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spk08: Good day and welcome to the Prosperity Bank Shares third 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 a touch-tone 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.
spk01: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' third 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, General Counsel of Prosperity Bank Shares. And here with me today is David Zolman, Senior Chairman and Chief Executive Officer, H.E. Tim Tomanich, Jr., Chairman, Alsobek Osmanov, Chief Financial Officer, Eddie Saffody, 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 Tomanis, 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, Matt. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of prosperity 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 10Q and 10 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.
spk09: Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2021 conference call. I'm pleased to report that because of the confidence in our company, our strong capital position and our continued success, our board of directors voted to increase the fourth quarter dividend to 52 cents, a 6.1% increase from the third quarter. Prosperity continues to do well, and we want to share that success with our shareholders. Additionally, as our stock price experienced declines in the third quarter, Prosperity repurchased 767,134 shares of its common stock at a weighted price of $67.87. Prosperity Bank was ranked by Forbes as the second best bank in America for 2021 and has been in the top 10 of the Forbes list since 2010. Prosperity reported net income of $128.6 million for the quarter ended September 30, 2021, compared to $130 million for the same period in 2020. The net income per diluted common share was $1.39 for the quarter ended September 30, 2021, and compared with $1.40 for the same period in 2020. Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.72%, and return on assets of 1.42% for the third quarter of 2021. Net interest margins have been stressed throughout the low rate environment. However, we believe this should improve if interest rates rise as projected, as the bank is positioned for increased earnings in a higher rate environment. Our loans on September 30, 2021 were just shy of 19 billion, a decrease of 1.8 billion or 8.8% compared with 20.8 billion on September 30, 2020. Our linked quarter loans excluding warehouse purchase program and PPP loans increased 217 million or 1.3%, 5.3% annualized from 16.4 billion on June 30, 2021. We saw loan growth throughout the company with the exception of the Dallas-Fort Worth area, as we continue to reduce loans that were categorized as PCD loans at the time of the merger, as well as loans in the non-recourse structure commercial real estate category. Excluding these categories, Dallas-Fort Worth continues to show solid growth and win some marquee deals in their area. Deposits on September 30, 2021 were $29.5 billion. an increase of 3 billion, or 11.3%, compared with 26.5 billion on September 30, 2020. Our linked quarter deposits increased 341 million, or 1.2%, 4.7% annualized from 29.1 billion on June 30, 2021. Deposits continue to increase, which we believe is due in part to the government benefits and programs implemented during the pandemic and more people saving to have a safety net after the recent events. Our non-performing assets totaled 36.5 million or 11 basis points of quarterly average interest earning assets on September 30, 2021, compared with 69 million or 24 basis points of quarterly average earning assets on September 30, 2020, and 33 million or 11 basis points of quarterly average interest earning assets on June 30, 2021. The reduction in non-performing assets year-over-year is 47.4%. The allowance for credit losses on loans was 287 million or 1.73 of total loans when excluding warehouse purchase program and PPP loans on September 30, 2021. The allowance for unfunded commitments was $29.9 million on September 30, 2021, unchanged from prior periods. This is a total reserve of $317 million. Our net charge-offs were $15.7 million for three months ending September 30, 2021. Net charge-offs included $4.6 million related to resolved PCD loans and $10.8 million related to a partial charge-off of one commercial structured real estate loan that was not a PCD loan and obtained through the acquisition. The PCD loans had specific reserves of $3.1 million, of which $2.2 million was allocated to the charge-offs and $944,000 was moved to the General Reserve. Further, an additional $14.3 million of specific reserves on resolved PCD loans without any related charge-offs was released to the General Reserve. Overall, in the third quarter of 2021, we resolved $54.9 million in acquired loans, had $15.7 million in net charge-off, and released $15.2 million to the General Reserve. With regard to acquisitions, we've seen more merger and acquisition transactions recently and believe that due to increases in technology and staffing costs, additional government regulations, and succession planning concerns, there will be continued activity, especially if current market valuations continue. We remain ready to enter conversations and negotiations when it's right for all parties and is appropriately accretive to our existing shareholders. The Texas and Oklahoma economies continue to benefit from companies reloading from states with higher taxes and more regulation. Texas is projected to increase jobs by 493,000 in 2021. This increase, combined with people moving to the state, requires additional housing and infrastructure. a driver for loans and increased business opportunities. We are seeing higher prices for most crops and higher oil prices, which should help the local economies. Inflation continues to be higher than we would like, but we hope that it will moderate next year as the Federal Reserve begins tapering its asset purchases as expected. We believe there are also signs that inventories are starting to increase and supply chains are improving. although it will take some time to stabilize and return to normal. Thanks again for your support of our company. Let me turn over the discussion to Osobek Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieve. Osobek.
