Prosperity Bancshares, Inc. (PB) Q1 2021 Earnings Report, Transcript and Summary

Good morning and welcome to the Prosperity Bancshares Incorporated First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, Senior Executive Vice President and General Counsel. Please go ahead.

Thank you. Good morning, ladies and gentlemen and welcome to Prosperity Bancshares first quarter 2021 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next several weeks, I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, 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 Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, he will discuss our lending activities including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Gary. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause the actual results 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, with the hard work by our entire team, the combination of Prosperity and Legacy Texas continues to bear fruit as reflected in our positive results for the first quarter. Prosperity Bank has been right as the number 2 Best Bank in America for 2021 and has been in the top 10 of Forbes America's Best Banks since 2010. I want to congratulate and thank all of our customers, associates directors and shareholders for helping us achieve this great honor. Our net income was $133.3 million for the three months ending March 31, 2021 compared with $130.8 million for the same period in 2020, an increase of $2.5 million or 1.9%. The net income per diluted common share was $1.44 for the three months ended March 31, 2021 compared with $1.39 for the same period in 2020, an increase of 3.6%. Our annualized returns on average assets, average common equity and average tangible common equity for the three months ended March 31, 2021 were a 1.54% return on average assets, 8.6% return on average common equity and 18.43% on average tangible common equity. Our Prosperity's efficiency ratio, excluding net gains and losses on the sale or write-down of assets and taxes was 41.25% for the three months ended March 31, 2021. We continue to watch expenses, but also expect to make prudent capital expenditures to plan for our future needs and increased shareholder value. Our loans at March 31, 2021 were $19.6 billion, an increase of $511 million or 2.7% when compared to $19.127 billion at March 31, 2020 primarily due to a $558 million increase in warehouse purchase program loans. Our linked quarter loans decreased $608 million or 3% from $20.2 billion at December 31, 2020 and that was primarily due to a $570 million decrease in the warehouse purchase program loans, more of a seasonal issue. At March 31, 2021, the company had $1.1 billion in PPP loans. At March 31, 2021, our oil and gas loans totaled $503 million net of the discount and excluding the PPP loans totaling $142 million compared with oil and gas loans of $718 million net of the discount at March 30, 2020. This represented a decrease of $214 million in oil and gas loans year-over-year, most of which was planned. Our deposits at March 31, 2021 were $28.7 billion, an increase of $4.9 billion or 20.7% compared with $23.8 billion at March 31, 2020. Our linked quarter deposits increased $1.4 billion or 5.1%, 20.5% annualized from $27.3 billion at December 31, 2020. Deposits continue to grow as the government stimulus payments and other assistance continues. Consumers are now spending more and we hear from restaurant and other business owners regarding the strength of their business. The PPP loans also contributed liquidity to businesses, some of which such as hotels, hospitality services, restaurants were in dire need of the funds, Our year-over-year non-performing assets decreased 34.2%. Our nonperforming assets totaled $44.2 million or 15 basis points of quarterly average interest earning assets at March 31, 2021 compared with $67.2 million or 25 basis points of quarterly average interest earning assets at March 31, 2020. The economy is doing well and should continue to improve as more and more people are vaccinated and more businesses reopen. Texas and Oklahoma. Both have bright futures. According to the Dallas Federal Reserve, Texas now has the fastest growing population in the nation. Further, the Dallas Fed Reserve is projecting over 6% job growth, meaning over 700,000 new jobs in Texas for 2021 and Texas is expected to outperform. most of the other states over the next three years. Companies continue to move to Texas with HP and Oracle announcing quarter moves and other companies such as Tesla and Samsung announcing a major expansion into Texas. Oklahoma is also projected to have population growth for 2021 and has seen expansion of many of its large businesses operating in the state, including Boeing, American Airlines, Costco and Amazon. Consumer spending in Oklahoma as above early 2020 levels and retail job additions and new housing permits are higher than the average U.S. rate. We are carefully monitoring office building, hospitality, and oil and gas loans, but continue to participate in these areas with experience borrowers that can withstand the ups and downs of their industries. As bank stock prices have increased, there are more conversations regarding mergers and acquisitions, I believe you will see more transactions throughout the year and less new tax rates are introduced, which may change the market. I expect that net interest margins will continue to decline, regulatory burden will be increase under the current administration and technology will continue to be ever-changing expensive and increasingly prevalent, which is a recipe for more consolidations. Overall, I want to thank all our associates for helping create the success we have had. We have a strong team and a deep bench of Prosperity and we'll continue to work hard to improve everyone's quality of life and shareholder value. Thanks again for your support to our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer to discuss some of the specific financial results we achieved.

