton in terms of balance sheet or loan growth this year. Any sort of thoughts around increased usage of the buyback as we move through the year, assuming credit remains relatively benign?
David E. Zalman
I mean I don't think that we would have ever issued a repurchase agreement if it wasn't our intention to use it. I think we did use it last year. I think how many shares did we purchase last year?
Asylbek Osmonov
About 1.2 million shares.
David E. Zalman
1.2 million. Again, not a lot, but we still did. I think that we were very cautious with -- look, last year was a year that we wish would have never happened starting in March with the Silicon Valley Bank and then Signature Bank. And so -- and then you have -- people are still being very critical of what kind of bond portfolios you have and what kind of losses there. So we took all that into consideration. The regulators were a little bit antsy about everything too. You have liquidity in that. So we were more cautious. I think we all feel much better right now. And I think that if we don't use it in another way, our perspective is that we always like to increase dividends, of course, that's kind of our deal. But if we don't -- we wouldn't use it all there, we would probably look at -- and we don't get an M&A deal, then we will look at purchasing stock if the stock is not appropriately priced.
Michael Edward Rose
Makes sense. And then last for me, Kevin, can we just get an update on the warehouse since you guys came in a little bit higher than what you had talked about last quarter?
Kevin J. Hanigan
Yes, Michael, as you know, I always talk in average balances for the quarter, and we did come in a little higher. I think my high-side estimate was maybe $750 million, and we ended up at $770 million as an average for the quarter. The first quarter is typically the weakest quarter. That hasn't always showed up that way over the last 10 years because we had so many refinance booms, some re-refinanced booms and everything else.
But the first quarter is generally pretty weak. January of this year has started off a lot like January of last year, weak. The average, Michael, through last night has come down from that $770 million for the fourth quarter down to $704 million. And last night's balance was maybe $610 million. So we're hitting a low point. I expect it to drift a little lower and get under $600 million here for a few days before it begins to rebound. So January and February are generally going to be pretty weak. March picks back up. My best guesstimate for the average for the quarter, I'm going to say $650 million, but could be as low as $625 million. But if I had to pick a number, I'd go $650 million.
Michael Edward Rose
Sounds good.
Operator
The next question comes from Brandon King with Truist Securities.
Brandon Thomas King
So I had a question on deposits, and we're looking at potential rate cuts this year. So how are you thinking about the ability to maybe reprice some of your core deposits given that you're already quite low compared to some of your competitors?
Asylbek Osmonov
So if you just look at cost of funding, let's say, let's start with the borrowing that we have with the Fed, the term bank funding program. We have $3.7 billion paying around 5%. So any cut we have is going to be direct impact to that. So we're going to get direct benefit from that standpoint.
As the rate -- the second part, I would say probably the special CD, we're offering at 5% right now. So if the rate would cut down, we would cut those down probably a little -- linger a little bit, but within 7 months, we should be able to reprice that -- that CD as well, lower rate. On other ones, I agree, probably we'll not be able to cut a lot on some money market because we don't offer high rates for our customers. So there might be a little bit of delay on that compared to if you had to offer 5% money market, probably it could cut right away when the rate goes down with us, probably it takes time with that. So I think that's overall composition of deposits.
David E. Zalman
I would say also -- I'd add to that, Brandon, is that -- if rates go down dramatically, which I don't think that they will, quite frankly. But if they do go down, I think that will take the strain off of the noninterest-bearing deposits leaving the bank more people. Unless they can get a lot of big interest rates somewhere else, they'll start leaving more money in their checking accounts. And so I think that will help also.
Brandon Thomas King
Got it. Very helpful. And then could you give us kind of the puts and takes on how you're thinking about loan growth this year? And then within that, also kind of talk about what you're seeing in regards to prepayment activity?
Kevin J. Hanigan
Yes, Brandon, this is Kevin. I think as we look at the year, our thoughts as we sit here today, is kind of 3% to 5% loan growth. I would have said more back-end loaded, but I -- we have had a few nice deals approved and loan committed that's yet to fund this quarter. So I think a couple of those are going to fund here towards the end of the month and early into February, and we're talking about some fairly meaningful funding. So I think Q1 might be pretty good for us.
