Prosperity Bancshares Inc (PB) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Prosperity Bancshares Second 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 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, 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 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, 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 3 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 3 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 $10,147,000,000. The linked quarter loans increased $135 million or 1.3%, 5.4% annualized from the $10,011,000,000 at March 31, 2018. We continue to see strong loan demand and borrower enthusiasm. Our total loan approvals were run higher and more consistent than in the last several years. However, we're still experiencing large payoffs. Our lenders are excited and are committed to continue to grow our loan portfolio. Our asset quality -- our nonperforming 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. Our -- overall, our asset quality continues to improve as the nonperforming 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 nonperforming assets.

With regard to deposits, our deposits at June 30, 2018, were $16,979,000,000, a decrease of $91 million or 0.5% compared with $17,071,000,000 at June 30, 2017. The linked quarter deposits decreased $354 million or 2% from $17,333,000,000 at March 31, 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. However, the good news is that our average noninterest-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 1 day and continue to purchase additional equipment, docks and cranes. Further, 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 5 consecutive years and was the highest-rated Texas-based bank for the past 5 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 specific financial results we achieved. Dave?

Thank you, David. Net interest income before provision for credit losses for the 3 months ended June 30, 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 30, 2018, compared to 3.14% for the same period in 2017 and 3.16% for the quarter ended March 31, 2018. Noninterest income was $28.4 million for the 3 months ended June 30, 2018, compared to $27.8 million for the same period in 2017 and noninterest expense for the 3 months ended June 30, 2018, was $83.6 million compared to $76.4 million for the same period in 2017. The efficiency ratio was 43.9% for the 3 months ended June 30, 2018. That's compared to 42.3% for the same period last year and 44.2% for the 3 months ended March 31, 2018. The bond portfolio metrics at 6/30/2018, showed a weighted average life of 4.05 years, effective duration of 3.6 and projected annual cash flows of approximately $1.8 billion.

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 June 30, 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 31, 2018. This is a 4.9% decrease from March 31, 2018. The June 30, 2018, nonperforming 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 nonperforming assets, $10,493,000 or 33% are energy credits, all of which are service company credits. Since June 30, 2018, $11,133,000 or 35% in nonperforming assets have been removed from the nonperforming asset list or are under contract for sale. But as we always say, there can be no assurance that those under contract will close. Net charge-offs for the 3 months ended June 30, 2018, were $2,636,000 compared to net charge-offs of $9,441,000 for the 3 months ended March 31, 2018. This is a decrease of 72%.

$4 million was added to the allowance for credit losses during the quarter ended June 30, 2018 compared to $9 million for the quarter ended March 31, 2018. The average monthly new loan production for the quarter ended June 30, 2018 was $297 million compared to $329 million for the quarter ended March 31, 2018. Loans outstanding at June 30, 2018 were $10,147,000,000 compared to $10,011,000,000 at March 31, 2018. The June 30, 2018, loan total is made up of 40% fixed-rate loans, 36% floating rate and 24% variable rate, unchanged from March 31, 2018.

I'll now turn it over to Charlotte Rasche.

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

(Operator Instructions) Our first question comes from Jennifer Demba with SunTrust.

This first question is for David Hollaway. David, were 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 if it was that much, as $5 million. It's just -- if I give a big picture, then I'll get specific to the question. We recover loans all the time quarter-after-quarter. What was unusual about this quarter is it was -- the loans that we collected were a little bit more than usual, and so 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. And 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. So 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 mean I think our -- we're still primarily focused on the (inaudible) the Texas market and the Oklahoma market, because we're there already. But 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. So 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, but we have looked in different markets recently.

Our next question comes from Dave Rochester with Deutsche Bank.

So 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 that second part first?

Well, let me take it, and then I'll give you the second part. You know, 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 and of course, as Dave mentioned with Jennifer a while ago, there was probably about $3 million additional recovery above and beyond what we normally get, but then we've -- and then there was also some interest accrual that we got from that, too. But at the same time, our expenses were a lot -- 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. And also, the -- usually our provision for loan losses, budgeted around $2 million to $3 million. And again, that's a model. So -- but in that model, we have the ability to look at midpoints, high points and low points. And so, we -- they were -- we're able to put a little bit more money into the provision than we normally would. So we took advantage of the situation. So David, I'll leave it with you there on the net interest part.

