Q1 2021 Prosperity Bancshares Inc Earnings Call
Good morning, and welcome to the prosperity Bancshares incorporated first quarter 2021 earnings conference call on.
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After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to Charlotte Rasche Senior Executive Vice President and General Counsel. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares first quarter 2021 earnings Conference call. This call is being broadcast live over the Internet and prosperity Bank USA Dot com and will be available for replay for the next several weeks.
I'm Charlotte Rasche she is.
Executive Vice President and General Counsel and prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H E. Tim to manage Juniors Chairman and also back out small enough Chief financial officer, and he's Saturday Vice.
And then Kevin Hanigan, President and Chief operating Officer.
Randy Hester Chief lending officer.
Merle Karnes Chief Credit Officer.
<unk> seven port director of corporate strategy, and Bob Dowdell Executive Vice President.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by also back on small enough and we'll review some of our recent financial statistics, and Tim to me and us and well discuss our lending activities, including asset quality.
Finally, we will open the call for questions. During the call interested parties may participate live by following the instructions that will be provided by our call moderator Gary.
Before we begin let me make the usual disclaimers and certain of the matters discussed in this presentation may constitute forward looking statements for the purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors.
Which may cause the actual results or performance of prosperity bancshares to be materially different from future results or performance expressed or implied by such forward looking statements additional information concerning factors that could cause actual results to be materially different and notes.
And the forward looking statements can be found in prosperity Bancshares filings with the Securities and Exchange Commission, including forms 10-Q, and 10-K and other reports and statements we have filed with the SEC.
All forward looking statements are expressly qualified in their entirety by these cautionary statements and.
Now, let me turn the call over to David Zalman.
Thank you Charlie.
With the hard work of our entire team the combination of prosperity and legacy Texas continues to bear fruit as reflected in our positive results for the first quarter.
Excuse me.
Prosperity Bank has been right as the number two best Bank in America for 2021 and has been and the top 10 of Forbes America's Best banks since 2010.
Want to congratulate and thank all of our customers and associates directors and shareholders for helping us achieve this great honor.
Our net income was $133 3 million, whereas the three months ending March 31, 2021, compared with 138 million for the same period in 2020 and increase of $2 5 million or one.
9%.
The net income per diluted common share was $1.44 for the three months ended March 31, 2021, compared with one dollar and 39 cents for the same period and 2020 and increase of three 6%.
And <unk>.
Our annualized return on average assets average common equity and average tangible common equity for the three months and at March 31, 2021, where a 1.54% return on average assets eight 6% return on average common.
Equity and 18.43% on average tangible common equity.
Our prosperity is efficiency ratio, excluding net gains and losses on the sale or write down of assets and taxes was 41.25 per cent for the three months ended March 31 2021.
We continued to watch expenses, but also expect to make prudent capital expenditures to play and for our future needs and increase shareholder value.
Our loans at March 31, 2021 were $19 6 billion and increase of $511 million or two 7% when compared to 19.127 billion at March 31, 2020, primarily due.
And two of $558 million increase and warehouse purchase program loans.
Our linked quarter loans decreased 608 million or 3% from 22 billion at December 31, 2000, and 'twenty and that was primarily due to a $570 million decrease and the warehouse purchase program loans more of a seasonal issue.
<unk>.
At March 31st 2021, the company had $1.1 billion and P. P P loans.
At March 31, 2021, our oil and gas loans totaled $503 million net of the discount and excluding the P. P. P loans totaling 142 million compared with oil and gas loans of 718 million.
And net of the discount at March 32020.
This represented a decrease of $214 million and oil and gas loans year over year, most of which was planned.
Our deposits at March 31, 2021 were $28 7 billion and increase of 4.9 billion or 27% compared with $23 8 billion at March 31 2020.
Our linked quarter deposits increased 1.4 billion or five 1% 25, 25% annualized from $27 3 billion at December 31, 2000 and 'twenty.
Deposits continue to grow as the government stimulus payments and other assistance continues consumers are now spending more and we hear from restaurant and other business owners regarding the strength of their business. The P. P. P loans also contributed liquidity liquidity two businesses some of which such as.
Hotels, and hospitality services restaurants, and we're in dire need of the funds.
Our year over year nonperforming assets decreased 34.2%, our nonperforming assets totaled $44 2 million or 15 basis points of quarterly average interest earning assets at March 31st 2021.
And on compared with $67 2 million or 25 basis points of quarterly average interest, earning assets at March 31 and 2020.
The economy is doing well and should continue to improve as more and more people are vaccinated and more businesses reopen.
Texas and Oklahoma, both have bright futures.
According to the Dallas Federal Reserve, Texas now has the fastest growing population and the nation.
Further the Dallas Fed reserve is projecting over 6% job growth, meaning over 700000, new jobs and taxes for 2021, and Texas is expected to outperform most of the other states where the next three years.
Companies continue to move to Texas, with HP, and Oracle announcing headquarter moves and other companies, such as Tesla, and Oregon, and as such as Tesla and St and Samsung announcing a major expansion into Texas.
Oklahoma is also projected to have population growth for 2021 and has seen expansion of many of its large businesses operating and the state, including Boeing American Airlines, Costco and Amazon.
Sumer spending and Oklahoma is above early 2020 levels and retail job additions and new housing permits are higher than the average U S right.
We are carefully monitoring monitoring office building hospitality and oil and gas loans, but continue to participate in these areas with experienced borrowers that can withstand the ups and downs of their industries.
