Prosperity Bancshares, Inc. (PB) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the Conference Prosperity Bancshares Incorporated 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 Third Quarter 2018 Earnings Conference Call. This call is being broadcast live over the internet at prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I’m Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. (Tim) Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Eddie Safady, President; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President; 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 David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activity, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions provided by our call operator, Michelle. Before we begin, let me make the usual disclaimer. 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 third quarter 2018 conference call. We are pleased with this quarter’s results. First of all, let me share the good news that Prosperity will be increasing its quarterly dividend to $0.41 a share from $0.36. This represents a 13.8% increase in our quarterly dividend. Prosperity shareholders have enjoyed a 13% compounded annual growth rate from 2003 to 2017. We showed impressive returns on third quarter average tangible common equity of 16.1% annualized and third quarter average assets of 1.46% annualized. Our net income was $82,523,000 for the three months ended September 30, 2018, compared with $67,908,000 for the same period in 2017, an increase of $14,615,000 or 21.5%. The net income per diluted common share was $1.18 for the three months ended September 30, 2018, compared to $0.98 for the same period in 2017, an increase of 20.4%. Loans at September 30, 2019 were $10,293 million. Our linked quarter loans increased $146 million or 1.4%, 5.8% on an annualized basis from the $10,147 million at June 30, 2018. We continue to see strong loan demand and borrower enthusiasm. Our total loan approvals are running higher and more consistent than in the last several years. However, we’re still experiencing large payoffs. Our lenders are optimistic and our committed to continue to grow our loan portfolio. With regard to asset quality, our non-performing assets totaled $16.7 million or 8 basis points of quarterly average interest earning assets at September 30, 2018, compared with $45.8 million or 24 basis points of quarterly average interest earning assets at September 30, 2017 and $31.5 million or 16 basis points of quarterly average interest earnings assets at June 30, 2018. [Technical Difficulty] like us in the good times that you will love us in the bad time. With regard to deposits. Deposit at September 30, 2019 were $16.7 billion, a decrease of $173 million or 1% compared with $16.9 billion at September 30, 2017. Our linked quarter deposits decreased $244 million or 1.4% from $16.9 billion at June 30 2018. The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 450 municipal customers, such as cities, schools and counties that use the tax dollars they receive in December and January throughout the year, resulting in declining account balances throughout the year. Our farming customers also have declining balances as their crops have been harvested or being harvested but have not yet been paid for. We also have experienced business people using their cash that in the past several years were keeping as reserves. During the last several, as rates were low, certificates of deposits decreased. However, the good news is that our average noninterest-bearing deposits for the third quarter of 2018 increased 5.3% year-over-year. With regard to acquisitions, as we mentioned in the past, we’ve indicated in prior quarters, we continue to have conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal where it is right for all parties and it is appropriately accretive to our existing shareholders. With regard to the economy, the economic fundamentals are strong in the communities we serve. The low national unemployment rate together with a GDP that is stronger than we have seen in years has resulted in interest rate increases that may continue over the next year. The increased interest rates have affected the rates we pay on deposits, the rates we charge on loans, and the rates we earn on bonds. We believe that the economy has provided an opportunity for the Federal Reserve to normalize rates and be ready to respond to any future economic downturn. We expect the increased rates to help our bank. For example, we have $9.5 billion in investment securities with a 3.6-year duration at September 30, 2018. That generates approximately $1.8 billion cash flow annually. If those cash flows were reinvested at today’s rates, we should generate yield approximately 1% higher than the current yield. Texas and Oklahoma should continue to prosper with no or low state income tax, a business-friendly political climate and a tailwind from the energy sector. Further, Texas has four out of the top 10 fastest growing MSAs in the United States, those being Houston, Dallas, Austin and San Antonio. Texas has also garnered the Best State for Business by CNBC this year. Overall, we continue to see positive customer sentiment. I would like to thank all of our customers, our associates, our directors, our shareholders for helping build such a successful bank. Thank you again for your support of our Company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Dave?

