Q2 2020 Prosperity Bancshares Inc Earnings Call
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At this time I'd like to turn the conference call over Q Charlotte Rasche sheet Ma'am. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' second quarter 2020, <unk> earnings Conference call.
This call is being broadcast live over the Internet at prosperity Bank U.S.A. dotcom and will be available for replay at the same location for the next few weeks.
I'm, Charlotte Rasche, Chief Executive Vice President and General Counsel of prosperity Bancshares and here with me today, It's David Zalman, Senior Chairman and Chief Executive Officer.
HM Tim Timanus Junior Chairman.
So back on small enough Chief financial Officer.
Eddie Saturday, Vice Chairman, Kevin Hanigan, President and Chief operating Officer, Randy Hester Chief lending Officer.
Merle Karnes, Chief Credit Officer May staff imports director of corporate strategy and Bob Downtown Executive Vice President.
David Zalman, well laid off what type review the highlights for the recent quarter.
You will be followed by also back all small enough who will reduce 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 lives by following makes instructions that will be provided by our call moderator Jamie.
Before we begin let me make the usual disclaimers.
Certain matters discussed in this presentation may constitute forward looking statements for the purposes at the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the actual results performance or achievements of prosperity bancshares.
To be materially different from future results performance or achievements 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 and prosperity bancshares filings with the.
Securities and Exchange Commission, including forms 10-Q, and 10-K and other reports that statement, we have filed with the FCC.
All forward looking statements are expressly qualified in their entirety buddies cautionary statement.
Now, let me turn the call out there today, the topline Nike Charlotte and good morning, everyone.
I would like to welcome and thank everyone listening to our second quarter 2020 conference call. We are pleased with our second quarter 2020 results and we're completing the operational integration of legacy on schedule in early June the team members from legacy now prosperity I've been asked.
And we could not have achieved such a smooth integration without their commitment and afterwards.
I want to thank all of our team members, who worked many hours to make this happened we remain excited about the combination and look forward to continuing to build the best thing anywhere.
Well the second quarter of 2020, we showed impressive return on average tangible common equity of 19.98% annualized and on average assets of 1.61%.
Our earnings were 130.9 million in the second quarter of 2020.
It was 82 million, where the same period in 2019.
An increase of 48 point sixmillion or 59.1%.
Our diluted earnings per share, what dollar and 41 cents, where the second quarter of 2020.
Paired with the dollar 18 cents, where the same period in 2019.
An increase of 19.5%.
The second quarter 2020 earnings per share of $1.41 includes a 22 cents income tax benefit.
Six cents charge for merger related expenses.
And a three cents charge for the write down of fixed assets related to the merger and some see our I phones.
In summary, there was 22 cents a benefit to earnings and nonsense and deductions mostly related to the merger.
Loans at June 32020, or 21.025 billion, an increase of 10.4 billion or 98.6% compared with 10.587 billion at June 32019.
Our linked quarter loans increased $1.898 billion or 9.9% from the 19.127 billion at March 31st 2020 of which.
1.392 billion or SP, a paycheck protection program, sometimes referred to as TPP loans.
Mortgage warehouse loans also increased 843 million in the second quarter 2020 compared to the first quarter.
Our core loans, excluding held for sale and the warehouse purchase program and the P.P.T. also decreased $311 million. However, a portion of this decrease resulted from loans that were intentionally removed that were identified in our due diligence of legacy.
We saw strong loan growth in the first part of the second quarter, but that slow as business shut down or reduced operations in response to various government orders.
Our deposits at June 32020 were 26.153 billion, an increase of $9.265 billion or 54.9% compared with 16 point 16 billion 888.
Neil Young at June 32019.
Our linked quarter deposits increased $2.326 billion or 9.8% from the 23.826 billion at March 31st 2020, historically, our deposits are lower in the second quarter every year.
Compared with the first quarter and then begin to increase in the third and fourth quarters for us, but this year second quarter deposits are higher a large portion.
Is from the P.P.T. loans as well as reduction if customer spending you test from are saving more right now.
With regard to asset quality is always been one of the primary focuses of our bank and always will be I have always said you a like us and the good times, but love us in the bad times and this is playing out to be true again during this pandemic and oil price downturn non.
Forming assets totaled 77.9 million.
28 basis points of quarterly average interest, earning assets at June 32020.
We continue to provide relief to our loan customers through loan extensions and deferrals when possible.
For the second quarter 2020, net charge offs were $13 million.
Are these charge offs 12.4 million will relate it to P. C D loans with specific reserves of 28.5 million that we acquired in the merger. So farther 16.1 million in specific reserves were released to the general reserve.
In addition to the 10 million provision for loan losses for the second quarter.
M&A activity has subsided during this period done it. Although there are there are some conversations and probably a few deals working we believed that the M&A activity will start to pick up as businesses really has been an economic activity increases size. It does seem to matter.
Especially with lower net interest margins the need for increased technology and the potential for additional regulatory burden that there's a change in the administration.
An example is the increase volume.
At our customer call center with many older customers wanting to set up online and mobile banking that a previously not been interested in doing so.
The economy, the Blue chip consensus forecasts estimates that fourth quarter, 2020, GDP, well and had a negative 5.6% compared with the fourth quarter of 2019.
How ever therefore forecasting a positive 4.8% GDP for the fourth quarter of 2021, compared with the fourth quarter of 2020.
They also forecasted in unemployment rate of 9.4% for the fourth quarter of 2020, compared with unemployment rate of 6.9% for the fourth quarter of 2021.
