Image source: The Motley Fool
Prosperity Bancshares Inc (PB -1.56%)
Q3Â 2018 Earnings Conference Call
Oct. 24, 2018, 11:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the third (ph) conference, Prosperity Bancshares Incorporated Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte M. Rasche -- EVP, General Counsel
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Third Quarter 2018 Earnings Conference Call. This call is being broadcast live over the Internet at 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; Merle Karnes, Chief Credit Officer; Bob Benter, Executive Vice President; 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 provided by our call operator, Michelle.
Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements, expressed or implied by such forward-looking statements.
Additional information concerning factors that could cause the actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.
Now let me turn the call over to David Zalman.
David Zalman -- Chairman & Chief Executive Officer
Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2018 conference call. We are pleased with this quarter's results.
First of all, let me share the good news that Prosperity will be increasing its quarterly dividend to $0.41 a share, from $0.36. This represents a 13.8% increase in our quarterly dividend. Prosperity shareholders have enjoyed a 13% compounded annual growth rate from 2003 to 2017. We showed impressive returns on third quarter average tangible common equity of 16.1% annualized and third quarter average assets of 1.46% annualized. Our net income was $82.523 million for the three months ended September 30, 2018, compared with $67.908 million for the same period in 2017, an increase of $14.615 million, or 21.5%.
The net income per diluted common share was $1.18 for the three months ended September 30, 2018, compared to $0.98 for the same period in 2017, an increase of 20.4%.
Loans at September 30, 2018 were $10.293 billion. Our linked quarter loans increased $146 million or 1.4%, 5.8% on an annualized basis from the $10.147 billion at June 30, 2018. We continue to see strong loan demand and borrower enthusiasm. Our total loan approvals are running higher and more consistent than in the last several years. However, we are still experiencing large payoffs. Our lenders are optimistic and are committed to continue to grow our loan portfolio.
With regard to asset quality, our non-performing assets totaled $16.7 million or 8 basis points of quarterly average interest earning assets at September 30, 2018, compared with $45.8 million or 24 basis points of quarterly average interest earning assets at September 30, 2017 and $31.5 million or 16 basis points of quarterly average interest earning assets at June 30, 2018. Our asset quality continues to improve as the non-performing assets at September 30, 2018 reflected a 63.4% decrease compared with the level at September 30, 2017 last year. Prosperity's asset quality is one of the best in the nation. I always say you will like us in the good times, but you will love us in the bad times.
With regard to deposits, deposits at September 30, 2018 were $16.7 billion, a decrease of $173 million or 1% compared with $16.9 billion at September 30, 2017. Our linked quarter deposits decreased $244 million or 1.4% from $16.9 billion at June 30, 2018. The decrease in deposits was primarily due to seasonality. As previously mentioned, we have over 450 municipal customers, such as cities, schools and counties, they use the tax dollars they receive in December and January throughout the year, resulting in declining account balances throughout the year. Our farming customers also have declining balances as their crops have been harvested or being harvested, but have not yet been paid for. We also have experienced business people using their cash that in the past several years we're keeping them as reserves. During the last several years, as rates were low, certificates of deposits decreased. However, the good news is that our average non-interest-bearing deposits for the third quarter of 2018 increased 5.3% year-over-year.
With regard to acquisitions, as we mentioned in the past, 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 ripe for all parties, and it is appropriately accretive to our existing shareholders.
With regard to the economy, the economic fundamentals are strong in the communities we serve. The low national unemployment rate, together with a GDP that is stronger than we have seen in years, has resulted in interest rate increases that may continue over the next year. The increased interest rates have affected the rates we pay on deposits, the rates we charge on loans and the rates we earn on bonds. We believe that the economy has provided an opportunity for the Federal Reserve to normalize rates and be ready to respond to any future economic downturn. We expect the increased rates to help our Bank. For example, we have $9.5 billion in investment securities with a 3.6 year duration at September 30, 2018. That generates approximately $1.8 billion in cash flow annually. If those cash flows were reinvested at today's rates, we should generate a yield approximately 1% higher than the current yield.
Texas and Oklahoma should continue to prosper with no or low state income tax, a business-friendly political climate and a tailwind from the energy sector. Further, Texas has four out of the Top 10 fastest growing MSAs in the United States, those being Houston, Dallas, Austin and San Antonio. Texas has also garnered the best state for business by CNBC this year.
Overall, we continue to see positive customer sentiment. I would like to thank all of our customers, our associates, our directors, our shareholders, for helping build such a successful Bank. Thank you again for your support of our Company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer to discuss some of the specific financial results we achieved. Dave?
David Hollaway -- Executive Vice President and Chief Financial Officer
Thank you, David. Net interest income before provision for credit losses for the three months ended September 30, 2018 was $157.3 million, compared to $156.1 million for the three months ended September 30, 2017, an increase of $1.2 million or 0.8%. The net interest margin on a tax equivalent basis was 3.15% for the quarter ended September 30, 2018, compared to 3.22% for the same period in 2017 and 3.28% for the quarter ended June 30, 2018. On a core basis, which excludes the loan discount accretion and the higher than normal collection on a non-accrual loan for last quarter, the core margin this quarter was 3.09% versus 3.11% last quarter and 3.07% for the same period last year.