spk06: Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended September 30, 2021, was $248.6 million compared to $258.1 million for the same period in 2020, a decrease of $9.5 million, or 3.7%. The current quarter net interest income includes $5.4 million in fair value loan income compared to $22.5 million for the same period in 2020, a decrease of $17.2 million. The third 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 second quarter 2021. The net interest margin on a tax equivalent basis was 3.10%, for the three months ended September 30, 2021, compared to 3.57% for the same period in 2020 and 3.11% for the quarter ended June 30, 2021. Excluding purchase accounting adjustments, The net interest margin for the quarter ended September 30, 2021 was 3.03% compared to 3.25% for the same period in 2020 and 2.96% for the quarter ended June 30, 2021. Non-interest income was $34.6 million for the three months ended September 30, 2021 compared to $34.9 million for the same period in 2020 and $35.6 million for the quarter ended June 30, 2021. Non-interest expense for the three months ended September 30, 2021 was $119.8 million compared to $117.9 million for the same period in 2020. On a linked quarter basis, non-interest expense increased $4.6 million from $115.2 million for the quarter ended June 30, 2021. The increase was primarily due to gain on sale of ORE of $1.8 million recorded during the prior quarter and higher current quarter salaries and benefits resulting from higher incentives. For the fourth quarter of 2021, we expect non-interest expense to be in line with the current quarter or in range of $118 to $120 million. The efficiency ratio was 42.3% for the three months ended September 30th, 2021, compared to 40.2% for the same period in 2020 and 41% for three months ended June 30th, 2021. During the third quarter of 2021, we recognized $5.4 million in fair value loan income. This amount includes $3.3 million from anticipated accretion, which is in line with the guidance provided last quarter, and $2.1 million from early payoffs. We estimate fair value loan income from anticipated accretion for the fourth quarter of 2021 to be around $2 to $3 million. As of September 30, 2021, the remaining discount balance is $18 million. Also, during the third quarter of 2021, we recognized $13.4 million in fee income from PPP loans. As of September 30, 2021, PPP loans had a remaining deferred fee balance of $15.6 million, with the majority of these deferred fees to be earned in the next two quarters. The bond portfolio metrics at 9-30-2021 showed a weighted average life of 3.5 years and projected annual cash flows of approximately $2.6 billion. And with that, let me turn over the presentation to Timothy Maness for some detail on loans and asset quality.
spk10: Timothy? Timothy Maness Thank you, Asilbek. Our non-performing assets at quarter end September 30, 2021, totaled $36,549,000, or 19 basis points, of loans and other real estate, compared to $33,664,000, or 17 basis points, at June 30, 21. This represents approximately a 9% increase in non-performing assets, which comes from one loan. The September 30, 21 non-performing asset total was made up of $36,073,000 in loans, $326,000 in repossessed assets, and $150,000 in other real estate. Of the $36,549,000 in non-performing assets, $5,000,000 $459,000 or 15% are energy credits, all of which are service company credits. The $5,459,000 as of September 30th, 21 is a 35% decline from $8,378,000 as of June 30th, 21. Since September 30th, 21, $7,990,000 in non-performing assets have been put under contracts for sale, but there is no assurance that these contracts will close. Net charge-offs for the three months ended, September 30th, 21, were $15,697,000 compared to $4,326,000 for the quarter ended June 30th, 21. The $15,697,000 includes approximately $11 million charged off on one commercial credit secured by an office building. No dollars were added to the allowance for credit losses during the quarter ended September 30th, 21, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended September 30th, 21 was $596 million. Loans outstanding at September 30th, 21 were approximately $18.958 billion, which includes approximately $366 million in PPP loans. The September 30th, 21 loan total is made of 38% fixed rate loans, 37% floating rate, and 25% variable rate. I will now turn it over to Charlotte Rasche.
