Q3 2021 Prosperity Bancshares Inc Earnings Call
[music].
Good day and welcome to the prosperity Bancshares third 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 Press Star then one on a touchtone phone to withdraw your question. Please press Star then two 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 Bancshares' third 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 Rushee Gen.
<unk> Council of prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H H, Tim to manage junior Chairman also backups, Manav, Chief Financial Officer, Eddie Saturday Vice Chairman.
Kevin Hanigan, President and Chief operating Officer.
Randy has sir Chief lending officer.
Merle Karnes, Chief Credit Officer, Mays, Davenport 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 backhouse Manav, who will review some of our recent financial statistics and Tim to minutes, who will discuss our lending activities, including asset quality.
I believe 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 mass.
Before we begin let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward looking statements for purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the actual results or performance of prosperity Bancshares.
To be materially different from future results or performance expressed or implied by such forward looking statements additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in 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.
Now, let me turn the call over to David Zalman.
Charlotte I would like to welcome and thank everyone listening to our third quarter 2021 conference call.
I'm pleased to report that because of the confidence in our company our strong capital position and our continued success our board of directors voted to increase the fourth quarter dividend to <unk> 52, Suez a six 1% increase from the third quarter.
Prosperity continues to do well and we want to share that success with our shareholders. Additionally, as our stock price experienced declines in the third quarter prosperity repurchased 767134 shares of its common stock at a weighted.
<unk> of $67.87.
Prosperity Bank was ranked by Forbes as the second Best Bank in America for 2021 and has been in the top 10 of the Forbes list since 2002.
Cross border reported net income of $128 6 million for the quarter ended September 30, 21, compared to 130 million for the same period in 2020.
The net income per diluted common share was $1.39 for the quarter ended September 32021.
Compared with the $1 40 for the same period in 2020.
Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16, 17% and return on assets of 1.42% for the third quarter of 2021.
Net interest margins had been stressed throughout the low rate environment. However, we believe they should improve if interest rates rise as projected as the bank is positioned for increased earnings and a higher rate environment.
Our loans at September 32021, we're just shy of 19 billion a decrease of $1 8 billion or eight 8% compared with 28 billion on September 32020.
Our linked quarter loans, excluding warehouse purchase program N. P. P. P loans increased $217 million or one 3% five 3% annualized from $16 1 billion on June 32021, we saw loan.
On growth throughout the company with the exception of the Dallas Fort Worth area. As we continue to reduce loans that were kind of garbled categorized as P. C. D loans at the time of the merger as well as loans and the nonrecourse structured commercial real estate category exclude excluding these categories Dallas Fort worth continues.
Shows solid growth and win some marquee deals in their area.
Deposits on September 32021, or 29, 5 billion, an increase of $3 billion or 11, 3% compared with $26 5 billion at September 32020, our linked quarter deposits increased 341 million.
Or 1.2% four 7% annualized from $29 1 billion on June 32021.
Pauses continue to increase which we believe is due in part to the government benefits and programs implemented during the pandemic and excuse me in more People's savings to have a safety net after the recent events.
Our nonperforming assets totaled $36 5 million or 11 basis points of quarterly average interest, earning assets on September 32021, compared with $69 million or 24 basis points of quarterly average earning assets.
At September 32020, and 33 million or 11 basis points of quarterly average interest earning assets on June 32021.
The reduction in nonperforming assets year over year is 47, 4%.
The allowance for credit losses on loans was $287 million or 173 of total loans and when excluding warehouse purchase program N. P. P. P loans on September 32021, the allowance for unfunded commitments was $29 9 million on September 30.
2021 unchanged from prior periods. This was a total reserve of $317 million.
Our net charge offs were $15 7 million for three months ending September 32021.
Net charge offs include a $4 6 million related to resolved P. C D loans and $10 8 million related to a partial charge off of one commercial structure real estate loan that was not a P. C D alone and obtained through the acquisition.
The P. C D loans had specific reserves of $3 1 million of which $2 2 million was allocated to the charge offs and 944000 was moved to the general reserves.
Are there an additional $14 3 million of specific reserves on resolved P. C. D alone without any related charge offs was released to the general reserve.
Overall in the third quarter 2021, we resolved $54 9 million in acquired loans have 15 points.
$15 7 million and net charge offs and released $15 2 million to the General reserve.
