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 day, and welcome to the Prosperity Bancshares Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 2021 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay 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, Senior Chairman and Chief Executive Officer; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. Tim Timanus, our Chairman is unable to join us today.
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 Randy Hester, 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, Sean.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes 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.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2021 conference call. For the second quarter of 2021 Prosperity had strong earnings, core loan growth, deposit growth, continued sound asset quality, impressive cost controls, our return on average tangible common equity of 17.49% and remains well reserved. Prosperity Bank has been ranked as the number two best bank in America for 2021 and has been in the top 10 of Forbes America’s best banks since 2010. I want to congratulate and thank all of our customers, associates, directors, and shareholders for helping us achieve this honor.
The unemployment rates continue to decrease. And GDP growth continues at a high level as forecasted last year with the reopening of the economy. We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies. Further, businesses and individuals continue to move to Texas for lower tax rates and a better quality of life.
Our earnings were $130.6 million in the second quarter for 2021, compared with $130.9 million for the same period in 2020. The second quarter of 2020 included a tax benefit for net operating losses of $20.1 million or $0.22 per diluted common share as a result of the enactment of the CARES Act. Diluted earnings per share were $1.41 for the second quarter of 2021 and for the same period in 2020. Earnings per share for the second quarter of 2020 included the $0.22 tax benefit partially offset by $0.06 charge merger related expense and $0.03 charge for the write down of fixed assets related to the merger and some CRA investment firms.
The net effect was a positive $0.13 and earnings per share for the second quarter of 2021, a 10.2% increase after considering the adjustments in the second quarter of 2020. Loans on June 30, 2021 were $19.2 billion, a decrease of $1.7 billion or 8.4% compared with $21 billion on June 30, 2020. Our linked quarter loans decreased $387 million or 2% from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans. On June 30, 2021, the company had $780 million of PPP loans compared with $1.4 billion of the PPP loans on June 30, 2020, I’m sorry. And $1.1 billion of PPP loans on March 31, 2021.
The linked quarter loans excluding the warehouse purchase program and PPP loans increased $148 million or nine tenths – 9 basis points, 3.7% annualized from the $16.2 billion on March 31, 2021. Our deposits on June 30, 2021 were $29.1 billion and increase of $2.9 billion or 11.3% compared with $26.1 billion on June 30, 2020. Our linked quarter deposits increased to $347 million or 1.2%, 4.8% annualized from the $28.7 billion on March 31, 2021.
We believe that the deposit inflows are starting to normalize as people were spending money again, and stimulus payments have been reduced. However, the child tax credit payments should again add deposits to the banks. Our asset quality as always been one of the primary focuses of our bank. Our non-performing assets totaled $33.7 million or 11 basis points of quarterly average interest earning assets as of June 30, 2021, compared with $77.9 million or 28 basis points of quarterly average interest earning assets as of June 30, 2020, a 56.8% decrease from last year.
Non-performing assets were $44.2 million or 15 basis points of quarterly average earning – interest earning assets as of March 31, 2021. M&A seems to be regaining momentum. We’ve had more conversation with bankers considering opportunities this quarter, that continued non – net interest margin pressure, the higher technology costs, the salary increases, loan competition, succession planning concerns, and increased regulatory burden, all point to a continued consolidation.
As mentioned in my opening comments, we believe the U.S. economy is starting to normalize, which has helped reduce unemployment and cause above normal growth rates in GDP. We are seeing higher prices for gas and groceries, labor shortages, inventory shortages, and more. We believe that Prosperity is well-positioned to grow along with the Texas and Oklahoma economies. We have a deep bench of associates with a passion to help Prosperity and our customers succeed. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank and an efficient manner while investing in ever changing technology and product distribution channels.
We continue to grow the economy both or we intend to continue to grow the company both organically and through mergers and acquisitions. 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 Asylbek Osmonov, our Chief Financial Officer to discuss some of the specific financial results we achieved. Asylbek?
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2021 was $245.4 million compared to $259 million for the same period in 2020, a decrease of $13.6 million or 5.2%. The current quarter net interest income includes $12.2 million in fair value loan income compared to $24.3 million in the second quarter 2020, a decrease of $12.1 million.
Net interest income also continues to be impacted by the Paycheck Protection Program and Warehouse Purchase Program. The second quarter 2021 net interest income excluding the impacts of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the first quarter 2021. The net interest margin on a tax equivalent basis was 3.11% for the three months ended June 30, 2021, compared to 3.69% for the same period in 2020 and 3.41% for the quarter ended March 31, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2021 was 2.96% compared to 3.33% for the same period in 2020 and 3.19% for the quarter ended March 31, 2021. The decrease was primarily due to change in the mix of interest earning assets and excess liquidity. Non-interest income was $35.6 million for the three months ended June 30, 2021 compared to $25.7 million for the same period in 2020 and $34 million for the quarter ended March 31, 2021.
Non-interest expense for the three months ended June 30, 2021 was $115.2 million compared to $134.4 million for the same period in 2020. On a linked quarter basis, non-interest expense decreased $3.9 million from $119.1 million for the quarter ended March 31, 2021. The current quarter benefited from gains on sale of ORE assets of $1.8 million and a decrease in salary and benefits. The decrease in salary and benefits is primarily due to lower employment related taxes for restricted stock invested during the first quarter 2021 and lower discretionary incentives.
For the third quarter 2021, we expect non-interest expense of $118 million to 120 million.
