Prosperity Bancshares Inc (PB) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Prosperity Bancshares First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares First 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. 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; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President; and Bob Dowdell, Executive Vice President. David Zalman will lead off the call 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, Austin.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the Federal Securities laws, and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone listening to our first quarter 2018 conference call. For the first quarter of 2018, we showed impressive returns on average tangible common equity of 15.4% annualized on an average and on average assets of 1.32%. Our quarterly earnings were $74,361,000 in the first quarter of 2018 compared to $68,565,000 for the same period in 2017, an increase of $5,796,000 or 8.5%. Our diluted earnings per share were $1.07 for the first quarter of 2018 compared to $0.99 for the same period in 2017, an increase of 8.1%. Despite the increase, earnings should have been better. Net charge-offs for the quarter of approximately $9,441,000 were an anomaly, with approximately 2/3 of this amount representing a loss of $0.07 per share, attributable to previously identified problem credits inherited from our last acquisition in Oklahoma. With respect to the largest charge-off of a $4.6 million energy credit, we elected to accept a greatly discounted offer to sell the asset and reduce our nonperforming assets by $7.6 million rather than continue to carry the problem loan for an unpredictable future period.

Loans at March 31, 2018 were $10,011,000,000, an increase of $272 million or 2.8% compared with $9,739,000,000 at March 31, 2017, and essentially flat compared with the fourth quarter of 2017. We experienced a large number -- a number of large pay downs in the quarter that impacted our overall growth. However, the good news is that the loan production was strong, and as Tim will discuss in a few minutes. And given the expected [bunning] of these new loans, we believe that we will achieve the 2018 organic loan growth guidance we gave earlier this year.

We remain excited about 2018. Although we had large pay downs due to our customers' cellular projects, converting completed projects to long-term financing or using cash reserves to pay down debt because of a more economic certainty, we believe that this increased certainty should result in businesses and individuals taking calculated risk and any loan funding to do so.

Our nonperforming assets totaled $33.2 million or 17 basis points of quarterly average earning assets as of March 31, 2018, and as compared with $41,199,000 or 21 basis points of quarterly average interest-earning assets at March 31, 2017. That represents a 19.4% decrease. And $37 million or 19 basis points of quarterly average interest-earning assets at December 31, 2017, an 11.3% decrease quarter-over-quarter. Our deposits at March 31, 2018 were $17,333,000,000, an increase of $297 million or 1.7% compared with the $17,036,000,000 at March 31, 2017. Our linked-quarter deposits decreased $488 million or 2.7% from $17,821,000,000 at December 31, 2017. This change was primarily due to seasonality. In the fourth quarter of 2017, consistent with historical trends, our deposits increased significantly, by $914 million. Typically, our deposits then decrease during the first and second quarters of the year. Historically, over the last 20 years, we have averaged an approximate 4% annual increase in organic deposits. More significantly, we continue to experience growth in our noninterest-bearing deposits, which increased 6% annualized in the first quarter of 2018.

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

On to the economy. The Texas and Oklahoma economies continue to grow, helped by diversity of business, low or no state income tax, a business-friendly climate and a strong tailwind from an improving energy industry. The Dallas Fed Reserve bank is projecting 3.4% job growth for Texas in 2018 or 418,000 new jobs. Houston is also making a comeback, with 4.7% annualized job growth through February 2018, and expected 160,000 new jobs during 2018. Home inventory in Texas is at approximately 3.6 months and auto sales are strong. The energy survey suggests an oil price of $63 a barrel for 2018. The breakeven cost for oil is $52 a barrel overall and $47 per barrel in the Permian. There's more price pressure for oil field services. Further, many experts close to negotiations believe that the United States is nearing a new NAFTA agreement with Mexico and Canada.

The outlook for Oklahoma for 2018 is also positive. There's growth in most major revenue sources and unemployment remains low. Oklahoma's unemployment rate in February 2018 was 4.1% and remains unchanged since September 2017. And employment growth has added jobs across most industries, with the strongest gains in the mining and other service sectors. Home prices increased 5.6% in the fourth quarter of 2017 compared to a year ago, and rig counts are well above their levels from a year ago. Since the beginning of 2018, Oklahoma's economy has experienced momentum with the announcement of several relocation and expansion projects. These projects play an important role in further diversifying Oklahoma's economy.

