Q2 2021 Prosperity Bancshares Inc Earnings Call
Good day and welcome to the prosperity Bancshares second quarter 2021 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you may.
The press Star then 1 on your Touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bank.
Bancshares second quarter 2021 earnings conference call.
This call is being broadcast live over the Internet at prosperity Bank USA Dot com and will be available for replay for the next few weeks I'm, Charlotte Rasche Executive Vice President and General counsel of prosperity.
Verity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer also backups, Manav, Chief Financial Officer, Eddie Saturday Vice Chairman.
Kevin Hanigan, President and Chief operating Officer.
Randy Hester Chief lending officer.
Merle Karnes Chief Credit Officer.
May serve import director of corporate strategy, and Bob Dowdell Executive Vice President.
Tim to manners, our chairman is unable to join us today.
David Zalman will.
Off with the review of the highlights for the recent quarter. He will be followed by ASO backhaul small enough who will review some of our recent financial statistics, and Randy Hester, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions during.
Will lead all interested parties may participate live by following the instructions that will be provided by our call moderator Sean.
Before we begin let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward looking statements for the purposes.
The court of 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.
As of by such forward looking statements additional.
Information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in prosperity Bancshares filings with the Securities and Exchange Commission, including forms 10-Q and 10-K.
In other reports and statements we have filed with the SEC.
All forward looking statements are expressly qualified in their entirety by these cautionary statements now let me turn the call over to David Zalman.
Thank you Charlotte.
I would like to welcome and thank everyone listening to our.
Second quarter 2021 conference call.
For the second quarter of 2021 prosperity had strong earnings core loan growth the.
Positive growth continued sound asset quality impressive cost controls our return on average tangible common equity.
<unk> of $17, 4.9% and remains well reserved.
Prosperity Bank has been ranked as the number 2 best Bank in America for 2021 and has been in the top 10 of Forbes America's Best banks since 2010 I want to congrats.
Congratulations and thank all of our customers associates directors and shareholders for helping us achieve this honor.
The unemployment rates continue to decrease and GDP growth continues at a high level as forecasted last year with the reopening of the economy.
We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies.
Further businesses and individuals continue to move to Texas for lower tax rates and a better quality.
<unk> live.
Our earnings were $136 million in the second quarter for 2021, compared with $139 million for the same period in 2020.
The second quarter of 2020 included a tax benefit from.
City of the operating losses of $21 million or 22 per diluted common share as a result of the enactment of the cares Act.
Diluted earnings per share were $1.41.
For the second quarter of 2021 and for the same period.
For net in 2020.
Earnings per share for the second quarter of 2020 included the 'twenty 2 tax benefit.
Partially offset by a <unk> <unk> charge of merger related expense and at the recent charge for the write down of fixed assets related to the merger.
Some CRA investment funds.
The net effect was a positive 13.
And earnings per share for the second quarter of 2021, a 10, 2% increase after considering the adjustments in the second quarter of 2020.
Loans on June 32021 were $19.2 billion.
A decrease of $1.7 billion or 8.4%.
Compared with $21 billion on June 32020.
Our linked quarter loans decreased.
$387 million or 2% from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans.
On June 32021, the company.
Company had $780 million of PPP loans, compared with $1.4 billion of the PPP loans on June 32, 22020, I'm, sorry, and $1.1 billion of PPP loans on March 31.
The.
2021 the.
The linked quarter loans, excluding the warehouse purchase program.
<unk> loans increased $148 million of <unk> 9 basis points, 3.7% annualized from the $16.2 billion.
As of March 31, 2021.
Our deposits on June 32021 were $29.1 billion, an increase of $2.9 billion or 11, 3% compared with $26.1 billion on June 32.
<unk> and 'twenty.
Our linked quarter deposits increased $347 million or 1.2% 4.8% annualized from the $28.7 billion on March 31.2021.
We believe that the deposit inflows are starting to normalize.
2 as people are spending money again and stimulus payments have been reduced however, the child tax credit payments should again add deposits to the banks.
Our asset quality has always been 1 of the primary focuses of our bank our nonperforming assets totaled 33 points.
<unk> $11 million.
Or 11 basis points of quarterly average interest, earning assets as of June $32, 21, compared with $77.9 million or 28 basis points of quarterly average interest earning assets as of June.
3 of 2020, a 56, 8% decrease from last year.
Nonperforming assets were $44.2 million or 15 basis points of quarterly average, earning net interest earning assets as of March 31.2021.
The M&A seems to be regaining momentum we've had more conversation with bankers considering the opportunities. This quarter. The continued non non net interest margin pressure the higher technology costs, the salary increases loan competition succession plan and concerns and increased.
Regulatory regulatory burden all point to a continued consolidation.
As mentioned in my opening comments, we believe the U S economy is starting to normalize which has helped to reduce unemployment and cause above normal growth rates in GDP, we are seeing higher prices for gas.
Increased <unk> labor shortages inventory shortages and more.
We believe the prosperity is well position to grow along with the Texas and Oklahoma economies, we have a deep bench of associates with the passion tale of prosperity and our customer succeed.
<unk> continues to focus on billings.
And good core customer relationships, maintaining sound asset quality and operating the bank and the efficient manner, while investing in ever changing technology and product distribution channels, we continue to grow the economy.
We intend to continue to grow the company.
Building, both organically and through mergers and acquisitions I want to thank everyone involved in our company for helping to make it the.
The success it has become thanks again for your support of our company, Let me turn over our discussion to also back us Manav, our chief financial officer to discuss some.
<unk> specific financial results, we achieved also back thanks.
Thank you Mr. Zalman good morning, everyone.
Net interest income before provision for credit losses for the 3 months ended June 32021 was $245.4 million compared to 259 million.
Some of this per day.
At the same period in 2020, a decrease of $13.6 million or 5.2%.