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended March 31, 2021 was $254.6 million compared to $256 million for the same period in 2020, a decrease of $1.4 million or 0.6%. The current quarter net interest income includes $16.3 million in fair value loan income and $13 million in fee income from PPP loans. The net interest margin on a tax equivalent basis was 3.41% for the three months ended March 31, 2021 compared to 3.81% for the same period in 2020 and 3.49% for the quarter ended December 31, 2020. Excluding purchase accounting adjustments, the net interest margin for the quarter ended March 31,2021 was 3.19% compared to 3.36% for the same period in 2020 and 3.26% for the quarter ended December 31, 2020. The net interest margin has been impacted by an influx of excess liquidity since the start of the pandemic. Excess liquidity during the first quarter 2021 impacted the net interest margin by 5 basis points compared to the quarter-ended December 31, 2020 and by 15 basis points compared to the same period in 2020. Non-interest income was $34 million for the three months ended March 31, 2021 compared to $34.4 million for the same period in 2020 and $36.5 million for the quarter ended December 31, 2020. Non-interest expense for the three months ended March 31, 2021 was $119.1 million compared to $124.7 million for the same period in 2020. On a linked quarter basis. non-interest expense decreased $1.1 million from $120.2 million for the quarter ended December 31, 2020. For the second quarter 2021, we expect non-interest expense of $118 million to $120 million. The efficiency ratio was 41.3% for the three months ended March 31, 2021 compared to 42.9% for the same period in 2020 and 48.8% for the three months ended December 31, 2020. During the first quarter 2021, we recognized $16.3 million in fair value loan income. This amount includes $6.3 million from anticipated accretion and $10 million from early payoffs. We estimate fair value loan income for the second quarter 2021 to be around $4 million to $5 million. This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payouts. Also during the first quarter 2021, we recognized $13 million in fee income from PPP loans, majority from the forgiveness of the first round PPP loans. As of March, 31st 2021, the first round of PPP loans had a remaining deferred fee balance of $9.4 million. We anticipate more than half of this remaining balance will be recognized in the second quarter 2021 due to loan forgiveness. Regarding the second round of PPP loans as of March 31, 2021, we recorded $530.7 million in loans and generated about $24 million in deferred fees, which will be recognized over 5-year period or until the PPP loan is forgiven. The bond portfolio metrics at 03/31/2021 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2 billion. And with that let me turn over the presentation to Tim Timanus for some details on loan and asset quality. Timanus?

Thank you. Asylbek, Our non-performing assets at quarter end March 31, 2021 totaled $44,162, 000 or 22 basis points of loans and other real estate compared to $59.570 million or 29 basis points at December 31, 2020. This represents approximately a 26% decline in nonperforming assets. The March 31, 2021 non-performing asset total was comprised of $43,338,000 in loans, $362,000 in repossessed assets and $462,000 in other real estate. Of the $44,162,000 and nonperforming assets, $9,505,000 or 22% are energy credits, all of which are service company credits. Since March 31, 2021, $844,000 in non-performing assets have been removed. Net charge-offs for the three months ended March 31, 2021, were $8,858,000 compared to $7,567,000 for the quarter ended December 31, 2020.. No dollars were added to the allowance for credit losses during the quarter ended March 31, 2021. The average monthly new loan production for the quarter ended March 31, 2021 was $645 million. This includes an average of $177 million in PPP loans per month. Loans outstanding at March 31, 2021 were approximately $19.6 billion, which includes approximately $1.1 billion in PPP loans. The March 31, 2021 loan total is made up of 39% fixed rate loans, 36% floating-rate loans and 25% that reset at specific intervals. I'll now turn it over to Charlotte Rasche.

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

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jennifer Demba with Truist Securities, please go ahead.

Thank you. Good morning.

Good morning.

Good morning.

And question for David. David, how much are you going to kind of grow the securities portfolio, while we're waiting for loan demand to improve in the industry? And then my Second question is on your pipeline in the mortgage warehouse, what are we seeing and expecting in the second and third quarters of this year? Thanks.

Okay. Thanks, Jennifer. I'll answer the first when I'll let Kevin take the second one on the mortgage warehouse aspect. You're rightly -- historically in the past, you watched us. We have our probably our duration on our bond portfolio is about three years and maybe 3.95 average life of 3 years duration. We had so much roll off every year that historically we were not only -- we weren't selling anything to the Federal Home Loan Bank at night. We were actually purchasing the $1 billion even leveraging the bank and probably this quarter, we've been anywhere from a $1.5 billion to $2 billion that we have not invested that money and -- at 10 basis points. So I think we usually say we buy in all markets, but again it was hard to buy when you were getting less than 1% on the securities. Now that the yields have picked up and it's perceived that they're going to pick up probably more, you'll probably see us start investing more of that money that's been left overnight and so I think that again even right now were high, but again we purchased like $400 million yesterday. So I think that will continue. WE will continue to start speeding that up and purchasing more. We think that rates probably -- the tenure will probably go higher toward year end or thinking maybe around thinking, I guess, I don't want to speak for chip, but from what I can tell 2% to maybe even 2.25% will continue to go. So I think you'll see us start using that securities portfolio and start investing more of it and it's not unlikely that once rates go up, you might see is maybe even in a leverage position again, but not currently.

And even during the first quarter. Just to add on, we have purchased $2.2 billion on the bond portfolio is just, we've had a lot of payoffs too because of the mortgage market right now.

