Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
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Good day, and welcome to the Prosperity Bancshares First Quarter 2019 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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’ first quarter 2019 earnings conference call. This call is being broadcast live over the internet at prosperitybankusa.com and will be available for replay at the same locations for the next few weeks.
I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. (Tim) Timanus, Jr., Vice Chairman; Asylbek Osmonov, Interim Chief Financial Officer. Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Bob Dowdell, Executive Vice President, and David Hollaway, our former Chief Financial Officer.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activity, including asset quality. Finally, we will open the call for questions.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator.
Before we begin, let me make the usual disclaimer. 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, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found 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.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2019 conference call. For the first quarter of 2019, we showed impressive annualized returns on average tangible common equity of 15.24% annualized and on average assets of 1.46% annualized. Our earnings were 8242000 in the first quarter 2019 compared to 74361000 for the same period in 2018, an increase of $841,000 or 10.8%. It should be noted that earnings in the first quarter of 2018 were impacted by a much higher provision for loan losses. The majority of which was attributable to an acquired bank.
Diluted earnings per share were $1.18 for the first quarter of 2019 compared to a $1.07 for the same period in 2018, an increase of 10.3%. Loans at March 31, 2019 for 10 billion 440 million an increase of 402 million or 4% compared with 10 billion, a 11 million at March 31st 2018. Our linked quarter loans increased 43.7 million or 40 basis points 1.7% annualized from 10 billion 370 million at December 31, 2018.
During the first quarter 2019, average loans increased 2.8% annualized. We saw some pause in loan growth during the first quarter impacted by the continued pay downs we experienced and the government shut down trade tariffs controversy and the seasonal economy. However, we are maintaining our 5% organic loan growth forecast for the year.
Our non-performing assets totaled $40,883,000 or 21 basis points of quarterly average interest earning assets at March 31, 2019 compared with $33,217,000 or 17 basis points of quarterly average interest earning assets at March 31, 2018 and $18,956,000 or 10 basis points of quarterly averaged infrastructure assets at December 31, 2018.
The lead quarter change was primarily due to two loans. One loan is to a well servicing business and the other loan is for a large home loan, a large home located in one of the higher-end neighborhoods in a major city in Texas. The energy loan was classified as a TDR when we restructured it.
The customer has banked with us for many years and we have a strong guarantor who have been servicing the loan when needed and who provided additional collateral in connection with the restructure. With respect to the home own house is currently on the market and listed for more than the loan amount.
With regard to deposits at March 31, 2019 they were 17 billion, 198 million a decrease of 135 million or 80 basis points compared with 17 billion, 333 million at March 31, 2018. Our linked quarter deposits decreased 58 million or 30 basis points from 17 billion, 257 million at December 31, 2018 primarily due to seasonality.
In the fourth quarter of 2018 we saw an increase of 522 million in deposits which is seasonally normal for us. On an average basis, quarterly deposits increased 265 million or 6.2% annualized compared with a quarter ending December 31, 2018.
With regard to acquisitions as we've indicated in prior quarters we continue to have active conversations with other banks regarding potential acquisition opportunities. We have experienced more interest from banks considering selling or considering a merger of equals after the announcement of the BB&T and SunTrust merger.
Prosperity is fortunate to operate in vibrant and growing states. We continue to see employment growth and a tailwind from companies expanding in and moving to Texas and Oklahoma due to a business-friendly political climate and lower tax rates. Approximately 600 jobs are created every day in Texas alone including Saturday and Sunday.
Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.
We intended to grow the company both organically and through mergers and acquisitions. We want to develop people to be the next generation of leaders, make every customer experience easy and enjoyable and operate in a safe and sound manner. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company.
Let me turn over our discussion to also back to Asylbek Osmonov, our Interim Chief Financial Officer to discuss some of the specific financial results we achieve. Asylbek?
Thank you, Mr. Zelman. Net interest income before provision for credit losses for the three months ended March 31, 2019 was 154.9 million compared to 153.2 million for the same period in 2018, an increase of 1.7 million or 1.1%. The net interest margin on a tax equivalent basis was 3.20% for the three months ended March 31, 2019 compared to 3.16% for the same period in 2018 and 3.15% for the quarter ended December 31, 2018.
Excluding the purchase accounting adjustments the net interest margin on a tax equivalent basis for the three months ended March 31, 2019 was 3.16% compared to 3.12% for the same period in 2018 and 3.10% for the quarter ended December 31, 2019.
