Good morning, and welcome to the Prosperity Bancshares Incorporated First Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. 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' Q1 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.
Timanus, Jr, Chairman Asobek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Merle Karnes, Chief Credit Officer Mae Stavenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. David Zelman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmanov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, 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 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 10Q and 10 ks 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 of our entire team, the combination of Prosperity and LegacyTexas continues to bear fruit as reflected in our positive results for the Q1. Prosperity Bank has been ranked 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 $133,300,000 for the 3 months ending March 31, 2021, compared with $130,800,000 for the same period in 2020, an increase of $2,500,000 or 1.9 percent.
The net income per diluted common share was $1.44 for the 3 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 3 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 percent for the 3 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 increase shareholder value. Our loans at March 31, 2021 were $19,600,000,000 an increase of $511,000,000 or 2.7 percent when compared to $19,127,000,000 at March 31, 2020, primarily due to a $558,000,000 increase in warehouse purchase program loans.
Our linked quarter loans decreased $608,000,000 or 3 percent from $20,200,000,000 at December 31, 2020, and that was primarily due to a $570,000,000 decrease in the warehouse purchase program loans, more of a seasonal issue. At March 31, 2021, the company had $1,100,000,000 in PPP loans. At March 31, 2021, our oil and gas loans totaled $503,000,000 net of the discount and excluding the PPP loans totaling $142,000,000 compared with oil and gas loans of 718,000,000 dollars net of the discount at March 30, 2020. This represented a decrease of $214,000,000 in oil and gas loans year over year, most of which was planned. Our deposits at March 31, 2021, were $28,700,000,000 an increase of $4,900,000,000 or 20.7 percent compared with $23,800,000,000 at March 31, 2020.
Our linked quarter deposits increased $1,400,000,000 or 5.1 percent, 20.5 percent annualized from $27,300,000,000 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 non performing assets totaled $44,200,000 or 15 basis points of quarterly average interest earning assets at March 31, 2021, compared with 67 $200,000 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 Federal Reserve is projecting over 6% job growth, meaning over 700,000 new jobs Texas for 2021.
And Texas is expected to outperform most of the other states for the next 3 years. Companies continue to move to Texas with HP and Oracle announcing headquarter 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 is 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 experienced 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 unless new tax rates are introduced, which may change the market. I expect that net interest margins will continue to decline.
Regulatory burden will 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 of our company. Let me turn over our discussion to Asylbek Osmanov, 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 3 months ended March 31, 2021 was $254,600,000 compared to $256,000,000 for the same period in 2020, a decrease of $1,400,000 or 0.6 percent. The current quarter net interest income includes $16,300,000 in fair value loan income and $13,000,000 in fee income from PPP loans.
The net interest margin on a tax equivalent basis was 3.41 percent for the 3 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 Q1 of 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 $34,000,000 for the 3 months ended March 31, 2021, compared to $34,400,000 for the same period in 20 $236,500,000 for the quarter ended December 31, 2020.
Non interest expense for the 3 months ended March 31, 2021 was $119,100,000 compared to $124,700,000 for the same period in 2020. On a linked quarter basis, non interest expense decreased $1,100,000 from $120,200,000 for the quarter ended December 31, 2020. For the Q2 2021, we expect non interest expense of 1 $118,000,000 to $120,000,000 The efficiency ratio was 41.3% for the 3 months ended March 31, 2021 compared to 42.9% for the same period in 202040.8 percent for the 3 months ended December 31, 2020. During the Q1 of 2021, we recognized $16,300,000 in fair value loan income. This amount includes $6,300,000 from anticipated accretion and $10,000,000 from early payoffs.
We estimate fair value loan income for the Q2 2021 to be around $4,000,000 to $5,000,000 This estimate does not account for any additional fair value loan income that may result from early loan pay downs or payoffs. Also during the Q1 of 2021, we recognized $13,000,000 in fee income from PPP loans, majority from the forgiveness of the 1st round PPP loans. As of March 31, 2021, the 1st round of PPP loans had a remaining deferred fee balance of 9,400,000 We anticipate more than half of this remaining balance will be recognized in the Q2 2021 due to loan forgiveness. Regarding the 2nd round of PPP loans, as of March 31, 2021, we recorded $530,700,000 in loans and generated about $24,000,000 in deferred fees, which will be recognized over a 5 year period or until the PPP loan is forgiven. The bond portfolio metrics at threethirty onetwenty 21 showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2,000,000,000 And with that, let me turn over the presentation to Tim Timanus for some details on loan and asset quality.
