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, Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions]
I'd now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third quarter 2020 earnings conference call. This call is being broadcast live over the Internet at 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, Senior Chairman and Chief Executive Officer; H.E. [Tim] Timanus Jr., Chairman; 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.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending 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, Grant.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now, let me turn the call over to David Zalman.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2020 conference call. I'm excited to announce that because of the confidence in our company, our strong capital position and our continued success in increasing earnings, as well as showing annualized returns of 19% on average tangible equity and 1.58% on average assets, our Board of Directors voted to increase the fourth-quarter dividend to $0.49, a 6.5% increase. The bank continues to do well and we want to share that success with our shareholders.
As stock prices experienced significant declines late in the third quarter. Prosperity Bank repurchased 98,000 shares of its common stock at a weighted price of $49.99. Our net income was $130.1 million in the third quarter 2020 compared with $81.8 million for the same period in 2019, an increase of $48.3 million or 59%. Our diluted earnings per share was $1.40 for the third quarter 2020 compared to $1.19 for the same period in 2019, an increase of 17.6%.
Net income was $391 million for the nine months ended September 30, 2020 compared with $246 million for the same period in 2019, an increase of $145 million or 59%. The earnings per diluted common share was $4.20 for the nine months ended September 30, 2020 compared with $3.55 for the same period in 2019, an increase of 18.3%.
Loans at September 30, 2020 were $20,796,000,000 an increase of $10,122,000,000 or 94.8% compared with $10,673,000,000 at September 30, 2019. Our linked quarter loans decreased $229 million or 1.1% from $21,025,000,000 at June 30, 2020.
At September 30, 2020, the company had $1,394,000,000 of Paycheck Protection Program, also known as PPP loans. Obviously, the increase year-over-year in total loans is attributable to the Legacy merger.
Our deposits at September 30, 2020 were $26,459,000,000 an increase of $9,529,000,000 or 56% compared with $16,930,000,000 at September 30, 2019. Our linked-quarter deposits increased $306 million or 1.2%, 4.7% annualized from the $26,153,000,000 at June 30, 2020. We are starting to see people spending more money and generating more account activity than earlier this year. Our asset quality remains sound with nonperforming assets at $69.5 million or 24 basis points of average interest earning assets. Our total non-performing assets decreased $8.4 million, compared with the second quarter of 2020.
Our net charge-offs were $10.6 million for the three months ended September 30, 2020 and were primarily due to $8.6 million in resolved PCD loans. These PCD loans have specific reserves of $15.7 million, of which $8.6 million was allocated to the charge-offs and $7.1 million was moved to the general reserve.
In addition, $6.1 million of specific reserves was released into the general reserve for resolved PCD loans with no charge-off. This represents a total of $13.2 million moved to the general reserve this quarter.
Loans on forbearance decreased from $3,625,000,000 or 17.2% of total loans as of June 30, 2020 to $231 million or 1.1% of total loans as of October 26, 2020. Our allowance for credit losses as a percent of total loans is higher than any time in my banking career and equates to a coverage ratio of 5.6 times our nonperforming loans.
While there have been some merger announcements recently in conversations with other bankers regarding potential acquisition opportunities, M&A activity overall is reduced. We believe that the M&A activity will start to pick up as economic activity continues to increase. We remain to enter into conversations and negotiations when it is right for all parties and is appropriately accretive to our existing shareholders.
We are starting to see green shoots in the economy, with consumers and businesses feeling more confident. The unemployment numbers are better than predicted and we believe third quarter GDP will also be higher than predicted.
Thanks again for your support of our company. Let me turn over our discussion to Asylbek, 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 September 30, 2020 was $258 million compared to $154 million for the same period in 2019, an increase of $104.1 million or 67.6%. The increase was primarily due to the merger with Legacy and loan discount accretion of $22.5 million in the third quarter 2020. The net interest margin on a tax equivalent basis was 3.57% for the three months ended September 30, 2020, compared to 3.16% for the same period in 2019 and 3.69% for the quarter ended June 30, 2020.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended September 30, 2020 was 3.25% compared to 3.14% for the same period in 2019 and 3.33% for the quarter ended June 30, 2020. The current interest rate environment combined with our excess deposit liquidity is continue to impact that net interest margin. This quarter, the excess liquidity negatively impacted the core net interest margin by approximately 45 basis points.
Non-interest income was $34.9 million for the three months ended September 30, 2020 compared to $30.7 million for the same period in 2019 and $25.7 million for the quarter ended June 30, 2020. In the third quarter, we saw improvements in service fees and mortgage income due to the improving economy compared to the second quarter.
Non-interest expense for the three months ended September 30, 2020 was $117.9 million compared to $80.7 million for the same period in 2019. The increase was primarily due to the merger with Legacy. On a linked quarter basis, non-interest expense decreased $16.4 million due to the efficiency gain from the core system conversion and operational integration and the decrease in merger-related expenses. For the fourth quarter of 2020, we expect non-interest expense of $117 million to $119 million.