We not only had that -- you just, I mean gosh year over year over $4 billion in deposits. Even in the first quarter, we had over $1 billion for and new deposits come in and I think most people. The first stimulus checks people really didn't spend, they were still cautious and were saving. We are seeing people starting to spend more money now, I mean, as I mentioned in my notes, when you talk to retailers and restaurants especially they are busier than they've ever been. So it looks like and even retail people and people going out and buying clothes again. So we're thinking they will start using some of that money. So I don't think you'll -- you're not going to lose deposits, but it may go down some, but not a whole lot, I don't -- it's just a different world, there so much stimulus being thrown into out there so. But we will and again that should -- hopefully that should improve our net interest margins going forward in the future too, but I'm glad we waited because rates are starting to go up again. We'll probably start making some moves now. Kevin, you want to address the mortgage warehouse deal?

Sure. Thanks, David. Jennifer, I don't know how good I am of predicting this. I think I 've -- I thought the first quarter with average about $2 billion, I think I said last quarter, I was only $200 million. We are a couple of couple hundred million better than that number. So as I look at where we sit today, rip by volume which has had at least five lives since 2015. It seems to actually be slowing down this time around, it may be for real. Now obviously that depends on what happens to rates. But I think mostly there's more bias to upside in rates versus downside in rates. And the Mortgage Bankers Association, if I just look at their projection for the last three quarters of this year compared to the last three quarters of last year, they would say refine volume is going to be off 60%, pretty huge drop in their minds and rebuy volume skewed towards the last two quarters of the year but starting this quarter while purchase volume, I think they had for the remaining three quarters of the year up just shy of 14%, 13.8% when I took a look at it. As that pertains to us, I would say, the quarter probably looks a lot more like the second quarter of 2020 than any other quarter. If I was just want volume wise of where the forecasts are. So we went ahead and so every retail have the fuel back to look at that was basically a $9 billion in volume, could be as high as $2 billion in terms of average volume for the for the quarter, but I think it's -- we're going to operate in that $9 billion to $2 billion range. The only thing that could change that besides rates are I think I said last quarter, we have hired a person in the Warehouse Group and they are working on a couple of new deals that could add moderately to the number. I just gave. At this stage of the game even if they book something today, it doesn't come on our books for another 3 or 4 weeks as we onboard that customer mix driven, fits into our system, so it won't have a big impact even if they have some moderate success.

Thank you.

The next question is from Ken Zerbe with Morgan Stanley. Please go ahead.

Hi, great thanks, David. Actually, just wanted to go back to a comment you made on bank M&A. I think we all kind of have been surprised to how much industry-wide M&A has picked up in the last few months or so. Can you talk about Prosperity's role and bank M&A going forward, but also the second part of question is why would tax rates meaningfully change that outlook for the industry. Thanks.

If I can. Let me answer the second part first. I mean if you have a bank and you have some big shareholders not Vanguard or BlackRock or somebody like that, but you have a lot of insider ownership and you sell today under the current tax rules, you'll pay a 20% capital gain on it. So you have to add $100 million of this bank and just say I had no cost basis in it. I pay $20 million. If this loss change, where they go to 40% capital gains tax rate and $100 million. I'm going to pay $40 million amount get to keep $60 million. So I think it's just in my mind, I may be wrong, but I think that you'll see people that have big ownerships, be more reluctant to sale because now just wait till another administration would come in, I mean the difference between taking $80 million home and taking $60 million home is a big deal, you just want to do it. So that's my reason as saying that new capital gains taxes, I think will affect to some degree if there is big individual ownerships in banks. So the first part of your question was where do we intend to play in the M&A again, there has been a number of transactions. There have been a number of larger transactions, I would tell you that we've looked at a number of them even including some that might have closed on the deal. We were not. -- we were probably not as interested, we continued to have a wish list and we continue to work on the wish list and I think that's what we're focused on we want to try to be more focused on a targeted and what we want to do and so that's kind of what we're working on right now that doesn't mean that we may not be something smaller in the future of it's within one of our market areas, but for the most part, we're really focused on certain transactions and that's really what we're focused on in. Seriously, we wanted to spend a lot of time keeping together our Legacy Texas deal with Prosperity. It's been really good. I don't think that any of us wanted to mess that up and try just to jump into something. And again, I think that we're really focused on making this work trend bank. These are really hard people. I don't know if sometimes people make it look easy, it's not that easily. A lot of help came from Kevin and his team and our team. But again, you don't want to just throw one deal after another and not make sure that your house is in order. So those would be my comments.

Hi. Now super helpful. So thank you for that, and maybe just one smaller question I think you mentioned if I was mistaken that you expect name to continue to decline. I get that, there is the fair value loan income there is the PPP fees, how are you guys thinking about core NIM over the next several quarters if we just exclude all that fair value and PPP noise.