Non-interest income was 28.1 million for the three months ended March 31, 2019 compared to 27.9 million for the same period in 2018. Non-interest expense for the three months ended March 31, 2019 was 78.6 million compared to 80.1 million for the same period in 2018. The efficiency ratio was 42.94% for the three months ended March 31, 2019 compared to 44.19% for the same period in 2018. And 43.20% for the three months ended December 31, 2018.
The bond portfolio metrics at March 31, 2019 showed a weighted average life of 3.79 years and effective duration of 3.43 and projected annual cash flow of approximately 1.9 billion.
And with it let me turn over the presentation to Tim Timanus for some details on loan and asset quality.
Thank you, Asylbek. Our non-performing assets at quarter end March 31, 2019 totaled $40,883,000 or 39 basis points of loans and other real estate compared to $18,956,000 or 18 basis points at December 31, 2018. This is an increase of $21,927,000 from December 31, 2018. As David previously mentioned this increase is made up of two credits.
One, an energy related well service company and the other a residential mortgage loan.
On March 3,1 2019, nonperforming asset totaled was comprised of $38,138,000 in loans, $649,000 in repossessed assets and $2,096,000 in other real-estate. Of the $40,883,000 in nonperforming assets. $17,161,000 or 42% are energy credits, all of which are service company credits. Since March 31, 2019, $601000 in nonperforming assets had been put under contract for sale but there can be no assurance that these contracts will close.
Net charge-offs for the three months ended March 31, 2019, where $1,049,000 prepared the net charge-offs of $556,000 for the three months ended December 31, 2018. $700,000 was added to the allowance for credit losses during the quarter ended March 31, 2019, compared to $1 million for the quarter ended December 31, 2018. The average monthly new loan production for the quarter ended March 31, 2019, was $284,000,000 compared to $248,000,000 for the quarter ended December 31, 2018.
Loans outstanding at March 31, 2019, were $104,140,000,00 compared to $10370000000 at December 31, 2018. The March 31, 2019, loan total is made up of 38% fixed rate loans, 38% floating rate and 24% variable rate. I'll now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Cole, can you please discuss with questions?
Certainly. [Operator Instructions] And our first question today comes from Jennifer Demba with SunTrust. Please go ahead.
Thank you, good morning.
Good morning.
Good morning.
David, just wondering if you could give us a little more detail on the new two new nonperforming loans and their sizes and your expected loss etcetera.
Yes, I'll start off, Tim may want to jump in but again. The loan that we have is from a customer a long time customer that banked with American Bank and we love it for a long period of time it's in the Permian Basin. Old company, strong guarantor. They pay down from $30 million to $15 million as we were trying to restructure it for a with some for a period of time with some interest in again the good loan ran extremely late and I don’t know 60 or 90 days.
And once it goes over 90 days, even that we got additional collateral with it, they became a TDR with a regulator. So, my gut feeling is that we shouldn’t lose any, we've had this borrower for ever and ever and real strong anchorage. And so, we shouldn’t, it don’t look like it but having said that you never been -- you still want to be in fact that you want but our gut feeling is now that we won't lose it.
And home loans is just a very large home loan. Again, I don’t want to give it away somebody is got the home loans $9 million is pretty easy to find out whether it's what city it's in but it's listed for about $13 million and it's one of the major metropolitan areas and one of the highest richest parts of town. So, we don’t think it will have, maybe do you think will see much of it.
Yes. I don’t think you'll see a loss, you probably have a marketing time of about, when you work from six to seven, nine months to market it, maybe 12 to sell it move it out.
Yes. I think that historically, we've been running about $40 million in nonperforming assets we got is low as $18 million, that's the lowest we've ever been. I've always said they're probably a normal NTA for a number of for a bank our size with volume always be between $40 million and $60 million. So, that's just my guess but again when I have these go on the NTAs on the other hand, it's not like we're seeing losses on and we shouldn’t see any loss for something like that.
So, we feel pretty good about it. Tim, you want to comment?
Yes Jennifer, I can give you a little additional color. Let's start with the well service credit. I'm just going to use round numbers. The balance is about $15 million approximately and the loan started out at about twice that amount. So, it has been paid down quite a bit.
It is primarily secured by equipment that as of 2015 it had an appraised value of about $32 million. And when we did some restructuring for the customer recently, he pledged additional collateral, that being real-estate it has an appraised value of a little over $9 million.
