Good day, and welcome to the Prosperity Bancshares Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. 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 2022 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay 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, Senior Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; 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 Asylbek Osmonov, 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 operator. 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 or performance of Prosperity Bancshares to be materially different from future results or performance 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 2022 conference call. With the second quarter of 2022, Prosperity had strong earnings, core loan growth, continued sound asset quality, impressive cost controls, and a return on average tangible common equity of 15.7%. We are optimistic about our company, which is evidenced by our repurchases of 981,000 shares of our stock during the second quarter. With regard to earnings on our linked quarter basis, our net income was $128 million for the three months ended June 30, 2022. And that's compared with the $122 million for the three months ended March 31, 2022, an increase of $6.2 million or 5%. Our net income for dilutive common share was $1.40 for the three months ended June 30, 2022 compared with the $1.33 for the three months ended March 2022. Our annualized return on average assets for the three months ended June 30, 2022 was 1.36%, and the annualized return on average tangible common equity for the three months ending June 30, 2022, again was 15.7%. With regard to loans, loans on June 30, 2022, were $18.2 billion, a decrease of $1 billion, or 5.4%, compared with $19 billion on June 30, 2021, primarily due to decreases in warehouse purchase program, PPP loans, and structured commercial real estate loans. Excluding the warehouse purchase program and the PPP loans, loans on June 30, 2022, were $17 billion compared to $16.4 billion on June 30, 2021, an increase of $667 million or 4.1%. Our linked quarter loans, excluding warehouse purchase program and PPP loans, increased $406 million or 2.4%, a 9.8% annualized growth. Bottom line, excluding the warehouse purchase program loans and the PPP loans, we saw 4.1% growth year-over-year and a 9.8% annualized growth quarter-over-quarter. Our deposits on June 30, 2022, were $29.9 billion, an increase of $755 million, or 2.6%, compared with the $29.1 billion on June 30, 2021. Our linked quarter deposits decreased $1.2 billion, or 3.9% from $31.1 billion on March 31, 2022. The decrease in deposits was primarily due to seasonality. 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 in the second and third quarters. Also contributing to the decrease was our public fund customers moving their investment funds to other options now offering higher rates that were not available to these customers before the recent interest rate increases. With regard to asset quality, our non-performing assets totaled $22 million or seven basis points of quarterly average interest earning assets on June 30, 2022. This was compared with $33 million or 11 basis points of quarterly average interest earning assets on June 30, 2021, a 34% decrease in non-performing assets. The allowance for credit losses on loans and off-balance sheet credit exposure was $313 million on June 30, 2022. With regard to acquisitions, we continue to have conversations with bankers considering opportunities. We believe that higher technology costs, salary increases, loan competition, funding costs, succession planning concerns, and increased regulatory burden are all pointing towards continued consolidation. Regarding the overall economy, Texas and Oklahoma continue to shine as more people and companies move to the area. For example, according to CNBC, Texas added more jobs over the last year than the 25 lowest job growth states combined. Additionally, during the last year, the Dallas Fort Worth area added 295,000 jobs, three times its annual average annual growth, and the Houston area added 185,000 jobs, with unemployment remaining unusually low. Prosperity continues to focus on building core customer relationships, maintaining sound asset quality, and operating the bank efficiently, while investing in ever-changing technology and product distribution channels. We continue to grow the company both organically and through mergers and acquisitions. I want to thank everyone in our company for helping us achieve this success. Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asylbek?

