Good morning, welcome to the Prosperity Bancshares second quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, welcome to Prosperity Bancshares second quarter 2018 earnings conference call. This call is being broadcast live over the internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares, here with me today is David Zalman, Chairman and Chief Executive Officer, H.E. Tim Timanus, Jr., Vice Chairman, David Hollaway, Chief Financial Officer, Eddie Safady, President, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, Bob Benter, Executive Vice President, Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, 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, Brandon. 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, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC.
All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our second quarter 2018 conference call. We were pleased with this quarter's results. We showed impressive returns on second quarter average tangible common equity of 16.48% annualized and on second quarter average assets of 1.44% annualized. Our net income was $81.5 million for the three months ending June 30, 2018, compared with $68.5 million for the same period in 2017, an increase of $13 million or 19%. The net income per diluted common share was $1.17 for the three months ending June 30, 2018, compared with $0.99 for the same period in 2017, an increase of 18.2%. The second quarter 2018 net income of $81.5 million was an increase of $7.2 million or 9.7% compared with the first quarter of 2018. With regard to loans, the loans at June 30, 2018, were $10.147 billion.
The linked quarter loans increased $135 million or 1.3%, 5.4% annualized from the $10.011 billion at March 31, 2018. We continue to see strong loan demand and borrower enthusiasm. Our total loan approvals are running higher and more consistent than in the last several years. We are still experiencing large payoffs. Our lenders are excited and are committed to continue to grow our loan portfolio. Our asset quality, our non-performing assets totaled $31.5 million or 16 basis points of quarterly average earning assets at June 30, 2018, compared with $47.6 million or 24 basis points of quarterly average interest earning assets at June 30, 2017, and $33.2 million or 17 basis points of quarterly average interest earning assets at March 31, 2018.
Overall, our asset quality continues to improve as the non-performing assets at June 30, 2018, reflected a 33.7% decrease compared with their level at June 30, 2017. Going forward, we continue to see a decrease in non-performing assets. With regard to deposits, our deposits at June 30, 2018, were $16.979 billion, a decrease of $91 million, or one-half of 1%, compared with $17.071 billion at June 30, 2017. The linked quarter deposits decreased to $354 million, or 2%, from $17.333 billion at March 31st, 2018. The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 500 municipal customers, such as cities, schools, and counties, that use the tax dollars they receive in December and January throughout the year, resulting in declining account balances. Our farming customers also have declining balances as their crops have been planted, but not yet harvested.
We also have experienced business people using their cash that in the past several years were keeping as reserves. During the last several years, as rates were low, certificates of deposits decreased. The good news is that our average non-interest bearing deposits for the second quarter of 2018 increased 4.8% year-over-year, and our average interest-bearing demand deposits for the second quarter 2018 increased 5.9% year-over-year. Both of these categories, either we pay no interest or very low interest on. With regard to acquisitions, as we've indicated in prior quarters, we continue to have conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal when it is right for all parties and is appropriately accretive to our existing shareholders.
With regard to the economy, the Texas economy continues with vibrant growth, helped by diversity of businesses, no state income taxes, a political climate friendly toward business, and a strong tailwind from an ever-improving energy industry. In fact, Texas was recently named the top state for business in America by CNBC. The Oklahoma economy is also boosted by its low state income tax, the improving energy industry, and a 3.9% unemployment rate for June 2018. The Dallas Federal Reserve Bank projects 3% job growth for Texas in 2018, or 370,000 new jobs. Houston is making a comeback with expected 3.7% job growth in 2018, or 113,000 new jobs. Unemployment rates remain low in Texas and business continues to expand. The Houston Port Authority reported that they are busier than they've ever been, processing 9,200 trucks in one day, and continue to purchase additional equipment, docks, and cranes.
Car sales increased approximately 6% in Texas and more in Houston. Overall, we continue to see positive customer sentiment with the reduction in income taxes and in government oversight and regulatory burden. Business people continue to tell me that for the first time in a number of years, they were able to spend more time growing their business. I would like to thank all of our customers, associates, directors, and shareholders for helping make such a successful bank. Prosperity Bank was rated by Forbes as one of the best banks in America again for 2018 and is the only Texas-based bank in the top 10. The bank has been rated in the top 10 for five consecutive years and was the highest-rated Texas-based bank for the past five years. Thanks again for your support of our company.
Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Dave?
Thank you, David. Net interest income before provision for credit losses for the three months ended June 30th, 2018, was $161.8 million compared to $152.2 million for the same period in 2017, an increase of $9.6 million or 6.3%. The net interest margin on a tax-equivalent basis was 3.28% for the quarter ended June 30th, 2018, compared to 3.14% for the same period in 2017 and 3.16% for the quarter ended March 31st, 2018. Non-interest income was $28.4 million for the three months ended June 30th, 2018, compared to $27.8 million for the same period in 2017. Non-interest expense for the three months ended June 30th, 2018, was $83.6 million compared to $76.4 million for the same period in 2017. The efficiency ratio was 43.9% for the three months ended June 30th, 2018.
That's compared to 42.3% for the same period last year and 44.2% for the three months ended March 31st, 2018. The bond portfolio metrics at June 30, 2018, showed a weighted average life of 4.05 years, effective duration of 3.6, and projected annual cash flows of approximately $1.8 billion.
With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim.
Thank you, Mr. Holloway. Our non-performing assets at quarter end June 30th, 2018 totaled $31,585,000, or 31 basis points of loans and other real estate, compared to $33,217,000, or 33 basis points at March 31st, 2018. This is a 4.9% decrease from March 31st, 2018. The June 30th, 2018 non-performing asset total was made up of $21,269,000 in loans, $0 in repossessed assets, and $10,316,000 in other real estate. Of the $31,585,000 in non-performing assets, $10,493,000, or 33%, are energy credits, all of which are service company credits. Since June 30th, 2018, $11,133,000, or 35%, in non-performing assets have been removed from the non-performing asset list or are under contract for sale. As we always say, there can be no assurance that those under contract will close.
Net charge-offs for the three months ended June 30th, 2018 were $2,636,000, compared to net charge-offs of $9,441,000 for the three months ended March 31st, 2018. This is a decrease of 72%. $4 million was added to the allowance for credit losses during the quarter ended June 30th, 2018, compared to $9 million for the quarter ended March 31st, 2018. The average monthly new loan production for the quarter ended June 30th, 2018 was $297 million, compared to $329 million for the quarter ended March 31st, 2018. Loans outstanding at June 30th, 2018 were $10,147,000,000, compared to $10,011,000,000 at March 31st, 2018. The June 30th, 2018 loan total is made up of 40% fixed rate loans, 36% floating rate, and 24% variable rate, unchanged from March 31st, 2018. I will now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Brandon, can you please assist us with questions?
Yes. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jennifer Demba with SunTrust. Please go ahead.
Thank you. This first question is for David Holloway. David, loan recoveries, how much dollar amount did that add to the net interest income in the second quarter? Was it around $5 million?
I don't know it was that much as $5 million. If I can give a big picture and then I'll get specific to the question. We recover loans all the time on quarter after quarter. What was unusual about this quarter is the loans that we collect are a little bit more than usual. I don't think that number was $5 million. I think the extra amounts that we collected over and above was probably more in the $3 million range.
Okay. David Zalman, could you just talk about the level of M&A discussions and activity you're seeing out in the marketplace right now?
Well, Jennifer, there's obviously a lot of M&A activity. You saw the recent acquisition or merger with Veritex Bank and Green Bank here in town in Houston. You saw the deal with Bank of Oklahoma and CoBiz. You saw the recent acquisition by Synovus and Florida Community Bank. There's a lot of stuff out there right now, and again, we're having opportunities to look at a lot of this stuff. We continue to look at it.
Are you looking further out of your footprint than you would have a couple of years ago?
I would say that we do. I think we're still primarily focused on the Texas market and the Oklahoma market because we're there already. Again, I think that we're experienced enough, and we have systems set up in place that it's not that hard to be in a different market. As we always said, if we're going into a different market, though, we want to be in the top 5 in that market within a shorter period of time. Us going into a different state or something to get $500 million would not be as meaningful. We would like to have a presence if we're going to go into a different market. We have looked in different markets recently.
Thank you.