As bank stock prices have increased there on a more conversations regarding mergers and acquisitions I believe you will see more transactions throughout the year unless new tax rates are introduced which may change the market.
I expect that net interest margins will continue to decline regulatory burden will increase under the current administration and technology will continue to be ever changing expensive and increasingly prevalent which is a recipe for more consolidations.
Overall I want to thank all our associates for helping create the success. We have had we have a strong team and a deep bench and prosperity and we will continue to work hard to improve everyone's quality of life and shareholder value. Thanks again for your support of our company, Let me turn over our discussion to also back on Mt.
<unk>, our chief financial officer to discuss some of the specific financial results we achieved.
Thank you Mr. Zalman and good morning, everyone net interest income before provision for credit losses for the three months ended March 31, 2021 was $254 6 million compared to 256 million from the same period and 2020 and decrease of 1.4.
Million or 0.6%.
The current quarter net interest income includes $16 3 million and fair value loan income and $13 million in fee income from PPP loans.
The net interest margin on a tax equivalent basis was 3.41% for the three months ended March 31, 2021 compared to 3.81% for the same period in 2020 and $3 four 9% for the quota and the December 31st 2020.
Excluding purchase accounting adjustments the net interest margin for the quarter ended March 31st 2021 was three point and one 9% compared to 336% for the same period in 2020 and 3.26% for the quarter ended December 31 2000.
20th.
The net interest margin has been impacted by an influx of excess liquidity since the start of the pandemic access liquidity during the first quarter staff on 'twenty, one impacted the net interest margin by five basis points compared to the quarter ended December 31st 2020, and by 15 basis points.
Compared to the same period in 2020.
Noninterest income was 34 million for the three months ended March 31st 2021, compared to $34 4 million for the same period in 2020 and $36 5 million for the quarter ended December 31 2020.
Noninterest expense for the three months ended March 31, 2021 was 119 point and 1 million compared to $124 7 million for the same period in 2020th.
On a linked quarter basis noninterest expense decreased 1.1 million from one from $120 2 million for the quarter ended December 31 2020.
For the second quarter of 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio was 41 three per cent for the three months ended March 31, 2021, compared to 42, 9% for the same period in 2020 and 48% for the three months ended December 31, 2020 and.
During the first quarter of 2021, we recognized $16 3 million and fair value loan income. This amount includes $6 3 million from anticipated accretion and $10 million from early pay offs, we estimate fair value loan income for the second quarter of 2021 to be around four.
And two 5 million. This estimate does not account for any additional share value alone income that may result from early loan pay downs or pay offs.
Also during the first quarter 2021, we recognized 13 million and fee income from PPP loans majority from the forgiveness of the first round P. P P loans.
As of March 31021, the first round of PPP loans had a remaining deferred fee balance of $9 4 million, we anticipate more than half of this remaining balance will be recognized and the second quarter 2021 due to loan forgiveness.
Regarding the second round of PPP loans as of March 31st 2021, we recorded 530.7 million and loans and generated about $24 million in differed deferred fees, which will be recognized over a five year period or until the P. P. P alone is.
Given that.
And then part and bond portfolio metrics at 331021 showed a weighted average life of three nine years and projected annual cash flows of approximately 2 billion and with that let me turn over the presentation to Tim to mountainous from some for some details on loan and asset quality so to Mems.
Thank you also back.
Our nonperforming assets at quarter end March 31, 2021 totaled.
<unk> totaled $44 million.
$162000 or 22 basis points of loans and other real estate.
Compared to $59 million.
$570000 or 29 basis points at.
At December 31, 2020.
This represents approximately a 26% decline and non performing assets.
The March 31, 2021 nonperforming asset total was.
And is comprised of $43.338 million and loans.
$362000 and repossessed assets.
And $462000 and other real estate.
Of the $44 million $162000, and nonperforming assets 9 million 500, and and $5000 or 22% are energy credits all of which are service company credits.
And since March 31, 2021, $844000 and nonperforming assets had been removed.
Net charge offs for the three months ended March 31 2021.
Were $8 million $858000.
Compared to $7 million $567000 for the quarter ended December 31 2020.
No dollars were added to the allowance for credit losses during the quarter ended March 31 and 2021.
The average monthly new loan production for the quarter ended March 31, 2021 was $645 million.
And this includes an average of $177 million and P. P T loans per month.
Loans outstanding at March 31, and 2021 were approximately $19.6 billion, which includes approximately $1.1 billion and P. P. P loans.
The March 31, 2021 loan total is made up of 39% fixed rate loans.
36% floating rate loans, and 25% that reset at specific intervals.
I'll now turn it over to Charlotte Rasche, Inc.
Thank you Tim at this time, we are prepared to answer your questions. Gary can you. Please assist us with questions.
We will now begin the question and answer session to.
To ask a question you May press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Our first question is from Jennifer demo with <unk> Securities. Please go ahead.
Thank you good morning.
And I.
Question Cor.
David David how much are you willing to kind of grow above that.
Securities portfolio.
And for loan demand to improve and the industry.
And then my second question is on pipe and.
And the mortgage warehouse and what are we seeing.
And expecting and the second and third quarters of this year.
Okay. Thanks, Jennifer I'll answer the first one I'll, let Kevin take the second one on the mortgage warehouse, but.
Youre right Lee you know.
Historically in the past and you've watched us.
We have you know.