Mr. Timanus?
Thank you, Asselbeck. 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 $59,570,000 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, dollars362,000 in repossessed assets and $462,000 in other real estate. Of the $44,162,000 in non performing assets, dollars 9,505,000 or 22% are energy credits, all of which are service company credits.
Since March 31, 2021, dollars 844,000 in non performing assets have been removed. Net charge offs for the 3 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 $645,000,000 This includes an average of $177,000,000 in PPP loans per month. Loans outstanding at March 31, 2021 were approximately $19,600,000,000 which includes approximately $1,100,000,000 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
Our first question is from Jennifer Demba with Truist Securities. Please go ahead.
Thank you. Good morning. Good morning. Question for David. David, how much are you willing 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 pipe 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 one. I'll let Kevin take the second one on the mortgage warehouse. But you're right.
Historically in the past and you watched us, we have probably our duration on our bond portfolio is about 3 years, maybe 3.95 average life, but 3 years duration. We had so much roll off every year that historically, we would not only we weren't selling anything to the Federal Home Loan Bank at night, we were actually purchasing $1,000,000,000 even leveraging the bank. And probably this quarter, we've been anywhere from $1,500,000,000 to $2,000,000,000 that we have not invested that money 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 we're high, but again, we purchased like $400,000,000 yesterday. So I think that we'll continue to start speeding that up and purchasing more. We think that rates probably the 10 year will probably go higher toward year end. We're thinking maybe
or I'm
thinking, I guess, I want to speak for Chip, but from what I can tell 2% to maybe even 2.25% if we 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 may see us maybe even in a leverage position again, but not currently.
And even during Q1, just to add on, we purchased $2,200,000,000 on the bond portfolio. It's just we had a lot of payoffs too because of the mortgage market right now.
Well, you not only have that, you just I mean, gosh, year over year over $4,000,000,000 in deposits. Even in the Q1, we had over $1,400,000,000 in 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're busier than they've ever been. So it looks like and even retail people and people are 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 the deposits, but it may go down some, but not a whole lot, I don't think. It's just a different world.
There's 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. But 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 at predicting this. I think I thought the Q1 would average about $2,150,000,000 I think I said last quarter, that was only $200,000,000 off. We are a couple of $100,000,000 better than that number.
So as I look at where we sit today, refi volume, which has had at least 5 lives since 2015, seems to actually be slowing down this time around and it may be for real. Now obviously that depends on what happens to rates, but I think most believe 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 refi volume is going to be off 60%. So, pretty huge drop in their minds and refi volumes skewed towards the last two quarters of the year, but starting this quarter. While purchase volume, I think they had for the remaining 3 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 that the quarter probably looks a lot more like the Q2 of 2020 than any other quarter. If I look just volume wise of where the forecasts are. So with that said, and so everybody doesn't have to peel back and look at that, that was basically a $1,900,000,000 dollars in volume, could be as high as $2,000,000,000 in terms of average volume for the quarter. But I think we're going to operate in that $1,900,000,000 to $2,000,000,000 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 and make sure everything 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, I just wanted to go back to the comment you made on bank M and A. I think we all kind of have been surprised to how much industry wide M and A has picked up in the last few months or so. Can you just talk about Prosperity's role in bank M and A going forward?
But also the second part of the 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 something like that, but you have a lot of insider ownership. And you sell today under the current tax rule, you'll pay a 20% capital gain on it. So if you had $100,000,000 if I owned $100,000,000 of this bank and I sold and just say I had no cost basis in it, I'd pay $20,000,000 If the loss change where they go to 40% capital gains tax rate and I own $100,000,000 and I sell, I'm going to pay $40,000,000 I'm only going to keep $60,000,000 So I think it is just in my mind, I may be wrong, but I think that you'll see people that have big ownerships be more reluctant to sell because they'll just wait till another administration would come in. I mean, the difference between taking $80,000,000 home and taking $60,000,000 home is a big deal.
