Prosperity Bancshares Inc (PB) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Prosperity Bancshares, Inc. Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Fourth Quarter 2017 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today, is David Zalman, Chairman and Chief Executive Officer; H.E. Tim Timanus Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; Merle Karnes, Chief Credit Officer; and Bob Benter, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending 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, Brian.

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 the 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 for listening to our fourth quarter 2017 conference call. For the year ended December 31, 2017, we had an impressive annualized return on average tangible common equity of 15.06%, and on average assets of 1.22%. Our net income was $272 million for the year ending December 31, 2017, compared with $274 million for the same period in 2016. Net income per diluted common share was $3.92 for the year ending December 31, 2017, compared with $3.94 for the same period in 2016. The income was affected in 2017 by a number of things: First, there was a decrease in loan discount accretion, noncore earnings the way we look at it, of $17 million in 2017 compared with 2016. We also made an additional provision for loan losses of $3 million in the third quarter related to Hurricane Harvey and also lost income from the waiver of late charges and overdraft fees during and for specified periods after the storm. Lastly, income was affected by a tax charge of $1.4 million related to the Tax Cuts and Jobs Act. On the loans, loans at December 31, 2017, were $10,021,000,000, an increase of $398 million or 4.1% compared with $9,622,000,000 at December 31, 2016. Our linked quarter loans increased $109 million or 1.1%, 4.4% annualized from the $9,911,000,000 at September 30, 2017. Our customers are optimistic because of the reduced regulatory restrictions and the expected positive financial benefit from the reduced tax rates. Business activity is robust, and business owners have been actively pursuing new opportunities.

Our asset quality in 2017, we saw a 22.5% decrease in nonperforming assets compared with their level at December 31 of 2016. Our nonperforming assets totaled $37.4 million or 19 basis points of quarterly average interest earning assets at December 31, 2017, compared with $48 million or 25 basis points of quarterly average interest earning assets at December 31, 2016, and $45.8 million or 24 basis points of quarterly average earning assets at September 30, 2017.

Our deposits at December 31, 2017, were $17.8 billion, an increase of $514 million or 3% compared with $17.3 billion at December 31, 2016. Our linked quarter deposits increased $913 million or 5.4% from $16,900,000,000 at September 30, 2017. As mentioned in previous earnings calls, our deposits generally increased significantly in the fourth quarter. The increase is due primarily to municipalities, farm and ranch customers that receive payment from their crops, and business owners and others preparing to pay their estimated taxes coming due. More significant is the growth we experienced in our noninterest-bearing deposits. Our noninterest-bearing deposits increased $432 million or 8.3% in 2017 compared with 2016.

With regard to acquisitions, as we've indicated in prior quarters, we continue to have active conversations with other bankers regarding potential acquisition opportunities. We remain ready to enter into a deal when it is ripe for all parties, and it is appropriately accretive to our existing shareholders.

With regard to the economy, Texas survived Hurricane Harvey and bounced back to a robust growth of 2.6%, adding 286,000 jobs through November of 2017. The unemployment rate in Texas of 3.8% is the lowest since 1970, and higher oil prices continue to improve the energy sector.

Oklahoma's economy experienced a solid recovery in 2017. The state's energy sector led the initial stages of the recovery, but most other sectors also improved in 2017. Oklahoma's unemployment rate in November 2017 was 4.2%, down 0.7% from 2016. The outlook in Oklahoma for 2018 is positive. We're excited going into 2018. We expect employment growth to shift into high gear in 2018, with healthy manufacturing and service sectors.

In closing, on December 22, 2017, the Tax Cuts and Jobs Act was enacted, which reduces the corporate tax rate from 35% to 21%. The act is expected to allow companies such as Prosperity to be more competitive, improve the lives of their associates, and increase shareholder value. At Prosperity, we communicate to our associates that they will be rewarded when the company does well. Accordingly, given the expected financial benefits of the lower tax rate, we are pleased to announce that we will provide the following to all associates at Prosperity Bank, other than members of the bank's executive committee, whose compensation is reviewed and approved by Prosperity's compensation community. We're giving a 5% salary or pay rate increase effective March 1, 2018, and an increase in the pay rate for all associates to a minimum of $11 per hour. We're excited that we're able to reward our associates for the many contributions they have made to Prosperity's success. I would like to thank our whole team once again for a job well done. Thanks, again, for your support of our company. Let me turn over our discussion 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 3 months ended December 31, 2017, was $156 million compared to $153.8 million for the 3 months ended December 31, 2016. This change was impacted by a decrease in loan discount accretion of $2.8 million. For the full year 2017, net interest income was $616.9 million compared to $632.6 million for 2016. Again, this change was impacted by a decrease in loan discount accretion of $17.1 million. I would note that going forward, we project loan discount accretion to run about $2 million to $2.5 million per quarter.

