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spk06: Good day, and welcome to the Prosperity Bank Shares second quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then 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 touchtone phone. 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. Please go ahead.
spk11: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' second quarter 2021 earnings conference call. This call is being broadcast live over the Internet at ProsperityBankUSA.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares, and here with me today is David Zalman, Senior Chairman and Chief Executive Officer, 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. Tim Tamanis, our Chairman, is unable to join us today. David Zolman 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 Randy Hester, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Sean. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity 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 actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bank Shares 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.
spk08: Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2021 conference call. For the second quarter of 2021, prosperity had strong earnings, core loan growth, deposit growth, continued sound asset quality, impressive cost controls, a return on average tangible common equity of 17.49%, and remains well-reserved. Prosperity Bank has been ranked as the number two best bank in America for 2021 and has been in the top 10 of Forbes America's best banks since 2010. I want to congratulate and thank all of our customers, associates, directors, and shareholders for helping us achieve this honor. The unemployment rates continue to decrease and GDP growth continues at a high level, as forecasted last year with the reopening of the economy. We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies. Further, businesses and individuals continue to move to Texas for lower tax rates and a better quality of life. Our earnings were $130.6 million in the second quarter for 2021, compared with $130.9 million for the same period in 2020. The second quarter of 2020 included a tax benefit for net operating losses of $20.1 million, or 22 cents per diluted common share, as a result of the enactment of the CARES Act. Diluted earnings per share were $1.41 for the second quarter of 2021 and for the same period in 2020. Earnings per share for the second quarter of 2020 included the 22 cent tax benefit, partially offset by a six cent charge merger related expense, and a three cent charge for the write down of fixed assets related to the merger and some CRA investment funds. The net effect was a positive 13 cents in earnings per share for the second quarter of 2021, a 10.2% increase after considering the adjustments in the second quarter of 2020. Loans on June 30, 2021, were $19.2 billion, a decrease of $1.7 billion or 8.4%, compared with $21 billion on June 30, 2020. Our linked quarter loans decreased $387 million, or 2%, from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans. On June 30, 2021, the company had $780 million of PPP loans compared with $1.4 billion of the PPP loans on June 30, 2020, and $1.1 billion of PPP loans on March 31, 2021. The link quarter loans, excluding the warehouse purchase program, and PPP loans increased $148 million, or nine basis points, 3.7% annualized from the $16.2 billion on March 31st, 2021. Our deposits on June 30, 2021, were $29.1 billion, an increase of $2.9 billion or 11.3% compared with 26.1 billion on June 30, 2020. Our linked quarter deposits increased 347 million or 1.2%, 4.8% annualized from the 28.7 billion on March 31st, 2021. We believe that the deposit inflows are starting to normalize as people are spending money again and stimulus payments have been reduced. However, the child tax credit payments should again add deposits to the banks. Our asset quality has always been one of the primary focuses of our bank. Our non-performing assets totaled $33.7 million, or 11 basis points, of quarterly average interest earning assets as of June 30, 2021, compared with 77.9 million or 28 basis points of quarterly average interest earning assets as of June 30, 2020, a 56.8% decrease from last year. Non-performing assets were 44.2 million or 15 basis points of quarterly average interest earning assets as of March 31, 2021, M&A seems to be regaining momentum. We've had more conversation with bankers considering opportunities this quarter. The continued net interest margin pressure, the higher technology costs, the salary increases, loan competition, succession planning concerns, and increased regulatory burden all point to a continued consolidation. As mentioned in my opening comments, we believe the U.S. economy is starting to normalize, which has helped to reduce unemployment and cause above normal growth rates in GDP. We are seeing higher prices for gas and groceries, labor shortages, inventory shortages, and more. We believe that prosperity is well positioned to grow along with the Texas and Oklahoma economies. We have a deep bench of associates with a passion to help prosperity and our customers succeed. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels. We intend to continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone involved in our company for helping to make it the success it has become. Thanks again for your support of our company. Let me turn over our discussion to Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Osobek?
spk00: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2021, was $245.4 million compared to $259 million for the same period in 2020, a decrease of $13.6 million, or 5.2 percent. The current quarter net interest income includes $12.2 million in fair value loan income compared to $24.3 million in the second quarter 2020, a decrease of $12.1 million. Net interest income also continues to be impacted by the Paycheck Protection Program and Warehouse Purchase Program. The second quarter 2021 net interest income, excluding the impacts of PPP loans, Warehouse Purchase Program loans, and fair value loan income, improved compared to the same results in the first quarter 2021. The net interest margin on a tax equivalent basis was 3.11% for the three months ended June 30, 2021, compared to 3.69% for the same period in 2020 and 3.41% for the quarter ended March 31, 2021. Excluding purchase accounting adjustments, The net interest margin for the quarter ended June 30th, 2021 was 2.96% compared to 3.33% for the same period in 2020 and 3.19% for the quarter ended March 31st, 2021. The decrease was primarily due to change in the mix of interest earning assets and excess liquidity. Non-interest income was $35.6 million for the three months ended June 30, 2021 compared to $25.7 million for the same period in 2020 and $34 million for the quarter ended March 31, 2021. Non-interest expense for the three months ended June 30, 2021 was $115.2 million compared to $134.4 million for the same period in 2020. On a linked quarter basis, non-interest expense decreased $3.9 million from $119.1 million for the quarter ended March 31, 2021. The current quarter benefited from gains on sale of ORE assets of $1.8 million and a decrease in salary and benefits. The decrease in salary and benefits is primarily due to lower employment-related taxes for restricted stock vested during the first quarter of 2021 and lower discretionary incentives. For the third quarter of 2021, we expect non-interest expense of $118 to $120 million. The efficiency ratio was 41% for the three months ended June 30th, 2021. compared to 46.6% for the same period in 2020, which included $7.5 million in merger-related expenses and 41.3% for the three-month ended March 31, 2021. During the second quarter of 2021, we recognized $12.2 million in fair value loan income. This amount includes $4.3 million from anticipated accretion which is in line with the guidance provided last quarter, and $7.9 million from early payoffs. We estimate fair value loan income for the third quarter of 2021 to be around $3 to $4 million. This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs. Looking forward, We expect the income from early paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCD loans with large discounts. The remaining discount balance is $25 million. Also, during the second quarter of 2021, we recognized $10.3 million in fee income from PPP loans. As of June 30, 2021, PPP loans had a remaining deferred fee balance of $28.3 million. The bond portfolio metrics at 6-30-2021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion. And with that, let me turn over the presentation to Randy Hester for some detail on loans and asset quality. Randy?
