Prosperity Bancshares Inc
NYSE:PB
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
57.5
84.3
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Prosperity Bancshares Inc
You don't have any saved screeners yet
Good morning, and welcome to the Prosperity Bancshares Second Quarter 2018 Earnings 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’ Second Quarter 2018 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location 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; David Hollaway, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President 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 David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Brandon.
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 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 second quarter 2018 conference call. We were pleased with this quarter's results. We showed impressive returns on second quarter, average tangible common equity at 16.48% annualized and a second quarter average assets of 1.44% annualized. Our net income was $81.5 million for the three months ending June 30, 2018 compared with $68.5 million for the same period in 2017, an increase of $13 million or 19%.
The net income per diluted common share was a $1.17 for the three months ending June 30, 2018 compared with $0.99 for the same period in 2017, an increase of 18.2%. The second quarter 2018 net income of $81.5 million was an increase of $7.2 million, or 9.7% compared with the first quarter of 2018. With regards to loans, the loans at June 30, 2018 were $10.147 billion. The linked quarter loans increased $135 million or 1.3%, 5.4% annualized from the $10.11 billion at March 31, 2018.
We continue to see strong loan demands and borrower enthusiasm. Our total loan approval ran higher and more consistent than in the last several years; however, we're still experiencing large payoffs. Our lenders are excited and are committed to continue to grow our loan portfolio.
Our asset quality, our nonperforming assets totaled $31.5 million, or 16 basis points of quarterly average earning assets at June 30, 2018 compared with $47.6 million, or 24 basis points of quarterly average interest-earning assets at June 30, 2017, and $33.2 million, or 17 basis points of quarterly average interest-earning assets at March 31, 2018.
Our, overall asset quality continues to improve as a nonperforming asset at June 30, 2018 reflecting a 33.7% decrease compared with their level at June 30, 2017. Going forward, we continue to see a decrease in nonperforming assets.
With regard to deposits, our deposits at June 30, 2018 were $16.979 billion, a decrease of $91 million or one-- [one half of 1%] compared with $17.071 billion at June 30, 2017. The linked quarter deposits decreased to $354 million or 2% from $17.333 billion at March 31, 2018. The decrease in deposits is primarily due to seasonality; as previously mentioned we have over 500 municipal customers such as cities, schools and counties that use the tax dollars they receive in December and January throughout the year resulting in declining account balances.
Our farming customers also have decline in balances as their crops have been planted but not yet harvested. We also have experienced business people using their cash and in the past several years were keeping as reserves. During the last several years as rates were low certificates of deposits decreased. However, the good news is that our average non-interest-bearing deposits for the second quarter 2018 increased 4.8% year-over-year, and our average interest-bearing demand deposits for the second quarter 2018 increased 5.9% year-over-year. Both of these categories either repay no interest or very low interest on.
With regard to acquisitions, as we've indicated in prior quarters, we continue to have conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal when it is right for all parties and is appropriately accretive to our existing shareholders.
With regard to the economy, the Texas economy continues with vibrant growth helped by diversity of businesses, no state income taxes, and a political climate friendly toward business and a strong tailwind from an ever improving energy industry. In fact, Texas was recently named the top state for business in America by CNBC. The Oklahoma economy is also boosted by its low state income tax, the improving energy industry and a 3.9% unemployment rate for June 2018.
The Dallas Federal Reserve Bank projects 3% job growth for Texas in 2018 or 370,000 new jobs. Houston is making a comeback with expected 3.7% job growth in 2018, or 113,000 new jobs. Unemployment rates remained low in Texas and business continues to expand. The Houston Port Authority reported that they are busier than they've ever been processing 9,200 trucks in one day and continue to purchase additional equipment, docks and cranes.
Further car sales increased approximately 6% in Texas and more in Houston. Overall, we continue to see positive customer sentiment with a reduction in income taxes and in government oversight and regulatory burden. Business people continue to tell me that for the first time in a number of years they were able to spend more time growing their business.
I would like to thank all of our customers, associates, directors and shareholders for helping make such a successful bank. Prosperity Bank was rated by Forbes as one of the best banks in America again for 2018 and is the only Texas-based bank in the Top 10. The bank has been rated in the top ten for five consecutive years and was the highest rated Texas-based bank for the past five years.