We are seeing more but with regard to acquisitions, we've seen more merger and acquisition transactions recently and believe that due to increases in technology and staffing cost additional government regulations and succession planning and concerns there will be continued activity, especially at current market valuations continue.
We remain ready to enter conversations and negotiations when it's right for all parties and is appropriately accretive to our existing shareholders.
The Texas and Oklahoma economies continue to benefit from company reloading from stage with higher taxes and more regulation.
Texas is projected to increase jobs by 493000 in 2021.
This increase combined with people moving to the state requires additional housing and infrastructure a driver for loans and increased business opportunities.
We are seeing higher prices for most crops and higher oil prices, which should help the local economies inflation continues to be higher than we would like but we hope that it will moderate next year as the federal reserve begins tapering its asset purchases as expected. We believe there are also signs that inventories are starting.
The increase in supply change or improve and although it will take some time to stabilize and return to normal. Thanks again for your support of our company. Let me turn over the discussion to also then ask Manav, our chief financial Officer to discuss some specific financial results. We achieved also back. Thank you Mr. Zalman.
Good morning, everyone net interest income before provision for credit losses.
The three months ended September 32021 was $248 6 million compared to $258 1 million for the same period in 2020, a decrease of $9 5 million or three 7%.
The current quarter net interest income includes $5 4 million in fair value of loan income compared to $22 5 million for the same period in 2020, a decrease of $17 2 million.
The third quarter of 2021 net interest income excluding the impacts of PPP loans warehouse purchase program loans and fair value of loan income improved compared to the same results in the second quarter 2021.
The net interest margin on a tax equivalent basis was 3.10 per cent for the three months ended September 30th styles in 'twenty, one compared to $3 five 7% for the same period in 2020 and $3 one 1% for the quarter ended June 32021.
Excluding purchase accounting adjustments the net interest margin for the quarter ended September 32021 was 3.03% compared to 232, 5% for the same period in 2020 and 296% for the quarter ended June 32.
<unk> thousand and 21.
Noninterest income was $34 6 million for the three.
Three months ended September 32021, compared to $34 9 million for the same period in 2020 and $35 6 million for the quarter ended June 32021.
Noninterest expense for the three months ended September 32021 was $119 8 million compared to $117 9 million for the same period in 2020.
On a linked quarter basis noninterest expense increased $4 6 million from $115 2 million for the quarter ended June 30th styles in 'twenty one.
The increase was primarily due to gain on sale of Oreo of one 8 million recorded during the prior quarter and higher current quarter salaries and benefits, resulting from a higher incentives.
For the fourth quarter of 2021, we expect noninterest expense to be in line with the current quarter or in the range of $118 million to $120 million.
The efficiency ratio was 42, 3% for the three months ended September 32021, compared to 42% for the same period in 2020 and 41% for three months ended June 32021.
During the third quarter of 2021, we recognized $5 4 million and fair value loan income. This amount includes $3 3 million from anticipated accretion, which is in line with the guidance provided last quarter and $2 1 million from early payoffs.
We estimate fair value loan income from anticipate accretion for the fourth quarter of 2021 to be around $2 million to $3 million.
As of September 32021, the remaining discount balance is $18 million.
Also during the third quarter 2021, we recognized $13 4 million in fee income from PPP loans as of September 32021, PPP loans had a remaining deferred fee balance of $15 6 million with the majority of these deferred fees to be earned.
The next two quarters.
The bond portfolio metrics at March 32021 showed a weighted average life of three five years and projected annual cash flows of approximately approximately $2 6 billion.
And with that let me turn over the presentation to two minutes to matters for some detail on loans and asset quality.
Okay.
Thank you you also back.
Our nonperforming assets at quarter end September 30th 21.
<unk> totaled $36 million $549000 or 19 basis points of loans and other real estate.
Compared to $33 million.
$664000 or 17 basis points at June 30th 21.
This represents approximately a 9% increase in nonperforming assets, which comes from one loan.
The September 30th 21 nonperforming asset total.
Was made up of $36.073 million in loans.
$326000 in repossessed assets.
And $150000 in other real estate.
Of the $36 million $549000 in nonperforming assets.
$5 million $459000 or 15% are energy credits all.
All of which are service company credits.
The $5 million $459000 as of September 30th 21 is a 35% decline.