Non-interest income was $30.6 million for the three months ended September 30, 2018 compared to $28.8 million for the same period in 2017, an increase of $1.8 million or 6.3%. Non-interest expense for the three months ended September 30, 2018 was $81.8 million, compared to $77.5 million for the same period in 2017, an increase of $4.3 million or 5.5%. This was primarily due to an increase in salary expense for all associates, following the enactment of the Tax Cuts and Jobs Act.
Efficiency ratio was 43.5% for the three months ended September 30, 2018, compared to 41.9% for the same period last year and 43.9% for the three months ended June 30, 2018. The bond portfolio metrics at 9/30/2018 showed a weighted average life of 4.07 years, an effective duration of 3.62 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?
H.E. (Tim) Timanus -- Vice Chairman
Thank you, Dave. Our non-performing assets at quarter end September 30, 2018, totaled $16.777 million or 16 basis points of loans and other real estate, compared to $31.585 million or 31 basis points at June 30, 2018. This is a 47% decrease from June 30, 2018. The September 30, 2018 non-performing assets total was comprised of $15.778 million in loans, $110,000 in repossessed assets and $889,000 in other real estate. Of the $16.777 million in non-performing assets, $3.846 million or 23% are energy credits, all of which are service company credits. Since September 30, 2018, $2.867 million or 17% of the non-performing assets have been removed from the nonperforming assets list or are under contract for sale, but there could be no assurance that those under contract will close.
Net charge-offs for the three months ended September 30, 2018 were $1.318 million compared to net charge-offs of $2.636 million for the three months ended June 30, 2018. This is a decrease of 50%. $2.350 million was added to the allowance for credit losses during the quarter ended September 30, 2018 compared to $4 million for the quarter ended June 30, 2018.
The average monthly new loan production for the quarter ended September 30, 2018 was $277 million compared to $297 million for the quarter ended June 30, 2018. Loans outstanding at September 30, 2018 were $10.293 billion compared to $10.147 billion at June 30 2018. September 30, 2018 loan total is made up of 39% fixed rate loans, 37% floating rate and 24% variable rate.
I will now turn it over to Charlotte Rasche.
Charlotte M. Rasche -- EVP, General Counsel
Thank you, Tim. At this time, we are prepared to answer your questions. Michelle, can you please assist us with questions.
Questions and Answers:
Operator
(Operator Instruction) The first question comes from Dave Rochester of Deutsche Bank. Please go ahead.
David Rochester -- Deutsche Bank -- Analyst
Hey, good morning guys.
Charlotte M. Rasche -- EVP, General Counsel
Good morning.
David Rochester -- Deutsche Bank -- Analyst
On the NIM, I just noticed that you guys may have moved some of your money market rates up a little bit on your website, maybe at quarter-end. Were those moves applied to the entire portfolio? And then just given that how are you guys thinking about that NIM guide going into 4Q?
David Zalman -- Chairman & Chief Executive Officer
This is David Zalman. It's true, we did raise interest rates. I think that really I would say they really just became more normalized. When I read a lot of reviews this morning, I saw that net interest income became a big issue. But if you remember, last time we had a higher net interest margin and we said that we are probably looking anywhere between 3.16% and 3.18%. I think we came in at 3.15%. And again, part of the reason for the downturn in the net interest margin was last quarter there was a recovery from a bigger accretion recovery and also some interest recovery at the same time. So we didn't hit it, but at the same time interest rates just went up higher than they normally. I think competition just went up. So we went up on interest rates, but again, it doesn't change our perspective going forward. And I would say this, because I have a feeling that everybody is going to be asking the same question on net interest income. So I am just going to put it to bed, right, to start with. We feel very comfortable with the net interest income -- net interest margin going forward. I think that -- again, we have a model and our model shows, especially with the amount of assets that we have, a repricing over a period of time that we go -- again this is just an interest rate model and models, the inputs you put into these models can change what the output is. So, just be careful when I tell you some of the stuff.
I mean, going forward, we look at a 3.20% net interest margin in six months. We look at 3.24% in 12 months. We look at 3.27% in 12 months, 3.48% in 24 months and 3.70% in 36 months. So, again, that's what the 100 basis points move up in rates, but again -- so we're very excited where we're at. I know that people had the net interest margin at 3.20% and we never kind of indicated that we would even be there, but I know that most analysts put us there. But, going forward, we are very happy where we're at for this quarter. I mean we hit our earnings per share, 5.8% loan growth. There are so many positive things, I just don't wanted to get bogged down in this net interest margin, because going forward that's a real plus for us, where I think a lot of other banks, they've had their play. I mean most of their stuff is floating. Ours is yet to come. I hope I didn't go into too much detail. Dave, you want to talk about it just a minute?