In addition to that, we started off Q3 with a lot of payoffs in July, just a ton of payoffs in July. And we have started off Q1 here with very few payoffs. So -- and I meant Q4 on that previous statement, I'm sorry. We're actually slightly up for loan growth. It's nominal, but we are slightly positive year-to-date. And again, we got a couple of big fundings coming up. So I think we're comfortable with the 3% to 5% kind of number, to the extent that the economy rebounds and GDP is higher than anticipated, that number could go up in the latter part of the year if, in fact, there are rate cuts.
As David said, we're -- we're probably less enthusiastic on our thoughts about rate cuts than many. And to the extent if there are any, we think they'll be later in the year. And I don't mean to speak for David, but I think we're -- around this table, we're not as charged up about the prospects as many.
David E. Zalman
I'd also comment, Brandon, that I think that our customers, I'm not saying other banks what customers aren't quality at ours. But we do have a real high-quality customer. And a lot of our customers really are borrowing what interest rates where they take less money in their checking accounts. So the interest rates -- what we saw as interest rates started increasing on their loans, they took money out of their checking accounts and really apply those more to the loan. So I think that's probably mitigated and stabilized also.
Kevin J. Hanigan
Yes, we saw that particularly in our C&I book, right? Just a ton of deposit decline with the money not going out of the bank. It was going to pay off loans.
David E. Zalman
And even we saw some real estate deals where they might have been at 5% or so, and the rate was going to go to 8% or 8.5%, and they just elected to pay off the whole loan. So certain smaller loans like that. Customers just had money and -- money in their accounts, and they paid those loans off, which is a good thing, too.
Brandon Thomas King
Great. Thanks for all the commentary. I'll hop back in the queue.
Operator
Next question comes from Stephen Scouten with Piper Sandler.
Stephen Kendall Scouten
I'm just kind of wondering with the Lone Star deal, if that gives us any kind of interpretation around future deals or changes maybe how you think about the time line of approval for future deals? Or is this more just still specific to Lone Star in particular?
David E. Zalman
I can't say it's specific to Lone Star because like I said, it's out of the Justice Department. It's really at the FDIC right now. I think all deals are going to take longer. But again, I think that I still feel certain that we have a good bank, and it may take a little bit more work, but that if we make something happen and the regulators like it, they're going to -- it will get done. It's just -- but there's no question, getting something done today as compared to a few years ago, it's a whole different horse right now.
Stephen Kendall Scouten
Yes. Fair enough. Okay. And just kind of switching -- I'm sorry.
David E. Zalman
This particular deal has some more issues than just the normal issues based on times. So hopefully, we won't run into some of that stuff. And it wasn't with their bank. Let me just say this. There was just -- it was a number of different things that we had to go through.
Stephen Kendall Scouten
Got it. And then just hopping back to the idea of the net interest margin. I know you guys said you're not assuming we'll see as many rate cuts as maybe the forward curve would suggest, and I agree with you there. But I mean if we get -- can you guys quantify maybe for each 25 basis point cut, maybe there's 1 basis point or to a NIM downside? Or do you think even with those cuts, over that 24-month period of time that you stated that there really is de minimis kind of downside on a basis point perspective?
Asylbek Osmonov
Yes. I think if you just look at our balance sheet and kind of go through what the impact would be, I think the first impact would be on our funding borrowing side of it. We have $3.7 billion that we're paying down. But if there would be a rate cut, you would see immediate impact over there. I think with a 25 basis points cut, I don't think the loan rate would going to change significantly. I think it's just going to reprice at the 8% or whatever we're getting right now.
So if you look at the long term, I mean our balance sheet is very neutrally positioned, so we benefit in rate cut or increases in the situation in rate cut. And like I said, in 24 months, if we're looking at our model, our margin, it's -- yes, it drops a little bit, but not significantly from what the guidance we gave you over 24 months because the power of our repricing of assets continues.
If you look at our loans, we have about -- principal paid down about $4.5 billion. Out of that, 60% is fixed loans, which we -- on the average rate is around 5%. So you're repricing that 5% at 8%, you're picking up 300 basis points there. And if rates -- I mean, if the rate goes down, you're picking up and borrowing. So I mean we look good in either way. So...
David E. Zalman
I would say, so back again, I'm just looking at the model, it doesn't go in 25 basis points increment that we go up 100 or down 100 -- even down 100 in 6 months. Instead of 2.96% net interest margin, we're showing 3.07%. In 12 months, we were at 3.14% flat. If it goes down 3.24% -- and so even in the 24 months, it goes up to 3%. So I think down 100, we still even do better than over time, even with interest rates going down even with [200] basis points.