Thanks again for your support to our company. Let me turn over our discussion to David Hollaway, our chief financial officer to discuss some of the specific financial results we achieved. Dave?
Thank you, David. Net interest income before provision for credit losses for the three months ended June 30, 2018 was $161.8 million compared to $152.2 million for the same period in 2017, an increase of $9.6 million or 6.3%. The net interest margin on a tax equivalent basis was 3.28% for the quarter ended June 30, 2018 compared to 3.14% for the same period at 2017 and 3.16% for the quarter ended March 31, 2018.
Noninterest income was $28.4 million for the three months ended June 30, 2018 compared to $27.8 million for the same period in 2017, and noninterest expense for the three months ended June 30, 2018 was $83.6 million compared to $76.4 million for the same period in 2017. The efficiency ratio was 43.9% for the three months ended June 30, 2018. That's compared to 42.3% for the same period last year and 44.2% for the three months ended March 31, 2018.
The bond portfolio metrics at 6/30/2018 showed a weighted average life of 4.05 years, factor duration of 3.6 and projected annual cash flows were approximately $1.8 billion. And with that let me turn over the presentation to Tim to manage for detail on loans, asset quality, Tim?
Thank you, Mr. Hollaway. Our non-performing assets at quarter end June 30th, 2018 totaled $31,585,000 or 31 basis points of loans and other real estate compared to $33, 217,000 or 33 basis points at March 31st, 2018. This is a 4.9% decrease from March 31st, 2018.
The June 30th, 2018 non-performing asset total was made up of $21, 269,000 in loan, $0 in repossessed assets. And $10, 316,000 in other real estate. Out of the $31, 585,000 in non-performing assets, $10, 493,000 or 33% are energy credits. All of which are serviced company credits.
Since June, 30th, 2018, $11,133,000, or 35% in non-performing assets have been removed from the non-performing asset list, or are under contract for sale. But as we always say, there can be no assurance that those under contract will close.
Net charge-offs for the three months ended June 30th, 2018 were $2, 636,000 compared to net charge-offs of $9, 441,000 for the three months ended March 31st, 2018. This is a decrease of 72%. $4 million was added to the allowance for credit losses during the quarter ended June 30th, 2018 compared to $9 million for the quarter ended March 31st, 2018.
The average monthly new loan production for the quarter ended June 30th, 2018 was $297 million compared to $329 million for the quarter ended March 31st, 2018. Loans outstanding at June 30th, 2018 were $10.147 billion compared to $10.011 billion at March 31st, 2018. The June 30th, 2018 loan total is made up of 40% fixed rate loans, 36% floating rates, and 24% variable rate unchanged from March 31st, 2018.
I will now turn it over to Charlotte Rasche.
Thank you, Tim. At this time we are prepared to answer to questions, Brandon, can you please assist us with questions?
[Operator Instructions]
Our first question comes from Jennifer Demba with SunTrust. Please go ahead.
Thank you. This first question is for David Hollaway. David, were --when recoveries, how much dollar amount did that add to the net interest income in the second quarter? Was it real on $5 million.
I don’t know it was that much of $5 million; it’s just, if I knew a big picture then I’ll give specific to the questions. We recover loans all the time on quarter after quarter. What was unusual about this quarter is, it was the loans that we collected were little bit more than usual. And so I don’t think that number was $5 million, I think the extra amount that we collected over and above was probably more than $3 million range.
Okay and David Zalman could you just talk about the level of M&A discussions and activity you're seeing out in the marketplace right now?
Well, Jennifer there's obviously a lot of M&A activity. You saw the recent acquisition of merger with Veratex Bank and Greenbank here in town. In Houston, you saw the deal with Bank of Oklahoma and Cobiz. You saw the recent acquisition by Synovus in Florida Community Bank. So there's a lot of stuff out there right now. And again we're having opportunities to look at a lot of this stuff. We continue to look at it.
Are you looking further out of your footprint than you would have a couple of years ago?
