Q3 2020 Prosperity Bancshares Inc Earnings Call

Relation and our continued success and increasing earnings as well as showing annualized returns of 19% on average tangible Equity month and 1.58% on average assets our board of directors voted to increase the fourth quarter dividend to $0.49 a 6.5% increase the bank continues to do well and we want to share that success with our shareholders.

Significant declines late in the third quarter Prosperity Bank repurchased 98000 shares of its common stock at a wage price of $49.99.

Our net income was 130.1 million and a third quarter 2020 compared with 81.8 million for the same period in 2019 and increase of 48.3 million or 59%

Our diluted earnings per share was a dollar forty cents or the third quarter 2020 compared to a dollar ninety-nine cents for the same period in 2019 and increase of 17.6%

net income was 391 million for the nine months ended September Thirty 2020 compared with 246 million for the same period in 2019 and increase of $145 million dollars or 59%

The earnings per diluted common share was $4.20 with a nine months ended September 30th 2020 compared with $6.55 for the same period in 2019 and increase of 18.3%

Loans at September 13th, 2020 with 20796000000 dollars an increase of 10122000000 or 94.8% compared with 10673000000 at September Thirty 2019 off Arlene quarter loans decreased 229 million or 1.1% from 21025000000 and 32020.

At September 13th 2020 the company had 1394000000 of paycheck Protection Program found is PPP loans, obviously the increase year-over-year and total loss is attributable to the Legacy merger.

Our deposits is September 30th 2020. We're 26459000000 and increase of 9529000000 or 56% compared with $16 billion 930 million at September 13th, 2019 off Arlene. Kohr deposits increased $306 million or 1.2% or 4.7% annualized from the 26th on 153 million at June 30th 2020. We are starting to see people spending more money in generating more account activity that earlier this year.

Our asset quality remains sound with non-performing assets at 69.5 million or 24 basis points of average interest-earning assets are total non-performing assets decreased 8.4 million compared with the second quarter of 2028.

Our net charge-offs were ten point six million for the three months ended September 30th 2020 and we're primarily due to eight point six million and resolve PCD loans. These PCD loans have specific reserves a fifteen point seven million dollars of which eight point six million was allocated to the charge offs and 7.1 million was moved to the general Reserve.

In addition 6.1 million of specific reserves was released into the general Reserve or resolved pretty seedy loans with no charge of service represents a total of 13.2 million moved to the general Reserve this quarter.

Loans on forbearance decreased from 3625000000 or 17.2% of total loans as of June 13th, 2020 the 231 million or 1.1% of total loans as of October 26th 2020.

Our allowance for credit losses as a percent of total loans is higher than any time in my banking career and equates to a coverage ratio of 5.6 time our non-performing loans.

While there have been some merger announcements recently in conversations with other Bankers regarding a potential acquisition opportunities m&a activity overall. We believe that the m&a activity will start to pick up as economic activity continues to increase we remain to enter into conversations and negotiations wage for all parties and is appropriately accretive to our existing shareholders.

We are starting to see green sheets in the economy with consumers and businesses feeling more confident. The unemployment numbers are better than predicted and we both will also be higher than predicted. Thanks again for your support of our company. Let me turn over our discussion to also that our Chief Financial Officer to discuss some of the specific Financial results. We achieve also back. Thank you. Mr. Zalman. Good morning everyone. Now the interest income before provision for credit losses for about 3 months ended September 30th, 2020 was 258 million compared to $154 million for the same period in 2019 and not crease of 104.1 million or 67.6% The increase was primarily due to the merger with Legacy and Loan discount accretion birth.

22.5 million in the third quarter 2020

the net interest margin on a tax-equivalent basis was 3.57% for the 3 months ended September 30th, 2020 compared to 3.16% for the same period in 2019 and 3.69% for the quarter ended June 30th, 2020 excluding purchase accounting adjustments the cone net interest margin for the quarter ended September 30th, 2020 was 3.25% compared to 3.14% for the same. Back in 2019 and 3.33% for the quarter ended June thirtieth two thousand twenty the current interest rate environment combined with our excess deposit down to do is continue to impact the net interest. Margin this quarter the excess liquid negatively impacted the core net interest margin by approximately four to five job.

basis points

Non-interest income was 34.9 Million for the 3 months ended September 30th, 2020 compared to Thirty point seven million for the same period in 2019 and 25.7 million for the quarter ended June 30th, 2020 in the third quarter. We saw improvements in service fees and mortgage income do the do the improving economy compared to that second quarter.

Not interest expense for the 3 months ended September 30th 2020 was 117.9 Million compared to 80.7 million for the same. 2019. The increase was primarily due to the merger with Legacy on a link order basis not interest expense decreased 16.4 million to do the efficiency gain from the court system conversion and operational integration and the decrease in merger-related expenses.

For the fourth quarter 2020. We expect not interest expense of $117 to $190 million.

The efficiency ratio was 40.2% for the 3 months ended September 30th, 2020 compared to 43.7% for the same period in 2019 and 46.6% for the three months ended June 30th 2020. The efficiency ratio was impacted by the merger cost savings and higher than anticipated a loan fear of value income during the third quarter.