The current quarter net interest income includes $12.2 million and fair value loan income compared to $24.3 million in the second quarter 2020 of.
As of $12.1 million.
Net interest income also continues to be impacted by the paycheck protection program and warehouse purchase program.
The second quarter 2021, net interest income excluding the impacts of PPP loans warehouse purchase program of loans.
And fair value loan income improved compared to the same results in the first quarter 2021.
The net interest margin on a tax equivalent basis was 3.4 and the 1.1% for the 3 months ended June 32021 compared to 3 points.
A decrease of 9% for the same period in 2023.
341% for the quarter ended March 31.2021.
Excluding purchase accounting adjustments the net interest margin for the quarter ended June 30 of 2021 was $2.96.
Second compared to 333% for the same period in 2020 and $3.1 9% for the quarter ended March 31, 2021. The decrease was primarily due to a change in the mix of interest, earning assets and excess liquidity.
Noninterest income was $35.6 million for the 3 months ended June 32021, compared to $25.7 million from the same period in 2020 and $34 million for the quarter ended March 31.2021.
Noninterest expense for the 3 months ended June 30th 2021 was $115.2 million compared to $134.4 million for the same period in 2020.
On a linked quarter basis noninterest expense decreased $3.9 million.
From $119.1 million for the quarter ended March 31.2021.
The current quarter benefited from gains on sale of Oreo assets of 1.8 million and a decrease in salary and benefits the.
The decrease in salary and benefits is primarily.
The lower employment related taxes for restricted stock vested during the first quarter of 2021 and lower discretionary incentives.
For the third quarter 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio.
<unk> was 41% per the 3 months ended June 30th 2021, compared to 46, 6% for the same period in 2020 of which included $7.5 million in merger related expenses and 41, 3% for the 3 months ended March 31.2000.
'twenty 1.
During the second quarter 2021, we recognized $12.2 million in fair value loan income. This amount includes $4.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $7.9 million.
From early pay offs, we estimated fair values, alright, sorry, we estimate fair value of loan income for the third quarter of 2021 to be around $3 million to $4 million. This estimate does not account for any additional share value of the loan income that may result from early loan pay.
Downs or pay offs.
Looking forward, we expect the income from early Paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCV loans with the large discounts.
The remaining discount balance is $25 million.
Also during the second quarter of 2021, we recognized $10.3 million in fee income from PPP loans.
As of June 32021, PPP loans had a remaining deferred fee balance of $28.3 million.
The bump.
Volume metrics at 632021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion.
And with that let me turn over the presentation to Randy Hester for some detail on loans and asset quality trend right. Thank you.
But are.
Our NPA as of quarter end June 30, 'twenty, 1 totaled $33 million $664000 or 1.7% of loans and Owari com.
Compared to $44 million 162000, or 2.2%.
Non put at March 31, 21, this represents approximately a 24% decline in NPS.
The June 30th 21, NPA total was comprised of $33 million $210000 in loans.
$310000.
The assets.
And only $144000 and Ori.
Of the 33 million of $664000 in NPS.
$8 million, 378000, or 25% or our energy.
Energy credits all of which are service company credits.
Net June 30th 20, 111 billion 448, I'm, sorry, 1.448 million Npa's have been put under contract for sale that doesn't necessarily mean, they're guaranteed.
The repos, but they are under contract and expected to close net.
Net charge offs for the 3 months ended June 30th 21 were $4 million 326000, compared to $8 million 858000 for the quarter ended March 31 of the.
The decline.
No dollars were added to the allowance for credit losses during the during.
During the quarter ended June 30, 'twenty 1.
Nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended.
We ended June 30th 21 was $641000.
This includes a total of $73.8 million in PPP loans book during the second quarter.
Loans outstanding at June 30, 'twenty, 1 or approximately 19.
<unk> been $3 billion, which includes approximately $780 million in PPP loans.
The June 30, 'twenty, 1 loan total is made up of 39% fixed rate loans, 36% floating.
19, 25% variable resetting at specific intervals.
I will now turn it over to Charlotte Rashi.
Thank you Randy at this time, we are prepared to answer your question. Sean can you. Please assist us with questions.
Certainly if you would.
Like to ask a question. Please press Star then 1 of it.
Anytime of your question has been addressed and you would like to withdraw your question. Please press Star then 2.
The first question for today will come from Jennifer I'm talking about with the Truest. Please go ahead.
Thank you good morning.
Good morning.
First question is on mortgage warehouse, just curious as to what the outlook from that business line of 19 any uptick in refi.
Here in the last few weeks.
Jennifer this is.
Kevin.
We've seen only a minor uptick in refi in the last couple of weeks of it takes a while once rates go down to pull through to US. If there is usually about a 6 week lag from a decline in rates and when we start seeing volume on the warehouse line. So.
Most of what.
I've seen at this point is just anecdotal evidence.
Evidence of out of our client base.
If we just look like what's happening quarter over quarter.
For instance in the current quarter the second quarter of this year of 66% of our volume was purchase.
As of.
In the first quarter only 47% of our volume was purchase so there was a pretty big shift.
Between.
Q1, and Q2 towards purchase volume.
That may moderate again, a little bit here in the early stages of this quarter.
As we look at volumes, they've held up pretty well so far for the month of July.
But throughout the quarter I would say it.
I had to pick a number I would expect our average loan volume to be down about $150 million from where it was in Q2.
Okay.
And how about pricing what are you seeing in that.
Yes, it's really held in there pretty well if you just look at weighted average coupon.
Again Q1 was 3 point.
2.3% I believe and it dropped only 2 basis points of $3.2 1% in Q2. So we have really done a good job of holding the line on pricing there's always been pressure.
And as you know every now and then.
The pressure gets greater.
Not that we don't sort of come we usually just let that client go and try to find out another 1 of the values of us a bit more.