Overall, excluding an anomaly in net charge-offs for the quarter, our outlook for 2018 is positive. Business fundamentals remain strong, which should benefit our customers. 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 Holloway, our Chief Financial Officer, to discuss some of the specific financial results we achieved.

Thank you, David. Net interest income before provision for credit losses for the 3 months ended March 31, 2018 was $153.2 million compared to $152.4 million for the 3 months ended March 31, 2017. This change was impacted by a decrease in loan discount accretion of $2.4 million, and looking forward, we're projecting loan discount accretion to run about $2 million per quarter. The net interest margin on a tax equivalent basis was 3.16% for the quarter ended March 31, 2018, compared to 3.20% for the same period in 2017, and again, 3.2% for the quarter ended December 31, 2017. Excluding the purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended March 31, 2018 was 3.12%, compared to 3.11% for the same period in 2017 and 3.12% for the quarter ended December 31, 2017. Noninterest income was $27.9 million for the 3 months ended March 31, 2018, compared to $30.8 million for the same period in 2017, and noninterest expense for the 3 months ended March 31, 2018, was $80.1 million compared to $78.1 million for the same period in 2017.

The efficiency ratio was 44.2% for the 3 months ended March 31, 2018, compared to 43% for the same period last year and 43.8% for the 3 months ended December 31, 2017. The bond portfolio metrics at quarter end showed a weighted average life of 4.08 years, an effective duration of 3.63 and projected annual cash flows of approximately $1.8 billion. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave. Nonperforming assets at quarter end March 31, 2018 totaled $33,217,000 or 33 basis points of loans and other real estate, compared to $37,455,000 or 37 basis points at December 31, 2017. This is an 11.3% decrease from December 31, 2017. The March 31, 2018 nonperforming assets total was made up of $22,679,000 in loans, $0 in repossessed assets and $10,538,000 in other real estate. Of the $33,217,000 in nonperforming assets, $13,345,000 or 40% are energy credits. This is broken down between $3 million production credits and $10,345,000 service company credits.

Since March 31, 2018, $4,291,000 or 12.92% in nonperforming assets had been removed from the nonperforming asset list or are under contract for sale. Net charge-offs for the 3 months ended March 31, 2018 were $9,441,000, compared to net charge-offs of $4,771,000 for the 3 months ended December 31, 2017. $9 million was added to the allowance for credit losses during the quarter ended March 31, 2018, compared to $2 million for the quarter ended December 31, 2017.

The average monthly new loan production for the quarter ended March 31, 2018 was $329 million, compared to $314 million for the quarter ended December 31, 2017. This is a 4.8% increase from the last quarter and the largest monthly average in our bank's history. Loans outstanding at March 31, 2018 were $10,011,000,000, compared to $10,021,000,000 at December 31, 2017. The March 31, 2018 loan total is made up of 40% fixed rate loans, 36% floating rate and 24% variable rate. This is unchanged from December 31, 2017. I'll now turn it back over to Charlotte.

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

(Operator Instructions) And our first question will come from Dave Rochester with Deutsche Bank.

So it looks like expenses beat your expectation again this quarter. Now that's a common theme here. How should we expect these to trend going forward?

Well, Dave, again, I think, what we said the last time, we think we're going to run in that $81 million range. So I think that's where we want to stay. Even though we beat it this quarter, I still want to project that going forward.

Okay. And then just switching to the NIM, can you just talk about how you're thinking about that trend from here, excluding accretion? Do you think we'll see more upside, just with the March hike?

Dave, this is David Zalman, I'll take that question. As I mentioned before, our NIM is probably different than maybe a lot of banks that have a 90%, 85%, 90% loan-to-deposit ratio. With having a $9 billion loan portfolio and a 3.6-year duration, it takes us longer. I always referred to it as trying to turn the Queen Mary around out in the parking lot. But our NIM will increase. Will look better in 6 months, will look better in 12 months, will look really good in 24 months, and look fantastic in 36 months. So it's a longer deal. It's a longer deal but that's just when we model, that's just what it looks like for us. So, I mean, it does go, it just doesn't change as quickly as a bank that maybe has a lot more floating rate loan to deposits.

Sure, got it. And I appreciate that. And I just notice the securities yield was up, ex-securities premium and expense this quarter. Was just wondering where reinvestment rates were for the quarter and then where that compares to rates you're seeing today?