We estimate loan fair value income for the fourth quarter to be around 9 to 12 million based on the current fair value discount for each loan amortized over its remaining loan life. This does not account for additional discount accretion income that may occur due to early loan pay Downs or payoffs, which we cannot wage which cannot be accurately estimated.

The bond portfolio metrics at 9:30 2020 showed a weighted average life of 2.68 years and projected annual cash flows of approximately $2,000 billion. And with that. Let me turn over the presentation to Tim to Manus for some detail and loans and asset qualities.

Thank you also back.

Our non-performing assets at quarter in September 30th, 2020 totaled $69 million $542,000 off our 33 basis points of loans and other real estate.

Compared to 77942000 Dollars are 37 basis points at June 30th 2020.

represents approximately an 11% decline

the September 30th 2020 non-performing asset total was made up of 57874000 dollars in loans.

$120,000 in repossessed assets

and 11548000 dollars and other real estate.

Of the 69542000 dollars and non-performing assets 11761000 dollars or 17% our energy energy credits all of with our service company credits.

Since September thirtieth two thousand twenty five million one hundred thirty-four thousand dollars and non-performing assets have been put under contract for sale. This represents 7.4% percent of the non-performing dollars.

That charge for the 3 months ended September 30th 2020 were ten million $570,000 compared to $13 million $1,000 for the quarter ended June 30th 2020.

Ten million dollars with added to the allowance for credit losses during the quarter ended September 30th 2020.

The average monthly new Loan Production for the quarter ended September 30th. 2020 was 449 million loans outstanding a September 30th 2020. We're twenty point eight billion dollars which includes 1394000000 dollars in PPP loans out of the original 1430000000 dollars booked.

The September 30th 2020 loan total is made up of 39% fixed rate loans 36% floating rate loans and 25% that box set at specific intervals. I'll now turn it over to Charlotte rashy.

Thank you Tim at this time. We are prepared to answer your questions. Can you please assist us with questions?

Of course, we will now begin the question-and-answer session. Ask a question. You may press * then 1 on your touchtone phone and withdraw your question, please press * then two months at this time. We will pause momentarily to assemble our roster.

Our first question today will come from Jennifer Demba with terrorists.

Please go ahead.

Thank you. Good morning. Good morning.

Just wondering about the income wondering what you're what you're thinking about the Mortgage Banking Outlook and and also the same things ability of the other line items to be income going forward. Will you see more business activity and consumer activity Improvement in those line items. Thanks God and this also that yeah, so I think the net interest income did rebound better this quarter because of the improving economy and you can see that our went up and kind of get him back then normalize rate. We had a pre cover it. We we believe we can we'll see continued Improvement on that aspect on the mortgage income. Yeah mortgage been pretty active lately. Should we continue to see the volumes there and I expect the thing come to continue to be stable or even grow. So overall we see the rebound in the fee income and we we yep.

Doing different other one of income that we generate in like syndication. We did in this quarter, which is one of income so few things that coming in we we see the continued Improvement of the income page or future. Yeah, I would just add Jennifer this we're seeing are beginning to come back because people are there's more activity out there to say you're seeing higher NSF fees. I would suggest that would probably still increase we had again higher mortgage fees where that may at some point in time temper back a little bit trust again. We had good trust fees this time and it's also been a comment while ago the Legacy team created they did a $275 million-dollar syndication which credit about a million dollars, but they continue to do that and to service we didn't have in the past and so where it may not be as much and Kevin may want to come back and we can we'll have returning will have income from that and also we charge fees for for servicing those at the same time.

David are you starting to get more incoming calls from potential merger Partners interested in in having discussions at this point?

I would say no, I mean the there we've always had kind of a a list of who we'd like to eventually be with and we continue to monitor those same conversation with those but I would say that we're not seeing, you know, at this point in time. I would say that it's more muted than in the past, you know before covet and the stock prices doing down Soulja Boy e it wouldn't be uncommon to be just busy with those all the time. I'd say there there's activity. But again, I think it will pick up as as you know, we get through this covideo off the economy comes back to again just really focused on the same ones. We've been focusing on and at some point in time trying to do deals with those

Okay. Thank you so much.

Our next question will come from rabbits with Optical please go ahead. Hey, good morning. Everyone. Good morning. It's just you know David it seems like the payoffs are a challenge for a lot of folks and obviously with the with the 449 million of monthly Loan Production commercial real estate market continues to have some atrophy. Do you have I guess one. Do you have any visibility into what payoffs might be in the next few quarter just looking at the rates that you have both of those loans and then you know just think I know it's too early to think about a budget for twenty one probably but just thinking about the outlook for growth on the balance sheet, you know x p p p eventual shrinking. You know, how are you thinking about managing the balance sheet when next year from a growth perspective? Well again, we we had a management committee meeting and we saw different areas of

The state do better than other periods of the state, you know, we saw the used to Market Central Texas Market really being up shoot up and then we had a you know, sometimes any Feast access was up. I think the Dallas Market was down south Texas was down in West Texas was down. So but again, we have probably another layer that home that probably you know, you have to throw in the equation. If you remember we have over four hundred million dollars in loans that we determined where PCD lines and so we're still in the process of getting rid of those loans. Somebody can jump in a minute tell me how much but I think just plugged up two hundred million of Kevin May jump in so we have that still to go and we also saw a decrease in a place called the portfolio structure commercial real estate loans. They were down about three hundred million 398. So we we saw and that's an area where you know, that may not be a timer.