And we are seeing some of it some encouraging things going on.
From from that perspective, we've got a couple of new clients that are in the queue to be boarded.
And we've seen a couple of our larger.
The clients with volumes being down this happens every time in this cycle as volume goes down folks look to kind of pare back the number of lending institutions. They have so we've had a couple of our big clients come to us and ask for us to take a larger piece of their overall volume because of our balance sheet size where the.
They are weeding out some of the smaller lenders and their bank group. So we.
We've been the beneficiary of some some larger increases for existing clients as well.
Thank you.
Separate question on M&A, David have you ever seen a frenzy.
Like we're seeing.
Now in this M&A market and does that concern you.
I would say that it is active right now, although I'd have to say that I've seen it I've seen it more active than it is today that we're talking to and so I.
I don't know I don't I don't think that it is concern.
<unk> me I mean, I again, like I've said before I've seen it more active I will say it is active there's no question.
When we talked in our last quarter I said you know.
What stock price of down things of kind of.
Things are really the phone calls of not been income in as much but as the stock prices of Ghana.
Yeah.
And everything is happening with the current administration, we are seeing more and more people are talking about doing something and so but having said that I've actually seen it I've seen it more active in this before so I think going forward youre going to see you've seen a lot of deals I think youre going to see more deals before the end of the year. There is no question about it but I was just going to be.
Pretty active year.
Okay.
And I'll, let others hop.
Hop in thanks.
Okay.
The next question today will come from Dave Rochester with Compass point. Please go ahead.
Hey, good morning, guys.
Morning.
So all of the.
It's going to be on growth X P. P. On the warehouse this quarter that was definitely stronger than the recent trend of what we were looking for this quarter. I know this has been 1 of the major concern surrounding the stock recently.
As to what those trends can look like this year. So I'm just wondering how does the loan pipeline looks heading into the <unk> X that warehouse. So as you can.
Just talked about that and what are your thinking regarding the run off that's left of that structured CRE book. The Thank you mentioned it was about $400 million left to go.
Back in April.
Yes. This is Kevin again pipelines look more robust than they have in quite some time.
And I would tell you that the.
And of our earlier calls we didn't think we'd see growth of until the second half of the year.
Fortunately some of that pull through and gave us of a second quarter, where we had a bit of of loan growth 3.7%.
We really were thinking that was going to show up as soon as it did and it's continued into.
First month of the Q3 here, it's actually been pretty solid running in the better pace than it did in Q2 so far.
And I think as we look at the pipeline of number of deals that are in the pipeline the close.
I haven't I haven't seen it like this in a number of quarters.
It's probably more encouraged by it and I've been in quite some time.
Things are active and also add day, when Randy was talking a while ago I heard 1 thing I don't know if you said the right thing, but the average monthly new loan production for the quarter ended 630, 21 was $641 million, we modest at 600.
Of the supporting 1 of it so that's a pretty that's a pretty good number for us so yeah and structured CRE of that portfolio is down to about $1 billion. In Q2, there was about $250 million in runoff so to produce some loan growth in the face of $250 million and runoff of map and.
In the quarter is.
Accomplishments in its own rate I think it will pare back a little bit, but I wouldn't be surprised if we saw another.
$150 million to $200 million runoff in Q3.
But as I say when I look at the pipeline I'm pretty encouraged that we're going to be able to face that headwind.
And still put up some pretty Dcs really considering if you took out the structure of CRE and just if we wouldn't have had the runoff of the structure of CRE of participated more on that I mean, our numbers were probably been double digit for the most part we play you're thinking that the.
Oh go ahead.
I will say, we have a good of number of loans on the books right now that our.
<unk> up that are that are past the pipeline stage the loans should fund up and that'll help us over the next quarters.
Yeah, David the other way to think about it a non structured CRE I think theres going to be up 4 of $500 million of that remaining 1 billion sticks with us.
Okay. So you get maybe out of the $2.50.
Funds, the Don and <unk> in the maybe have a little bit more run off after that but not all of it yes.
I think the closer to 200 in Q3 would be my guess and maybe another 200 in Q4, and then that will.
About do it.
Okay great.
And maybe on the resi segment of that growth really jumped.
Jumped this quarter is that solely just the function of greater activity in the market or has your appetite increase there and then what's your outlook for that in the back half of the year.
Residential.
I didn't I didn't hear the question can you say that when we get the residential.
Yeah the residential the.
Strength in the growth this quarter.
If that was just a function of.
The the market activity or if you have an increased appetite there and then what's your outlook for the back half.
I would say the market activity is just the very robust through throughout the entire footprint of the bank and we've not seen any slowdown of seasonality to that so far the pipeline looks just as strong as.
It has all year long so we're feeling pretty confident about the increased continued activity within the mortgage market.
And we're portfolio and about 90% of what we originate.
Sounds good and then just 1 last 1 on capital.
So the CET 1 ratios over kind.
2% now youre other ratios of very strong it seems like you have enough capital for a deal and buybacks sort of just curious what your thoughts were.
On that maybe starting up the buyback again, just to maintain capital ratios where they are.
I think you are accurate in what you're saying I think we.
We're really ability of lot of capital we have of.
The earnings we do pay a good dividend and generally try to increase it a little bit but youre right. We are we are retaining a lot of capital but.
Historically, we've used that to 4 acquisitions and I'd still like to keep it for that but having said that again with the stock price when it dropped into the <unk>, It's something certainly that we're going to consider maybe buying back some of.
Of our own stock of it.
Stay that low.
Okay, great. Thanks, guys.
And the next question will come from Brady Gailey with <unk>. Please go ahead.
Great. Thanks, Good morning, guys.
Good morning.
When I look at the bond book I know we've talked.
A lot of them.
You guys, putting some cash to work.
Sure.
We saw a decent amount of growth in the second quarter I think period balance.