The efficiency ratio was 40.2% for the three months ended September 30, 2020 compared to 43.7% for the same period in 2019 and 46.6% for the three months ended June 30, 2020. The efficiency ratio was impacted by the merger cost savings and higher than anticipated loans fair value income during the third quarter. We estimate loan fair value income for the fourth quarter to be around $9 million to $12 million based on the current fair value discount for each loan amortized over its remaining loan life.
This does not account for additional discount accretion income that may occur due to early loan paydowns or payoffs, which we cannot -- which cannot be accurately estimated. The bond portfolio metrics at 9/30/2020 showed a weighted average life of 2.68 years and projected annual cash flows of approximately $2.25 billion.
And with that let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?
Thank you Asylbek. Our nonperforming assets at quarter end September 30, 2020 totaled $69,542,000 or 33 basis points of loans and other real estate, compared to $77,942,000 or 37 basis points at June 30, 2020. This represents approximately an 11% decline. The September 30, 2020, nonperforming asset total was made up of $57,874,000 in loans, a $120,000 in repossessed assets and $11,548,000 in other real estate. Of the $69,542,000 in nonperforming assets, $11,761,000 or 17% are energy credits, all of which are service company credits.
Since September 30, 2020, $5,134,000 in nonperforming assets have been put under contract for sale. This represents 7.4% of the nonperforming dollars.
Net charge-offs for the three months ended September 30, 2020 were $10,570,000 compared to $13,001,000 for the quarter ended June 30, 2020. $10 million was added to the allowance for credit losses during the quarter ended September 30, 2020. The average monthly new loan production for the quarter ended September 30, 2020 was $449 million. Loans outstanding at September 30, 2020 were $20.8 billion, which includes $1,394,000,000 in PPP loans, out of the original $1,430,000,000 booked. The September 30, 2020 loan total is made up of 39% fixed rate loans, 36% floating-rate loans and 25% that reset at specific intervals.
I'll now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Grant, can you please assist us with questions.
[Operator Instructions] Our first question today will come from Jennifer Demba with Trust. Please go ahead.
Thank you. Good morning.
Good morning.
Good morning.
I'm wondering about fee income. Wondering, what you're thinking about the mortgage banking outlook and also the sustainability of the other line items in the fee income going forward. Will you see more business activity and consumer activity improvement in those line items. Thanks.
Jen this is Asylbek. Yes, so I think the net interest income did rebound better this quarter because of a improving economy. And you can see that our NSF fee went up and kind of getting back to then normalized rate we had pre-COVID. So we believe we can -- we will see continued improvement on that aspect.
On the mortgage income, yes, mortgage has been pretty active lately. So we continue to see the volumes there, and I expect the fee income to continue to be stable or even grow. So overall, we see a rebound in the fee income and we are doing different other one-off income that we're generating like syndication we did in this quarter, which is one-off income. So few things that are coming in, we see the continued improvement of the fee income in near future.
Yes, I would just add, Jennifer that -- what we're seeing our fee income come back because people or -- there is more activity out there and so you're seeing higher NSF fees. I would suggest that does look probably still increase we had again higher mortgage fees were that may at some point in time temper back a little bit.
Trust, again, we had good trust fees as time, and is Asylbek comment a while ago, the Legacy team created -- did a $275 million syndication, which created about $1 million, but they continue to do that and to service, we didn't have in the past. And so where it may not be as much and Kevin may want to jump in and we can -- that will have returning will have income from that. And also we charge fees for servicing those at the same time.
David, are you starting to get more incoming calls from potential merger partners interested in having discussions at this point?
I would say no, I mean there -- we've always had kind of a list of who we'd like to eventually be with and we continue to monitor those and stay in conversation with those. But, I would say that we're not seeing -- at this point in time, I would say that it's more muted than in the past before COVID and the stock prices going down so dramatically, it wouldn't be uncommon to be just busy with those all the time. I'd say here, there is activity, but again, I think it will pick up is as we get through this COVID deal and the economy comes back, but again just really focused on the same ones we've been focusing on. And at some point in time trying to do deals with those.
Okay. Thank you so much.
Our next question will come from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning, everyone.
Good morning.
Good morning.
Wanted to first ask -- David, it seems like the payoffs are a challenge for a lot of folks, and obviously with the $449 million of month in loan production. The commercial real estate bucket continues to ask macro fees. Do you have -- I guess, one, do you have any visibility into what payoffs might be in the next few quarters, just looking at the rates that you have with those loans? And then, just think I know it's too early to think about a budget for '21, probably, but just thinking about the outlook for growth on the balance sheet, ex-PPP, eventually shrinking. How are you thinking about managing the balance sheet in the next year from a growth perspective?
Well, our -- we had a management committee meeting and we saw different areas of the state do better than other periods of the state. We saw the Houston market, Central Texas market really being up, shoot up and then we had you know sometimes East Texas was up, I think the Dallas market was down, South Texas was down, and West Texas was down.
So -- but again we have probably another layer that probably you have to throw in the equation, if you remember, we had over $400 million in loans that we determine, were PCD loans. And so we're still in the process of getting out of those loans. Somebody can jump in a minute and tell me how much, but I think there's probably about $200 million that Kevin may jump in. So we have that still to go. And we also saw a decrease in what we call the portfolio structure commercial real estate loans, they were down about $300 million, $398 million.