Our next question comes from David Rochester with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
Back on the NIM. Just wondering how you're thinking about that trend in the back half of the year, and then as a part of that, what are you guys assuming for the rate environment?
Do you want to take the second part first?
Well, let me take it, and then I'll give you the second part. Dave, I think the increase that you saw in the loan yields, it can be attributed in large part to the favorable second quarter growth that we had in loans, coupled with positive impact of rising interest rates. Of course, as Dave mentioned with Jennifer a while ago, there was probably about $3 million of additional recovery above and beyond what we normally get.
Yep.
There was also some interest accrual that we got from that too. At the same time, our expenses were much higher than they normally are. We had an opportunity, and you saw that our expenses, we had elevated personnel expenses, some operational money we put away. Usually our provision for loan loss is budgeted around $2 million-$3 million. Again, that's a model. In that model, we have the ability to look at midpoints, high points, and low points, we were able to put a little bit more money into the provision than we normally would. We took advantage of the situation. Dave, I'll leave it with you there on the net interest margin.
No, I was just saying, how are we thinking about that going forward? I think it should be positive for us just as Fed continues to increase rates. If we can get all the new loans to stick, we're putting them on at higher rates than what the current yield is on the book. I think all those things will be positive. The unknown here, the biggest question is: what do the funding costs do when you look out over the next 3, 6, 12 months? If we can stay disciplined as we've had, there should be some good positive to our margin. If we have to become a little more aggressive, not quite as positive, but it's still good.
Your net interest margin, Dave, you think could be growing in the next quarter?
Say all in with fair value and everything impacting it, we think we could be in the next few quarters somewhere in the 316, 318. Again, it just depends on what cost of funding does.
Again, I'll point out again that our net interest margin will continue to improve over the next 12, 24, 36 month periods with repricing of assets. Our model shows significant net interest increases in 24 months and 36 months, sometimes as much as 3.4% in 24 months and 3.6% in 36 months, but with 100 basis points increases. I guess what I'm just saying, as I point out, I think going forward, our net interest margin will continue to improve. It doesn't improve as fast as everybody would like. It always uses the analogy it's like trying to turn the Queen Mary around out here in the parking lot. It just doesn't happen that quick. Longer term, things really look bright for us in that category.
Yeah. That's great color. Appreciate that. I guess as you're repricing that securities book over time, reinvesting the cash flows, you'll see that yield move up. Where are you seeing pricing on securities purchases today?
I didn't check this morning, but I'd say over 3% now.
Yeah.
Dave, do you have the number?
Yeah, we were running, if you're averaging over the last month and a half or two months or so, between $310 and $325.
Yeah.
Okay. Great. Then you just mentioned on the expense side, comp was up a little bit this quarter. Sounded like that's more of a one-time type of thing. You were taking advantage of some of that extra income there. Where should we expect to see expenses in the back half of the year?
Dave will go into it in deeper, but again, this is the first quarter that we really got the full effect of after the Administration passed the tax credits and the tax changes and all that. We upped our minimum wage, and then we also gave a 5% increase across the board to all associates. Overall, Dave's going to probably give you a little bit higher number, but again, we should be back to normal next month.
Yeah.
Yeah.
Your observation's right. We had these, you can call them one-time, events here this quarter. It raised our expense. But going forward, if our revenues can continue to increase, we might want to move that forward-looking quarterly non-interest expense we've been trying to run around $81. I'd say if our revenues continue to increase, we'll probably move that, just to give you a range of $81 to $82 basically. Just if the revenues go up. I would also point this out, to kind of drive that point home, even though our expenses went up this quarter, compared to the previous quarter when our expenses were less, the efficiency ratio actually went down. It went from 44.2% to 43.9%. You really got to look at this in its bigger picture.
Yep. All right. Great. Thanks, guys.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning, guys.
Good morning.
Good morning.
The cost of deposits was up only five basis points linked quarter. You have a lot of your peers, it's up 20, 25 basis points linked quarter. I know you guys have a great funding base, any color on any upward pressure you could see in deposit costs in the back half of the year?