spk18: Thank you, Asilbek. Our NPAs at quarter end June 30, 2021 totaled $33,664,000, or 0.17% of loans in ORE, compared to $44,162,000, or 0.22% at March 31, 2021. This represents approximately a 24% decline in NPAs. The June 30 21 NPA total was comprised of $33,210,000 in loans, $310,000 in repossessed assets, and only $144,000 in ORE. Of the $33,664,000 in NPAs, 8,378,000, or 25%, or our energy credits, all of which are service company credits. Since June 30th, 21, 1,448,000 NPAs have been put under contract for sale. That doesn't necessarily mean they're guaranteed to close, but they are under contract and expected to close. Net charge-offs for the three months ended June 30th, 21, were $4,326,000 compared to $8,858,000 for the quarter ended March 31 of 21. No dollars were added to the allowance for credit losses during the quarter ended June 30, 21, nor were any dollars taken into income from the allowance. The average monthly new loan production for the quarter ended June 30th, 21 was $641,000. This includes a total of 73.8 million in PPP loans booked during the second quarter. Loans outstanding at June 30th, 21 were approximately $19.3 billion, which includes approximately $780 million in PPP loans. The June 30th 21 loan total is made up of 39% fixed rate loans, 36% floating, and 25% variable resetting at specific intervals. I will now turn it over to Charlotte Rasche.
spk11: Thank you, Randy. At this time, we are prepared to answer your questions. Sean, can you please assist us with questions?
spk06: Certainly. If you would like to ask a question, please press star, then 1. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. The first question for today will come from Jennifer Demba with Truist. Please go ahead.
spk12: Thank you. Good morning.
spk00: Good morning.
spk12: First question is on Mortgage Warehouse. Just curious as to what the outlook is in that business line, and are you seeing any uptick in refi here in the last few weeks?
spk13: Jennifer, this is Kevin. We've seen only a minor uptick in refi in the last couple of weeks. It takes a while once rates go down to pull through to us. There's usually about a six-week lag from a decline in rates, and when we start seeing volume on the warehouse line. So most of what I've seen at this point is just anecdotal evidence out of our client base. If we just look at what's happened quarter over quarter, for instance, in the current quarter, the second quarter of this year, 66% of our volume was purchased, whereas in the first quarter, only 47% of our volume was purchased. So there was a pretty big shift. between Q1 and Q2 towards purchase volume. That may moderate again a little bit here in the early stages of this quarter. As we look at volumes, they've held up pretty well so far for the month of July. But throughout the quarter, I would say if I had to pick a number, I would expect our average loan volume to be down about 150 million from where it was in Q2. okay and how about pricing what are you seeing in that you know it's really held in there pretty well if you just look at weighted average coupon again q1 was 3.23 percent i believe and it dropped only two basis points three point two one percent in q2 so we have really done a good job of holding the line on on pricing there's always been pressure uh And as you know, every now and then pressure gets great enough that we don't succumb. We usually just let that client go and try to find another one that values us a bit more. And we are seeing some encouraging things going on from that perspective. We've got a couple of new clients that are in the queue to be boarded. And we've seen a couple of our larger clients with volumes being down. This happens every time in this cycle. As volume goes down, folks look to kind of pare back the number of lending institutions they have. So we've had a couple of our big clients come to us and ask for us to take a larger piece of their overall volume because of our balance sheet size where they're weeding out some of the smaller lenders in their bank groups. So we've been the beneficiary of some larger increases for existing clients as well.
spk12: Thank you. Separate question on M&A. David, have you ever seen a frenzy like we're seeing right now in this M&A market, and does that concern you?
spk08: I would say that it is active right now, although I'd have to say that I've seen it more active than it is today that we're talking. Mm-hmm. I don't think that it concerns me. I mean, again, like I said before, I've seen it more active. I will say it is active. There's no question. When we talked in our last quarter, I said, you know, with stock prices down, things have kind of – things have really – the phone calls have not been incoming as much. But as the stock prices have gone up, you know, and everything that's happening with the current administration, we are seeing more and more people talking about doing something. And so – but having said that, I've actually seen it more active than this before. So I think going forward, you're going to see, you know, you've seen a lot of deals. I think you're going to see more deals before the end of the year. There's no question about it. I think it's going to be a pretty active year.
spk12: All right, I'll let others hop in. Thanks.
spk06: The next question today will come from Dave Rochester with Compass Point. Please go ahead.
