Prosperity Bancshares, Inc. (PB) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prosperity Bancshares First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen and welcome to Prosperity Bancshares’ First Quarter 2018 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybankusa.com, and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. Tim Timanus Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President and Bob Dowdell, Executive Vice President. David Zalman will lead off the call with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Austin. 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, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares’ filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2018 conference call. For the first quarter of 2018, we showed impressive returns on average tangible common equity of 15.4% annualized on an average and on average assets of 1.32%. Our quarterly earnings were $74,361,000 in the first quarter of 2018 compared to $68,565,000 for the same period in 2017, an increase of $5,796,000 or 8.5%. Our diluted earnings per share were $1.07 for the first quarter of 2018 compared to $0.99 for the same period in 2017, an increase of 8.1%. Despite the increase, earnings should have been better, net charge-offs for the quarter of approximately $9,441,000 were an anomaly with approximately two thirds of this amount representing a loss of $0.07 per share, attributable to previously identified problem credits inherited from our last acquisition in Oklahoma. With respect to the largest charge-off of a $4.6 million energy credit, we elected to accept a greatly discounted offer to sell the asset and reduce our non-performing assets by 7.6 million rather than continue to carry the problem loan for an unpredictable future period. Loans at March 31, 2018 were $10.011 billion, an increase of $272 million or 2.8%, compared with $9.739 billion at March 31, 2017, and essentially flat compared with the fourth quarter of 2017. We experienced a number of large pay downs in the quarter that impacted our overall growth. However, the good news is that the loan production was strong and as Tim will discuss in a few minutes, and given the expected funding of these new loans, we believe that we will achieve the 2018 organic loan growth guidance we gave earlier this year. We remain excited about 2018. Although we had large loan paydowns due to our customers selling their projects, converting completed projects to long term financing or using cash reserves to pay down debt because of a more economic certainty, we believe that this increased certainty should result in businesses and individuals taking calculated risks and needing loan funding to do so. Our non-performing assets totaled 33.2 million or 17 basis points of quarterly average earning assets as of March 31, 2018 and as compared with 41,199,000 or 21 basis points of quarterly average interest earning assets at March 31, 2017. That represents a 19.4% decrease and 37 million or 19 basis points of quarterly average interest earning assets [indiscernible] an 11.3% decrease quarter-over-quarter. Our deposits at March 31, 2018 were 17.333 billion, an increase of $297 million or 1.7%, compared with $17.036 billion at March 31, 2017. Our linked quarter deposits decreased 488 million or 2.7% from 17.821 billion at December 31, 2017. This change was primarily due to seasonality. In the fourth quarter of 2017, consistent with historical trends, our deposits increased significantly by $914 million. Typically, our deposits didn’t decrease during the first and second quarters of the year. Historically, over the last 20 years, we have averaged an approximate 4% annual increase in organic deposits. More significantly, we continue to experience growth in our non-interest bearing deposits, which increased 6% annualized in the first quarter of 2018. With regard to acquisitions, as we've indicated in prior quarters, we continue to have active conversations with other bankers regarding potential acquisitions, opportunities, we remain ready to enter into a deal when it's right with all parties and is appropriately accretive to our existing shareholders. On to the economy, the Texas and Oklahoma economies continue to grow, helped by diversity of business, low or no state income tax, a business friendly climate and a strong tailwind from an improving energy industry. The Dallas Federal Reserve Bank is projecting 3.4% job growth for Texas in 2018 or 418,000 new jobs. Houston is also making a comeback with 4.7% annualized job growth through February 2018 and expected 160,000 new jobs during 2018. Home inventory in Texas is at approximately 3.6 months and auto sales are strong. The energy survey suggests an oil price of $63 a barrel for 2018, the breakeven cost for oil is $52 a barrel overall and $47 per barrel in the Permian. There is more price pressure for oilfield services. Further, many experts close to negotiations believe that the United States is nearing a new agreement with Mexico and Canada. The outlook for Oklahoma for 2018 is also positive. There is growth in most major revenue sources and unemployment remains low. Oklahoma's unemployment rate in February 2018 was 4.1% and remains unchanged since September 2017. The employment growth has added jobs across most industries with the strongest gains in the mining and other service sectors. Home prices increased 5.6% in the fourth quarter of 2017 compared to a year ago and rig counts are well above their levels from a year ago. Since the beginning of 2018, Oklahoma's economy has experienced momentum with the announcement of several relocation and expansion projects. These projects play an important role in further diversifying Oklahoma’s economy. Overall, excluding anomaly and net charge-offs for the quarter, our outlook for 2018 is positive. Business fundamentals remain strong, which should benefit our customers. I would like to thank our whole team once again for a job well done. Thanks again for your support of our company. Let me turn over our discussion today to Hollaway, our Chief Financial Officer, to discuss some specific financial results we achieved.