Well, I would say that we've probably been slower than some of the others to raise the interest rates, especially on CDs. I think that this last quarter, we did raise our interest rates on CDs. I think for a jumbo, again, I don't have it here in front of me, a jumbo 1% one year probably is more like about a 1.6% when not too long ago, you probably couldn't get 60 or 80 basis points. We have raised our CD rates. The bad part about that is we don't have much in CDs, but maybe we'll start getting more CDs. We let a lot of that money go because we weren't as competitive. The answer to your question is, we do think that interest rates are going to continue to rise.
Again, I think that we have probably one of the best bases out of any bank anywhere. When you look at the amount of non-interest-bearing accounts that we have, and you look at the interest-bearing demand that still are at very low rates, I think when you add up all that together, you'll see us increase probably in the money market and maybe some more in CDs. Again, I still think we'll probably have one of the better betas out of anybody, probably.
Just to close the loop on expenses, you did $83.6 million this quarter. You're guiding to something lower, kind of in the $81 million-$82 million range. It sounds like the changes you made in the comp line, you increased the minimum wage. You also gave, I think I heard you say 5% raises to some people. It sounds like those are more permanent. I was just wondering why the expense base would come down and if there was any truly one-time thing in that comp line this quarter.
Yeah, I think that's right. Some of that increase you saw were more one-time events. They're not the ongoing recurring things that was mentioned earlier. That will allow us to bring that number down. We won't be running at whatever it was, $83.5 million, $84 million. It just had those one-time events in it, that won't happen in the quarter coming up.
Gotcha. Finally from me, I know we've talked about the discount accretion being around $2 million a quarter. It's obviously a lot better than that this quarter, do you think $2 million is still a good estimate per quarter going forward?
It is, you're right. We saw some positive this quarter. If you look at the remaining balance, especially for that general run rate that we call the 91, just in the simplistic terms, if that were really running at $1.5 million or $2 million, it's only $17 million left, it's going to run out over the next year, and there's about $6 million in that '03. That's why you saw that pop there. We're cleaning up these loans. It's having a positive effect. Randy and his team are doing a good job, and we're getting some extra money coming back to us. Yeah, short answer is we still want to look at that $2 million per quarter.
Knowing that that can go up or down some at the time.
Got it. Thanks, guys.
Our next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Good morning.
Good morning, Peter.
I was curious about the average monthly loan production. It declined a little. It's still good, but declined a little bit from the first quarter. I'm just wondering if you could talk about that and if you've seen any impact on the tariffs and trade discussions.
First, I'll let Tim get into that, but the bottom line, I think, needs to be period end loans increased 5.4% on an annualized basis. Again, Tim will probably want to talk more about production. Maybe even talk about that first quarter compared to the second quarter you and I talked about.
Right. To address the second part of your question, from my perspective, we haven't seen any effects of the tariff issues that are out there in the news media. That lack of effect may or may not change going forward, but so far, it's been a non-event for our bank. As you say, we were down in the average monthly new loan production in this quarter. It was $297 million compared to $329 million in the first quarter of this year. $329 million is the best quarter we've ever had in the history of the bank. We'd obviously like to duplicate that and exceed it, but it is by far the best we've ever had. The average production for all of 2017, the average monthly production was $286 million. If you compare the second quarter at $297 million to all of 2017, it compares favorably.
Why the first quarter went up so much, there's no hard and fast answer to that. It's just, we were fortunate that we had some good business come our way. Our people are out there trying hard all day, every day, and they're producing results. Sometimes you get more in, sometimes you get less in. There really wasn't any particular one-time event that we could attribute to that first quarter production to. Things still look good from the economy perspective. Our people are still trying hard. There's no reason to think that the production's not going to remain decent throughout the rest of the year. I hope that answers your question.
Yeah, I'll just add, Tim, when you and I talk, it's ironic sometimes because we had higher production for the first quarter, and yet we didn't show an increase in loans due to payoffs. In the second quarter, we might have had less production, but still grew loans 5.4%. Production's one piece of it, but pay downs is another piece of it, too, at the same time.