Asylbek Osmonov
Yes. And because of borrowing, however.
Stephen Kendall Scouten
Okay. That's extremely helpful. And then just lastly for me. I mean the loan loss reserve is still 163 alone. Do you think we could continue to see the zero provision for some time here in the future?
David E. Zalman
It's pretty hard to see with $370 million in allowance for loan loss of $72 million nonperforming that we would be putting a lot. I know if you saw the charge-offs this time that almost its entirety was due to the FirstCapital Bank merger deal. And again, really some of those loans that I think with the new accounting, some of those loans, I liked it the old way, we would charge those things off as we collected them. Then we would take it in the recovery under the new CECL deal, if you think there's a chance of recovery, you put them on the books. And I wish that we wouldn't have put some of those on the books.
But again, we had to kind of believe in what some of the guys have told us that they were collectible. But the truth of the matter is we have -- they're fully reserved anyway. It's just a different way of accounting for them. I think we reserve between the allowance for loan loss that we brought over our allowance that we put in, I mean it was like $80 million or something like that, $80 million or $90 million. So again, I think that we're good. We do have some loans on the -- that increase right now, the $72 million and nonperforming again, the majority of those were from the merger.
Again, I don't see full losses in those loans like we had in those first charge-offs. There may be a little bit of loss, but there shouldn't be a whole lot. And I think in most of the deals we have deals working on them right now, it's just going to take us a little bit longer to work out of them. I'd say probably, it takes 6 months or a year to work out of those credits. And then I think that our nonperforming should be back down to more historical levels.
Asylbek Osmonov
Yes. And I just add to that, we're on the model and based on the model, what we see, how much provision needed. But since we had a full reserve for those acquired loans, we didn't need to put any provision based on the model. But we'll be running the model with the economic variables there and see if it requires any provision or not.
David E. Zalman
Our models are still showing that we have plenty in the account.
Asylbek Osmonov
Yes. We have a little bit of a recession in this side.
Stephen Kendall Scouten
Okay. Super. That's great color. Appreciate all the time, guys.
Operator
The next question comes from Manan Gosalia from Morgan Stanley.
Manan Gosalia
Maybe a big picture question on loan growth. I mean it looks like we're going to get a soft landing. Many of your peers are talking about loan growth reaccelerating in the back half of the year, and it sounds like you're saying that, too. But you still have all this capital on the books. So why not lean in a little bit more now and get that loan repricing and NIM benefit faster right now, especially if you can put it in some longer-dated loans and lock in some rate?
Kevin J. Hanigan
Yes. I think we're thinking about the exact opposite way. We all are still hopeful of a soft landing. I believe that's a possibility. At today's rates, it's really hard to make a lot of things work. By way of example, go back 2 years ago when we had lower rates. If we were looking at a multifamily construction project, we might have done it at the low 70s loan to hard cost kind of number. And that would produce, call it, a very comfortable [1.25] debt service coverage ratio even under a little bit of stress.
Today, that same exact loan, we require somewhere between 50% and 52% equity to get that same kind of the comfort at your debt service coverage ratio level. So we could lean into that, but there's not many equity players who want to lean into that with us. They're just going to wait for a better time and lower rates to do some of these projects. So we're being cautious, and I think we're being prudent and cautious at the same time. I think we'll get our fair share, and I believe we'll grow at or slightly above the GDP rates. And it just may be a little back-end loaded. As I said, I think that we have some fortune here in the first quarter. Things can always not close for various reasons. But we -- we've got some pretty nice deals that are teed up to close, that we're pretty optimistic that the first quarter is going to be pretty good.
David E. Zalman
Thanks a lot. Go ahead, Tim.
H. E. Timanus
Well, I think the good news is that virtually all of our customers are doing okay. They're not in financial difficulty. The reason they're not doing more in the marketplace is they're waiting to see if rates do go down. And they're waiting to get a little better handle on exactly where the overall economy is headed. But they, as entities, are in good positions, almost all of them. So if and when the picture is brighter and the cost of doing something is less, I think we have an excellent chance of seeing a lot of good loans come our way.