David Hollaway -- Executive Vice President and Chief Financial Officer
I'll just briefly say, from the money market that was just -- it wasn't specific account that we raise, we just normalized. From a liquidity position, as we came through the zero interest rate cycle, obviously, we didn't need that much liquidity. But now as rates have come up, we just need to normalize our rates, we can't, from a competitive standpoint, just fall so far behind and that's all we did this past quarter, is normalized money market and CD rates.
David Zalman -- Chairman & Chief Executive Officer
Well, I think if you look back before interest rates went so terribly low, banks like ours had anywhere from 20% to 30% of their money in CDs and when rates went extremely low, we saw rates go to -- and we saw -- like I think we have about 12% in CDs. I think what you will see and what I've said in the past, you will see that money will be moved out of certain money market accounts and retiring, your CDs will grow more. That's just part of what happens in a rising rate environment.
David Rochester -- Deutsche Bank -- Analyst
That's a lot of good detail, guys, I appreciate it. So I guess that -- your guide to 3.20% NIM over six months, I mean that's obviously incorporating all the changes you guys have just made. And I would -- I guess that incorporates not only the repricing up of the variable rate loans, but also sort of the roll-off of low rate securities coming on at higher yields and I think you mentioned something like -- something close to like a 3.30-ish or maybe mid-3s on the securities reinvestment rates right now, is that right?
David Zalman -- Chairman & Chief Executive Officer
I think if we reinvest our rates today, yes, it's probably at least a full point above where we're at today, probably around 3.5%. Yes, maybe a little bit more.
David Rochester -- Deutsche Bank -- Analyst
Okay, great. And then just switching to expenses. How are you guys thinking about that $81 million to $82 million range going forward? You guys landed in the -- right in that range this quarter, is it still good heading into the fourth quarter?
David Zalman -- Chairman & Chief Executive Officer
Yeah, I think so. I think for the foreseeable future that's the range we should be running, in between $81 million and $82 million.
David Rochester -- Deutsche Bank -- Analyst
And then you get that $2 million to $3 million benefit in 1Q, I guess, from the surcharge rolling off?
David Zalman -- Chairman & Chief Executive Officer
I don't know. We need to believe it's rolling off in the first quarter (multiple speakers) and I would just say for us, again, we said $2 million to $3 million, but that's the annualized, that wouldn't be in one quarter, but it is a (multiple speakers) effect, we get a quarter of that starting in the first quarter.
David Rochester -- Deutsche Bank -- Analyst
Yes, great. And then just one last one. I noticed you guys had some nice loan growth this quarter. CRE was pretty strong. And I know -- we've just heard in the market some commentary that suggests that non-banks, very competitive in that space, not only on pricing, but structure. Can you just talk about what you're seeing there and why this growth is still strong and your outlook on that?
H.E. (Tim) Timanus -- Vice Chairman
Sure, this is (Tim) Timanus. You're right, the competition is significant in pricing and structure, both, and that includes bank sources and non-bank sources. It just is what it is. I personally think we saw an increase in the competitiveness this quarter compared to the second quarter of the year. It ebbs and flows. Who knows what it will be like by the end of this year. But your assessment is correct, it's been very competitive here lately.
David Rochester -- Deutsche Bank -- Analyst
Okay, great. Thanks guys.
Operator
The next question comes from Geoffrey Elliott of Autonomous Research. Please go ahead.
Geoffrey Elliott -- Autonomous Research -- Analyst
Hi, thanks very much for taking the question. I'm going to ask another NIM question, so apologies for that in advance. The yield on securities was pretty flat compared with 2Q, it was up a basis point. And what held back the benefit from repricing, because I guess it kind of feels like we get on these calls, we hear the message, the reinvestment of cash flows is at a much higher rate. But so far that hasn't translated into a higher -- significantly higher yield on securities this quarter. So, what kind of held it back this time?
David Hollaway -- Executive Vice President and Chief Financial Officer
I'll jump in first. But just on a -- like a linked quarter basis, I mean it's a dynamic of mathematics, right. I mean, the cash flows that we reinvest, I don't have the specifics of how much cash we reinvested this quarter, but I mean at best $200 million, $300 million at the higher rate. It's just not going to move that overall yield on the portfolio, which is mathematics. But the point would be well taken to say, if we can reinvest at a 100 basis points higher than what the overall portfolio yields, we certainly should begin to see some dramatic effect on it as we move out six, nine and 12 months.
David Zalman -- Chairman & Chief Executive Officer
Yes, I mean, I don't think you have to be a mathematician or a scientist to take $9.5 billion, reprice it at one point above it. You can do the math, anybody can, put a tax effect on it, and you still have about $75 million more. But it's not always that simple as it seems, because you have moving parts and you have rights moving all the time. So I guess you'd have to say, OK, on a static basis what happens if things stopped today, what would happen to me, it doesn't take a math genius to figure that out.