So we saw -- and that's an area where you know that may not be a time that we really want to take jump into a bunch of commercial structured real estate loans at the same time, but so we -- those really have a quick pay down and those were decreasing. So some of our markets really grew and some went the other way, but there is explanations for both. I would say going forward, we still have some PCD loans that we have to get out. So that will be some stress on loans coming down.
And again, we'll see if we really want to jump back in and how much we're going to jump back in or can we get into the structured CRE loans, again and get those go moving forward instead of going backwards. But -- so those are some of the challenges that we have. I think, overall, a lot of it depends on the economy. I think, a lot of it. The media, lot of the elections, yesterday, everybody was happy this morning everybody, the world was coming to the end because of COVID-19. So I think when you asking for projection or budget of next year, I would say that in a normalized times that we would be shooting probably more for that 5% growth rate.
Okay. That's good...
Kevin, you may answer that.
That's accurate. David, I think that the PCD loans are down a little bit below the 200 mark, maybe 175 or 180 is a number I recently saw, but, we still have to work through those of the former legacy portfolio.
Okay. That's helpful. And then maybe Asylbek on the margin, it seems like we should be getting close to a core here I guess depending on how you think about core versus stated. Asylbek, any outlook on the margin from your view and what if any, can you do to continue to lower the funding cost. It seems like we're getting close to a core?
I'll talk about on the core basis because it's hard to predict with a fair value, fluctuating from quarter-to-quarter. But in the core basis, it's -- if we project in the near term, it's kind of hard to predict what the NIM would be, and I'll explain why it is because there is so many moving parts right it's -- as you saw that we -- our core margin was down 8 basis points this quarter, in the third quarter, but like 45 basis points was due to the liquidity we had in our books. So we continue to see this liquidity in our books and as you know us in the fourth quarter, we're going to get additional liquidity from the public funds, due to the tax payments usually will go up and the end of the year about $400 million or so additional deposits from public funds and others.
So that's going to be additional liquidity, but we're mitigating that by -- we're investing in the -- first of all, we try to invest in the loans, but then we've focused on the bond portfolio. We're right now -- we're doing a mix of the variables and fixed bonds because if rates goes up, we want to kind of have assurance there, that's why we're doing variable securities. Then other part is the PPP forgiveness, right, I mean, we have $1.4 billion and we already submitted some application for forgiveness and we already received smaller amount, but we already got forgiven. So we don't know how the dynamics on the PPP loan going to go and to see if the -- how much of pay off we're going to be there, that would create additional fee income that would impact the margin.
And then the deposit cost, yes, we actively manage deposit cost, I know we have done several cutaway, one cut in the third quarter and we're doing additional cuts in the fourth quarter on the deposits, you -- bringing it down. And the last part, it would be like sub debt. So we'll be paying of the sub-debt $125 million in the early December, that's going to be beneficial to the margin. So there is a lot of moving pieces and it's kind of hard to give accurate the NIM guidance. But like I'm going to mention that from 8 basis points we declined 45 that due to liquidity. So if everything stayed constant and I'm kind of looking forward to the fourth quarter, I would -- I could see our NIM going down maybe few basis points on the core basis. I know it was a long answer, but that's...
Not at all.
Come on, Brett. And the bottom line is, again we had a -- we normally we don't, but we had over $1 billion that we had in investing overnight at 10 basis points and generally we don't do something like that, but again with interest rates being so low, we didn't want to just jump in something and just buy at the first thing. So hopefully we're going to get that invested by the -- this quarter. We're pushing to get that investment. So the other deal that Asylbek is talking about is, we have more liquidity coming back in, we have [indiscernible] funds, that when those loans get paid back, that could throw a wrench into a bit.
If you take all that stuff aside, I think it's still, what we said exactly last quarter that you're going to see 2 to 3 basis points in core change, if you take out these variables with PPP, the liquidity and all of that stuff on a normalized basis.
Okay. Just one quick item around the margin, and you mentioned the $2.5 billion of cash flow in the securities portfolio. Any idea of how much that's coming off at and then what you're reinvesting or expecting to reinvest at?
So I think right now, if you get a fixed, I think $1 billion and $1.1 billion, $1.25 billion, I think on the variable you might get 50 basis points right now.
Okay. Thanks, appreciate all the color.
Our next question will come from Brady Gailey with KBW. Please go ahead.
Yes, hi. Thanks, good morning guys. The mortgage warehouse had another great quarter. I think, was up about 25% linked quarter to $2.3 billion and that's a big number. I know that can be hard to predict, but how do you think about the stability of the warehouse into the seasonally soft 4Q? And then as you look out to 2021?
Let Kevin take that.
Yes, it's all --- Brady, it's always a tough one to predict anything up more than six weeks, it gets pretty tough to predict. Within that six weeks band we, we can look at mortgage applications and we can look out from that time of applications is six weeks later, there's a pretty high, are squared of that's the time it's going to hit our mortgage warehouse line. As you said in the quarter, it was really, really strong, average balances for the quarter were $2,279,000,000 versus $1,843,000,000 last quarter.