Based on these estimates <unk> 2020, <unk> 2021 looks bright.
We are positive about our company's future, while our operating environment and economy is changing frequently we remain focused on addressing whatever comes our way it taking care of our customers and associates prosperity continues to focus on building core relationships, maintaining sound asset quality and operating them.
Any efficient manner, while investing in ever changing technology and product distribution channels, we intend to continue to grow the company, both organically and through mergers and acquisitions, we want to develop people to be the next generation of leaders like every customer experience easy an enjoyable.
And operate in a safe and sound manner.
I want to thank everyone involved in our company for helping to make it the success. It has become thanks again for your support of our company, Let me turn over our discussion to also back.
Our chief financial officer to discuss some of the specific financial results. We achieved also but thank you mr. was on good morning, everyone.
Net interest income before provision for credit losses for the three months ended June Thirtyth 2020 was 259 million compared to 154.8 million well the same period in 2019.
An increase of 104.1 million or six to seven 2.2%.
The increase was primarily due to the merger with legacy, Texas in November 2019, and loan discount accretion of 24.3 million in the second quarter 2020.
The net interest margin when a tax equivalent basis was 3.69% for about three months ended June Thirtyth 2020, compared to 3.16% for the same period in 2019 and 3.81% for the quarter ended March.
31st 2020.
Excluding purchase accounting adjustments the core net interest margin for the quarter ended June Thirtyth 2020 was 3.33% compared to 3.14% for the same period in 2019 and 3.36% for the key.
Quarter ended March 31st 2020.
Non interest income was 25.7 million for the three months ended June Thirtyth 2020, compared to 30 million for the same period in 2019.
The current quarter noninterest income was affected by 3.9 million in a write down of certain assets and general impacts of coal with 19 pandemic.
Non interest expense for the three months ended June Thirtyth, 2020 was 134.4 million compared to 80.8 million well the same period in 2019.
The increase was primarily due to their merger with legacy, Texas and onetime merger related expenses of 7.5 million due to the core system conversion that occurred in June.
In addition to this merger related expenses.
The second quarter results reflect an elevated expenses related to increased mortgage activities.
Well the core system conversion and operational integration process behind us, we do not anticipate any significant merger related expenses going forward.
We expect to start realizing the remaining cost savings beginning in the third quarter of 2020.
We expect this additional savings to be about seven to 9 million per quarter. This combined with a savings realized in the first and second quarter, we'll be in line with our previously stated 25% cost savings in non interest expense.
The efficiency ratio was 46.56% for the three month ended June Thirtyth 2020.
Compared to 43.74% for the same period in 2019 and 42.9 person for the three months ended March 31st 2020.
Excluding merger related expenses of seven point Fivemillion deficiency ratio was 43.97% put the three months ended June Thirtyth 2020.
The bond portfolio metrics at the 632020 showed a weighted average life of 2.69 years and projected annual cash flows of approximately 2.3 billion and with that let me turn over the presentation for Tim Timanus for some detail in laws and asset quality and.
Thank you also that.
Our nonperforming assets at quarter end June Thirtyth 2020.
Totaled $77.942 million.
Our 37 basis points of loans and other real estate.
The June Thirtyth 2020, nonperforming assets total was made up of 71 million.
$595000 in loans.
$187000 in repossessed assets.
And $6.160 million.
And other real estate.
Oh, the $77.942 million and nonperforming assets.
$12.173 million or 16%.
Our energy credits.
$12.073 million of which our service company credits and $100000 our production company credits.
Since June Thirtyth 2020.
$15.786 million has been removed from the nonperforming assets list through the sale of collateral.
This represents 20% of the nonperforming assets dollars.
Net charge offs for the three months ended June Thirtyth 2020 were $13.001 million.
$10 million was added to the allowance for credit losses during the quarter ended June Thirtyth 2020.
The average monthly new loan production for the quarter ended June Thirtyth 2020.
Was $871 million.
This includes a total of $1.430 billion in P.P.P. loans booked during the quarter.
Loans outstanding at June Thirtyth, 2020, or $21.0 billion to $5 billion.
The June Thirtyth 2020 loan total is made up of 39% fixed rate loans.
36% floating rate loans, and 25% loans resetting that specific intervals.
Fixed rate percentage increase somewhat due to the inclusion of the PPP loans.
I'll now turn it over to Charlotte Rasche.
Thank you Tim at this time, we are prepared to answer your question. Jamie can you. Please assist us with questions.
Ladies and gentlemen at this time will begin the question and answer session to ask a question you May Press Star and then one using a touchstone telephone.
To withdraw your questions you May press star and too.
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Once again that is star and then one to ask a question.
Well pause momentarily to assemble the roster.
And our first question today comes from.
Dave Rochester from Compass point. Please go ahead with your question.
Hey, good morning, guys.
Morning learning.
That's a good job hitting the a the numbers this quarter EPS accretion. So just wondering what your thoughts were on that going forward as well as the the accretion trend.
The back half year. If you can it seems like you guys a lot of room to move costs, a deposit costs lower just looking at where are you were pre rate cycle. So just sort of thoughts there too.
Yeah, I, probably let also that take him, but I think our accretion was higher than we normally gave guidance for I think on like we're looking what about $11 million to $13 million. That's right. So whatever yeah for the going forward I think next quarter, we're looking at $11 million to $13 million is little bit the elevated because some of those BCD along as well.
Working out, which they had a discounts in them and so those being paying off bringing additional the fair value income this quarter, but if you're looking going forward, we're projecting 11 to totaling $13 million based on what our model shows right now and I think on the second part of the question David We we have kept our.