spk04: Hey, good morning, guys. Good morning. Saw the loan growth XPP in the warehouse this quarter. That was definitely stronger than the recent trend and what we were looking for this quarter. I know this has been one of the major concerns surrounding the stock recently as to what those trends can look like this year. So just wondering, how does the loan pipeline look heading into 3Q X that warehouse? So she just talked about that. And what are you thinking regarding the runoff that's left in that structured CRE book? I think you mentioned it was about 400 million left to go back in April. Thanks.
spk13: Yeah, this is Kevin again. Pipelines look more robust than they have in quite some time. And I would tell you that, you know, in our earlier calls, we didn't think we'd see growth until the second half of the year and And fortunately, some of that pulled through and gave us a second quarter where we had a bit of long growth, 3.7%. But we really were thinking that was going to show up as soon as it did. And it's continued into the first month of the Q3 here. It's actually been pretty solid, running at a better pace than it did in Q2 so far. And I think as we look at the pipeline and number of deals that are in the pipeline to close, I haven't seen it like this in a number of quarters, and I'm probably more encouraged by it than I've been in quite some time.
spk08: Things are active. I'd also add, Dave, when Randy was talking a while ago, I heard one thing, and I don't know if he said the right thing, but the average monthly new loan production for the quarter ended 63021 was $641 million. We might have said $600 million. and 41,000, so that's a pretty good number for us.
spk13: Yeah, and in structured CRE, that portfolio is down to about a billion dollars. In Q2, there was about $250 million in runoff, so to produce some loan growth in the face of $250 million in runoff in that in the quarter is an accomplishment in its own right. I think it will pare back a little bit, but I wouldn't be surprised if we saw another 150 to 200 million runoff in Q3. But as I say, when I look at the pipeline, I'm pretty encouraged that we're going to be able to face that headwind and still put up some pretty decent numbers in Q3.
spk08: Yeah, really. If you took out the structured CRE and just – if we wouldn't have had the runoff in the structured CRE or participated more in that, I mean, our numbers would have probably been double-digit for the most part.
spk04: Are you thinking that that – oh, go ahead.
spk18: I'd say we have a good number of loans on the books right now that are funding up, that are past the pipeline stage. The loans should fund up, and that'll help us over the next quarter.
spk13: David, another way to think about it on structured CRE, I think there's going to be a $400 million or $500 million of that remaining billion that sticks with us.
spk04: Okay, so you get maybe, I don't know, $250 million of that you said gone in 3Q, and then maybe you have a little bit more runoff after that, but not a material amount?
spk13: Yeah. I think closer to 200 in Q3 would be my guess and maybe another 200 in Q4, and that will about do it.
spk03: Okay, great.
spk04: And maybe on the resi segment, that growth really jumped this quarter. Is that solely just a function of greater activity in the market or has your appetite increased there? And then what's your outlook for that in the back half of the year?
spk08: Residential. I didn't hear the question. Can you say that one more time? It's residential.
spk13: Sure.
spk04: Yeah, residential, the strength and the growth this quarter, if that was just a function of the market activity or if you have an increased appetite there, and then what's your outlook for the back half?
spk14: I would say the market activity is just very robust throughout the entire footprint of the bank, and we've not seen any slowdown or seasonality to that so far. The pipeline looks just as strong as it has all year long. So we're feeling pretty confident about the increased or continued activity within the mortgage market. And we're portfolio in about 90% of what we originate.
spk04: Sounds good. Maybe just one last one on capital. So the CEQ on ratios over 15% now, your other ratios are very strong. It seems like you have enough capital for a deal and buybacks. So I was just curious what your thoughts were. on that, maybe starting at the buyback again just to maintain capital ratios where they are?
spk08: I think you're accurate in what you're saying. I think we're really building a lot of capital. We have a lot of earnings. We do pay a good dividend, and generally we try to increase it a little bit. But you're right, we are retaining a lot of capital. But historically we've used that too for acquisitions, and I'd still like to keep it for that. But having said that, again, with the stock price when it dropped into the 60s, It's something certainly that we're going to consider maybe buying back some of our own stock if it stayed that low.
spk03: Okay. Great. Thanks, guys.
spk06: And the next question will come from Brady Gailey with KBW. Please go ahead.
spk03: Hey, thanks. Good morning, guys.
spk11: Good morning.
spk03: So when I look at the bond book, I know we had talked about, you know, you guys putting some cash to work there. You know, we saw a decent amount of growth. And the second quarter, I think, period balances has a bond book at about $12 billion. How do you think about, you know, continuing to grow that bond book at this level? I know the long end of the curve has kind of gone, I guess, just here recently. How do you think about continued growth in that bond portfolio?
spk08: I would say, Grady, you know, we've worked. You can see we continue to buy bonds and deposits just keep on rolling in all the time. So we have that to contend with. But again, I will say, as of today, probably we have over a billion, three billion, four just in overnight investments. And a little bit, we pulled back from investing because the 10-year has gotten too low, we feel. So we've just kind of pulled back from investing. And we're probably waiting a little bit. We probably could have made more money investing. And I would say overall, it's probably a smart thing to keep invested because if you keep that average three to four year, three and a half year average life, you know, you're going to You're probably going to make more money, but again, when interest rates go as low as they have, we still have pulled back, but we will be back in purchasing when they return a little bit to a normalization anyway. But again, it's just a lot of money and trying to keep it invested. When you have this much and just trying to plow everything you can when rates are the lowest, it may not be the smartest thing in the world.
spk03: Okay, and then this is the third quarter quarter. that we've seen a zero provision from you guys. As I look at the reserve, if you include the reserve for unfunded commitments, you're still north of 2%, which is just a big reserve relative to how clean your credit quality is. If y'all are not going to take a negative provision, to me it seems like you're going to have a zero provision for a while, maybe years. Is that the right way to think about the provision? I like the way you said it.