David Hollaway -- Executive Vice President and Chief Financial Officer
But you're looking at cash flow. If you could roll over 12 months and we're doing -- we still do $1.8 billion (ph), but you've got to average it out, because it doesn't happen on day one. So cut that in half and then average 100 basis points up, it will begin to move that overall.
David Zalman -- Chairman & Chief Executive Officer
I think that -- I mean, it wouldn't work like that if tomorrow we said, OK, our money market accounts were too low and we are going to raise them a full 100 basis points or something like that, but staying in a relatively moderate marketing, you're moving up, I mean, things should happen that way. It just -- it is -- I know everybody would like to see them move faster, myself included, but this is just the way it is. And again, I think a lot of our net interest margin is always sometimes harder. I don't want to get real deep into it, but when you have this accretion income coming this way and that way, it would be interesting just looking at it without any accretion what did the net interest margin do one way or another. But having said that, I don't want to get extremely technical. I think it still boils down to rates stop, take the $9.5 billion, reinvest it at a point or a point better, little bit more than a point and you can do the math, it is pretty easy.
Geoffrey Elliott -- Autonomous Research -- Analyst
And then just one other quick detail. Non-interest income was a bit stronger this quarter and in particular the other non-interest income line. Were there any kind of one-offs or episodic impacts that boosted non-interest income, particularly the other components?
David Zalman -- Chairman & Chief Executive Officer
The answer is yes to that. We had some one-offs there, those probably -- when you look at that overall number, there's probably $800,000 to $900,000 of what we would call extraordinary one-offs in there.
Geoffrey Elliott -- Autonomous Research -- Analyst
Great. Thanks for taking my questions.
Operator
The next question comes from Brady Gailey of KBW. Please go ahead.
Brady Matthew Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Good morning.
David Zalman -- Chairman & Chief Executive Officer
Good morning.
Brady Matthew Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst
So I know Prosperity has a buyback in place, you guys have not been active on that any time recently, but if you look at how the stock is trading, do you think it's to a level where a buyback might be more of a possibility for Prosperity?
David Zalman -- Chairman & Chief Executive Officer
This is David Zalman. I'll answer that. We have a buyback plan that's already been passed by the Board of Directors and I think that we're allowed to buy -- and Charlotte may jump in -- we can buy up to 5% of our stock. At this point we have not bought any of our stock back. But as you mention, our stock looks pretty, pretty cheap, in my opinion. I mean, when you're looking at the $60 range, you're not talking (inaudible) 12 times. So it's something we will really consider, we're not committing one way or another, but it's something that we really consider and we're prepared that we can -- we're making a lot of money, we have a lot of capital. So it's not out of the question.
Brady Matthew Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. And then just a little more on M&A. I know your stock price being lower is not helping on that front. But in the past you've talked about, it's really not a pricing issue for you guys, it's more of a what's for sale issue. I know you guys like to buy very old institutions that have good deposit bases and there hadn't been many of those for sale recently. Is that still the dynamics on the M&A front for you guys, or has anything changed recently?
David Zalman -- Chairman & Chief Executive Officer
That's still the dynamics and those are the deals that we're working on right now and it's like a fine wine. Sometimes it takes a little bit longer, but we're focused on that and I think that we're continuing on that path and I think over some period of time you'll see us. But again, we -- it's got to be the deal that we like. It's not something -- you said it earlier -- the type of banks that we really like to look at, it doesn't mean that it's the only type of bank that we'll look at, but it's banks that have been around for a longer time. And again, we really believe that the real value in any bank is in the deposit base, the core deposit base. And so, that's really what we focus on and that's the kind of banks we're talking to as we speak.
Brady Matthew Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Got it. Thanks for the color guys.
Operator
The next question comes from Jennifer Demba of SunTrust. Please go ahead.
Jennifer Demba -- SunTrust -- Analyst
David, I think that the last time you repurchased stock was when the price went down following the price of oil. And if I recall right, the price got into -- the Prosperity price got into the low 60s or mid-60s. So do you have less interest in repurchasing stock right now for some reason than you might have back then?
David Zalman -- Chairman & Chief Executive Officer
My memory may be wrong, but I think the stocks -- when the oil crisis and everybody thought we were falling off in the Gulf of Mexico, the stock went into the 30s and we really --
Jennifer Demba -- SunTrust -- Analyst
You are right -- I'm sorry 30s. I got the number wrong, I apologize.
David Zalman -- Chairman & Chief Executive Officer
That's OK. But again, we weren't making the kind of money we're making right now. I mean, you're showing $4.98 to $5, I guess, for '19. So I think that the stock looks very attractive. And again, we keep building a lot of capital and we're making a lot of money, but I've always said that I want to keep our capital more for growing the Bank and for -- and making acquisitions. But again, when you start seeing the stock at this price, it's something that we need to consider.
Jennifer Demba -- SunTrust -- Analyst
Okay, thank you.
Operator
The next question comes from Peter Winter of Wedbush Securities. Please go ahead.