Right, so little bit higher than we really had say I've always said that sometimes it really.
Good times people pay more than we days and then when things get a little tougher we kept our rates a little higher than everybody else, but we are looking at it right now to reduce our rates a little bit we should probably do that this week, yes. So we did reduce the rates upsold ride, we reduce race in the second quarter, but looking managing for the third quarter I reducing.
And if you look at our.
Deposits I mean, our Cds at the higher rate right now, but we're waiting to vote for them to be Reprised I think based on what we see we should have about $2 billion being the price next 12 months right I think the biggest but we should have a lot of money like in our premier money market account that we're still paying 40 basis points, if it's a million dollars plus.
So so we have some room to come down a little bit and additional there are some of you know broker deposits. We still have about 100 million to get repriced 700 million yes.
Next 12 months. So there is there's always some movements in the deposit cost.
Great appreciate that color and so just given all those opportunities where do you think the NIM goes from here acts the accretion.
Well the next quarter you know our model showed that our core margin to be a relatively stable I mean, given the current economic conditions, but how would you expect to see some additional pressure on NIM you know because of the loan repricing and if you look at for next quarter, we could see decline in their mind somewhere mid single digits I would say.
But I mean, there's a lot of moving pieces you know, it's you know how the ppb forgiveness kind of work and we'd have a you know with as every bank experiencing right now quite a lot of liquidity you know coming into the bank because of the PPP program, we've had and the stimulus governments. Similarly, I don't do you know we never like it.
Give advice of answered, but there's so many moving parts now I mean, you know there's $2.3 billion an extra deposits. It came in a lot of people thought billion of that was probably from the PPP loans, but you know you'd have to thank for I have to thanks.
That money, we put out will DPP. They should have used half of that are more some saying they didn't spend it because we're waiting to see us.
Yeah, I don't know what the reason is but I think there's I think there's more it's going to be more liquidity than than we anticipate so you had that you get the PBP line.
We do have some room on the deposit side I I would still say to be careful you still see some.
Probably probably more getting some decline of maybe mid to single digits Deathly just to be careful on everything I think.
Okay, and then I guess some of that pressure to your point is from just a higher liquidity levels.
Our liquidity levels in you know repricing of loans.
Yeah, and again when we when we give you that were not showing any increase in loans. If we if we increase slows.
That changes signs and if we if we buy some securities, which we've been reluctant today, because they've been so low that changes.
So there's a lot of moving parts on this this time.
Probably more notice this time than ever before for US I think that's right.
Understandable appreciate all that.
And then just switching to expenses, it's based on your comments on the cost savings are you guys still feeling good about that previous expense guidance store than it was 115 to 116 for for Q.
Are you thinking you're making it a little bit higher than that.
Yeah, I think we still believe that do you know, we're gonna get seven to 9 million dollar cost savings next few quarters.
But the remember like in my notes I said that I, we'd have a elevate a you know mortgage activities, which has some expenses relate to that so with the current environment with a rate that you know being so low we see a lot of a you know.
Getting new loans or mortgage loans, so that could keep up the volume would you would increase the you know expenses, but if you look at our current expense for the second quarter. It if you take out with a onetime expenses and reduce that that mylan by seven to 9 million. That's what we believe is gonna be on the next quarter, but do you think.
About 118, plus another 2 million and no I think it.
018 to around 118, one I want to 19, including the more that includes the team's efforts, including the mortgage activity there Sir.
Okay. That's for Threeq you. The White you know were 90.
Oh, yes.
Assuming that mortgage levels going to continue as we see we saw in the second quarter.
Gotcha.
Perfect and then maybe one last one on credit or on capital.
Guys, obviously have a lot of it and it was just curious how you're thinking about the buyback here if you're hearing anything from the regulators on that front.
And if there's any willingness to reengage there at all.
I think right now we do have a lot of capital, we're making a lot of money, we like the Milt money no question about it.
But I think that regulators at this point in time, if I think if we bought back stock. We there's we have no agreement with them.
But I would think they would look at negatively if you're buying back stock right now until we see farther let the pandemic is doing so I don't see us I don't see as buying stock back unless there's some really downturn in the stock really strong or something like that but for the where the media feature I think it wouldnt be looked at it would be frowned upon as they would say.
I think by the regulators if we bought some stock back right now probably.
Alright, great. Thanks, guys appreciate it.
Our next call comes from Jennifer Demba from Suntrust. Please go ahead with your question.
Good morning.
Good morning, good morning.
Oh for David.
David what do you see is no.
Correct.
Borrowers in your core.
Right now and and what kind of business trends are are they seeing right now and.
What kind of loss content.
Could potentially a rise in the next year so.
Well those are all hard questions.
Probably if you ask me sometime ago, we would've said the oil and gas Department was a tough I think oil and gas where as you know we're used to right now.
I think the prices, where we're at a lot better side.
Don't I think we've learned a little bit that although having said that I from what they tell me at some of the meetings on that they still say that oil and gas companies. There's still a large amounts of bankruptcies to come from that I feel pretty good lower at least I think the most spreads that I would see you know.
Looking looking at our portfolios, we have again I'm talking off the top of my head what about 300 million and.
Multi alone Threeeighty threat I think I think the businesses that are most affected by this pandemic are really the hotel motel loans, which we have about 380 million in that and then restaurant loans were about little over 200 million, but again I you know, we feel pretty good where we're at with with most of our customer.
