Michael Rose — Managing Director, Raymond James
Hey, good morning, everyone. Thanks for taking my questions. Just wanted to get some color, you know, looks like there was some purchase loan decline this quarter, but can we just get an update on any sort of revised expectations for loan growth ex warehouse? Seems like the industry is starting to pick up a little bit here. I assume you had some pay downs as well that were kind of impacting this quarter's growth. I did sense some optimism at the front of the call. Just trying to get an update there and then if Kevin's there, would love the update on the warehouse. Just looks like it did a little bit better on average than what he talked about last quarter. Thanks.
Kevin Hanigan — President and COO, Prosperity Bancshares
Yes, thanks, Michael. I'll try to tackle both and see if anybody wants to add on.
I think in terms of loan growth, the quarter has started off a little better than the prior quarters. We do have some loan growth, not a ton. Call it $40 million worth so far for the quarter. Pipeline looks pretty good. I think low single digit growth for the rest of the year is probably achievable. Just as a side, we've also had some core deposit growth. I think almost maybe $90 million so far for the quarter. Both of those seem to have stabilized a bit. Loan demand's okay. If there's been another point of weakness, it's been usage on corporate or middle market kind of revolvers. Usage is down quite a bit from where it had been with people taking excess cash and paying down debt rather than growing their balance sheets. We'll see whether that shifts around or not.
I think a lot of that was tariff related on the warehouse. Just by way of background, we averaged for the last quarter $1.179 billion. We thought it'd be about $1.150 billion, so we were just slightly ahead of what we were thinking. So far for this quarter, Michael, through last night we have averaged $1.307 billion, to be exact. Last night we closed out a little lower than normal at $1.226 billion. That's not unusual for this time of the month. We get a lot of Ginnie Mae settlements in the 20th, 21st, 22nd of every month. On balance, I think we will probably average a little better this quarter than last at $1.250 billion. Typically our third quarter is our best quarter in normal times and these are more kind of normal times.
I do expect it to be a little bit better, close to $100 million better on average than Q2.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, I think the thing that we liked about it too, rightly or wrongly, we really saw commercial, our commercial loans pick up and mortgage loans went down. We have so many mortgage loans that we seen that there were $73 million more in commercial loans increase. I think that was good. We do seem to see a lot of, I don't know, I wouldn't call it production, but there's a lot of stuff going through the loan committee now. Things look pretty good, I think.
Tim Timanus — Chairman, Prosperity Bancshares
Michael, this is Tim. Yes. With regard to what David just said, I do see coming up the next handful of months basically the same way that Kevin does. I think he's spot on.
Michael Rose — Managing Director, Raymond James
Very helpful. Maybe one for Asylbek just on the margin. Not as much momentum there, I think, as we would have thought. You have the range that you talked about, 3.25 to—I noticed that interest-bearing deposit costs were flat. Maybe just walk us through some of the puts and takes as we think about the next couple quarters. Bond portfolio repricing, pickup, further ability to lower deposit costs, CDs maturing, kind of, et cetera, and just how we should think about the trend relative to what you talked about earlier this year.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Thanks, Michael. Let me just start. I have kind of the model in front of me and just to kind of give you some color. I mean our net interest margin continues. It continues to grow. I think we're showing with no change in interest rates at 3.35% net interest margin in six months. If interest rates go down 100 basis points in that six months, it's at 3.3%. On a 12-month time frame with no change in interest rates, we get to 3.48%, and with 100 basis points down in 12 months, we're at 3.40%. Twenty-four months, and I won't go past that, we're at 3.76% with no change in net interest margin and 3.61% with 100 basis points down. Our models still continue to show great expansion in the net interest margin over a period of time. Sorry to jump in on you now.
Asylbek Osmonov — CFO, Prosperity Bancshares
That's numbers and just give a little bit of a color on the question why we're achieving these numbers. If you look at our model, our cost of deposit model shows that it's going to continue to stay as is. There's not much downward decrease on the cost of deposit. What we see is the repricing of two things, right. First of all, it's our bond portfolio. As we mentioned, we have about $1.9 billion of cash flow each year and rate on that is about 2.15%. You take give and take. That's going to be repricing at least, you know, depending on if you put it on the loans, repricing at 300 plus basis points. If you were going to put it on securities, it's still more than 2.5%. On the loan side, we have about $5 billion cash flow coming in.
Out of that, about 60% or $3 billion, it's more like fixed variable rate that's going to reprice higher than what we put in currently on the loans. Those drivers showing in our model that it will help us to continue to increase the margin and net interest income. I think our model still continues to show that we should be on average for the year to be as a range we provide, 3.25% to 3.3% NIM for the year.