The efficiency ratio was 41% for the three months ended June 30, 2021, compared to 46.6% for the same period in 2020, which included $7.5 million in merger related expenses and 41.3% for the three months ended March 31, 2021. During the second quarter 2021, we recognized $12.2 million in fair value loan income. This amount includes $4.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $7.9 million from early payoffs.
We estimate fair values – sorry, we estimate fair value loan income for third quarter of 2021 to be around $3 million to $4 million. This estimate does not account for any additional peer value loan income that may result from early loan paydowns or payoffs.
Looking forward, we expect the income from early paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCD loans with large discounts. The remaining discount balance is $25 million.
Also during the second quarter of 2021, we recognized $10.3 million in fee income from PPP loans as of June 30, 2021, PPP loans had a remaining deferred fee balance of $28.3 million. The bond portfolio 6/30/2021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion.
And with that, let me turn over the presentation to Randy Hester for some detail on loans and asset quality. Randy?
Thank you, Asylbek. Our NPAs at quarter end June 30, 2021 totaled $33,664,000 or 0.17% of loans and ORE. Compared to $44,162,000 or 0.22% at March 31, 2021. This represents approximately a 24% decline in NPA. The June 30, 2021 NPA total was comprised of $33,210,000 in loans, $310,000 in repossessed assets and only $144,000 in ORE. Of the $33,664,000 in NPAs, $8,378,000 or 25% or our energy credits. All of which are service company credits. That’s June 30, 2021, $1,448,000 in NPAs have been put under contract for sale. That doesn’t necessarily mean they’re guaranteed to close, but they are under contract and expected to close.
Net charge-offs for the three months ended June 30, 2021 were $4,326,000 compared to $8,858,000 for the quarter ended March 31, 2021. No dollars were added to the allowance for credit losses during the quarter ended June 30, 2021 nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended June 30, 2021 was $641,000. This includes a total of $73.8 million in PPP loans book during the second quarter. Loans outstanding at June 30, 2021 are approximately $19.3 billion, which includes approximately $780 million in PPP loans. The June 30, 2021 loan total is made up of 39% fixed rate loans, 36% floating and 25% variable resetting at specific intervals.
I will now turn it over to Charlotte Rasche.
Thank you, Randy. At this time, we’re prepared to answer your questions. Sean, can you please assist us with questions?
Certainly. [Operator Instructions] The first question for today will come from Jennifer Demba with Truist. Please go ahead.
Thank you. Good morning.
Good morning.
First question is on mortgage warehouse, just curious as to what the outlook is and in that business line. And are you seeing any uptick in refi here in the last few weeks.
Jennifer, this is Kevin. We’ve seen only a minor uptick in refi in last couple of weeks, it takes awhile once rates go down to pull through to us, if there’s usually about a six week lag from a decline in rates and when we start seeing volume on the warehouse line. So most of what I’ve seen at this point is just anecdotal evidence out of our client face. If we just look like what’s happening quarter-over-quarter, for instance, in the current quarter, the second quarter of this year, 66% of our volume was purchased, whereas in the first quarter, only 47% of our volume was purchased.
So there was a pretty big shift between Q1 and Q2 towards purchase volume that may moderate again a little bit here in the early stages of this quarter. As we look at volumes, they’ve held up pretty well so far for the month of July, but throughout the quarter, I would say if I had to pick a number, I would expect our average loan volume to be down about $150 million from where it was in Q2.
Okay. And how about pricing? What are you seeing in that?
It’s really held in there pretty well. If you just look at weighted average coupon, again, Q1 was a 3.23%, I believe, and it dropped only 2 basis points to 3.21% in Q2. So we have really done a good job of holding the line on pricing. There’s always been pressure. And as you know renown in pressure gets great enough that we don’t succumb. We usually just let that client go and try to find another one that values us a bit more. And we are seeing some encouraging things going on from that perspective.
We’ve got a couple of new clients that are in the queue to be boarded. And we’ve seen a couple of our larger clients with volumes being down, this happens every time in this cycle. As volume goes down, folks look to kind of pare back the number of lending institutions they have. So we’ve had a couple of our big clients come to us and ask for us to take a larger piece of their overall volume, because our balance sheet size, where they’re weeding out some of the smaller lenders in their bank group. So we’ve been the beneficiary area of some larger increases for existing clients as well.
Thank you. Separate question on M&A, David, have you ever seen a frenzy like we’re seeing right now in this M&A market and does that concern you?
I would say that it is active right now. Although, I’d have to say that I’ve seen it more active than it is today that we’re popping in. So I don’t know think that it concerns me, I mean, again, like I said before, I’ve seen it more active. I will say it is active. There are no question that if we – when we talked in our last quarter, I said, what stock prices down things have kind of – things that really, the phone calls are not bidding coming as much, but as the stock prices have gone, and everything that’s happening with the current administration. We are seeing more and more people talking about doing something.
And so but having said that, I’ve actually seen it, I’ve seen it more active than this before. So I think going forward, you’re going to see – you’ve seen a lot of deals. I think you’re going to see more deals before the end of the year. There’s no question about, and I think it’s going to be a pretty active year.
I’m sorry. I’ll little bit struck, hop in. Thanks.
The next question today will come from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning guys.
Good morning.