This is Asylbek. Let me try to address that. If you look at on a core NIM, there is so many variables that impacted our first quarter and I think it's going to continue to impact our second quarter and first of all what we kind of touched on earlier on is our excess liquidity, our deposits has grown $1.4 billion in the first quarter and we have more than $4 billion in the -- since the pandemic began. So, we actively trying to invest that the excess liquidity on the bond portfolio or growing the loans. So if you look at 03/31/2021, we had about $1.6 billion of excess cash that we have on our balance sheet. If we could reinvest that in the bond portfolio, it's going to definitely have accretive impact on our margin and our net interest income. So if you look at our bond portfolio, we purchased $2.2 billion on bond portfolio in the -- just in the first quarter, but we also had elevated pay-offs on the bond portfolio. So with -- what we saw lately, the curve is improving like long term curve is improving. So we are reinvesting at higher yield bond portfolio now than we did maybe a quarter ago. So that's benefiting and what's with the refi what happened with the low interest rate environment, there was so much refi in our premium amortization was significant, if you look at our premium amortization, this quarter was about $12.8 million. If you compare to last year same period, it was only $8 million. You can see how much significant that impacted our margin. And as we go and refi slowed down with Kevin mentioned earlier that should slow down the premium amortization thus helping us with our margin and income. And I think one other thing I know is a PPP, we don't consider the core, but in the first quarter, we had $13 million in PPP fee income and we have about $9.4 remaining from the first round that we are going to -- we believe we're going to recognize, more than half within the second quarter, but we also generated about $24 million in deferred fees on the second round of PPP loans. I think that the wildcard is a timing of it when we're going to recognize. I know that some customers are waiting to start the forgiveness process, but the timing would be the essence, but we believe is going to be start in second quarter, but probably more like third to fourth quarter event that would help us with our net interest income and margin. And lastly I think though I would touch on our deposits, we still have about $2.3 billion in the CDs, that's going to reprice next 12 months and out of that $1.5 billion going to get repriced next six months that should help us in the -- from the margin perspective. So there is a lot of moving pieces that kind of impact our margin and net interest income in the near future. But if you look at our long-term prospects, we are asset sensitive bank right now. So any pickup in the long-term curve will benefit us in the long term. So we feel pretty confident that as the rate goes up, and we start growing our loans that it would benefit that. I know it was kind of long-winded answer but...

No. I think it's good, if I can recap what you just said, because I think all that's report historically we would only say, okay. You can count on it 3 or 4 point net interest margin down or 3 point to 4 point net interest more going up, but again everything that also back and mentioned again you've got excess liquidity today were $2 billion in our overnight investments which we never do. Historically, we would have that $2 billion invested. We would even borrow another billion to invest that. We have so many loans through the deal with Legacy Texas it had the PCD -- the PCD loans at all of those loans that were PCD loans for the most part don't accrue interest. So we're not showing you accrued, just we're accruing it but we only take that interest in the income as our pan-off. So there, that's still a big number out there and then the higher amortization on the bonds. I mean the again going from $8 million of amortization to almost $13 million is a lot. I think you'll see a higher amortization this month. What we're expecting, but it should come down considerably. So we have a lot. I would say for the most Bank and I said, net interest margins are declining. I would think, I don't know if everybody has many options, but for us to get -- for us to keep it neutral or building, you can see we got a lot of work in front of us and we haven't been willing just to take those positions yet and that's the reason we can't give you an exact number. A lot out there, but I just don't want to give you some color and flavor on it.

That's helpful. I understand is a complex topic. All right, thank you very much.

The next question is from Peter Winter with Wedbush Securities. Please go ahead.

Good morning. I wanted to ask about the loan pipelines and how they compare to pre-pandemic levels and what you're thinking is for maybe loan growth in the second half of this year?

Well mean we try that first, I would describe it as a mixed bag in terms of where the loan growth might be coming from, things have picked up a little bit from a pandemic standpoint. But having said that, not much. It's easy, I think to understand that there are very many new hotel deal out there, there are not a whole lot of new restaurant deals out there, although there are some. Multifamily and most of our markets has dipped down a bit and I don't see that picking up substantially right away, although it has not totally fallen off. Oil and gas obviously has been a bit of a dip maybe not as bad as a lot of people might have predicted. We still see some loan requests on the oil and gas side, they haven't dried up completely. So I think it's going to be a slow but steady increase in loan requests and I didn't mention office, but I'll mention that now that certainly hasn't been robust. Most of our major markets, the occupancy rates aren't all that good scale. So they're not a whole lot of spec office requests. There are owner occupied office request, we still get some of those, So while there has been predictable fall off from the pandemic, it hasn't been as bad as a lot of people probably would have thought and it is starting to pick back up, but it's not going to be an overnight pickup, I don't think, but I suspect no later than the end of this year, we could see some substantial increase in some of our loan requests whether that happens this next quarter or the third quarter or the fourth. That's unknown, but I don't see it going down anymore.