So up $436 million on average. We ended the quarter particularly strong, highest number ever, $2,731,000,000. That nice September month end balance carries over in October. So October, is turning out to be even a better month. I'd say the average balance so far in the month of October is up a little over $250 million from what it was Q3.
So off to a really good start. I think that will moderate a little bit going into the fourth quarter. If I just look at the Mortgage Bankers Association, put out a new forecast about a week ago and their prediction and again rates could change all of this. Their prediction was the fourth quarter in terms of originations will be down about 4%, a little over 4%. It doesn't feel that way so far.
The refi boom continues. So I think the fourth quarter is going to be good. Getting in the first quarter of next year gets a little tougher to predict, but it again, you look at the MBA forecast and look they've never been right, but they've got more data than anybody and it's hard to be right. So I'm not faulting them. They're predicting for next year volume will be down about overall 23% and that's 48% down on the refi side of things, and about 5% up in purchase volume.
And so those rates -- so we'll go over that forecast is right or wrong. Most of that decline for next year is skewed to the latter part of the year. So it's in the last two quarters, they do expect the first couple of quarters to continue to be strong. So that's probably the best data we have going out beyond six weeks is just the MBA forecast.
As you saw from the quarter one of the things, I was pleased to see was our weighted average coupon kicked up from 310 to 318. It's been a long time since that happened. So that was good to say other stats, volume on our books was 51% purchase, 49% refi. So that's about what it was last quarter, turn days -- 15 days to turn the portfolio over. That compares to 14 last quarter that was like an all-time low and 17 in the typical quarter -- typical quarter. So also good -- all good so far for this quarter and I expect it to be pretty strong.
Kevin, would it be safe to say even though mortgage lending maybe leveling off to some degree and you may see a decrease, we took on a couple of additional customers that may help to keep our balance is more than it was...
That is safe to say David, if I look at the pipeline, I think we have three or four new clients that are -- one has spent too long to many, and we got three more scheduled I think between now and the end of the year, probably now and early December. And those things take about six weeks to board, through all the due diligence and test files and some other things to make sure systems are working before we go forward with the client, but I do think we'll add a couple of hundred million dollars worth of new commitments to the books, and that will help our volumes stay a little bit higher than that MBA forecast.
Right. All right, that's helpful. And then you reengaged on buybacks just barely in the third quarter, not a huge amount, but as you think about buybacks going forward, do you think you'll be active here? I mean the stocks at one-nine of tangible, which is a discount versus where you guys normally trade. So should we expect continued buybacks and size here or no?
Probably a little color where we came from, we had a buyback in plan, but as COVID started and you start off with $3.6 billion in forbearance loans, we kind of pulled back and said how long we -- maybe we just need to look at everything. And I think even the regulators, would talk to us and saying they never tell you, you couldn't do it, but at the same time, I think they really want it is to watch the amount of capital we were spending.
So we were cautious at this at the beginning of the year. And then even in this third quarter we really want to save our bullets to pay back the $125 million in debt that came along with Legacy, because that's at 5% or 6% that can save us $5 million or $6 million a year right there. So that's what we're focused on, but when the price drop so low, we had no choice.
We had to jump in and I would say probably this, we feel better where the market is today. I mean, we're at 1%, 1.1% of our loans on deferrals, our nonperforming are down. I feel kind of good, not on would -- you never know, but we feel pretty good where we're at from an asset quality issue. So I would say that if the price dropped again, we probably would -- probably be back in the market to some degree.
Okay. And then finally for me, I just wanted to touch on M&A, again. Yes, David, what needs to happen for you to get very comfortable, either the impact in the M&A game.
So I would say we are very comfortable, we're ready. So it's not as --- is I think a lot of it has to do with the other side, the other side, their stock prices are down like 25% or 30% or something like that compared to where they were in the high and even though they could say, well your stock at could say our stock is down too, but again for some reason, people like to -- they don't like to sell in the market, is the way it is, they like it to be better.
Having said that I think we -- all banks were ongoing through this deal ups and downs. Nobody really knew where all this pandemic was and all that kind of so. I would say that -- I'm just going to throw this out there, but I think you will start seeing more people talking now, I think you were, there's probably three or four deals people talking right now out there in the market. And I think by the beginning of the year, you'll start to see some pretty decent deals or significant deals come around again.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning guys. Thanks for taking my questions. I just want to make sure this is right, trying to understand, but I think the monthly -- the average monthly bond production was down pretty sharply. Can you just give some color around that and what we could expect going forward? I'm trying to reconcile your comments on core potential -- core expectations for somewhere close to mid-single digits next year? Thanks.
Okay. This is Tim, Michael. As I said, it was $449 million average monthly production for the current quarter. If you go back to the first quarter of this calendar year, it was $476 million and if you go back to the last quarter of '19, that quarter Legacy was with us two months, November and December, it was $496 million. So -- and I left out the quarter ended June of '20 on purpose because we had all those PPP loans that got booked in there that month, so it that quarter. So it's skewed that monthly number.