And our probably our duration on our bond portfolio was about three years and may be three point 95 average life of three years duration. We had so much roll off every year that historically, we were not only we weren't selling anything to the federal home loan Bank at night, and Lee were actually purchasing and $1 billion, even leveraging to buy and.
And probably this this quarter you know we've been anywhere from 1 billion and a half to $2 billion that we have not invested that money and you know at 10 basis points. So I think you know easily simply by and all markets, but again it was hard to buy when you were getting less and 1% on the securities now that.
The yields have picked up.
And it's perceived that theyre going to pick up probably more you'll probably see us start investing more of that money that's been left overnight and so.
I think that again, even right now were high but again, we purchased like 400 million yesterday. So I think that will continue we will continue to start speeding that up and.
And purchasing more we think that rates probably the tenure will probably go higher towards year end, we're thinking maybe.
Alright, and thinking I guess I'll speak for chip, but from what I can tell 2% to maybe even two and a quarter and we continue to go. So I think youll see us start using that securities portfolio and start investing more of it and it's not unlikely that once rates go up you may see us, maybe even and our leverage position again, but not not currently and even during the first.
Quarter on just to add on we purchased $2 2 billion on the bond portfolio is just a we had a lot of pay offs too because of the and.
Mortgage market right now and you're not only and that you just I mean gosh year over year over $4 billion and deposits even in the first quarter, we had over 1 billion and four and new deposits come in and you know.
I think most people the first stimulus checks people really didn't spend and they were still cautious and we're saving we are seeing people starting to spend more money now I mean, as I mentioned them on notice when you talk to retailers and restaurants, especially they are busier than they've ever been so it looks like and even retail people and people going out and buy.
And clothes again, so we're thinking they will start using some of that money. So I don't think you'll you know youre not going to lose and deposits, but it may go down some but not a whole lot I don't think it's just it's just a different world theres, so much stimulus being thrown into out there so, but we will and again that should help hopefully that should improve our net interest margin going forward.
And the future too, but I'm glad we weighted because rates are starting to go up and but again, we will probably start making some moves now that Kevin you want to address the mortgage warehouse steel.
Sure. Thanks, David.
Jennifer I don't know how good on him or predict on this.
I thought the first quarter would average about.
2 billion and $1 50.
I said last quarter, and I was only 200 million.
A couple of hundred million and better than that number so.
Okay.
And look at where we sit today refi volume.
<unk> had at least five lives.
2015 seems to actually be slowing down this time around and it may be for real and now obviously that depends on what happens to rates, but I think most believe theres more bias to upside and rates versus downside right.
And the.
The mortgage bankers Association and if I just look at their projections for the last three quarters of this year.
Compared to the last three quarters of last year. They would say refi volume is going to be off 60%.
So a pretty huge drop and their minds and refi volume skewed towards the last few quarters of the year, but but starting this quarter.
While purchase volume I think they had.
<unk> three quarters of the year up just shy of 14% and 13, 8% when I took a look at it.
And that pertains to us I would say.
The quarter, probably looks a lot more like the second quarter of 2020.
And then any other quarter, if I would just look volume wise.
Where you get on it.
And forecasts are.
So with that said and so.
And it really doesn't have to Peel back and look at that that was basically a $1 billion.
And volume could be a tier 2 billion in terms of average volume per the fourth quarter, but I think we're going to operate and that 1 billion $9 2 billion range.
And anything that could change that.
Besides rates are I think I said last quarter, we have hired a person and the warehouse group.
And they are working on a couple of new deals that could add moderately.
Number I just gave.
Yeah.
At this stage of the game, even if they book something today and it doesn't come on our books for another three or four weeks as we onboard that customer and make sure it fits.
And into our system. So it won't have a big impact even if they had some moderate success.
Thank you.
The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.
Alright, great. Thanks.
David actually I just wanted to go back to a comment you made on bank M&A.
I think we all kind of have been surprised how much industry wide M&A has picked up and the last few months or so can you just talk about prosperities.
Roll and bank M&A going forward, but also the second part of the question is is why would tax rates meaningfully changed that outlook for the industry.
If I can let me answer the second part first.
And if you have if you have a bank and.
You have you have some big shareholders, not not vanguard, blackrock or somebody like that but you'd have a lot of insider ownership and.
And.
You sell today under the current tax rules and you'll pay a 20% capital gain on it and so if you have COVID-19 had 100 million of island $100 million of.
And this bank and I smiled, and just say I had no cost bases and it would pay $20 million.
If if this loss change where they go to 40% capital gains tax rate and I on a $100 million and sell them on a pay 40 million and amount again to keep 60 million. So I think it is just in my mind I may be wrong, but I think that youll see people that have big ownerships.
Be more reluctant to two sale because they'll just wait until another administration would come in I mean, the difference between taking $80 million zone, and taking $60 million zone is a big deal. You. Just you just you just wouldn't do it. So that's my reason is saying that the new capital gains taxes, I think will affect.
And to some degree if theres, if theres big individual ownerships and banks.
So the first part of your question was and where do we intend to play on.
And the M&A game Theres been a number of transactions and Theres been a number of larger transactions I would tell you that we've looked at a number of them.
And including.
Some that might have closed on the deal we were not as we were probably not as interested.
We continue we continue to have a wish list and.
We continue to work on the wish list and I think that's what we're focused on we want to try to be more focused on and targeted and and what we want to do and so that's that's kind of what we're working on right now that doesn't mean that we may not be something smaller and the <unk>.
Future of it's within one of our market areas, but for the most part we're really focused on.