From $8 million $378000 as of June 30th 21.
Since September 30 was 21 $7.990 million in nonperforming assets had been put under contract for sale.
But there is no assurance that these contracts will close.
Net charge offs for the three months ended September 30th 21 were $15 million $697000.
Compared to $4.326 million for the quarter ended June 30, 'twenty one.
The $15 million and $697000 includes approximately $11 million charged off on one commercial credit secured by an office building.
No dollars were added to the allowance for credit losses. During the quarter ended September 30th 21, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended September 30th 'twenty, one was $596 million.
Loans outstanding at September 30th 21 were approximately $18.958 billion, which includes approximately $366 million in PPP loans.
The September 30th 21 loan total is made up of 38% fixed rate loans, 37% floating rate and 25% variable rate.
I'll now turn it over to Charlotte Rasche.
Tim.
At this time, we are prepared to answer your questions. Matt can you. Please assist us with questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Anytime you question, that's been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question will come from Jennifer Dunbar with Truest. Please go ahead.
Thank you good morning.
Good morning.
I'm wondering if you could give us some color on the $11 million charge off during the quarter.
Sure Jennifer This is Kevin let me handle that it was out of our.
Structured CRE portfolio.
Project in Houston, which.
Survived five year energy turned down and was was weakened a bit out of the energy turned down and coming out of Covid.
Combined with a loss of a tenant.
Scott is worried about the credit that still Kurt to this day, although there were some waitlist in the last couple of months.
We elected to habit reappraised.
And charged down.
I won't go into the exact numbers on it.
Because we're in the process of Oh.
A final resolution of that credit and I don't want to disrupt that process in any way shape or form.
I'll tell you that.
If you back up and.
Look back at merger time out of that structure CRE portfolio at the time of merger, we have a little over $500 million of structured CRE in Houston.
And about $91 million of that was in the energy corridor and <unk>.
You'll remember Jennifer back then from since you guys covered US we were reporting on how that debt portfolio was doing throughout the energy crisis, particularly in the energy corridor that portfolio has shrunk in the last two years from that $510 million to $177 million today.
And what we have left in the energy corridor is a total of $17 million down from 91.
So despite the massive if you will derisking of that portfolio in Houston, We had this one asset.
Between the energy crisis, and Covid just didn't make it.
I mean look they're current today.
We have a cooperative borrower.
We just took what we think is a prudent action of marketing it.
Down by a new appraisal and Oh go a level, we feel like we can deal with it.
I think another real positive also is even though it was a loan that we didn't spend any money aside for the PCB loan we have a bright guy named David Montgomery, who recovered about an extra $15 million and in money that we did have set aside for BCD loans that we never had to use that we took back into the general.
Serve so.
Under <unk> accounting, you don't get to see it but if we were still counting last year LIBOR last year, you'd have a $15 million recovery too so.
That's the positive thing about yeah, I mean, not all of the PCB loans.
In the March put on those we had although over 15 million 15 point too I think leftover.
Left over that went back to the general and this was the bad the bad Guy on the ledger, but you could weigh against that.
I don't think it's I don't think this is a wave two.
But any way shape or form.
Its a single asset.
I stumbled a bit in prior deals as you would see the same thing sometimes you might Miss one and then you recovered stuff that you didn't if you didn't count on recovery not the only thing thats different the way things are right now is the.
The way, we presented under the seasonal format I would say going in the future and morals talked about this state instead of having maybe a specific reserve for just one particular line will have a reserve for certain category of loans and that lag generally we've always done better we've always done better.
And then we've ever projected and I think that that will continue also.
We might emphasize also just for clarity.
That.
The main reason we took the step that we did on this this one credit.
Is that.
Two major tenants havent have given notice that they're not going to renew their leases.
I believe those two tenants are current right now, but they're going to be moving out soon and the owner of the building has not been able to find a replacement for those two tenants when they do move out.
It appears that the building will not have an NOI sufficient enough to make our payments. So that's why we are.
That's why we chose to do what we did and once again at the time that we join forces with legacy.
This building.
It was doing well in terms of its NOI.
There wasn't any reason to put a mark on it at that time.
The other hand, you get other people to lease that again. This is a nicer ability it goes from being negative to a part I mean this isn't a dump building. It's a really nice building. So it's it's I don't think Theres any question that they'll find some more people at least it's just a matter of time really but again according to what we need to do we did what we needed to do correct.