I would say that we do. I mean I think we're still primarily focused on the Houston, Texas market and the Oklahoma market because we are there already, but again I think that we're experienced enough and we have systems set up in place that it's not that hard to be in a different market. As we always said, if we're going into a different market though, we want to be in the top five in that market within a shorter period of time.
So us going into a different state or something to get $500 million would not be as meaningful. We would like to have a presence that we're going to go into a different market, but we have looked-- we have looked in different markets recently.
Our next question comes from Dave Rochester with Deutsche Bank. Please go ahead.
Hey, good morning guys. Back on the NIM, I'm just wondering how you're thinking about that trend in the back half of the year and then as a part of that what are you guys assuming for the rate environment?
Well, let me take it, and then I’ll give you the second part. Dave, I think the increase that you saw in the loan yields, it can be attributed in large part to the favorable second quarter growth that we had in loans, coupled with positive impact of rising interest rates. And of course as Dave mentioned with Jennifer a while ago, there was probably about $3 million additional recovery above and beyond what we normally get. But then we, and then there was also some interest accrual that we got from that too ,but at the same time, our expenses were a lot, were much higher than they normally are.
We had an opportunity and you saw that our expenses, we had elevated personnel expenses, some operational money we put away. And also the -- usually our provision for loan losses are budgeted around $2 million to $3 million. And again that's a model, so, but in that model we have the ability to look at midpoint, high points and low points.
And so we, that there was, we were able to put a little bit more money into the provision than we normally. So we took advantage of the situation. So, David, I'll leave it with you there on the net income --
No, as you were saying how we're thinking about that going forward. I think it should be positive for us just as Fed continues increased rates, and then if we can get those all the new loans to stick, we're putting them on at higher rates than what the current yield is on the book. So I think all those things will be positive. The unknown here, the biggest question is what do funding costs do when you look out over the next 3, 6, 12 months.
If we can stay disciplined as we had, then it should be some good positive to our margin. In fact, if we have to become a little more aggressive not quite as positive but still good.
So your net interest margin David you think could be running in the next quarter--
Say all end with fair value and everything impacting, it was going to be in the range-- we think we could be in the next few quarters somewhere in the 316, 318. And again it's just depends on what cost of funding does.
And again, I'll point out again that our net interest margin will continue to improve over the next 12, 24, 36 month period with re-pricing of assets, our model shows significant net interest increases in 24 months and 36 months, sometimes as much as 3.4% of 24 months, and 3.6% in 36 months but with 100 basis points increases.
So I guess what I'm just saying as I point out I think going forward, our net interest margin will continue to improve. I just don't - it doesn't improve as fast as everybody like it, it will use the analogy prior to turn the Queen Mary around out here in the parking lot, it just doesn't happen that quick, but longer term things really look bright for us in that category.
Yes, that's great color, I appreciate that. And I guess as you’re re-pricing that securities book overtime, reinvesting the cash flows, you'll see that yield move up, where are you seeing pricing on securities purchases today?
I didn't check this morning, but I'd say over 3% now. Dave does you that number?
Yes. We were running averaging over the last month-and-a-half, or two months or so, between 310 and 325.
Yes, okay, great. And then you just mentioned on the expense side, the comp up a little bit this quarter it sound like that, that's more of a one-time type of thing you're taking advantage of some of that extra income there, where should we expect to see expenses in the back half of the year?
Dave will go into that in deeper, but again, this is the first quarter that we really got the full effect after the administration passed the tax credits. And the tax changes and all that. We gave - we up our minimum wage. And then we also gave a 5% increase across the board to all associates. So, overall Dave’s going to probably give you a little bit higher number, but again, it should be getting back to normal next month.
Yes, you’re observation’s right. I mean we had all --some of these you can call it one time, advance here this quarter it raised our expense. But going - but that’s just going forward, if our revenues can continue to increase, we might want to move that forward-looking quarterly non-interest expense, we've been trying to run around 81.
I'd say if our revenues continue to increase, we'll probably move up, just to give you a range of 81 to 82 basically. Just if the revenues go up, and I would also point this out, even though our expense - to kind of drive that point home, even though our expenses went up this quarter, it compared to the previous quarter when our expenses were less, the efficiency ratio actually went down, it went from 44.2 to 43.9. So, you really got to look at this in its bigger picture.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning guys. So the cost of deposits was up only five basis points linked quarter, you have a lot of your peers it's up, 20-25 basis points linked quarter. Yes I know you guys have a great funding base but any color on any upward pressure you can see in deposit costs in the back half of the year?