You just wouldn't do it. So that's my reason in saying that new capital gains taxes, I think, will affect to some degree if there's big individual ownerships in banks. So the first part of your question was, where do we intend to play on the in the M and A game. There's been a number of transactions. There's 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 as we were probably not as interested. We continue 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 and targeted in 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 do something smaller in the future if it's within one of our market areas. But for the most part, we're really focused on transactions and that's really what we're focused on. And truthfully, 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 were really focused on making this work, trying to think these are really hard people.
I think I don't know that sometimes people make it look easy, it's not that easy. A lot of help came from Kevin and his team and our team too. 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.
All right. That's super helpful. So thank you for that. And then maybe just one smaller question. I think you mentioned, if I was mistaken, that you expect NIM to continue to decline.
I get that there's the fair value loan income, there's 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 Asselbeck. Let me try to address that. If you look at on the core NIM, there's so many variables that impacted our Q1 and I think we're going to continue to impact our Q2. And first of all, what we kind of touched on early on is our excess liquidity. Our deposits has grown $1,400,000,000 in the Q1 and we are up more than $4,000,000,000 in the since the pandemic began.
So we're actively trying to invest that excess liquidity on the bond portfolio or growing the loans. So if you look at threethirtyonetwentytwenty one, we had about $1,600,000,000 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 $2,200,000,000 on bond portfolio in the just in the Q1, but we also had elevated payoffs on the bond portfolio. So with the 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 and our premium amortization was significant. If you look at our premium amortization, this quarter was about 12.8 $1,000,000 If you compare to last year same period, it was only $8,000,000 You can see how much significant that impacted our margin. And as we go and refi slowdown what Kevin mentioned earlier that should slow down the premium amortization thus helping us with the margin and income.
And I think one other thing I know as a PPP we don't consider the core, but in the Q1 we had $13,000,000 in PPP fee income and we have about $9,400,000 remaining from the 1st round that we are going to we believe we're going to recognize more than half of it in the 2nd quarter, but we also generated about $24,000,000 in deferred fees on the 2nd round of PPP loans. I think that the wildcard is the 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 it's going to be starting Q2, but probably more like 3rd or 4th 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 $2,300,000,000 in the CDs that's going to reprice next 12 months. And out of that $1,500,000,000 going to get repriced next 6 months. That should help us in the from the margin perspective. So there's a lot of moving pieces that kind of impact our margin and net interest income in near future. But if you look at our long term prospect, 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 I
think that's Well, I think it's good if I can recap what you just said because I think all of that's really important. Historically, we'd always say, okay, you can count on a 3 or 4 point net interest margin going down or 3 or 4 point net interest margin going up. But again, everything that also Beck had mentioned, you got excess liquidity today. We're over $2,000,000,000 in our overnight investments, which we never do. Historically, we would have that $2,000,000,000 invested.
We would even borrow another $1,000,000,000 and invest that. We have so many loans through the deal with Legacy Texas that had the PCD, the PCD loans that all of those loans that were PCD loans for the most part don't accrue interest. So we're not showing you accrued interest, we're accruing it, but we only take that interest in the income as they're paying off. So that's still a big number out there. And then the higher amortization on the bonds, I mean, again, going from $8,000,000 in amortization to almost $13,000,000 is a lot.
I think you'll see a higher amortization this month, but we're expecting, but it should come down considerably. So we have a lot. But 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 as 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 kind of wanted to give you some color and flavor on it.
That is helpful. I understand it's 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 your thinking is for maybe loan growth in the second half of this year?
You want me to 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 aren't very many new hotel deals, for example, out there. There are not a whole lot of new restaurant deals out there, although there are some.
Multifamily in most of our markets has dipped down a bit. And I don't see that picking up substantially right away, although it hasn't totally fallen off. Oil and gas obviously has been in 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 still. So there are not a whole lot of of spec office requests.