So, in terms of appraised values, we appeared to be covered on our loan but I guess that's no guarantee. This well service credit is on interest only right now; it is current; so interest is paid current through the April payment. It will go on an amortization in October of this year and it's scheduled to amortize over five years.
As David say, this is a customer that was with American State Bank for many years and they had a decent history with him. So, given what appears to be sufficient collateral based on appraisal, once again that a main that the collateral would sell for the appraised amount but on paper there doesn't appear to be an extremely significant loss but there's just no guarantee there.
The other loan, that ones the residential loan and round figures the balance is about $9 million. It's actually made up of two different loans, a first lane and a second lane. The first lanes about $6 million, the second lane is about $3 million. The first lane is basically one month past due, it's due for the March payment, the April payment has not come due yet.
And the second lane is about six months past, so it's in worst shape than the first lane. And as David mentioned, the house has an appraised value of $14 million. So, is there a loss there, I guess on paper if you compare to the appraisal it doesn't appear to be but once again it depends on whether the customer pays and what somebody really pay for the house. So, once again the balance of the two loans is about $9 million and the appraisal on the house is about $14 million.
So, hopefully that gives you a little clarity.
Okay. And the residential mortgage, was that also made by an acquired bank?
No.
No. we made that one.
Okay. And is there any reserve for either loans right at this point?
A small amount.
Yes. Given the excess appraisal amount, the way our model works is the way we process these things. There is not what I call a substantial reserve or a mark against either one of those loans right now.
Thank you, very much.
And our next question comes from Dave Rochester with Deutsche Bank. Please go ahead.
Hey, good morning guys.
Good morning.
Good morning.
The expense trend was a bit better than expected and your guidance was for $80 million to $81 million quarterly sort of a theme with you guys. I was just wondering how are you thinking about that trend going forward, you still expect that to step up as the year progresses and maybe what's the new trend we should be using now.
This also, I'll take the question. I agree we came in a bit lower this quarter but as we stated in our prior call, this quarter we expected to be at a lower end of $80 million to $81 million and I think we did better than anticipated. But if you're looking forward for next few quarters, we project the noninterest expense to be around $81 million to $82 million.
That's what we've been saying prior quarters.
Okay. And then, it looks like you've left some securities roll off to push borrowings lower. Is that a trend we should expect going forward until purchase rates improve and then maybe if you could just give us some color as to what the securities purchase rates are at this point, that'd be great.
This is David Zalman. We said I think in our last call, it doesn't make up a lot of sense borrowing a lot of money from the federal home loan bank and borrowing it at 2.5% and leveraging into the bond portfolio. That we kind of pull back on that and then of course net interest margin has truly been helped with even though period in deposits were down, the average deposits were up on a 6.2% annualized.
That helps us at the same time, so we had more deposits at the same time. But yes, I think the answer, the short answer is "Yes," I mean that's still our strategy going forward. There may be certain times throughout the year, I think our funds get deposits are the lowest probably in mid-year and so. Generally, you may see a little bit borrowings in mid-year pickup at the end.
But for the most part, that's probably not a strategy that we want to do as a leverage with the federal home loan bank anymore.
Yes. And then in terms of yields what you're seeing in the market today, your ARPUs mid-teens, how much you're buying within a month?
We're getting I think, we did one yesterday a small one, it was 313 I think we got yesterday, 3.3.
Okay. And then, I think last quarter you -- oh go ahead, sorry.
We did. That was more of a big great one that floating right. We got probably 3% on in, yes.
Okay. And then, last quarter I think you've said new borrowing yields were serving at mid fives range, are you still there today and I think it's bigger picture given all of this on the asset side, how are you thinking about the NIM trends as we go through the rest of the year?
First, the answer to the first question is "Yes," I just we're still looking at around 5.5%. With regard to the net interest margin again, we saw some -- there's a number of things, I'll then also then jump into, he can get more technical. I always said that we had increased average loans and we've less federal home loan bank borrowings and that caused the net interest margin.
And he'll go into more detail about it at this time. But for the most part we've had this model that we've used in the bank since I've been here since 1986 and our model still shows a continual increase in net interest margin of over the next one, two, and three years. And it's modest in the short term but with the static rates raised, it's based on a static rate, so rates not moving one way or another it continues to go up.