Well, I think if it truly is most people are predicting at least a fair that will have 6 plus, 6.5, 6 plus GDP growth, your growth is going to definitely come in the second half. My only caution in that in areas is I do think these taxes that they're talking about now, all of those go through, I really think that could throw a wet towel on this. I'm not saying it would put it out completely. And that's why it's hard to give a little guidance and again we anticipate good growth in the second half on the -- at the same time, we still have a portfolio with Legacy that came over with us in the structured commercial real estate area. That really with if we have not really grown that portfolio, not really wanted to jump in and buy secondary B properties with no guarantees and stuff like that. So we continue to lose business in that area. So I think even with our growth this next year, you're probably won't see a lot of loan growth, because of what we still have to go. I think at Legacy and Kevin may want to jump in on that too. That's just my thoughts. Where we might mentioned real quickly also, the single-family demand, it is very good. We have listed residential housing from the single-family standpoint, the demand is very good and I don't see that dropping off anytime soon. As was mentioned earlier in this call, there is a lot of population growth in Texas and for that matter, some in Oklahoma also. So people are coming into our markets and they have to live somewhere. So I think that's going to be a good source of loans far certainly throughout this year and into next year.

We can ask for a better place to live. I mean we have the fastest population growth out there. So I mean, all the growth this year. I mean everybody saw where we gained, we picked up two house seats and places like California lost a house seats in the East Coast. New York in that area. losses. So this is definitely where things are growing and people are moving. So that should create growth, it should create loans for us going forward. Again, a lot of it. Thanks giving pan on taxes to a certain degree. I think there still be growth, it's just a matter of how much growth we'll have based on the new tax laws.

I think I agree completely. I mean taxes are emotional, they are real too obviously. Real dollars go out, but it's people get scared over taxes, they're not going to spend money. That's just life, that's just the way it works. So that's a wildcard. We will see.

Great. That's a lot of color, I appreciate that. If I can switch gears and talk about the CECL day one reserves. In January 1st, it was 1.98%, which -- it's elevated for you guys with you worked through some of the non-core loans from Legacy, do you have a sense what the right CECL level is for you guys as you kind of get through the loans from Legacy?

Nobody even wants to answer that here.

So I'll try to answer that question. So if and when it comes to the allowance, it's -- we have a model that we ran and we have a base and we also have layered on the stress environment, because of the current situation. I know that the Economy is progressing, but there's so much unknown there that we had to layer a little bit about stress scenario. That's why we at the current level. If you look forward, I mean it's going too hard to predict where we'll end, we just have to run the model, but as we continue to progress with the economy and as we go the cycle progresses, we probably going to bring down at that time, but what would be a normal run rate for us is hard to predict, but I think what I've heard from other banks or everyone in the industry they say maybe 1-3, 1-4 would be normal going forward with see so, but it's right now, I don't know if...

I would rather say, Peter instead of counting on a strong money back into the income statement. I would rather as a grow the loans to take care of what may be extra money in the provision instead of really taking money in and out. Again I know it's based on a formula after this. I think they still allow us to put stress test on it, just because it's not over yet. I mean you still have some hotel loans, you still have office loans and so it's not unrealistic to have extra stress on the model, but I would say if things continue to go the way they are and things continue to improve, I would rather instead of taking money out actually grow the loan portfolio to take us that difference to our finally is up at the lower 1-3, 1-4 something.

Got it. Thanks for taking my questions.

The next question is from Brady Gailey with KBW. Please go ahead.

Thanks, good afternoon guys.

Good morning.

Hi. But I wanted to circle back on bank M&A. David, when you look at your wish list, is that -- are those targets larger more transformational mergers, or is it more kind of smaller downstream targets and then I mean if there is nothing that is really working within the State of Texas and Oklahoma, it was now the right time to look outside like to the Southeast?

Well, I think you answered all your questions, yes, I mean I think we do have targets, we have some larger ones, and we have some smaller ones too. The smaller ones would probably be within our markets and those are just be balanced, basically that was more offices or customers in an area that we're already in, and probably the third part of the deal is, yes, we've probably if the targets that we're not focused in Texas, they would be focused out of state, probably in the area that you're talking about and some other area. And again, if we do that as I mentioned before, those targets would have to be a larger transaction and they would have to be dominant in market share in the state that they're in, I don't think that you're going to -- I would not -- you won't see us go and back, a $2 billion bank in another state, probably, it would have to have either it would have a large market presence or the ability to have a large market presence within a reasonable period of time.

Okay, all right, that's helpful. And then back to the bond portfolio is going to see that growth this quarter. How much, and I know you guys talked about potentially letting that continue to grow I mean I think average balances were about $9 billion, period end were up $10 billion, how much larger you still have a couple of billion of cash, do you still have money right there to put to use, how much larger do you think the bond book could get over time?