Thank you, David. Net interest income before provision for credit losses for the three months ended September 30, 2018 was $157.3 million compared to $156.1 million for the three months ended September 30, 2017, an increase of $1.2 million or 0.8%. The net interest margin on a tax equivalent basis was 3.15% for the quarter ended September 30, 2018, compared to 3.22% for the same period of 2017 and 3.28% for the quarter ended June 30, 2018. On a core basis, which excludes the loan discount accretion and the higher than normal collection on a nonaccrual loan for last quarter, the core margin this quarter was 3.09% versus 3.11% last quarter, and 3.07% for the same period last year. Noninterest income was $30.6 million for the three months ended September 30, 2018, compared to $28.8 million for the same period in 2017, an increase of $1.8 million or 6.3%. Noninterest expense for the three months ended September 30, 2018 was $81.8 million compared to $77.5 million for the same period in 2017, an increase of $4.3 million or 5.5%. This was primarily due to an increase in salary expense for all associates following the enactment of the Tax Cuts and Jobs Act. Efficiency ratio was 43.5% for the three months ended September 30, 2018, compared to 41.9% for the same period last year and 43.9% for the three months ended June 30, 2018. The bond portfolio metrics at 9/30/2018 showed a weighted average life of 4.07 years, effective duration of 3.62 and projected annual cash flows of approximately $1.8 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave. Our nonperforming assets at quarter-end, September 30, 2018 totaled $16,777,000 or 16 basis points of loans and other real estate compared to $31,585,000 or 31 basis points at June 30, 2018. This is a 47% decrease from June 30, 2018. The September 30, 2018, nonperforming asset total was comprised of $15,778,000 in loans $110,000 in repossessed assets and $889,000 in other real estate. Of the $16,777,000 in nonperforming assets, $3,846,000 or 23% are energy credits, all of which are serviced company credits. Since September 30, 2018, $2,867,000 or 17% of the nonperforming assets have been removed from the nonperforming assets list, or are under contract for sale. But, there could be no assurance that those under contract will close. Net charge-offs for the three months ended September 30, 2018 were $1,318,000 compared to net charge-offs of $2,636,000 for the three months ended June 30, 2018. This is a decrease of 50%. $2,350,000 was added to the allowance for credit losses during the quarter ended September 30, 2018, compared to $4 million for the quarter ended June 30, 2018. The average monthly new loan production for the quarter ended September 30, 2018 was $277 million compared to $297 million for the quarter ended June 30, 2018. Loans outstanding at September 30, 2018 were $10,293 million compared to 10,147 million at June 30, 2018. September 30, 2018 loan total is made up of 39% fixed rate loans, 37% floating rate, and 24% variable rate. I will now turn it over to Charlotte Rasche.

Thank you, Tim. At this time, we’re prepared to answer your questions. Michelle, could you please assist us with questions?

[Operator Instructions] The first question comes from Dave Rochester of Deutsche Bank. Please go ahead.

Hey. Good morning, guys. On the NIM, I just noticed that you guys may have moved some of your money market rates up a little bit on your website maybe at quarter end. Were those moves applied to the entire portfolio? And just given that, how are you guys thinking about that NIM guide going into 4Q?

This is David Zalman. It’s true, we did raise interest rates. I think, they really -- I would say, they really just became more normalized. When I read a lot of reviews this morning, I saw that net interest income became a big issue. But if you remember, last time we had a higher net interest margin, and we said that we are probably looking anywhere between 3.16 and 3.18. I think, we came in at 3.15. Again, part of the reason for the downturn in the net interest margin was last quarter there was a recovery from a bigger accretion recovery and also some interest recovery at the same time. So, we didn’t hit it. But at the same time, interest rates just went up higher than they normally. I think competition just went up. So, we went up on interest rates. But, again, it doesn’t change our perspective going forward. And I would say this because I have a feeling that everybody is going to be asking the same question on net interest income, so I’m just going to put it to bed, right, to start with, because we still feel very comfortable with net interest income or net interest margin going forward. I think that -- again, we have a model and our model shows with -- especially with the amount of assets that we have, repricing over a period of time that we go. Again, this is just an interest rate model and models which the input you put into these models can change what the output is. So, just be careful when I tell you some of the stuff. And going forward, we look at 3.20 net interest margin in six months; we look at 3.24 in 12 months; we look at 3.27 in 12 months; 3.40, 3.48 in 24 months; and 3.70 in 36 months. So, again, that’s what the 100 points move up in rates. But again, we are very excited where we are at. I know that people had the net interest margin at 3.20. And we never indicated that we will even be there. But I know that most analysts put us there. But going forward, we are very happy where we are at for this quarter. We hear our earnings per share, 5.8% loan growth. There is so many positive things. I just don’t want it to get bogged down in this net interest margin. Because going forward that’s the real plus for us where I think a lot of other banks -- they’ve had their play. I mean, most of their stuff is floating; ours is yet to come. I hope I didn’t go into too much detail. Dave, do you want to talk about it just a minute?