And we really wanted to jump into a bunch of commercial structure real estate loans at the same time. But we so we those really have a quick pay down and those were decreasing so, you know, some of our markets really dead grew and some point the other way but there's explanations for both. I would say going forward we still have some PCV loans that we have to get out of so that'll be some stress on loans coming down and again, you know, we'll see if we really want to jump back in or how much we're going to jump back in or can we get into the structure cre loans again and get those both we're moving forward instead of going backwards. But so those are some of the challenges that we have I think overall, you know, a lot of it depends on the economy. I think a lot of it the media a lot of the elections, you know yesterday. Everybody was happy this morning everybody in the world was coming to an end because of COVID-19. So I think when you ask me for a projection of budget of next year, I would say that in a normalized time that we would be shooting probably dead.

5% growth rate

Okay, that's good.

If that's anchored David, I think that the phones are down a little bit below the $200 maybe $175 or $100 is the number I recently saw but we still have to work through those of the former Legacy football game.

Okay, that's helpful. And then maybe Hasselbeck on the margin, you know, it seems like we should be getting close to a floor here. I guess depending on how you think about Gore versus stated, you know after back anyhow, look on the margin from your view and what what if anything you do to continue to lower the funny cause it seems like we're getting close to a floor wage. I'll I'll talk about on the core basis because it's hard to predict with the fair value, you know fluctuating from quarter-to-quarter, but in the corps bases, its if we project in the near-term, it's kind of hard to predict what name would be and I'll explain why it is because there's so many moving parts, right? It's it's you so that we our core margin was down eight basis points this cord and the third quarter off like 45 basis points was due to the liquidity we had in our books. So we continue to see this liquidity in our books and as you know, as you know in the fourth quarter, we're going to get additional liquidity from the

The public funds, you know due to the tax payments. Usually we go up and end of the year about four hundred million dollars or so additional deposits from public funds and others. So that's going to be additional liquid but we mitigating that by you know, we investing in the first of all we try to invest in the loans, but then we focused on the you know, Bond portfolio. We're right now, we're doing mix of the variables and fix bonds because you know, if race goes up we want to kind of have Assurance data. That's why we're doing variable Securities. Then other part is PPP forgiveness Thursday. We have one point four billion dollars and we already submitted some application for forgiveness and we already received smaller amount but we already got forgiven. So we don't know how the Dynamics on the PPP loan going to go and see if the how much of a payoff we're going to be there that would create additional fee income that would impact the margin and then the deposit cost. Yeah, we we activite

Manage deposit cost. I know we've done several one cut in third-quarter and we doing additional Cuts in the fourth quarter on the deposits. You can bring it down and the last part would be like something that's so we'll be paying off the subject hundred twenty-five million in the early December that going to be beneficial to the margin. So there's a lot of moving pieces and it's kind of hard to give a call back the name guidance, but like I'm going to mention that you know from 8 basis points with declined 45 was the you know due to liquidity. So if I if everything stayed consult, I'm kind of looking forward to the fourth quarter. I would I could see our name going down maybe a few basis points on the core basis. I know it was long answer but that's dead on you know, the bottom line is again, we had a we normally we don't we had over a billion dollars that we got in the you know, investing overnighted ten basis points, and generally we don't do something like that. But yep.

With Enterprise being so low.

We didn't want to get you jump into something and just buy the first thing so hopefully we're going to get that invested by the this quarter. We're pushing to get that invested. So the other deal that also backs talking about Iraq, you know, we have we have more liquidity coming back and then you have PP funds that when those loans get paid back that can throw a bucket throw a wrench into it. But if you take all that stuff aside, I think it's still dead-set exactly last quarter that you're going to see two or three basis points in court change if you take out these variables with PPP the liquidity and all that stuff on a normalized basis.

Okay, just one quick item around the margin and and you mentioned the two and half billion of cash flow in the Securities portfolio any idea of how much that's coming off at home that you're reinvesting or expecting to reinvest.

So I think right now if you get a fixed I think 1 and 1.11 and a quarter I think on the variable you might get fifty basis points right now.

Okay. Thanks. Appreciate all the car.

Our next question will come from Brady Kaley with KBW.

Please go ahead.

Yeah, I hate thanks gud morning guys. The mortgage Warehouse had another great I think was up about 25% to 2.3 billion. And that's that's a big number. I know that can be hard to predict. But how do you think about the stability of the warehouse into the seasonally soft for Q? And then as you look out for a 2021?

Molest Kevin take that yeah, it's all ready. It's always a tough one to predict any anything up out more than six weeks. It gets pretty tough to predict within that six-week Banja week. We can look at mortgage applications and and we can we can look out from that time of application to six weeks later. There's a pretty high are squared of that. That's kind of tough to hit our mortgage Warehouse line. As you said in the quarter. It was really really strong average balances for the quarter were two billion 279 versus civilian 843 wage order. So, you know up 436 million on average. We ended the quarter particularly strong highest number ever seven billion or two billion 731 that month nice September month and balance carries over in October. So October is turning out to be even a better month. I'd say, yep.