They are going up. I mean -- and I don't have it this morning, but again, the 10-year this morning was over 3% and probably what we invest in. I would say they were probably getting 3.20, 3.30 maybe this morning even.

So that will be a source of support for the NIM trend, I would think, going forward as it was this past quarter, right?

You can do bohemian math and just say you've got $9 billion and you're -- what are we at now, 2 point something -- 2.2. Anybody can do the math on that, on $9 billion, 1%. It looks pretty good.

Yes. I guess, just switching to deposit growth, you talked about that 4%, I guess, historically. How are you thinking about that for this year, just given the competitive pressures and the higher-rate environment?

Well, again, that trend was over 20 years average. And again, if you look at our last 2 years, we were in, I think, it was less when the oil industry went into a downturn. We didn't hit quite the 4% and I think even this last year, we only hit 1.7%, is that what we -- our increase was overall? I -- if the economy is good, I think that we should still be on course for that. I think, I mean, if the economy -- the fundamentals and the basics are out there, it should be good. Now again, we're not out there. Our rates are probably not the same as some of the others that are really needing the money. So we're not as aggressive. But overall, if the business -- if business continues to grow, our bank will do fine. I mean, we're in such a growth area with Texas and Oklahoma that there's so much action and so much activity. We should be the benefactors of that with so many -- I mean, 418,000 new jobs in Texas alone this year. That doesn't even count the number of people that are moving in. All of those will do well -- will be well for a good tailwind in back of us, I think. The long-term look will be very good.

Our next question is from Brady Gailey with KBW.

So when you talk about loan growth coming at a higher pace for the rest of the year, is that a function of production going up or is it more payoffs slowing down?

I'll get Tim to jump in on this a minute, but this is David again. I think, as Tim mentioned, our production has been more than we've ever had before. On the other hand, we've had more payoffs this year or this quarter than we ever had. I mean, just to give you some color, we developed a project in downtown Houston on a condo project. It was over $30 million. It sold. Everything sold out. We had a multifamily project in the Midland/Odessa area. And it went to secondary market. It was over $30 million. We had a church loan that paid in Dallas over $30 million and the people stacked $20 million in their accounts. So just a whole lot of pay downs. But our production looks extremely good. A lot of loans that we've approved so far should be drawing up. I think that will help and I think that as we get into the growing season also with agricultural products that will help in the next quarter or 2. Tim, you want to jump in?

I agree with everything that David just said. I think the focus really ought to be on production. Payoffs are what they are and pay downs are what they are. They come and they go. Obviously, you want scheduled pay downs to take place. The production pipeline looks good, as David went over in his opening remarks. Things look good across the board in Texas and Oklahoma also. I mean, everything we see is positive right now, and the loan pipeline looks good. You have to realize that when we announce loan production, what we're announcing is loans that have been documented and booked, not necessarily funded. You've got lines of credit, you've got construction loans, you've got agricultural loans. You've got certain energy loans. None of which typically fund up day 1. So we've got a lot of funding to take place ahead of us based on the production that we just had, and things look pretty doggone good right now.

And then David, on the bond book, we mentioned that the 10-year's back over 3% now. Are there any changes with the way that you're managing the bond book? Like at this level, do you think about extending duration? Or with tax reform, is there any mix and what's your buying like muni versus non-muni? Or is there any change in the way that you're managing the bond book, given the changes today?

No. I can go in elaborate detail, but we -- the bond book is, the way we operate the bond portfolio, we've operated for 25 or 30 years, and it's always done -- it always -- and again, we never tried to call rates one way or another. All we're really doing is, that's a place that we have the money that, until we can put it in loans, that we keep it and we try to keep that 3-point-something year duration. So we really haven't changed anything. We're still -- again, I don't want to throw numbers exactly out there, but probably 90% of the book is always agencies, and we're not looking at risk or anything like that, basically. It's just an average duration. I am not trying to call rates.

All right, that's helpful. And then finally for me, just an update on M&A. We've seen 3 other banks in Houston sold fairly recently. I feel like the last couple of times we've asked you on the call about it, you've said hey, banks are selling at pretty hefty prices. So we're going to be cautious. Is that still the way that you're thinking about the M&A today?