I’ll just briefly say, from the money markets, that -- it wasn’t specific account that we raised. We just normalized. On a liquidity position, as we came through the zero interest rate cycle, obviously we didn’t need that much liquidity. But now, rates have up come, we just need to normalize our rates. We can’t from a competitive standpoint just fall so far behind. And that’s all we did this past quarter is normalized money market and CD rates…

Well, I think, if you look back before interest rates went so terribly low, banks like ours had anywhere from 20% to 30% of their money in CDs. And when rates went extremely low, we saw rates go to -- and we saw like -- I think we have about 12% in CD. I think what you will see and what I have said in the past, you will see that money will be moved out of certain money market accounts and be tied and CDs will grow more. So, that’s just part of what happens in a rising rate environment.

That’s a lot of good detail, guys. I appreciate it. So, I guess, your guide to 3.20 NIM over six months, I mean, that’s obviously incorporating all the changes you guys have just made. And I guess, that incorporates not only the repricing of the variable rate loans, but also sort of the roll-off of lower rate securities coming on at higher yields. I think you mentioned something like -- something close to like 3.30ish or maybe mid-3s on the securities reinvestment rates right now. Is that right.

I think, if we reinvest our rates today, yes, you could probably see at least a full point above where we’re at today, probably around 3.5, yes, maybe little bit more.

Okay, great. And then, just switching to expenses. How are you guys thinking about that $81 million to $82 million range going forward? You guys landed right in that range this quarter. Is still good heading into the fourth quarter?

Yes, I think, so. I think, for the foreseeable future, that’s the range we should be running in between, 81 and 82.

And then, you get that $2 million to $3 million benefit in 1Q, I guess, from the surcharge rolling off?

I don’t know, do you believe this rolling off in the first quarter…

At some point.

And I would just refer again, we said 2 million to 3 million, but that’s the annualized; that wouldn’t be in one quarter. But we will get a quarter of that starting in the first quarter.

Yes. Great. And then, just one last one. I noticed you guys had some nice loan growth this quarter. CRE was pretty strong. And we’ve just heard in the market some commentary that suggests that nonbank is very competitive in that space, not only on pricing but structure. Can you just talk about what you’re seeing there, and why this growth is strong and your outlook on that?

Sure. This is Tim Timanus. You’re right. The competition is significant in pricing and structure, both. And that includes bank sources and nonbank sources. It just is what it is. I personally think we saw an increase in the competitiveness this quarter compared to the second quarter of the year. It ebbs and flows. Who knows what it be like by the end of this year. But, your assessment is correct. It’s been very competitive here lately.

The next question comes from Geoffrey Elliott of Autonomous Research. Please go ahead.

I’m going to ask another NIM question. So, apologies for that in advance. The yield on securities was pretty flat compared with 2Q, it was up a basis-point. And what held back the benefit from repricing? Because, I guess, it kind of feels like we get on these calls, we hear the message, the reinvestment of cash flows is at a much high rate. But so far, that hasn’t translated into a higher, or significantly high yield on securities this quarter. So, what kind of held it back this time?

I will jump in first. But just on a like linked quarter basis, it’s a dynamic of mathematics. I mean, the cash flows that we reinvest, and I don’t have the specifics as to how much cash we reinvested this quarter. But, I mean at best, $200 million, $300 million at the higher rate. It’s just not going to move that overall yield on the portfolio, just mathematics. But, the point would be well taken to say, if we can reinvest at 100 basis points higher than what the overall portfolio yields, we certainly should begin to see some dramatic effect on it as we move out six, nine, and 12 months.