So if you go back to the quarter ended December 31, '19, once again, it was $496 million, then he went to $476 million, now, it's going to $449 million, and I think all that is directly related to the COVID issues, and the oil and gas issues in the state of Texas and Oklahoma. All that seems to be leveling out at this point in time, no guarantees, obviously.
So I don't expect it to deteriorate substantially if at all from where we are and we're hoping that it will start building back up. We're going to budget some loan growth going forward. So it just is what it is in terms of the economic environment that we have to operate in.
David already addressed the -- some of the pay down issues. Our burn rate has been fairly substantial because of some of the PCD loans that we wanted to exit, etc. So I think it's going to be fairly stable going forward, I hope, I'm answering your question. But I think you take...
Yes. Yes, I was trying to get a sense for the drop sequentially.
Yes, I mean if you take out those numbers divided by the rate you're talking about $25 million at difference a quarter, so it's $100 million a year. So I don't think that's shouldn't jump out at anybody and I again, I do think there still be more pressure with this COVID-19 probably through the end of the year. So I don't know that you see a lot of growth, especially with the loans we're still trying to work out of Legacy. But, I think to me go into what we've gone through and you've only seen the $25 million down for the core. I actually think that's pretty good.
Yes, I don't think it's bad given the circumstances. One could easily have predicted a worse situation. We're still saying...
Okay. Helpful.
We're still seeing decent loan demand come through our loan committees. So there is just no reason right now expect a substantial fall off from where we are.
Got it. Okay, maybe as a follow-up. Can you just remind us where you are on the cost savings from the likes to deal, I know, the systems conversion is now gone in past and just how much more would you expect to get and any changes to the target and might have the environment. Thanks.
Yes, I mean from the cost savings from the acquisition of, yes, we realized, most of the cost spending, there might be small items we're looking at right now, but I have to say that while we may be have -- we will save a little bit more, but reinvesting in the technology, which is a one of that cost, we're one of the highest cost. So from that perspective, we might have savings on one wide area, but we're going to spend a little bit another. That's why from my guidance, I gave $117 million to $119 million for the next quarter based on this variables. But overall, yes, we achieved our cost savings from the Legacy merger.
Okay. Thanks for taking my question.
Thank you.
Our next question will come from Brad Milsaps with Piper Sandler. Please go ahead.
Good morning, guys. David, you commented that your reserve is the largest, it's really ever been in your career. It seems like most of the charge offs that you took this quarter related to the PCD book. Just kind of curious kind of the drivers behind the provision you took, maybe kind of what you're doing, kind of to review the existing portfolio and kind of what that means for provisioning as you kind of look out over the next several quarters. Do you think at some point, you're going to start maybe releasing some of that reserve based on what you see or kind of how are you thinking about that?
Well, if you go back and look the charge-offs are really the majority of everything from the PCD loans. And so that money being put it back into the general reserve. Yes, I mean, when you have 5.1 times coverage on nonperforming assets, I think that's huge and somebody was probably -- I even -- you have this formula that we have to follow. But, there's highs on it, lows and there is a medium, there probably could have been a point, we could have taken a position when you took put back that, but again with -- where we're at right now, again, I thought it was still prudent at this time to go ahead and put the $10 million in their deal.
But having said that, based on our model, we wouldn't -- I don't think that we know we have some flexibility there. I want to be very careful, but you do have flexibility, will you be on the high point, low point, moderate point. But I think, I don't know that I never recommend taking money out of the reserve, but what I would say is. I don't know that we would have to put money in the reserve going forward for some time unless something changes dramatically from what we see.
Great, that's helpful. And then, just to kind of follow up on the liquidity discussion. How are you guys thinking about PPP internally as those loans to get forgiven? Are you guys operating the assumption that a lot of that liquidity will leave the bank or are you preparing for getting that money back from the SBA and some of that deposit money sticking around? Just trying to get a sense of sort of how you're thinking about. I won't call it a liquidity problem, but just putting all of that cash to work as you kind of think about it internally and trying to size it.
I'll start off, if you want to you want to get just an overall where we're at on the PPP, Eddiee, and then though we could the liquidity issue what I think is.
Sure. We're still at about $1.4 billion, a little bit under on the balances. We started to getting some of the payoffs from the SBA, largely on loans under $50,000, about 400 loans today have been paid off, but it's only represented about $13 million or $14 million so far. We have several thousand more that are in the process, should be in submitted and what's sad to see how long that takes a lot of people waiting to see if that threshold on the paperwork would be reduced for loans under $150,000, so far that has still only been effective for those at $50,000. And just to give you an idea, about 60% of the number of loans that we have all fall under $50,000, but that only represents about 10% of the total dollars.
Yes. So that's kind of an overview, my personal opinion, this an opinion that. I think customers have a lot of money and I think that a good portion of the liquidity that we have will stay with us. I think it will be there. I think businessmen for sure want to keep additional money if any time you may see them if they have some loans, I only want to pay down person that I don't see the liquidity was the postures have gone away, really. In fact, I think you can only grow.