Thank you, David. Net interest income before provision for credit losses for the three months ended March 31, 2018 was $153.2 million compared to $152.4 million for the three months ended March 31, 2017. This change was impacted by a decrease in loan discount accretion of $2.4 million and looking forward, we're projecting loan discount accretion to run about $2 million per quarter. The net interest margin on a tax equivalent basis was 3.16% for the quarter ended March 31, 2018 compared to 3.20% for the same period in 2017 and again 3.2% for the quarter ended December 31, 2017. Excluding the purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended March 31, 2018 was 3.12% compared to 3.11% for the same period in 2017, down 3.12% for the quarter ended December 31, 2017. Non-interest income was $27.9 million for the three months ended March 31, 2018 compared to $30.8 million for the same period in 2017 and non-interest expense for the three months ended March 31, 2018 was $80.1 million compared to $78.1 million for the same period in 2017. The efficiency ratio was 44.2% for the three months ended March 31, 2018 compared to 43% for the same period last year and 43.8% for the three months ended December 31, 2017. The bond portfolio metrics at quarter end showed a weighted average life of 4.08 years, an effective duration of 3.63 and projected annual cash flows of approximately $1.8 billion. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave. Non-performing assets at quarter end March 31, 2018 totaled $33.217 million or 33 basis points of loans and other real estate compared to $37.455 million or 37 basis points at December 31, 2017. This is an 11.3% decrease from December 31, 2017. The March 31, 2018 non-performing assets total was made up of $22.679 million in loans, $0 in repossessed assets and $10.538 million in other real estate. Of the $33.217 million in non-performing, $13.345 million or 40% are energy credits. This is broken down between $3 million production credits and $10.345 million service company credits. Since March 31, 2018, $4.291 million or 12.92% in non-performing assets have been removed from the non-performing asset list or are under contract for sale. Net charge-offs for the three months ended March 31, 2018 were $9.441 million compared to net charge-offs of $4.771 million for the three months ended December 31, 2017. $9 million was added to the allowance for credit losses during the quarter ended March 31, 2018 compared to 2 million for the quarter ended December 31, 2017. The average monthly new loan production for the quarter ended March 31, 2018 was $329 million, compared to $314 million for the quarter ended December 31, 2017. This is a 4.8% increase from the last quarter and the largest monthly average in our bank’s history. Loans outstanding at March 31, 2018 were $10.011 billion compared to $10.021 billion at December 31, 2017. The March 31, 2018 loan total is made up of 40% fixed rate loans, 36% floating rate and 24% variable rate. This is unchanged from December 31, 2017. I'll now turn it back over to Charlotte.

Thank you, Tim. At this time, we are prepared to answer questions. Austin, can you please assist us with questions.

[Operator Instructions] And our first question will come from Dave Rochester with Deutsche Bank. Please go ahead.

So, it looks like expenses beat your expectation again this quarter and now that's a common theme here. How should we expect these to trend going forward?

Dave, again I think what we said at the last time, we think we're going to run in that $81 million range. So I think that's where we want to stay, even though we've beat at this quarter, I still want to project that going forward.

Okay. And then just switching to the NIM, can you just talk about how you're thinking about that trend from here, excluding accretion? Do you think we'll see more upside just with the March hike?