Thank you.
Cool.
Our next question will come from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, good morning, guys.
Hey, good morning.
It was great to see the prosperity reengage in the buyback the.
Stock is a little higher today versus the average price that you repurchased in.
In the third quarter I know you guys can be somewhat price sensitive.
But you know your capital is growing.
You haven't announced an M&A deal in a while so how should we and you increase the dividend to which was nice to see that.
How should we think about.
No additional buybacks and dividend increases from here do you become less price sensitive on the buyback just Kevin you got out of that.
Excess capital the prosperity has now.
Well I guess you could say, we did become more less prices to the last time, we bought it was in the $40 range that we can pay a 67 later, we're stepping out now.
Okay.
Answer to the question is.
I think we are making good money, we did raise the dividend.
We are going to be opportunistic I my personal feeling is I think our stock is still a real by today.
I think that is.
I think the overall answer would be yes, we will probably be less and less sensitive to the price not that will be not that we would pay anything for Don Don Let me go that far, but but again, we think we think it's a good buy I'll say it like that.
Okay.
Alright, and then maybe one for Kevin just on the mortgage warehouse.
Yeah earlier in the year was last year was such a robust level and now it's coming down to that kind of one point.
$1 billion level.
Is that are we at a normalized level or do you think that.
Longer term, we should think about the warehouse continuing to slip a little bit.
Really I'd say normalized with the caveat that normalized in terms of seasonality as well.
So.
We ended.
I think the average for the quarter was 1 billion 836.
October has been pretty good doses, it's averaged a little bit better than that it's been close to 1 billion 855 throughout October.
But due to seasonality and again this assumes rates stay basically close to where they all go up slightly.
I think we ended the year, probably closer to a $1 billion five maybe 1 billion $5 50, and the average for the quarter will be closer to 1 billion, 7% to 1 billion 750.
Alright, that's helpful. And then lastly from an average of 100 million off where we are today, but where we were in the in Q3.
Okay.
And then the last one for me Accretable yield.
A pretty big step down I heard your comments, how you only have $18 million left in that bucket.
To me it seems like it's time to refill that bucket.
Good morning.
Pretty quiet on the M&A front I know, we saw the happy deal, which was a big big deal in Texas that I thought yes.
They have made sense for prosperity, but David you just an update on <unk>.
M&A conversations how they'll go on do you think youre getting closer or anything just what's the latest on your M&A strategy.
I think there is more M&A out there. There's no question I mean, when you look at you look at the regulations and <unk> been talking about.
Specially for larger banks have report all of the dynamics that you look for a home, while making it more of a commodity that alone.
And price it trying to retain people and talent going up I mean, all of those things considering more regulatory burden.
There is going to be there's going to be more we did we did participate in the happy deal.
That probably it was really just a couple of us and Johnny Johnny got it I think our price that we bid we might have been just a tad higher a couple of cents higher per share or something like that I don't know that for sure but again, they they day, one with Johnny because one of the main things I wanted to date as they wanted to be able to keep.
Their name and that would've been very hard and difficult for us to do because we have banks surrounding their base and you Couldnt have a prosperity bank in one corner of town and I'm happy to state Bank and the other so that's the deal that I think but again, we were one of two or three people that that really got to look at the bank. So.
We're continuing to look we're looking at other deals we worked on some deals that come around that youre not expecting in the short term and at least to continue to work on deals that we've been working on two three and four years that so it's not a question. If it is going to happen. It's just a question when it's going to happen.
Okay got it good luck thanks.
Our next question will come from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning, guys.
Good morning.
Wanted to start on the loan trends was wondering how the pipeline looked at quarter end, what the trend was there versus the prior quarter and then I saw the runoff in CRE shrank a little bit this quarter I was just wondering if you're better able to offset that structured CRE runoff now with your business or the amount of run off youre expecting a shrunk a little bit and then where do you think that stabilizes.
Yeah go ahead, Kim I think the deal flow is steady.
It's not dramatically increasing and it's certainly not falling.
So.
We should be able to maintain our position and actually have a little growth.
As an example, there was a major announcement just recently in Houston.
One of the.
What I would call premier apartment developers and owners.
Here in Houston has sold their entire portfolio.
20 plus properties.