As far the loan growth XPP and the warehouse this quarter, that was definitely stronger than the recent trend and what we were looking for this quarter. I know this has been one of the major concerns surrounding the stock recently as to what those trends can look like this year. So just wondering, how does the loan pipeline look heading into three 3Q X that warehouse, since you just talked about that. And what are you thinking regarding the runoff that’s left in that structured CRE book? I think you mentioned it was about $400 million left to go back in April. Thanks.
Yes, this is Kevin, again. Pipelines look more robust than they have in quite some time. And I would tell you that in our earlier calls, we didn’t think we’d seek growth until the second half of the year. And fortunately some of that pull through and gave us a second quarter where we had a better loan growth 3.7%. But we really weren’t thinking that was going to show up as soon as it did. And it’s continued into the first month of Q3 here. It’s actually been pretty solid running in a better pace than it did in Q2 so far. And I think as we look at the pipeline and number of deals that are in the pipeline to close, I haven’t seen it like this in a number of quarters. And it’s – I’m probably more encouraged by it than I’ve been in quite some time. Things are active.
And also add Dave, when Randy was talking a while ago. I heard one thing and I don’t know if he said the right thing, but the average monthly new loan production for the quarter ended 6/30/2021 was $641 million. We might’ve said $641,000. So that’s a pretty good number for us. So…
Yeah. And in structured CRE that portfolio is down to about $1 billion in Q2, there was about $250 million in runoff. So to produce some loan growth in the face of $250 million in runoff in that in the quarter is an accomplishment in its own, right. I think it will pair back a little bit, but I wouldn’t be surprised if we saw another $150 million to $200 million runoff in Q3. But as I say, when I look at the pipeline, I’m pretty encouraged that we’re going to be able to face that headwind and still put up some pretty decent.
If you took out the structured CRE and just and we wouldn’t have had the runoff in the structure CRE or participate in more than that, I mean, our numbers would have probably been double-digit for the most part.
Are you thinking about that – go ahead.
I’d say we have a good number of loans on the books right now that are funding up that are that are past the pipeline stage. The loans should fund up and that’ll help us over the next quarter.
David, another way to think about it on structured CRE I think there’s going to be a $400 million, $500 million of that remaining billion that sticks with us.
Okay. So you get maybe $250 million that you said gone in 3Q and then maybe you have a little bit more run off after that, but not a material amount.
I think closer to $200 million in Q3 would be my guess and maybe another $200 million in Q4 and then that that’ll about do it.
Okay, great. And maybe on the resi segment that growth really jumped this quarter, is that solely to function of greater activity in the market or has your appetite increased there and then what’s your outlook for that in the back half of the year?
I didn’t hear the question. Can you say that one more time?
It’s residential. Yes. Residential, the strengthen the growth this quarter, if that was just a function of the market activity or if you have an increased appetite there, and then what’s your outlook for the back half?
I would say the market activity is just very robust throughout the entire footprint of the bank. And we’ve not seen any slow down or seasonality to that so far, the pipeline looks just as strong as it has all year long. So we’re feeling pretty confident about the increased – continued activity within the mortgage market and we’re portfolio and about 90% of what we originate.
Sounds good. Maybe just one last one, on capital. So the CET1 ratio is over 15% now, your other ratios are very strong, seems like you have enough capital for a deal and buyback. So just curious what your thoughts were on that maybe starting at the buyback again, just to maintain capital ratios where they are.
I think you’re accurate in what you’re saying. I think we’re really building a lot of capital. We have a lot of earnings, we did get dividend, and generally we try to increase it a little bit. But you’re right, we are retaining a lot of capital, but historically we’ve used that for acquisitions and I’d still like to keep it for that. But having said that again, with the stock price, when it dropped into the 60s, it’s something certainly that we’re going to consider maybe buying back some of our own stock if it, if it stayed that low.
Okay, great. Thanks guys.
The next question will come from Brady Gailey with KBW. Please go ahead.
Thanks. Good morning, guys.
Good morning.
So when I look at the bond book, I know we had talked about you guys putting some cash to work there. We saw a decent amount of growth in the second quarter. I think [indiscernible] has a bond book of about $12 billion. How do you think about continuing to grow that bond book at this level? I know the long end of the curve has kind of gone, I guess, just here recently. How do you think about continued growth in that bond portfolio?
I would say, Brady that we worked, you can see we continue to buy bonds and deposits just keep on rolling in all the time. So we have that to contend with. But again, I will say as of today probably we have over $1 billion, $3 billion, $4 billion just in overnight investments. And a little bit, we pulled back from investing because the 10 years has gotten too low, we feel. So we’ve just kind of pulled back from investing and we’re probably waiting a little bit. We probably could have made more money investing.
And I would say overall, it’s probably a smart thing to keep invested because if you keep that average three to four years, 3.5 year average life, you’re probably going to make more money. But again, when interest rates go as low as they have, we still have pulled back, but we will be back in purchasing when they return a little bit to normalization anyway. But again, it’s just a lot of money and trying to keep it invested. When you have this much and just trying to plow everything you can when rates are the lowest may not be the smartest thing in the world.
Okay. And then this is the third quarter that we’ve seen a zero provision from you guys. As I look at the reserve, if you include the reserve for unfunded commitments and you’re still north of 2%, which is just a big reserve relative to how clean your credit quality is. I mean, if y’all are not going to take a negative provision, I mean, to me it seems like you’re going to have a zero provision for a while, like maybe years. Is that the right way to think about the provision?