spk01: Thank you, Tim. At this time, we are prepared to answer your questions. Matt, can you please assist us with questions?
spk08: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jennifer Demba with Truist. Please go ahead.
spk00: Thank you. Good morning. Good morning. I'm wondering if you could give us some color on the $11 million charge off during the quarter.
spk05: Sure, Jennifer. This is Kevin. Let me handle that. It was out of our structured CRE portfolio project in Houston, which survived the five-year energy turndown and was weakened a bit out of the energy turndown. And coming out of COVID-19, combined with the loss of a tenant, got us worried about the credit. It's still current to this day, although there were some lateness in the last couple of months. We elected to have it reappraised and charged down. I won't go into the exact numbers on it because we're in the process of a final resolution of that credit, and I don't want to disrupt that process in any way, shape, or form. I will tell you that if you back up and look back at merger time, out of that structured CRE portfolio, at the time of merger, we had a little over 500 million of structured CRE in Houston, and about 91 million of that was in the energy corridor. And you'll remember, Jennifer, back then since you guys covered us, we were reporting on how that portfolio was doing throughout the energy crisis, particularly in the energy corridor. That portfolio has shrunk in the last two years from that $510 million to $177 million today. And what we have left in the energy corridor is a total of $17 million down from $91 million. So despite the massive, if you will, de-risking of that portfolio in Houston, we had this one asset that between the energy crisis and COVID just didn't make it. And look, they're current today. We have a cooperative borrower. We just took what we think is a prudent action of marking it down by a new appraisal and to a level we feel like we can deal with it.
spk09: I think another real positive also is, even though it was a loan that we didn't set any money aside for, a PECD loan, We have a bright guy named David Montgomery who recovered about an extra $15 million in money that we did have set aside for PCD loans that we never had to use and we took back into the general reserve. So, you know, under CECL accounting, you don't get to see it, but if we were still accounting last year, the way we were last year, you'd have a $15 million recovery, too. So, you know, I think that's the positive thing about this.
spk05: Yeah, I mean, out of all the PCD loans... and the marks put on those. We had a little over 15 million, 15.2, I think, left over that went back to the general, and this was the bad guy on the ledger that you could weigh against that. So I don't think this is a wave of any way, shape, or form. It's a single asset that stumbled a bit.
spk09: You know, in prior deals, you would see the same thing. Sometimes You might miss one, and then you recovered stuff that you didn't count on recovering. The only thing that's different, the way things are right now, is the way we presented under the CECL format. I would say going in the future, and Merle's talked about this too, instead of having maybe a specific reserve for just one particular loan, have a reserve for a certain category of loans. And that way, generally, we've always done better. We've always done better. Than we've ever projected and I think that that'll continue also.
spk10: I think we might emphasize also just for clarity that the main reason we took the step that we did on this this one credit is that Two major tenants haven't have given notice that they're not going to renew their leases I believe those two tenants are current right now, but they're going to be moving out soon and and the owner of the building has not been able to find a replacement for those two tenants. When they do move out, it appears that the building will not have an NOI sufficient enough to make our payments. So that's why we chose to do what we did. And once again, at the time that we joined forces with Legacy, this building was doing well in terms of its NOI.
spk09: So there wasn't any reason to put a mark on it at that time. Yeah, I mean, on the other hand, you get other people to lease it. Again, this is a nicer building. It goes from being a negative to a positive. I mean, this isn't a dumb building. It's a really nice building. So I don't think there's any question that they'll find some more people to lease. It's just a matter of time, really. But, again, according to what we need to do, we did what we needed to do.
spk00: Correct. Thank you.
spk08: Our next question will come from Brady Gailey with KBW. Please go ahead.
spk03: Hey, thanks. Good morning guys. It was great to see prosperity reengage in the buyback. Um, you know, the stock is a little higher today versus the average price that you repurchased, um, in the third quarter. And I know you guys can be somewhat price sensitive. Um, but you know, your, your capital is growing. And you haven't announced an M&A deal in a while. So how should we, and you increased the dividend too, which was nice to see. How should we think about additional buybacks and dividend increases from here? Do you become less price sensitive on the buyback just given the amount of excess capital that prosperity has now?