The average balance so far in the month of October is up a little over two hundred and fifty million from what it was and Q3 so off to a really good start. I think that will moderate a little bit going into the fourth quarter if I just look at the Mortgage Bankers Association put out a new forecast about a week ago and their prediction and again, I could change all of this. Their prediction was the fourth quarter in terms of originations would be down about 4% a little over 4% It doesn't feel that way so far off the refi boom continues. So I think the fourth quarter is going to be good getting into the first quarter next year gets a little tougher to predict. But again, you look at the the forecast in like they've never been right but they've got more data than anybody and if they it's hard to be right, so I'm not faulting them. They're predicting for next year volume will wage.

roundabout overall 23

Percent and that's 48% down in on the refi side of things and about 5% up in purchase volume and so those rates so we'll go whether that forecaster is right or wrong. Most of that decline for next year is skewed to the latter part of the year. So it's in the last two quarters that they they do expect the first couple of quarters to continue to be strong. So that's probably the best day that I have going out Beyond six weeks. It's just what they was empty a forecast. It is your software the Border one of the things I was pleased to see what they're weighted average coupon kicked up from 3:10 2018 for a long time since that happened so that that was good to say other stats volume on our books was 51% off purchase 49 rebuy. So that's about what it was last quarter turn days 15 days to turn the portfolio over that compares the 14 last quarter. That was like an all-time low.

And 17 and the tip of course is typical quarter. So also good all good so far for this quarter and I expect it to be pretty strong. Would it be safe to say that even though mortgage lending may be leveling off to some degree and you may see a decrease we took on a couple of additional customers that may help to keep our balance is up more than that is safe to say that is I look at the pipeline. I think we have three or four new clients one of them's been through loan committee. So and we got three more schedules. I think between now and the end of the year or probably now in early December and those things take about six weeks to board through through all the due diligence and and test files and some other things to make sure systems are working before we go forward with a club, but I do think we'll add a couple of hundred million dollars worth of new commitments to the books and that will help our volumes stay a little bit higher than that.

Right, right. That's that's helpful. And then you know you re-engaged on BuyBacks just barely in the third quarter not not a huge amount. But as you think about how long do you think you'll be active here? I mean the stocks that one nine of tangible, you know, which is a discount vs where you guys normally trades. It should should we expect continued FedEx in size here or no? Probably a little Cutler where we came from, you know, we we had to buy back in plan but as Covetous and you know, you start off with three point, six billion dollars and forbearance loans, we kind of pulled back and said, you know, hold on. We maybe we just need to look at everything and I think even The Regulators would talk to us, you know, they never tell you you couldn't do it. But at the same time, I think they really wanted us to watch them out of capital. We were spending so we weren't cautious at the at the beginning of the year and Ed.

Even in this third quarter. We really weren't to save our bullets to pay back 225.

A million dollars in debt that came along with his legacy because that's a five or six percent and that can save us five or six million dollars a year right there. So that's what we were both the saint but when the price drops so lunch, we we had no choice we have to jump in and I would say probably the you know, we feel better where the market is today. I mean, we're at 1% 1.1% of our loans on to Pearl Lounge are not performing or down. I I feel kind of did I knock on wood you never know but we feel pretty good where we're at from an asset quality issue. So I would say that, you know, if if the price drops again, you know, we probably would probably be back in the market to some degree.

Okay, and then finally for me I just wanted to touch On m&a Again David what what what needs to happen for you to get very comfortable, you know being back in the internet game.

I would say we are very comfortable. We're ready. So it's not us. It's I think a lot of it has to do with you know, the other side the other side, you know that their stock prices are down like twenty-five thirty percent or something like that compared to where they were in the high and even though they could say well you're you know, I could say our stock is down. But again for some reason people like to you know, they don't like to sell when the market is the way it is they they like it to be better having said that I I think we you know with all banks were all going through this deal ups and down. Nobody really knew were all this pandemic was and all that kind of stuff. I I would say that I'm going to I'm just going to throw this out there, but I I think I think you'll start seeing more people talking now. I think there's probably three or four deals people talking right now out there in the market and I think by the beginning of the year, you'll start to see some pretty decent deals.

Significant deals come around again.

Okay, great. Thank you.

Our next question will come from Michael Rhodes with Raymond James, please.

Hey, good morning, guys. Thanks for taking my questions. I just want to make sure this this is right in trying to understand but I think the monthly the average monthly billing production was down pretty sharply. You just give some color around that off and then what we could expect on forwarded. You know, I'm trying to reconcile with you have comments on Encore potential core expectations for you know somewhere close to the mid single-digits next year. Thanks. Okay, this is Tim Michael. As I said, it was 449 million average monthly production for the current quarter.

If you go back to the first quarter.

Of this calendar year. It was 476 million.

And if you go back to the last quarter of nineteen that quarter Legacy was with us two months November and December. It was four hundred ninety six million, so and I left out the quarter ended June.