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended June 30, 2022, was $248.5 million, compared to $245.4 million for the same period in 2021, an increase of $3.1 million or 1.3%. The current quarter net interest income includes fair value loan income of $59,000, compared to $12.2 million for the same period in 2021, a decrease of $12.1 million. The current quarter also includes PPP loan fee income of $2.3 million compared to $10.3 million for the same period in 2021, a decrease of $8 million. However, interest income on securities for the second quarter of 2022 increased $20.4 million and interest expense decreased $6.1 million, compared to the same period in 2021. Due to the asset-sensitive position of the balance sheet, we are seeing a benefit from increased rates and believe that the expected additional rate increases will benefit net interest income in the long term as assets reprice. At the end of the second quarter, we increased rates on our deposits. We expect the full impact of these increases in the third quarter interest expense. In summary, for the third quarter, we anticipate that net interest income will continue to improve. The net interest margin on a tax-equivalent basis was 2.97% for the three months ended June 30, 2022, compared to 3.11% for the same period in 2021 and 2.88% for the quarter ended March 31, 2022. The decrease in net interest margin year-over-year was primarily due to lower fair value loan income and PPP loan fees. Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2022 was 2.97%, compared to 2.96% for the same period in 2021 and 2.81% for the quarter ended March 31, 2022. Non-interest income was $37.6 million for the three months ended June 30, 2022, compared to $35.6 million for the same period in 2021, and $35.1 million for the quarter ended March 31, 2022. Non-interest expense for the three months ended June 30, 2022 was $122.9 million compared to $115.2 million for the same period in 2021 and $119.9 million for the quarter ended March 31, 2022. The increase in salary and benefits is primarily due to the annual merit increases in the second quarter of 2022 and higher discretionary incentives. For the third quarter 2022, we expect non-interest expense to be in the range of $120 million to $122 million. The efficiency ratio was 43.1% for the three months ended June 30, 2022, compared to 41% for the same period in 2021 and 43.7% for the three months ended March 31, 2022. During the second quarter 2022, we recognized $69,000 in fair value loan income. As of June 30, 2022, the remaining discount balance is $7.7 million. Due to the low remaining discount balance, we estimate that accretion income for the next few quarters to be around $1 million. During the second quarter of 2022, we recognized $2.3 million in PPP fee income. As of June 30, 2022, PPP loans had a remaining deferred fee balance of $1.6 million. We don't expect PPP fee income to be significant going forward as the PPP forgiveness winds down. The bond portfolio metrics at June 30, 2022 showed a weighted average life of 5.4 years and projected annual cash flows of approximately $2.2 billion. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Tim?

Thank you, Asylbek. Our non-performing assets at quarter end June 30, 2022, totaled $22,187,000 or 12 basis points of loans and other real estate, compared to $27,184,000 or 15 basis points at March 31, 2022. This represents approximately an 18% decrease in non-performing assets on a linked quarter basis. The June 30, 2022 non-performing asset total was made up of $20,632,000 in loans, $0 in repossessed assets, and $1,555,000 in other real estate. Of the $22,187,000 in non-performing assets, only $669,000 are energy credits. Net charge-offs for the three months ended June 30, 2022, were $1,204,000 compared to $1,217,000 for the quarter ended March 31, 2022. No dollars were added to the allowance for credit losses during the quarter ended June 30, 2022, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended June 30, 2022 was $674 million. Loans outstanding at June 30, 2022 were approximately $18.2 billion, which includes $27.6 million in PPP loans. The June 30, 2022 loan total is made up of 40% fixed-rate loans, 33% floating-rate loans, and 27% variable-rate loans. Charlotte, I'll now turn it over to you.

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

We will now begin the question and answer session. Our first question will come from Jennifer Demba with Truist Securities. You may now go ahead.

Thank you. Good morning.

Good morning, Jennifer.

Question on provision, you guys haven't had a provision for the past several quarters. Just wondering what the outlook there is. I know you probably think losses are going to remain pretty low. But just wondering how you look at provision versus maybe a more challenging economic outlook?

Jennifer, I'll start off. This is David. I think it's pretty simple math. You have $22 million in non-performing and $300 million in reserves. So, that's about a 14 times coverage, better than anybody in the industry. I don't see, unless we see something dramatically change in the immediate future, really increasing that.

I would say that, obviously, we have to make some hopefully reasonable projections about economic issues going forward. There's a lot of talk about recessionary activity. Maybe that'll come to pass, maybe it won't. But we have to take that into consideration, just like we did the issues during the period of COVID. We're past that now. It could come back, but right now, there's some level of concern about recessionary activity. To what extent that affects Texas and Oklahoma? We'll see. So far, both states are doing great.

Yes. I think some people could say, other people might take the position that you have too much in there. But again, not knowing what's on the horizon, I feel comfortable where we're at, very comfortable where we're at.

Yes. I mean, we have a model that takes into consideration everything I just said, and it indicates that we are where we should be. So, I don't envision any big change one way or the other anytime soon.

Kevin, do you have any thoughts on it?

No. I was going to say we went from concerns about COVID to concerns about recession. We've factored in, at the end of the quarter, the possibility of a recession and recessionary impacts on our portfolio in deriving the overall number, which is well over $300 million.

Okay. Thank you. And my second question is on loan growth. Can you just talk about your trends and what you're seeing now and what you think is possible for 2022, excluding and including the mortgage warehouse?