I don't want to I don't want to be you know Mr. Happy, but I don't want to be a downer either I think that we have given some extensions I think that we've extended our at forbearance on again I'm going to give you some numbers I'm, let somebody else jump in this in a minute, but we extended about 6700 loans is about 9.5% of our loan.
Loans outstanding.
On the other hand and at 6700, approximately 4800 has already started data we pay so you know.
Don't take those were exact numbers I'll, let somebody gave you the exact numbers I'm talking off the top of my head, but you know, we really feel pretty good where we're at a those loans that we charged off this quarter.
We're probably the the $12.4 million loans that came over through the legacy.
Merger and weak we fully leased will have reserved another back we had $28 million reserved on that so we were able to put another $16 million into the general reserves plus $10 million that we put so I feel like we had a real good quarter again, I don't want to be a pollyanna say things are are right, but I feel.
So we're probably one of the best thanks to be with in these kind of closet, Kevin you may want to jump in on some of the oil and gas what's your feelings on that too.
Yeah, I agree with David deal, if we look at stress areas, it's things to be on your top of mind, it's probably hotels, although I don't think we have any of them pass through at the moment.
I don't think we have any office buildings or retail centers pass through either now some of those are in for a period.
You're talking about that type of issue.
On the oil and gas fraud.
Obviously, the stress is less now with price was closer to 40, but it was we saw.
You know a single digit and worst oil and gas numbers. Our portfolio continues to work its way down if we just what quarter over quarter.
Portfolio shrunk $80 million over the quarter.
Unused commitments shrunk from.
Oh 390 million to 277, and that's largely due to Redetermination time. So it was a cutting commitments at redetermination time, putting everybody on M.C. ours.
54 million well over 54 million of that 80 million decline in oil and gas was from former legacy part, but had to Mark model.
And that's where a lot of loss content, we reported came from.
Just in terms of loss content on at 54 million it was about 18%.
But we had close to 48% reserves up up against that so you think about the reserve level.
Our.
All the Mark there was put on the thinking a month ago printing press the end of the.
Prosperity seem to put big marks on that portfolio, that's we had over $28 million.
54 million was marked and.
Loss content.
Oh.
[music].
About the.
Well for the half million dollars. So overall I think the portfolio energy wise is in good shape.
Because of the March be because with the hedging and fee because we continue to strike the down and we were pretty aggressive during redetermination time about putting monthly commitment reductions and every deal. So I think we're managing the risks around that portfolios.
Good as could be expected.
Yeah, and I was just say that the it again.
We have almost 1.9% and reserves when you exclude the PBT I. Thank them talking the tougher the top of my heads and mortgage warehouse. So.
We never really ever had that much in reserve before so I mean, I feel really good what where and Tammy you wanted to comment too.
I think I can maybe give a little help on the hotel and the restaurant question Wes.
Obviously, none of us can firmly predict the future. We can only talk about with certainty where we are today, but it's a lot better than one.
Would probably think it would be.
As of June Thirtyth on the nonperforming assets list, we only had two hotels.
H one had a balance of about 7 million. So we had a total of about 14 million.
One of them has already so.
So 7 million has has come off the list and as part of that number that I gave that total number that's come off the list since the end of June.
So there's only one remaining a hotel in the nonperforming asset list and it's got a balance of about 7 million and it's actually current right now.
Dave resumed payments and they've kept the current for a while.
To be conservative we left it on the list at the ended the quarter and we're going to watch it must buy must going forward, but.
The good news is its current right now.
There was only one restaurant.
On the nonperforming asset list at the ended the quarter and it had a relatively moderate balance of about $43000. It happens to be SB, a guaranteed and we've already filed a claim with the SB a two.
To get them to honor their obligation as it relates to that alone.
If you look at at the total hotel portfolio.
About $52 million of that portfolio carries and SBK guarantee.
And on the restaurant side about little over 10 million of the portfolio carries and SBK guarantee so.
Right now things are reasonably stable as it relates to our hotel motel and restaurant loans that we'll just have to see how feature plays out and I would think that's a dialogue that cover Tim and I would say the restaurant loan we really aren't doing a bunch a mom and pop restaurant. All these are customers that have maybe.
30 stores or franchises or something usually bigger bigger customers. So it would give you too much color Jennifer.
Not at all with Great I have one more question on crowded on one of your.
Exactly.
This call about medical while I'm. Just curious are you seeing any start up there or you just decide side.
Strip that out.
I'd have to ask tell him, but I didn't know I'd look at no. We were not seen any stress in the medical side I think it just something people have asked this foreign investors have asked us for like out next just recently broke it out primarily.
Perfect. Thank you.
Thank you think.
Our next question comes from Brad Milsaps from Piper Sandler. Please go ahead with your question.
Hey, good morning.
Good morning.
Hi, Thanks for taking my questions.
Just curious trying to figure out the impact of the PPP lines in the quarter I was curious if you might be able to disclose the average balance and then you know the level of interest income that you.
Including the then the coupon you're recognizing the quarter in any benefit I'm you know maybe from.
Fas 91 year deferred loan origination costs than might have been on expenses in the quarter.
Yeah. This is also that I'll give you a little bit color. So we do we recognized about a $4 million on the fee income during the second quarter, whereas about 2 million per month, and we deferred all the fees and including fees and before some direct expenses over 24 month as you know.
You know wants those loans got to get forgiveness payoff, we can recognize that income that time, well for time time being it's on the deferral for the 24 month.
I think on average we the average balance I believe for the second quarter was about 750 million or so on PPP alone.