spk08: You always have to be careful. There's another variant of COVID out there again. The long and the short of it is, like we said, it is a calculation that we go through. There seems to be a lot in there, but again, at the same time, we've always said that we would like to grow into it instead of just playing with the numbers and bringing money back and forth all the time if we can. I think there's I think there's still reasoning out there that justifies that, you know, we still don't know. There's a lot of variables out there that you just don't know what could happen. So I think as long as we can, we can keep the calculation, you know, we'll probably keep the money in there as long as we can, probably.
spk00: Yeah, I just add on on Brady. So we run our own model, you know, we have a baseline and we'll layer on this model. pessimistic scenario on that one, you know. So we'll probably continue a little while, but we just have to see how the, you know, economy continues, especially there's so much unknown still out there, you know, because it takes time for loans to, you know, show the, you know, the quality of it. So from that standpoint, we'll have to run the model, and if the model states that we need to take provision gain, we'll take provision gain. So we're just going to run the model.
spk08: But again, I think it's premature. I mean, I see a lot of banks doing it, but again, there's still Again, like, you know, they're talking about a mask again and another variant and all this stuff coming out. And so I just think it's premature just to say everything is just great right now. And it is good. There's no question. In fact, when you look at our asset quality and it decreased 58% from last year, I mean, knock on wood, things do look pretty good. But, again, I feel we're in the right place at the right time right now.
spk03: Okay. Got it. Thanks, guys.
spk06: The next question will come from Michael Rose with Raymond James. Please go ahead.
spk17: Hey, thanks for taking my questions. NSF fees were down a little bit this quarter, but there's clearly been some pressure out there in some banks curtailing some of those fees. Can you just walk us through the thought process on your NSF program at this point and maybe what you're doing to help out customers and if you're starting to hear any political or regulatory changes there. Thanks.
spk00: Okay. I'll just give the little bit highlight on NSF. Yeah, NSF a little bit down compared to the first quarter. But as you remember, in the end of March, there was a big stimulus package that was sent out to customers. So what we saw in April and May, there was less usage of NSF their time. But in June, it's rebounded. So if you're looking forward, I think for especially with the summertime and people going on vacation and all that, I think NSF is going to be better in the third quarter if I'm just looking at the numbers. But overall, if you look at, you know, environment and, you know, from the regulator side, yeah, we hear more about, you know, more focus on NSF. Right now we haven't changed anything because we want a little bit of weight before we do anything. But, yeah, I agree with you. There's more focus on NSF as we go.
spk08: You know, it's really you make NSF fees when people are really buying stuff, and there's so much stimulus money out there, and there's so many deposits, and consumers have so many deposits. But we were talking earlier in here, and it doesn't seem like the people are spending all the money that they have. You know, I guess going through what we've gone through over the last year, year and a half, maybe they're cautious, but then somebody said there's not enough inventory or products out there to spend the money on, so that's another spin or that side of it. You know, I think people are, you know, they're spending money, but again, they're just not out there. They're not out there spending everything. They're still trying to leave money for a rainy day, which is so different than I've ever been used to. But again, and I think that deposits are going to continue as long as there's more stimulus. We're still talking about a $300 tax credit that's going to be given to individuals again. So I think that's going to be another form of stimulus. So, you know, I think that maybe NSFBs may not get back to where they were exactly for some time, probably.
spk00: With the liquidity, I don't think it's going to get back to where we had pre-pandemic, but what I see, at least seeing in June and July, it's improving.
spk08: Yeah, I mean, it will. It's getting better all the time, and it will get better, but there's just more money out there right now.
spk17: Okay, that's helpful. Maybe just as a follow-up, Asilbak, I appreciate the color on the expense guide for the third quarter. Was there anything that happened in the salaries line? I may have missed it, but it did ramp down almost $4.5 million or so. It seems like that maybe will rebound back upwards, just trying to kind of reconcile how you get from the kind of $115,000 back to the $118,000 to $120,000. Thanks.
spk08: Kevin felt philanthropic and gave his salary and bonus back. We appreciate that.
spk00: No, primarily in the first quarter we had employment-related taxes for restricted stocks that were vested in the first quarter. That's why we had higher taxes. That's what we had higher in the first quarter. And also discretionary incentive in the second quarter were a little bit lower than we had in the first quarter. But you're right. When I gave you guidance 118 to 120, that includes all of it, right, because we have quite a lot of spending on IT side that's going to bump up a little bit. I think the salary is going to go up, but probably not back to that, you know, 80 million you saw in the first quarter. And we had the merit increase, you know, annual merit increase. That's going to pop in. So from that all the aspects that I kind of outlined that our expectation 100 to 120, it's a good guidance for next quarter.
spk17: Great. Thanks for taking my questions. Thank you.
spk06: And the next question will come from Brad Millsaps with Piper Sandler. Please go ahead.
spk02: Hey, good morning. Good morning. I just wanted to follow up on kind of the loan runoff discussion from a yield standpoint. Just kind of curious, you know, what rates are new loans are bringing on versus, you know, kind of some of the books, you know, that you're running off. I was trying to get a sense of, you know, maybe how much more, you know, yield compression, you know, you could see on the loan side.
spk08: You know, again, I don't have the numbers in front of me, but I would say, Probably the average rate, or at least with the rate that I'm looking at loans right now, is what, about $4.50, Randy, right now?
spk18: $4.50 to $3.99 to $4.50 range.