Just saying how we're thinking about that going forward, I think it should be positive for us just in this as Fed continues to increase rates and then we -- if we can get all the new loans to stick there, we're putting them on at higher rates than what the current yield is on the book. So I think all those things will be positive. The unknown here, the biggest question is, what do funding costs do when you look out over the next 3-, 6-, 12-months. If we can stay disciplined as we've had then it should be some positive good positive to our margins. If that -- if we have to become a little more aggressive, not quite as positive but still good.

So your net interest margin, Dave, you think could be running in the next quarter...

Say, all in with fair value and everything impacting it, we're going to be in the range -- we think we could be in the next few quarters, somewhere in the 3.16%, 3.18%. And again it just depends on what cost of funding does.

And 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 the 100 basis point increases. So, I guess, what I'm just saying as I pointed out, I think going forward, our net interest margin will continue to improve. I just don't -- it doesn't improve as fast as everybody would like. I always use the analogy that's like trying to turn the Queen Mary around out here in the parking lot, it just doesn't happen that quick. But longer term, things really look bright for us in that category.

And 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. Dave, you have the number?

Yes, we were running, if you're averaging over the last 1.5 months or 2 months or so, we're between 3.10%and 3.25%.

Yes.

Okay, great. And then, you just mentioned on the expense side, comp was up a little bit this quarter. Sounds like that's more of a onetime type of thing you're taking advantage of, some of that extra income there. Where should we expect to see expenses 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 gave -- we upped our minimal wage and then we also gave a 5% increase across-the-board to all associates. So overall, Dave is going to probably give you a little bit higher number, but again, it -- we should be back to normal next month I think, yes.

Yes, your observation is right. I mean, we had at least -- you can call them onetime events here this quarter that raised our expense but going -- but that -- going forward, if our revenues can continue to increase, we might want to move that forward-looking quarterly noninterest expense we've been trying to run around $81 million. I'd say, if our revenues continue to increase, we'll probably move that, to give you a range of $81 million to $82 million basically. Just -- if the revenues go up. And I would also point this out, even though our expense -- 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%. So we really got to look at this in its bigger picture.

Our next question comes from Brady Gailey with KBW.

So the cost to deposits was up only 5 basis points linked quarter. You had a lot of your peers, it's up 20, 25 basis points linked quarter. I know you guys have a great funding base but 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 but a jumbo 1%, 1 year probably, it's more like that, a 1.6% when not too long ago, you probably couldn't get 60 or 80 basis points. So we have raised our CD rates. The bad part about that is we don't have much of the CDs but maybe, we'll start getting more CDs. We let a lot of that money go because we weren't as competitive. But we do think that -- the answer to your question is, we do think that interest rates are going to continue to rise. And again, I think that we have probably one of the best bases out of any bank anywhere. So when you look at the amount of noninterest-bearing accounts that we have and you look at the interest-bearing demand that still are 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. But again, I still think we probably have one of the better betas out of anybody probably.

All right. And then, just to close the loop on expenses. So you did $83.6 million this quarter. You're guiding to something lower, kind of in the $81 million to $82 million range. But it sounds like the changes you made in the top line, you increase the minimum wage, you also gave, I think I heard you say, 5% raises just to people. It sounds like those are more permanent. So I was just wondering why the expense base would come down and if there was any truly onetime thing in the top line this quarter.

Yes, I think -- that's right. I mean some of that increase you saw were more onetime events. They are not the ongoing recurring things that was mentioned earlier. So that will allow us to bring that number down. We won’t be running it whatever it was $83.5 million, $84 million. It just had those onetime events in it, and so that won't happen in the quarter coming up.

Got you. And then finally for me, I know you talked about the discount accretion being around $2 million a quarter. It obviously got better than that this quarter, but do you think $2 million is still a good estimate per quarter going forward?