Kevin J. Hanigan
And I think to your lean in point, the things we would lean in on are -- not to name any names, but banks with a really high loan-to-deposit ratio that may have a customer request or a good long time customer that they would love to do, but maybe they just don't have the capacity to do as well or as much anymore. We would like to lean into those, where we get a full-blown, "Hey, we're going to help you out on this, but we want a full relationship here. We want your deposits, and we want to do a full relationship."
I see ourselves leaning into some of those situations when they come up. Those banks -- they can raise money and they are raising money, broker deposits, which we've chosen not to do. But if you go get a broker deposit at 5% or 5.5% these days and trying to make a loan to a good customer at 8.25% or 8.5%, there's just not -- there's not much in if once you put up some operating costs and the provision against it. So those are the opportunities we would lean into.
H. E. Timanus
I think that's absolutely right. I mean, from a competitive standpoint, some banks are just not able to move forward on the loan front in a very aggressive way. We have more flexibility than a lot of banks do in that regard. So if the bank is dragging its feet, so to speak, in giving an approval, we don't have that problem. We can look at a deal and give somebody an answer and move forward with it.
David E. Zalman
But also, you have to admit that last year was kind of a strange year. We were cautious. Deposits were leaving the bank, where we probably cut our own loan growth down because we were trying to set up financing [dry] relationships. We really went back to look just at customers that were customers that could be a deposit customer and a total relationship. So we probably cut ourselves off from a number of deals last year.
I think your point is well taken, maybe things do look better. But again, you want to make sure -- I don't think we're a bank that wants to end up with a 90% loan-to-deposit ratio. We want to have liquidity in the bank. And so you have to grow deposits and loans at the same time, just to think you can grow deposits and not grow -- just thinking you can grow the loans and not grow deposits would be -- would be a mistake. I know a lot of people don't see that, but you need to keep liquidity. If there's anything we should have learned this last year, that is to have liquidity in the bank. And -- and I don't believe -- again, I'm not judging other bankers. I just don't believe that broker deposits is true liquidity. That's not core deposits. And so we'll keep an eye on both of those things.
Kevin J. Hanigan
Yes. Look, it served us pretty well, not chasing the deposit side. But we are starting to inflect that our loan-to-deposit ratio limits, I think we have policy limits at 85%. We're not there yet. But we have stuck to our core deposit franchise. And as I -- you look at way more banks than I do, but I look actively at a number of banks, particularly during earnings season that are around our size or in our markets.
And -- and we came in at this in a very enviable position, maybe a 62% to 65% loan-to-deposit ratio, we didn't have to chase deposits to fund loans. We could let some deposits run off and our loan-to-deposit ratio go up and maintain the core deposit franchise underneath it all. And as a result, we come through a quarter where our total funding cost goes up only 4 basis points and now is at -- for interest-bearing liabilities, that includes the debt, 2.58%. I don't need to tell you where some of the other banks are reporting, but we're seeing numbers above 3%. We're seeing numbers above 3.25%. That gives us a 50 to 75 basis points spread to them in this kind of environment because we haven't chased it. And as I just do look at our overall cost of funds, it's driven largely now, 37%, almost 38% of our interest-bearing cost is in our debt.
And as you know, we're all -- we're paying down that debt as the bonds -- cash flow to us. So we expect $2 billion worth of paydowns in the debt roughly. And -- and that's meaningful. That was $52 million worth of cost in the first quarter -- or in the fourth quarter out of $139 million worth of deposit cost. So we've got that to look forward to, which is why we're so enthusiastic about our prospects for NIM improvement.
David E. Zalman
I think we're at a point in time where we were all locking into longer-term assets when rates were so low. I think now, I think your actions that you do right now by buying money and not having core deposits and increasing your rates on all your deposits could be the next mistake. So I think what may not look so good right now may be prudent going into the future.
Manan Gosalia
Got it. I really appreciate the fulsome onto here. Maybe on the core deposits point, I think you said a little bit earlier that for NIB growth, you could see some more customers leave more deposits that if rates go down. How -- how quickly do you think that can happen? Do you think that can happen as soon as you get 3 or 4 rate cuts? Or do you need to see rates go down closer to the -- maybe 3%, 3.5% range before you see that happen?
David E. Zalman
I think you will see -- I don't think it will be -- they're not going to rush to bring it back in. But every time the rates go down, and I think if you get 3 or 4 rate cuts, you're talking 100 basis points, that would be meaningful. Yes. I mean I think it would. And I think, again, I think we start seeing people moving money back in.