Dave, this is David Zalman. I’ll take that question. As I mentioned before, our NIM is probably different than maybe a lot of banks that have a 85%, 90% loan to deposit ratio with having a $9 billion bond portfolio and a 3.6 year duration. It takes us longer. I always refer to it as trying to turn the Queen Mary around out in the parking lot, but our NIM will increase, will look better in six months, will look better in 12 months, well, really good in 24 months and look fantastic in 36 months. So it’s a longer deal, it's a longer deal, but that's just when we model, that's just what it looks like for us. So I mean, it does go, it just doesn't, it just doesn't change as quickly as a bank that maybe has a lot more floating rates loan to deposits.

And I just noticed that securities yield was up, ex-securities premium and expense this quarter. I was just wondering where reinvestment rates were for the quarter and then where that competitors’ rate you're seeing today.

They're going up. I mean and I don't have it this morning, but again the tenure this morning was over three and part of what we invest in. I would say that we're probably getting 320, 330 maybe this morning even.

So that will be a source of support for the NIM trend I would say going forward as it was this past quarter, right?

[indiscernible] and just say, you got $9 billion and what do we add now, 2 point something, 2.2, anybody can do the math on 9 billion, 1%, it looks pretty good.

I guess just switching to deposit growth, you talked about that 4% I guess historically, how are you thinking about that for this year, just given the competitive pressures and then the higher rate environment.

Well again that trend was over 20 years average. And again if you look at our last two years, we were in -- I think we -- it was less when the oil industry went into a downturn and we didn't get quite the 4% and I think even this last year, we only hit 1.7%, because that’s what our increase was overall. If the economy is good, I think that we should still be on course for that. I think I mean the economy, the fundamentals and the basics are out there, it should be good. Now again, we're not out there, our rates are probably not the same as some of the others that are really needing the money. So we're not as aggressive, but overall, if the business -- if business continues to grow, our bank -- and I mean we're in such a growth area with Texas and Oklahoma that there's so much action and so much activity. We should be the benefactors of that with so many people, I mean 418,000 new jobs in Texas alone this year that doesn’t even count the number of people that are moving in. All of those will do well, will be well for a good tailwind in back of us I think. The long term looks very good.

The next question is from Brady Gailey with KBW.

So when you talk about loan growth, coming at a higher pace for the rest of the year. Is that a function of production going up or is it more payoff slowing down.

I’ll get Tim to jump in on this, I mean this is Dave again. I mean I think as Tim mentioned, our production has been more than we've ever had before. On the other hand, we've had more payoffs this year or this quarter than we ever had, I mean just to give you some color. We developed a project in Downtown, Houston on a condo project, it was over 30 million. If sold, everything sold, we had a multifamily project in the Midland Odessa area and with a secondary market was over 30 million. We had a loan that paid in Dallas, over 30 million in people, 20 million in their accounts. So just a whole lot of paydowns, but our production looks extremely good. A lot of the loans that we've approved so far should be drawing up. I think that will helped, but I think as we get into the growing season and also with agricultural products, that will help in the next quarter too. Tim, you wanted to jump in?

I agree with everything that David just said. I think the focus really ought to be on production, payoffs are what they are and paydowns are what they are. They come and they go. Obviously, you want scheduled paydowns to take place. The production pipeline looks good, as David went over in his opening remarks. Things look good across the board in Texas and Oklahoma also. I mean, everything we see is positive right now and the loan pipeline looks good. You have to realize that when we announced loan production, what we're announcing is loans that have been documented and booked, not necessarily funded. You've got lines of credit, you've got construction loans, you've got agricultural loans, you've got certain energy loans, none of which typically fund day one. So we've got a lot of funding to take place ahead of us based on the production that we just had and things look pretty good right now.

And then David on the bond book, we mentioned that the tenure is back over 3% now. Are there any changes with the way that you’re managing the bond book like at this level, do you think about extending duration or with tax reform, is there any mix and what you're buying like muni versus non-muni, is there any change in the way that you’re managing the bond book, given the changes today?

No. I could go in to an elaborate detail, but the bond book, the way we [Technical Difficulty]

[indiscernible] pretty hefty prices. So we're going to be cautious, is that still the way that you're thinking about M&A today?