It is and again, you're right, we saw some positive this quarter. If you look at the remaining balance specially for that general run rate that we call the 91, just in the simplistic terms. If that were really running it, $1.5 million or $2 million, it's only $17 million left. So it's going to run out over the next year and there's about $6 million in that [0 3] and so that's why you saw that pop there. We would -- it would clean out those 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. But yes, short answer is, we'd still want to look at that $2 million per quarter.

Knowing that, that can go up or down some at the time, yes.

Our next question comes from Peter Winter with Wedbush Securities.

I was curious about the average monthly loan production. It declined a little. I mean it's still good but declined a little bit from the first quarter, and 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, they increased 5.4% on an annualized basis. But again, Tim would probably want to talk more about production. Maybe even talk about the first quarter compared to the second quarter even 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 nonevent 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. So if you compare the second quarter at $297 million to all of '17, 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. But sometimes, you get more in, sometimes you get less in. There really wasn't any particular onetime event that we could attribute to that first quarter production to. Things do look good from the economy perspective. Our people are still trying hard. There's no reason to think that the production is not going to remain decent throughout the rest of the year. So I hope that answers your question.

Yes, I'll just add. Tim, when you and I talked, 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, when we might have had less production but still grew loans 5.4%. So production is one piece of it, but paydowns is another piece of it, too at the same time.

That's exactly right. I mean we had record production in the first quarter of this year and basically had record paydowns in the first quarter of this year. So the 2 have to work together to increase your outstandings, and paydowns 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, but we just had a lot of customers that sold projects and/or had excess cash and wanted to pay debt down, so we had a lot of paydown in the first quarter and those paydowns subsided this quarter. Going forward, who knows what that number is going to be, but there's nothing on the horizon that would obviously suggest a next era in increase in the percentage of paydowns. So that's just something we deal with quarter-to-quarter.

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.

Yes. 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% to 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. But the bias is clearly upward in terms of rates. It's upward in terms of our deposit cost, it's upward in terms of what we're going to earn on our loans and the securities for that matter. So I think the hard number is 5% to 5.5% is what we've been doing. Once again, lately, we have seen several that have moved to 6% to 6.5%. So the direction is upward.

Our next question comes from Gary Tenner with D.A. Davidson.

David, you just answered my question in terms of the production and paydown levels, so I appreciate that. So one question I have is regarding your expense guide and more on that $81 million to $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, but it's -- I don't say it's material but it's not immaterial either. I'm not going to be exact on this. I'll give you a range but -- somewhere in the $2 million, $3 million range. But again, I can't be exact on that but that gives you kind of a good feel for that.

Is that for certain that they are going to reduce once it hits the...

It has to hit. For them, it has to hit a certain level before, one point...

They stop the surcharge...

Reserve, yes. 1.35 or something like that. That'd still be nice.

Right, so that's $2 million or $3 million annually in terms of the kind of the...

Correct. A part, a part.

Right. And would that be -- would that -- is your guide in the $81 million to $82 million, is that inclusive of that surcharge going away or does that assume that it stays intact?

Well, 2 things. One, that guide, we're looking at that over the next couple of quarters -- we assume the surcharge -- yes, maybe I should back up, because there's general disagreement on this, I think, but 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. So I don't know if that helps in your question. Does it or does it not?

Okay, yes. I was thinking more about 2019, but I (inaudible) a little shorter term.

So really in 2019, and yes, that guide would include that part in there.

Our next question comes from Brett Rabatin with Piper Jaffray.

Wanted to ask -- and David, you've got a 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 as much TCE.

We -- as we mentioned before, we'll continue raising our dividends. I think, if it's been like they've historically have been in the past, we've been raising our dividends almost 10% or better a year. We'll continue to do that. But don't worry, we'll use the money. It'll be used. Now the only thing I would say is if the stock price got too low, again, we don't like the 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. But 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. And then 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 nonbank-type players in the space. I guess, what're you seeing there? 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 I mean we've heard some loosening, especially, in 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 nonbank 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, and we have tried to be more open-minded, shall I say, in terms of our credit approvals but at the same time, we don't want to leave the discipline that's made this bank as good as it is over many, 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. But 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. So 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. So that's kind of the way it's always been. But there hasn't been any decline in the veracity of the competition. It's out there. But once again, we haven't seen it from nonbank sources.