Well, I would say that we've probably been slower than some of the others to raise the interest rates especially on CDs. I think that this last quarter we did raise our interest rates on CDs. I think for a jumbo, again, I don't have it here in front of me, but in jumbo 1%, one year probably it’s more like about a 1.6%. We’re not too long ago --you probably couldn't get 60 or 80 basis points.
So we have raised our CD rates. The bad part about that is we don't have much of CDs, but maybe we'll start getting more CDs. We allowed a lot of that money go because we weren't as competitive. But we do think that the answer to your question is are we do think that interest rates are going to continue to rise, and again I think that we have probably one of the best bases out of any bank anywhere.
So when you look at the amount of non-interest-bearing accounts that we have, and you look at the interest bearing demand still are very low rate. I think when you add up all that together you'll see us increase probably in the money market and maybe some more in CDs. But again, I still think we are probably one of the better betas out of anybody probably.
All right. And then just to close the loop on expenses, so you did $83.6 million this quarter, your guiding to something lower kind of the 81 to 82 range, but it sounds like the changes you made in the top line, you increased the minimum wage, you also gave - I think I heard you say it’s 5% raises to some people, it sounds like those are more permanent. So I was just wondering why the expense base would come down, and if there was any, truly one-time thing in that comp line this quarter?
I think that's right, I mean some of that increase you saw was one-time events; they are not the ongoing recurring things that were mentioned earlier. So that will allow us to bring that number down, we won't be running it till whatever it was, 83.5, 84, it just had those one-time events in it, so that that won't happen in the quarter coming up.
Got you. And then finally for me, I know we've talked about the discount accretion being around $2 million a quarter, it’s obviously a lot better than that this quarter, but do you think $2 million is still a good estimate per quarter going forward?
It is, and, again, you're right, we saw some positive this quarter. If you look at the remaining balance especially for that general run rate that we called a 91 just in the simplistic terms. If that were really running at a $1.5 million, $2.5 million to $2 million, it's only $17 million less so it's going to run out over the next year. And there's about $6 million in that [03].
And so that's why you saw that pop there. We were cleaning out these loans; it's having a positive effect. Randy and his team are doing a good job. And we're getting some extra money coming back to us, but yes short answer is we’d still want to look at that $2 million per quarter.
Knowing that, that can go up or down some at a time.–
Our next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Good morning. I was curious about the average monthly loan production, it declined a little. I mean it's still good but declined a little bit from the first quarter. And I'm just wondering if you could talk about that. And if you're seeing any impact on the tariffs and trade discussions.
First, I'll let Tim get in to that but there’s the bottom line I think needs to be period in loans increased 5.4% on an annualized basis, but again Tim would probably want to talk more about production. Maybe if you talk about the first quarter compared to the second quarter, you and I talked about.
Right, to address the second part of your question from my perspective, we haven't seen any effects of the tariff issues that are out there in the news media. That lack of effect may or may not change going forward, but so far it's been a non-event for our bank. As you say we were down in the average monthly new loan production in this quarter, it was $297 million compared to $329 million in the first quarter of this year.
$329 million is the best quarter we've ever had in the history of the bank. We'd obviously like to duplicate that and exceed it, but it is by far the best we've ever had. The average production for all of 2017, the average monthly production was $286 million. So if you compare the second quarter at $297 million to all 2017, it compares favorably.
Why the first quarter went up so much, there's no hard and fast answer to that, it’s just --we were fortunate that we had some good business come our way. Our people out there trying hard all day, every day and they're producing results. But, sometimes you get more in, sometimes you get less in, there really wasn't any particular one-time event that we could attribute to that first quarter production to.
Things still look good from the economy perspective. Our people are still trying hard. There's no reason to think that the production is not going to remain decent throughout the rest of the year. So I hope that answers your question.