There are owner occupied office requests. 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 it happens this next quarter or the Q3 or the 4th, that's unknown.
But I don't see it going down anymore.
Well, I think if it truly is and most people predicting at least a bit that we'll 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 area is, I do think these tax that they're talking about now, if all of those go through, I really think that could throw a wet towel on this thing. 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.
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 we have not really grown that portfolio, not really wanted to jump in and buy secondary B finance 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 going to 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.
Well, we might mention real quickly also the single family demand. It is very good. 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's 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 for us certainly throughout this year and into next year.
We couldn't ask for a better place to live. I mean, we have the fastest population growth out there. So I mean, all the growth is here. I mean, everybody saw where we gained we picked up 2 house seats and places like California lost a house seat in the East Coast, New York and that area lost it. 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, I think, is going to depend on taxes to a certain degree. I think there will still be growth. It's just a matter of how much growth we'll have based on new tax laws, I think.
I agree completely. I mean, taxes are emotional. They're real too, obviously. Real dollars go out. But if 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'll see.
Great. That's a lot of color. I appreciate that. I can switch gears and talk about the CECL Day 1 reserves. In January 1, it was 1.98 percent, which it's elevated for you guys as you work 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, Peter. So
I'll try to answer that question. So when it comes to the allowance, it's we have a model that we ran and we have a base and we have 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 on a little bit of stress scenario. That's why we had the current level. If you look forward, I mean, it's kind of hard to predict where we land.
We just have to run the model. But as we continue to progress with the economy and as we go the cycle progresses, we're 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 CECL. But it's but right now, I don't know.
I would rather say, Peter, instead of counting on us throwing money back into the income statement, I would rather as it 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 that 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 to actually grow the loan portfolio to take up that difference to where it finally ends up at the 1.3%, 1.4% something.
Got it. Thanks for taking the questions.
The next question is from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good afternoon, guys.
Hey, good morning. Hi.
So I wanted to circle back on bank M and 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's nothing that is really working within the state of Texas and Oklahoma, is now the right time to look outside like to the southeast?
Well, I think the answer to all your questions are 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 the fill ins basically that would give us more offices or customers in an area that we're already in. And probably the third part of the deal is yes, we probably if the targets were not focused in Texas, they would be focused out of state those 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 say you won't see us going by a $2,000,000,000 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, it's good to see that growth this quarter. How much and I know you guys talked about potentially letting that continue to grow.
I think average balances were about $9,000,000,000 period end were about $10,000,000,000 How much larger and you still have a couple of $1,000,000,000 of cash, so you still have money right there to put to use. How much larger do you think the bond book could get over time?
Well, I think the bond book is just a function of what we don't put in the loans. I mean, that's a place we've kept the bond book extremely short. Might have made a mistake not investing more because our duration is only 3 year duration. So maybe should have invested all of it because somebody could say, well, you invested, it was you didn't get the highest rate. But the truth of the matter is we have so much rolling off 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 1 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 $1,000,000,000 less or so, but for the most part, I think we'll continue to grow. And what we don't put in the loans, we'll put into the bond portfolio. Now the mortgage warehouse facility, that's a huge difference at year end.
We're closer to $3,000,000,000 where today we were closer to the $2,000,000,000 mark. So that's a $1,000,000,000 swing right there. But whatever 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 and out of the structured commercial real estate as that all balances out. There's no reason why our bank shouldn't grow at least 5% a year. And if there's a decent market, so you're talking at least $1,000,000,000 a year or 2.
So it will be a combination.
And just
to add on, I think the timing as well, we didn't expect to grow $1,400,000,000 in deposit in the Q1. We were buying the bond portfolio to use up our liquidity what we had ended the year and we've got additional $1,400,000,000 So it's special though that 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. Rizalman said, we use that as a balance or if we don't grow loans we'll put it in the bond portfolio.
There's so much it rolls off every year because we keep such a short duration. We're not making a bet on the future of rates. We're just taking them in the middle of the road approach. And so we should probably be investing more than we have probably.
Got it. Thanks guys.