Yes. I don’t think you have to be a mathematician or a scientist. Take $9.5 billion, reprice it at 1 point above it, you can do the math, anybody can put a tax effect on it and you still have about $75 million more. But, it’s not always as simple as it seems because you have moving parts and you have rates moving all the time. So, I guess, you would have to say, okay, on a static basis what happens, if things stopped today, what would happen; and to me, it doesn’t take a math genius to figure that out.

But, you’re looking at cash flow; if you could roll over 12 months, and we are doing 1.8 billion, I think on average [indiscernible] doesn’t happen on day one, so cut that in half and then average 100 basis points up, it will begin to move that overall.

I think that -- it wouldn’t work like that, if tomorrow we said, okay, our money market accounts were too low and we are going to raise 400 basis points or something like. But staying in a relatively moderate marketing you are moving up. Things should happen that way, it’s just -- it is. I know everybody would like to see them move faster, myself included, but this is just the way it is. And again, I think a lot of our net interest margins sometimes hard, I don’t want to get real deep into it. When you have this accretion income coming this way and that way, it would be interesting just looking at it without any accretion, what did the net interest margin do one way or another. But, having said that, I don’t want to get extremely technical. I think, it still is down to rate stop, taking on that 1 billion, reinvest it at a point better, little bit more than a point, and you can do the math. It’s pretty easy.

And then, just one other quick detail. Noninterest income was a bit stronger this quarter and in particular the other noninterest income line. Were there any kind of one-offs or [Technical Difficulty]

[Technical Difficulty] Gailey of KBW. Please go ahead.

So, I know Prosperity has a buyback in place. You guys have not been active on that anytime recently. But, if you look at how the stock was trading. Do you think it’s to a level where a buyback might be more of a possibility for Prosperity?

This is David Zalman. I’ll answer that. We have a buyback plan that’s already been passed by the Board of Directors, and I think that we are allowed to buy, and Charlotte may jump in. We can buy up to 5% of our stock. At this point, we have not bought any of our stock back. But as you mentioned, our stock was pretty, pretty cheap, in my opinion. I mean, when you are looking at the $60 range, you are not talking about 19, [ph] earnings, little over 12 times. So, it’s something we will really consider. We are not committing one way or another but it’s something that we really consider, and we are prepared that we can. We’re making a lot of money. We have a lot of capital. So, it’s not out of the question.

And then, just a little more on M&A. I know your stock price being lower is not helping on that front. But, in the past you’ve talked about it’s really not a pricing issue for you guys, it’s more of a, what’s for sale issue. I know you guys like to buy very old institutions that have good deposit basis, and there hasn’t been many of those for sale recently. Is that still the dynamics on the M&A front for you guys, or has anything changed recently?

That's still the dynamics and those are the deals that we're working on, right now. And it's like fine line, sometimes it takes a little bit longer but we’re focused on that. And I think that we’re continuing on that path. And I think over some period of time, you will see it. But again, it's got to be the deal that we like, it's not something -- you said earlier, the type of banks that we would have liked to look at. It doesn’t mean that it's the only type of bank that we'll look at but its banks that have been around for longer time. And again, we really believe that the real value in any bank is in the deposit base, the core deposit base. And so, that's really what we focus on and that’s the kind of banks we’re talking to, as we speak.

The next question comes from Jennifer Demba of SunTrust. Please go ahead.

David, I think that the last time you repurchased was when the price went down following the price of oil. And if I recall right, the price got into -- the Prosperity price got into below 60s or mid 60s. So, do you have less interest in repurchasing stock right now for some reason than you may have back then?

My memory maybe wrong, but I think the stocks -- when the oil prices and everybody thought we’re falling off in the Gulf of Mexico went into the 30s and we really…

You're right. I am sorry, 30, I've got the number wrong I apologize.