Peter Winter -- Wedbush Securities -- Analyst
I guess sticking with the margin, if I look at the core margin quarter to quarter, and I strip out that 7 basis point benefit from the elevated interest recoveries, I guess I was a little bit surprised that even though it was still down and I'm just wondering if you could talk about that a little bit, especially with having good loan growth?
David Zalman -- Chairman & Chief Executive Officer
(Multiple speakers) won the lottery if you haven't talked to Peter today, but I guess I've been, so I am here. Dave, do you want to answer Peter?
David Hollaway -- Executive Vice President and Chief Financial Officer
That's just a reflection. I mean, again, when you look at -- we've kind of said this on lots of conference calls -- it's the dynamic of our balance sheet and where we're at today, and let's kind of go back through it. For this quarter, why you see what you see is we did normalize our money market and CD rates a little bit. It was time. We need to be competitive, we can't just shrink the Bank forever. So we normalized those rates a little bit. And when you raise rates like that it takes just a little bit longer for our assets to reprice, our loans, our securities. And so, one quarter to the next, you've heard us say this on prior calls, we can't see what all the variables are that are moving, but it might move our margin a few basis points. It might be stable, it might go down a couple, it might go up a couple, in this case it went down a couple. But when you look year-over-year, if you look at the core margin year-over-year, we went up a couple basis points. Now should have been a little bit more, but again, as we stabilize our core pricing, I think we'll be OK. And I'll just reiterate what David was saying.
So looking at the next quarter, let's look out 6 to 12 months and using the balance sheet we have today and again, I don't know what that specific -- David quoted some numbers, I don't know what that specific percentage could ultimately be. But what it does tell us directionally is we should do better, and let's just use the mathematics on that. Why would we do better? Well, it's simple, we've got $1.8 billion of cash flow coming from the bond portfolio at 2.29 (ph) and they'll go back in at, at least 100 basis points better. And on the loan side that average life in our own portfolio today is pretty short. I think we're running about $3 billion of cash flow there. So you would be able to reinvest that at current rates, which is the -- help me out here, it's 5.25% (ph) is the rate, we could do a little bit better than that and you are reinvesting that. And remember, when we look at the model, it's a static model, it doesn't account for growth. It looks at where we're at on that day.
So the other piece of this is if we continue to do what we've done this last couple of quarters in terms of growing our loan portfolio and we were booking those dollars at higher rates, all that would support our model that says our margins should expand as we go forward. The wild card on this is, is your funding costs and how fast they grow. But I think, again, we're core-funded and I think if you looked over -- since rates have been going up, our betas on our deposit costs have been pretty reasonable compared to a bank that's wholesale funded. I mean, Dave, do you want to jump in with some color on that?
David Zalman -- Chairman & Chief Executive Officer
Peter, I think everything that Dave was saying is accurate, and I understand where you're coming from on this, but at the bottom line, I think anybody could see that banks that were paying 10 and 20 basis points on their money market account and leaving in there forever, it wasn't going to work. So yes, I think not only our Bank, probably all banks really had kind of a normalization of rates. And when you have a big jump like that -- I think if you would have been in times past when rates were moving up all the time, you were moving rates up. Probably when prime went up, you've changed every time. I think all banks got to a point where nobody was raising rates, so we didn't. And then we woke up one day and everybody was real high. And so I think you went to a normalization of rate. And so I think when you have a normalization of rates like that, everything is not going to reprice. Your liabilities go up immediately, but your assets don't. And I don't know if I'm being very clear on that, but that's just a point. But as David said, you have to look at where we're going and where we're going to be. And our models show -- again, they are just models and things can change -- our models look very good and we're very excited where they're at, and we should be making a whole lot more money. Again, I think if you are an investor for three months or six months, you are probably not as excited, but if you are a longer-term investor for a year or two, you got be terribly excited where we're at and what we're looking at.
Peter Winter -- Wedbush Securities -- Analyst
Thank you. And I guess just on that, I guess, interest-bearing deposits increased about 12 basis points this quarter. And so with the increase in the money market accounts toward the end of the quarter, I mean how much do you think your interest-bearing deposits will go up in the fourth quarter?
David Zalman -- Chairman & Chief Executive Officer
I don't have that information.
David Hollaway -- Executive Vice President and Chief Financial Officer
I'd say a couple of things to that when you're looking at -- recall, again, remember how our balance sheet works. We have all these public fund entities. So I would guess when we get to the end of the quarter and you're looking at our period end interest bearing piece of the puzzle, that's going to go up, just simply because the public funds come running in.
David Zalman -- Chairman & Chief Executive Officer
And all (ph) funds coming into year-end, they just have a bigger increase in funds at year-end.
David Hollaway -- Executive Vice President and Chief Financial Officer
Each year when you look at us, you just see this huge inflow coming in. But to the question to, where we need to be in terms of growing our deposits, let's just say overall if we can kind of revert back to normal, we should be growing our overall deposit base when this is all said and done and you adjust for all the seasonality, 3% to 4%. Now, don't misunderstand what I'm saying. I'm not saying we would grow that 3% to 4% in the fourth quarter. That's an annualized number, but that's -- you've got these two dynamics at work, we should grow 3% to 4% annually and in the fourth quarter of every year we have a huge inflow of deposits coming in. So it will make all those balances a lot higher on a different year.