I don't think that you're ever going to go back to zero deposits. I shouldn't say never, I sure learned that in my lifetime, but I think what you're going to see is interest rates probably -- again, I don't think -- I don't even think in the first quarter or the second quarter. Having said this, it changes so fast from quarter-to-quarter. I think you'll see probably interest rates go down to short-term interest rates. But again, 5-year and 10-year, I think these are rates that are going to be this is normalization and you're going to probably see those rates where they're at or maybe can go up a little bit.
Kevin J. Hanigan
Last point is, I think this is playing out pretty much the way we thought.
David E. Zalman
Exactly.
Kevin J. Hanigan
Let's just go back to last quarter. I haven't really read the transcript, and I -- I should probably do that before I come into these calls. But I do recall us talking about when rates pause, it is not unusual. In fact, it's expected that deposit funding cost and mix changes continue for about 6 months thereafter. And I think we're all into that process right now. So some of this mix change could go on is another quarter.
David E. Zalman
Yes, I think I...
Kevin J. Hanigan
But it's coming at lower and lower levels. I mean, our total cost of funds went up a whopping 4 basis points last quarter. And so it's abating, but it's playing about how it's played out in prior cycles. So the Fed pauses, and rates continue to go up in the banking system for 6 months.
David E. Zalman
I mean your point is well taken. In previous quarters, we actually said that historically, banks had 20% or 30% of their (inaudible) deposits. And as rates go up, we would see money lead where we're at and go into some of these higher rate deals. And that's exactly what's happened. And vice versa will happen if rates go back.
Kevin J. Hanigan
Yes. Well, we're halfway through it. Let's hope we're right about the second half being in -- the next quarter being the end of it.
Operator
The next question comes from Jon Arfstrom with RBC Capital Markets.
Jon Glenn Arfstrom
Just a follow-up on that. Do you think that within the next couple of quarters, deposit costs really stop going up for you? Is that fair?
David E. Zalman
I would say absolutely.
Asylbek Osmonov
Yes. If you look at -- let's just look at the...
Jon Glenn Arfstrom
Certainly, overall funding costs.
Asylbek Osmonov
Yes, exactly. If you look at the cost of fund, Jon, I mean, just kind of look at the trends from the Q4 averages to Q1 increased like 41 basis points, increase on the -- from second -- from first to second, like 46 basis points, and then -- then it increased only 18 basis points. And this time, we only had 3 basis points increased cost of funds. So you can see it's coming down. Yes, we had significant increases in the first few quarters, but pace of increase is slowing down, especially if you have some rate cuts slowdown or completely go maybe reverse.
Kevin J. Hanigan
Yes. Obviously, it's a big part, Jon, of our feelings about our strength of the feelings about our NIM improving. It's -- it's a big component of it, obviously.
Jon Glenn Arfstrom
I'll just one more on deposits. The decline in deposits from a year ago, would you say that's all rate-driven? And has that stuff gone forever? Or can that start to come back as -- assuming rates are stable?
David E. Zalman
I mean I think that rates -- I do think that -- I don't know that it's all rate-driven. I think for the most part, it is. I think it is. There's some portion in it, I don't know what, where we have big accounts that have $20 million to $30 million in the account. And even though the CFO may like us, they have a Board of Directors and the CFO says, "Well, why take any chance if you can go to JPMorgan Chase or Wells Fargo?" So that certainly adds to some impact. But I have noticed as things become more normalized, people aren't as fearful. I think you will get a good chunk of the money back. I do. I do believe that.
H. E. Timanus
I think we're already seeing that, David. We've had a number of customers that initially moved money out 9 months to a year ago -- really 9 months ago when the bank started to fail. They moved money out for fear of insurance, not so much for rates. And most of that money went to treasuries.
And for really about 1 or 2 months now, we've started to see some of that money come back. Not a flood of it. But we started to see some of that money come back from existing customers. So I do think there's less fear in the market of bank failure. And if I'm right about that, then the competition is really rate driven, not fear of failure. And I think it's more so rate-driven now.
Kevin J. Hanigan
Yes. I haven't looked at it system-wide, Jon, but if you think about the Fed has taken money out of the system, M2 is down. So if you looked across the banking system and knew just how many deposits had left and subtracted out the amount that M2 went down because Fed actions, the rest would have to be rate-driven.