Balances has the bond book of about 12 billion, how do you think about continuing to grow the.
That bond book of dose level I know the long into the curve has kind of gone against us.
Here recently, but how do you think about continued growth in the bond portfolio.
I would say Grady.
Brady the.
We work you can see we continue to buy pounds in as deposits just keep on rolling in all the time. So we have that to contend with but again I will say as of today probably of.
The over 1 billion 3 billion 4 just an overnight investments and a little bit we pulled back from investing because of the tenure has gotten too low we feel so we've just kind of pull back from investing in we are probably waiting a little bit we probably could have made more money investing I would say overall, it's probably a smart thing.
Moving to keep investing because if you keep that average 3 to 4 years, 3 and a half year average life.
Youre going to Youre, probably going to make more money, but again when interest rates go as low as they have we still have pulled back, but we will be back in purchasing win.
We turned a little bit to normalization anyway, but again, it's just a lot of money and trying.
Invest it when you have this much and just trying to plow everything you can win rates are the lowest may not be the smartest thing in the world.
Okay and then this is the third quarter that we've seen of zero provision from you guys.
As I look at the reserve.
If you include the reserve for unfunded commitment.
Keep it are still north of 2%, which is just the big reserve relative to how clean your credit quality is.
If you all are not going to take a negative provision I mean to me. It seems like youre going to have is a zero provision for a while.
The years.
What's the right way to think.
That's the provision unlikely.
But you always have to be careful you know there's another version of Covid out there again.
You know the.
The long the short of it is like we said it. It is it is a calculation that we go through.
There is seems to be a lot of in there, but again at the same time, we've always said that we would like to.
About the Intuit instead of just playing with the numbers in and bringing money back and forth. All the time, if we can and I think there's.
I think theres still reasoning out there that justifies that we still don't know there's a lot of variables out there that you just don't know what could happen. So I'll, let I think as long as we can we.
We can keep the calculation.
Keep the money in there as long as we can probably yes, I would just add.
And on Brady. So we can run the our model we have of baseline and we will layer on the.
Pessimistic scenario on that 1.
So we will probably continue a little while but we just have to see how the economy continues.
The special there's so much unknown still out there you know because it takes time for loans to show the the quality of it so from that standpoint, we will have the run the model and the Toronto model of space that we need to take provision gain will take the provision gains. So we just kind of run the models, but again I think its premature I mean, I see a lot of banks doing it.
But again Theres still again.
Talking about our mask again in another variant and all of this stuff coming out and so I just think it's premature just to say everything is just great right. Now. So it is good there is no question and in fact, when you look at our asset quality and of decreased 58% from last year.
And knock on wood things look pretty good but again I feel we're in the right place at the right time right now.
Okay got it thanks guys.
The next question will come from Michael Rose with the Raymond James. Please go ahead.
Hey, thanks for.
For taking my questions.
NSF fees were down a little bit this quarter, but there's clearly been some.
Some of some pressure out there and some banks curtailing some of those fees can you can you just walk us through the thought process on your NSF program at this point and maybe what you're doing to help out customers and if youre starting to.
Is there any political or.
Regulatory.
The changes there.
Okay, I'll, just give the little bit highlight on NSF, yet the NSF little bit down compared to the first quarter, but as you remember in the end of March there was a big stimulus package that was sent out to a customer so what we saw.
April and May there wasn't less usage of NSF nsf's of their time, but in the June rebounded. So if youre looking forward I think for special with the summer time and people go on vacation all of that I think of NSF gonna be better in the third quarter. If I'm just looking at the numbers, but overall if you look at you know.
So environment in the.
From the.
Regulatory side, yes, we hear more about more focus on NSF right now we haven't changed anything because we want a little bit wait before we do anything but yes I agree with you there is of more focus on NSF as we go.
Hi.
Really you make NSF fees when.
And what are really buying stuff and there's so much stimulus money out there and there's so many deposits of consumers have somebody deposits, but we were talking earlier in year and it doesn't seem like the people are spending of the money that they have.
I guess going through what we've gone through over the last year year and a half maybe they are cautious, but then somebody said.
When people enough inventory of products out there to spend the money on so thats, another spin or that side of it so.
I think.
Spending money, but again theyre, just not out there theyre not out there spending everything they're still they're still trying to leave money for a rainy day, which is so different than I've ever been used.
They're not again and I think that deposits are going to continue as long as theres more stimulus, we're still talking about.
At $300 tax credit that's going to be given to <unk>.
Individuals' again, so I think that's going to be another form of stimulus so I.
I think that maybe NSF fees.
Not get back to where they were exactly the.
For some time.
With the liquidity I don't think its going to get back to the where we had pre pandemic, but what I see the at least seeing in June and July yes, it's improving yeah. I mean, it will it is getting better all the time in any of it will get better, but theyre just more money out there right now.
Okay. That's helpful and maybe just as a follow up ASO.
I appreciate the color on the the expense guide from the third quarter.
Was there anything that happened in the in the salaries line I may have missed it but the ramp down almost $4.5 million or so.
So it seems like that maybe will rebound back upward just just trying to kind of reconcile how you get from the kind of 115 back to the 118 to 1.
Thanks Evan.
Kevin felt philanthropic and gave the salary and bonus bags.
We appreciate it.
Okay.
No the primarily in the first quarter, we had the employment related taxes for restricted stocks that were vested in the first quarter. That's why we had a higher taxes that we.
Tier in the first quarter and also of discretionary incentive in the second quarter were a little bit lower than we had in the first quarter, but you're right. If when I gave you a guidance of 118 to 120 does include all of it right because we have quite a lot of spending on <unk> side that kind of bump up a little bit I think the salary going to go up but probably not.
We had effect of that.