Well, you always have to be careful, there’s another variant of COVID out there again. The long and the short of it is like we said, it is a calculation that we go through. There seems to be a lot in there, but again, at the same time, we’ve always said that we would like to grow into it instead of just playing with the numbers and bringing money back and forth all the time if we can. And I think there’s still reasoning out there that justifies that we still don’t know there’s a lot of variables out there that you just don’t know what could happen. So I think as long as we can, we can keep the calculation, we’ll probably keep the money in there as long as we can probably.
Yes. And just add on Brady. So we’d run the whole model, we have a baseline and we’ll layer on this pessimistic scenario on that one. So we’ll probably continue a little while, but we just have to see how the economy continues, especially if there’s so much unknown still out there because it takes time for loans to show the quality of it. So from that standpoint, we have to run the model and if the model stays there we need to take provision gain – we’ll take provision gains. So we’re just going to run the model.
But again, I think it’s premature. I mean, I see a lot of banks doing it, but again, there’s still – again, like they’re talking about a mask again and another variant and all this stuff coming out. And so I just think it’s premature just to say, everything is just great right now. So it is good. There is no question. In fact, when you look at our asset quality it decreased 58% from last year, I mean, it knock on wood, they used to look pretty good, but again, I feel we’re in the right place at the right time right now.
Okay. Got it. Thanks guys.
The next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, thanks for taking my questions. NSF fees were down a little bit this quarter, but there’s clearly been some pressure out there and some banks curtailing some of those fees. Can you just walk us through the thought process on your NSF program at this point? Maybe what you’re doing to help out customers. And if you’re starting to hear any political or regulatory changes there. Thanks.
Okay. I’ll just give a little bit highlight on NSF fee. NSF is little bit down compared to the first quarter, but as you remember in the end of March, there was a big stimulus package that was sent out to customers. So what we saw in April and May, there was less usage of NSF bear time, but in June it rebounded. So looking forward, I think for, especially with summertime and people go on a vacation, all that, I think NSF is going to be better in the third quarter, if I’m just looking at the numbers. But overall, if you look at environment and from the regulatory side, we hear more about more focus on NSF. Right now, we haven’t changed anything because we want a little bit wait before we do anything. But yes, I agree with you. There’s more focus on NSF as we go.
Really you make NSF fees when people are really buying stuff and there’s so much stimulus money out there and there’s so many deposits and consumers have so many deposits, but we were talking earlier in here. And it doesn’t seem like the people are spending all the money that they have. I guess, going through what we’ve gone through over the last year, year and a half, maybe they’re cautious, but then somebody said there’s not enough inventory or products out there to spend the money on. So that’s another spin on that side of it. So, I think people are – they’re spending money, but again, they’re just not out there spending everything. They’re still trying to leave money for a rainy day, which is so different that I’ve ever been used to. But again, and I think that deposits are going to continue as long as there’s more stimulus, we’re still talking about a $300 tax credit, that’s going to be given to individuals again. So I think that’s going to be another form of stimulus. So I think that maybe NSF fees may not get back to where they were exactly for some time.
With the liquidity, I don’t think it’s going to get back to where we’ve had pre-pandemic, but what I see at least seeing in June and July, it’s improving.
Yes, I mean, it will. It’s getting better all the time and it will get better. There’s just more money out there right now.
Okay. That’s helpful. Maybe just as a follow-up, Asylbek I appreciate the color on the expense guide for the third quarter. Was there anything that happened in the salaries line? I may have missed it, but it did ramp down almost $4.5 million or so. It seems like that maybe will rebound back upwards, just trying to kind of reconcile how you get from the kind of $115 million, back to the $118 million to $120 million. Thanks.
Kevin [indiscernible] gave his salary and bonus back.
We appreciate that.
No, primarily in the first quarter we had employment-related taxes for restricted stocks that were vested in the first quarter. That’s why we had higher taxes. That’s what we had higher in the first quarter. And also discretionary incentives in the second quarter were a little bit lower than we had in the first quarter. But you’re right, when I gave you guidance $118 million to $120 million, that include all of it, right? Because we’ve had quite a lot of spending on IT side that going to bump up a little bit. I think the salary going to go up, but probably not back to that $80 million you saw in the first quarter. And we’ve had the merit increase, annual merit increase that’s going to pop in. So from that all the aspects that I kind of outlined that our expectation $100 million to $120 million it’s a good guidance for next quarter.
Great. Thanks for taking my questions.
The next question will come from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Good morning.
Just wanted to follow up on kind of the runoff discussion from a yield standpoint. I’m just kind of curious, what rates are new loans are bringing on versus kind of some of the books that you’re running off. Just trying to get a sense of maybe how much more yield compression you could see on the loan side.
Again, I don’t have the numbers in front of me. But I would say probably the average rate, or at least what the rate that I’m looking at loans right now is what about 4.5% Randy, right now.
4.5% – 3.99% to 4.5% range.
4% to 4.5% probably the average. I mean, you’re floating your large loans are not getting at your large loans are probably in the 3s, but if you look at the overall portfolio, so it’s – I would say though, it’s a good bet that the loans that are running off are probably a higher yield than what we’re putting back on probably, they’re probably in the 5s or something. I don’t – again, I don’t have that in front of me, but it would be – it’s probably pretty easy to – that would be a good analogy, I think.