spk09: Well, I guess you could say we did become less price sensitive. The last time we bought it was in the $40 range. Paying $67, we're stepping out now. But the answer to the question is I think we are making good money. We did raise the dividend. I think that we are going to be opportunistic. My personal feeling is I think our stock is still a real buy today. I think that it's a, you know, I think The overall answer would be yes, we'll probably be less sensitive to the price. Not that we would pay anything for it. Don't let me go that far. But, again, we think it's a good buy, I'll say it like that.
spk03: All right. And then maybe one for Kevin, just on the mortgage warehouse. You know, earlier in the year and last year, it was at such a robust level, and now it's coming down to that kind of 1.8, billion-dollar level. You know, is that – are we at a normalized level, or do you think that, you know, longer term we should think about the warehouse continuing to slip a little bit?
spk05: Yeah, Brady, I'd say normalized with the caveat of normalized in terms of seasonality as well. So, you know, we ended – I think the average for the quarter was $1.836 billion. October has been pretty good to us. It's averaged a little bit better than that. It's been close to $1.8 billion throughout October. But due to seasonality, and again, this assumes rates stay basically close to where they are or go up slightly, I think we end the year probably closer to $1.5 billion, maybe $1.5 billion, and the average for the quarter will be closer to $1.7 billion to $1.750 billion. All right. That's helpful. And then lastly, 100 million off where we are today, where we were in Q3.
spk03: Yep. Okay. And then the last one for me, you know, accretable yield took a pretty big step down. I heard your comments how you only have $18 million left in that bucket. So to me, it seems like it's time to refill that bucket. You guys have been pretty quiet on the M&A front, I know we saw the Happy Deal, which was a big, big deal in Texas that I thought may have made sense for prosperity. But, David, just an update on M&A conversations, how they're going. Do you think you're getting closer or anything? What's the latest on your M&A strategy?
spk09: I think there's more M&A out there. There's no question. I mean, when you look at the regulations and CFB talking about, you know, especially for larger banks having reports, all the dynamics that you would for a home loan, making it more of a commodity than a loan, the price of trying to retain people and talent going up. I mean, all those things considering more regulatory burden. I think there's going to be more. We did participate in the HAPI deal. I think that probably it was really just a couple of us, and Johnny got it. I think our price that we bid, We might have even been just a tad higher, a couple of cents higher per share or something like that. I don't know that for sure. But again, they went with Johnny because one of the main things they wanted to do is they wanted to be able to keep their name. And that would have been very hard and difficult for us to do because we have banks surrounding their banks and you couldn't have a prosperity bank in one corner of town and a happy state bank in the other. So that's the deal that I think. But again, we were one of two or three people that that really got to look at the bank. So we're continuing to look. We're looking at other deals. We've worked on some deals that come around that you're not expecting in the short term, and then we continue to work on deals that we've been working on two, three, and four years. So it's not a question if it's going to happen, just a question when it's going to happen.
spk03: Okay, got it. Good luck.
spk09: Thanks.
spk08: Our next question will come from Dave Rochester with CompassPoint. Please go ahead.
spk11: Hey, good morning, guys.
spk06: Good morning.
spk11: I just wanted to start on the loan trends. I was wondering how the pipeline looked at quarter end, what the trend was there versus the prior quarter. And then I saw the runoff in CRE shrank a little bit this quarter. I was just wondering if you're better able to offset that structured CRE runoff now with new business or the amount of runoff you're expecting has shrunk a little bit and then where you think that stabilizes.
spk10: I think the deal flow is steady. It's not dramatically increasing and it's certainly not falling. So I think we should be able to maintain our position and actually have a little growth on top of that. As an example, there was a major announcement just recently in Houston that one of the what I would call premier apartment developers and owners here in Houston has sold their entire portfolio, which is 20 plus properties for in the billions of dollars. And as far as I know, this is the first time that outside money of that size and that consequence has invested in Houston in two or three or so years. So that purchaser obviously thinks that there's a future in the apartment market in Houston. That's just an example of how things seem to be turning around. So I don't think there's any reason to be pessimistic about the deal flow. Kevin, you may comment on that.
