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spk12: Good morning and welcome to the Prosperity Bank Shares Incorporated first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Senior Executive Vice President and General Counsel. Please go ahead.
spk01: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' first 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 several weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares, and here with me today is David Zolman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanis, Jr., Chairman, Asobek Osmanov, Chief Financial Officer, Eddie Saffity, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, 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 Osobek Osmanov, who will review some of our recent financial statistics and Tim Tamanis, 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, Gary. 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 Bank shares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bankshare's 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.
spk13: Thank you, Charlotte. With the hard work of our entire team, the combination of Prosperity and Legacy Texas continues to bear fruit as reflected in our positive results for the first quarter. Excuse me. 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 great honor. Our net income was $133.3 million for the three months ending March 31, 2021, compared with $130.8 million for the same period in 2020, an increase of $2.5 million or 1.9%. The net income per diluted common share was $1.44, where the three months ended March 31, 2021, compared with $1.39 for the same period in 2020, an increase of 3.6%. Our annualized returns on average assets, average common equity, and average tangible common equity for the three months ended March 31st, 2021 were a 1.54% return on average assets, 8.6% return on average common equity, and 18.43% on average tangible common equity. Our prosperity's efficiency ratio, excluding net gains and losses on the sell or write-down of assets and taxes, was 41.25% for the three months ended March 31st, 2021. We continue to watch expenses, but also expect to make prudent capital expenditures to plan for our future needs and increase shareholder value. Our loans at March 31st, 2021 were $19.6 billion, an increase of $511 million, or 2.7% when compared to $19,127,000,000 at March 31, 2020, primarily due to a $558 million increase in warehouse purchase program loans. Our linked quarter loans decreased $608 million, or 3%, from $20.2 billion at December 31, 2020. And that was primarily due to a $570 million decrease in the warehouse purchase program loans, more of a seasonal issue. At March 31, 2021, the company had $1.1 billion in PPP loans. At March 31, 2021, our oil and gas loans totaled 503 million net of the discount and excluding the PPP loans, totaling 142 million, compared with oil and gas loans of 718 million net of the discount at March 30, 2020. This represented a decrease of $214 million in oil and gas loans year over year, most of which was planned. Our deposits at March 31, 2021 were $28.7 billion, an increase of $4.9 billion, or 20.7%, compared with $23.8 billion at March 31, 2020. Our linked quarter deposits increased $1.4 billion, or 5.1%, 20.5% annualized from $27.3 billion at December 31, 2020. Deposits continue to grow as the government stimulus payments and other assistance continues. Consumers are now spending more, and we hear from restaurant and other business owners regarding the strength of their business. The PPP loans also contributed liquidity to businesses, some of which, such as hotels, hospitality services, restaurants, were in dire need of the funds. Our year-over-year non-performing assets decreased 34.2%. Our non-performing assets totaled 44.2 million or 15 basis points of quarterly average interest earning assets at March 31st, 2021, compared with 67.2 million or 25 basis points of quarterly average interest earning assets at March 31, 2020. The economy is doing well and should continue to improve as more and more people are vaccinated and more businesses reopen. Texas and Oklahoma both have bright futures. According to the Dallas Federal Reserve, Texas now has the fastest growing population in the nation. Further, the Dallas Federal Reserve is projecting over 6% job growth meaning over 700,000 new jobs in Texas for 2021. And Texas is expected to outperform most of the other states for the next three years. Companies continue to move to Texas with HP and Oracle announcing headquarter moves and other companies such as Tesla and Samsung announcing a major expansion into Texas. Oklahoma is also projected to have population growth for 2021 and has seen expansion of many of its large businesses operating in the state, including Boeing, American Airlines, Costco, and Amazon. Consumer spending in Oklahoma is above early 2020 levels, and retail job additions and new housing permits are higher than the average US rate. We are carefully monitoring office building, hospitality, and oil and gas loans, but continue to participate in these areas with experienced borrowers that can withstand the ups and downs of their industries. As bank stock prices have increased, there are more conversations regarding mergers and acquisitions. I believe you will see more transactions throughout the year unless new tax rates are introduced, which may change the market. I expect that net interest margins will continue to decline, regulatory burden will increase under the current administration, and technology will continue to be ever-changing, expensive, and increasingly prevalent, which is a recipe for more consolidations. Overall, I want to thank all our associates for helping create the success we have had. We have a strong team and a deep bench of prosperity and will continue to work hard to improve everyone's quality of life and shareholder value. Thanks again for your support of our company. Let me turn over our discussion to Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