Of 20 all-purpose because we had all those people p loans that got booked in there that month. So it's it that quarter. So it's queued that monthly number. So, if you go back to to the quarter ended December thirty first nineteen, once again, it was for $96 then it went to four $76 now it's going to 4:49 and I think all that is not directly related to the Covetous use and the oil and gas issues in the state of Texas and and in Oklahoma all that seems to be leveling out at this point in time no guarantees, obviously, so I don't expect it to deteriorate substantially if at all from where we are and we're hoping that it'll start building back up. We're going to budget some loan growth going forward.

So it just is what it is in terms of the economic environment that we have to operate in David already addressed the some of the pay down issues. You know, our burn rate has been has been fairly substantial because of some of the he CD loans that that we wanted to exit Etc. So I I think it's going to be fairly stable going forward. I hope I'm answering your question. I think any say yeah. Thanks for the way to take off the phone numbers / 3, you're talking about 25 million dollars a difference of quarters. So that's a hundred million a year. So I don't think that's that shouldn't jump out at anybody and I again, I do think there should be more pressure of COVID-19 probably through the end of the year. So I don't know that you see a lot of Roads, especially with the loans are still trying to work out of Legacy, but I you know to me going through what we've gone through and you're only seeing the 25 off

You know the downtown core of the quarter-hour Jack I actually think that's pretty good. Yeah, I I don't I don't think it's bad given the circumstances one could easily could have predicted a worse situation. You know, we're still helpful. We're still seeing decent loan demand come through our loan committees. So, uh, there's just no reason right now to expect a substantial fall off from where we are.

Got it. Okay. Maybe it's a follow-up. Can you just remind us where you are on the on the cost savings from Legacy deal? I know the systems conversion is is now gone and passed and you know, just how much more would you expect to get off any changes to the Target might have the environment? Thanks.

Yeah, I'm from the cost savings from the acquisition of yeah, we realize most of the cost savings. There might be a small items were looking at right now, but I have to say that you know while we maybe have we will save a little bit more but we invest in the technology which is a one of the cost for one of the highest costs. So from that perspective, we might have savings on one area, but we're going to spend a little bit another month from my guidance. I gave $170 to $119 million for the next quarter based on this variables, but overall. Yes, we achieved our cost savings from a legacy merger.

Okay. Thanks for taking my questions.

Thank you.

Our next question will come from Brad Millsaps. But Piper Sandler, please go ahead.

Hey, good morning guys this morning.

David you commented that. You know, you're reserved is is the largest it's really ever been in your career. It seems like most of the charge off that you took this quarter related to the to the PCM book. Um, just kind of curious, you know, kind of the drivers behind the provision you took um, you know, maybe kind of what you're doing kind of to review the existing portfolio and kind of what that means, you know a provisioning as you kind of look out over the next several quarters. Do you think it you know at some point, you know, you're going to start maybe releasing some of that reserved based on what you see or um, kind of how you thinking about that.

Well, if you go back and look the charge-offs are really the majority of everything from the PCD loans. And so that money being put it back into the general Reserve. Yeah, I mean when you when you have 561 times coverage or non-performing assets, I think that's huge and somebody was probably I even you know, you'd have this formula that we we have to follow but there's highs on it and loves and there's there's there probably could have been a point we could have taken a position and you could put back but again with where we're at right now again, I I thought it was still approve of time to to go ahead and and put the ten million dollars in their steel. But having said that based on our model we wouldn't have I don't think that we you know, we have some flexibility needs to be very careful. But you do have flexibility where you'll be on the high point low point and moderate point, but I think I don't I don't know that I'd ever recommend taking money out of the out of the reserve but what I would change

Say is I don't know that we would have to put money in the reserve one for work for some time. Unless something changes from out of people mostly see.

Great, that's helpful. And then just to kind of follow up on the quality discussion. How are you guys thinking about TPP internally, you know as those loans to get forgiven. Are you guys offering the suggestion that a lot of that liquidity will leave the bank or you know, are you preparing for you know, getting that money back, you know from the SBA and and and some of that, you know, the deposit money sticking around just just trying to get rid of sort of how you're thinking about, you know, you know, I won't call it liquidity problem. But you know, just just putting all that cash to work as you kind of think about it internally and trying to size it.

I'll start off if you want to you want to get just an overall where we're at on the PPP steady blue and then I'll go into the issue what I think we're we're still at about one point four billion of them under on the balances. We started to getting some of the payoffs from the SBA largely on loans under $50,000 about four hundred loans a dead been paid off that's only represented about thirteen or fourteen dollars so far. We have several thousand more that are in the process of being submitted. Um, and what's that to see how long that takes a lot of people are waiting to see if that threshold on the paperwork would be reduced for loans under a hundred and fifty thousand so far that has still only been affected for those of fifty thousand and not just to give you an idea about 60% of the number of loans that we have off all under $50,000, but that only represents about 10% of the total dollars a month.

Yes.