And if you calculate including that 1% interest income, we're generating about 2.5% yield on those loans right now.
I think overall Oh, we leased the Bradley brought in around $50 million in fee income and.
The and probably at about five or $6 million links. So again will amortize that over a 24 month period, but as those give forgiven, we'll probably will will bring it back into into model like I think the average long may be wrong in that this eight 750 negative is that the what's the average loan size about 350 day, well, we don't know we booked.
12000 loans in round numbers summit, we think eddie ever faster lunch.
I love to get out of this our average fee was I would say our average fee was probably closer to around 3% probably or or not.
I think that's what you're trying to get out as an yes, our alstom, giving the average balance for the quarter total TPPL, while he may be right am I was just said sorry I missed the.
Yeah, we booked, especially a total of 1.430 billion and that was spread out over 12000 loans in round numbers, yes, that's right.
We get to what you need Brad Yeah that was gray, but just to be clear aspect that the Fas 91 adjustment wasn't a huge number in the quarter and you still feel comfortable getting down to that kind of expense numbers, you talked about earlier, even even without adjustment.
Yes, so the you if those the fee the PPP if you yeah, we deferred it all the direct expenses will also defer to but as part of the.
Interest income part of it the way, it's how gap is down so he's not going to be impacting our noninterest expense Brett.
Got it okay. Thank you and then just as a follow up maybe maybe for Kevin.
Obviously, a great warehouse corn or you know kind of what's what's your crystal ball say, you know kind of the over the next 90 days in terms of turns of average then also there was the yield was down there maybe more than that some of your peers I'm just kind of curious you know kind of thoughts on you know that competitive landscape and an ability to hold on to pricing.
Hi, This is Kevin Brad I'll take that one.
But obviously the quarter was was really strong averaging a billion 843 I think.
And ending at much higher numbers, you're almost 2.6 billion.
So that.
Ending June month end balance gives us a.
Great running start going into July because those balances cure period on for much of a month.
Based on whatever we're hearing from our clients are we expect the end of this marked the be really strong again.
And.
That comes to us by virtue of I'm asking for over lines are extending the facilities.
Larger levels to get them through this.
I'm really robust period of time, what's particularly interesting to me is that the turn days. Despite all that volume to turn days, which typically run for us and the industry at about 17 days only ran at 14 days. This quarter. So when you think of that in terms of the amount of activity would have those level where balances.
With that quick to turn days, it's pretty remarkable.
The around this business a long time and typically we would the average and I'm more 20.
Or work 20.
Three to 25000 files and Q1 was a new record we did 41000 files and we'd be at almost 82000 files in Q2 so.
The amount of volume going through there is pretty high.
And that volume does produce throw off levels of fee income were collecting I calculated sporting about 37 Bucks a file that we touch in fee income. So I think you know Q3, and again, who knows beyond where we sit today.
But if rates stay.
Reasonably stable, where they are I think Q3 is gonna be even stronger than Q2 was by if we ever go your way that wouldn't be surprised we average.
2 billion EUR 2.1 billion for the quarter, we'll just see how it plays out from here, but all pretty strong.
Finally on rates I think a rate pressure is kind of subsided by thank you finally, and I would tell you that all of our loans have won four floors and then so every loan that we haven't we have 39 customers now has a LIBOR floor of Weibo big weren't 1%.
So any any moves a lot or for where we are now would impact pricing like it hasn't been.
Great. That's helpful. Thank you guys.
Thanks, Jim.
And our next question comes from Brady Gailey from KBW. Please you have with your question.
Hey, Thanks, good morning, guys.
Well anyway.
I wanted to ask about the need or lack thereof.
Future provisioning.
You had a zero provision last quarter.
10 million this quarter, but David as you said your reserves.
Almost 2% you guys are known as having one of the cleanest loan books and industries. So.
Do you think that there will be a me either for future progress provisioning just given how clean your book isn't how strong the reserves are currently.
Well you know this time again when I say this is something may go wrong, but [laughter].
Even the $10 million provision that we made this this time.
These under Ses or any other type of calculations you have you have a you can go you can either be at the high ends a median or the low end and even to get the $10 million that we had this time, we had to really try to be on the high end of our provisioning. So my gut feeling is it unless some.
Nothing changes I don't see us provisioning.
That's you know I, just don't see it right now.
I'm sure you every I'm looking at morale in the credit guys always stay lets say you know they'd only like have everything is a world in there, but the bottom line is I again, I guess I see is highly provision I you know when we do the stress tests I remember when we had the D Fas fess and even under a stress test.
The most that you would lose over a.
Two year period, it I mean compared to what the stress test say, if they're right I don't see it now the question is what new regulators.
Going forward through this pandemic or till we get some guide to see what we have but I think the 1.9%.
There for loan losses, too high for bankers life hours, having said that I. Thank regulators want to see that I think your chief credit officer wants to see that but I think you know that that $354 million that we have in there I don't think we've lost that since I've been in banking if you add all the years together.
Right that we haven't lost $100 million or 80 million and that's what some of the banks. We bought so God help us out we don't get there, but in my lifetime I've never seen us.
Maybe close to what we what we have it and what we would use that just me, but having said that I know we have to be careful we don't know when this will all in and win everything will open back up but I don't I up I'll throw it out there I don't see I think it's too much but it is what it is we have these calculations that we have to go with the calculations and it's not just.
Me running the bank Theres the credit people in the regulators and everybody else, but I I think extremely hot really.