spk11: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2021, was $254.6 million, compared to $256 million for the same period in 2020, a decrease of $1.4 million, or 0.6%. The current quarter net interest income includes $16.3 million in fair value loan income and $13 million in fee income from PPP loans. The net interest margin on a tax-equivalent basis was 3.41%, for the three months ended March 31st, 2021 compared to 3.81% for the same period in 2020 and 3.49% for the quarter ended December 31st, 2020. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31st, 2021 was 3.19% compared to 3.36% for the same period in 2020 and 3.26% for the quarter ended December 31st, 2020. The net interest margin has been impacted by an influx of excess liquidity since the start of the pandemic. Excess liquidity during the first quarter of 2021 impacted the net interest margin by five basis points compared to the quarter ended December 31st, 2020. and by 15 basis points compared to the same period in 2020. Non-interest income was $34 million for the three months ended March 31st, 2021, compared to $34.4 million for the same period in 2020 and $36.5 million for the quarter ended December 31st, 2020. Non-interest expense for the three months ended March 31st, 2021 was $119.1 million compared to $124.7 million for the same period in 2020. On a linked quarter basis, non-interest expense decreased $1.1 million from $120.2 million for the quarter ended December 31st, 2020. For the second quarter of 2021, We expect non-interest expense of $118 to $120 million. The efficiency ratio was 41.3% for the three months ended March 31st, 2021, compared to 42.9% for the same period in 2020 and 40.8% for the three months ended December 31st, 2020. During the first quarter of 2021, we recognized $16.3 million in fair value loan income. This amount includes $6.3 million from anticipated accretion and $10 million from early payoffs. We estimate fair value loan income for the second quarter of 2021 to be around $4 to $5 million. This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs. Also, during the first quarter of 2021, we recognized $13 million in fee income from PPP loans, majority from the forgiveness of the first-round PPP loans. As of March 31, 2021, the first round of PPP loans had a remaining deferred fee balance of $9.4 million. We anticipate more than half of this remaining balance will be recognized in the second quarter of 2021 due to loan forgiveness. Regarding the second round of PPP loans, as of March 31, 2021, we recorded $530.7 million in loans and generated about $24 million in deferred fees, which will be recognized over a five-year period or until the PPP loan is forgiven. The bond portfolio metrics at 3-31-2021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2 billion. And with that, let me turn over the presentation to Tim Timanis for some details on loan and asset quality. Mr. Timanis?
spk14: Tim Timanis Thank you, Asilbek. Our non-performing assets at quarter end March 31, 2021, totaled $44,162,000 or 22 basis points of loans and other real estate compared to $59,570,000 or 29 basis points at December 31st, 2020. This represents approximately a 26% decline in non-performing assets. The March 31st, 2021 non-performing asset total was comprised of $43,338,000 in loans, $362,000 in repossessed assets, and $462,000 in other real estate. Of the $44,162,000 in non-performing assets, $9,505,000 or 22% are energy credits, all of which are service company credits. Since March 31st, 2021, $844,000 in non-performing assets have been removed. Net charge-offs for the three months ended March 31st, 2021, were $8,858,000 compared to $7,567,000 for the quarter ended December 31st, 2020. No dollars were added to the allowance for credit losses during the quarter ended March 31st, 2021. The average monthly new loan production for the quarter ended March 31st, 2021 was $645 million. This includes an average of $177 million in PPP loans per month. Loans outstanding at March 31st, 2021 were approximately $19.6 billion, which includes approximately $1.1 billion in PPP loans. The March 31st, 2021 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.
spk01: Thank you, Tim. At this time, we are prepared to answer your questions. Gary, can you please assist us with questions?
spk12: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question is from Jennifer Demba with Truist Securities. Please go ahead.
spk08: Thank you. Good morning. Good morning. Question for David. David, how much are you willing to kind of grow the securities portfolio while we're waiting for loan demand to improve in the industry? And then my second question is on your pipe in the mortgage warehouse. What are we seeing and expecting in the second and third quarters of this year? Thanks.
spk13: Okay, thanks, Jennifer. I'll answer the first one. I'll let Kevin take the second one on the mortgage warehouse. But you're right. You know, historically in the past, and you watched us, We have, you know, probably our duration on our bond portfolio is about three years, maybe 3.95 average life for three years duration. We had so much roll off every year that historically we would not only, we weren't selling anything to the Federal Home Loan Bank at night. We were actually purchasing a billion dollars and even leveraging the bank. And probably this quarter, you know, we've been anywhere from a billion and a half to two billion dollars that we have not invested that money and it, you know, at 10 basis points. So I think, uh, you know, we usually say we buy in all markets, but again, it was hard to buy when you were getting less than 1% on the securities. Now that the yields have picked up and it's perceived that they're going to pick up probably more, you'll probably see us start investing more of that money that's been left overnight. And so, uh, I think that, again, even right now we're high, but again, we purchased like $400 million yesterday. So I think that we'll continue to start speeding that up and purchasing more. We think that rates probably, the 10-year will probably go higher toward year-end. We're thinking maybe, or I'm thinking, I guess, I won't speak for Chip, but from what I can tell, 2% to maybe even 2.25% if we continue to go. So I think you'll see us start using that securities portfolio and start investing more of it and It's not unlikely that once rates go up, you may see us maybe even in a leveraged position again, but not currently.
spk11: And even during first quarter, just to add on, we purchased $2.2 billion in the bond portfolio. It's just we had a lot of payoffs, too, because of the mortgage market right now.
spk13: Well, you not only had that, you just, I mean, gosh, year over year, over $4 billion in deposits. Even in the first quarter, we had over $1.4 billion in new deposits come in and You know, I think most people, the first stimulus checks, people really didn't spend. They were still cautious and were saving. We are seeing people starting to spend more money now. I mean, as I mentioned in my notes, when you talk to retailers and restaurants, especially, they're busier than they've ever been. So it looks like even retail people and people are going out and buying clothes again. So we're thinking they will start using some of that money. So I don't think you'll You know, you're not going to lose the deposits, but it may go down some, but not a whole lot, I don't think. It's just a different world. There's so much stimulus being thrown out there. But we will, and again, hopefully that should improve our net interest margins going forward in the future, too. But I'm glad we waited because rates are starting to go up, but again, we'll probably start making some moves now. Kevin, you want to address the mortgage warehouse deal?