And if interest rates go up, it even performs better. So, in the long run our net interest margin should always continue to get better. There may be some glitches, some ups and downs, days is another quarter or something like that. But for the most part, I would say it should continue to get better.
Yes.
I agree. This quarter we benefitted from our increased loan balances and pick up in the yield on those loans and our repricing of our security portfolio at higher yield helped a bit. But again we've mentioned before that mix of money is important in funding side and you saw this quarter that we were able to shrink our FX and will be borrowing and by replacing that with the increased in our average deposits.
So, the mix of money on the front it helped us with the margin. If you going forward if we look at if we continue to control our funding cost and give our asset size of the balance sheet, sometime to reprise on the catch up as you mentioned, I think our net interest margin story should be continue be positive.
And we might not see the exact same rate hike we saw this quarter but it's going to be still positive throughout.
Okay. All right, great, thanks guys.
Thanks.
Thank you.
And our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, good morning.
Good morning, Brett.
Good morning.
I wanted to ask about fee income and I know in the first quarter deposit service charges are usually a little more seasonal but the decrease in 1Q this year was a little bigger. And so, I was just curious, was it more NSF fees or credit card or debit card, what was kind of the impact in 1Q on that.
And just any thoughts on the rebound of that line item in particular?
Yes, I mean Brett, again our fee income, even I don’t remember what it was $800000 difference but it's not really material in our company as much. It is a bottom on in are in. I would say for the most part it is seasonality. But also, I think last year look if you're comparing last year or the quarter before, I think sometimes we'll get some higher trust income.
But again, I don’t see that really being significant if there was any change in the way we do business or anything like that, I just think it's just one of those things. It's also like you would.
Yes, I just wanted specifically answer your question our NSF fee and the credit card, debit card income decrease this quarter, but if you look at our prior year first quarter same thing the trend with so it's decreased but we should see some bouncing back on the following quarters but I agree going forward I mean we ran 28, 29 million unless there's a one-off thing happened during the quarter I would say run 28, 29 million.
Yes sometimes you'll have a big trust fee that we did something but for the most part I think it's more seasonal like he said.
One thing as an example of what also Beck, just mentioned our foreign transactions that are ATMs were down quite a bit in the first quarter compared to the linked quarter and we've looked at that and try to understand why that's the case and candidly we're not completely sure other than just obviously the usage was not what it had been the prior quarter but that's an example of what transpired during this first quarter of this calendar year.
I appreciate the color there. And then David I know you never have been a huge fan of share buybacks and using capital out there -- for growth or for acquisitions but your TCE is approaching 11 now, any thoughts on more aggressive stance on using the capital?
I'm still pretty consistent. I'm a good husband I do what I say I guess. I've always said we're going to use the money for we're always going to use the money for building a bank organically and or else or buying another bank and that still a story today same story. If the price is really plummeted then we would jump in but for the most part we still want to grow the bank with the capital and that's just something we do. We are doing that. We also increase our dividends about 10% every year so we're continuing to do that too. So I think you can see is using the money for increased dividends you can see it for mergers and acquisitions and organic growth.
Appreciate the color.
And our next question comes from Brady Gailey with KBW. Please go ahead.
Hey good morning guys.
Morning Brady.
So maybe following up on the capital and M&A question. David I heard you say that after BB&T, SunTrust was announced there's more interest on the selling side and then on the MOE side, I don't think I've heard you talk much about the possibility of doing it MOE, but maybe just give a little more color on, do you think you're actually closer to announcing another deal and then is an MOE like I think about you guys with like Bank of Oklahoma or Frost like another longtime Texas franchise it is an MOE something that you would really consider at this point?
I think we're open to anything that enhances shareholder value and MOE are very tough as you mentioned. There's before you get anywhere else you got to get through the social aspects of it. So they're very tough. Again I think that we're considering since the BB&T as I mentioned that since the BB&T, SunTrust I seen an unusual amount of people talking that have never talked in the past and whether something comes out of that my gut feeling is that it will. In the past nobody who got to play God who didn't get to play God those were all big deals now things seem everybody's looking I think shareholders and shareholder value and what's good for the company what's the future of our business.
So I think that we're looking at all. We're looking at MOEs. We're looking at outright purchases and mergers and so I leave it open. You just have to kind of stay tuned hopefully something to happen but if it doesn't it doesn't but we're going – we are always going to make the right decision.