Okay, great. And David, just a bigger picture question around M&A. Some deals that have been announced have been received better than others. How do you sort of balance kind of the best long-term move for the company versus why might be a stock price reaction that might not be as favourable kind of in the near-term based on kind of what we’ve seen thus far in the market?
Well, I think that’s one of the hardest deals we do have even when we’re negotiating with somebody, because when our stock price is down and compared to what they want, it’s just hard to give them what they want all the time. I mean, if you’re going to do a deal with us, you have to really bank that our price of our stock is really down a little bit, because we’re just basically not going to do a deal that I’ve said in the past, it’s not accretive or doesn’t increase our franchise value. So we’re not out there just to do deals and we’re not going to do it. So whoever teams up with us, if they’re taking stock, they really have to believe in the long-term future of us and stay with us basically, and may not be the same price they could get somewhere else. I don’t know.
Okay. And just one final housekeeping question, Asylbek, do you have the average balance of PPP loans in the quarter.
Yes. I think the average balance for the quarter was – I’ll give you around $1 billion for the second quarter.
Great. Thank you, guys.
And the next question will come from Bill Carcache with Wolfe Research. Please go ahead.
Thank you. Good afternoon. I had a follow-up on your credit comments and the idea that rather than releasing reserves, you’d prefer to grow into it. Can you give a rough sense of what you view as a sort of normalized level for your reserve rate?
I guess, what’s normalized today may not be normalized what I was used to in banking. Growing up in banking, I always thought that if you had a 1% loans, you were in pretty good shape. In today’s world, again, you have to take into consideration regulators and everybody else. And they might not necessarily see it that way. I think everybody went off the cliff. Last year when we saw everything and everybody wanted 1.5% in there, now everybody’s kind of coming back and pulling money out of reserves and taking them back down to probably 1.5%, 1.25%. Probably I still think in my opinion, this is just my opinion, I think in the long run, if you run a good clean bank, 1.25% is a pretty high rate in a reserve in my opinion. That’s just my opinion. Again, taking into consideration anything that may happen, another pandemic or another something that we’re not aware of, then you have to have extra money in my opinion.
Maybe another way to think about it, which I think gets almost the same exact number is if you took our post CECL pre-pandemic, combined legacy Prosperity, all that happened to all of them, about at the same time I know. But if you just took our combined CECL kind of numbers, pre-pandemic were in that 1.25% to 1.35% range. So if you had to pick a normal, I’d pick a 1.30%.
That’s really helpful color. Thank you. Separately, can you speak to what you’re hearing from clients about labor shortages they are facing? Any color on if it’s getting better or worse? Just any broad commentary across your client base would be helpful.
Well, you want to hear about our labor shortages? In Austin and Houston basically that we may have to just have drive-throughs on two of our locations.
We may have, it’s just very difficult to find enough teller help and frontline people that are willing to come back to work with face-to-face type and with the pay scales with all the other companies competing for the same population of workers and hourly rate and what some of the private industry is offering in the way of additional benefits and those that are allowing them to work from home, whereas we really need some in-store people.
Yes. I mean, we’re really going through, again, I’ve said this as a really dichotomy, but what I’m seeing is really something different than I’ve never seen before right now. I’ve never seen as many people changing jobs going from one job to another. I do know it’s just psychological. There’s some companies like Bank of America that have raised their tellers to $25. And then – so there’s this competition, I think Walmart offered today that they’re going to be able to send, if you worked for them again, they’re going to send your kids through school. So there’s so many different incentives. And then you have this other dynamic that’s been real – that I’m trying to get my mind.
I’m seeing people that really aren’t – I don’t know if they’re just wore out or they’re tired right now, it seems like everybody’s worked so hard that maybe that’s not everything or maybe rethinking things. And then you’re seeing this other group that had got to work from home. And now we’re asking all of those people to come back to the office. And some of those, especially the elder people were saying, you know what, it’s not worth it. Maybe I’ve taken care of an older parent at home. I made a lot of money.
So I’m not answering your question right, I’m trying to give you some color though. There’s a tremendous amount of dynamics going on right now in the workforce. And I don’t know where it’s all going to pan out. My thought is it will get back to normalization, but it’s going to take some time. We’ve all gone through a lot of different way we do things. There’s been a lot of different psychological strains on a lot of people and it just going to take some time. But I do know, I do think there will be some people working from home, probably a combination. You’ll have a combination, but I think for the most part, businesses want most of their people to come back to the job and come back to work. But having said that there may be some exclusions for people that are really good that just that you can’t get back, at least for short-term while they still want to finish out the rest of their careers.
Yes. And I think just feedback from our clients – this is Kevin, particularly in home building, restaurants and some other folks, they just can’t get staff. But I see full restaurants, but service quality is not what it used to be at places I’ve – even places I’m pretty well known. Where I expect to get service it’s down from where it used to be, because they just don’t have enough staff. Our home builders are having to pay up to get staff, the crews out there on home building sites and their businesses are robust, but they’re just struggling to get people back, so it’s pretty pervasive.
There’s still some supply shortages. I was talking to somebody who receives a lot of their product from overseas. He said just the cost of getting a container is ridiculous. Just the container to ship stuff in, there’s a shortage. So it’s pretty pervasive and I do – I’m in the camp that tends to think some of this isn’t going away. Some of it is transitory clearly. But once wages go up, I don’t think they’re going back down. And I think once the restaurant prices go up, they’re probably not going back down. So I think some of this stuff is going to be in the system and it’s actually going to stick.