spk03: Sure. Thanks, David. Jennifer, I don't know how good I am at predicting this. I think I thought the first quarter would average about $2,150,000. I think I said last quarter I was only $200 million off. We were a couple hundred million better than that number. So as I look at where we sit today, refi volume, which has had at least five lives since 2015, seems to actually be slowing down. this time around, and it may be for real. Now, obviously, that depends on what happens to rates, but I think most believe there's more bias to upside in rates versus downside in rates. And the Mortgage Bankers Association, if I just look at their projection for the last three quarters of this year, compared to the last three quarters of last year, they would say refi volume is going to be off 60%. So a pretty huge drop in their minds in refi volumes skewed towards the last two quarters of the year, but starting this quarter. While purchase volume, I think they had for the remaining three quarters of the year up just shy of 14%, 13.8% when I took a look at it. As that pertains to us, I would say the quarter probably looks a lot more like the second quarter of 2020. than any other quarter, if I would just look volume-wise of where the forecasts are. So with that said, and so everybody doesn't have to peel back and look at that, that was basically a billion nine in volume, could be as high as two billion in terms of average volume for the quarter, but I think we're gonna operate in that billion nine to two billion range. The only thing that could change that, Besides rates, I think I said last quarter, we have hired a person in the warehouse group and they are working on a couple of new deals. That could add moderately to the number I just gave. At this stage of the game, even if they book something today, it doesn't come on our books for another three or four weeks as we onboard that customer and make sure everything fits into our system. So it won't have a big impact even if they have some moderate success.
spk00: Thank you.
spk12: The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.
spk05: All right. Great. Thanks. David, I actually just want to go back to the comment you made on bank M&A. I think we all kind of have been surprised at how much industry-wide M&A has picked up in the last few months or so. Can you just talk about Prosperity's role in bank M&A going forward? But also the second part of the question is, is why would tax rates meaningfully change that outlook for the industry? Thanks.
spk13: If I can, let me answer the second part first. I mean, if you have a bank and you have some big shareholders, not Vanguard or BlackRock or somebody like that, but you have a lot of insider ownership and – you sell today under the current tax rule, you'll pay a 20% capital gain on it. So if you had $100 million, if I owned $100 million of this bank and I sold and just say I had no cost basis in it, I'd pay $20 million. If the laws change where they go to 40% capital gains tax rate and I own $100 million and I sell, I'm going to pay $40 million. I'm only going to keep $60 million. So I think Just in my mind, I may be wrong, but I think that you'll see people that have big ownerships be more reluctant to sell because they'll just wait until another administration would come in. I mean, the difference between taking $80 million home and taking $60 million home is a big deal. You just wouldn't do it. So that's my reason in saying that new capital gains taxes, I think, will affect to some degree if there's big individual ownerships in banks. So the first part of your question was, you know, where do we intend to play on the, you know, in the M&A game? There's been a number of transactions. There's been a number of larger transactions. I would tell you that we've looked at a number of them, even including some that might have closed on the deal. We were probably not as interested. We continue to have a wish list, and we continue to work on the wish list, and I think that's what we're focused on. We want to try to be more focused on and target it and what we want to do. And so that's kind of what we're working on right now. That doesn't mean that we may not do something smaller, you know, in the future if it's within one of our market areas. But for the most part, we're really focused on certain transactions, and that's really what we're focused on. And truthfully, we wanted to spend a lot of time keeping together our legacy Texas deal with prosperity. It's been really good. I don't think that any of us wanted to mess that up and try just to jump into something. And, again, I think that we were really focused on making this work, trying. These are really hard people, I think. I don't know. Sometimes people make it look easy. It's not that easy. A lot of help came from Kevin and his team and our team, too. But, again, you don't want to just throw one deal after another and not make sure that your house is in order. So those would be my comments.
spk05: All right. That was super helpful. So thank you for that. And then maybe just one smaller question. I think you mentioned, if I wasn't mistaken, that you expect NIM to continue to decline. I get that there's the fair value loan income. There's the PPP fees. How are you guys thinking about core NIM over the next several quarters if we just exclude all that fair value and PPP noise?