For in the billions of dollars and as far as I know this is the first time that.
Outside money of that size and that consequence has invested in Houston, and two or three or so years.
So does that purchased or obviously.
If there is a future in the apartment market in Houston.
That's just an example of how things seem to be turning around so I don't think there's any reason to be pessimistic about the deal flow. Kevin you may know that would I would echo what Tim says I think the pipeline is strong.
Grew roughly three and a half I think percent in Q2 and five 3% in Q4.
Specific to your question, Dave some of that was aided by slightly lower.
Structured CRE payoffs in the quarter, we had about $100 million of payoffs in the quarter.
If you recall from the last quarterly call I said I thought maybe we'd do $200 million in Q3.
And in Q4, so the five 3% was a combination of slightly better production.
And slightly better results on the CRE payoffs.
I think as we go through that structured CRE portfolio.
I'd say rather than $200 million in payoffs in Q4.
I've lowered the expectation of that down to 130.
So we're nearing again, but the shrinkage of that portfolio, which is helping on the loan growth side.
Also specific to your question, what we are seeing some funding up of revolvers are seeing.
C&I book.
Usage is higher than it's been in a long time a couple of years.
As companies are recovering carrying more levels of receivables and when they can get inventory overstocking inventory.
Zero, but being short in the future. So there is some of that going on.
In the first three weeks of October.
In C&I alone our C&I balances are up $55 million, which is an awfully good start to the quarter and I think.
For the economy in general when we start seeing revolver usage pick up on.
The C&I companies and we're seeing it real time.
Particularly in the last couple of weeks.
That's not just good for us that's good for the U S economy, I mean, it's a to me that's a telltale sign that.
Things are firming up and I would also be a telltale sign of I think.
We can put up another mid single digit growth quarter in the fourth quarter and into the first quarter of next year. So I think we're feeling a little bit better about our growth prospects.
The other thing again, if you didn't have the if you list that we wouldn't have had the.
The structured real estate running off our growth rate will be probably in the 7%. So almost eight 8% range. So I think we're doing pretty good with that.
He followed us for a long time, you've seen now when different companies and merge with enjoying we get out of a certain.
And then you will get to a certain risk still maybe get into a different risk deal, but again I think I think our growth was good and even considering what the structure will estate that reduced being near 8%.
We have some pretty I thought we did a pretty good to me it looks pretty good when I look throughout the home.
State.
I think we saw growth really in every every area of the state so and even Oklahoma. So.
I think we feel pretty good where we're at and the growth was primarily in <unk>.
Central Texas, and Houston, but it was.
A little bit of everywhere you are right, but again, if you looked in Dallas and you added back the structured real estate you were seeing good growth there that's correct.
Right.
We had growth.
Go ahead go ahead.
So you had some good growth in energy was just wondering what your outlook was that if you saw some good opportunities there we should see more of that.
Well, we may be crazy, probably but we may have.
We have a big client in the Midland Odessa area and the customer has been with us for probably 30 years.
He has about as much money in checking as he does borrow from us, but again he borrowed he bought a piece of exxon's Exxon with selling some of their percentage out there and he bought a big percentage of course today. It looks like you almost doubled as the money.
That was a big one.
That was that was just shy of a $100 million Dave.
The net of that we grew 60, so the portfolio outside of that single transaction actually shrunk 40 million right.
We've always said, we're not turning our back on that industry. We're just trying to be selective and prudent in what we do.
And I think that's going to continue to be the case and again, we try to focus what we've tried to say will grow and try to even grow more with the customers that have been for 30 years that really guarantee the notes.
They have been part of it and stay on it is very important and stuff like that and that's that's just exactly what we're doing the old time players that by when Everything's day on that too, we're really focusing online some of those bigger clients like that.
Yeah, Okay, well that 130 that you mentioned in terms of expected runoff in the structured book is that pretty much it.
I'll wrap it up.
No.
I think in terms of materially.
Always going to be something drop it up but it will be not the big numbers that we've had shrunk.
Drunk almost $1 billion in two years.
Yeah Yeah.
It does not work here.
Near the end of it and I think.
Knock on wood from a guy who has been in Dallas for the last 22 years maybe.
Maybe Dallas can help participate in the loan growth story here going forward.
Yeah.
Maybe if I can just get one last one in on.
Deposit growth I know that's generally.