Michael Rose — Managing Director, Raymond James
Okay, I appreciate all the call, everyone. I'll step back. Thanks.
Catherine Mealor — Managing Director, KBW
Thanks. Good morning. Follow up on the margin. Good morning. I just want to follow up on the margin with just the size of the balance sheet as we kind of think about it. I saw that the cash and average earning assets kind of came down. How should we be thinking about just the size of the bond book and the size of cash in the next couple quarters?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I think the balance sheet size, if you look year over year, we were down 1.6% on the deposit side. If you look at this quarter, as mentioned earlier, this is seasonally a time when we do lose deposits. We think that the deposits probably have stabilized. I think that you'll probably see the third quarter still kind of where we're at right now, but it should start picking up in the fourth quarter for sure. We should see fourth and first quarter pickup in that. I think that a lot of it depends on interest rates. I think in general, if we really wanted to build the balance sheet, and we weren't as disciplined as we were, you could easily, I mean, we don't have any broker deposits. We could easily bring in a bigger balance sheet if you're willing to pay the 5%, 4.5%, 4.5%, 5% interest rate.
You can build a balance sheet, but we've been trying to be very disciplined and really manage our net interest margin. That's kind of where we're at right now. Overall, to answer your question, I think that we have stabilized and I think you will see growth going forward, not tremendous growth.
Asylbek Osmonov — CFO, Prosperity Bancshares
I agree. That's exactly right. I would just say on the model, fundamentally nothing changed from us. It just was the deposit drop off we saw in the second quarter impacted NII as we saw it. Fundamentally, our model is still showing that continued expansion, the margin and net interest income.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
You also have reduced your borrowings from the Federal Home Loan Bank compared to last year, where we were $3.9 billion last year.
Asylbek Osmonov — CFO, Prosperity Bancshares
Yeah, in the beginning it was 3.9 and we'd reduced to 2.9 this year.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
That was a big drop in the asset size. It shouldn't affect the net interest income, but just a big drop in the asset size. Correct,
Catherine Mealor — Managing Director, KBW
Got it. Okay, that's helpful. On loan yields also, I feel like mix shift just within your balance sheet is what's driving the margin expansion. Curious if you see some more upward momentum in loan yields as maybe growth improves into the back half of the year as well.
Kevin Hanigan — President and COO, Prosperity Bancshares
I'd say yes, a couple things is mix less mortgage, more commercial. I think we'll pick it up there. As Asylbek said, shift out of bonds and into loans also improves. As we look at it, you probably, someone mentioned early in the early reports this morning that loans held for investment, the yield was down a basis point. That's really just in terms of inside baseball. We always have, not always, but typically have some non-accrual pickup income in a quarter. We had more than usual last quarter, maybe $2.3, $2.4 million, and we had $400,000 this quarter. Believe it or not, on the overall loan yields, that changed loan yields to minus 1 basis point versus up 2 or 3. That's just a small inside baseball piece of it. This quarter, maybe last quarter wasn't quite as good as it was advertised or written.
This quarter is not as bad. Just a couple of basis point difference. We don't see that number being down this quarter. It's an aberration, not a trend.
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
Okay, that's very helpful. Still upward momentum in loan pricing as expected.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yes
Catherine Mealor — Managing Director, KBW
, that's great. Okay, great. Thank you.
Manan Gosalia — Analyst, Morgan Stanley
Hey, good morning all. I wanted to focus on the acquisition and specifically on the NII accretion from the acquisition. Can you comment on I guess what sort of NII you think you can get from the acquisition? Are there any revenue synergies that you're building in? Is there any benefit on the deposit cost side, and if there's any loans that you might want to run off after completing the acquisition?
Asylbek Osmonov — CFO, Prosperity Bancshares
Okay, I'll take that one and I'll start off with deposit. What we're noticing is American has a really good deposit base and very similar to ours. That's what attracted us to American Bank. If you look at their cost of deposit, this was 1.66%, very close to ours. If you look just overall industry, very low, they have a very strong deposit base. On the loans, they yielded higher than ours. I think their loan yield is about 6.43%. Both of them, taking those, is going to be accretive to our margin. If you look overall on dollar wise, I think on an annual basis it's going to bring, if you just take the run rate, it's about $85-$90 million on NII by themselves. In addition, we're going to be having some markups on those loans to the fair value.