Our next question comes from Matt Olney with Stephens.

I want to hit on credit quality, and overall credit trends still look excellent. Dig into 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 the energy. So 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 might want to jump in, but again most of our charge-offs are coming still from cleanup on loans that we acquired from previous bank acquisitions for the most part.

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, but it's not anything that's material and there's nothing on the horizon that we see in terms of commercial real estate that's problematic for us.

You get a one-off every once in a while, but it's not -- we haven't seen an uptick by any means yet. Values haven't gone down or nothing's changed on that front.

Yes. In fact, the economies that we operate in, other than office space occupancies, everything looks pretty good in terms of commercial real estate. Houston is gotten a lot better in terms of its apartment occupancies. And while it would be good for everybody in the marketplaces if the demand for office space were to improve, and I'm talking about nonowner-occupied office space, that hasn't been much of a direct effect on us. We have very few dollars in nonowner-occupied office space. So it would be good in terms of the overall effect, but it doesn't have much of a negative effect on us directly.

Other than that..

I don't have the numbers in front of me but Matt is probably pointing to a deal and I would say that again, I'll go back, that the charge-offs in commercial real estate, really had to do with banks -- acquisitions that we acquired. Both -- one was a participation from one and then another one was some bank. But again, it's just cleanup on some banks that we had.

Yes, when you clean the numbers up, that was $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. I mean, the point is that -- what you're referring to is not indicative of where we are going forward.

Okay, that's helpful. And then, Tim, you mentioned a few minutes ago that the credit committee is trying to be more open-minded in certain circumstances. So 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 light flag in the room some times, but --

He wanted us to start serving Chardonnay at the meetings, but I told him we couldn't do that.

I -- we are trying, in all seriousness, we are trying again -- I think that people have to realize though as you build your loans and, again, we're still only around 5% to 6% loan growth. We used to do about 8% organic loan growth. So we're still behind where we normally were, but again this -- really the last year or 2 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 cleanup. So, I think, our team really does -- we're looking at more loans, we're looking bigger loans than we have in the past, and everybody has to realize that when you have bigger loans, at some point in time, I mean when you look at the amount of nonperforming, we have $30-something million, and we have deals on half of those to get rid of those. But 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.

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

Just had a question kind of about the balance sheet. David, you relied more heavily on borrowings -- 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 now would be, do still expect that same phenomenon in the third and fourth quarter? And then, kind of what's the average rate that you're putting on, that -- those cost in the second quarter?

This is Dave Hollaway. I'll take part of that first and will provide any clarity on the second part. But the first part, yes, I mean it's exactly what you laid out, the public funds start drawing down their accounts in 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, and then in the fourth quarter, all that money comes flooding back in and so yes, the result of that is as the deposits go down, we have to borrow a little bit more, but then it's...

I think what he's asking is, whether you still see an increase at year-end like we normally do, and I would say, yes, however, I would have to caution you, last year, we had like a -- in the last quarter, $900 million and, Dave, you pointed this out, I mean, just in the last quarter we increased $900 million. It was a huge increase in one quarter, and we felt like we normally increase, what $400 million, $400 million to $500 million?

$400 million, $500 million.

And 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.

Yes, just assume when we get -- eventually when we get to year-end, and we're looking at year-over-year numbers in deposits. Remember, the whole tax discussion was going on and a lot of people had rushed in to prepay their property taxes last year. So that what David is saying is, we saw this huge $900 million come in by year-end, that was an anomaly, it normally is $400 million, $500 million.

It's historically, again, our -- if you look at 20 years, our deposits grew -- grow organically, what, 2% to 4% a year annually?

Right, yes.

Yes, that's a number.

Got it. And any thought, do you -- versus maybe relying more on the borrowings raising, would it help raise your overall deposit rates a bit? Obviously, those are coming in at this quarter around 190 basis points. I assume, will be higher in the third. Just kind of thinking around how to price versus having to go relying on the wholesale market, even though it's for a short period of time.