spk11: This is Osselbeck. Let me try to address that. If you look at it on a core name, there's so many variables that impacted our first quarter, and I think we're going to continue to impact our second quarter. And first of all, what we kind of touched on early on is our excess liquidity. Our deposit has grown $1.4 billion in the first quarter, and we're up more than $4 billion since the pandemic began. So we're actively trying to invest that excess liquidity on the bond portfolio or growing the loans. So if you look at 3-31-21, we had about $1.6 billion of excess cash that we have on our balance sheet. If we could reinvest that in the bond portfolio, it's going to definitely have an accretive impact on our margin and our net interest income. So if you look at our bond portfolio, we purchased $2.2 billion on bond portfolio just in the first quarter, but we also had elevated payoffs on the bond portfolio. So what we saw lately, the curve is improving, like long-term curve is improving. So we are reinvesting at higher yield bond portfolio now than we did maybe a quarter ago. So that's benefiting. And what's with the refi, what happened with the low interest rate environment, there was so much refi. And our premium amortization was significant. If you look at our premium amortization, this quarter was about $12.8 million. If you compare it to last year's same period, it was only $8 million. You can see how much significant that impacted our margin. And as we go and refi slowdown, what Kevin mentioned earlier, that should slow down the premium amortization, thus helping us with the margin and income. And I think another thing, I know as a PPP we don't consider the core, but In the first quarter, we had $13 million in PPP fee income, and we have about 9.4 remaining from the first round that we believe we're going to recognize more than half of it in the second quarter. But we also generated about $24 million in deferred fees on the second round of PPP loans. I think that the wild card is the timing of it, when we're going to recognize. I know that some customers are waiting to start the forgiveness process, but the timing would be the essence. But we believe it's going to be starting second quarter, but probably more like third or fourth quarter event that would help us with our net interest income and margin. And lastly, I think, though, I would touch on our deposits. We still have about $2.3 billion in the CDs that are going to reprice next 12 months. And out of that, $1.5 billion is going to get repriced next six months. That should help us from the margin perspective. So there's a lot of moving pieces that kind of impact our margin and net interest income in the near future. But if you look at our long-term prospect, we are an asset-sensitive bank right now. So any pickup in the long-term curve will benefit us in the long term. we feel pretty confident that as the rate goes up and we start growing our loans, that it would benefit that. I know it was kind of a long-winded answer.
spk13: Well, I think it's good. If I can recap what you just said, because I think all of that's real important. Historically, we'd always say, okay, you know, you can count on a three- or four-point net interest margin going down or a three- or four-point net interest margin going up. But, again, everything that also Beckham mentioned, you've got excess liquidity today. We're over $2 billion in our overnight investments, which we never do. Historically, we would... Had the $2 billion invested, we would even borrow another billion and invest that. We have so many loans through the deal with Legacy Texas that had the PCD loans. All of those loans that were PCD loans, for the most part, don't accrue interest, or we're not showing you accrued interest. We're accruing it, but we only take that interest in the income as they're paying off. So that's still a big number out there. And then the higher amortization on the bonds, I mean, again, going from $8 million in amortization to almost $13 million is a lot. I think you'll see a higher amortization this month than what we're expecting, but it should come down considerably. So we have a lot. But I would say for the most bank, and I said net interest margins are declining, I would think, I don't know if everybody has as many options, but for us to keep it neutral or building, you can see we've got a lot of work in front of us, and we haven't been willing just to take take those positions yet, and that's the reason we can't give you an exact number. A lot out there, but I just kind of wanted to give you some color and flavor on it.
spk05: That is helpful. I understand it's a complex topic.
spk12: All right. Thank you very much. The next question is from Peter Winter with Wedbush Securities. Please go ahead.
spk10: Good morning. I wanted to ask about the loan pipelines and how they compare to pre-pandemic levels and what your thinking is for maybe loan growth in the second half of this year?
spk14: You want me to try that first? I would describe it as a mixed bag in terms of where the loan growth might be coming from. Things have picked up a little bit from a pandemic standpoint, but having said that, not much. It's easy, I think, to understand that there aren't very many new hotel deals, for example, out there. There are not a whole lot of new restaurant deals out there, although there are some. Multifamily in most of our markets has dipped down a bit, and I don't see that picking up substantially right away. although it hasn't totally fallen off. Oil and gas, obviously, has been in a bit of a dip, maybe not as bad as a lot of people might have predicted. We still see some loan requests on the oil and gas side. They haven't dried up completely. So I think it's going to be a slow but steady increase in loan requests. I didn't mention office, but I'll mention that now. That certainly hasn't been robust. Most of our major markets, the occupancy rates aren't all that good still. So there are not a whole lot of spec office requests. There are owner-occupied office requests. We still get some of those. So while there has been predictable falloff from the pandemic, it hasn't been as bad as a lot of people probably would have thought. And it is starting to pick back up. But it's not going to be an overnight pickup, I don't think. But I suspect no later than the end of this year, we could see some substantial increase in some of our loan requests. Whether it happens this next quarter or the third quarter or the fourth, you know, that's unknown. But I don't see it going down anymore.
spk13: Well, I think if It truly is, and most people are predicting, at least the Fed, that we'll have six plus, six and a half, six plus GDP growth. Your growth is going to definitely come in the second half. My only caution in that area is I do think these taxes that they're talking about now, if all of those go through, I really think that could throw a wet towel on this thing. I'm not saying it would put it out completely, and that's why it's hard to give a little guidance and Again, we anticipate good growth in the second half. At the same time, we still have a portfolio with legacy that came over with us in the structured commercial real estate area. We have not really grown that portfolio, not really wanted to jump in and buy, you know, finance secondary B properties with no guarantees and stuff like that. So we continue to lose business in that area. So I think even with our growth this next year, You're probably going to see a lot of loan growth because of what we still have to go, I think, at Legacy. And Kevin may want to jump in on that, too. That's just my thoughts.
spk14: Well, we might mention real quickly also the single-family demand. It is very good.
spk13: Yeah, well, that's true.