Well, let me start off. This quarter ended June 30 was the best quarter in terms of three months of loan growth that we've ever had. The $674 million compares very well with the first quarter of this year, which was $632 million. The average for all of 2021 was $621 million. And it culminated with a very good number for the month of June. We did over $824 million in the month of June, just that one month. So, our loan committee activity since the end of June has been robust. As mentioned just a minute ago, the economies in Texas and Oklahoma appear to be very strong so far. There's a good chance we're going to see excellent loan growth going forward.

Jennifer, this is Kevin. Just a little inside baseball on the quarter. It started off, and I think we talked to some of you early in the quarter. The quarter started off, and we were $126 million in the hole late in the month of April. We had a relatively big hole to dig out of. That was due to a couple of large multifamily projects that paid off early in the quarter. We rebounded from that. Going into the last week of the quarter, we were up over $500 million in that neighborhood. A few days before quarter-end, we had a $104 million structured CRE deal pay off, and we got a nice prepayment fee out of that deal. This quarter started off better. We're tracking along pretty fine. I would say as a company, we're probably going to stick with for the year, the 5%, mid single-digit kind of loan growth for the year. First quarter, we didn't have much of anything. Second quarter was pretty good. This quarter is feeling pretty good. Tim said loan committee activity has been very strong. I think last quarter, we talked about hiring the corporate banking group down in Houston. We've hired a team, and they've done better than we even expected, and we had high expectations of them. We're feeling pretty good about loan growth, achieving that mid single digits for the year.

Thanks.

Our next question will come from Brett Rabatin with Hovde Group. You may now go ahead.

Hey, good morning, everyone.

Good morning.

You talk about deposits, and you mentioned the municipal deposits being some of the source of the decline linked quarter. I was hoping you could just talk about those deposits specifically and the decline. Was that just due to lower balances with those customers? Or did you elect to not be as competitive on bids or maybe a little more color on those deposits specifically?

Brett, this is David. If you've been following us for a long time, historically, just the seasonality, we would always lose a certain amount of deposits in the second quarter and the third quarter because of many municipalities, which are made up of cities, schools, municipalities, and counties. They get their tax dollars at the end of the year, the first of the year, and then they use it usually in the summertime for the third quarter is the lowest that they have. So, we always have a run on those deposits, because they use them. I would say this time, with $1.2 billion, we thought it would be around $500 or $600 million, that would probably down in that category. However, what we saw was, when rates were low, we usually have the operating accounts for these municipalities. Their investment funds are usually kept somewhere else. But when rates were low, they kept not only their operating accounts, but more of their investment accounts with us. So as they were able to go out and start getting 1.5% or 1.6%, you probably saw the other $500 or $600 million go not just to the use of funds, but because they could get better investments. This is a seasonality-type deal combined with the amount of their investment funds that we normally didn't have. We usually just have their operating accounts. Our deposits overall have grown a little over 2% year-to-date. If you look at it, less than municipal deposits, I think our deposits year-to-date have really grown a little over 2%. So, we knew it was coming with just more in the municipal side.

What you said is exactly correct. If you look historically, what happened this quarter is very normal. It happens all the time.

This happens every year. Except the last previous two years where rates were low, and we were just covered up with deposits from stimulus money.

That's right. As low as our rates were during that period, they were still better than what commercial rates were outside of banking. So, virtually all these public entities left much more of their money with us during that period than they've historically done. They're still our customers. As David said, we typically have the operating accounts in that part of their business. So that hasn't changed. This is really something that's normal.

What I'm saying is if you looked at our deposits, stripping out our deposit franchise, our non-public fund side of things did pretty well. So, this was isolated to the public funds side. Our non-public fund deposits are holding up really well.

Okay. That's great color. I figured a lot. It was just the seasonality from taxes and whatnot, but just wanted to get a better understanding on that. And then secondly, it looks like you did add a little bit to the securities portfolio this quarter. Just curious on the bond portfolio, additions, what you added at what rates and what do you think the yield on that portfolio might do? I don't know what the premium amortization was this quarter, but I was just hoping for a little more color on that.

I'll start off and somebody else would probably jump in. But, again, obviously, what we're getting on securities is much better than we were three or four months ago. I think right now, we probably a quarter before, the quarter before that, we were probably on our investment securities and probably getting about 1.25%. Today when we're buying something, as of a couple weeks ago, it was probably around 3.8. It's dropped a little bit now down to around 3.6. But that's the yield that we're getting right now. Much better, and I think that will continue.