I’d just add, Tim, when you and I talk it's ironic sometimes because we had a higher production for the first quarter, and yet we didn't show an increase in loans due to payoffs. In the second quarter, we might add less production, but still move on 5.4%. So production is one piece of it but pay downs is another piece of it too at the same time.
That's exactly right. I mean we had record production in the first quarter of this year. And basically had record pay downs in the first quarter of this year. So the two have to work together to increase your outstandings. And pay downs are something that we don't have a whole heck of a lot of control over.
Sometimes we have some influence on a particular loan, but we just had a lot of customers that sold projects and or had excess cash and wanted to pay debt down. So we had a lot to pay down in the first quarter. And those pay downs subsided this quarter, going forward who knows what that number is going to be, but there's nothing on the horizon that would obviously suggest a necessarily an increase in the percentage of pay down. So that's just something we deal with quarter-to-quarter.
That's very helpful. That's a very good detailed answer. Just on the loan yields, increasing with the new loan production. I'm just curious what type of increase in new loan production versus the existing portfolio you're getting?
In terms of rates?
Yes on the loan yield, right.–
Yes. We've been averaging between 5% and 5.5%. Let's just say for most of this last quarter and what we've been adding here recently we've been seeing more in the 6% to 6.5% range. How long that's going to last and how much influence that's going to have, I really say right now. But the bias is clearly upward in terms of rates. It suffered in terms of our deposit cost, it suffered in terms of what we're going to earn on our loans. And the Securities for that matter, so I think the hard number is 5% to 5.5%, it's what we've been doing once again lately. We've seen several; let it move to 6% to 6.5%. So the direction is upwards.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning. David, you just answered my question in terms of the production pay down levels. So appreciate. So -- the one question I have is regarding your expense guide and more than $81 million to $82 million range, what is the impact in 2019 of the FDIC surcharge going away? How much will that reduce these estimates on quarterly basis?
I don't have the exact number, but it's-- I don't say it's material, but it's not immaterial either. I am not going to be exact on it. I will give you a range, but you somewhere in the $2 million -- $3 million range. But again, I can't be exact on that, but that gives you kind of a good feel for that.
Is that for certain that they are going to reduce once it is--
It has to hit -- for them it has to hit at a certain level before one point to stop the surcharge, 1.35 or something like that.
And that's still being nice.
Right. So that's $2 million or $3 million annually in terms of the benefit.
Right, all part.
Right. And with that be -- is your guidance that 81 to 82 is that inclusive of that surcharge going away, or does that assume that stays intact?
Well, two things. One, that guide forward looking at that over the next couple of quarters, we assume the surcharge, maybe I should back up, because there is general disagreement on that, but I think that we believe that surcharge won't be going away until 2019 all the way. I know some of the indicators start that would happen late this year, so I don't know if that helps in your question, does it or does it not.
Okay. Yes, I was thinking more about 2019 but--[Multiple Speakers]
Yes. So really in 2019 and yes the guide would include that argument.
Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hi, guys. Good morning. I wanted to ask, David you got 16% total risk based capital now and capital keeps building given your level of profitability. I am just curious if the right deal doesn't come along in interim, are you planning on doing anything different with capital? I don't think ever I've seen you have this much TCE?
We as I mentioned before we will continue raising our dividends I think. If it's been like this historically and has been in the past, we have been raising our dividends almost 10% or better a year. We will continue to do that. But don't worry. We will use the money, it will be used. The only thing I would say is that if the stock price got too low, again, we don't like to buy our own stock, but if it just got too low we would come in and buy 5% or 10% of our stock two at the same time. But for the most part we want to use that money for acquisitions and we will end up using at some point in time.
Okay. And I just wanted to follow up on the commentary on origination rates, pretty healthy levels, a lot of folks have been talking about increased competition from non-bank type players in this space. I guess what you are seeing in there? Are some of the loans that you are not getting, is it a function of rate or is it more on you guys have really stringent underwriting and we have heard some loosing especially in commercial real estate. What are the factors that may be keeping loans from being originated that you might look out?