That's kind of an overview. My my personal opinion. This is an opinion that I think customers have a lot of money and I I think that a good portion of the liquidity that we have will stay with us. I think he'll be there I think businessman for sure want to keep additional money. If anything he makes feed them if they have some loans. They only want to pay down person but I I don't I don't see I don't I don't see the liquidity that the The Fosters have going away really. In fact, I think he could only grow David. I might comment I I agree with you if if you could look at who we made these loans to the vast majority of the loans went to what I would call our core customer base their people that have banquet this for many years in most cases. So I I would be surprised if if that money just automatically went somewhere else. I don't see that other thing that I noticed is that a lot of the money that that wage.

And their account they didn't spend that's true in some cases. They didn't spend it or else they use their other funds and we're scared that maybe the government wasn't going to really give it back. But maybe they were saving just in case to pay it again. They would lie to but for the most part A lot of them didn't they just they're still Savers from what I can tell.

Great. Thanks for the call. I appreciate it.

Our next question will come from Peter winter with wedbush Securities, please.

Morning, I wanted to ask about the the core margin be on the fourth quarter. It just seems that they'll be ongoing pressure off on the core Mark and just with the reinvestment on the fixed-rate loans and the Securities cash flow over two billion. I'm just wondering if you could talk about you know, some of the what your thoughts on the core margin the on the fourth quarter.

Yeah, beyond the fourth quarter. It's very hard to tell. I mean, it's PPP loans. I know we having forgiveness now, but I think the most of the people were expecting more of a dog person second quarter of next year. So I mean and with a, you know current, you know, economic environment and the you know with the election coming up it's so hard to give a guidance. So I don't think you'll be prudent give any guidance at this moment. Yeah, I mean Peter I think the bottom line is as you said, I think there could be some downward pressure to three basis points off for margin on the other hand. A lot of things can change that to I mean, we we have been lowering some rates as as much as a week ago. That's going to help us a little bit. We might have a little black cord on that side. We had a billion dollars in liquidity that really was an investment in basis points ugly. We would like to build loans and not go backwards and Loans. So all of those Dynamics change

You know, we never been the bank of what's happening. Now, we've always just tried to hit singles and doubles and I think for the most part, you know.

We we don't have things out there that just changed dramatically and I don't think you're going to see us change dramatically and and we're trying to be very transparent. You know, if I could really give you just a real idea of what what I thought the name is going to be next year. I would be more than happy to but there there are still a lot of variables and I just don't think that we can right now wouldn't be fair to anybody because I think it could go either way sometimes probably more. So on the downside with the core of maybe two or three basis morning, but that's just as easy to go the other way. I mean you if we get all the PPP money back, you know, we can take all that into income that changes Dynamics completely with God. There's so many dynamics that can change economy goes back to keep it 5% loans on. So again, I know I'm throwing a lot of stuff out there, but there's a lot of stuff out there right now.

Okay, you know cuz the reason I ask is I think about expense management for you guys. It's always been a strength of the company. I'm I'm just wondering with more customers utilizing digital banking. Is there any plans to maybe re-evaluate that the branch Network or looking to reduce some of the office square footage with this work from home?

You know, I don't mind my gut is we don't have plans to shut locations down unless we do a deal with another bank that has a lot of locations close to us. I will say what it is helping us when she needed additional space at our corporate office in Houston. We were considering buying a building or building another building again with the people working from home. It's helped alleviate some of that money situation. So when it may do is cut costs were going up more dramatically in the future, but I don't see us cutting cost at our location. I think one of the things that I hear more about five customers, they love that they can go almost anywhere in the state of Texas and we're we have a bank they're form whether their kids are at school or they start retiring out to the suburbs. That's that's probably one of the that's probably one of the biggest things I do like about it. So I would say that probably as we build new Banks you'll build bags probably with lesser square footage off.

And they'll be more digital but you'll still you'll still have Banks out there at the same time maybe less people in them, but we'll still offer that service and I think that's what makes us different than a lot of the other other people really we took some of the big guys shut down and places like Victoria Bank of America and Wells Fargo and we open we open one of the locations where why we I thought it was crazy cuz we had so many locations there anyway and that particular bang really Thirty or forty million dollars in a few months. So, you know, so you know it for us it works. I'm not saying for everybody in as long as we can keep our official summer expenses where they're at. I don't see as closing a bunch of locations. I think that we are against maze want to talk about it, but we cut some deals on some of our home office a lower-end. It's going to probably save us a couple of million dollars a year and so in some other offices of the sauce, but we do look at into the expenses and you know, we try to log

Make sure we cut the expenses but I want to kind of point that you know, we might have more opportunity to do a little bit of savings. But all the same time we want to invest in the technology so we don't want to ignore the technician. I think it's a future of the

So all the savings that we have we want to invest in technology and we have been doing that and what the benefit would you know would merger with Legacy was very beneficial what I see that you know, they had a great technology and we have a great technology and when you consolidating this two Banks, you kind of look at it and evaluate your each this you know it system and you pick the best one, you know, it might cost a little bit more but you you look up from the you know, our customer perspective and we choose a best system. So we've been investing in quite a lot of them in the technology lately. So that's might be upsetting some of the costs we could come up. So in the net I think I'm just going to stay where we are and but something that I've looked at I think sometimes you see that okay, you can have a reduction in staff or you can have a smaller deal and you save money there. But then when I look at what we spend on technology it takes that answer because actually I don't know you may save on some but with this technology, I mean I saw this dog

Just this was Unreal how much money we spend a month on technology just a lot. Let me emphasize a couple of things that have just been said David mentioned the fact that we both picked up some additional customers because some of our competitors closed down their locations that's primarily been as David mentioned Wells Fargo Bank of America and granted it's been in some of our smaller communities, but in essence those banks have have vacated those communion and it has benefited us quite a bit very significantly. So in those communities themselves and while there's a clear direction towards technology and banking which we understand we Embrace and we we intend to continue with and even improve what we offer in that regard. We still have birth.