spk14: Residential housing, from the single-family standpoint, the demand is very good. And I don't see that dropping off anytime soon. as was mentioned earlier in this call. There's a lot of population growth in Texas, and for that matter, some in Oklahoma also. So people are coming into our markets, and they have to live somewhere. So I think that's going to be a good source of loans for us, certainly throughout this year and into next year.
spk13: We couldn't ask for a better place to live. I mean, we have the fastest population growth out there. So, I mean, all the growth is here. I mean, everybody saw where we gained. We picked up two house seats, and places like California lost a house seat, and the East Coast, New York, and that area lost it. So this is definitely where things are growing and people are moving. So that should create growth. It should create loans for us going forward. Again, a lot of it, I think, is going to depend on taxes to a certain degree. I think there will still be growth. It's just a matter of how much growth we'll have. based on new tax laws, I think.
spk14: I agree completely. I mean, taxes are emotional. They're real, too, obviously. Real dollars go out. But if people get scared over taxes, they're not going to spend money. That's just life. That's just the way it works. So that's a wild card. We'll see.
spk10: Great. That's a lot of color. I appreciate that. If I can switch gears and talk about the CECL Day 1 reserves um in january 1st it was 1.98 which i you know it's elevated for you guys as you work through some of the non-core loans from from legacy do you have a sense you know what what the right um cecil level is uh for you guys as you kind of get through the the loans from legacy Nobody even wants to answer that, Peter.
spk11: I'll try to answer that question. So when it comes to the allowance, we have a model that we ran, and we have a base, and we also have layered on the stress environment because of the current situation. I know that the economy is progressing, but there's so much unknown there that we had to layer on a little bit of a stress scenario. That's why we, at the current level, If you look forward, I mean, it's kind of hard to predict where we land. We just have to run the model. But as we continue progress with the, you know, economy and as we go, the cycle progresses, we're probably going to bring down at that time. But what would be a normal or run rate for us is hard to predict. But I think what I've heard from other banks or everyone in the industry, they say maybe 1.3, 1.4 would be normal going forward with CECL. But... Right now, I don't know.
spk13: I would rather say, Peter, instead of counting on us throwing money back into the income statement, I would rather grow the loans to take care of what may be extra money in the provision instead of really taking money in and out. Again, I know it's based on a formula, but after this, I think they still allow us to put stress tests on it just because it's not over yet. I mean, you still have some hotel loans. You still have you know, office loans. And so it's not unrealistic to have extra stress on the model. But I would say if things continue to go the way they are and things continue to improve, I would rather instead of taking money out, actually grow the loan portfolio to take up that difference to where it finally ends up at the 1.3, 1.4 or something.
spk10: Got it. Thanks for taking the questions.
spk12: The next question is from Brady Gailey with KBW. Please go ahead.
spk04: Hey, thanks. Good afternoon, guys. I wanted to circle back on Bank M&A. David, when you look at your wish list, are those targets larger, more transformational mergers, or is it more smaller, downstream targets? If there's nothing that is really working within the state of Texas and Oklahoma, are it was now the right time to look outside, like to the southeast?
spk13: Well, I think the answer to all your questions are yes. I mean, I think we do have targets. We have some larger ones, and we have some smaller ones too. The smaller ones would probably be within our markets, and those would just be fill-ins basically that would give us more offices or customers in an area that we're already in. And probably the third part of the deal is yes, we probably, if the targets were not focused in Texas, they would be focused out of state, probably in the area that you're talking about and some other area. And, you know, again, if we do that, as I mentioned before, those targets would have to be a larger transaction and they would have to be dominant in market share in the state that they're in. I don't think that you're going to, I would not say you won't see us going by a $2 billion bank in another state. Probably, you know, it would have to have either, it would have a large market presence or the ability to have a large market presence within a reasonable period of time. Okay. All right.
spk04: That's helpful. And then, and then back to the bond portfolio is good to see that, that growth this quarter, you know, how much, and I know you guys talked about potentially letting that continue to grow, uh, I think average balances were about $9 billion, period in were about $10 billion. How much larger, and you still have a couple billion in cash, you still have money right there to put to use, how much larger do you think the bond book could get over time?
spk13: Well, I think the bond book is just a function of what we don't put in the loans. I mean, that's a place, you know, we've kept the bond book extremely short. Might have made a mistake not investing more because, you know, our duration is only three-year duration. So maybe should have invested all of it because somebody could say, well, you invested, you didn't get the highest rate. But the truth of the matter is we have so much rolling off all the time, it really doesn't matter. So I think as the bank grows, I don't know that I've ever seen our bank grow organically in one year 20%, you know, in deposits. So I don't I don't expect that to be the norm, but I don't expect to lose a lot of that money either. You know, there may be a billion dollars less or so, but for the most part, I think we'll continue to grow. And what we don't put in the loans, we'll put into the bond portfolio. Now, the mortgage warehouse facility, that's a huge difference. At year end, we're closer to $3 billion. Today, we were closer to the $2 billion mark. So that's a billion-dollar swing right there. But whatever we don't put in loans, I would hope that as we get through the loans that we were trying to get out of in the oil and gas, which I think for the most part was the legacy, and out of the structured commercial real estate as that all balances out. There's no reason why our bank shouldn't grow at least 5% a year if there's a decent market. And so you're talking at least a billion dollars a year there too. So it'll be a combination.