Yes, I don’t think I’m with you, Kevin. I don’t think it’s just transitory, as everybody said. In fact, all the price increases that people that were – they’re minimum wage and they’ve taken it up. I think if you ever go to the grocery store, you could see they lost that the prices have just gone far more than what their – then their wages have I think.
That’s super helpful color. I think what I was trying to get at is, to what extent you think it may be inhibiting investment. And it sounds like it’s hard to tell because there’s a lot of moving parts, but it may be across your customer base. And so, to the extent that that gets better at some point, then maybe that that should be a positive.
I think that it will get back to some point. And I think a lot of it just depends on your investment. I think people that are doing good are going to continue to invest. But again, it may be a slower – they may be slower than what everybody thinks too. But again, the economy, you got to remember the economy has been shut down for so long, the GDP numbers that you’re seeing right now 8% and 10%, it’s going to be so much more than it was previous year. But at some point, hopefully we’ll get back to normalization. I guess, what we’re saying is, a lot of the inflation rates that we’re seeing and stuff like that may not be transitory, I guess, that what we’re saying.
Understood. And if I could squeeze last one. Maybe if you could give a little color around whether your commitment across different verticals is evolving in any way, just curious whether you’d look to get bigger or smaller in any areas in light of the increased focus that the investment community has been pleasing on ESG and I just wondering if that’s becoming a consideration at all, as you look at the business going forward?
Not really for us, I think maybe in the energy space, it is for some, maybe some of the bigger banks would like to report lower energy balances. And some of the bigger oil companies would prefer that, but you’ll see independence, their production picking up. And in our case, there’s probably more oil and gas opportunities than we’ve seen in the past. I will say, I haven’t seen pricing or structure improve to the extent that capacity is restrained and they should. And we have just speaking about oil and gas, we’ve done a lot to de-risk this portfolio, which was at one point maybe as high as $800 million, it’s down to $502 million at quarter end. That’s been a massive, de-risking mostly of the legacy side of the portfolio that in oil and gas, that was $550 million when we merged, it has probably $160 million now. So most of that, de-risking has referred in the legacy portfolio. So ESG is certainly having an impact on oil and gas. I don’t expect that to, in our case to result in any massive increase in oil and gas lending, we’re pretty selective in what we do, there and the rest in terms of the rest of the verticals. We’re still interested in growing most of them outside of big growth in oil and gas. So it’s – as long as we can find customers who are willing to pay with the right kind of structures, we’re going to grow verticals.
Yes. I mean, I just think you have to be careful. I mean, ESG is an important part of any business. I guess everybody is on the climate deal right now. But if you were just a focus that you’re not going to do anything, I mean, look around, I mean, everything on the coast is chemical plants. They make chlorine, they make anything that we see on a daily basis. So that’s not going to go away. I mean, it’s true that they’re saying that they want oil and gas or cars ought to be electric within the next 10 years or so. So you’re definitely going to see a change, but as a bank, we couldn’t just walk away from so many of our businesses. I mean, it’s just going to be – it’s going to take time. You just can’t do it overnight. And that’ll evolve as people change and you have different businesses to come up with a new, tough environment. It just happens over time. You just have to be with the right people and making sure the loans that you do go, that people will still have enough money to pay it back in the time. So it doesn’t run out for them. I think that’s the main thing.
Understood. That’s really helpful. Thank you all for taking my questions. Appreciate it.
The next question today will come from Peter Winter with Wedbush Securities. Please go ahead.
Good afternoon. David. I wanted to ask about just to follow up on the M&A, if there is more of a focus or emphasis on maybe doing a larger sized deal outside of Texas versus within Texas would kind of be more of a fill-in type opportunity?
I guess you’re asking the question. Are we looking outside of Texas more than inside of Texas, or is that?
I guess more, more about – I guess, size, is it – or are you more interested in doing a larger size deal versus a fill in that tends to be a little bit smaller?
First of all, I would say that we’ve always said we’d like deals. If we can do it in the states that we’re in Texas and in Oklahoma, where we’re more focused on that. And you know me, you’re setting me up here, but I like bigger deals. That’s there’s not any question about that. But sometimes you can’t always get the bigger deals. So you can try and try and sometimes you can date somebody for a long time and you just can’t get to that base. And so you look at what’s next what’s out there that you can do. And then you go to that other deal that you can do. And sometimes it’s not exactly what you want to do, but if that other opportunity exists where we can get accretion, whether it’s here or into another state, we would probably do that. I would say that if we go into another state though, if the franchise has to be big enough, that it’s worth us going and we can really grow at. I can’t see us going to another state, for example, for a $2 million deal. Maybe not even a $5 million deal would have to be a little bit big. Yes. I mean, yes, $1 billion deal. I mean, it would have to be a bigger deal. So it’s something that we could be – we always like to be, if we’re going to be somewhere, we’d like to be in the top five market share in that state, if we’re going to be, so it would have to be a bigger deal.
Okay. That’s helpful. And then just also back on the core margin, it came in lower than what I was expecting. I was just wondering, part of it is the increase in premium amortization expense and the excess liquidity. I’m just wondering how you’re thinking about the margin next quarter of core margin?