Yes. I mean, I don't think anything's changed in the way that we look at M&A. There's, again, we're still talking to a number of people. Probably, at any given time, we're talking to at least 2 or 3 groups at any given time. Banks are expensive. We have an idea of the kind of banks that we like. We discussed that before, the kind of banks that we do like. It doesn't necessary mean that we won't change from that at some point in time, but we can go that to more detail. But I think there will be deals. Prices, prices are still pretty hefty out there. So it's -- if you're buying, I think, again, if you're buying a bank that's publicly traded, there's probably not a lot of premium in a bank is probably publicly traded. And then probably a bank that's not publicly traded, that's privately held, they'll see more of an increase than a bank that's publicly traded. So I mean -- but it is what it is.

Your next question comes from Jennifer Demba with SunTrust.

David, unusual for us to see kind of a negative surprise on credit from you guys. Just wanted to get some details on those charge-offs you took this quarter from the Oklahoma deal and just see how you feel about the marks on what's remaining in your energy portfolio or on loans acquired in that deal?

I'll going to let Randy answer that in just a minute, Jennifer, but again, I agree, it is disappointing. Normally, we always -- if anything, there's -- even so, we try to do better than that, but again, I think that when we bought the Oklahoma deal, probably the market was different at the same time, and the underwriting was quite different than the way we underwrite today. But nevertheless, there's no reason to hide it, we are disappointed about it too at the same time. So Randy, you want to jump into it?

Yes, Jennifer, this is Randy Hester. We had a few loans still on the book that we were carrying from the F&M transaction, and we decided that we wanted to get out of them. And the market, it rebounded a little bit, but it wasn't enough to cover what we needed to get. But we needed to get out of the credits. We carried them long enough, and we decided to go ahead and take our loss and reinvest that -- some of that money back into real loans.

I think that we were getting, probably over the last year or so, we had letters of intent on some of these loans and it just seems like they never did transpire. So we just said, once you hold something too long, it's better just to say it's a loss and let's just go.

Yes, I agree.

Our next question comes from Geoffrey Elliott with Autonomous Research.

I wondered if you could give a little bit more granularity on the deposit repricing, and specifically, looking at the interest-bearing demand category, the 12 basis point increase there. Is that a kind of broad 12 basis point increase, or are there some subsegments within that, that have moved more and some that have moved less or not at all?

I cannot try to attempt that. I don't know how much more color I can give you. But when you look at our deposit base, again, we have very few certificates of deposits. Dave, was it 13% or less?

13.5%.

So most of our accounts are, we have over 30-something percent noninterest bearing and probably another 30% demand accounts that may be drawing 10 and 15 basis points. And then you have a higher yield money market account, but again, the rates that we're at compared to our -- that some of the people that are really paying out there right now, that really need -- that are at 90% loan-to-deposit ratio, I think, their cost has gone up more. Just to give you an example, after the last 3 or 4 interest rate increases that went up, say 100 basis points, might not have gone up 20 basis points on our certificates of deposits and maybe 10 basis points or 20 on the money market and probably 5 basis points on the demand checking. Having said that, as interest rates go up, and they are going up, I think that as for every hundred basis points, at least what we are modeling and some of the numbers that I quoted a while ago, what we model is that if -- every hundred basis points we -- in our model shows about an 80 basis points increase in the CD rates and 80 basis in the higher yield money market accounts. The other betas on the other accounts are a lot less. And again, historically, we've not gone up the 80 basis, but again, I think it's prudent to model that. But even modeling that, as I mentioned earlier, our numbers look good in a year, they look very good in 2 years and great in 3. So all of those are in our models, really. I don't know if that's helpful or not, a lot of color. Dave, do you want to add anything?

No, I would just say, obviously, the big discussion's about betas and deposits. And you're right, it went up, in the linked quarter, 4 basis points just for the deposits themselves. But I don't know 1 quarter can really illustrate what's going on. I'd rather look at it from year-over-year over the 12-month period. That same number probably changed about 10 basis points for the cost of funds. And if you wanted to isolate the interest-bearing aspect of it, which are CDs, money markets, et cetera, that went up year-over-year by about 16 basis points. So pretty well contained over this last year. I don't want to infer we can -- it's going to be exactly that when we get a year from now, but I guess what that would illustrate is we are managing the pressure with those last 12 months hasn't been quite there. I think you probably heard that from other banks, but as we continue to go forward, we'll probably see a little bit more pressure. But that'll kind of dovetail into what David was just saying earlier.