The net interest margin on a tax equivalent basis was 3.20% for the quarter ended December 31, 2017, compared to 3.26% for the same period in 2016 and 3.22% for the quarter ended September 30, 2017.

Excluding purchase accounting adjustments, the net interest margin on a tax-equivalent basis for the quarter ended December 31, 2017, was 3.12% compared to 3.12% for the same period in '16 and 3.07% for the quarter ended September 30, 2017.

Non-interest income was $29.2 million for the 3 months ended December 31, 2017, compared to $29.5 million for the same period in 2016. For the full year 2017, noninterest income was $116.6 million compared to $118.4 million for the full year 2016.

Noninterest expense for the 3 months ended December 31, 2017, was $81.1 million compared to $79.2 million for the same period in 2016. For the full year 2017, non-interest expense was $313.1 million compared to $318.4 million for 2016. The fourth quarter 2017 expense included a $3 million write-down of other real estate, which took the quarterly expenses out of our predicted range of $78 million to $80 million. And I would add that because of the positive impact from the Tax Cuts and Jobs Act for 2018, we will be reinvesting some of that savings back into the company, which will move our quarterly projected non-interest expense total to approximately $81 million per quarter.

The efficiency ratio was 43.8% for the 3 months ended December 31, 2017, compared to 43.3% for the same period last year and 41.9% for the 3 months ended September 30, 2017. For the full year of 2017, the efficiency ratio was 42.8% compared to 42.5% in 2016.

The bond portfolio metrics at 12/31/17 showed a weighted average life of 3.97 years, an effective duration of 3.63, and projected annual cash flows of approximately $1.6 billion. Finally, our effective tax rate for 2018 is projected to be approximately 21%. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Mr. Hollaway. Our nonperforming assets at quarter end December 31, 2017, totaled $37,455,000 or 37 basis points of loans and other real estate, as compared to $45,823,000 or 46 basis points at the end of the third quarter 2017. This represents an 18.26% decrease from September 30, 2017.

The December 31, 2017, nonperforming asset total was comprised of $26,268,000 in loans, $35,000 in repossessed assets, and $11,152,000 in other real estate. Of the $37,455,000 in nonperforming assets, $14,150,000 or 38% are energy credits. This is broken down between $8,861,000 production credits and $5,289,000 service company credits.

Since December 31, 2017, $522,000 in other real estate has been sold and $588,000 in loans have been removed from the nonperforming assets list. This is a total of $1,110,000 in December 31, 2017, nonperforming assets that have been removed.

Net charge-offs for the 3 months ended December 31, 2017, were $4,771,000 compared to net charge-offs of $3,871,000 for the 3 months ended September 30, 2017. $2 million was added to the allowance for credit losses during the quarter ended December 31, 2017, compared to $6,900,000 for the quarter ended September 30, 2017.

The average monthly new loan production for the quarter ended December 31, 2017, was $314 million, compared to $241 million for the quarter ended September 30, 2017, this is a 30% increase.

Loans outstanding at December 31, 2017, were $10,021,000,000 compared to $9,911,000,000 at September 30, 2017, representing 4.4% annualized growth. The December 31, 2017, loan total is made up of 40% fixed rate loans, 36% floating rate loans and 24% resetting at specific intervals, unchanged from September 30, 2017. I'll now turn it over to Charlotte Rasche.

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

(Operator Instructions) Our first question comes from Dave Rochester with Deutsche Bank.

On the expenses, I appreciated the updated guidance of $81 million there. Can you just talk about some of the things that you'll be targeting for additional investment, outside of the salary increases that you mentioned?