That's exactly right. We had record production in the first quarter of this year and basically had record pay downs in the first quarter of this year. The two have to work together to increase your outstandings. Pay downs are something that we don't have a whole heck of a lot of control over. Sometimes we have some influence on a particular loan. We just had a lot of customers that sold projects, and/or had excess cash and wanted to pay debt down. We had a lot of pay down in the first quarter. Those pay downs subsided this quarter. Going forward, who knows what that number's going to be, but there's nothing on the horizon that would obviously suggest a net increase in the percentage of pay downs. That's just something we deal with quarter to quarter.
Okay. No, that's very helpful. That's a very good detailed answer. Just on the loan yields increasing with the new loan production, I'm just curious what type of increase in new loan production versus the existing portfolio you're getting.
In terms of rates?
Yes, on the loan yields, right.
Yeah. We've been averaging between 5% and 5.5%, let's just say for most of this last quarter in what we've been adding. Here recently, we've been seeing more in the 6%-6.5% range. How long that's going to last and how much influence that's going to have, I really can't say right now. The bias is clearly upward in terms of rates. It's upward in terms of our deposit costs, it's upward in terms of what we're going to earn on our loans, and the securities for that matter. I think the hard number is 5%-5.5% is what we've been doing. Once again lately, we've seen several that have moved to 6%-6.5%. The direction is upward.
Great. Thanks very much.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning. David, you just answered my question in terms of the production and pay down levels, I appreciate that. The one question I have is regarding your expense guide and more of that $81 million-$82 million range. What is the impact in 2019 of the FDIC surcharge going away? How much will that reduce the assessment on a quarterly basis?
I don't have the exact number, I don't want to say it's material, it's not immaterial either. I'm not going to be exact on this. I can give you a range, somewhere in the $2 million, $3 million range, again, I can't be exact on it, that gives you kind of a good feel for that.
Is that for certain that they are going to reduce it once it hits the-
For them, it has to hit a certain level before-
1 point-
they stop the surcharge.
Reserve.
Yeah.
1.35 or something like that. That'd still be nice.
Right. That's $2 million or $3 million annually in terms of the benefit.
Right. Ballpark.
Right. Is your guide at that $81-$82, is that inclusive of that surcharge going away, or is that assuming that it stays intact?
Well, two things. One, that guide, if we're looking at that over the next couple of quarters, we assume the surcharge-- Maybe I should back up because there's general disagreement on this, I think. I think that we believe that surcharge won't be going away until 2019, although I know some of the indicators thought that would happen late this year. I don't know if that helps in your question, does it or does it not?
Okay. Yeah, I was thinking more about 2019, but I get your-
Yeah.
little charter.
Yeah. We're looking at 2019, Yes, that guide would include that thought in there.
Okay. All right. Thank you.
Our next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, guys. Good morning.
Good morning.
Morning.
Wanted to ask, David, you've got 16% total risk-based capital now, and capital keeps building given your level of profitability. I'm just curious, if the right deal doesn't come along in the interim, are you planning on doing anything different with capital? I don't think I've ever seen you have this much TCE.
As we mentioned before, we'll continue raising our dividends. I think if it's been like we historically have been in the past, we've been raising our dividends almost 10% or better a year. We'll continue to do that. Don't worry, we'll use the money. It'll be used. The only thing I would say is if the stock price got too low, again, we don't like to buy our own stock, but if it just got too low, we would come in and buy 5% or 10% of our stock too at the same time. For the most part, we want to use that money for acquisitions, and we will end up using it at some point in time.
Okay. Wanted just to follow up on the commentary on origination rates, pretty healthy levels. A lot of folks have been talking about increased competition from non-bank type players in the space. I guess, what are you seeing there, and are some of the loans that you're not getting, is it a function of rate, or is it more on you guys have really stringent underwriting, and we've heard some loosening, especially on commercial real estate. What are the factors that are maybe keeping loans from being originated that you might look at?
We've seen very little competition from non-bank sources. I guess that's subject to change, but to date, we really haven't seen any effect from that segment of the lending out there. It is competitive. All financial institutions need loans and want loans. When we lose one, it's typically over pricing. If we don't want it because of underwriting, I don't consider that to be a loan that's lost. At the same time, we don't want to leave the discipline that's made this bank as good as it is over many years. I've been in the lending business a long time, and one thing I've learned, and we all know it, when banks get in trouble and go out of business, it's because of bad loans. It's not anything else.