spk11: And just right on, I think the timing as well, we didn't expect to grow $1.4 billion in deposits in the first quarter. We were buying the bond portfolio to use up our liquidity when we had the end of the year, and we got an additional $1.4 billion. So it's special, though, that the additional came in later in the quarter. So just going through that, we're going to work through that, buying more bonds. But again, like Mr. Zalman said, we use that as a balancer. If we don't grow loans, we'll put it in the bond portfolio.
spk13: There's so much that rolls off every year because we keep such a short duration. We're not making a bet on the future of rates. We're just making a middle-of-the-road approach. We should be investing more than we have, probably.
spk04: Got it. Thanks, guys.
spk12: The next question is from Michael Rose with Raymond James. Please go ahead.
spk02: Hey guys, just on M&A, any sorts of fee opportunities that you guys are looking at at this point? You know, a smaller bank in Texas announced a little investment last night. Just wanted to see if there's any opportunities like that for you guys to maybe bolster some fee income while we're waiting for loan growth to come back. Thanks.
spk13: No, I mean, I think you're referring to the Veritex deal where they bought the mortgage business. We're building our mortgage business organically. I mean, I think this – was it this month? I think, Eddie, we did 784 loans in our own mortgage company and booked almost $300 million.
spk10: The 640 that went into portfolio for $250 million.
spk13: So our mortgage department continues to grow. A lot of our business comes from customers as well as from others. So I think we're doing that. I think that if we look at buying a business, Michael, it would be more on the trust side. That would be more of a business that we would be more interested in, probably for the most part.
spk02: Okay, that's helpful. Maybe just one quick follow-up. NSF fees, you know, down a little bit this quarter. Obviously, the deposit growth has weighed on that. Any sort of kind of nearer term outlook? I mean, should we expect, you know, NSF fees and service charges to remain, you know, kind of near these levels while liquidity continues to build in the system? Thanks.
spk11: Yeah, if you look at overdraft, it did drop off and drop off, significant drop off was kind of end of the quarter because there's a stimulus money came in. But if you look at the last year, our overdraft fee were over 9 point, almost 9 point. That's almost $3 million drop we had at this quarter. So I think as the business opens up and what I'm hearing, the people using their cash to do travels and shopping, as that continues, that we'll see that the liquidity being used up and then going to – that will increase our overdraft fees. But if you look at our debit cards, I mean, we had a pretty strong growth in debit card fee income because just the business was doing it. But overall, our non-interest income kind of held up pretty well if you compare it. our trust income actually increased compared to last quarter. So I think we're holding pretty well on our non-interest income except the overdraft, and we know what the reason of the drop-off there.
spk13: Yeah, I mean, again, we're $3 million a month less, $3 million a quarter less in overdraft fees compared to before COVID. I think that eventually we'll come back, not immediately. You're probably six months to a year away from that. And just this last month, our ATM and debit card fees were up almost $1 million in just one month. So that tells you the amount of transactions and what people are spending out there. And I think that we have some opportunities maybe in trust and a few other areas that maybe we can raise fees a little bit that we been pretty low in the past, that we're considering raising those fees. That would add a little bit of help too.
spk11: Yeah, I think trust and also mortgage. I know with the volume of mortgage, we'll probably feel like it's going to be a volume increase, going to give us a little bit extra boost on the mortgage income. Right.
spk13: So we have a couple of triggers I think we can pull there too.
spk02: Very helpful. Thanks for taking my questions.
spk12: The next question is from Brett Rabbiton with Hopti Group. Please go ahead.
spk07: Hey, good morning, everyone.
spk08: Good morning.
spk07: I wanted just to, I guess, first just talk about the loan portfolio. I know, David, that there were some loans post-Legacy that maybe you were expecting to pay off or wanting to move off the balance sheet. Where are we in terms of that size of that bucket? How much might be remaining that you're looking to move out of the bank that might slow your organic growth? I'm going to let Kevin take it. Okay.
spk03: Yeah, I'm going to answer it in two ways. I think going into the merger, we expected some declines, meaningful declines in oil and gas. And by that, I mean probably $300 million. In fact, the oil and gas portfolio has shrunk almost $400 million. And I think we're pretty well done with that. And then we expected some in the structured real estate group, call that another $300 million or $400 million. So going into the merger, I think we – if you go back and look at our transcripts, we were talking about $600 million or $700 million of loans that we would exit that were in the legacy portfolio. Then the pandemic hit, and I think things changed in the pandemic in that – that structured real estate portfolio was not a portfolio we thought was going to hold up any real estate portfolio. It was not a portfolio that we thought was going to hold up great, especially as it pertains to retail and office. So we got a little bit more aggressive about not hanging on to some of that structured real estate portfolio. And in that regard, Brett, I think For the remainder of this year, we may see that portfolio, particularly in the office retail side, shrink down another $400 million or so. It's just not a really good time. There was some statistics out yesterday, despite, and most of that portfolio is in Dallas and surrounding cities. The stats out yesterday were Dallas job growth throughout the pandemic year, so just last year was a little over $110,000 of net migration of new jobs, good jobs, into the Dallas market. Oddly enough, that is usually a great sign for office space and office vacancy rates coming down and office vacancy is up. So it's just a reflection of COVID. And I think the rest of that story is yet to be written about how many people actually come back to the office, how many come back part-time and share an office with somebody, but it's playing out about how we thought. Great job growth, but has it reflected in declines in vacancies? There's actually been increases in vacancies. So I think our cautiousness in the COVID world towards that structured real estate exposure has been the right move for us, but has resulted in greater levels of loan runoff from the legacy portfolio than we originally anticipated back in November of 2019 when we announced the deal.