Yes, I mean, it will be more of a general thing. I don't think there will be anything major. It'll be, as we've mentioned before, some salaries. It will be a few things addressing some of our building needs, it will be some things revolving IT, but nothing significant. It'll just be small amounts that will add up to that, the guidance that we gave you.

Okay, great. And just switching to the NIM, you guys had some nice upside this quarter, ex-accretion and it looked like you got a little bit of help from stable cost of deposits in the runoff of some borrowings, which was good to see. Have you had to raise deposit rates much more post the rate hike, and how you're thinking about the NIM for the next quarter?

Do you want to answer the second part first?

We did raise the rates a little bit. Mike, do you remember how much we raised rates this time on CDs? I mean, it wasn't that...

We only -- we raised it on a few select CDs. A total of 5 to 10 basis points was the most we raised and we didn't do -- did very little on the NOW accounts or money market accounts.

Yes, I don't think we did much on the money market or NOW accounts, did raise CDs maybe 10 basis to 15 basis points, but some, but not a whole lot. I mean, if you really want to -- if you're really shopping for a CD rate, there's a lot of deals out there right now, that we're not there with.

And I think, in regards to the margin, if you look over the next few quarters, just with that -- the way everything is setting up, it looks good, we'll have a stable margin that may be modestly positive. Just again, if it sets up the way the balance sheet did here in the fourth quarter, and with rates going up, I think that's a very positive thing for us.

Okay, great. And where you guys see the securities reinvestment rates these days?

That's the good news today. The 10-year is finally moving and the product that we kind of bought, we're probably getting around 2.7% or a little bit better right now, today.

Got you. And how about new money yields on the loan side? Where are the loan yields coming in?

I'd say, we're trying to shoot closer to the 4.80% to 5%. Sometimes when the things become very competitive, we may drop down a little bit. But we're still shooting around 4.75% to 5%, basically.

That's right. If you're just doing average, you're at 4.80%, 4.85%, easily.

Okay. And just one last one if I could on M&A, appreciated your comments there. I was just wondering if you're feeling any better about bank valuations as you look for potential opportunities out there, just given tax reforms and the upward earnings revisions that we are seeing in the space? I think you commented that some potential opportunities for trading in line with takeout valuation, so just curious if you have updated that -- the thought at this point?

I'd say, Dave, that every deal is different. We look at some smaller deals if they are in market and -- but then again, as we look at the bigger deals, as mentioned earlier, a lot of the deals, they're trading. I think the deals that you would look at us doing probably on a larger scale, there may be some upside, especially with the new tax deal and everything, but for the most part, it's really make 2 -- taking 2 things and making one thing better. So I mean, both sides have to look at what does it do for both sides. And that's kind of the deals we're looking at right now. I mean, there is -- always on a takeout, you can't say there's not going to be some upside, but for the most part, we all know that prices are pretty high right now, and to put 2 deals together, especially on a larger scale, it has to be -- it has to make sense what improves both banks, basically.

Next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

I was wondering if you can just sort of touch upon loan growth. Obviously, last year, the hurricane kind of derailed some of the growth in the third quarter. It feels like production volumes were pretty strong in the fourth quarter. How are we thinking about loan growth in '18 relative to like the 4% to 6% outlook we had for '17 a year ago?

I think what we're looking at right now, Tim may want to jump in and give you just some kind of what we're doing and what kind of production we're doing, but we're shooting between 5% and 6% for 2018 on loan growth. And again, we had a very strong -- we had a very strong fourth quarter, some bigger loans that we approved that might not have gotten funding yet. So on the other hand, January, always the first couple of weeks, it's real cold and things slow down. So we still feel pretty good that with the economy as strong as it is, and all of our customers, I would say for the majority of them, really, I think, we see the animal spirits out there right now. So we're hoping with job increases and people having more money in their pockets that people are going to be willing to do more, and we're hoping for around 5% or 6% growth. Tim, you want to jump in?

That's exactly right. I mean, we see reason for optimism on loan growth. There is just nothing that we see out there that appears to be negative in terms of loan growth. We have some loans that we've approved that we are being told by the customers we are going to fund. You never know until it happens, but we are being told that we are, and those have yet to fund. So we feel like the pipeline is good. Our lenders are out there working hard. They are bringing business in. So we are optimistic about that.