To add a little bit more on that, because we had a little bit of liquidity at the end of the first quarter, we utilized that liquidity to buy up some bonds at a higher rate. That's why you see the improvement on the yield. But as you look at our bond portfolio in big picture, as I mentioned earlier, we have about $2.2 billion of annualized cash flow from the bond portfolio. So, that sets us up pretty well to reprice those that we just discussed at yields of 3.6% or 3.7%. That’s very beneficial for us from that standpoint. The second part of your question, I think you asked about premium amortization is slowing down, and we can see it. In the second quarter, we saw our premium amortization was $11.5 million. If we're projecting for the third quarter, I think premium amortization is going to come down a little bit more. We're estimating to be around $10.5 million, assuming the balances of the bond portfolio stay the same. The plan right now is to keep the bond portfolio balance as we saw in the second quarter.

And Asylbek, I would add to that, that our average rate for this prior quarter on the securities portfolio was 1.72%. We appear to be at a period right now where we can invest between 3.6% and 3.8%, and that clarity seems to be going up, not down. So, I think we're going to consistently see an increase in the rate of return of the securities portfolio, probably for at least a year.

That's easy math, two percentage points from 14, 15 billion.

It's fairly easy. It looks favorable going forward at least.

Correct.

That's great color. One last one, if I could. Given all that you just said, a lot of people are expecting a little higher deposit betas. But it would almost seem like your margin expansion could even be a little higher than it was in the second going forward. Is that a fair assumption you think, or do deposit betas catch up and offset, or is that not the case?

We do our own modeling. And I'd have to say when we do our modeling, it looks extremely good. Again, I've always been cautious, because the flies in the ointment, you never know when something could happen. But doing the modeling, it looks very favorable for us.

Yes. To add a little more color, if you're just looking at the big picture of the margin or net interest income, you have to look at the parts we have in our balance sheet. We discussed about the bond portfolio being repriced, $2.2 billion getting repriced. Our loan growth will definitely help, especially putting the loans at higher yields than we had a few months ago, that's going to help. But you're right, I think that the deposit rate increase we did in the second quarter will have minimal impact on the second quarter. But we'll see that the impact of that deposit increase in the third quarter. Overall, looking at the situation, we will continue to see increases in net interest income and margin in the third quarter, but it might be a little less than what we saw in the second quarter due to the impact of the deposits.

I will use the story of the Queen Mary, I hate to keep bringing it up. But it's like trying to turn the Queen Mary around in our parking lot right outside. Where a lot of the other banks saw big net interest margin increases, the interest rates went up. They're probably more floating in ours. It takes us a time to turn the ship around. But the captain has told me, it's going in the right direction and looking really good.

Okay. That's a great color and congrats on the loan growth.

Our next question will come from Brady Gailey with KBW. You may now go ahead.

Hey, thanks. Good morning guys.

Good morning.

I just had a big picture question on capital levels. Capital just continues to grow quarter after quarter. So, I mean, absent any sort of M&A that will help deploy that, what do you do with the excess capital? Do you let it just keep growing? I mean, your deposit payout ratio is still pretty conservative at around 35%. Do you think about more aggressively increasing the dividend? How do you think about this growing pile of excess capital?

The first question is, there will be M&A. Some of that money will be used for that. It's just going to be for the right thing. Secondly, I would say that you saw us pick up almost 900,000 shares. So, I thought that it was really showing that we felt our stock was really undervalued. I think our average price was $67 or something like that. So, we were really fine with that. You'll see us, if our stock becomes undervalued again, we'll jump in there and do that. We've consistently increased our dividends, and I don't see it being any different. You'll probably see some increase in dividends going forward this year. Of course, that's an important decision. We intend to continue growing the assets of the bank. So, I think you'll see us use excess capital for growth of the bank organically and through M&A, increased dividends, and possibly buy back stock if it becomes undervalued. It's a little bit of everything.

Great. And David on the M&A comment, it seems like from the banks on their earnings calls this quarter, M&A dialogue has really slowed here just with economic uncertainty out there. I know Prosperity's M&A model is sometimes a little different than peers. Would you say you're still actively engaged in M&A? And is M&A still a possibility for you guys near term?

For us, it's been more active this quarter than probably the previous quarter. We've had a pretty active quarter in talking to different banks.