Well, you know where we are as an individual bank right now is relatively stable.
Things are arguably a lot better than a lot of people would assume they would've been.
But clearly there's a lot of instability in the economy out there right and.
You know our reserve is based on a lot of things obviously.
Very important part of it is where we are as a bank, but also their economic factors that go in there and a lot of those are not trending well right now for obvious reasons. So it's just very hard to very hard to say I I'm inclined to agree with your David I, it's hard to imagine.
That our portfolio is going to fall apart overnight.
But you know you never know world is what it isn't anything can happen Kevin I don't know if you want to add to that at all if it.
No I think you've got to covered pretty well.
Hi, Thanks.
Brady I don't have answered, but that's just are not the overall feelings of the.
Yeah, No that goes Great. Then my second question is good nine on a personal loans over modified.
Right.
What does that as of today I'm guessing that's come down Solomon.
Yeah idea how much of those initial modifications will need a sector modification.
I can give us a little more certainty that obviously, we can't give 100% survey.
As as has been previously mentioned.
We extended some payments.
On it was.
To be precise it was 6727 loans.
And the total aggregate outstanding balance Oh, those loans together was EUR 3 billion EUR $626 million.
And that's extending at least one month most of them were two or three months there've been a few not many that has gone as far as its four months being extended but really the vast majority of those were two or three month extensions out of that 6.727 million.
4864 of those loans have have already resume making normal payments and the aggregate total balance of those 4864 that have resumed payments and still thing.
That balance is 2.283 billion. So you know how long those that have resumed payments continue to do so obviously, we can't say with certainty, but those customers are implying to us that they have reasonable stability in their business right now.
We still continue to extend the payment here there for a few customers but.
Not nearly as many as as we did and April and May.
So everything seems to have stabilized a bit but obviously, there's just no guarantees.
Thanks.
4800 loans resuming payments at 6727.
Sounds that we extend its pretty good I think that shows freak show you that our customer.
Customers that we have are really good customers.
Great. Thanks, guys.
<unk>.
Our next question comes from Ken Zerbe from Morgan Stanley. Please go ahead with your question.
[laughter].
We are the P.C.D. loans, you guys took charge offs on this quarter, where they sold in the quarter I'm just trying to figure out like how you also were able to release the $16 million of other reserves on those back into the general portfolio for general reserves.
Loans were the loans were moved out of the bank were paid off.
Got it Okay you took it.
We charge on those as they.
Yeah.
I'm sorry got it okay.
And then just I just want make sure I got the math right on this I understand.
David I, certainly think the reserves are very high and struggled to get the 10 million a provision.
If you move the $16 million.
Specific reserves into January reserves is it fair way of looking out into your provision expense this quarter.
He's probably where your seasonal model. So you see some model says you should have booked a 26 million dollar provision.
But yes 16 coming from the specific in the 10 million is coming from regular provisions.
Hitting the now on the head I think we let we actually put $26 million into the General Reserve does this month basis.
But you have a wide range in there and we were at the upper end to that range here. If he's asking would we have been required to put 26 million in there. If we hadn't got no I mean, that's wrong I think you're saying yeah. Not we said we took the upper range of what we could be in and so basically but the net but the bottom line is.
Secondly, we increased the general reserve by $26 million this quarter basically.
Because a 20 odd dipped slightly to 28 million, we added reserve and what we collected we actually there was $16 million more specific reserves that no. One yesterday that 60 million before before you had this new accounting that's $16 million would have come through the income statement now it does it.
I used to be caught SLP three other three or something like that in today's world. It doesn't come through the income statement. It goes directly.
I guess that we wouldn't I guess, if we wouldn't.
Added to the other reserves it might have but we put it to the reserves a general reserves, but it doesn't automatically go in income.
Right.
I guess, if I've got no I'm trying to get from a technical standpoint, I'm learning something myself I guess, if we want to just said also left that we couldn't put that 16 million into the general reserve I guess that model been pulled back into the income statement I guess technically on an old ways, you would take that 60 million as a esso feels pretty fair value income.
And technically if the model we've decided not to go with the upper end you could technically take it as a provision income because it washes releases you could take a provision income but based on the model in the our discussion would believed that just leaving as a general reserve was more appropriate it wouldn't be prudent in today's world to bring something.
Back into income I don't think with the damage pandemic and not knowing where everything is going to eventually settle out at all done yet but in perfect World you tactically should uptake in a part of its probably weren't in a pandemic and all that we probably wouldnt, even put the 10 million is and we and modest and take a 16 million back into provisioning jump right.
Okay and just last question just in terms of fee income are you seeing any rebound in deposit service charges and also just more broadly like how do you see fee income trending over the next quarter too.
Yeah go ahead, and you can jump in I, suppose but I have seen this last month. Our finally, our service harvest picked up over a million dollars. This last month, just general service charges.
You will get us I know that's exactly because those are fee income, we so down into April and May Mountain, we saw some bounce back in June. So if we continue the way I believe the fee income will go up. So you you were right on Mr alone and I think as as the economy opens up I mean really the service charge income is people really just weren't spending money in in their site.
And money and they're not they're not doing things that I think we did see this last month I saw that service charge income didn't do a pretty good Omega dollar so but.
One wild cards I would just throw out there we just have to be conscious that you know there's a second stimulus package they talking about the passing it so they're going to give the stimulus money to people. They will have access liquidity there too that they could impact by the wildcard not six you could see another round of big deposits come in probably increases.
Order it with the stimulus package and all that you probably good.
You also have to take in consideration that.