We have seen very little competition from non-bank sources. I guess that's subject to change, but to date we really haven't seen any effect from that segment of the lending out there. It is competitive; all financial institutions need loans and wants loans. When we lose one it is typically overpricing. If we don’t want it because of underwriting, I don't consider that to be loan that's lost. And we have tried to be more open minded, shall I say in terms of our credit approvals, but at the same time we don't want to leave the discipline that's made this bank as good as it over many, many years.
I have been in the lending business a long time, and one thing I have learnt and we all know it, when banks get in trouble and go out of business it's because of bad loans. It’s not anything else. That's what does it every time. And we don’t to want to end up there one day.
But having made that conservative statement, you can see our production. We are trying to look at every loan on its own merits. We are trying to figure out ways to say yes, we want to make it as opposed to saying manually no; we don't want to make it. So I think when we lose one, it's typically overpricing. We are willing to be reasonably aggressive on pricing, but every now and then, our competitor does thing that we just simply don’t understand, and they come with a rate that would not be appropriate for our structure.
So that's kind of the way it's always been, but there hasn’t been any decline in the veracity of the competition. It's out there, but once again we haven't seen it from non-bank sources.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks. Good morning guys. I wanted to hit on credit quality and overall credit trends still look excellent, digging the net charge-offs, it looks like it's all tick up in net charge-offs of commercial real estate loans, I think in years past we have seen some higher losses in C&I via the energy, so I am curious what you are seeing now on the CRE front that resulted in some higher charge-offs over the last few quarters?
Randy might want to jump in, but again most of our charge-offs are coming still from clean up on loans that we have acquired from previous bank acquisitions for the most.
Most of the charge-offs are still the C&I, oil and gas clean up from acquired banks. We haven't seen an uptick in CRE losses recently.
There may have been a minor uptick but it's not anything that's material, and there is nothing on the rise that we see in terms of commercial real estate as problematic for us.
And when you get one off every once in a while, but it's not - we haven't seen an uptick by any mean yet, values have gone down, nothing has changed on that front.
And in fact the economies that we operate in, other than office space occupancies, everything looks pretty good in terms of commercial real estate. Houston has got a lot better in terms of its department occupancies, and while it would be good for everybody in the market place if the demand for office space were to improve, and I am talking about non-owner occupied office space. That hasn’t been much of a direct effect on us. We have very few dollars in non-owner occupied office space. So it would be good in terms of the overall effect but it doesn't have much of a negative effect on us directly.
I don't have the numbers in front of me, but Matt's probably pointing to a deal and I would say that again I will go back at the charge-offs of some commercial real estate really had to do with banks. Acquisitions that we have acquired both one with the participation from [Inaudible] and another one with some bank and again it are just clean up from banks that we add.
One, you change the numbers up - or something like that. It was just a cleanup from acquired bank. It wasn't anything that affected commercial real estate across the board.
That's right. I mean the point is that what you're referring to is not indicative of where we are going forward.
Okay. That's helpful. And then Tim you mentioned few minutes ago that credit committee is trying to be more open-minded in certain circumstances. So I would like to hear from David Zalman about how open-minded you are feeling these days on the credit committee?
I am leading the charge. I have a light flag in the room, any time brother.
He wanted us to start to serve Chardonnay at the meetings. But I told him we couldn't do that.
We are trying in a lot seriousness-- we are trying again, I think the people have to realize always you build your loans, and again we are still only around 5% to 6% loan growth, we used to do about 8% organic loan growth, so we are still behind where we normally were, but again this really is the last year to -- is the first time we really had to focus on building up a portfolio and not really getting rid of loans that we had through acquisitions that we have cleaned up so.
I think our team really does we are looking at more loans. We are looking at bigger loans and we have in the past, everybody has to realize though that when you have bigger loans at some point in time, I mean when you look at the amount of nonperforming, we have 30 something million dollars and we have deals on half of those to get rid of those, but some of these bigger loans go bad. You get a $20 million or $30 million loan, but you have just to realize that that could possibly happen too as you get more aggressive.
Our next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey good morning. Just had a question kind of about the balance sheet. David, you relied more heavily on borrowings-- wholesale borrowing this quarter obviously the supplement, I guess that's from public funds running out typically those kind of peak in the second quarter, and then draw back down-- question that would be do you still expect that same phenomenon in the third and fourth quarter, and then kind of what's the average rate that you are putting on that-- that those cost in the second quarter.