The next question is from Michael Rose with Raymond James. Please go ahead.
Hey, guys. Just on M and A, any sorts of fee opportunities that you guys are looking at this point? Smaller bank in Texas announced a little investment last night. Just wanted to see if there's any opportunities like that for you guys to maybe bolster some fee income while we're 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 a we're building our mortgage business organically. I mean, I think this was it this month? I think, Eddie, we did 784 loans in our own mortgage company and booked almost $300,000,000
The $640,000,000 that went into portfolio for $250,000,000
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. 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 this quarter. Obviously, the deposit growth is weighed on that. Any sort of kind of near term outlook? I mean, should we expect NSF fees and service charges to remain kind of near these levels while liquidity continues to build in the system?
Yes. If you look at our overdraft, it did drop off and drop off significant drop off was kind of end of the quarter because there was stimulus money came in. But if you look at the last year, our order off fee were almost $9,400,000 that's almost $3,000,000 drop we had at this quarter. So I think as the business opens up and what I'm hearing that people using their cash to do travels and shopping, as that continues that we will see that the liquidity 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 just the business we're doing it.
But overall, our non interest income kind of held up pretty well if you compare it. Our trust income actually increased compared to last quarter. So I think we're holding pretty well on our non interest income except the overdraft and we know what the reason of the drop off there.
Yes, I mean, again, we're $3,000,000 a month less $3,000,000 a quarter less and overdraft fees compared to before COVID. I think that eventually will come back not immediately. You're probably 6 months to a year away from that. And just this last month, our ATM and debit card fees were up almost $1,000,000 in just 1 month. So that tells you the amount of transactions and what people are spending out there.
And I think that we have some opportunities maybe in trust and a few other areas that maybe we can raise fees a little bit that we've been 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, we 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.
I wanted just to, I guess, first just talk about the loan portfolio. I know, David, that there were some loans post legacy that maybe you were expecting to pay off or want to move off the 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'm going
to let Kevin take it.
Okay.
Yes, I'm going to answer it in 2 ways. I think going into the merger, we expected some declines, meaningful declines in oil and gas. And by that, I mean, probably $300,000,000 I mean, in fact, the oil and gas portfolio has shrunk almost $400,000,000 And I think we're pretty well done with that. And then we expected some in the structured real estate group, call that another $300,000,000 or $400,000,000 So going into the merger, I think we if you go back and look at our transcripts, we were talking about $600,000,000 or 700,000,000 dollars of loans that we would exit that were in the legacy portfolio. Then the pandemic hit, and I think things changed in the pandemic in that structured real estate portfolio was not a portfolio we thought was going to hold up.
Any real estate portfolio was not a portfolio that we thought was going to 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 structured real estate portfolio. And in that regard, Brett, I think for the remainder of this year, we may see that portfolio, particularly in the office and retail side, shrink down another $400,000,000 or so. It's just not a really good time. There were some statistics out yesterday despite and most of that portfolio is in Dallas and surrounding cities.
The stats out yesterday were Dallas job growth throughout the pandemic year. So just last year was a little over $110,000 of net migration to 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 it's 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 an office with somebody. But it's playing out about how we thought.
Great job growth, but hasn't reflected in declines in vacancies. There's 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 runoff from the legacy portfolio than we originally anticipated back in November of 2019 when we announced the deal.
Okay. That's great color, Kevin. Appreciate it. And then I guess the other thing I was curious about was just you're reinvesting in new securities. 1, I'm just curious what your 1Q, what the reinvestment rate was relative to the existing portfolio?
And then 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 or what we bought, I would say, today, you're probably looking at depending we bought a small amount of 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 rates are probably in the 130 area, probably up 100 basis points, you're probably about 147, 150.
That's right.
Okay. Great. 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 4 quarters at 38 or 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 has 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 Asselbeck. I'll give you a little bit color. But if you look at our cost of interest bearing deposits, 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, we are at 38.
So we have been steadily decreasing that. But you're absolutely right, we have a significant portion of public funds that we have some floors that kind of holding the interest expense on those little bit longer. But I think the majority is going to start repricing or the new contracts are going to start kicking in by end of the Q2. I think majority is going to be in the 3rd Q4. So we are getting to the stretch that we are going to be we are getting a new contract with the public funds.