You look at the core margin, I think what we’ve tried to focus on actual net interest income. If you look at all our deposits, right? Since Q2 – end of Q2 of last year to now, we’ve grown $3 billion. If you look at it from the end of 2019 or pre pandemic, we have grown our deposits like $4.9 billion. So that’s a mix of money that we’re putting our balance sheet. You saw that we have grown our bond portfolio significantly is impacting the core margin, but we looking at the more like core of net interest income. So I kind of came up saying super core, what’s a super coore net interest income that’s excluding warehouse, excluding PPP and loan, fair value income. If you look at that super core net interest income is improved in the second quarter, because of combination of growth in the bond portfolio and loans. And if you look forward, if you look at a core – super core net interest income with growth of the loans, I think it’s going to be improved in the third quarter. And that’s what we’re focusing on right now. It’s kind of hard to focus on the margin right now, just because of the interest rate environment right now.
Now you’re going to trademark that super core, Peter. So don’t use it without trademark.
That’s the first I’ve heard it so far. Thanks for taking my questions.
And the next question will come from Matt Olney with Stephens. Please go ahead.
Thanks guys. Just a quick up on loan growth. We saw pretty material growth in single family loans in the second quarter, just curious if we’re going to see a continued growth in that portfolio over the next few quarters. Thanks.
I would say, yes. We continue to have very robust production and of course there are payoffs, but the new production is far exceeding. What’s rolling out and we have a very skilled mortgage team and the application volume continues to be as strong as it’s been all year. So I would anticipate that that portfolio would grow.
I would also add Eddie that I think that, over the last few quarters that when overall commercial loans have been down, that’s been a good thing to be able to replace it with. And we would say that as commercial lending picks up, there may be a point in time where we may not keep the majority of not all – everything that we do, because if we were selling some of this mortgage stuff off as you’ve pointed out that may add $18 million a quarter or so to our income, but we just kept that – kept it in that over the long run, we should benefit from it, but we’re not getting any points for selling it or anything like that. So, as commercial lending picks up that may be something we might sell off later on, but in the short term, it was a good feeling to replace some of the stuff, the more risky assets that we were trying to get out off.
Our lender referrals throughout our footprint really pushed it, pushed that number of that pipeline full.
Yes.
And just following up on that, David, as far as the new loan yields, I think you mentioned before, a lot of the new loan yields are not 4%, 4.5%range, but that’s kind of smaller deals. So larger deals maybe in that 3% range, when you layer in single family, I assume that’s going to be quite a bit lower. So maybe kind of on a, all in kind of a weighted average basis, how should we be thinking about kind of the newer core loan yields?
What you all think?
Probably 3.5%, if you were to back during the mortgage, because that, the average mortgage yield is coming in right under 3% right now.
Before we throw that in, I would rather try to do some numbers on that. I think you’re going to probably be, we don’t know we’re throwing out a number. I think it will be closer to 4%, but again, don’t book that, let us try to get you a better number than that.
Sure. Understood. All right. Thanks guys.
Yes.
The next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Hey, good morning, everyone.
Hey, Jon.
Good morning.
Question for you on you talked about deposit in flow, starting to moderate somewhat, wondering if you could give us a little bit more color on what you’re seeing there?
Well, I mean, it’s pretty much, Jon is probably about as simple as that. I mean, last year we saw what was our growth rate last? I mean, you look year-over-year, we were at 11%, but if you looked at the full-year from December 20 to December – from January to December, the numbers was in the 20% plus range. You have that….
Yes. That’s just a given numbers. If you look at the end of June of last year till end of June of this year that’s – the deposit grown $3 billion.
Yes.
But if you look at from the pre-pandemic times or 12/31/19, our deposit grown $4.9 billion. So that’s a significant deposit growth. But I agree if you look at just the second quarter, our deposits, I think annualized growing 5%. So, we do see some moderation of the deposit growth and, but this combination of people using money in the less stimulus.
I think it’s less stimulus and people using money. And again, you would think that people will start using some of those deposits to, so fortunately or unfortunately deposits to me are still, it’s still, it’s, it’s the bread butter of the bank. It’s the mother’s milk as I used to say. But the – I think that even though you’ll see deposits decrease, because people are using them, just because what we’ve normally done on an average basis, we usually grew low – we use to grew deposits organically 2% to 4% a year. So, you’re probably not going to – it may take a couple of years for them to use some of these deposits. You probably won’t see a decline in our deposits because we’re growing organically that much or more. So there’s a process that you probably won’t be able to see. But again, for the first part of this year, the first six months we’re at 4.8%, I think so, consider annualized.
In the second quarter...
Second quarter annualized. So, you had a bigger chunk the first quarter, but I think you’re starting to see, I guess I hope I’m getting enough color, Jon. You’re starting to see deposits, not rolling quite as much.
You think you were at the point where loans can start to outgrow deposits, at least for the next few quarters. And that loan-to-deposit ratio starts to come back up?
I think we are. I did, I normally wouldn’t say something like that, but, I do, I think that the growth that we have right now is pretty impressive when you look at the amount of loans that we were – you’ve been with us a long time, you saw [indiscernible] join us our loans would go down because we, this the kind of loans that we would outsource and what we wanted to get the portfolio to, it’s a hard deal to do. If you look at the amount of loans that Kevin talked about earlier on the oil and gas that we’ve outsourced, and you look at the structured commercial with a state that we outsource and still are showing the growth. If you look at the rest of the bank and just took out the Dallas market, because of the ones we lost in that particular deal, you’re probably looking at 10% plus and growth overall, so once we get, once we quit losing the loans, I’d say losing or outsourcing what we didn’t want in the Dallas market and they’re growing, I saw the growth this quarter. I’m pretty excited.