spk05: I would echo what Tim says. I think the pipeline is strong. We grew roughly 3.5%, I think, percent in Q2 and 5.3% in Q4. Specific to your question, Dave, some of that was aided by slightly lower structured CRE payoffs in the quarter. We had about 100 million of payoffs in the quarter. If you recall from the last quarterly call, I said I thought maybe we'd do 200 million in Q3 and 200 million in Q4. So the 5.3% was a combination of slightly better production and slightly better results on the CRE payoffs. I think as we go through that structured CRE portfolio, I would say rather than $200 million in payoffs in Q4, I've lowered the expectation of that down to $130. So we're nearing the end of the shrinkage of that portfolio, which is helping on the loan growth side. Also specific to your question, we are seeing some funding up of revolvers on our CNI book, and usage is higher than it's been in a long time, a couple of years, as companies are recovering, carrying more levels of receivables, and when they can get inventory, overstocking inventory for fear of it being short in the future. So there is some of that going on. In the first three weeks of October, in CNI alone. Our CNI balances are up $55 million, which is an awfully good start to the quarter. And I think for the economy in general, when we start seeing revolver usage pick up on these CNI companies, and we're seeing it real time, particularly in the last couple of weeks, that's not just good for us, that's good for the U.S. economy. I mean, to me, that's a telltale sign that Things are firming up, and it would also be a telltale sign of I think we can put up another mid-single-digit growth quarter in the fourth quarter and into the first quarter of next year. So I think we're feeling a little bit better about our growth prospects.
spk09: And I think the other thing, again, if you didn't have the – if we wouldn't have had the structured real estate running off, our growth rate would be probably – in the 7% range. So I think we're doing pretty good. You followed us for a long time, and you've seen how when different companies we merged with and joined, maybe we'd have a certain risk deal, maybe get into a different risk deal. But again, I think our growth was good, and even considering what the structure of real estate that reduced being near 8%, I thought we did pretty good. To me, it looks pretty good. When I looked throughout the whole I think we saw growth really in every area of the state and even Oklahoma. So I think we feel pretty good where we're at.
spk10: Yeah, the growth was primarily in central Texas and Houston, but it was a little bit of everywhere. You're right.
spk09: But again, if you looked in Dallas and you added back the structured real estate, you would have seen good growth there too. That's correct.
spk10: That's right.
spk09: Go ahead, Dave. Go ahead.
spk11: Oh, I was just going to say, I saw you had some good growth in energy. I was just wondering what your outlook was on that. If you saw some good opportunities there, we should see more of that.
spk09: Well, we may be crazy probably, but, uh, we, we may, we have, we have a big client in the Midland Odessa area and the customer has been with us for probably 30 years and he He has about as much money in checking as he does borrow from us. But, again, he bought a piece of Exxon. Exxon was selling some of their percentage out there, and he bought a big percentage. And, of course, today it looks like he's almost doubled his money. So that was a big one.
spk05: Well, look, that was just shy of $100 million, Dave. And net of that, we grew 60. So the portfolio outside of that single transaction actually shrunk $40 million. Right.
spk10: You know, we've always said we're not turning our back on that industry. We're just trying to be selective and prudent in what we do. And I think that's going to continue to be the case.
spk09: And, again, we try to focus, but we try to say we'll grow and try to even grow more with the customers that have been for 30 years that really guarantee the notes and have been, you know, that have been part of it and stay on as guarantors and stuff like that. And that's just exactly what we're doing. The old-time players that buy when everything is down, that's who we're really – focusing on right now, some of those bigger clients like that.
spk11: Yeah, okay. Well, that 130 that you mentioned in terms of expected runoff in the structured book, is that pretty much it? Does that wrap it up?
spk05: You know, I think in terms of materially, you know, there's always going to be something dropping out, but it'll be not the big numbers that we've had. You know, that thing's shrunk almost a billion dollars in two years.
spk11: Yeah, yeah. You don't want to work there.
spk05: It's good to be near the end of it. And I think, knock on wood, from a guy who has been in Dallas for the last 22 years, maybe Dallas could help participate in the loan growth story here going forward. Yeah.
spk11: Good. Maybe if I just get one last one in on deposit growth. I know that's generally really strong in the fourth quarter. It's your strongest quarter of the year. Um, and you normally have more, more deposit growth and loan growth in that particular quarter, not to make any comment on loan growth before Q, but normally deposit growth is pretty robust. I was just wondering, given where the curve is today, um, it's a little bit better than it was for the last quarter. You know what your thoughts are in terms of growing the securities book. It looked like you grew that a decent amount in three Q. So just curious, you know, where purchase yields were for the quarter, where they are today. If, if, uh, Any notable change there and what your thoughts are on that growth going forward?