When I think the bond book is just a function of what we don't put in the loans. I mean that's place we've kept the bond book extremely short might have made a mistake not investing more because, our duration is only three -- three year duration. So maybe should have invested all of it because somebody could say, well, you invested, it didn't get the highest rate, but the truth of the matter is we have so much rolling up all the time, it really doesn't matter. So I think as the Bank grows, I don't know that I've ever seen our bank grow organically in one year, 20% in deposits. So I don't expect that to be the norm. But I don't expect to lose a lot of that money either. There may be a $1 billion lesser. So, but for the most part, I think you will continue to grow and we don't put in the loans, we will put into the bond portfolio now the mortgage warehouse facility that's huge difference at year-end were closer to $3 billion to today, we were closer to the $2 billion mark. So that's a $1billion swing right there. But whenever we don't put in loans. I would hope that as we get through the loans that we were trying to get out of in the oil and gas, which I think for the most part was the Legacy in out of the structured commercial real estate as that all balances out. We -- there is no reason why our bank should not grow at least 5% a year and if there is a decent market and so you're talking at least $1 billion a year there too. So it will be a combination.

And just add on, I think is a timing as well we didn't expect to grow $1.4 billion in deposits in the first quarter, we were buying the bond portfolio to use up our liquidity what we had, end of the year and we've got additional $1.4 billion. So it's special though that the additional came in later in the quarter so just going through that we're going to work through that buying more bonds, but again like Mr. Osmonov said we use that as a balancer. If we don't grow, loans will put it in the bank.

There is so much it rolls off every year exactly keep such a short have ratio. We're not making a bet on the future of rates. We're just yet we're just taking the middle of the road approach and so, we should probably has been, we should be investing more than we have probably.

Got it. Thanks guys.

The next question is from Michael Rose with Raymond James. Please go ahead.

Hi guys, just on the M&A, any sorts of fee opportunities that you guys are looking at this point smaller bank in Texas announced a little investment last night. I just wanted to see if there is any opportunities like that for you guys to maybe fee income are waiting for loan growth to come back. Thanks.

No, I mean, I think you're referring to the Veritex deal where they bought the mortgage business. We have -- we were building our mortgage business organically. I mean, I think this was at this month I think we did 784 loans in our own mortgage company and booked almost $300 million.

We did 640 that went into portfolio for $250 million.

So our mortgage department continues to grow, a lot of our business comes from customers as well as from other. So I think we're doing that. I think that if we look at buying a business, Michael would be more on the trust side and that would be more of a business that we would be more interested in probably for the most part.

Okay, that's helpful. And maybe just one quick follow-up. NSF fees down a little bit this quarter. Obviously, the deposit growth is just weighed on that. Any sort of kind of near-term outlook. I mean should we expect NSF fees and service charge to remain kind of near these levels while liquidity continues to build in the system. Thanks.

If you look at our overdraft, it did drop off and drop of significant, drop off was kind of end of the quarter because there is a stimulus money came in, but if you look at last year, our overdraft fewer over almost $9.4 million. That's almost $3 million drop we had in this quarter. So I think as the business opens up and what I'm hearing the people using their cash to do travels and shopping, as that continues, that we will see that the liquidity is being used up and then going to -- that will increase our overdraft fees, but if you look at our debit cards. I mean we had a pretty strong growth in debit card fee income because of just the business we're doing it. But overall, our non-interest income kind of held up pretty well if you compare. Our trust income actually increased compared to last quarter. So I think we're holding pretty well on them. Our non-interest income except the overdraft and we know what the reason of the drop-off there.

I mean, again, were $3 million a month less -- $3 million a quarter less and overdraft fees compared to before COVID. I think that eventually will come back, if not immediately, you're probably six months to a year away from that. And again, just this last month, our ATM and debit card fees were up almost $1 million in just one month. So that tells you the amount of transactions or what people are spending out there and I think that we have some opportunities may be for us and a few other areas that maybe we can raise fees a little bit that we in pretty low in the past that we're considering raising those fees that would add a little bit help to.

Yes, I think, trust and also mortgage I know with the volume of mortgage will probably feel like it's going to be, volume increase going to give us a little bit extra boost on the mortgage income.

Right. So we have a couple of triggers. I think we can pull there too.

Very helpful. Thanks for taking my questions.

The next question is from Brett Rabatin with Hovde Group. Please go ahead.

Hey, good morning everyone.

Good morning.

Good morning.

Wanted to just to, I guess, first, just talk about the loan portfolio. I know David, there were some loans post Legacy that maybe you were expecting the payoff or want to move off balance sheet. Where are we in terms of that size of that bucket, how much might be remaining that you're looking to move out of the bank that might slow your organic growth?

I mean like Kevin take it.