David Zalman -- Chairman & Chief Executive Officer
I think that deposits -- and again, I don't know that -- I think we probably have a better core deposit base than anybody does, but you had so many of these deposits that people just left in checking accounts and as they saw that they can go get 2% or 2.5% in other places, they started moving that money and you also have the dynamic that businesses weren't using their money, they were just using them as reserves in the bank, and now you have businesses buying capital equipment, they are using their money and you have this dynamic of interest rates moving. So -- but having said all of that, I still think that we're one of the better positioned banks to contend with all of that.
Peter Winter -- Wedbush Securities -- Analyst
Okay. And then just finally, If I look at the fourth quarter, do you think the run rate for the reported margin would be back to that 3.16%, 3.18% level?
David Zalman -- Chairman & Chief Executive Officer
He says he is not going to tell you anything (multiple speakers). Are you comparing that to the 3.09% number, is that what you are doing?
Peter Winter -- Wedbush Securities -- Analyst
No, reported, the reported number, so it would be the (multiple speakers).
David Zalman -- Chairman & Chief Executive Officer
The best crystal ball we have is it possible we could be at 3.16%, 3.17%? Yes. Is it possible we could be at 3.15%? Yes. Is it possible 3.14%? Yes, I mean I get where you're going. But the trend line would say we should do a little bit better, but I can't guarantee that, because there are too many moving parts. I think -- again. I wish we wouldn't have to look at quarter-to-quarter. I wish you could look at the dynamics of the Bank and what our models say and our models are showing that again, these are just models, but in six months we are looking at 3.20%, in 12 months 3.27%, in 24 months 3.48% and in 36 months 3.70%. And you can do the math on that and I think these models, we've been running this model for 20 something, or 30 something years, and we're pretty close. So I don't see these changing really.
Peter Winter -- Wedbush Securities -- Analyst
Okay, thanks very much for taking the questions.
Operator
The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Good morning. It's a question on loan growth. You said -- pretty good numbers the last couple of quarters. And I know there's some competition as well. But how do you feel about the current pace of growth and give us an idea if you're doing anything different than maybe you were a year ago?
David Zalman -- Chairman & Chief Executive Officer
I think, Tim, you may want to jump in or let may start off (multiple speakers). I'd say, Jon, the bottom line is the fundamentals, when you look at the economy are extremely good. The last couple of weeks or so, you know, I don't know what happened, whether it's the geopolitical issue, one losing a house or not losing a house or is it interest rates that may be bothered (ph). I mean, there's a couple of deals out there, I don't know the answer to what's causing that deal. But when you look at the fundamentals, the fundamentals are still very good. They are still very strong. And when I think we get out of the psychological aspect, what people think about interest rates or who is going to be leaving the house or something like that. I think if things don't change, we should still see the good growth that's out there. I think this is a blip. And I think fundamentals are very good. Now having said that, we are always subjected to some large loan pay-off. But we are working harder to make loans, we're focused on our organic growth. Tim, you may want to jump in.
H.E. (Tim) Timanus -- Vice Chairman
I think what you're saying is correct. The economic fundamentals, from our perspective, are still strong. So the softness that we saw in loan production during this most recent quarter, I personally don't think has anything to do with a softness in the economies that we serve. Having said that, I agree with David, as we've gotten closer to these mid-term elections, I think we've noticed a little bit of a decline in request for new fundings. I think people are just nervous about what might happen with these elections, but we'll know one way or the other in a couple of weeks on that. So it's not -- it's not going to be an unknown for very long. As I mentioned earlier in the call, the biggest problem that created a little bit of a decline in our production is competition. We looked at a lot of loans and we approved a lot of loans, but we continue to have competitors out there in the marketplace that from a pricing perspective and from a structure of the loan perspective are willing to do things that candidly, we just don't like in the best interest of our shareholders. Below prime pricing is prevalent and that doesn't do anybody's margin any good. And when you take extreme risk in the structure of a loan, long term that doesn't seem to work very well for very many lenders. So we're trying to keep an equilibrium and watch it week-by-week. But I think the competition was clearly the biggest problem for the quarter. We'll see how that plays out going forward.
David Zalman -- Chairman & Chief Executive Officer
I would say competition has always been tough, it will always be tough, as Tim says it may be tougher now. But in the long run, we've always had that in banking, in my whole career, and usually the people that are doing that kind of stuff, they usually don't last out that very long, or they want to join us, or It's just -- a lot of them are just in secondary markets that we're competing against too. And so that never lasts in the long run. As long as we're consistent, we keep our head to the ground, we have our sleeves rolled up and we continue doing what we're doing, it will be fine.