spk07: Okay, that's great, ColorCab, and I appreciate it. And then I guess the other thing I was curious about was just, you know, you're reinvesting in new securities. You know, one, I'm just curious what you, one cue, what the reinvestment rate was relative to the existing portfolio, and then I'm just kind of thinking about what you're buying today, what it might yield.
spk13: Yeah, I don't have the number of what the average was or what we bought. I would tell you today, you're probably looking at depending, you know, we bought a small amount of 20-year product that we got about 1.67 on. Then the 15-year product, I think, that were bought yesterday, probably, again, it depends on the speed and interest rates, but Probably in a base rate, you're probably in the 130 area, probably up 100 basis points. You're probably about 147, 150.
spk05: That's right.
spk13: Okay.
spk12: Great. Appreciate the caller. The next question is from Brad Millsaps with Piper Sandler. Please go ahead.
spk15: Hey, good morning, guys. Good morning. Good morning. Just had a follow-up on your cost of deposits, specifically the cost of interest-bearing demand deposits. I think they've stayed pretty stable for about four quarters at 38 or 39 basis points. I think you've got some contractual public funds in there. Can you remind us when we might start to see some of that reset, maybe the amount? Because it looks like this category is growing, and I would think that new money coming in would be at lower rates, yet the average has stayed stable. you know, pretty stable for about the last 12 months. So, any color there on kind of when you might see some additional relief.
spk11: Hey, Brad, this is Osselbeck. I'll give you a little bit of color. But if you look at our cost of interest-bearing deposits, it has actually decreased. If you look at our Cost of deposits in the Q1 of last year, it was like 91 basis points. Right now, we're at 38. So we've been steadily decreasing that. But you're absolutely right. We have a significant portion of public funds that we have some floors that are kind of holding the interest expense on those a little bit longer. But I think the majority are going to start repricing or the new contract is going to start kicking in by the end of the second quarter. Second quarter, I think majority are going to be in the third and fourth quarter. So we're getting to the stretch that we're going to be getting a new contract with the public funds, but right now that's what's holding up the interest rate on our deposits.
spk15: Yeah, I was asking specifically about that interest-bearing demand category. It's about $6 billion or so where the public funds are. So you're saying it's You probably have another quarter, and then you'll start to see some relief.
spk11: Yeah, it starts at the end of the second quarter, but when we looked at the repricing, it comes in the third and fourth quarter of this year. Okay, great. Thank you, guys. You're welcome.
spk12: The next question is from Dave Rochester with CompassPoint. Please go ahead.
spk06: Hey, good morning, guys. Good morning. Back on the M&A topic, appreciated all the color there. You guys gave a lot of good color. I was just wondering, are you feeling positive on the potential for announcing something, maybe even in the next year? Or do you think it might take longer than that, just given where the bid-ask spreads are, where they seem to be at this point?
spk13: Again, you can't really give an answer to that. I think that we feel good where we're at on what we're working at, but again, You know, if it happens, it happens. If it doesn't, it doesn't, I think. Again, I still think something should happen this year just because of the tax situation. But, again, if they make it retroactive, that could change things, too. So, you know, I would tell you there's a lot of action. I wouldn't say a lot. There's not like it used to be. I mean, but it's definitely picked up, and you will see more transactions, even if not by us, by other people this year. They're just stuff in the works, I think.
spk06: Yeah. Okay. When you think about markets outside of Oklahoma and Texas, what would be maybe your top two or three that you would potentially target if you went outside?
spk13: I really don't want to go there with that because then the first thing, you know, investors will start purchasing stock in those particular banks, and I just don't want to go there with that.
spk06: Yep. Understood. Understood. And then while you're working on it, capital is continuing to grow. And you have let those levels get higher in the past. But is the thought that if you don't get a deal done near term, you'll just let that keep growing? Or would you take a look at the buyback? How do you think about that?
spk13: historically, you know, we've used our money to continue to increase dividends, and we used it also when the stock got out of, you know, proportion. I mean, whenever, when something, I mean, when it fell to $40, $50, and $60 last year, we started buying, and I, again, right now, I almost thought we were fairly priced, but then when I look at other banks trading it, we're trading at 13 times earnings, and I see these other banks trading at 20, and Other companies like Microsoft and Apple trading at $30 and $40, we look pretty cheap. So a lot of it depends. I mean, we take the money during an acquisition, and we like using our money so that it would make the deal more accretive. I would say that if we didn't do a deal, there's a possibility that we would go into market to support our stock. Historically, again, I want to reemphasize this. Historically, we've used that money to increase dividends and also use it for acquisitions.
spk06: Yep, appreciate that. Maybe just one last one on loan yields. Just backing out, you know, all the noise from PPP fees and everything else. I was just wondering what the differential was on the front book, back book at this point where new loans are coming on versus where the book yield is. Thanks.