Many many customers that come to the banks come through the motor backs come to the lobbies. We don't see any indication at all that our customers don't want to use the brick-and-mortar. So I would suspect we're going to hold our place. You can see the deposits even the deposits that we grew this quarter. I mean when I walk through the lobby of the bank that I sit in, you know, I see two or three people through counseling other banks are closed. I want you to get an appointment. I think they like the service. I have customers mentioned to me all the time how much they appreciate our network of banking facilities that they can actually go to if they have a need to do so, I think it gives us a real Edge it's important but I think you don't I don't have the edge that they can go there but then I'd have to say our call center. They've really been great too with the technology. So we we offer both really, right.

That's great color. I really appreciate that. Thank you.

Our next question will come from Karachi with wolf research, please. Go ahead. Thank you. Good morning. Everyone David. I wanted to follow up on your earlier on Monday, with some investors have started to wonder whether it made be getting increased incrementally more difficult for you guys to continue to grow V acquisition in Texas after the Legacy Texas bank. Can you speak to that and more broadly discuss how close we are to the point where you're satisfied with your positioning in Texas and could we see you start to consider growing more aggressively in other markets outside of months. I think that we've always said that, you know, our first and foremost would be to continue to build our Texas Oklahoma franchise because that's where we're at. I think that's still our first focus and you know, just just just go to the FDIC website and pull all the banks that over a billion dollars in taxes and you'll see there's a hell of a lot of them so long

I think there's a hell of a lot about

Opportunity there but having said that you know, I don't know that we'll ever I don't know that we will say no to something that makes sense. I I don't know that we want to be somewhere else do something with somebody that has a, you know, ten billion dollars but there in five different states or something like that, you know, but if there's some there's something in another state that has and they have good control making the market share, you know, I think that we would looked at the same time. It would be probably our second taking our first fixed but you know, we're not opposed to looking at that. I think that we're ready to walk in the Legacy team have been so good that you know, I I would have never thought that we would either be in a position to do this at this point and and we are because of them. They've been just great great members and religion is built this deal with so I think it allows us to look at things in a different perspective than a different perspective. They've done things that we didn't do in the past. You know that we were probably scared to do more in the warehouse for the month.

Stop to think he had in and some of the other commercial middle-market Landing that were getting more comfortable with and so I think that it it broadened our Horizons at the same time to read it. Maybe thank God Son from us on the on the underwriting side that's helped them. So I think we're all learning together. And I think that because of our deal in our fields that we put together if it provides just the ability to look at more opportunities than we might have if we were just by ourselves with the year ago. I don't think give you any color or not. Yeah. Yeah. I know that's very helpful. Thank you separately with your efficiency ratio, X murder charges is at the lowest levels we've seen and your comments on expenses were were very helpful. But can you give some color on how much of the efficiency Improvement you think is a function of scale benefits? And how do you I guess how do you all think about the trajectory of operating efficiency in light of the technology Investments that that that you discussed?

Efficiency was what 40.2% this quarter and it was aided by the you know, the cost savings we had and also this fair value income that we generated so long it's you know, I think going looking forward. I mean we ran about what $42 43% as pretty Legacy. So I think if it normalised I would say probably we're going to be getting around that time that rate maybe a little bit less. So we did gain efficiency from that perspective, but the same time, you know investment in technology is pushing up the expenses, but I mean overall I mean if you look at it, we have best-in-class and efficiency ratio, you know, and you know, I think we always say that we can't get any better. So now we do but again I say the I'd say if you go any deeper you're cutting red meat, you know, if you're not cutting fat you're cutting red need probably.

Understood and lastly, you know, we have a good idea of what to expect from a tax policy perspective if Trump is re-elected. But under a Blue Wave scenario that that leads to you know, corporate tax rates to rise to you know, twenty one to 28% Can you discuss what that would translate into for you guys?

No.

I can I can take that so if you know under by then assuming he wins the tax rate is 28. So we kind of rent pro forma analysis on taxes to see how much of a tax effective tax rate would be dead. If you look at currently at 21% our effective tax rate is around 21% So when we run the pro forma, the our effective tax rate will be around 28% And the reason is because I mean we don't have signal in tax exempt income that would be making differential but since it could be a change because now since if the tax increases that we might be investing in tax exempt assets that would have brought us would help us. But right now at the ProForm at 9:30 we staying at 28% or so. I think it's hard to call. I mean it's easy just take a pencil and make up the difference between 20% and 28% If you just looked on other 7% of what your tax taxes are on the other hand usually for every action there's a reaction and what I've seen dead.