During the worst of that for US, which were the months of April and May we specifically waived a number of service charges for customers to help them out that's a good forms and and we're not seeing the necessity right now to do as much of that I've forgotten about so good point that a lot of some of that decrease.
Because we weighing certainly we purposely waived service charges for a number of customers to help them out.
And you know the necessity for that of course could come back, but right now we're not saying it right. So I think that that by itself is going to create some additional.
Compared to where we work during this last quarter.
Alright, perfect. Thank you.
Thank you.
And our next question comes from Peter Winter from Wedbush. Please go ahead with your question.
Hi, good morning.
Wanted to ask about the.
Trends the core loan trends I was just curious how much of a lot in terms of the run off of legacy and then secondarily.
What's the loan demand like in the core portfolio ex the mortgage warehouse.
Okay, I mean I'm trying to read my notes here that they wrote for me, but I think we started off with about 400 million in lows.
Thank you talk around one of a million in loans. Some legacy that we decided that we thought that we would try to outsource out of the banks I think so far we moved out in the first quarter in the second quarter about $131 million of those loans. So still about still out 283 million left there. So.
We'll have to will have to get through that but.
As far as loans down you know again, we have tremendous felt in the PDP with tremendous growth in the in the mortgage warehouse, we actually saw a decrease I think if you looked at our core loans. This quarter I think I said I'm tougher the top of my head. So forgive me if I'm wrong I'm thinking around 311 312 million less in core loans and out of those core loan.
I would say that about 65 million of that was really made up of these loans that we talked about earlier that we we got we got out of them.
We had some recoveries on them. So that was about 65 million and I would say probably is just some of the other loan.
From legacy the merger and the C. R. E product you know, we're not putting on as many of.
Particular loans it naturally in this type economy <unk> commercial real estate.
On the retail side is not something that would jump into so having said that if you look just at core loans I think we were down about if you take out the 65 million I think that was about 1.6% of course you'd have to annualize at 1.6% for the quarter. We were down I really when I look at everybody else that that was considered pretty good I think going.
Well, we're you know to give to give us a number of loan growth going forward I think it's hard like I said before they shut downs, we were having great growth. Both in the first quarter is first part of the second quarter as a shutdowns tank we saw things can track so.
With us having to get at its still a couple hundred million dollars in loans $280 million in loans at legacy.
And looking at the pandemic, where it's at I would have to forecast that probably the best you could help work for us would probably be anywhere from a zero to 3% growth right. This time I think thats just make talking to somebody else may want to jump in Kevin you want to jump in on that so.
David I I agree across the board, we're still seeing deals and loan Committee every Thursday.
Things are getting approved but.
I think you'd go understands it really tough time to underwrite.
Alone for me in the retail center comes in and what do you what do you do how many of these people are buying how many of these people are going to be able to continue to pay how many are being deferred.
[noise] say not commercial office building, what's the future commercial office buildings I don't think.
It would have to be a pretty spectacular amount of equity in a really strong geared toward to do a retail deal or commercial office building deal.
That's a that's already constructed office building new construction for the most part.
Gave a really really unusual situation.
Yeah, I'm wondering if I could say, it's a really tough time for underwriting on the other him I can tell you it's really easy [laughter].
Things are just not going to touch during a period of time slot.
Wow loans, you know shrunk I guess, the $312 million number a good portion of that it was was running off for stuff that are out of the legacy portfolio, we didn't want to keep.
It's going to be caught up in this environment and I'm not worried about not producing loan growth right now I'd like to see a little more clarity as to what underwriting works like across the board I think we all would before we feel better about producing a whole lot longer I.
I think thats right and I think also you could say the loans that were looking at now I mean, if you're coming to us for a multifamily project or an office building, where you know we might have been willing to get 40% down 35, or 40% down in a passing go with the somebody Lee said, we're probably going to ask for some guarantees support another global support.
More than just a project itself. So I think you're underwriting where toughening up right now I will lose it as things turned around but right now we're able to get a little bit better comfort. If we're doing stuff, we're able to get a little bit better.
Collateral support guarantor support I think.
The only sector really.
That doesn't appear to slow down a bit is homebuilding right. Most of our homebuilders are still selling their houses and building their houses.
We haven't seen a big drop in demand from from our homebuilders good point, but everything else has slowed a bit not not a screeching halt but has slowed a bit and we had already slowed our approach to apartments and office buildings before the virus Gabe out every new anything.
About it I think that's right so.
There should be an opportunity for us so where other banks that are having loan issues, they're not going to be willing to do anything [laughter] I don't think where I think that we can be more optimistic on something and maybe we could get better.
In terms of better terms with we maybe able to do it where some of the other banks can at least we have in the past <unk> in the past that's exactly bend the case, when when things have gotten bad, especially really bad.
And other banks have been grip.
And and found themselves in a position of really being able to alone.
You know we've been able to get some some customers in that are good customers because they can find financing the way they have wanted it in the past.
And our conservative terms become more acceptable to them right. So it has work that way as almost every time.
If we answer theater [laughter] above and beyond that's very helpful. [laughter] cut.
Question on earning earning asset yield.
Can you talk about how much is cash flowing in the securities portfolio in what you're reinvesting that rate up and then secondarily.
The yield it's still fairly high on loans held for investment I'm, just wondering what the new loans.
What reinvestments are going on.
On the loan portfolio as well.
I'm going to start from the top of my head again, I'm not rating from anything but again, we haven't been buying any securities. Most of lead let all of our borrowings run out and we think in that money and and really just funded the mortgage warehouse or let deal now where we're having some liquidity right now we still haven't bought anything probably a four or 500.