Yes. I mean I don't think anything's changed in the way that we look at M&A. There's -- again we're still talking to a number of people, probably at any given time, we're talking to at least two or three groups at any given time, banks are expensive. We have an idea of the kind of banks that we like. We’ve discussed that before the kind of banks that we do like. It doesn't necessarily mean that we won’t change from that at some point in time, but we can go that to more detail, but I think there will be deals, prices are still pretty hefty out there. So it's, if you’re buying, I think, again, if you're buying a bank that's publicly traded, there's probably not a lot of premium in a bank that's probably publicly traded and then you probably have a bank that's not publicly traded that probably have, they'll see a more of an increase in a bank that's probably traded. So it is what it is.

Our next question comes from Jennifer Demba with SunTrust.

David, unusual for us to see kind of a negative surprise on credit from you guys. Just wanted to get some details on those charge offs you took this quarter from the Oklahoma deal and just see how you feel about the market from what’s remaining in your energy portfolio or loans acquired in that deal?

I’m going to let Randy answer that in just a minute, Jennifer, but again, I agree, it is disappointing normally. Normally, we always, if anything, there's even some – we try to do better than that, but again I think that when we bought the Oklahoma deal, probably the market was different at the same time and the underwriting was quite different than the way we underwrite today. But nevertheless, there's no reason to hide it. We're disappointed about it too have the same time. So Randy, do you want to jump into it?

Yeah. Jennifer, this is Randy Hester. We’ve had a few loans still on the books that we’re carrying from that F&M transaction and we decided that we wanted to get out of them and the market rebounded a little bit, but it did what enough to cover what we needed to get. So, but we needed to get out of the credit, we carried them long enough and we decided to go ahead and take our loss and reinvest that, some of that money back into real loans.

I think that we were, probably over the last year or so, we had letters of intent on some of these loans and it just seems like they never did transpire. So we just said, once you have something too long, it's better just to say the loss and let's just go.

Our next question comes from Geoffrey Elliott with Autonomous Research.

I wondered if you could give a little bit more granularity on the deposit repricing and specifically looking at the interest bearing demand category, the 12 basis point increase there, is that kind of broad 12 basis point increase or are there some subsegments within that that have moved more and some that have moved less?

I’ll try to attempt that. I don’t know how much more color I can give you, but when you look at our deposit base again, we have very certificates of deposit, was it 13% or less. So, most of our accounts are, we have over 30 something percent non-interest bearing and probably another 30% demand accounts that maybe growing 10 and 15 basis points and you have a higher yield money market account, but again, the rates that we're at compared to our, that some of the people that are really paying out there right now that really need that 90% loan to deposit ratio, I think their cost has gone up more. Just to give you an example of that, after the last three or four interest rate increases that went up 100 basis points, we might not have gone up 20 basis points on our certificates of deposits and maybe 10 basis points or 20 on the money market and probably 5 basis points on the demand checking. Having said that, as interest rates go up and they're going up, I think that has 100 basis points, at least what we're modeling and some of the number that I thought a while ago, what we model is that if every 100 basis points we in our model shows about an 80 basis points increase in the CD rates and 80 basis in the higher yield money market accounts. The other betas on the other accounts are a lot less. And again historically, we’ve not gone up the 80 basis, but again, I think it's prudent to model that, but even modeling that, as I mentioned earlier, our numbers look good in a year. They look very good in two years and great in three. So all of those are in our models really. I don’t know if that’s helpful or not. Dave, do you want to add anything?

No. I would just say, obviously the big discussions about betas and deposits and you're right, it went up on a linked quarter 4 basis points, just for the deposits themselves, but I don't know one quarter can really illustrate what's going on. In fact, rather look at it year over year over the 12-month period. That same number probably changes about 10 basis points for cost of funds. And if you want to isolate the interest bearing aspect of it, which are CDs, money markets, ex cetera, that went up year-over-year of about 16 basis points. So pretty well contained over this last year. I don't mind for, we can, it's going to be exactly that when we get a year from now, but I guess what that would illustrate is we are managing it, the pressure over those last 12 months hasn't been quite there. I think you've probably heard that from other banks, but as we continue to go forward, price will see a little bit more pressure but that will kind of dovetail in to what David was just saying earlier.