Certain transactions and that's really what we're focused on and truthfully, we wanted to spend a lot of time.
Keeping together our legacy Texas deal with prosperity, it's been really good I don't think that any of us wanted to mess that up and and try and just to jump into something and and and again I think that we were really focused on making this work try and think these are really hard people I think I don't know that sometimes people make it look easy it's on.
And that easily.
A lot of help came from Kevin and his team and our team too, but again you don't want to just throw one deal after another and not make sure that your houses and order. So those would be my comments.
Alright, and I was super helpful.
Thank you for that and then maybe just one smaller question.
I think you mentioned and if I if I was.
Isn't mistaken that you expect NIM to continue to decline I get that there is the fair value loan income there is the PPP fees. How are you guys thinking about core NIM over the next several quarters. If we if we just exclude all that fair value and PPP noise.
This is a hostile back let me try to address that if you look at on our core.
Name there is so many variables that impacted our first quarter and I think we're going to continue to impact our second quarter and first of all what we kind of touched on early on is our excess liquidity. Our deposits is growing one 4 billion and the first quarter and we are more than 4 billion in the since the pandemic began.
So we actively trying to invest that the excess liquidity on the bond portfolio or growing the loans. So if you look at a 331 'twenty 'twenty. One we've had about $1 $6 billion of excess cash that would have on our balance sheet. If we could reinvest that and our bond portfolio, it's going to definitely have.
And you know accretive impact on our margin and our net interest income. So if you look at our bond portfolio, we purchased $2 2 billion on bond portfolio and the just in the first quarter, but we also had elevated payoffs on the on the bond portfolio. So with the with what we saw lately the curve is improving like <unk>.
On term Corp is improving so we and reinvesting at higher.
Yield bond portfolio now than we did maybe a quarter ago. So that's benefiting and what's with the refi what happened with the low interest rate environment. There was so much refi and on our premium amortization was significantly if you look at our premium amortization. This quarter was about $12 8 million if you compare it to <unk>.
Last year same period and was only 8 million and you can see how much significant that impacted our margin and as we go and refi has slowed down with Kevin mentioned earlier that should slow down the premium amortization and thus, helping us with the margin and income.
And I think one other thing I know is a PPP with non considered the core but on.
And the first quarter, we had 13 million and PPP fee income and we have about $9 four remaining from the first round that we are going on.
We believe we're going to recognize more than half are within the second quarter, but we also generated about $24 million and deferred fees on the second round of PPP loans I think that the wildcard is the timing of it when we got to recognize I know that some customers are waiting to start.
The forgiveness process, but the timing would be the essence, but we believe is going to be started and second quarter, but probably more like toward a fourth quarter event that would help us with our net interest income and margin and lastly, I think though I would touch on on our deposits.
We still have about $2 3 billion in the Cds that are going to reprice next 12 months and out of that the $1 5 billion and can I get repriced next six months that will should help us and the from the margin perspective. So there's a lot of moving pieces that are kind of impact our margin and net interest income and near future, but if you look at our.
Long term.
Aspect, we are asset sensitive bank right now so any pick up in the long term curve will benefit us and long term. So we feel pretty confident that as the rate goes up and we start growing our loans that would benefit that I know it was kind of a long winded answer, but I think.
And if I can recap what you just said because I think all natural import and historically, we would always say okay. You can count on a three or four point net interest margin went down on three or four points net interest margin going up but again every day and it also back and mentioned again, you got excess liquidity today world were $2 billion and our overnight investments, which we never do historically, we would have to be.
And invested leawood.
And even borrow another 1 billion and invest that.
We have so many loans through the deal with legacy, Texas. It had the P. C D E.
P C D loans and all of those loans that were P. C. D loans for the most part don't accrue interest and we're not showing you accrued interest were accruing it but we only take that interest and the income as our pan offs. So there that's still a big number out there.
And then.
The higher amortization on the bonds, I mean, again going from $8 million and amortization to almost $13 million is a lot I think youll see a higher amortization. This this muscle that we're expecting but it should come down considerably. So we have a lot I would say for the most bank and I said net interest margin are declining and I would think I don't know if everybody has many on.
And <unk>, but for us to get for us to keep it neutral or ability you can see we got a lot of work in front of us and we haven't been willing just to take take those positions yet and that's the reason we can't give you an exact number a lot out there, but I just kind of wanted to give you some color and flavor on it.
That's helpful. I understand it's a complex topic alright, thank you very much.
The next question is from Peter Winter with Wedbush Securities. Please go ahead.
Hi, Good morning, I wanted to ask about the loan pipelines and how they compare to pre pandemic.
Pandemic levels and what's your thinking is for maybe loan growth from the second half of this year.
Well maintenance and try that first.
I would describe it is a mixed bag.
In terms of where the loan growth might be coming from.
Things have picked up a little bit from a pandemic standpoint.
But having said that not much.
It's easy I think to understand that there arent very many new hotel deals for example out there.
They are not a whole lot of new restaurant deals out there although there are some.
Multifamily and most of our markets has dipped down a bit.
And I don't see that picking up substantially right away, although it hasnt totally fallen off.
Oil and gas obviously.
It has been and a bit of a dip.
Maybe not as bad as a lot of people might have predicted.
We still see some loan requests on the oil and gas side, they haven't dried up completely.
So.
I think it's going to be.
Slow, but steady increase in and and loan requests.
And.
I Didnt mentioned office.
And that now.
And certainly hasnt been robust.