Maybe just update us on size-wise, what targets are you interested in? I know your top focus is in the state of Texas. But what other geographies would you potentially be interested in?

We're primarily focused in the state of Texas and Oklahoma because that's where we're at right now. Having said that, we've had banks from out of state that we've talked about. And several banks within Texas also. I think, again, I mentioned we’ll probably look at smaller-sized banks that are within our markets. If they're in Dallas, Houston, Austin, we’ll consider them. If we go to another state, we wouldn't do it unless we think we could really be in the top five in assets and deposits. That's just our general rule of thumb.

And then finally for me, I know the mark-to-market on your bond portfolio doesn't happen for you guys. Because all your stuff is held to maturity. What's the unrealized loss up to on that held-to-maturity portfolio as of quarter end?

Thinking after Texas, it might be about a million or $1.1 billion.

Yes, I'm sorry. I think that was going to show $1.4 billion.

That's before tax.

Yes, before tax, yes.

The tax-deferred asset would be about $1.1 billion.

Yes. So, but I talked to our treasury people, and they said there was so much improvement last few weeks. So yes. That $1.4 was the highest we got. But it's so much better now, like $1 million.

It's probably better because the tenure has come down. That unrealized loss that bothered me, I'd rather that tenure go up, because the future earnings are so much better for the bank. I mean, we get our money back in a very short term. I think our duration of the portfolio is only four years. So we start seeing results in a reasonable period of time. Historically, it's never been a problem. We've never had to sell any securities out of our portfolio. That's the past futures. We got to be the most liquid bank around. I think we can borrow $10 or $15 billion anytime at the Federal Home Loan money.

Great. Thanks for the call, guys.

Our next question will come from Brad Milsaps with Piper Sandler. You may now go ahead.

Hey, good morning, guys.

Good morning, Brad.

I was curious just to follow up on the margin discussion if you might have where sort of spot loan and deposit rates were at June 30, kind of relative to where the average was for the quarter?

If you look at it, the cost of deposits was 11 basis points at the end of the quarter, and the loans for loans held for investment was 4.35%. If you're looking at total deposits, it's around six basis points. Looking back in 2015 when we had our rate increases, our beta on that time was 21 basis points, and we're doing much better than we did back in 2015, 2016, 2017.

Okay. Maybe ask differently on the loan side of the equation. Where are you seeing sort of new loan yields coming on the books relative to the average yield?

Our average for the quarter was 4.28%. In loan committee, we're seeing loans from just under 5% to maybe five and three-quarters percent. There's some outliers, lower than that, and some higher than that, but basically, between almost 5% and five and three-quarters percent.

Okay. Thank you.

Some of those are current loans on variable rate loans and floating loans. They will go up as rates go up. I'm not talking about just fixed-rate loans.

Got it. And then just one more for me. I did notice that you added a small amount of Federal Home Loan Bank advances in the quarter. Was that more just to cover the outflow of public funds, and the plan would be to just pay those off when the public money starts to flow back into the bank?

I don't know necessarily that's true. I mean, in the past, over the last two years, when interest rates were at zero, and we couldn't get 91% on our investments, we really didn't do that. But if you look before that, we leveraged the bank anywhere between $1 billion to $2 billion. Of the bonds that roll off every year, which you can make a pretty good spread off of that. We never really did more than what we had coming off our existing portfolio. As interest rates stay high, you will probably see us leverage the bank a little bit more.

Okay. That was my next question. It sounds like also that I've mentioned, the bond portfolio staying relatively flat, but it sounds like if you pursue that strategy, that could be another use of capital. Maybe leverage that a little bit to create some spread?

We will, Brad, we will.

Our next question will come from Ebrahim Poonawala with Bank of America. You may now go ahead.

Good morning.

Good morning.

I just wanted to follow up on a few things, one on deposits. I heard you on the seasonal impact this quarter, and maybe a little bit in Q3. But just outside of seasonality, how do you expect deposit growth to play out as more customers seek higher rates, net-net. One, talk to us about your assumptions around the mix of moving from non-interest bearing into interest bearing? And where do you see the loan to deposit ratio going from here?