Jon Glenn Arfstrom
Right.
Kevin J. Hanigan
Would have to be. It could be service levels, but largely rate-driven.
Jon Glenn Arfstrom
And then just a small one. It looks like it was a PCD loan, but can you touch on the charge-off there? And is there anything left? FirstCapital that might be coming through?
H. E. Timanus
Well, number one, all of the FirstCapital issues that we're aware of -- and we believe we are aware of all of them -- are fully reserved at this time. So there's not going to be any surprise loss in there based on what we see.
David E. Zalman
I do think the -- we did, I think, in some of the first loans that we put on, we did -- we do ask -- usually any time we do a deal, we go with management and what they say. They thought that they -- that there was -- even though we reserve fully for them, we still put them on the books. They thought that they could be collected. They weren't collected. And then you had other loans that came back on that we have put back on nonperforming. I don't think those loans are like the loans that we first put on. We knew these first loans we put on were very challenged. We still -- we're really giving management a chance to believe what they said. And again, it just didn't work out.
So -- but again, I don't think the loans that we have in nonperforming right now, you shouldn't see those kind of losses the way we charged off those first ones. In my opinion, we should have just charged them off to begin with, not only reserve when we charged them all to begin with.
Jon Glenn Arfstrom
Okay. Thanks for the help.
David E. Zalman
You didn't ask about the Queen Mary.
Jon Glenn Arfstrom
I think you've turned the corner.
David E. Zalman
The Queen Mary is selling in the right direction. We should reach our destiny soon. While the passengers and crew are a good spirits.
Operator
The next question comes from Brady Gailey with KBW.
Brady Matthew Gailey
I just wanted to hit on average earning assets. As I look at the dynamics that you have loan growth that's expected to outpace deposit growth, you're trying to get borrowings down. So bond balances are coming down, and your average earning assets did shrink on a linked quarter basis. So how should we think about the level of average earning assets into 2024? Do you think we could see some continued shrinkage there? Or do you think that will be more stable?
David E. Zalman
Again, these are questions that are -- it's -- we think it has definitely become more stable. There's no question. I mean, your assets depend on your deposits, your liabilities that you have in. Again, I don't -- I think it's a tougher deal right now. Over time, just like -- just like as assets grew dramatically, they came down pretty good over the last year. So things will stabilize again. And even though I would think that we'll probably still grow. We'll still grow the assets, just because as mentioned, said...
Kevin J. Hanigan
As I think about it, loan growth, that is true. But Brady, I think about it this way. We know we have cash flows coming off the bond book of $2.1 billion, $2.2 billion. And our intention today is to let that bond book drift lower. Right? And take the money and pay off the float, right? We're picking up 300 basis points. It's margin-enhancing. It's good in all kinds of ways for us. It's NII-enhancing.
And you take 5% loan growth on -- we don't have $20 billion, but call it $20 billion, that would tell you, you'd have about $1 billion worth of total asset shrinkage in the absence of long-term rates being high and thus -- I like thing to be back into the buying of the bond book, right, would be one alternative or loans growing faster. But outside of that, I think just the math would be -- we could actually shrink the balance sheet $1 billion in that scenario that I've just described, which is what we've guided to here today and before, but grow NII.
David E. Zalman
Yes. I mean I think that's the real story, Brady. I think growth in loans and all that's really important. But our real story is the growth in the net income on the bottom line. I mean, again, if our models are right whereas deal, this should be a dramatic opportunity for somebody to come in. I mean you're looking at the income that we're making today compared to where we'll be making in -- it won't change dramatically and real big in 12 months and 24 months, it's a dramatic change, and I think that's the real story really. And that's where we all need to be focusing on, not just trying to go and build a bunch of broker deposits into the bank that focus on what we have are good core deposits, make good loans have some growth in there and really increase the earnings to what we think they will be.
Asylbek Osmonov
I agree. And if you just take a pure math, assuming -- I know it takes time to pay down borrowings. But if you take a pure math, a $2 billion spread of 3% you're going to get from paying down the borrowings, that's $60 million annualized. And if you have that fixed loans that we principal pay down and reprice that, we have about, what, $2.5 million -- or billion, I'm sorry, that is a 3% spread, that's another $75 million. I mean, if you look at that, that's why we very strongly believe that our margin is going to improve and our NII is going to improve. As we said, maybe first half is going to be a little bit slower, but the second half and beyond in '25, it looks very strong.