Most of our major markets.
The occupancy rates are and all that good still.
And so theyre not a whole lot of of spec office requests there are owner occupied office request and we still get some of those.
So.
While there has been.
Predictable falloff from the pandemic.
It hasn't been as bad as a lot of people probably would've salt and.
And it is starting to pick back up.
But it's not it's not going to be and overnight pick up I don't think.
But I suspect no later than the end of this year, we could see sub substantial increase and some of our loan request whether it happens this next quarter or the third quarter or the fourth that's unknown, but I don't see it going down anymore, well I. Thank you.
And if it truly is and most people are predicting at least a bit that we'll have six plus six and asics plus GDP growth your growth is going to definitely come and the second half my only caution and that in areas is I do think these taxes that theyre talking about now if all of those go through I really think that could that could throw a wet towel.
On this site I'm not saying it would it would put it out completely and that's why it's hard to give a little guidance and again, we anticipate good growth and the second half on the at the same time, we still have a portfolio with legacy that came over with us and the structured commercial real estate.
Area that really.
We have not really grown that portfolio and not leave wanted to jump in and buy secondary b, finding and secondary b properties with no guarantees and stuff like that so we continue to lose business and that area. So I think even with our growth. This next year, you probably won't see a lot of loan growth because of because of what we still have to go I think it legacy and <unk>.
Kevin May want to jump in on that too that just my thoughts we might mention real quickly also.
Single family demand it is very good well that residential.
Residential housing.
From a single family standpoint.
The demand is very good.
And I don't see that dropping off anytime soon.
As was mentioned earlier and this call there's a lot of population growth and Texas and for that matter someone Oklahoma also so people are coming into our markets and they have to live somewhere.
So I think that's going to be a good source of loans far certainly throughout this year and and into next year. We can ask for a better place to live I mean, we have the fastest population growth out there.
So I mean, all of the growth this year I mean, everybody saw where we gain we picked up two house seats and places like California, and lost a house seats and and the East Coast, New York and that Aerie losses. So this is definitely where things are growing and people are moving so that should create relative should create loans for us going forward again, a lot of it at Thanksgiving Japan.
On.
Taxes that to a certain degree and think there'll still be growth. Its just a math matter how much growth will have value.
Just on the new tax laws I think I agree completely I mean taxes are emotional and they're real too obviously real dollars go out, but if people get scared over taxes, they're not going to spend money.
And that's just life, that's just the way it works. So that's a wildcard yes, we'll see.
Alright, Thanks, a lot of color I appreciate that.
If I can switch gears and talk about the seasonal day one reserves.
And January 1st it was 198%, which.
Elevated from you guys as you.
Worked through some of the non core loans from from legacy do you have a sense.
What the right.
Seasonal level is for.
And for you guys as you kind of get through the loans from legacy.
Okay.
Nobody wants to answer that Peter.
With that.
So I'll try to answer that question, so if and when it comes to the allowance. It's a you know we have a model that we ran and we have a base and we have also have layered on a stress environment because of the current situation I know that the economy's progress and but there's so much on known there that we had to lay off a little bit.
Stress scenario and that's why we at the current level. If you look forward and it's kind of hard to predict where we land. We just have to run the model, but as we continued progress with the.
Economy, and as we go the cycle progresses, we probably going to bring down at the at that time, but what's so would be a normal run rate for us is hard to predict but I think what I've heard from other banks or everyone in the industry. They saying, maybe 1314 would be normal going forward, we'll see so but it's.
But right now I don't know if I would.
Rather site, Peter instead of counting on us throwing money back into the <unk>.
Income statement I would rather grow the zillow loans loans to take care of what may be extra money and the provision of a set of really taking money in and out again and I know, it's based on a formula.
After this.
I think they still allow us to put stress test on it just because it's not over yet on the east they'll have some hotel loans you still have office loans and so it's not unrealistic to have extra stress on them on the model, but I would say if things continue to go the way they are and things continue to improve I would rather instead of taking money out and actually grow the loan portfolio to take us that.
And difference to where it finally ends up at the loans and three one for something.
Got it thanks.
Thanks for taking my questions.
The next question is from Brady Gailey with <unk>. Please go ahead.
Thanks, Good afternoon guys.
Hey, good morning.
But I wanted to circle back on Bank M&A, David when you look at your wish list is that are those targets larger more transformational mergers or is it more kind of smaller downstream targets and then.
And if theres nothing that is really work on within the state.
And in Texas, and Oklahoma. It was now the right time to look outside to the southeast.
Well I think you answered all your questions are yes.
And I think we do have targets we have.
Some larger ones and we have some smaller ones to the smaller ones would probably be within within our and our markets and those are just be fill ins and basically that would give us more offices or customers and an area that we're ready and and probably the third part of the dailies, yes, we probably.
<unk>.
And if the targets that we're not focused and taxes. They would be focused out of state probably in the area that you're talking about some other area and.
Again, if we do that as I mentioned before those those targets would have to be a larger transaction and they would have to be dominant and market share and the state that they're in and I don't think that youre going to I would not say you won't see us go and buy a.
$2 billion bank and another state probably it would have to have either it would have a large market presence or the ability to have a large market presence within a reasonable period of time.
Okay, Alright, that's helpful and.
And then back to the bond portfolio was good to see that growth this quarter.
Margin.
<unk> talked about potentially rather and that continue to grow.
I think average balances were about 9 billion and period and we're about $10 billion.
And how much larger.