So basically, organically, our deposits normally grow about 2% to 4% every year, excluding the previous two years. This year, I think if you exclude the municipal deposits, our deposits were up about 2% year-to-date. Normally, I would say that we're always going to have that growth of 2% to 4%. It's hard for me to commit my personal feeling. It's harder to commit right now. There was so much money in the banks that the stimulus programs provided that people had money in their accounts that they never had before. They're spending it now. If you asked my gut, I believe we'll end up again, excluding the municipal accounts, I think that deposits would be at least flat or up to 4%. I know that sounds crazy, because they're down right now. But looking at year end historically, that's what has happened. But you'd have to deduct some of this money that's in people's accounts right now because they're using some of that. I'll say 2%. I'll be conservative in saying that. At the end of the year, we'll be up 2% overall from the prior year. That's just my thought. Concerning the loan side, the loan growth looks really good. We have weekly loan committee meetings that have been busy. If that develops, we see good growth. We're still sticking to mid-single-digit growth for the year.

I would add something from maybe thinking about this from the other side of the fence. I used to run a bank that had a 100% loan to deposit ratio without the warehouse and 114% loan to deposit ratio with the warehouse. In times like that, when you're growing your loans, it can be tough to fund. We have the luxury position, with a lower loan to deposit ratio, which gives us flexibility in times like this.

It's looking good, and when you look at our growth in deposits, non-interest bearing demand deposits grew $255 million for the quarter. That’s an annualized linked quarter growth of 9.5%. From the standpoint of the core competency of ours, our non-public fund deposits are holding up really well.

Got it. That's a lot of helpful color. Thank you. And just one follow up. David, you mentioned M&A discussions picked up this quarter versus last. What's the biggest hang-up when you talk to potential merger partners or sellers? Is it just a macro uncertainty, or is it also the regulatory backdrop impacting larger deals? Which of the two is a bigger factor for potential sellers?

The first issue is always money. I can be a little bit better than that, though. With bigger banks, their bond portfolios have significant losses, and it’s hard for them to recognize. In a mark-to-market world, when you take a hit, it’s hard for them to have some flexibility to mitigate. If dealing with a smaller bank, it’s not that big of an issue. It’s more of an issue when you’re dealing with a bigger bank.

Got it. Thank you, I guess you need to loosen the purse strings a little bit, David, but thanks for taking my questions.

Our next question will come from Dave Rochester with Compass Point. You may now go ahead.

Hey, good morning, guys.

Good morning, Dave.

Just back on the loan growth guide, for the mid-single digits you guys are looking forward. Just wondering what you're assuming for the structured CRE book. It's a part of that. How much runoff are you baking in there? And then separately just on the warehouse. I know you talked about moving a client out of the book this quarter. How are you guys feeling about the rest of the book at this point? Where do you see that bottoming out in the current rate environment?

Yes. I think the warehouse is an easy one for us. Not necessarily easy, but we feel like that is going to average $900 million in Q3, off the average of $1.256 billion in Q2. We did let a client or two go this quarter, and one of them was a relatively big client. We might be down a little bit more than the average warehouse bear because of that. Call it $900 million average for Q3. The structured CRE book, I mentioned earlier in the loan growth comments that we had a $104 million structured CRE deal pay off at the very end of the quarter. It was $178 million total for the quarter. So, that book ended up around $507 million. We’ve estimated in the last couple quarters that there was around $400 million in that book that was sticking. Some very little runoff left.

Okay, great.

This puts the loan growth trend back on track without the headwinds we've been facing.

Maybe just one last one, just switching to fee income. Any thoughts on that directionally going forward, as you guys are looking at the back half of the year? And then, are you guys thinking about tweaking overdraft, NSF fee policies, anything like that going forward?

We tweaked a little bit. We did some things like, the maximum we would charge for the number of overdrafts that you had in any one given day. If your overdraft wasn't over $5, you wouldn't get it. But doing away with overdrafts, I don’t see us doing that in the near future. If I ask customers moving to us why, they’re actually moving from a bank they’re giving everything away. Do we want the customers? Do you want a customer that's overdrafting? So, there may be some reduction later on. Not that I've seen this in the foreseeable future. But I think we’re good where we’re at right now.

Overall, if you look at just excluding one-off items, our non-interest income would range around the $35 million to $36 million. I think that’s going to continue. There’s more usage of debit cards and credit cards, which will be beneficial for us. But any significant change in non-interest income? Probably not. But an opportunity to possibly sell some mortgage loans. In several quarters, we generated around $2 to $2.5 million from the sale of mortgage loans. But we've been booking those mortgage. As we start continuing to grow our loans, there’s potential to sell those loans and make some extra money. That’s a future opportunity but we haven’t done that yet.

Okay, great. Thanks, guys.