That’s okay. But again, we weren’t making the kind of money we’re making right now. I mean we’re showing $498 to $5 I guess for '19. I think that the stock looks very attractive. And again, we keep building a lot of capital. We’re making a lot of money. But I've already said that I want to keep our capital more for growing the bank and for making acquisitions. But again, when you start seeing the stock at this price, it's something that we need to consider.

The next question comes from Peter Winter of Wedbush Securities. Please go ahead.

I guess, sticking with the margin. If I look at the core margin quarter-to-quarter and I strip out that seven basis point benefit from the elevated interest recoveries. I guess, I was a little bit surprised that even though it was still down. And I’m just wondering if you could talk about that a little bit, especially with good loan growth…

We won the lottery and as I talk to Peter today. So I guess I've been, so I’m here. Dave, do you want to answer that?

I mean, that’s just a reflection. I mean, again, when you look at -- we just said this on a lots of conference calls. So the dynamics our balance sheet and where we're at today and just go back for this quarter why you see what you see is we did normalized our money market and CD rates a little bit. It was time that we needed to be competitive. We can't just shrink the bank forever. So, we normalized those rates a little bit. And when you raise rates like that, it takes just a little bit longer for our assets to reprise, our loans, our securities. And so one quarter o next, you've heard us say this on prior calls, we can’t see what all the variables are that are moving but that might move our margin a few basis point. It might be stable. It might go down a couple. It might go up a couple. In this case, it went down a couple. But when you look year-over-year, if you look at the core margin year-over-year, we went a couple basis points. Now, should have been a little bit more. But again, as we stabilize our core pricing, I think we'll be okay. And I'll just reiterate what David was saying. So let's -- instead of looking at the next quarter, let's look out six to 12 months, using the balance sheet we have today and again I don’t know what that specific data closing numbers. I don’t know what that specific percentage could ultimately be. But what it does tells directionally is, we should do better and let's just use the mathematics on it. But why would we do better? Well, it's simple. We've got $1.8 billion of cash flow coming from the bond portfolio to 29 and go back in it at least 100 basis points better. And on the loan side that average life on our portfolio today is pretty shorter. I think growing about $3 billion of cash flow there. So, you would be able to reinvest that at current rates, which is the products -- if they help me out here, 5.25 is the rate. We can do a little bit better than that and you're reinvesting that. And remember when we look at the model, it’s a static model. It doesn't account for growth. It looks at where we are at on that day. So the other piece of this is as we continue to do what we've done this last couple of quarters in terms of growing our loan portfolio and we're booking those dollars at higher rate, all that would support our model that says our margins should expand as we go forward. The wildcard on this is your funding cost and how fast they grow. But I think again, we're core funded and I think if you've looked over since rates have been going up, our betas on our deposit costs have been pretty reasonable compared to a bank that’s also fund. Dave, do you want to jump in with some color on that?

Peter, I think everything that Dave is saying is accurate. And I understand where you're coming from on this. But at the bottom line, I think anybody could see that banks that we're paying 10 and 20 basis points on their money market account and leaving in there forever, it wasn’t going to work. So yes, I think not only our bank probably all banks really had a normalization of rates. And when you have a big jump like that, I think if you would have been -- in times pass when rates were moving up all the time, you were moving rates up probably than primarily not that you've changed every time. I think all banks got to a point where nobody was raising rates, so we didn’t. And then we woke up one day and everybody was real high. And so, I think you went to a normalization of rates. And so I think when you have a normalization rates like that -- everything is not going to re-price, your liabilities go up immediately but your assets don’t. And I don’t know if I'm being very clear on that, but that’s just the point. That as David said, you have to look at where we're going and where we're going to be. And our model show -- again, they're just models and banks can change. Our models look very good and we're very excited where they're at. And we should be making a whole lot more money. Again, I think if you're an investor for three months or six months, you'd probably not as excited. But if you're a longer-term investor for a year or two, you got to be terribly excited where we're at from what we're looking at.

And I guess, just on that -- I guess, interest bearing deposits increased about 12 basis points this quarter. And so with the increase in the money market accounts towards the end of the quarter, how much do you think your interest bearing deposits will go up in the fourth quarter?