Really strong in the fourth quarter, its strongest quarter of the year.
And you normally have more more deposit growth and loan growth in that particular quarter not to make any comment on loan growth of <unk>, but normally deposit growth is pretty robust I was just wondering given where the curve is today.
It's a little bit better than it was last quarter and what your thoughts are in terms of growing the securities book. It looked like you grew that.
A decent amount in <unk>, so just curious where purchase yields were for the quarter, where they are today.
Any notable change there or what your thoughts are on that growth going forward.
Youre absolutely right in fact gave me in the third quarter in normal times, we go negative sometimes.
<unk> growth, but I guess it gets so much money out there right now we're still about 11% when you look at year over year.
4% for the fourth.
For the quarter, but you will see our deposits really shoot up in the fourth quarter and Youll see that and again we're not.
When there was really a decent spread or a yield curve there will be times, when we would even borrow sometimes up to $2 billion.
From the federal home loan bank, because we have so much money rolling off that we would buy in advance and take advantage of that situation because rates, where they were and it went solo we quit doing that $2 billion in fact that depth that we have.
Any money, where actually we know key probably over $1 billion.
Over there, it's instead of purchasing from them. So we're not being aggressive buying back right. Now we are bond because we have so much money that rolls off every year, we're continuing we're not making any big moves and we'll continue buying buying as the money comes in hopefully are a real hope is that we can continue to increase.
I want to put more money into the loan category really.
Yes.
Right.
Oh go ahead, Sir our ability to acquire and retain deposits is still good and strong.
We don't have any problem.
Sand customers wanting to bring money to us.
If rates start to go up materially I suspect that's going to change somewhat.
Some of the high ratepayers.
Finally had to get out of the market will probably get back in.
But we've been through those circumstances before and we can deal with it with really add any problem. So I think deposits are solid down probably will be for a while all of our deposits are core to further.
Most of our all core we don't go out we hardly had any Cds left in almost all of our growth is really from core customer really that's correct.
Yes.
And where you're seeing the securities yields today.
I think they are closer to probably up one five is what we're shooting for that's what we see.
<unk>.
What were the book the orders right now so not not really dilutive at this point no.
That's great.
Alright, thanks, guys.
Thanks.
Our next question will come from Peter Winter with Wedbush. Please go ahead.
Hi, good morning, I wanted to.
On the lending environment I know, it's always competitive but can you talk about.
What's happening in the portfolio in terms of new loan yields versus loans maturing.
Yes, it is extremely competitive, especially from a pricing standpoint.
The.
The yields that we book today are on the low end.
275 on the high end four five.
And we're trying to get a three in front of as much as we can.
Some of the better stronger credits.
It's becoming more and more difficult.
But.
That's in general the spread that we're seeing.
Well I think generally we know what this month.
Our loan average was 430, you said or something yes, I think around.
Around 4% I think.
He was referring to new loans.
All right.
That number did anyone had it I think is around 4%.
Just under 4%.
4%.
That's the average for the third quarter just under a third.
4%.
That's right.
Okay.
And then if I could ask.
If I think about prosperity.
One of the strengths is that ability to manage expenses.
But going through earnings.
Ensuring a lot of discussion about inflation pressures as we move until next year and I was just wondering could you talk about some of those inflation pressures that youre seeing and maybe how youre thinking about expense growth next year.
Yes.
Yes, we do see that pressure because we deal a lot of wood.
The vendors and we see quite a lot of pressure not just from the vendors, but also from the HR side of it you know there's a lot of.
People coming in and trying to get our employees, but overall, there's a lot of things that we're doing right.
Putting a lot of technology right. There is a lot of spaces that you could replace some manual work that we do our employee with the automation that will focus on a lot and we have a lot of project going on that side of it so that should reduce some expenses related to offset this inflation.
Inflationary pressures that we have.
If you look at from the roofing, what we would have would have long term contracts in place for their significant expenses. So there is no much pressure on that side of it. So we were able to manage that but when it comes to expenses. We're looking all aspects of the drag that we're looking at the branches. We're looking at the automation of certain processes that I already described.
Hopefully as we implement those processes in place that should offset some expenses.
The increase in the due to the inflationary so when I look at next two quarters I think the projects and I gave one.
$118 million to $120 million I think that should stay at least quarter to you know and by that time.