And then I mean if you look at your capital you're at a 10.7% TCE now. So I'm sure if you're doing a deal you'd like to use as much cash as possible but I know the map works better when you use your currency especially with your currency having had a good run now trading that around 15 times earnings. So how do you think about your desire to deploy excess capital and use cash versus the benefit of using your currency in a transaction?
Our preference and it almost has to be because if we do a bigger deal we want at least a double-digit accretion number. So it has to whoever we end up or we're going to be with one way or another we have to put cash into the deal. We're probably thinking at least 25% cash. I know you guys don't like it because you've got this crazy crossover method analogy that I'll never understand but the bottom line is that we'll probably we'll probably always put some cash component into it to make the accretion. We always look buying something and how long does it really take us to get our money back and that's really what we're focused on and also we're really focused on the accretion and -- that was Brady.
All right, great. Thanks guys.
And our next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Good morning.
Morning Peter.
David, if I could just follow up on the M&A question just with regards to the outlook in terms of your tolerance for earning secretion dilution what is it on tangible book value in terms of dilution on tangible book? Kind of what's your tolerance for that?
Again we know I guess in deals that we've looked at in the past somebody's going to probably jump in to say I don't know that we ever really did negative – that we went negative on tangible. Again the bottom line we've always looked on deals is how accretive it is and how long will it take us to get our money back and we've always liked to get our full money back when I say money back that's the money above what their tangible book value is whatever the premium we pay for we'd like to get it back in at least five years and that's kind of our strategy really. We're looking at accretion how long it takes us to get our money back basically.
Okay.
Dilution I know it's a big deal on the street now this dilution and crossover methods of accounting but again I we've done 42 transactions and the way we do them have been extremely successful and I know there's some on this crossover method they don't like to see dilution. I know it they want the crossover method not to be back more than three years but when the crossover method that's being used now and the method I say getting our money back it's a different way accounting I realize. So maybe they come back about the same I don't know.
And then just a follow-up question. You reiterated the guidance for loan growth at 5% and if I look at average loan growth it moderated this quarter and the end of period isn't that much higher than the average. So I was just wondering what's some of the drivers to get to that 5% loan growth this year?
Well, again if you look that period in, you would have, I think it's 1.7% annualized have you looked at average loans throughout the quarter we were up to about 2.8% on the last few days of the period we had $120 something million loan payoff and another big loan payoff. So again not 3% is not where we want to be at. We want to be at 5% but for me the fundamentals still look very good in our economy. We still have people moving here. We have a lot of requests. I think again somebody can jump in a minute but I think when I heard last time we have about a billion $300 million in loans that are booked but not funded yet.
So, maybe bigger than we've ever had before especially in Dallas and Houston and in Austin. So if that's an indication now having said that we turn our portfolio turns over a lot. So a billions three sounds like a lot but again we get a lot of payoffs because a lot of our loans are on payoffs but from what I can tell right now some of our guys are excited. They're busier than we ever have been seen in a long time but again it's got to happen. It's got to come. You got to really make it happen. So from what everybody is telling me fundamentals are good. People are still doing deals and that's how we're coming up with and I don't think 5% is unrealistic at all really. The pipeline is full yes. Tim, do you want to say anything?
Well, I think what you just described is accurate. Our primary business that we like to do that pipeline still seems to be fine. If there's been any slowdown in the market overall my perception it's been in the very large real estate projects primarily those that get funding through non-recourse financing and candidly really very little equity on the part of the borrower and the projects. Those are loans that we've never felt were appropriate for our bank anyway. So the fact that some of those they have fallen off in terms of the overall market volume really doesn't affect us. So I think everything still looks reasonably decent. I mean Texas and Oklahoma is doing fine as far as we can tell. So I don't see any substantial weakness there at all.
In fact I would say things weren't as strong as they were. You wouldn't see all the payoffs that we're getting because all these projects that we're doing are really getting financed in the secondary market and that wouldn't be doing that unless the economy was good.
Well that's exactly right I mean it's a mixed blessing. It's not good that we're losing the earning asset but it's justification of our decision when somebody wants to buy the project or refinancing. So you are right I mean those are solid projects and that's just the way the market works sometimes.
Great. Thanks very much.
And our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Good morning guys.
Morning.