Kevin J. Hanigan
It's coming.
Brady Matthew Gailey
Okay. All right. That's good color. And then on M&A, assuming loan targets approved here near term and you start to look at new M&A opportunities. David, what do you think will be the primary focus? You did kind of 2 smaller deals here recently with Lone Star, FirstCapital. Before that, you did a bigger deal with legacy Texas and Kevin. But are you looking for bigger in size opportunities or smaller or above?
David E. Zalman
I would say we're looking for banks like we are with good core deposits, good -- good people that run them that can help us build our bank into the future, whether that's a $2 billion bank or a $30 billion bank. I know that's a big wide range, but a lot of it, to me -- to me, really, it's really trying to find banks that are like us that can really help us to have a good core deposit base like we do or that can help us get there if they're not right now, making sure of that direction.
I just think that's the way to go. And really, management is very important that they can help us grow at the same time, too. But I think we're going to stick to what we've always stuck to. I think we really need to know the other bank or the other people. You need to have the relationship. We've developed these relationships over the years. Right now, I think that they're out there. If you look at the regulatory burden, I've said this before in this room, it's just unbelievable. Right now, we probably have over 200 people in this bank that really work from a regulatory standpoint, not for us, but BSA, fair lending compliance, that kind of stuff.
And most banking and technology is -- you don't even need to go there. The expense for technology, what everybody is having to go through is unbelievable. And then they're talking about cutting -- cutting income from overdrafts and stuff like that. So there's going to be a tremendous amount of opportunity. And I think that we have a -- we do have a large amount of capital. We haven't just gone and spent it. And I think that we have that opportunity, and I think we have a reputation that people will want to join us.
Kevin J. Hanigan
Yes. Brady, this -- again, I've said this several times, but I can speak as a seller to David. And as you know, because you've said in many conferences with me, I said for 3 or 4 years, I would never sell to David until the day I thought about selling. And I made one phone call and only one phone call, I call David. Because I wanted his currency, not somebody else's. And I truly made one 6:30 in the morning phone call. I didn't know David was such a late riser than I was.
David E. Zalman
I Work later, though...
Kevin J. Hanigan
He works a whole lot later than I do, but...
David E. Zalman
My happy hour doesn't start till 8.
Kevin J. Hanigan
That's right. I start happy hours sooner. But I made one phone call and it was to David. And even with that -- and we know each other forever -- it took us 2 years of really getting to know each other. I mean, opening up the books and thinking about how you put this together and how it works afterwards. And I don't need to tell you because you've seen it for years. Prosperity, it's a machine on the M&A side. There's no surprises.
David E. Zalman
And I would say we still have those opportunities right now. It's just a question of getting the FDIC on board and the regulatory people on board. And I think we're getting there.
Brady Matthew Gailey
Yes. All right. That's helpful. And then finally for me, just a real quick one. I'm guessing the unrealized loss and the held-to-maturity bond book improved at year-end versus linked quarter. What would that number, the unrealized loss?
Asylbek Osmonov
So unrealized loss at end of December was $1.1 billion net of tax. So it came down from $1.6 billion to $1.1 billion. Or around $1.5 billion from. So we decreased by $400 million to $500 million.
Operator
The next question comes from Ben Gerlinger with Citi.
Benjamin Tyson Gerlinger
I know we've kind of beat the margin horse dead here. But David, I just had one quick question. You said [2.96], 6 months from now, you're applying basically 20 basis points of upside on the NIM over the next 6 months?
David E. Zalman
I'm try to hear the question. Going up -- our model shows in 6 months to be around [2.96]. And with a static balance sheet, yes.
Benjamin Tyson Gerlinger
Yes, got you. I just -- we've thrown out a lot of numbers. I just want to make sure I had that one right. And then a little bit of a cleanup question. Asylbek, you said for the expense base, [1.34 to 1.36]. When you look towards the back half of the year, is that a good starting point on an organic basis, i.e., not including the deal closing?