We're also going to have AOCI adjustment on their bond, which can generate additional $15 million per year, $15-$16 million. Combining those, we know it's going to be pretty strong expansion on our net interest income. If you look at on margin wise, if we calculate it, it gives about mid single digit on the margin increase overall.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I think you could say also that American Bank is very similar to us. If you look at our cost of deposits, their cost of deposits were very close. I don't think you're going to see with some banks that join us. We know going in that there's going to be a pretty good loan runoff and a pretty good deposit runoff. We don't see that in American Bank. We feel comfortable. They're very much like we are. I don't see. I think it's just a good core bank. Really it's a peach.
Manan Gosalia — Analyst, Morgan Stanley
That's helpful. Maybe on capital deployment priorities from here, I think you mentioned in your opening comments that you continue to have conversations. It looks like you're open to more M&A, but this is also an all stock acquisition. Is there any ability to maybe buy back some of the stock you issued in the open market once the acquisition closes?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right now there's a lot of activity in M&A, and again I suspect that we'll be using some of that capital that we have going forward, probably in M&A.
Manan Gosalia — Analyst, Morgan Stanley
Got it. Thank you.
Peter Winter — Analyst, D.A. Davidson
Good morning. I wanted to ask about the Lone Star portfolio. Loans were down about $180 million year-over-year and deposits were down about $250 million year-over-year. Are you nearing a bottom, and maybe if you can talk about the quality of American Bank Holding Corporation's loans and deposits, would you expect some runoff once you close that deal?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I'll start the Lone Star deal. Lone Star State Bank did have a lot of higher cost deposits, so we're not rattled by that amount of deposits, and they were extremely high cost, sometimes 100 basis points more than what we were paying. We suspected that. As far as the loan side, somebody may be able to help me with the loan side. I know that we, I think overall the loan quality was really pretty good. We have one large loan that got thrown into the non-performing assets that was $13-$14 million. Again, it's well securitized. I don't think that we see any loss in that. Their underwriting at Lone Star Bank was very good. I think, with the exception of this one credit that we have, they were very good.
Going forward with American Bank, again a little bit different in some underwriting, but I think if anybody came and looked at us from another bank, they would think we're different than them. I think overall, I don't see the deposit loss or the—there'll always be some, but I don't see the deposit loss or the loan loss in the American deal. I think it's just a really good core bank. It's hard to find real good core banks like this, and this is really a good core bank.
Tim Timanus — Chairman, Prosperity Bancshares
David, one thing I would mention, I do think that Lone Starhas stabilized in terms of loans and deposits both.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right.
Tim Timanus — Chairman, Prosperity Bancshares
The future will tell us, but I do feel like they're stabilized.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We knew going in they were the certain portion, they were about 100%.
Kevin Hanigan — President and COO, Prosperity Bancshares
There were some 5% CDs that were going to go, you know.
Tim Timanus — Chairman, Prosperity Bancshares
That's correct. From day one they have worked very closely and very well with us to address those issues and deal with them.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We knew that even going in. It wasn't anything none of us expected. Let me say that that's correct.
Kevin Hanigan — President and COO, Prosperity Bancshares
Yeah. By recap, I think we're done or near done with Lone Star shrinking. I think American Bank is just, it's a different animal. It's been around 50+ years. Really, really solid deposit franchise. I mean, very, very solid. Credit quality good. Maybe underwriting a little different than us, but the credit quality very good. Does that mean there'll be zero runoff? No, but it's going to be very mild. Very, very mild. This is not a big shift in terms of what they're paying on deposits versus us. It's a high quality franchise. We're lucky to get it.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Yeah, I think the American Bank deal makes, you know, we have a big, strong position in the Houston market. We have a strong position in the Dallas market and a good position in the Austin market. Again, along the Gulf of America we have Victoria. It was such a great merger with us. I mean, they joined us and we became the number one market share in that whole second tier market. Right down the road is Corpus Christi, and this gives us the number one market share in Corpus Christi. I mean, we really have become number one market share or major market shares in these second tier markets like Victoria, like Corpus Christi, like Odessa, Lubbock, Midland, Bryan, College Station. Those are really great markets, and this just fits in just perfectly with that.
Not to mention that it gives us, we really needed some locations in the San Antonio market where we only had one. I think this gives us, what, four more locations in the San Antonio market. It really helps us get a jump in the San Antonio market as well. We're really excited about that.