Some processes, we are working on it should.
Some fruits.
There is no question inflation is there.
Peter and we're watching it.
Luckily it very strongly.
We're going to try everything we can to two even though it may cost us money from the technology side to automate more and I would say there is also positions in the company and jobs really pad.
Let me satisfied that the things that maybe branches or something that we didn't look at in the past that were not that were not profitable or certain areas of the bank that werent profitable, we're going to fix that because you just have doing these kind of times and Thats, where we hope to do it. So last thing I would add is I think about this.
In a broader context, sometimes.
Looking at our customer base and they've got they've got white.
<unk> wages, just like we all do but they have also.
Component there.
Struggles here, which is the rising input costs, whether that steel or the product they are getting.
And.
Every company is dealing with that except for banks. When you think about our input costs, our wages and cost of money and cost of money is still going down for us.
Look at the cost of our deposits, it's still trending down and I think it will trend down again in the fourth quarter. So we're just dealing with the wage pressure part of it and not having to deal with the other input costs.
I think financial services is relatively.
Less affected by input cost in just about any other industry in America and having locked in contracts is a big deal.
We've got some really big stuff is really locked in long term contracts.
Okay, Great and then if I could just sneak in one more just.
The core margin.
Had a really nice increase and I'm, assuming a lot of that was driven by the repricing of the public funds and I'm just wondering.
How much is left and maybe if you could just talk about what what the core margin looks like for next quarter.
So if you look at it's kind of hard to give you exactly what's going to look like next quarter, but I'll give you some variables that probably will help you to get there. If you look at you know our PPP fee income was $13 4 million this quarter, which was up from the second quarter. That's why you see kind of uptick on the net.
Interest income and if you look at our core loan growth, we had pretty good loan growth was five 3% annualized in the third quarter. So if you look at the well I call it Super core and net interest income.
Excluding the PPP warehouse and fair value it has improved compared to the second quarter. So if you are looking for the next quarter. We should continue to improve the core Super core NII and then you just have to adjust for the guidance what I gave on the.
Fair value income and the PPP fee because on the PPP fees, we have $15 6 million deferred fee left and I think the way it kind of slows down we think it's going to be more like two quarters before were recognized most of it. So I think thats variables to give you kind of guidelines, where we are heading related to the Netherlands.
Interest income.
And you mentioned public funds.
I can give you a little color on that that might be helpful.
At the end of the June.
June 'twenty one quarter.
Our average interest expense on public funds was 71 basis points.
At the end of September this most recent quarter it had decreased to 33 basis points.
And between now and mid year.
2023, we have several hundred million dollars in public funds and youre going to reprice.
And at this point in time.
Public funds that are repricing are typically being done.
And the 10 to 20 basis points range.
So we're going to see I believe continued decreases in public fund cost.
Yeah, So definitely I think looking forward at least on the fourth quarter our interest.
Expenses will definitely be a little bit lower than what we've had in the third quarter, but just because of the repricing of the public funds Peter that that that Super course trademark if youre going to use that.
Okay.
I'll I'll send over a fee.
Okay.
Curtis.
Thank you.
That's all I had thanks very much.
Again, if you have a question. Please press Star then one our next question will come from Jon <unk> with RBC capital markets. Please go ahead.
Hi, Thanks, good morning, everyone.
Are we done.
Just a couple of follow ups.
Do you guys feel like.
Texas loan growth is accelerating at this point, it's obviously much stronger than.
A lot of other areas of the country, but do.
Do you feel like it's accelerating can accelerate into 2022.
This is Kevin.
Again, a personal opinion and just what I feel being in the market everyday I do think it's accelerating.
I think we're going to go through an interesting phase when the supply chain breaks break free and we get back to a more normal.
Think what we'll see because of pent up demand, we're going to see.
A short period of maybe hyper growth as people pull through products that they've been waiting for.
And I think that will give us.
It's good now they'll go really good for that temporary period of time and they may back up a little bit once we get through the backlog of pent up demand if that makes sense to you.
So I think the industry is going to see.
Better growth than we've seen followed by really good growth.
When we pull through the supply chain issues and then it moderates from there.
I agree with that and I think one thing to add to it.
Debt.
We need to focus on is what really happens in the.
Energy side.
The Texas economy in Oklahoma City for that matter.
If these increased prices really are sustainable.