And we'll have a couple going on a cash and you still have money right there to put to use.
And how much larger do you think the bond book could get overtime.
And I think the bond book is just a function and what we don't put it into loans I mean thats a place we've kept the bond book extremely short.
Mato made a mistake not investing more because our duration is only three three year duration. So maybe should have invested all of it because if somebody could say well you're investing it was you didn't you didn't get the highest rate, but the truth of the matter is we have so much rolling up all the time, it really doesn't matter side.
I think as the bank grows and I don't know that ive ever seen our bank grow organically and.
And one year, 20% and deposits. So I don't I don't expect that to be the norm, but I.
Don't expect to lose a lot of that money either you know there may be a $1 billion lesser so but for the most part I think you will continue to grow and what we don't put in the loans will put we will put into the bond portfolio now the mortgage warehouse facility that betsy's difference at here and we're closer to $3 billion secured today, we're closer to the $2 billion Mark.
So that's $1 billion swing right, there, but whenever we don't put in loans I would hope that as we get through the.
Loans that we were trying to get out of and the oil and gas, which I think for the most part was on the legacy and <unk> out of the structured commercial real estate as that as that.
Ounces out.
At least there is no reason why our bank Shouldnt ROE at least.
And 5% a year and if theres a decent market and so you are talking at least you know at least $1 billion a year there too so it'll be a combination and just to add on and I think is on timing as well and we didn't expect to grow one 4 billion and deposits in the first quarter, we were buying the bond portfolio to use up our liquidity, what we had ended the year and.
That additional $1 4 billion. So it's special though that additional came in later in the quarter just going through that we're going to work through that buying more bonds, but again like Mr. Zalman said, we use that as a balance our and we don't grow loans, we will put it and the bump where theres. So much it rose off every year and <unk> such as <unk>.
<unk> had a ratio and we're not we're not making a bet on the future of rates were just yet and we're just taking the middle of the rote approach and so we should probably would be and we should be investing more than we have.
Got it thanks guys.
The next question is from Michael Rose with Raymond James. Please go ahead.
Hey, guys just on the on M&A.
He starts on a fee opportunities that you guys are looking at at this point you know a smaller bank.
And Texas to announce a little investment last night and I just wanted to see if theres any opportunities like that for you guys too and maybe bolster some fee income outerwear and prolonged growth to come back. Thanks.
No I mean, I think you're referring to the vertex deal where they bought the <unk>.
The mortgage business, we have and we're building on our mortgage business organically I mean I think this was.
This month I think Eddie we did.
784 loans, and how and our own mortgage company and booked almost $300 million.
640 that went into portfolio for $250 million. So our mortgage department continues to grow a lot of our business comes from customers as well as from other so I think we're doing that I think David if we look at buying a business.
Michael It would be more on the on the trust side.
That would be more of a business that we would be more interested and probably for the most part.
Okay. That's helpful and maybe just one quick follow up and I.
Fees down a little bit this quarter, obviously, the deposit growth was weighted on that any sort of kind of nearer term outlook I mean should we expect.
And I sat fees and service charges to remain.
And a near these levels, while our liquidity continues to build on the system.
And if you look at our overdraft and it did drop off and we'll drop of significant drop off was kind of end of the quarter because theres a stimulus monarch came in but if you look at the last year, our overdraft Seaworld and nine almost $9.4 million, that's almost $3 million drop we had in this quarter. So I think as the business opens up and what I'm here.
And the people you know using their cash to do travels and shopping as that continues that we'll see that the you know the liquidity being used up and then go on to that would increase our overdraft fees, but if you look at our debit card I mean, we've had a pretty strong growth and debit card fee income because of just the business, we're doing it but overall our.
Noninterest income on kind of held up pretty well if you compared our our trust income actually increased compared to last quarter. So I think were holding pretty well on our noninterest income except the overdraft and we know what the reason of the drop off there.
And again were $3 million.
Months less.
$3 million, a quarter less and overdraft fees compared to before COVID-19.
Think that eventually will come back and not immediately youre, probably six months to a year away from that and are getting just this last month, our ATM and debit card fees were up almost $1 million and just one month. So that tells you the amount of transactions and what people are spending out there and I think that we have some opportune.
These may be interest and a few other areas that maybe we can raise fees a little bit that we been pretty low and the past that we're considering raising those fees. It would add a little bit held to it yes, I think on trust and also mortgage I know with a volume of mortgage will probably feel like it's going on while we may increase going to give us a little bit extra boost on the mortgage income.
And so we have a couple of traders I think we can pull there too.
Very helpful. Thanks for taking my questions.
The next question is from Brett Robinson with Hockey Group. Please go ahead.
Hey, good morning, everyone.
Morning.
Wanted to just to I guess first just talk about the loan portfolio I know David that there were some loans on its legacy that maybe you were expecting to pay off for wanting to move off the balance sheet, where are we in terms of that size of that bucket, how much might be remaining that youre looking to move.
Out of the bank and that might flow your organic growth.
I'm going to let Kevin take it.
Okay.
Yes.
And I'm going to answer it in two ways I think going into the merger.
We expected some declines meaningful declines in oil and gas and.
And by that I mean, probably 300 and.
And in fact, the oil and gas portfolio and shrunk almost $400 million.
And I think we're pretty well done with that.
And then we expect some and the.
Structured real estate group called out another three or $400 million, so going into the merger.
I think we've Inc.
If you go back and look at our transcript, we were talking about six or 700 million.