Peter Winter — Analyst, D.A. Davidson
Thank you for all that detail. I could ask on credit, I'm certainly not worried about credit with you guys, but just curious about what drove the increase. $29 million increase in non-performing assets, and then, you know, just what's the outlook for non-performing assets going forward? Just given the comment, most of it is acquired loans which you have reserves against, but I'm just wondering when those should start to decline.
Tim Timanus — Chairman, Prosperity Bancshares
I think I can address that for you. The increase is really made up of three buckets, so to speak. One is a $13 million loan that David referred to a minute ago from Lone Star State Bank. It's real estate secured. We think we're probably not going to lose any money from that loan. Time will tell, but that's our forecast right now. That's $13 million. There's another one, $19 million. That's from the LegacyTexas portfolio. It's secured by notes on used vehicles. We do think there's a bit of a loss there, but it's fully reserved, so we don't see any negative impact from that standpoint. The biggest change is we've got about $51 million in single family homes included in the non-performing.
We made efforts starting a couple of years ago to increase our minority home loan products, and the result is we've taken several homes back. The good news is as we are able to foreclose on them, we've been able to sell them all relatively quickly. We think this is something that we're going to work through over the course of the next year. If you look at those three buckets, one is $51 million, one is $13 million, and one is $19 million. That's a huge percentage of the total non-performing assets. We think we're dealing with all those effectively.
Kevin Hanigan — President and COO, Prosperity Bancshares
Yeah. Just to add to what we see in the future, you never know what's going to happen in the future, but we don't see anything in our commercial loan system that's particularly worrisome at this stage of the game. I would say that there is a chance, maybe even likelihood, that we continue to tick up just a little bit on the single family mortgage portfolio from that $51 million that it's at today. Fortunately, that asset class is a very low loss given default. I think the bottom line is as we sit here today, obviously we went through all of this in our reserve analysis at the end of the quarter for quarter end and concluded we didn't need to add the reserves. We'll see where we are next quarter, but I don't see anything on the horizon that's going to change that.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
We also cut the product off. This was a product that was designed just for minority lending, low income lending, that again there's not much money down and even get some walking around money when you go. This was to help with fair lending. It's kind of a catch 22. If you don't produce a certain amount of this kind of production, then if you really want to expand and grow, you're out of the game also. It's just part of the deal. I think that we've got all under control and the good news is as we repossess this stuff, we've gotten out of it pretty quick with very little loss.
Tim Timanus — Chairman, Prosperity Bancshares
That's right. We did discontinue that type of loan actually over a year ago.
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
Right, over a year ago.
Peter Winter — Analyst, D.A. Davidson
Got it. Thanks for taking the questions, I appreciate it.
Steven Scouten — Analyst, Piper Sandler
Yeah, thanks everyone. Appreciate it. Just going back to American Bank and David, you noted the four additional branches in San Antonio. Given that that's, I think you guys said the third largest MSA in Texas. Do you look to deepen that franchise further in San Antonio beyond this acquisition? Could you look at new hires or could incremental M&A in that market be in the cards?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I guess I should just say stay tuned.
Steven Scouten — Analyst, Piper Sandler
Okay, fair enough. Then maybe on pricing around the deal, I mean the three year earn back feels like maybe towards the longer end of what we've seen from you guys. Would you say that that was kind of pushing the limits of what you would want to do from an earn back perspective on a deal
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
that three year. Scouten, help me, does that three year include the, you know, the way it was priced? It looks like it was priced higher than some of the other deals at 2.2 times. When we looked at the bank and you added back the AOCI, the price was like 1.8 times, which for a bank like that we thought was a very, very good deal. That three year, was that based on the. It does include that. Yeah, it does include that. For a bank that's a quality bank like this, that three years is not unreasonable at all. I'd do it again tomorrow. If we get another bank like that, it's really a sweet bank.
Steven Scouten — Analyst, Piper Sandler
Okay, great. As you think about future targets, I know the last three deals have been maybe towards the smaller end, more digestible end of the spectrum. Do you think about maybe a more meaningfully sized deal? Additionally, would you look at anything outside of Texas and Oklahoma today, or do you want to continue to deepen that footprint in the strength of those markets?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I guess I'd just say stay tuned. There's a lot of activity going on right now, and hard to give. I can repeat what we've said in the past, that we always like Texas and it's always a fill in, and because if you're in a car and you drive 30 minutes anywhere, you're going to see one of our banks. When we can fill in, I don't think we're in the valley. That may be the first part of the valley and probably El Paso. Anywhere else you go, Texas, you're going to see us wherever you go. I think that our first and foremost is always in Texas and we're in Oklahoma too if something developed there. Again, of a certain, of an asset, we're outside the state. We're not going to go outside the state for a $2.5 billion deal.