The $80 million you saw in the first quarter and we've had the merit increase you know annual merit increases that is kind of pop and so from that all the aspects that I kind of outlined how we expectation of 100 to 120 its a good guidance for next quarter.
Great. Thanks for taking my questions.
Banking.
And the next question will come from Brad Millsaps from Piper Sandler. Please go ahead.
Okay.
Hey, good morning.
Good morning.
Just wanted to follow up on kind of the loan runoff discussion from the from a yield standpoint, just kind of curious.
What what what are the rates are new loans from bringing on versus kind of some of the books that you're running off is trying to get a sense of.
And maybe how much more yield compression you can see on the loan side.
You know again I don't have the numbers in front of me, but I would say.
Probably the average rate or at least what the.
The rate that I'm looking at loans right now is what about 4 and of HAMP, Randy right now, 4.5% to 399% for the half of.
Arrange for the 4 and a half probably the average I mean, you're blowing your large loans youre not getting nature of our large loans are probably.
In the threes, but if you look at the overall portfolio. So that's true I would say, though.
It's a good bet that the loans that are running off of probably a higher yield than what we're putting back on probably they are probably in the 5 or something I don't again I don't have that in front of me, but it would be.
It's probably pretty easy to.
That would be of good analogy I think.
Okay, Great and David just a bigger picture question around M&A.
Some deals that have been announced have been received better than others, how do you sort of balance.
Kind of the best long term move for the company versus why it might be.
Our stock price reaction that might not be as favorable kind of in the near term based.
We've seen thus far in the market.
Well I.
That's 1 of the hardest deals we do have even where we're negotiating with somebody because.
When our stock prices down and compared to what they want it's just hard to give them what they want all the time I mean, if you're going to do a deal with as you'd have to.
On kind of what you have to really banks that are price of our stock is really down a little bit because we're just basically not going to do a deal that ive said in the past, it's not accretive or doesn't increase our franchise value. So we're not out there just to.
And just to do deals and we're not going to do it so.
Average day ever teams up with us if they are taking stock.
They really have to believe in the long term future of us and stay with us basically and may not be the same price they could get somewhere else I don't know.
Okay and just 1 final housekeeping housekeeping question also back do you happen to have the average balance of PPP loans in the quarter.
Yes, I think the average.
It's balanced for the quarter was a I'll give you a round.
The $1 billion.
The second quarter.
Great. Thank you guys.
Yes.
Right.
And the next question will come from Bill car cash with Wolfe Research. Please go ahead.
Average.
Good afternoon.
Hello up on your credit comments and the idea of that rather than releasing reserves you preferred to grow into it can you give a rough sense.
Of what you view of sort of normalized level for your reserve rate.
Yeah.
I guess, what's the normal.
<unk> today may not be normalize what I was used to in banking.
Growing up in banking I always thought the have you had the <unk>.
The 1%.
The 1% loans you were in pretty good shape.
In today's world again, you have to take into consideration regulators and everybody else in zama.
They might not necessary.
Necessarily see it that way I think everybody went off the cliff.
Last year, when we saw everything and everybody wanted.
The 1.5% in there now everybody is kind of coming back and pulling money out of reserves and taking it back down to probably wanted to have 1 in the quarter.
Probably.
Probably I still think in my in my opinion. This is just my opinion I think in the long run if you run of good clean bank.
1 of the quarter per cent is a pretty high rate.
And our reserve in my opinion, that's just my opinion again, taking out of taking out of taking into consideration anything it may.
May happen in other pandemic or another something that we're not aware of them. Then you have to have extra money in my opinion.
Maybe another way to think about it which I think gets almost the same exact number is if you took our.
Our post seasonal pre pandemic combined legacy prosperity and all of that happened all.
All of our profit at the same time I know, but if you just took our combined.
The seasonal kind of the numbers pre pandemic, we're in that $1.25 to $1.35 range. So if you had to pick of normal I'd.
I'd pick of $1.30.
That's really helpful color. Thank you.
Separately can you.
Speak to what you're hearing from clients about labor shortages are facing any color on if it's getting better or worse.
Just.
Any any broad commentary across across your client base would be helpful.
What do.
That our labor shortages.
[laughter].
Japanese bearing in Austin and out of you said basically that we may have to just have drive throughs on 2 of our locations because the way. We may have it's just very difficult to find enough.
All of our health and frontline people that are willing to.
The work with face to face time and at the.
The pay scales with all of the other companies competing for the same population of workers and the hourly rate and what some of the private industry is offering of the way of additional benefits and those that are allowing them to work from home, whereas we really need some.
2 kind of in store people.
Yes, I mean, we're really going through the again I've said this Scott is really day to me, but what I'm, saying is it really something different than I've never seen before right now even.
I've never seen as many people changing jobs going from 1 job to another.
I don't know if its.
Psychologically there is sort of and then or some.
Like Bank of America in the razor.
The tellers to 20 to $25 in it.
So there is competition in other.
I think Walmart offer today that they're going to be able to send if he would work for them because they're going to send your kids through school. So theres so many different incentives.
The <unk> have this other dynamic thats been that I'm trying to get from my mind.
I am saying people that really.
I don't know if theyre just wore out are there tier right now it seems like everybody's work so hard.
That maybe maybe that's not everything or maybe rethinking things and Youre seeing this other group.
Then you had got to work from home and now we're asking all of those people will come back to the office and some of those especially the older people are saying.
It has not worked and maybe I have taken care of and older parent great home.
Made a lot of money so I'm not answering your question rate again, I'm trying to get some color the theres a tremendous amount of dynamics.
That's going on right now and the work force and I don't know where its all going to Pan out of my thought is it will get back to normalization, but it's going to take some time, we've all gone through a lot of different why do we do things theres been a lot of different psychological strains on a lot of people and it's just it's just going to take some time, but I do know.