We're going...

Exactly right.

You are ahead of us, and our meeting this afternoon, that's exactly what we're discussing. So you're ahead of us on that.

(Operator Instructions) Our next question comes from Geoffrey Elliott with Autonomous Research.

You had some growth in commercial real estate this quarter. It feels like that scenario where some banks have been talking about pulling back a bit because of what they are 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 and 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 nonowner-occupied office space. So we would be hard-pressed to be desirous of booking one of those loans in Houston right now, for example. But owner-occupied is a different story. And there are multiple submarkets in a metropolitan area like Houston and Dallas Fort Worth. So 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. So 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. So 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 but that's the way it's always been. There is nothing new about that. So I think we'll continue to maintain and maybe even build a little bit our commercial real estate portfolio. The pricing on that maybe a little lower than the average pricing. But once again, if it gets too low, we back away, and we don't do it. So I don't see any big change there. It -- I hope I'm answering your question.

Yes. And 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?

Well, they put up a border wall, so I can't go into California. So they're not going to let us go there. And they probably wouldn't let me go to New York, so -- but no, I think we're open. We are open again wherever it make sense. I mean again I think the main thing that we would want if you went into another state is that we could be a real player and of significant size and that it was accretive. I mean 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.

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

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 -- have you 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, our deals that we said that -- really not -- again I don't want to put anything that we wouldn't do but you've known us a long time, and we said 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. And if you look at a lot of the deals that have done recently, I mean, you look at the Green Bank, it was started over the last number of years and brought -- again, 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, and again it's not that we wouldn't look at them but it -- paying a premium price for a bank that's been started like that is not as -- you know, it's probably -- we would just again I would -- we -- the kind of banks we're looking for -- you know what we're looking for with good solid core deposits that's been around for a long time. And again, when you -- 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 but again, it has to be the right kind of bank, let me just say it like that.

Okay. And, I guess, can you just touch a little bit on the deposit performance in some of your nonmetro markets I know that's also been where a lot of your acquisition have happened historically, but how are those deposits holding up? And how's the pricing competition there?

Those markets are good. I mean, it's probably better than your metro markets, because the money just doesn't move as much. But again having said that, I think pricing has gone up everywhere. I went to bed one night, I feel where CDs for 6 months were at 60 or 70 basis points, and I woke up, we're -- they were ads in the paper at 2% for 1 year. So pricing has definitely changed. Now most of those are outliers with some banks. There's a handful of banks that are doing that. But overall, pricing has really gone up on money. It really has.

Okay. And then, just last 2. Can you give us an update on health of the ag book, and how you feel about that portfolio? And then, any updates on your energy lending appetite?

Yes, the ag, 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. And right now, all the crops look good. I think, the biggest issue some people talk about are probably tariffs, and it's probably that's affected more 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. But having said that, and when I talked to the cattle people and everybody else, we really haven't been affected that much yet. And Trump is -- 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, but farmers always seem to get taken care of. Right now, we don't see the impact in farming as a good deal for us and a lot of the communities that we're in, that's a big part of it. With oil and gas, we -- really we're still doing oil and gas but again, the oil and gas loans that we're making again, and we made a few larger ones but usually they are in West Texas or somewhere where we're really trying to say, we're looking at it a lot of 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 is 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 5- to 6-year period? Am I wrong on that, Tim?

No, that's exactly right. And 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. But almost all of our problems, not 100%, but almost all of our problems have come from energy loans that we obtain 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. And a lot of the other banks have embraced those types of credits and they've gotten in trouble. So 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, and we think that, that represents the bulk of our portfolio right now. So 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.

Yes, so I don't think you'll see us really participate in a lot of shared national credits or something like that. That's just -- that's not what we're going for.

Exactly. We are trying to take share of our local companies.

This concludes our question-and-answer session.

We'll stay on about a few minutes on there.

I would like to turn the conference 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, and we will continue to work on building shareholder value. Thank you.

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