spk08: $4.00 to $4.50 probably is the average. I mean, you're floating your large loans. You're not getting that. Your large loans are probably in the threes. But if you look at the overall portfolio, so it's – That's true. I would say, though – It's a good bet that the loans that are running off are probably a higher yield than what we're putting back on. Probably they're probably in the fives or something. I don't, again, I don't have that in front of me, but it would be, it's probably pretty easy to, to, to, that would be a good analogy. I think.
spk02: Okay, great. And David, just a bigger picture picture question around MNA. Um, you know, some, some deals that have been announced have been received better than others. How do you sort of balance, you know, kind of the best long-term move for the company versus, you know, why it might be, you know, a stock price reaction that might not be as favorable, you know, kind of in the near term based on kind of what we've seen thus far in the market?
spk08: Well, I think that's one of the hardest deals we do have even when we're negotiating with somebody because, you know, when our stock price is down and, compared to what they want. It's just hard to give them what they want all the time. I mean, if you're going to do a deal with us, you have to really bank that our price of our stock is really down a little bit, because we're just basically not going to do a deal that I've said in the past. It's not accretive, or it doesn't increase our franchise value. So, you know, we're not out there just to do deals, and we're not going to do it. So, whoever teams up with us, if they're taking stock, they really have to believe in the long-term future of us and stay with us, basically. It may not be the same price they could get somewhere else. I don't know.
spk02: Okay, and just one final housekeeping question. Also back, do you happen to have the average balance of PPP loans in the quarter?
spk00: Yeah, I think the average balance for the quarter was, I'll give you around a billion dollars for the second quarter.
spk02: Great. Thank you, guys.
spk06: And the next question will come from Bill Karkosh with Wolf Research. Please go ahead.
spk01: Thank you. Good afternoon. I had a follow-up on your credit comments and the idea that rather than releasing reserves, you'd prefer to grow into it. Can you give a rough sense of what you view as a sort of normalized level for your reserve rate?
spk08: I guess what's normalized today may not be normalized what I was used to in banking. Growing up in banking, I always thought that if you had a 1% loan, you were in pretty good shape. In today's world, again, you have to take into consideration regulators and everybody else, and they might not necessarily see it that way. I think everybody went off the cliff last year when we saw everything and everybody you know, 1.5% to 2% in there. Now everybody's kind of coming back and pulling money out of reserves and taking it back down to probably 1.5%, 1.25%. Probably, I still think, in my opinion, this is just my opinion, I think, in the long run, if you run a good, clean bank, you know, 1.25% is a pretty high rate in a reserve, in my opinion. That's just my opinion. But again, taking out... Taking into consideration anything that may happen, another pandemic or another something that we're not aware of, then you have to have extra money, in my opinion.
spk13: Maybe another way to think about it, which I think gets almost the same exact number, is if you took our post-CECL, pre-pandemic, combined legacy prosperity, and all that happened all about at the same time, I know, but if you just took our combined... uh, Cecil kind of numbers pre pandemic, we're in that one 25 to one 35 range. So if you had to pick a normal, I'd pick a one 30.
spk01: That's really helpful color. Uh, thank you. Uh, separately, can you speak to what you're hearing from clients about labor shortages they're facing, you know, any color on if it's getting better or worse? Um, Just any broad commentary across your client base would be helpful.
spk08: Well, you want to hear about our labor shortages? Eddie is an athlete here in Austin. And, Eddie, you said basically that we may have to just have drive-throughs on two of our locations.
spk14: We may have. It's just very difficult to find enough teller help and front-line people that are willing to come back to work with face-to-face type and at the pay scales with all the other companies competing for the same population of workers in the hourly rate and what some of the private industry is offering in the way of additional benefits and those that are allowing them to work from home, whereas we really need some in-store people.
spk08: Yeah, I mean, we're really going through, again, I've said this, it's really dating me, but what I'm seeing is really something different than I've never seen before right now, even I've never seen as many people changing jobs, going from one job to another. I don't know if it's just psychological. Then there are some companies like Bank of America that have raised their tellers to $20, $25. So there's this competition. I think Walmart offered today that they're going to be able to send, if you work for them, they're going to send your kids through school. So there's so many different incentives. And then you have this other dynamic that's been real – that I'm trying to get in my mind. I'm seeing people that really aren't – I don't know if they're just wore out or they're tired right now. It seems like everybody's worked so hard that maybe that's not everything or maybe rethinking things. And you're seeing this other group that had got to work from home, and now we're asking all those people to come back to the office. And some of those, especially the older people, are saying – You know what? It's not worth it. Maybe I was taking care of an older parent at home. I made a lot of money. So I'm not answering your question very good. I'm trying to give you some color, though. There's a tremendous amount of dynamics going on right now in the workforce. And I don't know where it's all going to pan out. My thought is it will get back to normalization, but it's going to take some time. We've all gone through a lot of different ways we do things. There's been a lot of different psychological strains on a lot of people. And it's just going to take some time. But I do know, I do think that there will be some people working from home. You'll probably be a combination. You'll have a combination. But I think for the most part, businesses want most of their people to come back to the job and come back to work. But having said that, you know, there may be some exclusions for people that are really good that you can't get back, at least for short term, while they still want to finish out the rest of their careers.
spk13: And I think just feedback from our clients. This is Kevin. Particularly in home building, restaurants, and some other folks, they just can't get staff. I see full restaurants, but service quality is not what it used to be. Even places I'm pretty well known, where I expect to get service, it's down from where it used to be because they just don't have enough staff. Our home builders are having to pay up to get staff back. to cruise out there on home building sites, and their business is robust, but they're just struggling to get people back. So it's pretty pervasive. There's still some supply shortages. I was talking to somebody who receives a lot of their product from overseas. He said just the cost of getting a container is ridiculous, just the container to ship stuff in because there's a shortage there. So it's pretty pervasive, and I do – I'm in the camp that tends to think, oh, some of this isn't going away. Some of it is transitory, clearly. But once wages go up, I don't think they're going back down. And I think once restaurant prices go up, they're probably not going back down. So I think some of this stuff is going to be in the system and it's actually going to stick.