That's what does it every time, and we don't want to end up there one day. Having made that conservative statement, you can see our production. We're trying to look at every loan on its own merits. We're trying to figure out ways to say, yes, we want to make it as opposed to saying mentally, no, we don't want to make it. I think when we lose one, it's typically over pricing. We're willing to be reasonably aggressive on pricing, but every now and then, a competitor does things that we just simply don't understand, and they come up with a rate that would not be appropriate for our structure. That's kind of the way it's always been. There hasn't been any decline in the veracity of the competition. It's out there. Once again, we haven't seen it from non-bank sources.
Okay. Great, appreciate the color.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks. Morning, guys.
Morning.
Morning.
Want to hit on credit quality and overall credit trends still look excellent. Digging through the net charge-offs, it looks like there's a little tick up in net charge-offs of commercial real estate loans. I think in years past, we've seen some higher losses in C&I via energy. I'm curious what you're seeing now on the CRE front that resulted in some higher charge-offs over the last few quarters.
Randy may want to jump in. Again, most of our charge-offs are coming still from cleanup from loans that we have acquired from previous bank acquisitions for the most part.
Yeah, most of the charge-offs are still the C&I, oil and gas cleanup from acquired banks. We haven't seen an uptick in CRE losses recently. There may have been a minor uptick, it's not anything that's material. There's nothing on the horizon that we see in terms of commercial real estate that's problematic for us.
Yes, well, you get a one-off every once in a while, we haven't seen an uptick by any means yet. The values haven't gone down or nothing's changed on that front.
In fact, the economies that we operate in other than office space occupancies everything looks pretty good in terms of commercial real estate. Houston's gotten a lot better in terms of its apartment occupancies. While it would be good for everybody in the marketplaces if the demand for office space were to improve, and I'm talking about non-owner occupied office space that hasn't been much of a direct effect on us. We have very few dollars in non-owner occupied office space. It would be good in terms of the overall effect, it doesn't have much of a negative effect on us directly.
I don't have the numbers in front of me, but Matt's probably pointing to a deal. I would say that again, I'll go back that the charge-offs from commercial real estate really had to do with banks, the acquisitions that we acquired, both one was a participation from one, and then another one was some bank. Again, it's just cleanup on from banks that we had.
You've seen the numbers, it wasn't $1.4 million or something like that. It was just a cleanup from an acquired bank. It wasn't anything that affected commercial real estate across the board.
That's right. The point is that what you're referring to is not indicative of where we are going forward.
Okay. That's helpful. Tim, you mentioned a few minutes ago that the credit committee is trying to be more open-minded in certain circumstances. I'd like to hear from David Zalman about how open-minded you are feeling these days on the credit committee.
I'm leading the charge. I have a white flag in the room at the same time.
He wanted us to start serving Chardonnay at the meetings, I told him we couldn't do that.
We are trying, in all seriousness, we are trying again. I think that people have to realize, though, as you build your loans, again, we're still only around 5%-6% loan growth. We used to do about 8% organic loan growth, we're still behind where we normally were. Again, really the last year or two is the first time we really had to focus on building the portfolio and not really getting rid of loans that we had through acquisitions that we clean up. I think our team really does. We're looking at more loans. We're looking at bigger loans than we have in the past.
Everybody has to realize, though, that when you have bigger loans, at some point in time, when you look at the amount of non-performing, we have $30-something million, we have deals on half of those to get rid of those. As some of these bigger loans go bad, you get a $20 million or $30 million loan. Everybody just has to realize that that could possibly happen too, as you get more aggressive.
Okay, great. That's all for me. Thanks, guys.
Thank you.
Our next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey, good morning.
Morning.
Morning.
Just had a question kind of about the balance sheet. David, you relied more heavily on wholesale borrowings this quarter, obviously to supplement I guess that's from public funds running out. Typically, those kind of peak in the second quarter and then draw back down. Question would be, do you still expect that same phenomenon in the third and fourth quarter? What's the average rate that you're putting on those costs in the second quarter?