I don’t have that information…

Well, I'll say a couple of things. So that when you're looking at recall again remember how our balance sheet works. We have all these probably fund entities. So, I would guess when we get to the end of the quarter and you're looking at our period to period end interest-bearing piece of it puzzle, that's going to go up just simply because the public funds come running in.

And all funds coming in at year end which have a bigger increase in funds at year-end…

Each year when you look at us, you just see this huge inflow coming in. But for the question to where we need to be in terms of going our deposits, so let's just say overall. If we can revert back to normal, we should be growing our overall deposit base and this is all said and done. And you adjust for all the seasonality 3% to 4%. Now, don’t misunderstand what I'm saying. I'm not saying we would grow at 3% to 4% in the fourth quarter, that’s an annualized number. But you've got these two dynamics of work we should grow 3% to 4% annually. And in the fourth quarter of every year, we have a huge inflow of deposits coming in. So we'll make all those balances a lot higher when we get to the end.

I think the deposits and again I don’t know that we’re -- I think we're part of a better core deposit base than anybody does. But you have so many of these deposits that people just left in checking accounts. And as they saw that they can go and get 2% or 2.5% in other places, they started moving that money. And you also have the dynamic, that businesses weren’t using their money. They were just using them as reserves in the bank. And now you have businesses buying capital equipment, they're using their own money. And you have this dynamic of interest rates moving. But having said all that, I still think that we’re one of the better positioned banks to contend to with all of that.

And then just finally, if I look at the fourth quarter do you think the run rate for the reported margin would be back to that 3.16 to 3.18 level?

Are you comparing that to the 3.09 number, is that what you're doing?

No, the reported numbers. So it would be the…

The best crystal ball we have. Is it possible to be at 3.16, 3.17? Yes. Is it possible to be at 3.15? Yes. Is it possible 3.14? Yes. I mean, I get where you’re going. But the trend line would say we should be a little bit better. But I can't guarantee that because there's too many moving parts.

I think, again, I wish we wouldn’t have to look at quarter-to-quarter. I wish you could look at the dynamics of the bank and what our models say. And our models are showing that again these are just models, but in six months, we’re look at 3.20, in 12 months 3.27, in 24 months 3.48, in 36 months 3.70. And you can do the math on that. And I think these models, we've been running this model for 20 something or 30 something years. And we’re pretty close. So I don’t see these changing really.

The questions next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

A quick question on loan growth, you said pretty good numbers the last couple of quarters. And I know there is some competition as well. But how do you feel about the current pace of growth and give us an idea if you’re doing anything different than maybe where you were a year ago?

I think, Tim, you may want to jump in. But I think let me start off. I'd say, John, the bottom line is where -- the fundamentals when you look at the economy are extremely good. The last couple weeks or so, I don’t know what happened, whether it's the geopolitical issue of one losing the house or not losing the house or is it interest rates that maybe bothering. I mean, there is couple of deals out there. I don’t know the answer to what’s causing that. But when you look at the fundamentals, the fundamentals are still very good, they're still very good. And when I think get out of this psychological aspect what people think about interest rates or who is going to be leading the house or something like that, I think if the things don’t change, we should still see the grow that’s out there. I think this is a blip and I think fundamentals are very. Now having said that, we're always subjected to some large loan pay-off but we are working hard to make loans and focus only on organic growth. And Tim, you want to jump in.

I think what you're saying is correct. The economic fundamentals from our perspective are still strong. So the softness that we saw in loan production during this most recent quarter, I personally don't think has anything to do with softness in the economies that we serve. Having said that, I agree with David as we've gotten closer to these new term elections, I think we've noticed a little bit of a decline in request for new fundings. I think people are just nervous about what might happen with these elections. But we'll know one way or the other in a couple of weeks on that. So it's not going to be an unknown for very long. As I mentioned earlier in the call, the biggest problem that created a little bit of a decline in our production is competition. We looked at a lot of loans and we approved a lot of loans but we continue to have competitors out there in the marketplace that from a pricing perspective and from a structure of the loan perspective are willing to do things candidly, we just don't are in the best interest of our shareholders. Below pricing is prevalent and that doesn't do anybody's margin any good. And when you take extreme risks in a structure of loan, long-term that doesn’t seem to work very well for very many lenders. So, we're trying to keep an equilibrium and watch it week-by-week. But I think the competition is clearly the big problem for the quarter. We'll see how that plays out going forward.