This is Dave Holloway. I will take harder that first for any clarity on the second part, but first part, yes I mean that's exactly what you laid out of the public funds start drawing their accounts in the second quarter. It starts mitigating in our third quarter go down a little more, but not as much as you saw this quarter. Again, they have not been in the fourth quarter, all that money comes flooding back in and so yes, the result of that is if the deposits go down we have to borrow a little bit more. But--
Yes, I think what he is asking for he still seeing an increase at year end like we normally, and I would say, however, I would have to caution you, last year we had a like in --the last quarter a $900 million and Dave you pointed this out. I mean just in the last quarter we increased to $900 million, it was a huge increase in one quarter, and we felt like we normally increase about $400 million--
Yes, $400 million - $500 million
And the $400 million that you felt was really because of the new tax laws that people prepay taxes and stuff like that you may not see this year.
Yes, just to assume when we get --eventually when we get to year end, and we are looking at year-over-year numbers in deposits, remember, the whole tax discussion was going on and a lot of people had rushed in to prepay their property taxes last year. So that what David is saying is we saw a huge $900 come in by year end that was not normal. It normally is $400 or $500.
Historically again, maybe when you look at 20 years our deposits grew organically what 2% to 4% a year annually. Yes, that's the number.
Got it. And any thoughts versus you may be relying more on the borrowing, raising would it help to raise your overall deposits rates a bit, obviously those are coming in at this quarter around 190 basis points I assume will be higher in the third. Just kind of thinking around how to price versus having to go if rely on wholesale market even though it's for a short period of time?
That's right. You are ahead of us, and our meeting this afternoon that's exactly what we are discussing. So you are ahead of us on that.
Our next question comes from Geoffrey Elliott from Autonomous Research. Please go ahead.
Hello. Thanks for taking the question. You had some growth in commercial real estate this quarter. It feels like that scenario where some banks have been talking about pulling back a bit because of what we are seeing on the competitive side. Can you give a bit more detail on what you are seeing there in terms of pricing and structure and whether there is anything kind of egregious going on in any markets that you just want to stay away from?
Okay. Our outstanding did pick up just a little bit. I think we are about 34% of our total loan portfolio is in commercial real estate right now. As I have said a little while ago when I look at the economy in Texas and our major markets in the state of Texas and our economy in Oklahoma, there is nothing that we see that's really problematic on commercial real estate. We hope that we are selective and what we are approving and booking. We think we are-- we look at each loan on its own merits. I mentioned there is there's clear weakness in non-owner occupied office space.
So we would be hard-pressed to be desired some booking one of those loans in Houston right now for example, but owner-occupied is a different story and their multiple submarkets in a metropolitan area like Houston and Dallas Fort Worth. So you can't paint it all with a broad brush. We have to look at it loan by loan and what the credit is behind those loans. So I don't see this pulling away from commercial real estate based on anything that we know at this point in time.
The better deals are price competitive. So when we book a commercial real estate loan it's obviously a loan that we think is good and it's harder to get premium yields on those. But that's the way it's always been. There is nothing new about that. So, I think we will continue maintain and maybe build a little bit of our commercial real estate portfolio. The pricing on that may be a little lower than the average pricing, but once again if it gets too low we back away and we don't do it.
So, I don't-- I don't see any big change there. I hope I have answered your question.
Yes. Thank you. And may just another one on the M&A side, you kind of told about a bit more openness to look at things outside of Texas and Oklahoma. How far outside you are willing to go out important for you have to continuous footprint?
Well, if they put up a border laws, so I can't go into California. So they're not going to let us go there. And they probably would not allow going to New York. So -- but I think we are open-- we are open again wherever it makes sense I mean, again I think the main thing that we would want to if we are going into another state is we-- we can be a real player and a significant size and that it was accretive. I mean it is priced properly. I think those are some of the issues that we would look at. I don't know that we would just put off limits to just anything really.
Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning everyone. I just wanted to touch on the M&A first, if I can-- following up on Geoffrey's question, is it just price and do you feel like you have not been competitive and closed on transactions or is there something else that's holding you back?