This is David Zalman. I'll take part of that first, and we'll probably need clarity on the second part. The first part, yeah, it's exactly what you laid out. The public funds start drawing down their accounts from the second quarter. It starts mitigating in the third quarter. It'll go down a little bit more, but not as much as you saw this quarter. In the fourth quarter, all that money comes flooding back in. Yes, the result of that is the deposits go down, we have to borrow a little bit more. Vince, briefly-
Yeah, I think what he's asking for, do you still see an increase at year-end like we normally do? I would say yes. However, I would have to caution you. Last year, we had, in the last quarter, $900 million. Dave, you pointed this out to me, just in that last quarter, we increased to $900 million. It was a huge increase in one quarter. We felt like we normally increase, what, $400 million?
Yeah.
Four to $500 million.
$400 or $500 million.
The $400 million of it you felt was really because of the new tax laws that people prepay taxes and stuff like that that you may not see this year.
Eventually, when we get to year end and we're looking at year-over-year numbers and deposits, remember the whole tax discussion was going on, and a lot of people had rushed in to prepay their property taxes last year. What David is saying is when we saw this huge $900 million come in by year end, that was an anomaly because normally it's $400 or $500 million.
Historically, again, if you look out at 20 years, our deposits grow organically, what, 2%-4% a year annually?
Right.
Yeah, that's the number.
Got it. Any thought to versus maybe relying more on the borrowings, would it help to raise your overall deposit rates a bit? Obviously, those are coming in at this quarter around 190 basis points. I assume we'll be higher in the third. Just kind of thinking around how to price versus having to go rely on the wholesale market, even though it's for a short period of time.
That's exactly right.
You're ahead of us. At our meeting this afternoon, that's exactly what we're discussing. You're ahead of us on that.
First time. All right, great. Thanks, I appreciate it.
As a reminder, if you would like to ask a question, please press star then one. Our next question comes from Geoffrey Elliott from Autonomous Research. Please go ahead.
Hello, thanks for taking the question. You had some growth in commercial real estate this quarter. It feels like that's an area where some banks have been talking about pulling back a bit because of what they're seeing on the competitive side. Can you give a bit more detail on what you're seeing there in terms of pricing and structure, and whether there's anything kind of egregious going on in any markets that you just want to stay away from?
Okay. Our outstandings did tick up just a little bit. I think we're at about 34% of our total loan portfolio is in commercial real estate right now. As I said a little while ago, when I look at the economy in Texas, at our major markets in the state of Texas, and our economy in Oklahoma, there's nothing that we see that's really problematic on commercial real estate. We hope that we're selective in what we're approving and booking. We think we are. We look at each loan on its own merits. I mentioned there's clear weakness in non-owner occupied office space. We would be hard pressed to be desirous of booking one of those loans in Houston right now, for example. Owner occupied is a different story, and there are multiple sub-markets in a metropolitan area like Houston and Dallas-Fort Worth.
You can't paint it all with a broad brush. You have to look at it loan by loan and what the credit is behind those loans. I don't see us pulling away from commercial real estate based on anything that we know at this point in time. The better deals are price competitive. When we book a commercial real estate loan, it's obviously a loan that we think is good, and it's harder to get premium yields on those. That's the way it's always been. There's nothing new about that. I think we'll continue to maintain and maybe even build a little bit our commercial real estate portfolio. The pricing on that may be a little lower than the average pricing, once again, if it gets too low, we back away and we don't do it. I don't see any big change there.
I hope I'm answering your question.
Yeah. Thank you. Maybe just another one on the M&A side. You kind of talked about a bit more openness to look at things outside of Texas and Oklahoma. How far outside are you willing to go? How important is it to you to have a contiguous footprint?
They've put up a border wall, I can't go into California, they're not going to let us go there. They probably wouldn't let me go to New York. No, I think we're open. We are open again, wherever it makes sense. I think the main thing that we would want if we went into another state is that we could be a real player and a significant size, and that it was accretive. If it is priced properly, I think those are some of the issues that we would look at. I don't know that we would just put off limits to just anything, really.
Okay, got it. Thanks very much.
Our next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.
Hey, thanks. Good morning, everyone.
Good morning.
Good morning.
I just wanted to touch on M&A for a second, following up on Geoffrey's question. Is it just price, and do you feel like you have been competitive and close on transactions, or is there something else that's holding you back?