spk08: Yeah, I don't think it's done with you, Kevin. I don't think it's just transitory, as everybody said. In fact, all the price increases that people that were, you know, that their minimum wage and they've taken it up, I think if you ever go to the grocery store, you can see they lost that. The prices have just gone up far more than their wages have, I think.
spk01: That's super helpful, Culler. I think what I was trying to get at is to what extent you think it may be inhibiting investment. And it sounds like it's hard to tell because there's a lot of moving parts, but it may be across your customer base. And so to the extent that that gets better, at some point, then maybe that should be a positive.
spk08: I think that it will get back to some point, and I think a lot of it just depends on your investment. I think people that are doing good are going to continue to invest, but again, it may be slower than what everybody thinks, too. Again, the economy, you've got to remember the economy has been shut down for so long. These GDP numbers that you're seeing right now, 8% and 10% and that, it's going to be so much more than it was previous year, but it At some point, hopefully, we'll get back to normalization. I guess what we're saying is a lot of the inflation rates that we're seeing and stuff like that may not be transitory, I guess is what we're saying.
spk01: Understood. And if I could squeeze in the last one, maybe if you could give a little – color around whether your commitment across different verticals is evolving in any way. Just curious whether you'd look to get bigger or smaller in any areas in light of the increased focus that the investment community has been placing on ESG. I'm just wondering if that's becoming a consideration at all as you look at the business going forward.
spk13: Not really for us. I think maybe in the energy space it is for some. Maybe some of the bigger banks would like to report lower energy balances, and some of the bigger oil companies would prefer not to. You know, you see independents, their production picking up. And in our case, you know, there's probably more oil and gas opportunities than we've seen in the past. I will say I haven't seen pricing or structure improve to the extent that capacity is restrained, and it should. And we have Just speaking about oil and gas, we've done a lot to de-risk this portfolio, which was at one point maybe as high as $800 million. It's down to $502 million at quarter end. That's been a massive de-risking, mostly of the legacy side of the portfolio. In oil and gas, it was $550 million when we merged, and it's probably $160 million now. So most of that de-risking has occurred in the legacy portfolio. So ESG is certainly having an impact on oil and gas. I don't expect that to, in our case, to result in any massive increase in oil and gas lending. We're pretty selective in what we do there. And in terms of the rest of the verticals, we're still interested in growing most of them outside of big growth in oil and gas. And as long as we can find customers who are willing to pay with the right kind of structures, We're going to grow our verticals.
spk08: Yeah, I mean, I just think you have to be careful. I mean, ESG is an important part of any business. I guess everybody is on the climate deal right now. But if you were just to focus that you're not going to do anything, I mean, look around. I mean, everything on the coast, it's chemical plants. They make chlorine. They make anything that you use on a daily basis. So that stuff's not going to go away. I mean, It's true that they're saying that they want oil and gas or cars ought to be electric within, you know, the next 10 years or so. So you're definitely going to see a change. But as a bank, we couldn't just walk away from so many of our businesses. I mean, it's just going to be – it's going to take time. You just can't do it overnight. And that will evolve as people change and you have different businesses that come up with a new type of environment. It just happens over time. You just have to be with the right people and making sure the loans that you do go, the people still have enough money to pay it back in time. so it doesn't run out for them. I think that's the main thing.
spk01: Understood. That's really helpful. Thank you all for taking my questions. Appreciate it.
spk06: The next question today will come from Peter Winter with Wedbush Securities. Please go ahead.
spk19: Good afternoon. Good afternoon, Peter. Hello. David, I wanted to ask about just a follow-up on M&A. If there's more of a focus or emphasis on maybe doing a larger size deal outside of Texas versus within Texas would kind of be more of a fill-in type opportunity.
spk08: I guess you're asking the question, are we looking outside of Texas more than inside of Texas, or is that the question?
spk19: Well, I guess more about, I guess, size. Are you more... interested in doing a larger size deal versus a fill-in that tends to be a little bit smaller?
spk08: You know, first of all, I would say that we've always said we like deals. If we could do it in the states that we're in, Texas and Oklahoma, we're more focused on that. And you know me, you're setting me up here, but you know I like bigger deals. There's not any question about that. But sometimes you can't always get the bigger deals. So, you know, you can try and try and Sometimes you can date somebody for a long time and you just can't get to that base. And so you look at what's next, what's out there that you can do, and you go to that other deal that you can do. And sometimes it's not exactly what you want to do, but if that other opportunity exists where we can get accretion, whether it's here or to another state, we would probably do that. I would say that if we go into another state, though, the franchise has to be big enough that it's worth us going and we can really grow it. I can't see us going to another state, for example, for a $2 million deal, maybe not even a $5 million deal. It would have to be a little bit bigger. Billion. Yeah. I mean, yeah, billion. I'm sorry. I'm doing it randomly.
spk07: I'm messing up.
spk08: Yeah, a billion, a billion-dollar deal. I mean, it would have to be a bigger deal. And something that we could be You know, we always like to be, if we're going to be somewhere, we'd like to be, you know, in the top five market share in that state if we're going to be. So it would have to be a bigger deal.