Items that we would exit were and the legacy portfolio.
And then the pandemic hit and I think things changed from the pandemic and.
That structured real estate portfolio.
And what's not a portfolio and we thought was going to hold off any real estate portfolio.
Portfolio.
Ill hold up great.
Especially as it pertains to retail and office. So we got a little bit more aggressive about not hanging on to some of that structure real estate portfolio and <unk>.
Net regard.
Right.
For the remainder of this year.
Great to see that portfolio, particularly in the office or retail side.
Shrink down another $400 million or so and just not a really good time.
And there was some statistics out yesterday, despite and most of that portfolio is in Dallas and.
And surrounding.
Susan.
Thats up yesterday.
<unk> job growth throughout the pandemic years, so just.
Last year was.
And over $110000 net.
Great and new jobs, good jobs and the Dallas market.
Oddly enough.
And it's usually a great sign for office.
Space and office vacancy rates coming down and office vacancy is up.
And so there's just a reflection.
COVID-19 and.
And I think the rest of that story is yet to be written about how many people actually come back on the office, how many come back part time and share and office with somebody.
But it's playing out about how we bought great job growth, but hasnt reflected and decline and vacancies there has actually been increases and vacancies. So I think our cautiousness in that.
And the COVID-19 towards that structured real estate.
On exposure has been the right move for us.
And as result of the and greater levels of one off from our legacy portfolio than we had originally anticipated back in November 2019, we announced per diem.
Okay, that's great color, Kevin and I appreciate it.
And then I guess the other thing I was curious about was just.
Youre reinvesting and.
And new Securities on and I'm, just curious what Youre <unk>.
<unk>, what the reinvestment rate was.
Relative to the existing portfolio, and then and just kind of thinking about what you are buying today.
And what it might yield.
Yes, I don't have the number and what the average was what we bought I would tell you today, you're probably looking at that.
Penny.
And.
As we bought a small amount 20 year product that we got about $1 $6 seven on.
And then the 15 year product I think that were.
Yesterday, probably again it depends on the speed and interest rates, but probably and our base rates are probably and the 130 area, probably up 100 basis points and you're probably about $1 47 to 150 so.
That's right.
Okay great.
Great appreciate the color.
The next question.
And as from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning.
Just had a follow up on.
And your cost of deposits specifically the cost of our interest bearing demand deposits.
I think they've stayed pretty stable for about four quarters at 30, and 39 basis points. I think you have got some contractual public funds and there can you remind us when we might start to see some of that reset maybe the amount because it looks like this category is growing and I would think that new money coming in would be at lower rates, yet the average and state.
Pretty stable for about the last 12 months, so any color there on on kind of when you might see some additional relief.
Hey, Brad this hostile back I'll give you a little bit color, but if you look at our cost of interest bearing deposits has actually decreased if you look at our cost of deposits Linda Q1 of loss share. It was like 91 basis points right. Now we have 38, so we've been steadily decreasing debt, but you're absolutely right. It would have a significant portion of public funds that we.
Have some floors that we.
Would that kind of holding the interest expense on those little bit longer, but I think the majority are going to start repricing over the new contract is going to start kicking in by and of the second the second quarter. I think the majority are going to be and the third and fourth quarter. So we're getting to the strength that we're going to be a book.
And we're getting on new contract with the public funds, but right now that's what's holding up on them.
And interest.
Interest rate on the.
On the power deposits.
Yeah, I was asking specifically about that interest bearing demand category, it's about 6 billion or so where the where the public funds are so you're saying, it's you probably have another quarter and then you'll start to see some relief.
Yes, its towards the end of the second quarter, but when we looked at it.
Repricing it comes in the third and fourth quarter of this year.
Okay, great. Thank you guys.
And welcome.
The next question is from Dave Rochester with Compass point. Please go ahead.
Good morning, guys.
There's one back on the M&A topic I appreciated all the color. There you guys gave a lot of good color. We're just wondering are you feeling positive on the potential for announcing something maybe even in the next year or do you think it might take longer than that just given where the bid ask spreads are where they seem to be at this point.
Again.
Hi.
And you can't really give an answer to that and I mean, I don't know that I think we feel good where we're at on on what.
And what we're working at but again.
And if it happens it happens or it doesn't it doesn't I think.
Again, I still think.
Thanks, something should happen this year, just because of the tax situation that again, if they make it retroactive that could change things too so.
I would I would tell you there is a lot of there's a lot of action I wouldn't say a lot theres not like it used to be but it's definitely picked up and you will see more transactions, even if not by us by other people. This year Theyre just step and the works I think yeah. Okay.
When you think about markets outside of Oklahoma, and Texas, what would be maybe your top two or three that you would potentially target.
Went outside.
I really don't want to go there with that because and the first thing and.
Investors to start purchasing stock in those particular banks and and I just don't want to go there with that.
Yeah understood and.
And then while you're working on a capital is continuing to grow and you have what those levels get higher and the past.
But is the thought that if you don't get a deal done near term Youll, just let that keep growing or would you take a look at the buyback how do you think about that.
Historically, we've used our money to continue to increase dividends and.
And we use it also when the stock got out of.
Proportion I mean, whenever when something when it fell to $4 50, and $60 last year, we started buying and I again.
Again, right now I almost thought we were fairly price, but then when I look at other banks trading at we're trading at 13 times earnings and I see these other banks trading at <unk> and other companies like Microsoft and Apple trading at 30, and 40, we look pretty cheap so a lot of it depends I mean, we used to take them.