And Kevin is a real leader, I think in focused on building loans, where I wasn’t in the past as much, I was always a core deposit guy. And as long as you could take the money in deposit it in a bond, I was happy and a lot less risk in making it, but Kevin’s work real hard and he’s got his team together. And I think they’re doing a good job. And with his help and pushing us, I think that we will – I think that we will have some growth.
Yes, I agree, David, I think particularly with deposits moderating, and let’s just say deposits grow at 4%, instead of 11% or 12%, which is probably way more likely that the growth in the loan portfolio aided by less runoff of the old legacy portfolio, so that we’re about them with that de-risking. The pipeline, as I said, at the beginning in the call looks better than it’s looked in a really long period of time. The loan pull through in terms of just, we had some growth last quarter, the growth we’ve had quarter-to-date this quarter would indicate that we’re running well ahead of where we did last quarter. So that that’s north of 5% kind of growth rates. So, I do think we’re in a position today for a period of time where we cannot – we can grow the loan portfolio faster than we’re growing the deposit portfolio. And that’s obviously excluding warehouse and PPP. I’m talking about core loan portfolio.
And I don’t think that the other thing is considered, I don’t think we have to be the first to ever raise rates as rates go up. We have so much there’s so many core deposits. I think that we’re going to have a better lever than our competition is, because most of our money, I think we probably have 10% of our money in CDs.
Yes.
I mean, so it’s a very low amount, almost everything we have is really transaction accounts.
Yes. And just to kind of couple the thought with, I think it was Matt’s question previously about, the blended grade. I do think we’re seeing the growth I’m seeing in the pipeline, is growth that’s outside of mortgage growth. So Eddie’s talking about the mortgage growth, I’m talking about C&I, construction lending, middle market lending, CRE lending. We’re seeing nice pickups in those categories that are coming with higher way, that average coupon, obviously that we’re seeing in the mortgage side.
And the only caveat I would put again at if our administration decides to shut down the economy, that could change a lot of things again, but having where we’re at now, we can keep going and everybody – I mean, we need not only Texas to keep going. We need the other economies in the rest of the U.S. to keep going too, because they have to produce the goods that we need to sell and everybody has to chip in. So we can keep that going, it’ll be an okay deal.
Okay, good. And thanks for all that. And I guess one last one, also back you’ve kind of got halfway to my question on the super core concept.
Trademark, trademark.
Yes, exactly. And I was focused on PPP and some of the fair value. And can you talk about running off and this concept of net interest income bottoming, but how big is that gap between what you call the super core and your stated number and how quickly are those two converging together?
So, I feel – less take it them to separately. If you look at our fair valley income that we generated $12.2 million in the second quarter, but if you look at what the remaining balance, it’s about $25 million left, so probably we’re going to be earning next few quarter that’s $25 million, but it all depends on the – how fast does a early pay offs or some pay downs. We know that the pay offs and pay downs is definitely slowing down the guidance that we look at it on the amortization basis it’s $3 million to $4 million next few quarters just looking at, but then we’ll have $25 million. So, if you take that, it’s could have been another five, six, seven quarters before we earned up.
On the PPP side, we earned in $10.3 million on the PPP fee income, and we’ll have about $28.3 million remaining. If we look at – when we, it’s kind of hard to tell when we’re going to earn that PPP fee, but if you look at the first round of PPP, it took us about to get majority of it first three quarters, I would say. And I think if you take what the PPP around dictated, we probably going to earn that next when the third, fourth and first quarter of next year that the remaining $28 million – majority of $28.3 million that we remaining. So, I hope this gives you a color on those two items.
Yes, that helps. Thank you.
The next question will come from Gary Tenner with DA Davidson. Please go ahead.
Thanks. Good morning. Just had a quick follow-up actually on PPP, which you’ve sort of answered just a moment ago, but in terms of how you see working down that portfolio for the back half of this year, and then related to that, given that you don’t want to surely invest in bond portfolio at current rates, how you think about replacing some of that yield and earning asset.
So if you look at on the PPP, so on the round one, forgiveness is pretty much, it’s very close to be done. On round two was just kicked off in June, and I think, like I mentioned, we expect probably it’s all depends on the timing, right? When the customer want to file the forgiveness process application, but probably is going to be next three quarters. We think that the forgiveness will be done. I mean, it’s kind of hard to say, when it’s going to be heavier in the first, third or fourth quarter, but between three quarters, I think the forgiveness will be done. And then I think it comes down to how we are going to replace that? I mean, we’re growing our loans. That’s a little bit priority number one. So all the excess liquidity from the PPP loans will be put into as much as possible to new loan, but if there’s an access to money left, probably we’ll definitely put it on bond portfolio because we want to earn some income on that. We wouldn’t be probably leaving a lot of justice sitting on the cash. But we just have to wait to – when we see to see rates improve on the bond portfolio.
I like to have 10 months left to fall for forgiveness. So it won’t happen, it’s not going to all happen this year. It’ll happen. Like you said, over the next three, maybe, four quarters. There’s the bottom line, the full focus is taking the money and put it into the loans if we can.
Yes, definitely.
Yes. Very good. Thank you.
This will conclude today’s question-and-answer session. And I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Sean. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company, and we will continue to work on building shareholder value. Thank you.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.