And again, the good news is, the reinvestment for our $1.8 billion that rolls off every year, instead of getting the $2.2 billion you're probably reinvesting at 3.30 if you're not on the loan side getting 5% plus. So those are all positive.

Understood. I guess, the specific question was on the interest-bearing demand category given that the average cost was 35 bps in 4Q and 47 bps in 1Q. It looked like a pretty big acceleration and it was in a category that, I guess, your comments were suggesting normally, less-rate sensitive in savings or money market or CD. So just curious if there was anything you could add there on why that 12 basis points step-up in 1Q?

Yes, I mean, that's absolutely spot on. And one of the things that impacts that and what we saw over the last few months, remember that we are a bank -- I think David had mentioned it earlier, remember we are a bank that has a lot of public fund entities and they bring in all their money at quarter end. And so as that money has sat in the bank over the last quarter, that does tend to be a little bit more interest sensitive. It's more -- I would call it more like a money market type account even though they keep it in the interest-bearing, and that's what you're seeing the impact in terms of the rate.

As we move forward, those funds start to move out of the bank because they spend that money. That will mitigate itself. That's just a thing that happens as we come in from end of the year to the beginning of the new year.

Yes, we have $900 million and we had 1 quarter increase in deposits at year-end, and probably $400 million of that was probably in the public fund category.

It's probably public funding entity, so that's...

And that's probably gone now.

So that's what's causing that little blip that you see.

Our next question comes from Peter Winter with Wedbush Securities.

I was curious with the loans. You guys always have a long history of being very conservative with the underwriting. Is there any thought of maybe loosening some of the underwriting standards a little, as a way to add to the growth?

Yes, that's a great question after charging off $9 million, Peter.

But was an acquired bank, not you guys.

No, I think it's a good question, Peter. We thought about it ourselves, and I'm pushing hard on this and Randy is pushing me back on the other end. But I think we're probably going to end up somewhere in the middle, I think. I think that to grow the portfolio, we are trying to be -- again, I don't think you're ever going to see us change the model of our bank, but there's some things that we can change to be more flexible where -- and for an example, if somebody -- we're competing against somebody that's where we want a 20-year amortization and they want a 25-year amortization, that we can go on that. Or instead of us requiring on a commercial project 35% down, maybe we could go 30%. There are some things I think that we can do to mitigate some of the terms and conditions. Randy or Tim, you want to jump in?

Yes, I think it's safe to say that every week when we meet for loan committee, we have this discussion. And we are trying to selectively look at things that we can maybe tweak a bit or change a bit that would still keep us safe and sound, but at the same time, allow us to make some loans that maybe historically, we have not been able to make. And that's not necessarily an easy thing to do but it is possible. So we're very much focused on it, and I think we have made some changes that we can all feel good about that will make a difference going forward. And it's a continual process. We look at it, as I say, literally weekly. So it's underway.

This is Randy, Peter. We have been fortunate that we've moved away from the rule book a step or two, occasionally. But because we are a relationship bank and we have only done it for good customers that we've had good relationships with, we've been successful and not had any losses because of it. And we've done a little more of that and that should help us in the future.

And having said all of this, I'm going to come completely around circle here and say, even though our loan-to-deposit ratio is not 90% or 85%, you can look -- you can compare our return on assets and return on tangible capital to anybody, and we've not taken the risk and still had returns as good or better than most people. So I'll just leave that out there at the same time. But they could be better, I agree with that.

Your next question is from Brett Rabatin with Piper Jaffray.

I wanted to ask I guess just on the discount accretion, a little lower number this quarter. Can you give us an update on what's remaining on that, and then just maybe just a pace of that in the next few quarters?

Yes, I mean, overall, it's $29 million, but the accretable aspect is about $18 million. So it's not very much at this point. It's negligible. So if we were to run about $2 million per quarter, it will take a couple of years to consume that $18 million. But remember, it's not linear. It's depending on the cash flow of those loans. But that's how you can kind of see it and think about it in the [big] picture.