If it's a deal that really has true market share that we can, it's really helpful and it helps us from a strategic point of view from where we're going and where we're going to be. The answer to that would be yes.
Steven Scouten — Analyst, Piper Sandler
Great. Maybe one last point of clarification on the NIM trajectory you talked about, David, I think you said 3.35% could happen in six months, 3.48% over 12 months, et cetera. Does that include the mid single digit impact to the margin from American Bank or is that kind of on your existing balance sheet?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
No, this is just our existing balance sheet. That should help. No question.
Steven Scouten — Analyst, Piper Sandler
Perfect. Thanks for the clarification. Thanks for the time today.
Speaker — Analyst, Bank of America
Hey everyone, this is Eric on for Eb. Just had one on the fee income line.
It has been running above.
I know previously you've talked about $36-$38 million as kind of the run rate that you view, but it's been above that for several quarters now. Is the run rate in your mind higher now? Like how should we think about that kind of moving forward?
Yeah, Eric, I agree. I think I would probably update our run rate to $38-$40 million now because we've seen very strong, you know, our service fees and debit card fees overall have increased because of the volume. Yes, we see increase on overall non-interest income. I would say I would update range to $38-$40 million.
Okay, that's helpful. Maybe one more on M&A. David, based on everything you said, I have a guess of what you'll say, but does the American deal limit the ability to complete any other deals until that closes, or are you still very active?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
No, we're still very active. Got it.
Speaker — Analyst, Bank of America
Okay.
That was it for me. Thank you.
Jon Arfstrom — Managing Director, RBC Capital Markets
Thanks. Good morning.
Asylbek Osmonov — CFO, Prosperity Bancshares
Good morning.
Jon Arfstrom — Managing Director, RBC Capital Markets
Hey, just to follow up on that, I know you guys had a tough time with the last deal, getting it closed on time. Any evidence of less regulatory pressures, David? I mean, I don't think you're going to get into that situation again, but any evidence of that?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
I hope so. You saw the Cadence deal close in just a few months. We understand that Bank, Industry bank, they wanted to get that off of their books before something else happens. Everybody else that we've talked to so far, it looks, you know, historically we used to get a bank deal done in three months. I'm hoping that Charlotte may jump in. I'm still thinking that, you know, we're going to go back to those three to four months. I think that's what we're looking at. That last deal, it started off with the DOJ in a town of 10,000 people, that we were a big bank and I mean, there were so many miles from Tyler or something. I don't want to get into all the details. It was another deal after that.
From what everybody tells me, they're more focused on substance instead of forum right now. Unless something changes in the administration, which I don't see happening right now, it seems to be a much cleaner and clearer path where we're going. I think everybody kind of knows where they're going right now.
Jon Arfstrom — Managing Director, RBC Capital Markets
Okay, you kind of alluded to this. Two more questions here. You kind of alluded to this, but you feel like you have enough branch density in some of your larger markets, and then also curious about some of the faster growing outer suburbs of the big cities in Texas. Do you feel like you have density there, or is that a target for you?
David Zalman — Senior Chairman and CEO, Prosperity Bancshares
That's what we're building right now. I mean, I do think if you look at Houston, Dallas, Austin, probably the only place that we don't have enough stores or locations is probably the San Antonio markets, which we would much like be much bigger there. Anytime we can move into a market and be a number one market share in the second tier, like Corpus Christi, that's just stuff we love. I mean, we've done that. Victoria, Corpus, Midland, Odessa, Lubbock area, Bryan, College Station. Whenever we can do that, that's really a sweet spot for us, really.
Jon Arfstrom — Managing Director, RBC Capital Markets
Okay. Kevin, one for you. Follow up. From very early, you talked about revolvers being down a bit, and you thought it was maybe just, you know, maybe from some of the uncertainty last quarter. Anything else in your mind driving that change? Do you expect that to stabilize?
Kevin Hanigan — President and COO, Prosperity Bancshares
I do. We spent the better part of a couple of days digging into it here last week and this week and talking to clients, and I think it's not only going to stabilize, it's probably going to go the other way.
Jon Arfstrom — Managing Director, RBC Capital Markets
Okay. You feel like it's starting to turn now?
Kevin Hanigan — President and COO, Prosperity Bancshares
It is.
Jon Arfstrom — Managing Director, RBC Capital Markets
Okay. Thank you very much.
Charlotte Rasche — EVP and General Counsel, Prosperity Bancshares
Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value.