Asylbek Osmonov
Yes, I agree. I think [1.34, 1.36] is a good starting point. And I think this is going to be -- that range probably the first half of the year and probably increase a little bit in the second half of year. And I think I gave the guidance last quarter being around 2% maybe from the starting point, 1.34, 1.36 . For second half of what I think is still good guidance, about 2% increase because due to our merit increases and what we talked about, there's a lot of technology expenses coming to you with that. So 1.34, 1.36 is a good starting point, not including one-time off items.
Benjamin Tyson Gerlinger
Right. Right. Got you. Okay. And then loan growth is better than expected. Should we assume that's probably on the higher end of the range with like payout commission kind of things?
Asylbek Osmonov
Yes. I mean if you have a loan growth, there will be some pickup there. Higher.
Benjamin Tyson Gerlinger
Yes, it's a good cost.
Operator
The next question comes from Brody Preston with UBS.
Broderick Dyer Preston
I just wanted to ask a few questions. The first one was -- it's a little ticky tack, but I noticed that the borrowing rate ticked down this quarter. I wanted to ask if you maybe substitute any borrowings for BTFP usage at all?
Asylbek Osmonov
We have substituted pretty much 100% of it. So we own the BTF right now. That's why -- and with that rate decrease, we were able to reprice those.
Broderick Dyer Preston
Okay. And did that all happen -- did that happen early in the quarter? Or did that happen late in the quarter? I'm just trying to think about the spot rate on the borrowings?
Asylbek Osmonov
Yes. It was later in the year, and the spot rate was [4.80].
Broderick Dyer Preston
Got it. All right, cool. On the loan yields, I just wanted to better understand the trajectory of the core loan yields that you're expecting within the margin modeling that you all are doing on a quarterly basis through 2024?
Asylbek Osmonov
Yes. On that loan margin, I mean, it's just based on the model we've -- our model shows that, like I said, we have that $4.5 billion coming due, which is 60% fixed, 40% is all the variable so that rate is already baked in. So we're repricing about 60% of it in the market. Repricing of the loans, I think the average loan rate on those fixed loans about 5%. So we're repricing around 8% in the model.
Broderick Dyer Preston
Okay. And then the last one was, I just want to circle back to the buyback. I know you said that you'd do it, you've never not done it if you have the authorization. But it seems like capital returns are becoming a bigger theme amongst your mid-cap peers. And so just given the capital advantage that you all have and given the fact that this Lone Star deal is taking longer, is there any reason to think that you might not look to be aggressive at all? And I guess I'm asking, is there anything is Lone Star stopping you from wanting to be aggressive on the buyback? I'm just trying to better understand what's the holdup as it relates to it, just given the stock price?
David E. Zalman
I think historically, we've really -- buying our stock back, we have when the price didn't seem appropriate when it went kind of crazy. That's really what we always use our buyback money for. But our machine really has always been to take our earnings and increase dividends and also to do mergers and acquisitions. And I think that's our focus since last year. I would have to tell you that -- I mean, we're almost forgetting that what we went through in March through December. I mean the regulators and everybody just got really nervous.
So we were really trying to build capital at the same time too. We didn't care that we had so much capital. In fact, it was a good position to be in. And I think it's a good position to be right now. But when it's appropriate, we will buy stock back if it's an appropriate time. There's no question. But again, we're focused on M&A and increasing dividends.
H. E. Timanus
And I think it's important to emphasize that the potential for M&A right now is very significant. May or may not happen, but it's out there.
Broderick Dyer Preston
What's the -- what's like -- yes, go ahead, David. I'm sorry.
David E. Zalman
We think -- we in the past think that you can really make more money through -- if you make a good M&A deal and you can just see more accretion there than you can just buying back your stock. But again, that's not always true. And so we'll have to look at each deal on its own at the same time.
Broderick Dyer Preston
Got it. Is there a minimum threshold on CET1 that you wouldn't want to go below? Or is there like kind of like a medium-term or longer-term level of CET1 that you think is appropriate for the bank, just given the relatively lower risk profile of it?
David E. Zalman
I'm more of a leverage ratio guy. I understand that really -- you just take your goodwill out, divide it by your assets and that's your leverage ratio. And I think we're probably at around 10% right now. And, I remember in the old days, if you had 5% or 6%, that was pretty good. So I think the regulators want you to get to where this double-digit is. I don't think you have to be, but I think they like us that we are right there. I'd like to maintain if we do a deal or -- I don't think I'd ever want to drop below 8% on a leverage ratio. That's just my gut feeling right now.
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 now disconnect.