Our next question will come from Gary Tenner with D.A. Davidson. You may now go ahead.

Thanks. Good morning. I want to ask about loan portfolio yields. I think in the quarter, excluding kind of adjustments, it was pretty flat. I appreciate the commentary on the higher yielding loans now going through committee. But in terms of repricing of the existing portfolio, was there any sort of lag that held those yields flat in the second quarter that would correct itself here in Q3?

Yes, mostly floors. There might be one or two stragglers, but we broke through the floors. But we had a 1% LIBOR floor for all the warehouse clients. It took a while to break through that. We’re through all the floors now, so the last 75 basis points should work moderately through those floors and whatever happens today, we're going to get the full impact of.

Okay. And then on the warehouse, I appreciate the comments, Kevin, in terms of warehouse floors as well. Given the decline in volumes in warehouse nationally, has the pricing competition in that business gotten worse? Did that factor at all into you exiting a couple of those larger relationships?

It was less pricing and more operational. The team came out and said, this customer is just not cooperating with some information they normally don’t. They felt uncomfortable and who are we to question them. They got unlimited capacity to say no, but not to say yes. Pricing is competitive, though. Bu based on some quick numbers this morning regarding an uptick of 75 basis points, it would cost us about $5 million a year or $1.2 million a quarter pre tax, a million after tax, called a penny.

That if you reinvest that money, we could have a significant spread. In the past, we had really needed the warehouse loans. So, if you were getting 1.25% on an investment and maybe close to 3% on the warehouse loan, we could probably match any rate you're getting on a warehouse purchase with an investment.

Great caller. Thank you.

Our next question will come from Michael Rose with Raymond James. You may now go ahead.

Hey, guys, most of the questions have been asked and answered. Just a lot of moving pieces of the balance sheet and rate sensitivity. I think the last disclosure on the plus 100, plus 200 was at December 31. It was up about 5% and 11%, respectively? Do you have an update to those numbers as of June 30?

I don't have the exact update. But I think, the way we're tracking it might look the same level or a little bit better.

I'd say it's better; it's probably quite a bit better. But it takes time. It doesn't happen in three or six months. It looks good, and the long-term outlook is favourable.

We got it. Thanks for answering my question.

Our next question will come from John Armstrong with RBC Capital Markets. You may now go ahead.

Hey, good morning, guys.

Good morning.

Michael Rose just stole my question; he’s a really smart guy.

That's like him, late in the day or late the call, there’s one thing left to ask; he got it.

When I look at slide eight, and you have that core net interest margin that peaks out at 330, 335, and I went back in my model, and before that it was even higher. David, you just alluded to it, 12 to 18 months out; I think you guys could start punching through some of the highest margins you guys have seen in the last 10 years. Just curious on that. We’re at mid 3% Fed Funds; where could this margin go over the long term?

You're spot on. You watch it for so many years. I think a year down the road or two years, we will probably break some of our net interest margins, no question about it. It feels good compared to where we were at the lowest. Even if you use something moderate; I know some of these, you saw back in 2011 was 398, 2014, 380. If you take the accounting out of it, I think that even the 335, 325 looks good. I think you could do better than that.

I agree. Looking at the long term, definitely would be beneficial, but the uncertainty surrounding potential interest decreases may play a role.

It's hard to keep track with all the movement in the financial news, I guess. That's helpful. Any changes in the economic outlook that you're seeing and hearing from clients? Your numbers are very clean, and you've got a good growth outlook. But any feedback from clients that maybe is a little less bullish that you've heard recently?

Everybody talks about recession, but when I look at the city sales tax rebates for cities throughout the state, we're still seeing double-digit growth in sales tax rebates. So people are still spending a lot of money. Our real estate construction loans, the inventories have gone down a bit, and people trying to buy houses are down a little bit. I wouldn't call it recession, it's more like normalization. Who wants to live with 20% increases in home sales every year? What we're doing is coming back to a normalization.

I don’t see any customers abandoning projects or changing materially due to concerns of a big problem. They might be thinking that, but they haven’t told us.

When you look at our commercial loans, they appear stronger than ever right now.

Job growth fuels a lot of stuff, and we've had a ton of that here in Texas.

The amount of jobs that are being created in Texas and Oklahoma is incredible. So, what I'm saying is, when they talk about recession, it could be more regionalized. Texas and Oklahoma still have a whole lot going for it because of the job growth and people moving in.

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.

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