spk09: You're absolutely right. In fact, usually in the third quarter, in normal times, we go negative sometimes in deposit growth. But I guess there's just so much money out there right now. We're still about 11% when you look at year over year and over 4% for the quarter. But you will see our deposits really shoot up in the fourth quarter, and you'll see that. And, again, we're not – When there was really a decent spread or a yield curve, there would be times when we would even borrow sometimes up to $2 billion from the federal home loan bank because we have so much money rolling off that we would buy in advance and take advantage of that situation. Because rates were where they were and it went so low, we quit doing the $2 billion. In fact, I doubt that we have any money. We now keep probably over $1 billion over there instead of purchasing it from them, so We're not being aggressive buying back right now. We are buying because we have so much money that rolls off every year. We're continuing, but we're not making any big moves, and we'll continue buying as the money comes in. Hopefully, our real hope is that we can continue to increase loans and put more money into the loan category, really.
spk10: Yeah, our ability to acquire and retain deposits is still good and strong. We don't have any problem seeing customers wanting to bring money to us. If rates start to go up materially, I suspect that's going to change somewhat because some of the high rate payers that finally had to get out of the market will probably get back in. But we've been through those circumstances before and we can deal with it without any So I think deposits are solid now and probably will be for a while.
spk09: All of our deposits are core deposits. I mean, for the most part, all core. We don't go out. We hardly have any CDs left. And almost all of our growth is really from core customers, really. That's correct. Yeah. And where are you seeing those securities yields today? I think they're closer to probably up one and a half is what we're shooting for. That's what we see.
spk11: That's not where the book yield is right now, so not really dilutive at this point.
spk09: No.
spk11: That's great. All right.
spk08: Thanks, guys. Our next question will come from Peter Winter with Wedbush. Please go ahead.
spk07: Good morning. I wanted to ask on the lending environment. I know it's always competitive, but can you talk about what's happening in the portfolio in terms of new loan yields versus loans maturing?
spk10: Yes, it is extremely competitive, especially from a pricing standpoint. You know, the yields that we book today are on the low end, 2.75, on the high end, 4.5. And we're trying to get a three in front of as much as we can. Some of the better, stronger credits, that's becoming more and more difficult. But that's, in general, the spread that we're seeing.
spk09: Well, I think, generally, we know what this month the quarter loan average was. 430, you said, or something?
spk06: Yeah, I think around 4%, I think.
spk09: Yeah, well, I was referring to new loans that we're putting on. You had that number, didn't you?
spk06: Yeah, I had it. I think it's around 4%. Just under 4%. Yeah, just under 4%.
spk09: That's the average for the third quarter, just under 4%?
spk06: Yeah, that's right. Okay.
spk07: And then, If I could ask, you know, if I think about prosperity, one of the strengths is that ability to manage expenses. But going through earnings, we've been hearing a lot of discussion about inflation pressures as we move into next year. And I was just wondering, could you talk about some of those inflation pressures that you're seeing and maybe how you're thinking about expense growth next year?
spk06: Yeah. Yeah, we do see the pressure, you know, because we deal a lot of with, you know, a you know, the vendors, and we see quite a lot of pressure, not just from the vendors, but also from the HR side of it. You know, there's a lot of, you know, people coming in trying to get our employees. But overall, there's a lot of things that we're doing, right? I mean, we're putting a lot of technology, right? There's a lot of spaces that you could replace some manual work that we do or employ with the automation that we're focusing a lot. We have a lot of projects going on that side of it. So that should reduce some expenses related to offset this, you know, inflationary pressures we have. If you look at from the – well, the good thing what we have, we have long-term contracts in place for the significant expenses, so there's not much pressure on that side of it, so we're able to manage that. But when it comes to expenses, you know, we're looking at all aspects of it, right? We're looking at the branches. We're looking at the – you know, automation, certain processes that I already described. And hopefully, as we implement those processes in place, that, you know, should offset some expenses, you know, increasing due to the inflationary. So when I look at next two quarters, I think the projection I gave, 118 to 120 million, I think that should stay at least quarter two, you know. And by that time, some processes we're working on should, you know, bear some fruits.