That's going to start having a trickle effect throughout the entire economy.
It's a little pop.
Personally thanks, a little too soon to make a call on that but obviously things have changed dramatically in just a few months in terms of the price of oil and natural gas.
All of which helps Texas and Oklahoma, I think Texas is going to be better than most all other states just in migration yesterday, the migration you're looking at a number of people that are coming up.
<unk> you have to build a home or we have to build the infrastructure and really where the current administration that hates fossil fuels I can see nothing but an increase in and that I was talking to some people actually this is what I wanted to hear yesterday when I was sitting in the Doctor's office the guy that was.
He has a certain oil service company and they're as busy as they can be and so.
People that are in the service side of it so things are really picking up and I don't think youll see a lot of people jumping into the business like you did in the old day you'd have the elder people. The other companies that have been there and you'll see I think the price to go up because they're just there.
There won't be as much drilling there will be a just a supply and demand and then another thing that with this inflation is.
Texas steel produces a lot of crop study.
Cotton that's selling at.
Higher than I've seen it for.
10 years, probably.
$1 10, a pound or something of corn.
Milo So you have got commodities going up you've got oil and gas going up you've got people moving in.
It's the stars are aligned.
Okay.
David I asked you about this couple of quarters ago.
<unk>.
How do you think about higher rates on your business model.
On one hand, you are.
Growing the securities portfolio.
And I would imagine you're thinking you have to be a little bit careful and protect yourself.
On the other hand, two thirds of your loan portfolio levered to higher rates.
Think about the balancing act.
Between those two forces.
So I want to make sure I understand the question. Your question is what exactly I don't know that got it.
How do you think about extension risk in the portfolio, putting money to work at lower rates.
And then on the other hand, it sounds to me like Youre expecting higher rates, which should be very positive.
The earnings trajectory of your company.
Really it sounds crazy, but we really don't try to call the rates.
You don't get our we look at our loan portfolio, we have about a three year turnover I mean, it all wells and really when you look at our bond portfolio as well as about every three or four years and a half years, three and a half year. So really we're not trying to call rates I think higher rates will help us dramatically.
When you when we are modest at least our models say they will I mean, our model show that 100 basis points does okay for us that 200 basis points really showed a lot of a lot of a lot of growth. So I think that we're going to continue buying likely do I think as money comes in we will continue to buy I don't think were going to try to position ourselves there.
There are times when we see spikes that we may buy more than we normally would and I think that will continue but again.
I don't think that were going to try and call rates and the thing that will help us the most.
I don't know that the pad can raise interest rates as fast as everybody thinks they can at least only.
At least from the prime rate perspective, I mean, you've got a stock market. That's extremely high you've got one to four family residential loans in homes that are selling and those had like 20% increase or sometimes in Texas. So they can't just go to the prime rate and Tim just raise it extremely <unk>.
Fast or they can blow the economy on the other hand, they can get rid of it they can get rid of the tapering and drive up the 10 year yield and get an extra 100 basis points in their China that way I think escalation to be done of course, they don't payment it's stable.
Or that's just my opinion, hopefully that we can raise that tenure have a real spread on the 10 year and get a little bit higher yield there and just start right in the prime rate shortly and little bits and thereafter.
It does look positive.
I will say, one thing and the premium amortization drops dramatically, yes that would definitely and from other sense I think it's not as much of a worry because if you look at our bond portfolio, we generated $2 $6 billion in annual cash flow that will be invested to the either loans or one portfolio from that standpoint, we'll have so much cash flow coming in.
I don't know that anybody has brought that up our amortization cost on our portfolio just skyrocketed in this quarter too I mean, hopefully when that slows down that would be a real plus for us. This quarter, we had $15 1 million of amortization and based on what are we reading it seems like it should slow down I don't know its going to be that significant but even slow us down to <unk>.
$2 million of extra $1 million, there that I remember when it was $8 million it wasn't lost share yes.
Chris do you have a bigger portfolio, but still that go from $8 billion to $15 and 15 million $18 15, It's a law.
During the quarter.
Okay, alright, thanks for the help I appreciate it.
Yes.
This concludes our question and answer session I would like to turn conference back over to Charlotte Rasche for any closing remarks.
Thank you, Matt. Thank you, ladies and gentlemen for taking the time to participate in our call today. We appreciate the support that we get.
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.