Yes, we'll probably go in and by some sort of security that are probably be a mixture of some.
Floating rate stuff with some 15 year in mortgage backed security it'll be somewhere in between but as Kevin mentioned earlier, we hope that.
Some of the liquid he's going to be taken up by the mortgage warehouse financing toward the toward the end of the court heard the next few months that will probably still have to buy some summit.
But again, we've let we've just we've been let it run off that thank gosh I'm talking over the top of my hand, but we have probably what over $1 billion a year billion what.
That rolls off our annual cash flow right now it's the project at about 2.3 billion going up it's gone as going up significantly because all the refinances and a new mortgage but yeah for the second quarter, we didn't buy any of those securities we use all the.
You know.
Money full toward the warehouse and paying down the borrowing so but now we will be looking into that I think well I think we'll be forced to to buy some securities is this quarter, probably again I don't not that'll be 300 million or 500 million, but we'll probably be forced to do something like that.
And on the yield question on the average I'd say.
Most of the new loans were booking now or about 4%.
That's about where we are I think the fixed Franco all you know a little bit better yeah, I'm, just saying across the board across the board across again.
Is that.
That's pretty close to you know what it would be.
Okay, great. Thanks for taking my question.
Sure.
And our next question comes from Michael Rose from Raymond James. Please go with your question.
Hi, guys. The two loans that were the PCB loans were they.
Sorry, I missed or were they energy loans.
It was more than two loans, but yes ever energy loans.
Yeah, Michael I think those four loans totaling.
$54 million.
[music].
That's correct. Okay. So what was the what was the haircut on what you guys vessel, but.
I'm sorry, it was a.
18% discount off the principal balance, whereas we had about 48 or 49% specific reserves up against it.
Okay. Thank you Kevin what's what's the the go forward outlook for for the energy business for you guys are knows obviously a bigger pieces.
Legacy, but given that things have changed I mean, as the isn't so a business that prosperity.
As a real interest and been being in a sort of size or capacity.
Yes, I mean, I should pick that the David but I would say our position as it is a cautious we're in Texas. So I I pick our intention is to remain in the business.
To be.
Stick to our knitting in terms of underwriting and now we've gone through a.
Redetermination period under the prosperity Rone policy all of the legacy loans are now.
Worked and forming with prosperity loan policy in terms of advance rates and how we do engineering and things like that.
Portfolio will probably continue to shrink Michael before it gets any beggar.
Because we're being particularly cautious right now.
I think will remain that way, but I don't see us as a Texas bank.
Exiting the business.
No we've got a bit of over 3% between three and 4% of our total.
Loan assets, and that's probably not a bad place to be maybe maybe you can trade lower than that in the near term.
Okay one for.
I I have ever David weigh in on that Yeah, I agree with everything you're saying I think that I think when Kevin and I first off we put these deals together I think Kevin said didnt carefully ever in the oil gas business again, [laughter] I'd be happy [laughter] [laughter] well you know we are in Texas, and we will be in the oil and gas business I think.
Just be difference it'll be a difference in underwriting and again I I think probably not as many deals with.
You know shared credits in private equity and stuff like that it will be to the oil and gas fields will be primarily water core customers that can show in the underwriting where whatever they buy at that particular at that particular deal can pay itself back in and four or five years and that's why we would structured basic.
Okay. That's helpful. Maybe one final one for you I David.
Were 90 days past the last earnings call.
We're past the conversion for the legacy deal.
What have you learned.
At this point in has your views on potential M&A partners changed just given what you've learned baby in the past 90 days. Thanks.
Yes, I'm back and love again with them in a after our bromance with Kevin [laughter] after [laughter].
Last the last he may not be in bromance with me I don't know is back starting right now today, but.
I still up your favorite okay. Good [laughter] now, which has been great I lost some of the love of M&A. After one of the deals that we did it just a everything that was said was just kind of the opposite but this has been really good or the end in not only Kevin is team when I talk with the team and I really.
I couldn't tell would literally really be interested and you know in this mortgage warehouse and it's really turned out it's really felt a great need with interest rates going as low as I have I mean have any option of doing this and I feel better with it because I feel good what their team their team the mortgage warehouse thing really knows what they're doing and have a lot of course.
Confidence in them, so I I really feel good with that piece of the business and really almost everybody that I've worked with at <unk> at legacy all the piece, we're very professional various state I think there I couldn't be more please let me just say that.
Going forward.
Any updated views on on M&A for you guys.
Yes, I mean, I think I mentioned that M&A, probably right now where we've had a lot of calling in the past when things are good everybody's calls not everybody, but usually we have two or three deals working at any given time, that's probably not the case right now, but having said that generally what happens in times like this is Joe.
Generally we get a deal that we will never been counted on its a deal that somebody's. It has some issues and I have to get out of it and I wouldn't be surprised if we get a lot of it depends on this pandemic and how long it last but I wouldn't be surprised if something like that comes to us and we've got deals even some really good deals come to us right now, but again the.
Price that they want right now would be and where they're located with wouldn't be what we want to do exactly right.
Great. Thanks for taking my question.
Sure.
And ladies and gentlemen at this time will end today's question and answer session I like to turn the conference call back over for any closing remarks.
Thank you Jamie Thank you, ladies and gentleman for taking the time to participate in our call. Today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
Ladies and gentlemen, with that will conclude today's conference call. We do thank you for joining you may now disconnect your lines.