But right now that's what's holding up the interest rate on the power deposits.
Yes, I was asking specifically about that interest bearing demand category. It's about $6,000,000,000 or so where the public funds are. So you're saying it's you probably have another quarter and then you'll start to see some relief?
Yes. It starts end of the second quarter, but when we looked at the repricing, it comes in the 3rd Q4 of this year.
Okay, great. Thank you, guys.
You're welcome.
The next question is from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning, guys.
Good morning.
Back on the M and A topic, appreciated 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, 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 doesn't. I think the again, I still think 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's a lot of action. I wouldn't say a lot, there's 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. They're 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, investors will 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 it, capital is continuing to grow and you have let those levels get higher in the past. But is the thought that if you don't get a deal done near term, you'll just let that 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 use it also when the stock got out of proportion. I mean whenever when something I mean when it fell to $40, $50 $60 last year, we started buying. And again, right now, I almost thought we were fairly priced, but then when I look at other banks trading at, we're trading at 13 times earnings and I see these other banks trading at 20 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 during an acquisition and we like using our money so that it would make the deal more accretive.
So I would say that if we didn't do a deal, there is a possibility that we would go into market to support our stock. Historically, again, I want to reemphasize this, historically, we've used that money to increase dividends and also use it for acquisitions.
Yes, 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.
Where new loans are coming on, do you want to answer that or Tim want to answer that?
Well, I don't think there's a huge difference
also, Beck. Yes. I think that
if you look in the yields that we generated on the actual loans were 4.80 for the quarter and the core without fair values of 4.47. So I think we're booking around 4.5 on new loans production.
Well, on the low end, it's 3% to 3% a quarter and on the high end, it's 5% to 5.5%. So 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 better to invest in the mortgage loans right now than putting in our bond portfolio was generating 1.25%. Yes.
And I didn't include
the mortgage loans in that number. Okay. Yes. So that's 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 in 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 $400,000,000 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 that 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. Thanks for letting
me in. We can play speed around here. I just have
some random
motions.
Elsselbeck, you talked about the change on the reserve. Can you touch a little bit more on the 13,000,000 dollars increase in environmental factors on the reserve?
Yes. So if you look at there's 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 with Texas GSP or GDP coal. This included WTI price, U.
S. CRE price. And so there's a lot of that environmental factors that are included in this model. Also we have the our internal model that our losses we incurred historically. So with that combination of all of that, we the model show that the increase of $13,000,000 related to that factoring.
That's called PolyJet.
It kind of ties into my next question. You talking about 700,000 new jobs in Texas in 2021. What's the labor?
I think it's more than that. I got that number, John, from that number is a little older probably at one of my meetings I got that probably about 3 or 4 weeks ago and another meeting I was at they had a little higher number than that actually.
What is the labor situation 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. 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 the little bonus that they're giving them. And I don't think that bonus that 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 can't we're not open because we can't find enough people to work. So I mean, it's a
real issue.
Okay. 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've never been a bank that goes out and hires a group like when a bank buys another bank or anything 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 onesies and twosies. Probably it's not like tensies and 20s.
That's right. It's a selective process. 1 here, 1 there. And if we find somebody that we think can add to the program incrementally, then we're bringing them in. Yes.
And there are those that come in. We do.
And we have a number of people that continue to contact us and we'll talk to them too. 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 another institution's 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're leaving where they are for a valid reason that makes sense, we'll look at them and if they're the right kind of folks, we'll bring them in.
Last one for you, David. We maybe touched on this at our conference earlier, but it sounds like you would welcome modestly higher rates. 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. Is that a big concern of yours longer term?
I wish I could show you our model because the higher the rates, 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 and 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 month, you're an increase of, gosh, it's almost too much to tell you maybe $130,000,000 $140,000,000 probably. That's how much interest rates really help us a lot.
All right. Well, we're waiting for loan growth. So that's what we're all waiting for, but
That's too good.
Get us there 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.