<unk> there will be some people working from home you will probably be a combination of a lot of combination, but I think for the most part of business is want most of the people to come back to the job and come back to work, but having said that.
There may be some there may be some exclusions for people that are really good that just that you can't get back at least for short term, while they still want to finish.
Thanks for the careers.
And I think just feedback from our clients. This is Kevin.
Particularly in homebuilding restaurants, and some other folks that just can't staff at <unk>.
The restaurants, but service quality is not what it used to be.
The side.
In places I'm pretty well known.
At the rate.
Where I expect to get service, it's down from where it used to because they just don't have enough staff or homebuilders are having to pay up to get the staff.
The crews out there on homebuilding sites of there.
Their business is robust with it they are just struggling to get people back so.
It's pretty pervasive theres still some supply shortages.
Talking to somebody.
Receives a lot of their product from overseas. He said just the cost of getting a container is.
Is ridiculous.
Just the container to ship stuff in this there is a shortage there.
So it's pretty pervasive.
And I do.
We're in the camp the tends to think of.
Some of this isn't going away some of it is transitory clearly.
But once wages go up I don't think youre going back down.
And I think once the restaurant prices go up they are probably not going back down. So I think some of the stuff is going to be in the system and that's.
Actually going to stick.
I don't think of Assembly of East Kevin I don't think of just transitory as everybody said in fact, all of the price increases that the.
People that the.
The minimum wage and they've taken it up I think if you ever go to the grocery store you see they lost that the <unk>.
So I've just gone.
There are more than what their profit then.
Their wages.
That's super helpful color I think what I was trying to get at is to what extent you think it may be inhibiting investment and then it sounds like it's hard to tell because there's a lot of moving parts, but it may be across your customer base and so.
To the.
Except that the.
Gets better.
At some point, then maybe that should be of positive.
I think the.
It will get back to some point and I think the lot of it just depends on your investment I think people that are doing good are going to continue to invest but again. It may it may be of slower and maybe slower than what everybody. Thanks to the again the economy got to remember the economy has been.
Shut down for so long the GDP numbers that Youre seeing right now in 8 and 10% of net it's going to be so much more than it was previous year, but at some point, we'll hopefully we will get back to normalization, but I guess, what we're saying is.
Sure.
Lot of the <unk>.
Lot of the.
The inflation rates that we're seeing and stuff like that.
The transitory I guess of the worsening.
Yes.
Understood and if I could squeeze in the last 1.
Maybe if you could give a little.
The color around whether your commitment across different verticals is evolving in any way just curious whether you'd look to get bigger or smaller in area of any areas in.
In light of the increased focus that.
That the investment community has been placing on ESG and I was just wondering if that's becoming a consideration at all.
As you look at the business going forward.
That really for US I think maybe in the energy space and as per some maybe some of the bigger banks would like the report lower.
Main of energy balances in some of the bigger oil companies would prefer.
Youll see independence, the production picking up.
And in our case.
There is probably more oil and gas opportunities that we've seen in the past I will say I haven't seen pricing or structure.
Proved to the extent.
The capacities restrained of it should.
And and we have just.
Just speaking about the oil and gas we've got lots of Derisked of this portfolio, which was at 1 point, maybe as high as $800 million, it's down to $502 million at quarter end.
That's been a massive derisking, mostly of the legacy side of the portfolio.
Folio of it.
And the oil and gas it was $550 million when we merged and Thats, probably 160 now so most of that Derisking as occurred in the legacy portfolio.
So ESG is certainly having an impact on oil and gas I don't expect that to in our case to result in any massive.
The increase in oil and gas lending, we're pretty selective in what we do.
And in the rest of in terms of the rest of the verticals.
We're still interested in growing most of them outside of the big growth in oil and gas.
As long as we can find customers who are willing to pay the right kind of structures.
We're going to grow our verticals yes.
They make anything on a daily basis, so that's not going to go away.
It is true that they are saying that they want oil and gas or parse out of the electric with the.
The next 10 years or so so you're definitely going to see of change, but as of bank. We couldnt just walk away from so many of our businesses I mean, it's just going to be.
It's going to take time, you just can't do it overnight and that will evolve as people change and you have different businesses that come up with the new type of environment. It just happens over time, you just have to be with the right people and making sure. The loans that you do go the people still have enough money to pay it back in the time, so the Doug run out for them I think that's the main thing.
Understood.
That's really helpful. Thank you all for taking my questions I appreciate it.
And the next question today will come from Peter Winter with Wedbush Securities. Please go ahead.
Good afternoon.
David.
Hello.
David I wanted to ask about.
Just to follow up on the M&A. If there is more of a focus or emphasis on maybe doing a larger sized deal outside of Texas versus within Texas would kind of be more of a fill in type of opportunity.
I guess, you're asking the question.
Are we looking outside of Texas more than inside of Texas or is that wallet share.
More more about.
I guess size is it are you more interested in doing a larger size deal versus the.
Phil and that tends to be a little bit smaller.
Of course.
First of all I would say that we've always said, we like deals if we can do it in the states that we're in Texas and Oklahoma were more focused on that and you know me.
You're setting the up here, but I like bigger deals Thats. There is not any question about that but sometimes you can't always get the bigger deals. So we can try and try and sometimes.
You can date somebody for a long time and you just can't get to that base and so you look at what's next what's out there that you can do and you go to that that other deal that you can do and sometimes it's not exactly what you want to do but if that other opportunity exist, where we can get accretion whether it's tier alright to another state we.
We would probably do that I would say that if we go into another state though that the.
The franchise has to be big enough that it's worth us going and we can really grow it.
I can't see us going to another state for example, 4 of $2 million deal.
Maybe not even of $5 million deal would have to be a little bit of.
Yes.
I'm, the 1 billion I'm, sorry, I'm doing the brands.
All of the medicine.