David, I might comment I agree with you, if you look at who we made these loans to, the vast majority of the loans went to what I would call our core customer base. There are people that have bank with this for many years in most cases. So I would be surprised if that money just automatically went somewhere else. I don't see that.
Well, the thing I noticed is that a lot of the money that that is in their account they didn't spend.
That's true in some cases. Yes.
They didn't spend it, where else they use or other funds and or scared that maybe the government wasn't going to really give it back to, and maybe they were saving just in case to pay it. In case they were lied to, but for the most part, a lot of, we didn't. I just, they're still savers from what I can tell.
Great. Thanks for the color, I appreciate it.
Our next question will come from Peter Winter with Wedbush Securities. Please go ahead.
Good morning. I wanted to ask about the core margin beyond the fourth quarter. It just seems that there'll be ongoing pressure on the core margin just with the reinvestment on the fixed-rate loans and the securities cash flow of over $2 billion. I'm just wondering if you could talk about some of what you're seeing on the core margin beyond the fourth quarter.
Yes. Beyond the fourth quarter, it's very hard to tell. I mean it's PPP loans, I know, we're having forgiveness now, but I think most of the PPP we're expecting more, Eddie with first and second quarter of next year. So, I mean, in with the current economic environment and the with election coming up, it’s so hard to give a guidance, so I don't think it will be a prudent to give any guidance at this moment.
Yes, I mean, Peter. I think the bottom line is, as you said, I think there could be some downward pressure, 2 to 3 basis points on the core margin on the other hand, a lot of things can change that too. I mean we have been lowering some rates much as a week ago, that's going to help us a little bit. We might have a little bit more on that side. We had $1 billion in liquidity that really wasn't invested at 10 basis points.
Hopefully, we would like to build loans, not go backwards in loans. So all of those dynamics change. We never been the bank of what's happening now. We've always just tried to hit singles and doubles and I think for the most part, we don't have things out there that just changed dramatically. And I don't think you're going to see us change dramatically and we're trying to be very transparent. And if I can really give you just a real idea of what I thought the net interest margin would be next year, I would be more than happy to, but there is still a lot of variables and I just don't think that we can and that wouldn't be fair to anybody, because I think it could go either way sometimes, probably more so on the downside.
On the core, maybe 2 to 3 basis points, but -- just it could go the other way. I mean, if we get all the PPP money back. We can take all that into income. That changes dynamics completely by $40 million. There are so many dynamic segment change. Economy goes back, you put 5% loans also, again I know I'm throwing a lot of stuff out there, but there is a lot of stuff out there right now.
Okay. The reason I ask is, I think about expense management for you guys. So it's always been a strength of the company. And I'm just wondering with more customers utilizing digital banking, is there any plans to maybe reevaluate the branch network or looking to reduce some of the office square footage with this work-from-home?
I don't -- my gut is, we don't have plans to shift locations down unless we do a deal with another bank that has a lot of locations close to us. I will say what is helping us, when we needed additional space at our corporate office in Houston, we were considering to buy a building or build another building, again with the people working from home, it's helped to alleviate some of that situation.
So what it may do is cut costs from going up more dramatically in the future, but I don't see us cutting cost at our location and I think one of the things that I hear more about our customers, they love that they can go almost anywhere in the state of Texas and we have a bank there formed. Whether their kids are at school or they start retiring out in the suburbs and that's probably one of the biggest thing they do like about us.
So I'd say that probably as we build new banks, we build probably with lesser square footage and they'll be more digital, but you'll still have banks out there at the same time, maybe less people in them while still offer that service. And I think that's what makes us different than a lot of the other people really.
We saw some of the big guy shut down in places like Victoria, Bank of America and Wells Fargo and we opened at one of the locations where why I thought it was crazy because we had some many locations there anyway and that particular bank raised $30 million or $40 million in a few months. So it -- for us it works and I think for everybody and as long as we can keep our efficiency ratio and our expenses where they're at, I don't see us closing a bunch of locations. I think that we are again may as well talk about it, but we cut some deals on some -- on the plan office save around. It's going to probably save us a couple of million dollars a year.
Yes.
And so in some other offices.
Yes, Peter, this is Asylbek. We do look at into the expenses and we try to make sure we cut expenses, but I want to kind of point that we might have more opportunity to do a little bit of a savings, but at the same time we want to invest in the technology. So we don't want to ignore the technology. And I think it's a future of the bank. So all the savings that we have, we want to invest in technology and we have been doing that. And what the benefit, what --- merger with Legacy was very beneficial, but I see that they had a great technology and we have a great technology and when you consolidating these two banks, you kind of look at and evaluate each this IT system and you pick the best one, it might cost a little bit more, but you from the -- our customer perspective and we choose the best system. So we've been investing quite a lot of in the technology lately. So that might be offsetting some of the cost saving we could come up. So in the net, I think we're just going to stay where we are and -- but...
But net something that I've look at, I think sometimes you see that. Okay. You can have a reduction in staff or you can have a smaller deal, and you save money there. But then when I look at what we spend on technology it takes that and some...