I have a question I'm sorry if you already addressed this around deposit cost. So I heard your comments around expectation for the margin to trend higher from here but one I guess do you expect deposit growth to keep pace with loan growth and secondarily what are you seeing in terms of pricing competition? Are you seeing things ease up or do you still expect pressure on deposit pricing based on what competitors are doing?
You want to off?
Yes I can give little bit highlight on that. Regarding the deposit we did normalize our deposit rate bank by last quarter and some of the increased cost carried over to this quarter. But this quarter we have not increased any of those deposits significantly. So from the deposit costing I think it should moderate a little bit. I don't think it's going to be a significant increase we saw this quarter but I think we have to just look at long term when you look in a margin and like we mentioned earlier 12 months, 24 months it's once our balance sheet asset side of the balance sheet prices and catch up that time that's why we see our margin increasing but we don't look at like in next quarter we're looking at the long term.
Yes. If I can summarize Ebrahim deposit cost it seems to have normalized. I think for a long period of time deposit cost was real low and we saw in the last quarter in the first part of this quarter people really taking money out of their checking accounts. It really wasn't earning hardly anything trying to go more into money market accounts and even purchase CDs and stuff like that but having said that we think that we have seen it more normalized now and so you have bigger impacting but again it's just a buildup we think.
Net interest margin going forward as you mentioned. We do think that just re-pricing are our assets a $9 billion portfolio from 2.43 to say you're getting 3 or little over 3 y can do the math on that over the next one, two and three years. So that really increases margin that without any increase in interest rates and I think your third question was what about the grade loans. Our alone we're expecting at least 5% we hopefully do better. I think on the positive growth we're shooting for about 2% to 4%. So you can do the math on that too organic growth.
That's very helpful. Thank you. And just if I can add one more sort of to the M&A question. It means it would seem that given the strength in your stock in your currency and what you mentioned in terms of a lot more conversation your ability to do a deal probably is the strongest it has been in four to five years. Is it still that seller expectations around pricing remain high or are there other factors where you still rather do something in footprint with louder footprint that's a hurdle to deal making?
I'll answer it into two ways. I'd say the MOE most people talking about an MOE realize you can't pay a big premium if you're doing an MOE. So you've seen banks that have paid a big premium for one over the other and most stocks get killed. So I think in doing an MOE a number of people I think they really understand it on some they may not understand that. I have talked to two different companies two different ways one understands it, one doesn't understand it well. Hopefully over time they do understand it better. And then in all outright purchase I would say probably a quarter ago the price expectations were a little too high. I would say this quarter that they've mitigated a little bit too.
So, I think it's working in our favor both ways.
Got it, that makes sense. Thanks, Dave.
Uh-huh.
[Operator Instructions] And our next question comes from Matt Olney with Stephens. Please go ahead.
Great, thanks. I want to go back to the balance sheet strategy. And you mentioned you're taking down your borrowings, do we see the full impact of this in 1Q or are we going to see the remaining impact of this during 2Q. And then as a follow-up, is there additional opportunity to take down borrowings from these current levels, assuming that yield curve remains where it's at?
I'll start off with them now and it's related to also that. But I think for the most part, we were borrowing as much as we're also back a last year a $1.5 billion or something.
Half billion, half yes.
I think in the last conference call we said we're going to try to stick around $800 million to a $1 billion; we've been able to do that. I think it's still our goal to keep it under a $1 billion, there may be times in the summer where we may have to borrow back up a little bit. But for the most part, our hope is to reduce that and try to fund it with core deposits basically.
Basically our core deposit row basically and maybe even reducing securities. Whatever we don’t put in loans, we can always reduce securities to help on that in. but the long and short of it is I don’t think that we benefit having a big leverage positioned also backing on join in.
Yes, I completely agree with that statement. I think overall, our borrowings were at level at about a $850 million or so this quarter and it's probably going to tick up a little bit as we mentioned because with the --
Mid-year.
Mid-year. But if we were able to continue to keep our borrowings, I think we should still positive impact going forward but it all depends on our core deposits.
I think a lot of it's on deposits, through the deposits that came in for such a long time, we were flush with deposits, it's not been visually working on money. Because now there weren’t any place to get any better. I think its interest rates went up, we saw we had a number a lot of public funds, those closed funds did go.
They were really right sense and then we understand that some portion of them, so they might have went somewhere else. This we shouldn’t see the draw down as much this year as we saw last year, I think just because of those public fund deal. So, there may be some but I just can't give you an exact number.