A lot of deals that you have seen recently, our deals that we said that really not-- again I don't want to just put anything that we wouldn't do, but -- you have known us a long time and we are the kind of banks that we always like are banks that have been around for a long time that have a lot of core deposits, long-term relationships.
And if you look at a lot of the deals that we have done recently, I mean if look at the Green Bank, it was started over the last number of years and brought-- again it's not a bad bank at all, it's just a different model and if you look at the bank in Florida you look at ICOM Bank, you look at --all of those banks that you are seeing were started over the last 10 years really, and again it's not that-- not that we wouldn't look at but paying a premium price for a bank that's been started like that is not as-- is not--it's probably we-- we would just again-- I would-- we would-- the kind of banks we are looking for what we're looking for a good solid core deposits been around for a long time.
And, again, when we find a good bank pricing is not the issue to us. You'll see some of our deals that we've done we-- we paid more than anybody, but, again it has to be the right kind of bank, and let me just say it like that.
And I guess can you touch a little bit on the deposit performance in some of your non-metro markets. I know that's also been where a lot of your acquisitions have happened historically, but how-- how are those deposits holding up and how is the pricing competition there?
Well, those markets are good. I mean it's probably better than your metro markets because the money just doesn't move as much, but again having said that, I think pricing has gone up everywhere. I went to bed one night I feel we are CDs for six months, we are at 60 or 70 basis points, and when I woke up there were ads in the paper at 2% for one year. So pricing has definitely changed.
Now most of those are outliers with some banks, is a handful of banks that are doing that. But overall, pricing has really gone up on the money. It really has.
Okay. And then just last two, can you give us an update on health of Ag work and how you feel about that portfolio and then any updates on your energy lending appetite?
Yes. Ag isn't an important part of our company. I think we have $700 million in that category and we are probably one of the biggest in the state. And right now all the crops looked good. I think the biggest issue some people talk about are probably tariffs and is probably that's affected more the soybean market more than cattle probably. I read an article in the Wall Street Journal where it said that, again I don't have the ship crates but the crates that went into China were like $75,000 more than the previous.
And they just have to go up on that. But having said that when I talked to the cattle people and everybody else, we really haven't been affected that much yet, and Trump has just said yesterday that he is going to give for any farmers affected, they are going to put $12 billion out there. I don't know how the other business people feel about that but farmers are only seeing to get taken care of. Right now, we don't see the impact in farming as a good deal for us and a lot of communities that we are, that's a big part of it. Oil and gas, we really -- we are still doing oil and gas but again oil and gas, loans that we are making, again we made a few larger ones but usually they are in West Texas or somewhere -- what we are really trying to say, we are looking at a lot different where instead of just total revolving on a credit based on some kind of discounted present value that engineer comes up with are looking harder at exactly how much money is coming in minus real expenses, not just expenses that they use out of the air and can that person pay back, their lines of credit over a five to six years period.
I am not wrong on that, Tim.
That's exactly right. I think it's important to focus on historically where we have been in terms of energy lending. Here over the last couple of years, the energy books danced around between 3% and I guess 3.5% which is where it is right now of our total loans outstanding. But almost all of our problems, not a 100% but almost all of our problems have come from energy loans that we obtained from acquisitions. Historically, when we looked at energy lending, whether it's on a production side or the service side, we've looked at local companies that are in our local areas and in our geography, that have been around long time, that have weathered the ups and downs. That have decent balance sheet. We've always stayed away from the new comer and ones I call the fly by nighters.
And a lot of other banks had embraced those types of credits and they have got in trouble. So we hope to maintain a presence in energy lending. That's our intention. But we hope to do with the type of credits that we've always try to service. And we think that represents the bulk of portfolio right now. So I don't think you'll see a whole lot of change either up or down anytime soon in terms of what we are doing there.
I don't think you'll see us really participate in a lot of share national credit or something like that. That's not what we are going for.
Exactly. We are trying to make sure by local companies.
This concludes our question-and-answer session. I'd now like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Brandon. 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 value. Thank you.
The conference is now concluded. Thank you for attending to today's presentation. You may now disconnect.