Got it. And just to follow up on the expense guide on the $81 million, Dave. Is that $81 million, should we view that as first quarter expense sort of run rate, and from thereon that incrementally goes up as full quarter impact of the wage increase takes effect in 2Q, or is $81 million kind of where you expect it to bounce around for the -- all of 2018?

Yes, I think it's really more consistent, where it should be around $81 million for each quarter, going forward.

Got it. And any thoughts on the $3 million we reserved for the hurricane last quarter? Any chance that comes back in the next quarter or 2?

I think it's probably premature to say that. I mean, we really -- we haven't seen the losses that -- and again, we said that when we did this that in the prior hurricanes, we didn't see the losses. We're still not seeing the losses. But again, I don't know that it ever hurts to have money -- extra money in the provision for loan loss. I mean, if we [were] cautious.

The model will drive that, but I would also think, if we continue to have that significant loan growth, that model will account for some of that problem versus bringing it back.

That's a good point.

That's right, it will be absorbed. The growth will take it in.

Fair enough. And, Dave, you mentioned on M&A in terms of the larger deals both parties need to come to the table. When you think about those kind of deals, do you see opportunities in Texas, Oklahoma? Or do you think you need to think beyond your footprint when you're looking at larger-sized deals today, given what's out there in terms of possible merger partners?

Again, we've always said that Texas is our primary market and Oklahoma is our primary market. On the other hand, we're not opposed -- once you go out of state, it's not that big of a deal. So we're looking at deals in Texas, we're looking at deals in surrounding states around us also. It's not just Texas or Oklahoma. We are looking at other states as well.

All right, the next question comes from Brady Gailey with KBW.

So the 5% buyback authorization that you all announced last week, should we read that as just re-upping a previous plan that expired? Or are you guys seriously thinking about buying back stock, just given the higher capital ratios that are coming this year with the lower tax rate?

Well, it's a good question. Again, our capital is building and people ask us about that, but primarily, the reason we put the stock purchase plan in place is a couple of years ago, when everybody thought that Texas was going to fall into the Gulf of Mexico with oil prices going down, we weren't ready, and it took us a while to get ready. So that -- we're still just getting ready that if something ever happened, that we have it all in place and we can move real quickly. Last time, it took us a while. By the time we started buying, we missed out on a lot of opportunity because our stock price went down. But our goal, and our objective and our mission has always been the same, we really don't want to -- we want to use our money and our excess capital to grow the bank and to buy other banks. That's kind of what we're still looking for.

Okay. And then I know you all talked about it, but funding cost, really. The increase in 2017 was fairly low, only up about 10 basis points. Do you think you will see more pressure to increase funding cost as we continue to progress in 2018?

I think the more interest rates that you have -- I've never seen the betas that we're using right now. I mean, with the interest rates that have gone up as much as they have, and us only going maybe 10 basis points on money market and some stuff like that, it's kind of a little unusual. I think as interest rates go up and if there are 4 increases this year, you'll see a higher beta for the deposits. You'll have to go up on some of that stuff. But again, I think, a lot of that's going to be -- we're kind of excited when we see our re-investments of loans and bonds, we're getting a much better rate than what's on the books right now. So all in all, I think that looks pretty good. But to answer your question, yes, I think it'll increase faster as more interest rates come on board.

Our next question comes from Ken Zerbe with Morgan Stanley.

Just in terms of the purchase accounting accretion, if I heard right, it's about $2 million, $2.5 million this quarter. Last quarter, the guidance was closer to $4 million. Can you tell us what that difference was? What drove that sort of persistent downward accretion?

Yes, I think, Ken, it's just the nature of the beast, right? I mean this is all -- this is a set amount that is loans, cash flow and payoff. This comes back to us in terms of accretion. And it's -- we've gotten to a point now where the remaining balance is just not that material. And so the income that you get back is tracking cash flow. And I'm assuming we haven't looked at the loan level, but these loans probably have longer maturities, and it's just beginning to slow down dramatically for us, to think that we can run $4 million a quarter going forward, I think, would be overly optimistic. There's only about $20 million of the actual discount accretion, the AS-20 on the book. If you're running at $5 million, it would be gone pretty quickly. But it has slowed down, just based on cash flow. That's the mathematics.