And again, the good news is the reinvestment for our [indiscernible] you're probably reinvesting at 330 if you're not on the loan side getting 5 plus. So those are all positive.

Understood. I guess the specific question was on the interest bearing demand category, given that the average cost was 35 bps in 4Q and 47 bps in 1Q. It looked like a pretty big acceleration and it was in a category that I guess your comments would suggest, it is normally less rate sensitive in savings or money market or CDs and just curious if there was anything you could add there on that why that 12 basis points step up in 1Q?

Yeah. I mean that’s absolutely spot on. And one of the things that impacts that and what we saw over the last few months, remember that were a bank, I think David had mentioned it earlier, remember we’re a bank that has a lot of public funding entities and they bring in all their money at quarter end. And so that money has sat in the bank over the last quarter that does tend to be a little bit more interest sensitive, it's more, I would call it, more like a money market type account, even though, they keep it in the interest bearing and that's what you're seeing the impact in terms of the rate. As we move forward, those funds can start to move out of the banks, because they spend that money. That will mitigate itself. That’s just a thing that happens as we come in from the end of year.

Yeah. The 900 million in one quarter increase in deposits at year end and probably 400 million of that was probably in the public funds category and it’s probably gone now. Yeah.

So that's what's causing that little blip that you see.

The next question comes from Peter Winter with Wedbush Securities.

I was curious with the loans. You guys always have a long history of being very conservative with the underwriting. Is there any thought of may be loosening some of the underwriting standards a little as a way to add to the growth.

That's a great question after charging off $9 million.

But that was an acquired bank, not you guys.

I think it’s a good question, Peter. We thought about it ourselves and I'm pushing hard on this and Randy is pushing me back on the other end, but I think we’re probably going to end up somewhere in the middle I think. I think that to run the portfolio, we are trying to be -- I don't think we're ever going to see us change the model of our bank, but there's some things that we can change to be more flexible, where if for an example, if somebody, we're competing against somebody that’s -- we want a 20-year amortization and they want a 25-year amortization and we can go on that or instead of us requiring on a commercial project, 35% down, maybe we could go 30%. There are some things that I think that we can do to mitigate some of the terms and conditions, Randy or Tim, you want to jump in.

Yes. I think it's safe to say that every week when we meet for loan committee, we have this discussion and we are trying to selectively look at things that we can maybe tweak a bit or change a bit that would still keep us safe and sound, but at the same time allow us to make some loans that maybe historically we have not been able to make and that's not necessarily an easy thing to do, but it is possible. So we're very much focused on it and I think we have made some changes that we can all feel good about that will make a difference going forward and it's a continual process. We look at it as I say literally weekly. So it's underway.

This is Randy, Peter. We've been fortunate that we’ve moved away from the rule book a step or two occasionally but because we're a relationship bank and we've only done it for good customers, we've had good relationships with, we've been successful and not had any losses because and we've done a little more of that and that should help us.

And having said all of this, I'm going to come completely a round circle here and say, even though our loan to deposit ratio is not 90% or 85%, you can compare our return on assets and return on tangible capital to anybody and we've not taken the risk, still have returns as good or better than most people. So I'll just leave that out there at the same time, but they could be better. I agree with that.

Our next question is from Brett Rabatin with Piper Jaffray.

I wanted to ask I guess just on the discount accretion, a little lower number this quarter. Can you give us an update on what's remaining on that and then just -- maybe just the pace of that in the next few quarters?

Yeah. I mean overall, it's 29 million, but the accretable aspects is about 18 million. So it's not very much at this point. It's ineligible. So we want to run about 2 million per quarter, it will take a couple of years to consume that ’18, but remember, it's not linear, it's depending on the cash flow of those loans, but that’s how you can kind of see, think about them.

And then just thinking about the loan growth and your monthly loan production was up about 50 million or by about 18% year-over-year and the loan book has grown mostly in construction and commercial real estate is -- increases in the production, is it in those categories, maybe, can you give us a little color on just what you're seeing in commercial real estate pricing. People are talking a lot about spread compression and banks competing away, tax reform, what are you seeing from a spread rate perspective on commercial real estate.