Exactly, that’s a –
Kind of, I don't know, you may save some but with this technology, I mean I saw this month. Just it was unreal how much money we spend a month on technology, which is just a lot.
Let me emphasize a couple of things that have just been said. David mentioned the fact that we picked up some additional customers because some of our competitors closed down their locations. That's primarily been as David mentioned, Wells Fargo and Bank of America. And granted it's been in some of our smaller communities, but in essence those banks have vacated those communities and it has benefited us quite a bit very significantly. So in those communities themselves.
And while there's a clear direction toward technology and banking, which we understand, we embraced and we intend to continue with and even improve what we offer in that regard, we still have many, many customers that come to the banks, come to the motor banks, come to the lobbies, we don't see any indication at all that our customers don't want to use the brick and mortar. So I would suspect, we're going to hold our place.
So you can see the policy through deposits we grew this quarter, I mean when I'll walk through the lobby of the bank that I sit in and I see two or three people who counts other banks that are closed. Why don't you get an appointment. I think they like the service.
I have customers mentioned to me all the time, how much they appreciate our network of banking facilities that they can actually go to, if they have a need to do so. I think it gives us a real edge and it's important.
Well, I think you not only have the edge that can go there, but then I'd have to say our call centers have really been great to with the technology. So we offer both really.
Right.
That's great color. I really appreciate that. Thank you.
Our next question will come from Bill Carcache with Wolfe Research. Please go ahead.
Thank you. Good morning, everyone. David, I wanted to follow up on your earlier M&A comments. Some investors have started to wonder whether it may begin an increase incrementally more difficult for you guys to continue to grow via acquisition in Texas after the Legacy Texas deal. Can you speak to that and more broadly discuss how close we are to the point where you're satisfied with your positioning in Texas and could we see you start to consider growing more aggressively in other markets outside of Texas?
I think that we've always said that, our first and foremost, would be to continue to build our Texas Oklahoma franchise, because that's where we're at. I think that's still our first focus and just out of the FDIC website and pull all of the banks at over $1 billion in Texas, and you'll see there is a hell of a lot of them. So I think there is a hell of a lot of opportunity there. But having said that, I don't know that we'll ever -- I don't know that we will say, no to something that makes sense. I don't know that we want to be somewhere, do something with somebody that had $10 billion but they're in five different states or something like that, but if there is something in another site that has -- and they have good control, they control the market share. I think that we would look at that, at the same time, it will be probably our second pick, not our first pick. But we're not opposed to looking at that. I think that we're ready, Kevin and the Legacy team have been so good that, I would have never thought that we would either be in a position to do this at this point and we are because of them. They've been just great, great members and really helped us build this deal.
And so I think it allows us to look at things in a different perspective. They had a different perspective. They've done things that we didn't do in the past. That we were probably scared to do more in the warehouse financing stuff that they had and some of the other commercial, middle-market lending that we're getting more comfortable with. And so I think that it would broaden our horizons at the same time too. I think they may -- they've got some from us on the underwriting side that's helped them. So I think we're all learning together and I think that because of our deal and the deals that we put together, it provides us the ability to look at more opportunities that we might have, if we were just by ourselves, a year ago. I hope that gives you any color or not.
Yes. That's really helpful, thank you. Separately, your efficiency ratio ex-merger charges at the lowest levels we've seen and your comments on expenses were very helpful, but can you give some color on how much of the efficiency improvement you think is a function of scale benefits and how do you -- I guess how do you all think about the trajectory of operating efficiency in light of the technology investments that you've discussed.
I mean, the efficiency was about 40.2% this quarter and it was aided by the cost savings we had. And also this a fair value income that we generated. So it's I think going -- looking forward, I mean, we ran about what 42%, 43% as pre-Legacy. So I think if it normalized, I would say, probably, we're going to be running around that time -- that rate and maybe a little bit less, so we did gain the efficiency from that perspective, but at the same time the investment in technology is pushing up the expenses. But I mean, overall, I mean if you look at it, we have best-in-class and efficiency ratio...
Yes, hi. I think we always say that we can't get any better, somehow we do, but again I'd say the -- I'd say, if you go any deeper you're cutting red meat, you're not cutting fat, your cutting red meat probably.
Understood. And lastly, we have a good idea of what to expect from a tax policy perspective if Trump is reelected, but under blue wave scenario that leads to a corporate tax rates to rise to 28%. Can you discuss what that would translate into for you guys?
I can take that. So if under Biden assuming he wins, the tax rate is 28%. So we kind of ran pro forma analysis on taxes to see how much of a effective tax rate would be. I mean if you look at currently at 21%, our effective tax rate is around 21%. So when we run the pro forma, our effective tax rate will be around 28%. And the reason is because I mean we don't have significant tax-exempt income that would be making differential. But since it could be a change because now since if the tax increases that we might be investing in tax-exempt assets that would help us, would help us. But, right now at the pro forma 9/30, we're staying at 28% or so.