Okay. And then, just thinking about the loan growth, and your monthly loan production was up about $50 million or about 18% year-over-year, and the loan book has grown mostly in construction and commercial real estate. Is -- increases in the production, is it in those categories? Maybe can you give us a little color on just what you're seeing in commercial real estate pricing? People are talking a lot about [some price] compression and banks competing away tax reform. What are you seeing from a spread rate perspective on commercial real estate?

Well, the breakdown of our loans really has not changed fundamentally over the last several years, actually. We are still at about 33% of our loan portfolio in commercial real estate, for example, and the new production pretty much holds true in that regard. Our 1-4 family dropped a little bit; it went from 25% of the portfolio to 24%, not a material change. So the various buckets remain unchanged, and the new production, it can vary from those buckets a little bit quarter-to-quarter or month-to-month, but not in a material way. So I don't think there's any reason to forecast that, for example, our percentage of commercial real estate loans is going to change dramatically, our percentage of agricultural change dramatically. I don't think any of those buckets are going to change dramatically. The pricing is tough. The loan competition is out there. Many of our competitors on the floating rate loans will price well under prime, which, obviously, doesn't do anybody's margin a favor. I don't see that slowing down unless we run into economic headwinds that start affecting some of these banks adversely. But that's not in the cards right now, from what we see. So pricing is going to continue to be thin and be difficult, but we hold our own and we get our share, and I don't think that's going to change. I hope I am answering your question.

And I just wanted to say, Brett, that -- this is David -- it may answer part of Peter's question too. It is very competitive out there both on rate and terms and conditions. We're not -- we are trying to hold onto our margin that we have and what we charge on these loans. We're trying to be flexible, but that's also the same time while we may not be growing the loans as fast as maybe some of the competitors. We're not -- we are trying to maintain the position that we have.

Okay, and then maybe just one last one. David, you've never been a big proponent of adding lending teams or bulking up with expensive talent. Would you change that philosophy any, or can you talk maybe about any thought on adding lenders to your team and if that might be something you'll consider if M&A doesn't really come to fruition here in the next few quarters?

There's probably -- first of all, we have a quarterly meeting where all of our various chairmen and presidents meet. And that's one of the things that we look at, is how many new hires that we've hired throughout the quarter and throughout the year. And we're constantly bringing on more and more people now. That's probably not the same type of people that you're referring to. I think you're probably referring more to people that are in wholesale lending and bringing over groups that are just paid based on commission and based on production. And again, we haven't looked at that aspect of it. Some of the banks that have talked to us about joining us, they have teams like that, and it's one of the challenges that we're still talking over, can we get used to these buckets in lending and in wholesale lending. It's something that we are giving a lot of consideration to. But we're not there yet. That's not in our bank. I don't want to underestimate the number of people that we're hiring. I don't know if anybody in this room -- do we know how many people we hired this last year? I don't know that we have that, but it's a number of people.

It's quite a few people. But they're not -- they don't come over in groups.

No.

These are individual hires, they come 1 or 2 at a time, and we are focused on it and have done it. One thing that I think needs to be emphasized is that historically, we've tried to lend on a what I call a core bank basis, and what I mean by that is, we look at the deposits we can get along with the loan. We look at the total relationship, and we are constantly emphasizing to our lending staffs that you need to bring deposits in with the loans. And I think you can see the good result of that. When you look at how strong our noninterest-bearing deposit base is, I think it's up to about $5.7 billion right now. Now the negative to that is, maybe you don't have as quick a loan growth when you are willing to make loans just for a loan's sake, and we understand that, and we are trying to evaluate that more closely. And we do make some loans without requiring that the deposits come to us. But in general, our history has been that the two go hand-in-hand, and it's served us very well over time. So we're trying to balance that out as we move forward and look at ways to expand our lending.

Yes, and I think everything that Tim has said is right. We're a relationship bank, we're hiring people to really do core loans, and as we want to grow our lending staff, and we will, we're doing it more one at a time. Historically, we have not gone to other banks and hired groups of their people away. That hadn't been our deal. I don't necessarily see that being going forward either.

(Operator Instructions) Your next question comes from Matt Olney with Stephens.

I want to go back to the discussion on the loan pay downs. And some of your peers have adjusted their expectations for loan pay downs. I think some of your peers are just recognizing that there is an increased level of competition that may continue for a while. So I'm curious about Prosperity. Are you guys adjusting your expectations for pay downs longer term, or do you still expect pay downs to slow the next few quarters?