spk19: Okay. That's helpful. And then just also, Bach, on the core margin, it came in lower than what I was expecting. I was just wondering, you know, part of it is the increase in premium amortization expense and the excess liquidity. I'm just wondering how you're thinking about the margin here. next quarter? Yeah, the core margin.
spk00: Yeah, if you look at the core margin, I think what we're trying to focus on actual net interest income, if you look at our deposits, right, since Q2, end of Q2 of last year to now, we've grown $3 billion. If you look at from the end of 2019 or pre-pandemic, we have grown our deposit like $4.9 billion. And So that's a mix of money that we're putting in our balance sheet. You saw that we've grown our bond portfolio significantly. It's impacting the core margin. But we're looking at the more core net interest income So I kind of came up saying super core, you know, what's a super core net interest income, that's excluding warehouse, excluding PPP and loan fair value income. If you look at that super core net interest income, it's improved in the second quarter, you know, because of combination of growth on the bond portfolio and loans. And if you look forward, if you look at a core, super core net interest income with the growth of the net I think it's going to be improved in the third quarter, and that's what we're focusing on right now. It's kind of hard to focus on the margin right now just because of the interest rate environment right now.
spk08: Now, he's going to trademark that super core, Peter, so don't use it without trademarking or giving him credit.
spk19: That's the first I've heard it so far. Thanks for taking my questions. Go ahead.
spk06: The next question will come from Matt Olney with Stevens. Please go ahead.
spk16: Thanks, guys. Just a quick follow-up on loan growth. We saw pretty material growth in single-family loans in the second quarter. Just curious if we're going to see continued growth in that portfolio over the next few quarters. Thanks.
spk14: I would say yes. We continue to have very robust production, and, of course, there are payoffs, but the new production is far exceeding what's rolling out. And we have a very skilled mortgage team, and the application volume continues to be as strong as it's been all year. So I would anticipate that that portfolio would grow.
spk08: I would also add, Eddie, that I think that, you know, over the last few quarters that when overall commercial loans have been down, that's been a good thing to be able to replace it with. And we would say that as commercial lending picks up, you know, there may be a point in time where we may not keep the majority, not everything that we do, because if we were selling some of this mortgage stuff off, as you pointed out, that may add $18 million a quarter or so to our income, but we've just kept that, you know, kept it in. that over the long run we should benefit from it, but we're not getting any points for selling it or anything like that. So, you know, as commercial lending picks up, that may be something we may sell off later on. But in the short term, it was a good fill-in to replace some of the stuff, the more risky assets that we were trying to get out of.
spk18: Our lender referrals throughout our footprint really pushed that number up, that pipeline full. Yeah.
spk16: And just following up on that, David, as far as the new loan yields, I think you mentioned before a lot of the new loan yields are in that four, four-and-a-half range. But that's kind of a small deal. So larger deals may be in that three range. When you layer in single family, I assume that's going to be quite a bit lower. So maybe kind of on an all-in kind of way-at-average basis, how should we be thinking about kind of the newer core loan yields? What do you all think, guys?
spk14: probably three and a half if you were to factor in the mortgage because the average mortgage yield is coming in right under 3% right now.
spk08: Before we throw that in, I would rather try to do some numbers on that. I think you're going to probably be – we don't know. We're throwing out numbers right now. I think you're going to be closer to four. But, again, don't book that. Let us try to get you a better number than that, Matt.
spk16: Sure. No, understood. Thanks, guys.
spk06: The next question will come from John Arstrom with RBC Capital Markets. Please go ahead.
spk05: Hey, good morning, everyone. Good morning. Question for you on you talked about deposit inflows starting to moderate somewhat. Wondering if you could give us a little bit more color on what you're seeing there.
spk08: Well, I mean, it's pretty, John, it's probably about as simple as that. I mean, last year we saw, what was our growth rate last? I mean, if you look year over year, we were at 11%. But if you look at the full year from December 20 to December, from January to December, The numbers were in the 20% plus range. Do you have that?
spk00: Yeah, just the given numbers. If you look at the end of June of last year until end of June of this year, that deposit grown $3 billion. But if you look at from the pre-pandemic times of 12-31-19, our deposit grown $4.9 billion today. So that's a significant deposit growth. But I agree. If you look at just the second quarter, our deposits, I think, annualized and grown 5%. So we do see some moderation in the deposit growth. But it's a combination of people using money and less stimulus.
spk08: I think it's less stimulus and people using money. And, again, you would think that people will start using some of those deposits, too. Fortunately or unfortunately... deposits to me are still, you know, it's the bread and butter of the bank. It's the mother's milk, as I used to say. But I think that even though you'll see deposits decrease because people are using them, just because what we've normally done on an average basis, we usually grew deposits organically 2% to 4% a year. So you're probably not going to see It may take a couple of years for them to use some of these deposits. You probably won't see a decline in our deposits because we're growing organically that much or more. So there's a process that you probably won't be able to see. But again, for the first part of this year, the first six months, we're at, what, 4.8%, I think, so annualized.
spk00: In the second quarter.
spk08: In the second quarter, annualized. So you had a bigger chunk the first quarter, but I think you're starting to see, I guess I hope I'm giving enough color, John, you're starting to see deposits not rolling quite as much.
spk05: Do you think you're at the point where loans can start to outgrow deposits, at least for the next few quarters, and that loan-to-deposit ratio starts to come back up?