The $1 billion deal I mean, it would have to be a bigger deal so and something that we could be we always like to be if we're going to be some where we'd like to be on the top 5 market share in that state. If we're going to be so it would have to be a bigger deal.
Okay.
That's helpful and then just.
Off of <unk>.
On the core margin.
It came in lower than what I was expecting I was just wondering.
Part of it is the increase in premium amortization expense.
Excess liquidity I am just wondering how you're thinking about the margin.
Sure.
The next quarter.
Yes, the core margin.
Yes, if you look at the core margin I think what we are trying to focus on actual net interest income if you look at all the deposits right.
Since the Q2 end of Q2 of last year to now we've grown $3 billion. If you look at from the end of 2000.
19 of them of pre pandemic, we have grown our deposits like $4.9 billion. So that's a mix of money that we're putting our balance sheet. You saw that we have grown our bond portfolio significantly is impacting the core of margin, but we're looking at the more like core net interest income so.
I kind of came out of staying Super core you know whats the Super core net interest income that's the excluding warehouse, excluding PPP and the loan fair value of income if you look at the Super core net interest income is improved in the second quarter, you know because of combination of of growth on the bond portfolio and loans.
And if you look forward if you look at our core.
Super core net interest income with the.
Growth of the <unk>.
Loans I think it's going to be improved in the third quarter and that's why we're focusing right now it's kind of hard to know.
Focus on the margin right now just because of that.
The interest rate environment right now.
Now he's done a trademark that's super core Peter So don't use it without trademark David.
Brad.
That's the first I've heard it so far.
Yes.
Okay.
Thanks for taking my questions.
Right.
The next question.
<unk> will come from Matt Olney with Stephens. Please go ahead.
Thanks, guys, just a quick follow up on loan growth.
We saw a pretty material growth in single family loans in the second quarter, just curious if we're going to see.
<unk> growth in that portfolio over the next few quarters.
I would say yes.
We continue to have very robust production and of course, there arent pay offs, but the new production is far exceeding what is rolling out and we have a very skilled mortgage team and the application volume continues to be as strong as it's been all year. So I would anticipate of that portfolio.
Folio we'd growth.
I would also add any of that I think that.
Over the last few quarters that line.
Overall commercial loans have been down and that's been a good thing to be able to replace it with and then we would say that as commercial lending picks up.
There may be a point in time, where we may not keep the majority of the.
All every day net we do because if we were selling some of this mortgage step off of it as you pointed out that mate at $18 million of quarter or so out of our income, but we just kept that kept it in that over the long run we should benefit from it but we're not getting any points for settlement or anything like that so so as commercial.
The lending picks up that may be something we made the selloff later on but in the short term. It was a good fill in to replace some of the stuff the more risky assets that we were trying to get out of.
Lender referrals throughout our footprint really push the pushed the number of the pipeline full.
And just following up on that David.
David as far as the new loan yields I think you mentioned before a lot of the new loan yields are in that 445 range, but that's the kind of small deals the larger deals maybe in that 3 range. When you layer in the single family I assume that's going to be quite a bit lower so maybe kind of on a all in kind of a weighted average basis.
How should we be thinking about kind of the newer core loan yields.
Do you all think.
Probably 3 and a half of a fever the factor in the mortgage because that the average mortgage yield is coming in right under the 3% right now before we throw that in I would rather try to do some numbers on that I think youre going to probably be we don't know.
We're throwing out a number of adrenalin.
You're going to be closer to 4 but again don't don't book that let us try to get you get you a better number than that Matt sure now understood.
Alright, thanks, guys.
Yes.
The next question will come from Jon <unk> with RBC capital markets. Please go.
Hey, good morning, everyone.
Good morning.
Question for you on.
You talked about deposit inflow.
Flow is starting to moderate somewhat.
I'm wondering if you could give us a little bit more color on what youre seeing there.
Well I mean, it's pretty Magellan is probably.
Holly is about as simple as that I mean last year, we saw the level of our growth rate last I mean, if you look year over year, we were at 11%, but if you looked at the full year from December.
The 22 of December from December from January to December the numbers was in the 20% plus range you have.
Yeah, just to give the numbers if you look at the end of June of last year.
End of June of this year. So that's all of the yes, the deposit growing $3 billion, yeah, but if you look at from the pre pandemic times of 12, 31, 19, our deposit growth $4.9.
So that's a significant deposit growth, but I agree if you look at just the second quarter, our deposits I think annualized growth, 5%. So we do see some moderation of the deposit growth and but it's a combination of people using money in the.
And the less stimulus I think it's less stimulus.
And people using money and again, you would think that people will start using some of those deposits to the <unk>.
Fortunately or unfortunately the.
Deposits to me are still still.
It's the it's the bread and butter of the bank as some others of milk as I used to say that the.
The I think that.
Even though youll see deposits decrease because people are using them just because of what we've normally done on an average basis. We usually grew loans. We used the grew deposits organically, 2% to 4% of year, So youre, probably not going to see it may take a couple of years for them to use some of these deposit you probably won't see a decline in our deposits because.
We are growing organically that much or more so is the there's a process that you probably won't be able to see but again for the first for the first.
Part of this year the first 6 months, we're at 4.8% I think so consumer.
Annualized.
The second quarter, the second quarter annualized. So so you had a bigger you've got a bigger chunk.
As of quarter, but.
I think youre, starting to see I guess I hope I've given enough color John as you're starting to see deposits not rolling quite as much.
Do you think you're at the point where <unk>.
Loans can start to outgrow deposits at least for the next few quarters.
The loan to deposit ratio starts to come back up.
The first I think we are.
Did I normally wouldn't say something like that but.
I do I think that.
The growth that we have right now is pretty impressive when you look at the amount of loans that we were <unk> been with US a long time and you saw how the banks and join US our loans would go down because we have this the kind.
Because if we were to outsource and what we wanted to get the portfolio too.