I'll start off with that. Matt, this is David. I don't have anything that's factual or more quantitative, but my gut feeling is, from what we saw, this is the first time that we saw such huge pay downs. I don't know that we're seeing that right now, just trying to give you some color. I mean, there's pay downs, but we don't see the kind of pay downs or projecting the type of pay downs that we have. We have a project or two that's pretty big, probably here in Houston, that it has gotten developed. It's -- Bob, what size is that?

$62 million.

$62 million. Eventually, we're expecting it to go to the secondary financing at some point in time. But again, we don't -- it's just my gut, I don't see the amount of pay downs that we had this last quarter. Does anybody else want to jump in?

I think that's right. We do have some large projects, obviously, that will, when they stabilize, they will get sold, and that was anticipated when we made the loans. So that's as it should be. But I don't think there's any reason, based on what we see, to forecast unusually high pay downs going forward. I mean, we did have a few things this last quarter that are not normal. I mean, David mentioned a church. They owed us between $30 million and $40 million, and they had that much money and more in their checking account, and they just decided to get out of debt. Well, that is what it is. But we've been carrying those loans for quite some time for them, and we did not anticipate that those loans were going to be paid off. They were, and that's just the way it is sometimes. So I don't think that there's any substantial change in the air, so to speak.

There are a couple of bigger projects probably in the Dallas market that -- where there are multi-families and again, they haven't drawn up yet. But they are bigger projects, and once they do draw up and then once they hit their occupancy rate, then you will see. So I think as we are making bigger loans, you'll probably see bigger pieces that we haven't seen in the past. So that has to be taken into consideration too. We are not naive to that point, for sure.

Exactly.

But, again, we haven't been a bank that's gone after a ton of commercial real estate loans, development loans that are just here to get them and then they're going to flip them. We've got some but that hasn't been our cup of tea.

Okay, that's helpful, guys. And then switching gears onto premium amortization expense in the bond portfolio. It looked like that expense declined about $1 million, sequentially. I'm interested on how you're viewing that expense, especially in light of the recent moves in the yield curve? Help me understand how low that expense can go for Prosperity?

This is Dave Hollaway. It did drop, just because as rates are going up, it's affecting prepayment speeds, and then on the other side, we're getting to an environment where the securities we buy forward won't have these huge premiums anymore. They could, in fact, have discounts every now and then. So it's all those dynamics playing into it. So depending where rates go and how all those prepayment speeds and refinancing and all those concepts play into it, I mean, this -- it could continue to drop a lot. It won't go to 0 anytime soon, but we were $8.5 million this past quarter. Could it be lower than that? Yes. Can I give you any specific number where it would be? Not really. Can it go to 0? Probably that's not a realistic expectation. So I know I can't give you a specific answer, but what I would just reiterate is, if rates continue to go up and everything continues as we've seen, it could come down some more.

But again, probably it would be good to point out that just because your amortization expense is coming down, doesn't necessarily mean that it's going to impact the income. Because if you're buying bonds today and you're buying them at par, you're not going to have an amortization expense, where a year or 2 years ago, you were paying 102 or 103 from them. So a lot of -- it's more than just the amortization expense, and again, we bought a lot of bonds when interest rates were real low, then paid a premium for them. And going in today's market, you may not -- you are not really borrowing. I mean you're not really paying premiums that much. So those dynamics change a lot. It has to do more than just amortization and income, really.

Okay. That's helpful. And I guess, on the same topic, David, you mentioned some of the recent reinvestment rates around 3.20 or 3.30 right now. Help us understand what's roaming off the bond portfolio so we can understand what the trade-off is there?

Basically, I think, Dave, you said it's about $1,800,000,000 a year.

I think he's asking about what the rate is on that stuff.

Oh, was it 2.20 right now?

Yes.

I think it's about 2.20 right now, yes.

Okay. And then my last question for Holloway, effective tax rate was a little bit lower than your expectations. For the full year, are you still holding on to that 21%?

Yes, in the first quarter, it was a little lower than where we -- because we continue to project it to be around 21%. It was just a little lower in the first quarter due to some restricted stock vesting from some years ago and the tax benefit that comes from that. But yes, looking forward, I think we'd be closer to 21%.

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

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