A lot of the deals that you have seen recently are deals that we said that. I don't want to just put anything that we wouldn't do, but you've known us a long time.
Yeah.
We know the kind of banks that we always like are banks that have been around for a long time, that have a lot of core deposits, long-term relationships. If you look at a lot of the deals that have done recently, you look at the Green Bank, it was started over the last number of years and. Not that it's a bad bank at all, it's just a different model. You look at the bank in Florida, you look at Icon Bank, you look at all of those banks that you're seeing were started over the last 10 years, really.
It's not that we wouldn't look at them, but paying a premium price for a bank that's been started like that is not the kind of banks we're looking for, you know what we're looking for with good solid core deposits, been around for a long time. When we find a good bank, pricing is not the issue to us. You'll see some of our deals that we've done, we've paid more than anybody. It has to be the right kind of bank. Let me just say it like that.
Okay. I guess, can you touch a little bit on the deposit performance in some of your non-metro markets? I know that's also been where a lot of your acquisitions have happened historically, but how are those deposits holding up and how is the pricing competition there?
Well, those markets are good. It's probably better than your metro markets because the money just doesn't move as much. Having said that, I think pricing has gone up everywhere. I went to bed one night, I feel were CDs for six months, were at 60 or 70 basis points, and I woke up, there were ads in the paper at 2% for one year. Pricing has definitely changed. Now, most of those are outliers with some banks. There's a handful of banks that are doing that. Overall, pricing has really gone up on money. It really has.
Okay. Just last two, give us an update on health of the ag book and how you feel about that portfolio, and any updates on your energy lending appetite.
Yeah, the ag is an important part of our company. I think we have $700 million in that category, and we're probably one of the biggest in the state. Right now, all the crops look good. I think the biggest issue some people talk about are probably tariffs, it's probably affecting more of the soybean market more than cattle, probably. I read an article in The Wall Street Journal where it said that, again, I don't know how they ship crates, but the crates that went into China were like $75,000 more than the previous, and they just have to go up on that. Having said that, when I talk to the cattle people and everybody else, we really haven't been affected that much yet.
Trump has just said yesterday that he's going to give for any farmer affected, they're going to put $12 billion out there. I don't know how the other business people feel about that, farmers always seem to get taken care of. Right now, we don't see the impact, farming is a good deal for us in a lot of the communities that we're in. That's a big part of it.
With oil and gas, we're still doing oil and gas, again, the oil and gas loans that we're making, we made a few larger ones, usually they're in West Texas or somewhere where we're really trying to say we're looking at it a lot different, where instead of just a total revolving line of credit based on some kind of discounted present value that an engineer comes up with, we're really looking harder at exactly how much money's coming in minus real expenses, not just expenses that they use out of the air, and can that person pay back their lines of credit over a five to six-year period? Am I wrong on that, Tm?
No, that's exactly right. I think it's important to focus on historically where we have been in terms of energy lending. Here over the last couple of years, the energy books bounced around between 3% and I guess 3.5%, which is where it is right now, of our total loans outstanding. Almost all of our problems, not 100%, almost all of our problems have come from energy loans that we obtained from acquisitions. Historically, when we've looked at energy lending, whether it's on the production side or the service side, we've looked at local companies that are in our local areas, in our geography, that have been around a long time, that have weathered the ups and the downs, that have decent balance sheets. We've always stayed away from the newcomers and the ones I'd call the fly-by-nighters.
A lot of the other banks have embraced those types of credits, and they've gotten in trouble. We hope to maintain a presence in energy lending. That's our intention, but we hope to do it with the type of credits that we've always tried to service. We think that that represents the bulk of our portfolio right now. I don't think you'll see a whole lot of change, either up or down, anytime soon in terms of what we're doing there.
I don't think you'll see us really participate in a lot of shared national credits or something like that. That's not what we're going for.
Exactly.
Yeah.
We're trying to take care of our local companies.
Thanks for the help. I appreciate it.
Thanks. This concludes our question and answer session. I would like to now-
Well, I've got three minutes-
-turn the call back over to Charlotte Rasche for any closing remarks.
Thank you, Brandon. 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. We will continue to work on building shareholder value. Thank you.
This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.