spk13: Where new loans are coming on. Do you want to answer that or does Tim want to answer that? Well, I don't think there's a huge difference also, Beck.
spk11: Yeah, I think that if you look in the yield that we generated on the Actual loans were 480 for the quarter, and the core without fair value is 447. So I think we're booking around 4.5 on new loans production. Well, on the low end, it's 3 to 3.25, and on the high end, it's 5 to 5.5.
spk14: Where it all falls out, I don't think it's going to be a whole lot of difference here in the next quarter or so.
spk11: Exactly, and we're growing our mortgage loans as well, which is a little bit lower yield, but it's better to invest in the mortgage loans right now than putting it in our bond portfolio, which is generating one and a quarter. Yeah, and I didn't include the mortgage loans in that number. Okay, yeah, so that's what Outlook is.
spk06: Okay, great. Maybe just, sorry, one more last question. I may have missed this. Did you guys give the potential runoff in that structured CRE book just what you guys are expecting for this year, what's left of that? Thanks.
spk03: Yeah, this is Kevin. I indicated a number of roughly $400 million for the remainder of this year.
spk06: Okay, great. And at that point, you think that pretty much stabilizes?
spk03: It could. Again, it also depends on how in the post-COVID world occupancies, particularly in retail and office, play out. The multifamily portfolio there has held up pretty well, believe it or not, and it's really office and retail that we've got our eyes on.
spk06: Okay. Great. Thanks, guys.
spk12: Thank you. The next question is from John Arstrom with RBC. Please go ahead.
spk09: Yeah, thanks. Thanks for letting me in. We can play speed round here. I just have some random questions. Asselbeck, you talked about the change on the reserve. Can you touch a little bit more on the $13 million increase in environmental factors on the reserve?
spk11: Yeah, so if you look at, there's a, you know, it's, external factors and internal factors. So it's a mix of the factors that we use for our model. But if you're looking like our environmental factor, we use Texas unemployment with the current and forecast, same as goes with Texas GSP or GDP call. And, you know, this included WTI price, U.S. CRA price. And so there's a lot of environmental factors that are included in this model. Also, we have the, you know, our internal models that our losses we incurred historically. So with a combination of all of that, the model showed that the increase of $13 million related to that factoring.
spk09: But that's in... That's called... It kind of ties into my next question. You're talking about 700,000 new jobs in Texas in 21.
spk13: What's the labor... I got that number, John, from... That number's a little older, probably at one of my meetings. I got that probably about three or four weeks ago at another meeting I was at. They actually had a little higher number than that, actually.
spk09: What is the labor situation like, in your view, in Texas?
spk13: Probably like it is everywhere else. We never shut down like the rest of the country did, so a lot of the jobs kept going, but again, a number of people work from home, but Really, when you're talking to people, I mean, they need truck drivers. They need people that work in restaurants. They need people to work in construction. And we're just like everywhere else. The people aren't willing to work because they can actually make more money with the government unemployment and the little bonus that they're giving them. And I don't think that bonus that the government gives them runs out until, I think, September or October. So it's really tough. You can see businesses even today have a sign outside where we can't. we're not open because we can't find enough people to work. So, I mean, it's a real issue.
spk09: And where are you hiring? Are you hiring lenders or do you feel like your lenders have capacity at this point?
spk13: You know, I would say that we've never been a bank that goes out and hires a group like when a bank buys another bank or anything like that. But we do. First of all, I think our bankers do have capacity. I do think we have capacity. But I think that if somebody comes to us and they're really good, we're still willing to look at bringing on. But I think we bring them on onesies and twosies. Probably it's not like tensies and twenties.
spk14: That's right. It's a selective process. One here, one there. If we find somebody that we think can add to the program incrementally, then we're bringing them in.
spk13: And there are those that come in. We do. And we have a number of people that continue to contact us and we'll talk to them too. But as far as hiring groups or something. We generally don't do that.
spk14: That's right. I mean, we've never felt comfortable with rating another institution's employees. It just doesn't feel like it's the right thing to do. So I don't see a change in that philosophy. But if the right person comes along and they're leaving where they are for a valid reason that makes sense, we'll look at them. And if they're the right kind of folks, we'll bring them in.
spk09: Last one for you, David. We maybe touched on this at our conference earlier, but it sounds like you would welcome modestly higher rates. Do you have concerns about materially higher rates? I mean, you're talking about tight labor and maybe a little bit of strengthening in energy, and you guys have typically had a big bond portfolio. Is that a big concern of yours?
spk13: I wish I could show you our model because the higher the rates, the better it would be. I mean, it's really big numbers. I mean, we're so asset sensitive. Even though we're booking a lot of fixed-rate stuff and home loans and stuff like that, just to give you an idea, I mean, again, if these models are right, just up 300 basis points in a 12-year month, you're an increase of, gosh – It's almost too much to tell you, maybe $130, $140 million probably. That's how much interest rates really help us a lot.
spk09: All right. Well, we're waiting for loan growth, so that's what we're all waiting for. Let's do it.
spk12: Yeah.
spk09: Thanks a lot.
spk12: Thanks. This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
spk01: Thank you. 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.
spk12: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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