H.E. (Tim) Timanus -- Vice Chairman
I think that's right. If you look at our discipline over many, many years, it has clearly paid off and that doesn't mean that we shouldn't look at credits on a credit-by-credit basis and try to be as flexible as we can, because we in fact do that, but at the same time, we try not to do things that are just blind stupid. And that's the way we've always run things and I think it's paid off for us.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Okay, good. That's helpful. And then just back on the capital question, it's probably annoying to you, but your capital keeps growing and you're at a 10% TCE. It's probably the highest you ever been. It's kind of a luxury, but at what point does it just get too high, and it kind of forces your hand to do something like return the capital or really step on the gas on a buyback?
David Zalman -- Chairman & Chief Executive Officer
Jon, you could never annoy me. We've been around too long ,let me say that. But talking about the capital at 10%, I mean believe it or not, I mean before the last election, regulators were almost getting you to say that 10% is the normal, where they wanted you to be. We don't think that's the issue right now and we are building a lot of capital, even after the increase. You saw those increased dividends, so that address part of it. I think you'll see us continue to increase dividends. I mean, our annual increase has been over 13% over the last number of years. I read those in my comments earlier. But I think there's two things. We're going to make a deal. I mean, at some point in time, you can look in our history, we've had 42 acquisitions. And that's not going to change. I can promise you, we're going to use the money.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Okay. Alright, thank you.
Operator
The next question comes from Ebrahim Poonawala at Bank of America ML. Please go ahead.
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
Good morning, guys. A quick follow-up on deposits. So we've had pretty significant seasonality, as you said, close to $900 million in deposit growth fourth quarter of last year. Should we expect a similar magnitude of growth this year as well, and is the majority of that growth going to happen in interest bearing deposits?
David Zalman -- Chairman & Chief Executive Officer
I'll start off. Basically no, the $900 million was not -- that was above and beyond what we normally get in at year-end. I think we normally get in around $400 million to $500 million and that's kind of what we're anticipating probably this year. I think a lot of it is interest bearing. But again, I don't have the exact numbers, because again, you have so many dynamics happening. You have businessmen that start bringing money back in, getting ready for their quarterly federal income tax, you've got farmers and people like that have sold their crops. You've got public funds, they're bringing their tax dollars and the majority of it is tax dollars a lot of time. So you have so many dynamics happening. Dave, do you have a better answer than I do?
David Hollaway -- Executive Vice President and Chief Financial Officer
No, I mean I think it will be all the above. I mean, the interest bearing and non-interest bearing.
David Zalman -- Chairman & Chief Executive Officer
Probably leaning more toward interest bearing, I'm sure.
David Hollaway -- Executive Vice President and Chief Financial Officer
I mean, again, if you were looking at last year, non-interest bearing increased a couple hundred million in the fourth quarter. So I mean it's going to be all the above.
David Zalman -- Chairman & Chief Executive Officer
I just don't know. But I guess the thing we can answer is, no, we're not expecting $900 million at the end of this year.
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
And that's helpful. And just going back to sort of deposit pricing, you mentioned, I mean obviously it's picking up, you're trying to defend your share. But when you look at the loan to deposit ratio today at 62%, it's up year-over-year. Is it your best guess that given the 2% to 3% outlook that you've laid out for deposit growth over time, deposit -- loan to deposit ratio should continue to trend higher?
David Hollaway -- Executive Vice President and Chief Financial Officer
I'll answer that first. I mean it should trend higher. I mean, I guess the math -- in this case, the mathematics may work against us and I'll do this off of the top of my head, but if we grew, let's say, deposits 3% that's going to be somewhere in the $500 million range. And if we grew loans at 5% that's somewhere in the $500 million range. So if we were growing, the Bank, they would both be going up and I don't know you will gain on that loan to deposit ratio necessarily the way we could gain. So somehow we could take the cash flow coming from the securities while growing deposit and reinvest that some on the loans, but it's mathematics. That's why just caution you on that. We can't just jump to 70% if we are growing our deposits. And by the way, that's the best scenario of all of the above. Grow your deposits and grow your loans.
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
Right. But it seems like there are other banks who have allowed the loan to deposit ratio to trend higher without raising deposit rates, but doesn't sound like that's the case with you, where you do want to retain your customers, you are sort of adjusting pricing to bring in deposits as opposed to just letting this ratio move considerably higher relative to where it is today?
David Zalman -- Chairman & Chief Executive Officer
I would be cautious and say, we're trying to keep our core customers. We're not trying -- you can pick up the paper and -- I don't even need to name the banks, see everybody can tell you, their loan to deposit ratios are 100%. And so they're paying anywhere from 2.5% to 3%. We are not doing that, but at the same time, we don't want our core customers that -- we know some of our customers can get paid more somewhere else. But we don't want them to be completely -- we don't want to be the highest, but we want to be fair to them, let me just say that. So we don't want to lose our core customers and so you can't be paying 25 basis points on a money market account if somebody else is paying 80 or 90 basis points, and there are some banks that are paying 200 or 225 basis points. So, I guess the point what I'm trying to make, we're trying just to keep our good customers, our core customers that are somewhat cognizant of pricing, but again not totally based with is just on pricing.