And Ken, we've always said that accretion accounting is [build] on the accounting to begin with. I mean, it's not really core, it's not core, it's not core earnings and really, I think, when you're looking at a bank, if they are growing earnings organically, you have to take those numbers out sometimes. And I think we've done a pretty good job growing our bank organically, when you exclude those -- the accretion numbers, in my opinion. Even if we bought another bank and we will 1 day, we are very pretty well committed that we're breaking out when we report on the income statement what's accretion and what's core income. Because I think there are 2 -- to make long-term decisions based on accretion income, in my opinion, is not very prudent and for people to buy base -- a stock on accretion numbers is just not prudent in my opinion.

Got it, okay. And then last question, just in terms of technology. I mean, I'll admit, I don't spend a lot of time in Texas, so I don't know your -- like your bank's technology from a consumer aspect, certainly not from business aspect. You did mention you are going to spend a little more on IT as part of the $81 million expense run rate. But how do you more broadly feel about your -- where you stand from a tech, mobile, online platform? And does that system or that user interface need to be improved in any meaningful way?

I need to set you down with our Head of IT geeks because it's a fight every day. We spend probably more money on technology than anything else right now, sometimes it's $500,000 to $600,000 a month. But to answer your question is, yes, we feel technology is everything in banking in today's world. You are seeing more and more stuff especially, younger people, millennials, leaning more toward technology. So you have to keep up with it. We've entered into some new contracts that provide us even greater technology with regard to the debit cards to alerts to getting alerts even when you're buying something, and so -- and we're really staying on top of it. And I mean, Dave, you want to...

It's absolutely right, we have to stay on the cutting edge of technology, and those -- we've made some of those investment decisions a year ago that are already in play. And we've started making sure that we come up to speed on all the mobile applications, the peer-to-peer payments when you want to pay somebody some money, as you see on the advertising on TV, all of that or things that as David said we entered into new agreements and have begun to already make those investments, but that's been 12 months ago. So we'll continue to make those investments, as we're going forward.

I think, going forward, it's one of the most important things any bank can do. I mean, banks, as you build new banks going forward. People still want a banking center. I mean, it's kind of like the Apple stores. When something really goes wrong, they want to be able to walk into it. But more and more people are doing more and more online all the time.

Got it, okay. That sounds like there's no big expense spend or technology spend on the way, it's just something you're constantly doing. Okay.

We're currently doing it. It's one of our biggest expenses always.

Our next question comes from Brad Milsaps with Sandler O'Neill.

This is actually Peter Ruiz, on for Brad. Most of my questions have already been answered. Just maybe if you guys can give a little bit of color around the 2 C&I credits that they were charged off this quarter. And anything systemic there? Or just what were the moving parts?

It was just oil and gas related that a company has finally sold some assets, and they were probably valued less than they were when the loan was originally made. It was an acquired, a couple of acquired loans. So it's just cleanup of an acquisition.

Yes, I think, all of our stuff is not new stuff. I mean, the -- we made an acquisition, and again, the acquisition had a lot of oil and gas stuff. And again, we've been nursing it for a long time, and I think finally, some of the stuff is just coming to a close basically. And then, of course, we had the ORE charge too, of a -- it was another participation at one of the banks we bought had with another bank, and it got reappraised and we wrote that down too. So I think it's just -- I think it's really just some cleanup, and that's most that I can say about it, really.

Appreciate that. And maybe just back to M&A, asking kind of a different way. Have seller expectations changed in any way over the last 6 months as multiples have expanded? Both on the private and the public, have seller expectations changed at all?

Yes, they want more. It's really hard right now, because a year ago or longer back, there was a real -- bank stocks were suffering, and so there was a ton of regulatory burden that was put on banks, and so all of those dynamics were working in there. Today, with the regulatory environment, the new administration, it looks like we really have a friendly business partner. So I think most bankers are feeling better where they're at, most of them, their stock prices are -- they're very high. Probably if a bank is not publicly traded, you might be able to do a little bit better, but the stock prices are -- it's just higher right now. You're going to pay if you're buying a bank right now, you're going to be on the high side right now.