Yes. I'm going to answer it in two ways. I think going into the merger. We expected some declines -- meaningful declines in oil and gas and by that I mean probably $300 million and in fact, the oil and gas portfolio has shrunk almost $400 million and I think we're pretty well done with that and then we expected some in the structured real estate group call another $300 million or $400 million. So going into the merger, I think we -- If you go back and look at our transcripts, we were talking about $600 million or $700 million of loans that we would exit that were in the Legacy portfolio. But then the pandemic hit and I think things changed from the pandemic in this that structured real estate portfolio was not a portfolio we thought was going to hold out any real estate portfolio was not a portfolio that we thought it would hold up great especially, as it pertains to retail and office. So we got a little bit more aggressive about not hanging on to some of that structure, real estate portfolio and in that regard, well, I think for the remainder of this year, we will -- we may see that portfolio, particularly in the office retail side shrink down another $400 million or so. It's just not a really good time. There was some statistics out yesterday, despite and most of our portfolio is in Dallas. And surrounding. The stats out yesterday where Dallas job growth throughout the pandemic year, so just last year was a little over $110,000 of net migration in new jobs, good jobs into the Dallas market. Oddly enough that is usually a great sign for office space and office vacancy rates coming down and office vacancy is up so just a reflection of COVID and I think the rest of that story is yet to be written about how many people actually come back to the office, how many come back part time and share office with somebody, but it's playing out about how we bought. great job growth, but hasn't reflected in decline in vacancies. There has actually been increases in vacancies. So I think our cautiousness in that in the COVID world was that structured real estate exposure has been the right move for us, but it has resulted in greater levels of loan run-off from the Legacy portfolio than we had originally anticipated back in November of 2019. we announced.

Okay, that's great color, Kevin. appreciate it. And then, I guess the other thing I was curious about was just know you're reinvesting in new securities. One, I'm just curious what your 1Q, what the reinvestment rate was relative to the existing portfolio. And then and just kind of thinking about what you're buying today what it might yield?

Yes, I don't have the number of what the average was what we bought. I would tell you today, you're probably looking at the depending as. We bought this small amount 20-year product that we got about 1.67 on then the 15-year product. I think that were bought yesterday, probably, again, it depends on the speed and interest rates, but probably in a base rate you're probably in the 130 area probably up 100 basis points. You're probably about 147, 150. So that's right.

Okay. Appreciate the color.

The next question is from Brad Milsaps with Piper Sandler. Please go ahead.

Hey, good morning guys.

Good morning.

Good morning.

Just had a follow-up on your cost of deposits. Specifically, the cost of interest bearing demand deposits. I think they've stayed pretty stable for about fourth quarters at 38, 39 basis points. I think you've got some contractual public funds in there. Can you remind us when we might start to see some of that reset maybe the amount because it looks like this category is growing and I would think that new money coming in would be at lower rates. Yet the average stayed pretty stable for about the last 12 months. So, any color there on kind of when you might see some additional relief?

Hey, Brad. This is Asylbek. I'll give you a little bit color, but if you look at our cost of interest bearing deposits. Is it has actually decreased. If you look at our cost of deposits in the Q1 of last year, it was like 91 basis points right now with 38. So we've been steadily decreasing that but you're absolutely right. We have a significant portion of public funds that we have some floors. That would, that kind of holding that the interest expense on those a little bit longer, but I think the majority are going to start repricing or the new contract is going to start kicking in the end of the second quarter I think majority is going to be in the third and fourth quarter. So we are getting to the stretch that we're going to be getting a new contract with the public funds. But right now, that's what's holding up then interest rate on the deposits.

Yes. I was asking specifically about that. Interest-bearing demand category, it's about $6 billion or so for that were the public funds are so you're saying it. You probably have another quarter and then you'll start to see some relief?

Yes, it's towards the end of the second quarter but we when we looked at the repricing it comes in the third and fourth quarter of this year.

Okay, great thank you guys.

Welcome.

The next question is from Dave Rochester with Compass Point. Please go ahead.

Hey, good morning guys

Good morning.

Back on the M&A topic appreciate all the color there. You guys gave a lot of good color, I was just wondering, are you feeling positive on the potential for announcing something maybe even in the next year or do you think it might take longer than that. Just given where the bid-ask spreads are where they seem to be at this point.

Again I, -- you can't really give an answer to that. I mean, I don't know that -- I think that we feel good where we're at on what we're working at, but again if it happens, it happens, if it doesn't, it's does not, I think -- again, again, I still think thanks something should happen this year just because of the tax situation. But again, if they make it retroactive, that could change things too so I would say there is a lot of action. I wouldn't say a lot, there is not like it used to be. I mean, but it's definitely picked up and you will see more transactions. Even if not by us by other people this year. There is just stuff in the works. I think.

Yes okay. When you think about markets outside of Oklahoma and Texas. What would be, maybe your top 2 or 3 that you would potentially target, if you went outside?

I really don't want to go there. With that, because in the first thing you know investors to start purchasing stock in those particular banks and I just don't want to go there. With that.

Yes, understood. And then while you're working on a capital is continuing to grow. And you have let those levels get higher in the past but is a thought that if you don't get a deal done near term you'll just what they keep growing or would you take a look at the buyback, how do you think about that?

Historically, we've used our money to continue to increase dividends and we used it also when the stock got out of proportion. I mean, whenever it was something I mean when it fell $40 to $60 last year, we started bind and again right now I almost thought we were fairly price. But then when I look at other banks trading it we're trading at 13 times earnings and that's these other banks training [indiscernible] and other companies like Microsoft and Apple trading at 30 and 40 we look pretty cheap; so a lot of it depends. I mean, we used to take the money and drawing acquisition and we like using our money. So, it would make a deal more accretive. So I would say that if we didn't there is possibility that we would go into market to do you know to support our stock is historically, again I want to reemphasize this historically we've used that money to increase dividends and also use it were acquisitions.