spk09: There's no question inflation is there, Peter, and we're watching it. We're watching it very strongly. We're going to try everything we can to, even though it may cost us money from the technology side, to automate more. And I would say there's also positions in the company and jobs where we've had, let me say this, that the things that maybe branches or something that we didn't look at in the past that we're not that were not profitable or certain areas of the bank that weren't profitable. We're going to fix that because you just have to in these kind of times, and that's where we hope to do it.
spk05: Last thing I would add is I think about this in a broader context sometimes, looking at our customer base, and they've got rising wages just like we all do, but they have also another problem. component of their struggles here, which is their rising input costs, whether that's steel or the product they're getting. And every company is dealing with that except for banks. When you think about our input costs, it's our wages and cost of money. The cost of money is still going down for us. If you look at the cost of our deposits, it's still trending down, and I think it'll trend down again in the fourth quarter. So we're just dealing with the wage pressure part of it and not having to deal with the other input costs. So with I think financial services is relatively less affected by input costs than just about any other industry in America. And having locked-in contracts is a big deal, too, I think.
spk09: Our big stuff is really locked in.
spk07: Long-term contracts.
spk09: Yeah.
spk07: That's great. And then if I could just sneak in one more. Just the core margin had a really nice increase, and I'm assuming – A lot of that was driven by the repricing of the public funds. And I'm just wondering how much is left, and maybe if you could just talk about what the core margin looks like for next quarter.
spk06: So if you look at – it's kind of hard to give exactly, you know, what it's going to look like next quarter, but I'll give you some, you know, variables that probably will help you to get there. If you look at, you know, our PPP fee income was $13.4 million this quarter, which was up from the second quarter. That's why you see a kind of uptick on the, you know, net interest income. And if you look at our core loan growth, we had pretty good loan growth with 5.3% annualized in the third quarter. So if you look at the, well, I call it super core net interest income, that's excluding the PPP warehouse and fair value, it has improved compared to second quarter. So if you're looking for the next quarter, we should continue to improve that core, super core NII. And then you just have to adjust for the guidance, what I gave on the, you know, fair value income and the PPP fee. Because on the PPP fees, we have, what, 15.6 million deferred fee left. And I think the way it kind of slows down, we think it's going to be more like two quarters before we recognize most of it. So I think that variables can give you, you know, kind of guidelines where we're heading related to net interest income.
spk10: And you mentioned public funds. I can give you a little color on that that might be helpful. At the end of the June 21 quarter, our average interest expense on public funds was 71 basis points. At the end of September, this most recent quarter, it had decreased to 33 basis points. And between now and mid-year 2023, we have several hundred million in public funds that are going to reprice. And at this point in time, the public funds that are repricing are typically being done in the 10 to 20 basis points range. So we're going to see, I believe, continued decreases in public fund costs.
spk06: Yeah. So definitely, I think, looking for, at least on the fourth quarter, our interest – Expense will definitely be a little bit lower than we've had in the third quarter just because of the repricing of the public funds.
spk09: Peter, that super core is trademark if you're going to use that.
spk07: I'll send over a fee. Thank you. That's all I had. Thanks very much.
spk08: Again, if you have a question, please press star then 1. Our next question will come from John Arstrom with RBC Capital Markets. Please go ahead.
spk02: Thanks. Good morning, everyone. Just a couple of follow-ups. Do you guys feel like Texas loan growth is accelerating at this point? It's obviously much stronger than a lot of other areas of the country, but do you feel like it's accelerating and it can accelerate into 2022?
spk05: This is Kevin. This is, again, a personal opinion and just what I feel from being in the market every day. I do think it's accelerating. I think we're going to go through an interesting phase when the supply chain breaks, breaks free, and we get back to more normal. I think what we'll see, because of pent-up demand, we're going to see a short period of maybe hyper-growth as people pull through products that they've been waiting for. And I think that will give us, you know, it's good now. It will go really good for that temporary period of time, and then may back up a little bit once we get through the backlog of the pent-up demand, if that makes sense to you.
spk02: Yep.
spk05: So I think the industry is going to see better growth than we've seen, followed by really good growth when we pull through the supply chain issues, and then it moderates from there.
spk10: And I agree with that, and I think one thing to add to it that we need to focus on is what really happens in the energy side of the Texas economy, and Oklahoma's too, for that matter. If these increased prices really are sustainable, that's going to start having a trickle effect throughout the entire economy. I think it's a little – I personally think it's a little too soon to make a call on that, But obviously, things have changed dramatically in just a few months in terms of the price of oil and natural gas, all of which helps Texas and Oklahoma.