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
Understood. and just David Hollaway, one last follow-up question on the tax rate. 21%, it seems like we are trending closer to 20% for the year. Is 21% still the right way to think about tax rate going into '19?
David Hollaway -- Executive Vice President and Chief Financial Officer
Yes. You know when we looked at it earlier in the year with all the changes and our best guess estimate was we should run around 21%. Apparently, we've been able to take advantage of a few things in the new tax law. Got us to about 20.5%. So I don't think I'd go down to 20%. If somebody want to put in 20.5% that's fine. That probably works for next year.
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
Got it. Thanks for taking my questions.
Operator
(Operator Instructions) The next question comes from Matt Olney of Stephens. Please go ahead.
Matthew Olney -- Stephens -- Analyst
Thanks guys, good morning.
David Zalman -- Chairman & Chief Executive Officer
Good morning.
Matthew Olney -- Stephens -- Analyst
Tim, you provided some really good commentary on loan competition that you guys are seeing. I think investors generally have a concern that newer loan yields that are being put on are pressuring the overall loan yields and really starting to impact that overall loan betas at higher rates. Any color you can give us as far as the newer loan yields? And Tim, you gave us the new monthly loan production. Can you give us some yields that go along with that? Thanks.
H.E. (Tim) Timanus -- Vice Chairman
Sure, just across the board, as a comment about the average, what we are booking now on the low end is prime at this time, 5.25%, and at the high end 6%, or just a little above. So if you want to say the bulk of it is falling in the 5.5% to 5.75% range. That would be pretty much accurate. But having said that we've lost a lot of stuff, because people have priced it a lot less than --
David Zalman -- Chairman & Chief Executive Officer
I mean, there's plenty of pricing way below prime out there still, which doesn't make any sense to us, but whatever works, works, I guess. But that's still been out there. That's right.
Matthew Olney -- Stephens -- Analyst
And do you feel like some of the banks in your marketplace are taking advantage of the corporate tax cut move this year, and starting to compete that away within loans and deposits so far this year?
H.E. (Tim) Timanus -- Vice Chairman
Well, I think there's probably some of that. My personal opinion is that they're building their banks to sell them. They're trying to put as many assets as they can on the books and they're going to try to sell their institutions. But I don't know that for a fact, but that's how we see these things play out historically. Doesn't mean there's anything wrong with it or doesn't mean there's necessarily anything good about it. It is what it is. So the tax rate, I think, makes people feel better and it frees up some funds and does create some flexibility in the market from that standpoint, but I wouldn't call that the primary driver.
David Zalman -- Chairman & Chief Executive Officer
I have to agree with you, Tim. That's a good analogy.
Matthew Olney -- Stephens -- Analyst
Okay. And then I guess separately, thinking about loan pay-downs, I think in the past you've talked about loan pay-downs can ebb and flow. So help us understand was the third quarter a relatively higher or lower quarter for loan pay-downs versus the first half of the year?
H.E. (Tim) Timanus -- Vice Chairman
It was lower. There's really not much way to predict that. And earlier this year, we had a few very large loans pay off, because they were tied to essentially real estate projects and the owners of those projects received some very good offers and they decided to sell what they had. And you know that can happen -- doesn't tend to happen in a real poor economy, but in a decent economy that's a good thing, and it happens. So we did have a lower burn rate, if you want to call it that, on our loans, we didn't have as many pay-offs, but that could turn around and be different the last quarter of the year. A lot of times things, as we know, happen during the fourth quarter, because people want to take profits, what have you, during this calendar year as opposed to pushing them into the next. So I really can't make up a firm prediction, just kind of is what it is.
Matthew Olney -- Stephens -- Analyst
And then the last question from me, thinking about your overall deposit franchise, how do you guys think about in terms of what portion of the deposit franchise is retail in nature versus more commercial in nature? Thanks.
David Zalman -- Chairman & Chief Executive Officer
I don't think that we -- I don't know that we have any exact number. Historically, it's been about 50-50, about half of our deposit base has been retail and the other 50% has been commercial.
Matthew Olney -- Stephens -- Analyst
Thank you guys.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Charlotte M. Rasche -- EVP, General Counsel
Thank you, Michelle. 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.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 55 minutes
Call participants:
Charlotte M. Rasche -- EVP, General Counsel
David Zalman -- Chairman & Chief Executive Officer
David Hollaway -- Executive Vice President and Chief Financial Officer
H.E. (Tim) Timanus -- Vice Chairman
David Rochester -- Deutsche Bank -- Analyst
Geoffrey Elliott -- Autonomous Research -- Analyst
Brady Matthew Gailey -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Jennifer Demba -- SunTrust -- Analyst
Peter Winter -- Wedbush Securities -- Analyst
Jon Arfstrom -- RBC Capital Markets -- Analyst
Ebrahim Poonawala -- BofA Merrill Lynch -- Analyst
Matthew Olney -- Stephens -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