<unk> and join and acquisition and we like using our money. So it would make the deal more accretive so I would say that if we didn't do a deal. There is a possibility that we would go into market to support our stock is historically again I want to reemphasize as historically, we've used that money to increase dividends and also use.
And for acquisitions.
Yes, I appreciate that and maybe just one last one on loan yields just backing out.
All of the noise from Pvp fees and everything else I was just wondering what the differential was on the front book back book.
At this point, where new loans are coming on versus where the book yield is.
Our new loans are coming on do you want it and that is Tim want to answer that well I don't think there's a huge difference also back.
Yeah, I think if you look and the yields that we generated on the actual loans were $4 80 for the quarter.
And on the core without fair value of $4 47, So I think we are booking around water.
Around four and a half on new loans production.
On the on the low and it's three to three and on.
And on the high and it's five to five and and a half so.
And where it all falls out I don't think its going to be a whole lot of difference here the next quarter or so exactly and we are growing our mortgage loans as well, which is a deliberate and.
Lower yield, but it's a better and to invest on the mortgage loans right now and then putting on our bond portfolio was generating one and a quarter yeah and I didn't include the mortgage loans and that number okay and so that's what the outlook is.
Okay, Great maybe just sorry, one more last question.
And I may have missed this did you guys give the potential run off and.
And that structured CRE book, just what you guys are expecting for this year, what's left of that.
Thanks.
Yes. This is Kevin and I indicated on a number of roughly $400 million for the remainder of this year, okay, great and at that point, you think that pretty much stabilizes.
And again it also depends on.
How and the post COVID-19 World Occupancies, particularly and.
Retail and office play out that day.
And the.
Multifamily portfolio, there has held up pretty well believe it or not and.
It's really office and retail, but we've got our eyes on.
Okay, great. Thanks, guys.
Thank you. The next question is from Jon <unk> with RBC. Please go ahead.
Yeah. Thanks, Thanks for letting me and we can put a speed round here. It just took some reductions.
Ask about you talked about.
<unk> change on the reserve could you touch a little bit more on the $14 million.
Increase and environmental factors on the reserve.
Yeah. So if you look at theirs.
And external factors and internal factors. So it's a mix of the factors that we use for our model, but if youre looking like our environmental factor, we use Texas unemployment with the current and forecast same as goes was pixels GSP or GDP coal and this included though.
W. Ti price U S CRA price and so there's a lot of that the environmental factors are included in this model also we have the our internal models that our losses, we incurred historically, so with a combination of all of that.
I will show that the interest of co $2 million related to that are factoring.
But that's okay.
Thanks, Scott and Jeff.
[laughter].
And it kind of ties into my next question, you're talking about 700000, new jobs in Texas from 'twenty one.
And what's the.
And then that I got that number John from.
That number is a little older probably at one of my meetings I got that probably about.
About three or four weeks ago and another meeting on was that they actually had a little higher number than that actually.
What does the labor situation point and your view on Texas.
And probably like it is everywhere else.
We never shut down like the rest of the country did sell a lot of the jobs kept go on but again a lot of a number of people work from home, but really when you're talking to people and they need truck drivers and I need people that work and restaurants and they need people to work in construction and we're just like everywhere else.
People arent willing to work because they can actually make more money with the government unemployment and a little bonus that theyre, giving them and I don't think that bonus at the government gives them runs out until I think September or October. So, it's really tough and you can see business EBIT today have a sign outside where we can't we're not open.
And because we can't find enough people to work so I mean, it's a real issue.
Okay, and where are you hiring are you hiring lenders are tier.
Feel like your lenders have capacity at this point.
I would say that we've never been a bank and it goes out and hires of grid Black when a bank bought another bankrate and then but we do.
We at first of all I think our bankers do have capacity at essentially and capacity.
Where if somebody comes to us and they're really good we're still willing to look at bringing on and I think we can bring them on onesies and twosies, probably it's not like tens and twenties.
Right, it's a selective process on it one here one there and if we if we find somebody that we think and.
Ed.
The program incrementally and we're bringing them in and there are those that come in and we.
And number of people that continue to contact us and we'll talk to them too, but as far as hiring.
Hiring and groups or something we generally don't do that that's right I mean, we've never felt comfortable with writing and other institutions employees.
It just doesn't feel like it's the right thing to do.
So I don't see a change and that philosophy, but if the right person comes along and they they are leaving where they are for a valid reason that makes sense.
We will look at them and if theyre the right.
Kind of folks will bring them in.
Last one for you David maybe touch on the sort of conference earlier, but it sounds like you would welcome.
Modestly higher rates.
Yes.
Do you have concerns about materially higher rates and youre talking about tight labor and.
Maybe a little bit of strengthening and energy and you guys have typically had a big bond portfolio was that a big concern of yours.
Longer term I wish that it at least assets show you our model because the higher day rates to better it would be.
I mean, this really big numbers.
So asset sensitive even though we're booking a lot of fixed rate stuff and home loans and stuff like that just to give you an idea I mean again if these models are right.
And just up three 300 basis points and a 12 year money your ear and increase of gosh.
It's almost too much to tell you, maybe 100 or $140 million, probably that's how much interest rates really help us along.
Okay.
Alright, well, we're waiting for loan growth, so and that's the whirlwind and four but thats still cartoon and get us there as well.
Okay. Thanks, a lot.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you. Thank you, ladies and gentlemen for taking the time to participate and our call. Today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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