Yes, I would say competition has always been tough, it will always be tough. As Tim said, it's maybe tougher now but in the long run, we've always had that in banking career. And using the people that are doing that stuff, they usually don't last out there very long where they want to join us. A lot of that is just in secondary market that we're competing against too. And so that never lasted in the long run. As long as we're consistent, we keep our head to the ground. We have our sleeves rolled up and we will continue doing what we're doing. It will be fine.

I think that’s right. If you look at our discipline over many, many years, it has clearly paid off. And that doesn’t mean that we shouldn't look at credits on a credit-by-credit basis and try to be as flexible as we can, because we in fact do that. But at the same time, we try not to do things that are just playing stupid. And that's the way we've always run things and I think it's paid off for us.

And then just back on the capital question, it's probably annoying to you. But your capital keeps growing and you had a 10% TCU, it's probably the highest you have ever been. It's kind of a luxury that at hat point of just does it just get too high and it forces your hand to do something like return the capital or really step on the gas on buyback?

John, you could never annoy me. We've been around too long, let me say that. But talking about the capital at 10%, I mean believe or not before last election, regulators were almost gaining to say that 10% is a normal where they wanted you to be. We don’t think that’s the issue right now. And we are building a lot of capital even after the increase you saw increased dividends so that addresses part of it. I think you'll see us continue to increase dividend. I think our annual increase has been over 13% over the last number of years. I read those in my comments earlier. But I think there is two things, we're going to make a deal. And I mean at some point in time, you can look in our history, we've had 42 acquisitions and that’s not going to change. I can promise you we're going to use the money.

The next question comes from Ebrahim Poonawala of Bank of America ML. Please go ahead.

A quick follow-up on deposit, so we've had pretty significant seasonality as you said close to $900 million in deposit growth fourth quarter of last year. Should we expect a similar magnitude of growth this year as well and is the majority of that growth going to happen in interest-bearing deposits.

So basically no. The $900 million was not -- that was above and beyond what we normally get in at year end. I think we normally get in around $400 million to $500 million, and that’s what we’re anticipating probably this year. I think a lot of it is interest bringing. But again, I don’t have any exact number, because again, you have so many dynamics happening. You have businessmen that start, bringing back in, getting ready for their quarterly federal income tax. You've got farmers and people like that that sell their crops, you've got public funds where they're bringing in tax dollars, the majority of it is tax dollars a lot of times. So you have so many dynamics happening. Dave, do you have a better answer than I do?

No, I mean, I think it will be all of the above. I mean, it'll be interest bearing and non-interest bearing.

Probably leaning more toward interest bearing, I am sure…

I mean again, so you’re looking at last year, non-interest bearing increased couple hundred million in the fourth quarter. So I mean it's going to be all the above.

I just don’t no. But I guess the thing that can’t answer is no, we're not expecting $900 million at the end of this year.

And just going back to deposit pricing, you mentioned obviously you're picking up, you’re trying to defend your share. But when you look at your loan to deposit ratio today at 62, it's up year-over-year. Is it your best guess that given that 2% to 3% outlook that you led out for deposit growth overtime, loan to deposit ratio should continue to trend higher?

It should trend higher. But I guess the math in this case -- the mathematics may work against us when I do this off the top of my head. But if we grew deposits 3% that’s going to be somewhere in the $500 million range and if we grew loans at 5%, that's somewhere in the $500 million range. So if you were growing the bank, they would both be going up, and I don’t know you regain on that loan deposit ratio necessarily. The way to gain this is somehow we could take the cash flow coming from securities, while growing the deposit and reinvest that somehow in the loans. But its mathematics that’s why I just cautioned you on that. We can't just jump to 70 for growing our deposits. And by the way, that’s the best scenario of all the above, grow your deposits and grow your loans.