spk08: I think we are. I normally wouldn't say something like that, but I do. I think that The growth that we have right now is pretty impressive when you look at the amount of loans that we were. You've been with us a long time, and you saw how when banks joined us, our loans would go down because this is the kind of loans that we would outsource and what we wanted to get the portfolio to. It's a hard deal to do. If you look at the amount of loans that Kevin talked about earlier on the oil and gas that we've outsourced, and you look at the structured commercial real estate that we outsource and still have shown the growth, If you look at the rest of the bank and just took out the Dallas market because of the ones we lost in that particular deal, you're probably looking at 10% plus in growth overall. Once we quit losing or outsourcing what we didn't want in the Dallas market and they're growing, I saw the growth this quarter, I'm pretty excited. Kevin is a real leader, I think, and focused on building loans where I wasn't in the past as much. I was always a core deposit guy, and as long as you could take the money and deposit it in a bond, you know, I was happy and lot less risk in making it. But Kevin's worked real hard, and he's got his team together, and I think they're doing a good job. And with his help in pushing us, I think that we will have some growth.
spk13: I agree, David. I think particularly with deposits moderating, and let's just say deposits grow at 4% instead of 11% or 12%, which is probably way more likely, the growth in the loan portfolio aided by less runoff of the old legacy portfolio. So we're about done with that de-risking. The pipeline, as I said at the beginning of the call, looks better than it's looked in a really long period of time. The loan pull-through in terms of just we had some growth last quarter. The growth we've had quarter to date this quarter would indicate that we're running well ahead of where we did last quarter. So that's north of 5% kind of growth rates. So I do think we're in a position today for a period of time where we can grow the loan portfolio faster than we're growing the deposit portfolio. And that's obviously excluding warehouse and PPP. I'm talking about core loan portfolio.
spk08: And I don't think, you know, the other thing is consider, I don't think we have to be the first to ever raise rates as rates go up. We have so much money, so many core deposits. I think that we're going to have a better lever than our competition is because most of our money, I think, we probably have 10% of our money in CDs. I mean, so it's a very low amount. Almost everything we have is really transaction accounts.
spk13: And just to kind of couple the thought with I think it was Matt's question previously about the blended rate, I do think we're seeing the growth I'm seeing in the pipeline is growth that's outside of mortgage growth. So Eddie's talking about the mortgage growth. I'm talking about CNI, construction lending, middle market lending, CRE lending. We're seeing nice pickups in those categories that are coming with with a higher weighted average coupon, obviously, than we're seeing in the mortgage side.
spk08: The only caveat I would put, again, is if our administration decides to shut down the economy, that could change a lot of things, again. But where we're at now, we can keep going. I mean, we need not only Texas to keep going. We need the other economies in the rest of the U.S. to keep going, too, because they have to produce the goods that we need to sell and everybody has to chip in. So if we can keep that going, it'll be an okay deal.
spk05: Good. And thanks for all that. And I guess one last one. Also, Becky, you kind of got halfway to my question on the super core concept.
spk08: Trademark, trademark.
spk05: Yeah, exactly. And I was focused on PPP and some of the fair value income you talked about running off. and this concept of net interest income bottoming. But how big is that gap between what you call the super core and your stated number, and how quickly are those two converging together?
spk00: So let's take them two separately. If you look at our fair value income that we generated $12.2 million in the second quarter, But if you look at what the remaining balance, it's about $25 million left. So probably we're going to be earning next few quarter that $25 million. But this all depends on how fast the early payoffs and paydowns. We know that the payoffs and paydowns is definitely slowing down. The guidance that we look at it on the amortization basis, it's $3 to $4 million next few quarters just looking at. But then we have $25 million. So if you take that, It could be another five, six, seven quarters before we earned up. On the PPP side, we earned $10.3 million on the PPP fee income, and we have about $28.3 million remaining. It's kind of hard to tell when we're going to earn that PPP fee, but if you look at the first round of PPP, it took us about, to get the majority of it, the first three quarters, I would say. And I think if you take what the PPP round dictated, on the third, fourth, and the first quarter of next year, that the remaining 28, majority of 28.3 million that will be remaining. So I hope this gives you a color on those two items. Yep, that helps. Thank you.
spk06: And the next question today will come from Gary Tanner with TA Davidson. Please go ahead.
spk15: Thanks. Good morning. Just had a quick follow-up actually on PPP, which you sort of answered just a moment ago. But in terms of how you see working down that portfolio for the back half of this year, and then related to that, given that you don't want to necessarily invest in bond portfolio at current rates, how you think about replacing some of that yield and earning asset?
spk00: So if you look at on the PPP, so on the round one, forgiveness is pretty much, you know, it's very close to be done. On round two, we just kicked off in June. And I think, like I mentioned, we expect probably – it's all dependent on timing, right, when the customer want to file the forgiveness process application. But probably it's going to be next three quarters we think that the forgiveness will be done. I mean, it's kind of hard to say, you know, when it's going to be, you know, heavier in the first or third or fourth quarter. But between three quarters, I think the forgiveness will be done. And – I think it comes down to, you know, how we're going to replace that. I mean, we're growing our loans. That will be priority number one. So all the excess liquidity from the PPP loans will be put into as much as possible to new loan. But if there's, you know, excess money left, probably we'll definitely put in a bond portfolio because we want to earn some income on that. You know, we wouldn't be probably living a lot just sitting on the cash portfolio. But we just have to wait to when we see rates improve on the bond portfolio.
spk18: I think they have 10 months left to file for forgiveness, so it won't happen. You know, it's not going to all happen this year. It'll happen, like you said, over the next three, maybe, you know, four quarters.
spk08: But the bottom line, the full focus is taking the money and putting it in the loans if we can. Yeah, definitely.
spk15: Yeah, very good. Thank you.
spk06: This will conclude today's question and answer session, and I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
spk11: Thank you, Sean. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company, and we will continue to work on building shareholder value. Thank you.
spk06: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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