Appreciate that. Maybe just one last one on loan yields just backing out all the noise from PPP fees and everything else. I was just wondering what the differential was on the front book, back book at this point where new loans are coming on versus where the book yield is. Thanks.

I already loans are coming want that is Tim Williams for that.

Well, I don't think there is a huge difference also back yes, I think that if you look at the yields that we generated on the actual loans were 480 for the quarter and on the core without fair values of 447. So I think we're booking around 4.5 on new loans production well on the low end, it's 3% to 3% on quarter and on the high end, it's 5 to 5.5 and soon where it all falls out, I don't think it's going to be a whole lot of difference here in the next quarter or so. Exactly. And we're growing our mortgage loans as well, which is a little lower yield, but it's a better to invest in the mortgage loans. Right now, then putting our bond portfolio was generating one of the quarter. Yes, and I didn't interest mortgage loans in that number. Okay. So that's what, what the outlook is.

Okay, great. Maybe just, sorry, one more last question, I may have missed this, did you guys give the potential runoff and that structured CRE book, just what you guys are expecting for this year. What's left of that? Thanks.

Yes, this is Kevin. I indicated a number of roughly $400 million for the remainder of this year.

Okay, great. And at that point you think that pretty much stabilizes?

It could again. It also depends on how in the post COVID world occupancies, particularly in retail and office play out that the multifamily portfolio there has held up pretty well. Believe it or not and it's really office and retail, but we've got our eyes on.

Okay, great, thanks guys.

Thank you.

The next question is from Jon Arfstrom with RBC. Please go ahead. Yes, thanks for. Let me. And we [indiscernible] just have some…

Asylbek you talked about the change on the reserve. Can you touch a little bit more on the $13 million increase in environmental factors on the reserve?

Yes. So if you look at, there is, you know it's external factors and internal factors so it's a mix of the factors that we use for our model. But if you're looking like our environmental factor, we use Texas unemployment with the current and forecast, same as goes was Texas GSP or GDP call and this included the WTI price, US CRE pricing so there's a lot of that's the environmental factor that included in this model. Also we have the, our internal models that our losses we incurred historically so with the combination of all of that, we, the models show that the increase of $13 million related to that a factoring.

Thanks Scott.

It kind of ties into my next question. You talking about 700,000 new jobs in Texas in '21, what's the...

I got that number John from that's number is a little older, probably at one of my meetings. I've got that probably about three to four weeks ago and another meeting was that they actually had a little higher number than that actually.

What is the labor situation point like in your view in Texas.

Probably like it is everywhere else. We never shut down like the rest of the country did. So a lot of the jobs kept going, but again, a lot of a number of people work from home. But really, when you're talking to people, I mean they need truck drivers, they need people that work in restaurants, they need people to work in construction and we're just like everywhere else, the people aren't willing to work because they can actually make more money with the government unemployment and a little bonus at there given, I mean I don't think that bonus at the government gives them runs out until I think September or October. So it's really tough you can see businesses even today have a sign outside where we're not open because we can't find enough people to work so I mean it's a real issue.

And where are you hiring, are you hiring lenders or do you feel like your lenders have capacity at this point?

I would say that we lead never been a bank that goes out and hires a group like when a bank buys another bank, everything like that, but we do -- we first of all, I think our bankers do have capacity. I do think we have capacity, but I think that we're, if somebody comes to us and they're really good, we're still willing to look at bringing on, but I think we bring them on 1's and 2's, probably, it's not like 10's and '20s.

That's right. It's a selective process one here, one there. If we find somebody that we think can add to the program incrementally, then we're bringing them in. And there are those that come in.

We have a number of people that continue to contact us and we will talk to them to but as far as hiring groups or something, we generally don't do that.

That's right. I mean we've never felt comfortable with rating and other institutions, employees, it just doesn't feel like it's the right thing to do. So I don't see a change in that philosophy, but if the right person comes along and they they're leaving where they are for a valid reason that makes sense, we'll look at them and if they, the right kind of folks will bring them in.

Last one for you, David. But we can maybe touch on the sort of conference earlier, it sounds like you would welcome modestly higher rates it do you have concerns about materially higher rates, I mean you're talking about tight labor and maybe a little bit of strengthening in energy and you guys have typically had a big bond portfolio that a big concern of yours longer term.

At least at this show you our model because the higher the rights the better it would be, I mean it's really big numbers, I mean we're so asset sensitive, even though we're booking a lot of fixed rate stuff in home loans and stuff like that. Just to give you an idea, I mean again if these models are right just up 300 basis points in a 12-year an increase of -- it's almost too much to tell you, may be $130 million -- $140 million probably. That's how much interest rates really help us a lot.

All right. Well, we're waiting for loan growth so that's the world waiting for. But that's just as well.

Yes.

Thanks a lot.

Thanks, 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. 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.

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