You know that happens you never know. There may be a difference in the yolk or where we're at right now. We're you know, where we like them more of a yield curve. It's more flattering. But again any kind of pick up in the yield curve of anything, you know of your ten years instead of being 80 basis points. It's 150. It's huge when you multiply that by 30 billion dollars an hour. So it's just hard to call. I mean fundamentally, it's very basic. You can just take the difference but usually for every action there's a reaction and historically we've operated under Republican administrations are we operated under Democratic administrations and it's always been we've always been successful at it who can vote

It's very helpful. Thank you for taking my questions.

Our next question comes from Kerry Tanner with d a Davidson, please go ahead. Good morning. Just wanted to ask a quick follow-up in terms of kind of the balance sheet wage expectations on the Investment Portfolio of you know, with the billion of cash. Uh, I think the time that was that you're focusing on putting that to work out if it goes into the Investment Portfolio, is that kind of radical over the fourth quarter, or would you want to get that invested sooner than later?

I think we're trying to push it sooner than later. Yeah.

Again, and then when you start buying and we buying blocks of a hundred million to 200 million and so a lot of stuff we have to buy it just it's not out that we may have to deal directly with Fannie Mae or Freddie Mac and they're just so much production. They have a month too at the same time by and sometimes in the secondary Market. It's a you know, it's hard to get blocks and stuff like that or at least at the coupons where you want and stuff. So it's not an overnight deal. It's not like you can go take and invested a billion dollars, but we're already working on it. And I you know, I'm hoping within over the next month or so, we'll have it invested. Yeah, and also we're monitoring, you know our deposit. I mean how much how how sticky is a deposit or you know, so that's going to be a big, you know role in to see how much will be invest in the Securities, but I agree with you actively trying to invest those liquidity as much as possible to variable and fix the rate wage.

securities

Okay, and then the quarterly cash flow coming off the service portfolio right now.

Right now is annualized cash flow is about two point two billion dollars on those Securities over the next twelve months.

All right, great. Thank you.

Our next question will come from Jennifer Campbell with truth, please. Go ahead.

Hi, thank you for letting you back in a few two questions. Fridays only had two questions for you David with so many industry had wins for.

Prosperity and the banks the yield curve lower loan accretion, you know tough mortgage comparisons maybe a higher tax rate can earnings-per-share be up for Prosperity next year or the knee levers that you have that could make that happen. And then I have another question. I don't know that they'll be exactly where they're at home here because it's been a great year but I would say would probably do better than what the analysts have is that cuz it's wild card Jennifer. He is fair value income on loans off because it's it's going to be decreasing next year. So that's going to be a significant amount of income that we generated this year that we might not have any send that back if we take Thirty or forty million dollars the income from PPP you could beat this year and that's a good point. You don't know but I mean if everything were static and we were advertising the the the money were getting from the PPP.

That out. I do think you'll get it next year and I think that'll change the Dynamics and it could be more than you did this year, but leaving that aside I still think we'll do better than what the analysts have. Is that just in my own calculation, you know.

Thank you. And my second question is when I talk to investors sometimes about owning your stock one concern that comes out is that Prosperity is going to do less than desirable transaction. And I'm just wondering if you could speak to your long-term disciplines in the face of earnings headwinds that you haven't done off track the deals that you waited been patient and waited for the right deals. No matter how long they could taken to come on out. So, can you just talk to that now? You've got a nice people can say whatever they want. But history tells you the real story you just go back and look at us. We've never done a deal just to do deals. It had to make sense where all the people had to be with us that we helped our franchise. It's it's it, you know, there was something that added to us that would help us get you know, I don't think we ever did a deal that wasn't it.

Created you can see you can see how much the legacy is. Really Act.

Start bottom line. I can't imagine if they weren't with us right now. You wouldn't see a 17.6% accretion year-over-year this time. And so I I think they were a big part of that. I think Thursday you'll never done and I would say out of the 40 something deal. We've done all the lady exception of two that we've been a little bit that hadn't turned out our way but it hadn't turned out our way maybe from a social side. But from the earnings side, it's always turned out our way and I don't you know when you own as much stock as I do or we all do it's just room, you know, I'm not here just to build a build a company just just to be bigger. I mean, you know if my age and if it stays on and people keep running it I want to make sure this is the right thing and we make more money and it's safe and sound off never want to do a deal with looking on a stock I have in my family has this thing I never want to do a deal just to say we're going to do a deal to be bitter.

This is Kevin. How are you guy who sat across on the other side of the table from David and team for two years trying to get them to do an unattractive deal with you know, the price and you know, there was never a waiver into their discipline about what they expected and model for a creation wage. They didn't want anybody any investment bankers model was no good. They had their own model modeling accretion and and there was not a iota of budge and I tried for two years. So and and I consider myself a pretty good salesman and I got nowhere.

Thank you so much. I appreciate that. Thank you. Thank you. Thank you.

A small conclude our question-and-answer session. I'd like to turn the conference back over to Charlotte passion for any closing the Box.

Thank you. Grant. Thank you. Ladies and gentlemen for taking the time to participate in our call today. We appreciate the support that we get from your company and we will continue to work on building shareholder value off.

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