spk09: Well, I think Texas is going to be better than most all other states. In migration. Just through the migration. You look at the number of people that are coming, the apartments you have to build, the homes you have to build, the infrastructure. And really, with a current administration that hates fossil fuels, I can see nothing but an increase in that. So I was talking to some people. Actually, this is what I wanted to hear yesterday when I was sitting in the eye doctor's office. The guy that was – that was – he has an oil service company, and they're as busy as they can be. And so people that are in the service side of it, so things are really picking up in I don't think you'll see a lot of people jumping into the business like you did in the old days. You have the older people, the older companies that have been there, and you'll see I think the price will go up because there won't be as much drilling. There will be just a supply and demand. And then another thing with this inflation is Texas still produces a lot of crops. I mean, you've got cotton that's selling at – higher than I've seen it for 10 years probably, $1.10 a pound or something, corn, milo. So you've got commodities going up. You've got oil and gas going up. You've got people moving in. I mean, the stars are aligned, I think.
spk02: Okay. And, David, I asked you about this a couple of quarters ago. How do you think about higher rates in your business model? On one hand, you're growing the securities portfolio, and I would imagine you're thinking you have to be a little bit careful and protect yourself. But on the other hand, two-thirds of your loan portfolio is levered to higher rates. How do you think about the balancing act between those two forces?
spk09: I want to make sure I understand the question. Your question is what exactly? I don't know that I got it.
spk02: I just want to make, you know, how do you think about extension risk on the portfolio, putting money to work at lower rates? And then on the other hand, it sounds to me like you're expecting higher rates, which would be very positive for the earnings trajectory of your company.
spk09: You know, really, it sounds crazy, but we really don't try to call the rates. If you look at our loan portfolio, we have about a three-year turnover. I mean, it all rolls. And really, when you look at our bond portfolio, It rose about every three or four years. Three and a half years. Three and a half years. So really, we're not trading call rates. I think higher rates will help us dramatically. I mean, when our models, at least our models, say they will, I mean, our models show that 100 basis points is okay for us, but 200 basis points really shows a lot of growth. So I think that we're going to continue buying like we do. I think as money comes in, we'll continue to buy. I don't think we're going to try to position ourselves There are times when we see spikes that we may buy more than we normally would, and I think that'll continue. But again, I don't think that we're going to try to call rates. And the thing that will help us the most, I don't know that the Fed can raise interest rates as fast as everybody thinks they can, at least from the prime rate perspective. I mean, you've got a stock market that's extremely high. You've got one to four family residential loans and homes that are selling And those had like 20% increases sometimes in Texas. So they can't just go to the prime rate and just raise it extremely fast or they could blow the economy. On the other hand, they can get rid of the tapering and drive up the 10-year yield and get an extra 100 basis points in there. Kind of that way, I think that's the way it should be done. Of course, they don't pay me to say what that is. It's just my opinion. Hopefully that we can raise the 10-year have a real spread on the 10-year and get a little bit higher yield there, and then start raising the prime rate shortly and little bits thereafter. But I think it does look positive, yeah.
spk05: And I would bet one thing... Because the premium amortization drops dramatically.
spk06: Yeah, that would definitely. And from other things, I think it's not as much of a worry because if you look at our bond portfolio, we generate like $2.6 billion in annual cash flow that will be invested to the either loans or... one portfolio from that standpoint, you know, we have so much cash flow coming in.
spk09: Well, I don't know that anybody's brought that up. Our amortization costs on our portfolio just skyrocketed this quarter, too. I mean, hopefully when that slows down, that would be a real plus for us.
spk06: Yeah, I mean, this quarter we had 15.1 million amortization, and based on what we're reading, it seems like it should slow down. I don't know it's going to be that significant, but even It slows down to $14 million of the extra million dollars there.
spk09: I remember when it was $8 million.
spk06: It was the last year.
spk09: Of course, you have a bigger portfolio, too. But still, to go from $8 million to $15 million, $8 million to $15 million, it's a lot. That's about a quarter.
spk02: Okay. All right. Thanks for the help. I appreciate it.
spk08: 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, Matt. 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.
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