The next question comes from Peter Winter with Wedbush Securities.

I wanted to just follow up on the core margin outlook where you said it was stable to slightly up, and I'm just thinking, with the outlook for better loan growth and better yields on securities reinvestment, why wouldn't it be stronger, going forward?

Well, Peter, this is Dave Holloway. I think it will be, but again, remember our balance sheet. To take full advantage of this, it just takes us a little while to get all that cash flow to reinvest back in at these higher rates, so it's just mathematics, right? I mean, if the cash flow coming off the security -- if we're putting it back in the securities portfolio, you're getting a $1.5 billion cash flow coming back that you'll reinvest, this doesn't change overnight, it takes it a little while to get there. And the same thing with the loans. I mean, I think the average life of the loan portfolio, somebody correct me if I'm wrong, but that's 3 years, 3.5 years. So the cash flow coming off of that is also significant. So all positive dynamics, but it's just not like having a loan -- if your 100% went up, everything is based on prime, it all reprices in the next day, or it just takes some time. But that's been our story.

Yes. I mean, we've always used the analogy, Peter, that it's like trying to turn a Queen Mary around out in the parking lot. It just doesn't happen overnight, it takes us a period of time. If, again, if more of the loans were just floating constantly, then it would -- our -- looking forward, 18 months, 2 years down the road, it looks extremely positive for us. And I think that it just takes us longer to get there.

Okay. If I could just ask a follow-up question. The -- could you just give us some guidance in terms of the outlook on fee income in '18?

I guess, I could take a shot at that. I don't know that we would see anything significant. We've been running, off the top of my head, I think, we're running about $29 million a quarter. I think that will increase a little bit. I don't know if it would be significant. We're making some major investments in terms of fee income. If you're looking at the detail numbers, you'll see that our trust area income has increased nicely. And you can see that we're beginning to turn the corner on our other lines of business being what we call brokerage, and I guess, we're still calling it home loans and our mortgage area. We've had to make some changes in terms of -- because of the regulatory expectations, but now that we have come over that hurdle, those will probably tend to go up. But I do not want to predict anything significant, I mean, David, do you want to make a call on that?

Maybe Eddie does since he's in charge of that.

I think what David said is accurate. We've had some major [rebranding] of our platforms to be more efficient and that took away from some of the production that we've historically had, but we're regearing and hoping to see that to stabilize or even increase into the latter part of the year.

We're really gone to more of a platform that's more centralized for everybody that's all on one platform and more automated. So hopefully, we'll see some good stuff from that.

And we continue to evaluate our service charges and hopefully, we will hold our own in that area too.

Next question comes from Brett Rabatin with Piper Jaffray.

Wanted to ask, just looking at the deposits, you talked about how the fourth quarter is usually a little stronger, and it definitely was this quarter, maybe more so than usual. Can you give us any color on what you're expecting for deposits in 1Q and the interest-bearing DDA that you grew in 4Q, if that was mostly concentrated in municipal deposits or may be a little more color around the growth in the fourth quarter?

Whether there's really not -- there is -- in noninterest deposits, there's no municipal deposits in that. So basically that came from probably a couple of things in our loan portfolio growing, new customers, and we think, and again, we don't have a hard number on this, but some of the insurance money that came in from Hurricane Harvey, we said our deposits would increase and, Dave, you want to take a shot at it? Is it $100 million? We just don't know on that.

Yes. Just trying to estimate it, I think David's right, it could be in that $100 million range, where it's related to the hurricane and what they're doing and then, some of it's going to be related to the municipalities. Not the non-interest-bearing, but just overall, if you're looking that way, and then part of it's just your general business, the relationships that we've brought to the table.

And I think, with the municipalities, generally, that does run off over a period of time, usually have a better handle on it. This year, we lost a lot of municipal money throughout the year because we just didn't pay the rates -- that some of the investments rates they could get at other places, and so, a lot of that money. Normally, we try on the municipalities, really just have their day-to-day operating accounts that they use their money for checking and paying employees and stuff like that. But because rates were so low for such a long period of time, they started building up. It didn't really make a difference if they did put it here or some investment firm, and they left all their money here. But again, as rates went up this year, a lot of that money left and went to other places. So again, how much -- again, all I could probably say is that January -- well, the fourth quarter and the first quarter are always good. The -- probably, starting in third quarter and the summer, they're starting to use up most of their operating funds and they rebuild, I mean, it's just something we have.