Well, the breakdown of our loans really has not changed fundamentally over the last several years actually. I mean, we’re still at about 33% of our loan portfolio in commercial real estate for example and the new production pretty much holds true in that regard. I wonder for a family dropped a little bit, it went from 25% of the portfolio to 24, it’s not a material change. So the various buckets remain unchanged and the new production, it can vary from those buckets a little bit quarter to quarter or month to month, but not in a material way. So I don't think there's any reason to forecast that for example our percentage of commercial real estate loans is going to change dramatically. Our percentage of agriculture change dramatically. I don't think any of those buckets are going to change dramatically. The pricing is tough. The loan competition is out there. Many of our competitors on the floating rate loans will price well under prime, which obviously doesn't do anybody’s margin a favor. I don't see that slowing down, unless we run into economic headwinds that started affecting some of these banks adversely. That's not in the cards right now from what we see. So pricing is going to continue to be thin and be difficult, but we hold our own and we get our share and I don't think that's going to change. I hope I'm answering your question.

It may answer part of Peter's questions too. It is very competitive out there, both on rate and terms and conditions and we're not -- we're trying to hold on to our margin that we have and what we charge on these loans. I mean we’re trying to be flexible, but that's also the same time why we may not be growing the loans as fast as maybe some of the competitors or not. We're trying to maintain a position that we have.

Okay. And then maybe just one last one. David, you've never been a big proponent of adding lending teams or bulking up with expensive talent, would you change that for Fannie or can you talk maybe about any thought on adding lenders to your team and if that might be something you’ll consider if M&A doesn't really come to fruition here in the next few quarters?

There's probably -- first of all, we have a quarterly meeting where all of our area Chairman and Presidents meet in. That's one of the things that we look at is how many new hires that we've hired throughout the quarter and throughout the year and we're constantly bringing on more and more people now. That's probably not the same type of people that you're referring to. I think you're probably referring more to people that are in wholesale lending and bringing over groups that are just based on commission and based on production and again we haven't looked at that aspect of it. Some of the banks that have talked to us about joining us, they have teams like that and it's one of the challenges that we're still talking over. Can we get used to these buckets in lending and in wholesale lending. It’s something that we’re giving a lot of consideration to, but we're not there yet. That's not in our bank, but we -- I don't want to underestimate the number of people that we're hiring. I don’t know if anybody in this room do we know how many we’ve hired this last year, I don’t know that we have that, but it's a number of people -- it's quite a few people. But they're not -- they don't come over in groups. These are individual hirers that come one or two at a time and we are focused on it and have done it. One thing that I think needs to be emphasized is that historically, we've tried to land on a, what I call a core bank basis and what I mean by that is, we look at the deposits we can get loan. We look at the total relationship and we are constantly emphasizing to our lending staffs that you need to bring deposits in with the loans and I think you can see the good results of that. When you look at how strong our non-interest bearing deposit base is, I think it's up to about 5.7 billion right now. Now, the negative for that is, maybe, you don't have this quicker loan growth when you're willing to make loans just for a loan sake and we understand that and we're trying to evaluate that more closely and we do make some loans without requiring that to deposits come to us. But in general, our history has been that the two go hand in hand and have serviced very well over time. So we're trying to balance that out as we move forward and look at ways to expand our lending.

And I think everything Tim is saying is right, we’re a relationship bank. We’re hiring people to really good core loans and as we want to grow, we want to grow our lending staff and if we will, we're doing it more one at a time historically. We have not gone to other banks and hire groups, other people away that hadn’t been our deal. I don't necessarily see that being the going forward either.

[Operator Instructions] Our next question comes from Matt Olney with Stephens.

I want to go back to the discussion on the loan paydown and some of your peers have adjusted their expectations for loan paydowns. I think some of your peers are just recognizing that there's an increased level of competition and may continue for a while. So I'm curious about Prosperity. Are you guys adjusting your expectations for paydowns longer term or do you still expect paydowns to slow in the next few quarters?