I think it's hard to call. I mean, if you just take a pencil and make up the difference between 21% and 28%, if you just multiply another 7% to what your tax are. On the other hand, easily for every action there is a reaction. And what I've seen is that happens, you never know there may be the difference in the yield curve where we're at right now. Where we'd like to more of a yield curve, it's more flatter right now, but again any kind of pickup in the yield curve of anything we are 10 years instead of being 80 basis points, it's 150, a huge when you multiply that by $30 billion in assets. So it's really hard to call, I mean, fundamentally is very basic you can you just take the difference. But usually for a reaction, there is a reaction. And historically we've operated under Republican administrations and we've operated under Democratic administrations and it's always been -- we've always been successful at it and can vote.
That's very helpful. Thank you for taking my questions.
Our next question comes from Gary Tenner with DA Davidson. Please go ahead.
Thanks, good morning.
Good morning.
I wanted to ask a quick follow-up in terms of kind of the balance sheet expectations on the investment portfolio with the $1 billion of cash. I think the time it was that you're focusing on putting that to work. If it goes into the investment portfolio, is that kind of ratable over the fourth quarter or would you want to get that invested sooner than later?
I think we're trying to push it sooner than later. Yes. Again...
Okay. And then...
When you start buying and we buy in box of $100 million to $200 million and so a lot of stuff we have to buy, it's just -- it's not out, we may have to deal directly with Fannie Mae or Freddie Mac, and there just so much production they have a month two at the same time, bond sometimes in the secondary market, it's hard to get boxes, stuff like that or at least at the coupons we want and stuff. So it's not an overnight deal is not likely you to take and invest $1 billion, but we're already working on it and I'm hoping that within over the next month or so we'll have an investor.
Yes. And also we're monitoring our deposit. I mean, how much of -- how sticky the deposits are. So that's going to be -- they've roll in to see how much will be invest in the securities. But I agree, we are actively trying to invest those liquidity as much as possible to variable and fixed-rate securities.
Okay. And then the quarterly cash flow coming off his various portfolio right now?
Right now is annualized cash flow is about $2.2 billion on those securities over the next 12 months.
All right. Great. Thank you. Our next question comes from Jennifer Demba with Trust. Please go ahead.
Hi, thank you for letting me you back in the queue. Two questions.
You came back.
Yes. Two questions for you, David. With so many industry headwinds for Prosperity and the banks, the yield curve, lower loan accretion, tough mortgage comparisons, maybe a higher tax rate. Can earnings per share be up for Prosperity next year? Are there any levers that you have that could make that happen? And then I have another question.
I don't know that there'll be exactly where they're at this year because it's been a great year, but I would say we're probably better than what the analysts have us at.
The wildcard Jennifer is fair value income on loans, because it's going to be decreasing next year. So that's going to be significant amount of income that we generated this year that we might not have mentioned.
No, having said that, so Asylbek if we take $30 million or $40 million in the income from PPP, we could beat this year.
And that's a good point.
You don't know, but I mean if everything were static and we were amortizing the money we're getting from the PPP, leave that out. I do think you'll get it next year and I think that will change the dynamics and it could be more than you did this year. But at leaving that aside, I still think we'll do better than what the analysts have aside, just in my own calculation.
Thank you. And my second question is, when I talk to investors, sometimes about owning your stock. One concern that comes out, is that Prosperity is going to do less than desirable transaction. And I'm just wondering if you could speak to your long-term discipline in the face of earnings headwinds that you haven't done unattractive deals, that you've waited, you've been patient and waited for the right deals. No matter how long that have taken to come around. So can you just talk to that maybe?
Right. People can say whatever they want but history tells you the real story. If you just go back and look at it, we've never have done a deal just to do deals. It has to make sense where the people had to be with us that we have helped our franchise. It is -- there was something that added to it that would help us get. I don't think we ever did a deal that wasn't accretive. You can see how much that Legacy is really added to our bottom line, you can imagine as they work with us right now. You wouldn't see a 17.6% accretion year-over-year at this time.
And so I think they were a big part of that, I think every deal we've ever done. And I would say, out of the 40 or something deal we've done all the remaining it is exception of two we've been a little bit that hadn't turned out our way. But it hadn't turned out our way, maybe for the social side, but from the earning side, it's always turned out our way and I don't -- when you own as much stock as I do or we all do history, I'm not here just to build a company just to be bigger, I mean at my age and if it stays on, people keep running it. I want to make sure that's the right thing and we make more money than safe and sound, I don't, ever want to do a deal with looking out of stock. I have in my family has been saying I never want to do a deal just to say we're going to do a deal to be bigger.
Hey Jennifer.
Hi.
This is Kevin. I want to overview -- the guy who sat across on the other side of the table from David and team for two years, trying to get them to do unattractive deals. In terms of the price and there was never a waiver into their discipline about what they expected and model for accretion. They didn't anybody -- any investment bankers model was no good, they have their own model, modeling accretion, and there was not a order of bunch and I tried for two years. So -- and I consider myself a pretty good salesman and I got nowhere.
Thank you so much. I appreciate that.
This will conclude our question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Grant. 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.
The conference has now concluded. Thank you for attending presentation. You may now disconnect.