Yes, I would -- picture this a little bit. Again, when you -- when we get to the end of the year, every year when you look at us, we'll have grown 4% to 5%, this year, we're a little light at 3%. But I think David is exactly right. These funds will -- most of these funds will hold in the bank through the -- basically, through the end of the first quarter. And I'll also throw this idea out at you. Part of what we saw in these numbers had to be due to the new tax rules. I think a lot of people ran in and were paying their taxes by December 31, where they usually might have waited until January in our role. So I think that had some impact. But I think these deposits will hold, at least through the first quarter.

Yes. I mean, there are deposits today or actually over yesterday, when I looked were higher yesterday than they were at year-end. So -- but again, that will, some of that will flow back out. But as David says, if you're looking at it on a year-to-year basis, we generally always grow 3%, 4% a year in deposits.

And...

Go ahead.

I was just going to say that's great color but go ahead, I'm sorry.

Well, I was just going to say, we probably should emphasize something that David said. As we work with our loan officers on improving our loan production, we always try to do that with a view to a relationship, and bringing deposits in with those loans is something that we really focus on and concentrate on, and we have seen pretty good traction build up on that. So I'm optimistic that as our loan officers bring additional loan business in the deposit business will come in with that. That's what we've been seeing.

Okay. And then kind of as it relates to that, I know you're being pretty conservative on your funding costs, you're pretty core funded, having increased your deposit rates that much. But with a little better investment yield and the securities book potential, if M&A doesn't play out, would you be more aggressive with deposits to fund some more securities purchases, to potentially deploy some extra capital? Any thoughts on the capital deployment aside from obviously, loan growth and M&A?

Again, I would probably emphasize that we'll probably never change our model. I think that, again, I don't know that we're really buying the stock with the stock purchase. But you probably will see, probably increased dividends to our shareholders at some point in time. But again, we still want to use our excess capital to grow the bank organically and do M&A, that's still our goal, but probably -- again our capital is building a pretty good, so you'll probably see a little bit better. Again, everything, nothing changes, you'll probably see some increases in shareholder dividends as well.

Next question comes from Geoffrey Elliott with Autonomous Research.

On the 5% to 6% loan growth that you're targeting, can you give us a bit more color around that? Where would you be hoping comes in over the 5% to 6%, what might come in under, just a bit more granularity on what's going to drive the loan growth?

I wish I could give you more granularity, but the bottom line is, it's in all areas. I think that the economy is humming probably in all areas. You'll see us probably picking up a little bit more oil and gas lending probably because the price is up a little bit. And some of our good customers that were really going backwards, now are starting to do some deals. So we're looking at that. I think you'll see more. We are focused on trying to build C&I, commercial real estate in the Houston market with regard to multifamily is not something, it's still a little overbuilt, so you may see more CRE in the Dallas market maybe, but again, we have to be careful there or in Austin markets. But all in all, I think that we are in all areas, in ag lending, energy lending, C&Is, commercial real estate and retail real estate, it's just, it's everywhere. I think that all of our customers are doing really good right now.

(Operator Instructions) Our next question comes from Bryce Rowe with Baird.

Just a real quick one on the securities portfolio. With the recent run-up in the 10-year yield and in rates on the opportunities you were seeing in the securities portfolio, have you pre-bought any securities like you have maybe in the past?

Now, when rates are going up, it's probably not something you want to pre-buy. So again, if we think rates are going up, we're probably not pre-buying right now. But as we need product, we are buying. We still think rates are going to continue to rise. So as we're needing it. I don't know that we're changing our model or anything like that as it rolls off and we can't put it into the loan side. We are buying the bonds as we need them.

So it's your outlook, David, is that the rates are more likely to go -- to continue to go up than to stay here and grow lower?