I'll start off with that, Matt. This is David. I mean I don't have anything that's factual or more quantitative, but my gut feeling is from what we saw, this is the first time that we saw such hugs paydowns. I don't know that we're seeing that right now, just trying to give you some color. I mean there's paydowns, but we don't see the kind of paydowns or projecting the type of paydowns that we have. We have a project or two that is pretty big, probably here in Houston that has gotten developed, about what the size, 62 million. Eventually, we're expecting it to sometime go to the secondary financing at some point time, but again, we don't, it's just my gut, I don't see the amount of paydowns that we have this last quarter. Anybody else want to jump in?

I think that's right. I mean we do have some large projects obviously that will, when they stabilize, they'll get sold and that was anticipated when we made the loans. So that's as it should be. But I don't think there's any reason based on what we see to forecast usually higher paydowns going forward. I mean, we did have a few things this last quarter that are not normal. I mean David mentioned a church, they owed us between 30 million and 40 million and they had that much money and more in their checking account and they just decided to get out of debt. Well, that is what it is. But we have been carrying those loans for quite some time for them and we did not anticipate that those loans were going to be paid off. They were. And that's just the way it is sometimes. So I don't think that there is any substantial change in the air so to speak.

Couple of bigger projects probably in the Dallas market that where there are multifamilies and again they haven't drawn up yet, but they're bigger projects and once they do draw up and once they hit their occupancy rate, then you’ll see. So I think as we’re making bigger loans, you'll probably see bigger pieces that we haven't seen in the past. So that has to be taken into consideration too. We're not naive to that point for sure. But again, we haven't been a bank that has gone after a ton of commercial real estate loans, development loans that are just here to get them and they're going to flip and we've got some, but that hasn’t been our cup of tea.

And then switching gears on to premium amortization expense in the bond portfolio, it looked like that expense declined about $1 million sequentially. I'm interested in, on how you're viewing that expense and especially in light of the recent moves in the yield curve. Help me understand how low that expense can go for Prosperity.

This is Dave Hollaway. It did drop, just because as rates are going up, it's affecting prepayment speeds and then on the other side, we're getting to an environment where the securities will buy forward, won't have these huge premiums anymore that can in fact have discounts every now and then. So it's all those dynamics playing into it. So, depending where rates go and how all those prepayment speeds and refinancing, all those concepts play into it, I mean, it can continue to drop a lot. It won't go to zero any time soon, but we were 8.5 million this past quarter, could it be lower than that? Yes. Can I give you a specific number where it would be? Not really. Can it go to zero? Probably that's not a realistic expectation. So I know I can't give you a specific answer about what I would just reiterate is, if rates continue to go up and everything continues as we've seen, it can come down some more.

But again I probably did point out that just because your amortization expense is coming down, doesn't necessarily mean it's going to impact income, because if you're buying bonds today and you're bond is in par, you're not going to have an amortization expense where a year, two years ago, you were paying 102 or 103. So it’s more than just the amortization expense and again, we bought a lot of bonds, interest rates were real low, paid a premium form and going in today's market, you may not -- you're not really borrowing. I mean you're not really paying premiums that much. I mean, those dynamics change a lot. It has to do more than just amortization and income really.

And I guess on the same topic, David, you mentioned some of the recent reinvestment rates through 320 or 330 right now, help us understand what's growing off the bond portfolio so we can understand kind of what the tradeoff is there.

Basically, I think that it sits about 1.800 billion a year. I think that's about what the rate is on that stuff. We’re at 220 right now. I think it’s about 220 right now. Yeah.

Okay. And then my last question for Hollaway, effective tax rate was a little bit lower than your expectations for the full year, are you still along that 21%?

Yeah. In the first quarter, it was a little lower than where we were trying, because we continue to project to be around 21%, it was just a little lower in the first quarter due to some restricted stock vesting from some years ago and the tax benefit that comes from that, but yeah, looking forward, I think we’d be closer to 21%.

And this concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

Thank you, Austin. Thank you, ladies and gentlemen for taking time to participate in our call today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.