It's a hard deal to do have you look at the amount of loans that Kevin talked about earlier on the oil and gas that we've outsourced and you look at the structure commercial with the state that we outsource instead of shown the growth have you. If you look at the rest of the bank and just took out the Dallas.
On the loan market because of the ones, we lost in that particular deal.
Probably you're probably looking at 10% plus in growth overall, so once we get once we quit losing of the loans are losing are outsourcing what we didn't want in the Dallas market and Theyre growing.
Some of the growth this quarter.
I'm pretty excited.
Kevin as a real leader I think and focused on building loans, where I wasn't in the past as much I was always of core deposit guy in the long is you could take the money and the positive in <unk>.
And of bonds, I was happy and lot less risk and making it.
The kevins work real hard and he's got his team together and I think they're doing a good job and with his help in pushing pushing us I think that I think that we will I think that we will have some growth.
I agree David I think particularly with the deposits moderating of once you say deposits growth was 4% instead of.
11% of 12%, which is probably the way more likely.
The growth in the loan portfolio.
Aided by less runoff of the old legacy portfolio. So net.
But what that Derisking the.
Pipeline as I sort of the beginning of the call looks better than Baseload.
Getting really long period of time.
The loans pull through in terms of just we had some growth last quarter.
The growth we've had quarter to date this quarter would indicate that we're running well ahead of where we did last quarter.
So that's north of 5% kind of growth rates. So I do think we're in.
Cash and today.
For a period of time, where we can that we can grow the loan portfolio faster than we're growing the deposit portfolio.
And Thats net.
Obviously, excluding warehouse in PPP talking about core loan portfolio.
And I don't think that the.
The other thing is considered I don't think we have to be.
The first ever raise rates as rates go up we have so much.
So many core deposits I think that we're going to of a better lever than our competition is because most of our money I think we probably have 10% of our money in Cds.
It's a very low amount of most everything we have is really transaction accounts and just to kind of couple of of thought with I think.
It was Matt's question previously about.
But 1 of the great I do think.
We're seeing the growth of seeing in the pipeline.
Is growth that's outside of.
Mortgage growth, so and he's talking about the mortgage growth I'm talking about C&I.
Construction lending middle market.
Lending CRE lending.
We're seeing nice pickups in those categories that are coming with a higher weighted average coupon obviously than we're seeing in the mortgage loans.
And the only caveat I would put again of that.
If our administration decides to shut down the economy that could change a lot of things again.
The having where we're at now we can keep going and everybody I mean, we need we need not only Texas to keep going we need the other economies in the rest of the U S to keep going too because they have to produce the goods that we need to sell and everybody has to chip in so we can have we can keep that going.
It'll be an okay deal.
Good.
Thanks for all of that and I guess, 1 last 1 ASO back you've you've kind of got halfway to my question on the Super core concept, but [laughter] trademark trademark yeah, exactly and I was focused on P. P. P and some of the fair value income you talked about running off and.
Concept of net interest income bottoming.
But how big is that gap.
Between what you call the Super core and your stated number and how quickly are those 2 converging together.
So we feel the less taken them to of separately you know if you look at our fair value of income.
And the things that are.
We generally of $12.2 million in the second quarter, but if you look at what's the remaining balance is.
About 25 million of left you know so probably going to be earning next few quarter that $25 million all defense on the you know that.
How fast is the early payoffs and pay downs, we know that the pay.
Definitely the slowing down the guidance that we look at it on the amortization basis. It's 3 to 4 million next few quarters, just looking at but then we'll have $25 million. So if you take that it could.
<unk> been in other you know 567 quarters before we earned up on the PPP side, we are in.
And point 3 million on the PPP fee income and we have about $28.3 million remaining.
If we look at you know when you kind of heart of tailwind, we're going to earn the PPP fee, but if you look at the first round of PPP. It took the took us about to get majority of its first 3 quarters I would say.
And I think if the if you take the PPP around dictated we probably going to earn that the next of.
On the third fourth and first quarter of next year that the remaining 20 majority of $28.3 million that we remaining so.
I Hope this gives you a color on those 2 items.
Yes.
<unk> helps thank you.
And the next question today will come from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Quick follow up actually.
On PPP, which you sort of answered just a moment ago.
But in terms of of how you see.
The working down that portfolio for the back half of this year and then related to that given that you don't want to necessarily invest the bond portfolio of current rate. It's how you think about replacing.
Some of the yield on earning assets.
So if you look at on the P. P. P. So in the round 1 the forgiveness as.
Pretty much very close to be done on round..2 we just kicked off in June and I think like I mentioned, we expect probably is all of the upon the timing right when the customer want to file of the forgiveness process application, but probably is going to be next 3 quarters. We think that the forgiveness will be done I mean, it's kind of hard to.
Say, when it's going to be.
Heavier in the first of all of a third of fourth quarter, but between 3 quarters I think the forgiveness will be done and then I think it comes down to how we're going to replace that I mean, we're growing out of the lowest that's will be priority number 1 so all of the excess liquidity from the PPP loans will be put into as much.
It's pretty possible to new loan, but if there's an excess of money left probably will definitely put it on the bond portfolio, because we want out of your earn some the income on that.
We wouldn't be probably leaving a lot of just the sitting on the cash.
But we'll just have to wait to see to see rates improve on the bond portfolio.
I think they have 10 months left the file for forgiveness of it won't happen, it's not kind of all happen. This year it'll happen like you said over the next 3 maybe 4 quarters.
But the bottom line of the full focus is taking the money and put it in the loans if we can definitely.
Yeah very good thank you.
Sure.
Yes.
This will conclude today's question and answer session and I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you Sean Thank you, ladies and gentlemen for taking the time to participate in our call. Today. We appreciate the support that we get for our company and we will continue to work on building shareholder.
Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.