But it did seems like that other banks who've allowed the loan to deposit ratio to trend higher without raising deposit rates, but doesn’t sound like that’s the case with you where you do want to retain your customers, you are adjusting pricing to bring in deposits as opposed to just letting this ratio move considerably higher relative to where it is today.

I would be cautious and say, we’re trying to keep our core customers. We’re not trying -- you can take up the paper and I don’t even need to name the banks, everybody can tell you that their loan-to-deposit ratios are 100%. And so they're paying anywhere from 2.5% to 3% we’re not doing that. But at the same time, we don’t want our core customers that we know some of our customers to get paid more somewhere else. But we don’t want them to be completely -- we don’t want to be the highest, but we want to be fair to them, let me just say that. So we don’t want to lose our core customers. And so you can't be paying 25 basis points on a money market account if somebody else is paying 80 or 90, and it's not banks that are paying 200 or 225. So I guess the point that I'm trying to make, we're trying just to keep our good customers, our core customers that are somewhat -- that are somewhat cognizant of pricing but again, not totally based with us just on pricing.

And then David Hollaway one last follow-up question on the tax rate. 21%, it seems like we are trending closer to 20% for the year. Is 21% still the right way to think about tax rate going into '19?

When we look at it early in the year while it changes and our best guess estimate was we should run around 21%, apparently we've been able to take advantage of few things in the new tax law, got us to about 20.5%. So, I don’t think I'd go down to 20%. If somebody wants to put in 20.5%, that’s fine, that probably works for next year.

[Operator Instructions] The next question comes from Matt Olney of Stephens. Please go ahead.

Tim, you provided some really good commentary on loan competition that you guys are seeing. I think investors generally have a concern that newer loan yields that are being put on are pressuring the overall loan yields and really starting to impact the overall loan betas at higher rates. Any color you can give us as far as the newer loan yields. And Tim, you gave us the new monthly loan production. Can you give us some yields that go along with that? Thanks.

Sure. Just across the board as a comment about the average. What we're booking now on the low end is prime at this time 5.25% and at the high end 6 or just a little above. So if you want to say the bulk of it is falling in the 5.5% to 5.75% range that would be pretty much accurate.

But having said that, we've lost a lot of step because people -- prices are a lot less than that…

Well, I mean, there's plenty of pricing way below prime out there still, which doesn’t make any sense to us but whatever work, it works I guess but that’s still been out there that's right.

And do you feel like some of the banks in your marketplace are taking advantage of the corporate tax customer this year and starting to compete that away within loans and deposits so far this year?

Well, I think there is probably some of that. My personal opinion is that they are building their banks to sell them. They're trying to put as many assets as they can on the books and they're going to try to sell their institutions. But I don’t know that for a fact but that's how we see these things play out historically. It doesn’t mean there is anything wrong with it or it doesn’t mean there is necessarily anything good about it, it's just is what it is. So the tax rate I think makes people feel better and it frees up some funds and does create some flexibility in the market from that standpoint. But I wouldn’t call that the primary driver.

I agree with you, Tim, that's a good analogy.

And then I guess separately thinking about loan pay downs. I think in the past, you've talked about loan pay downs can ebb and flow. So help us understand was the third quarter a relatively higher or a lower quarter for loan pay downs versus the first half of the year.

It was lower. There's really not much way to predict that and earlier this year, we had a few very large loans pay-off, because they were tied to essentially real estate projects. And the owners of those projects received some very good offers and they decided to sell what they had. And that can happen -- it doesn’t tend to happen in a real poor economy but in adjacent economy, that's a good thing and it happens. So, we did have a lower burn rate, if you want to call it that on our loans. We didn't have as many pay-offs. But that could turnaround and be different the last quarter of the year. A lot of times things as we know happen during the fourth quarter because people want to take profits and what have you during this calendar year as opposed to push them into the next. So, I really can't make a firm prediction just is what it is.

And then the last question from me, thinking about your overall deposit franchise. How do you guys think about in terms of what portion of the deposit franchise is retail in nature versus more commercial in nature? Thanks.

I don’t think that we -- I don’t know that we have the exact number. Historically, it's been about 50-50. We've about half of our deposit base has been retail and the other 50% has been commercial.

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

Thank you, Michelle. 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.

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