But the philosophy is the same, the philosophy is to try to maintain the federal home loan bank at least at a $1 billion or under.
Exactly, like we reiterated. We want to keep our borrowings lower and increase our deposit that would help us going forward.
Okay, that's helpful. And then, on the securities book, I think the premium amortization expense was around $6.5 million in the first quarter. And given where the yield curve is today, what would you expect in migrations from that $6.5 million per quarter level?
Again, I'll just jump in. I think that rates they tend to go down on mortgages. What we seeing really kind of an uptick and I understand what the premium amortization might have interest rates go down, people refinancing. But recently we've seen interest rates on mortgages go up.
So, I don’t see that I don’t see premium amortization increase and that might even again I wish I would add in our ILN meeting where I did this. But I'd probably will say that maybe decrease in also back what's your opinion may be?
I would say it's going to stay the same or maybe a little bit tick-up but I don’t think it's going to drop less than 6.6, I'm thinking because special with the interest rate drop in this quarter compared to what we had in the fourth quarter.
But interest rates, really that should be the amortization should be affected by the by accelerated pay downs.
Yes.
And I don’t think if interest rates are going up on mortgages, not ever so much but slightly, you still wouldn’t think that you would see a bigger pay off in mortgages. So, maybe that let's leave the words at.
Maybe, yes let's -- just next quarter.
Yes, I agree.
Okay, that's helpful. And then just lastly on M&A. obviously the footprints now in Texas and Oklahoma, I think you've discussed for stain these markets. But it seems like a lot of these MOE possibilities could also be out of the footprints. So, just remind me kind of what the tolerance is at this point for moving out of the footprint?
I think you're right. I've always said that our first place would be in the markets that we're in and that would be Texas and Oklahoma. Having said that, if that doesn't work, we would go out of state preferably on states that are contiguous to us or if we have to jump a state to the other one.
But that's primarily our focus. I don’t necessarily see us in, I've always said that I don’t necessarily see us in California and I can never say never but they got a poster warning sign on the boundary when I come in and so I can't get in there maybe.
In New York, I don’t really see us in New York as much but I think we're the states that are contiguous to us, the Midwest, we're open to those kind of news basically.
Very good, thank you.
Uh-huh.
And our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Thanks, good morning.
Good morning, Jon.
Good morning.
David, they don’t they won't let you take a lit cigar into California. So, if you put it out I think they'll let you.
I don’t know, just having on in the car like you say they smell it. I don’t know, clean up let me in.
Maybe a question for you, Tim or David, just on the loan production again. You're monthly loan productions up sequentially but it's down from last year. And I guess, I've never asked the question in terms of how you calculate that. Is that a NAT or a gross?
And I guess what I'm getting to, are you seeing the payoffs are higher today than they were a year ago and that kind of the gross monthly production is just as high or is there something that maybe a little bit different than a year ago, does that make sense?
It does. It is a gross number. As I've said earlier, the average production for this quarter was $284 million. For the fourth quarter of '18, it was $248 million but for the entire year of '18, it was $288 million. So, our production for this quarter in '19 was a little bit less than the average for the entire year of '18.
But you have to go back and look at what made up that number for '18. Our average in the first quarter of '18 was $329 million, thus far that's just ever been in the history of the company. And rightly rolling we just haven’t been able to sustain that production since the first quarter of '18.
On the payoffs as an example, once again looking at the first quarter of this year, on the incoming side, $284 million, on the payoffs side it's in -- it's approximately $269 million. Now, these are hard numbers and you have to realize that because out of the $284 million, there constructions loans in there that haven’t started to fund up yet, the borrowers equity is being used to start the projects.
There are lines of credit that necessarily haven’t funded up. So, there are a lot of working parts to this. But if you just look at production and once again gross of $284 million, the burn rate was $269 million. So, it never all sticks and it's moving all the time. So, I hope I'm answering your question.
Yes, you are. And then just in terms of some of the payoff pay down activity, any different than it was a year ago would you say?
Well, the average for all of 2018 was $259 million. So, at $269 million for the first quarter is above that average obviously. And it’s way above what it was in December, it was $222 million for the quarter ended December of '18. So yes, it spiked up this quarter.
Okay, all right. That's all I had, thank you.
Uh-huh.
And this will conclude our question and answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Cole. Thank you ladies and gentlemen for taking time to participate in our call today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.