The fattest work estimate, there will be at least 3 rate increases during this year. Some people now are saying that if the economy continues to hum even more than before -- for -- the thing that's really kind of a little bit unusual, as the interest rates went up last year, say 100 basis points or not, your short-term rates went up, but your 10-year didn't go up. And so, my gut feeling is, you're seeing more of a 10-year rate increase probably now moving faster, and I think it may move faster and catch up a little bit because it didn't do it, I didn't do it last year. So that's just our gut feel that probably you might see more movement than you did last year because it just didn't move. I mean, again, short-term interest rates went up 3x or 4x. And your 10-year, until a few months ago, was probably the same as it was a year before or lower. So you might see more of an increase in that area I think. This is just me, and there's nothing else. You may see a bigger increase there going forward, probably to catch up.

Our next question comes from Jennifer Demba with SunTrust.

Just curious, David, conceptually do you think you'll see a point where you may be rationalizing a few or your branches over time as online and digital use continues to grow for banking customers? How do you look at that in the context of no M&A, but just on its own?

Well, first of all, I don't want to say no M&A, I know everybody is always disappointed. But again, we still have to point out that we've done 40 deals or so throughout, through building the company. We've probably done more M&A than probably all the other banks combined in the state of Texas. So I don't want to get that, that there won't be M&A. We're still working on that, but having said that, we look at our banking centers all the time. And if we feel that we can consolidate those or they are not growing or they're not making enough money. So we look at that all the time. I don't know -- Mike, how many this year did we actually consolidate, do you think? 2 or 3?

Yes, maybe more than that. 4 -- total of 4 and 2 are in process now.

So we -- Mike, that's Mike Epps and again, we did 4 that those closed last year, and consolidating 2 this year. So I think you'll continue to see that. I think as we do a bigger transaction you'll even see more consolidation, for the most part. But banking centers are changing. I think you're going to see banking centers that are going to still be important as I mentioned earlier. I think they will be smaller, but I think they will still be an important part of a bank, because we need -- still when you do the surveys today and you ask somebody why they bank somewhere, the #1 reason is not technology, it's #4 or 5, it's how close their banking center is to them. So they still play a very important role, but the long and the short of it, the answer is, we constantly look at it. We did 4 last year, and we're looking at 2 right now.

The next question comes from Jon Arfstrom with RBC Capital Markets.

Just one follow-up for Tim. The average monthly production number being up 30% over the prior quarters, that's just -- would you just say it was depressed last quarter? Is there anything that you could point to? It's just such a big increase.

It is. It was a good increase. Jon, not really anything that I would call specific. The prior quarter was light, as you said, some of that was hurricane related. Some of it was related to we don't know what. All I can say is, our loan officer pool is optimistic. We're getting a chance to look at a lot of loan business. We are approving a fair amount of that. We are booking a fair amount of that. So I mean, the machine seems to be working well and headed in the right direction. As David has said, at least once in this call, the economy or economies where we operate are decent right now, and we see it across-the-board. We are even looking at some increased energy lending on a careful basis. So I just think it's coming from every direction, and I don't see any reason why it's going to fall off. There are always surprises in life, but I think it's across-the-board.

And it's been consistent in 2018 thus far?

It has been, yes. Of course, we're barely into '18. The toe is just barely in the water. But yes, it has been.

Okay. And then, you mentioned energy lending a bit. I'm just curious, we asked a lot of these questions 2 years ago, but the flip side would be, some of the areas that you acquired in the West Texas, and some of the energy-heavy regions of Oklahoma. Talk a little bit about what's happening in those regions right now.

Well, things are a lot better, that goes without saying. When I say that we're looking at increased opportunities, we're not out there necessarily calling on new people to do business. But the existing customers that have been in the business for a long time, that have proven records, through good times and bad times, we are starting to see a few more opportunities through those kinds of customers. The Permian Basin is really strong right now, in terms of its production, it has set a new record this last year in terms of barrels of oil produced. So things are just looking up pretty well in that area. As you know, most of our energy lending has come through acquisitions. So if you look at our energy lending on a historical basis, we have not been a strong energy lender. We've primarily gotten into it through our acquisitions. And yes, there were some problems, but we knew those were problem loans when we brought them in. So the portfolio has cleaned itself up a bit, and I don't think we're going to see huge increases in energy lending, but I do think it's positive and I think we're going to see some increases. I hope that answers your question.

At this time, this will conclude our question-and-answer session. I would now like to turn the conference back over to Charlotte Rasche for any closing remarks.

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

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