Prosperity Bancshares, inc (PB) Q3 2021 Earnings Call Transcript

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Prosperity Bancshares, inc (PB -1.37%)
Q3 2021 Earnings Call
Oct 27, 2021, 11:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Prosperity Bancshares Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte M. Rasche -- Executive Vice President/General Counsel

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Third Quarter 2021 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, 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 moderator, Matt. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results 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.

David Zalman -- Senior Chairman & Chief Executive Officer

Thank you, Charlotte. I would like to welcome and thank everyone listening to our third quarter 2021 conference call. I'm pleased to report that because of the confidence in our company, our strong capital position and our continued success, our Board of Directors voted to increase the fourth quarter dividend to $0.52, a 6.1% increase from the third quarter. Prosperity continues to do well, and we want to share that success with our shareholders.

Additionally, as our stock price experienced declines in the third quarter, Prosperity repurchased 767,134 shares of its common stock at a weighted price of $67.87. Prosperity Bank was ranked by Forbes as the second best bank in America for 2021 and has been in the top 10 of the Forbes list since 2010. Prosperity reported net income of $128.6 million for the quarter ended September 30, '21 compared to $130 million for the same period in 2020. The net income per diluted common share was $1.39 for the quarter ended September 30, 2021 and compared with $1.40 for the same period in 2020.

Prosperity continues to exhibit solid operating metrics and return on tangible equity of 16.2% and return on assets of 1.42% for the third quarter of 2021. Net interest margins have been stressed throughout the low rate environment. However, we believe this should improve if interest rates rise as projected as the bank is positioned for increased earnings in a higher rate environment. Our loans on September 30, 2021 were just shy of $19 billion, a decrease of $1.8 billion or 8.8% and compared with $20.8 billion on September 30, 2020.

Our linked quarter loans, excluding Warehouse Purchase Program and PPP loans increased $217 million or 1.3%, 5.3% annualized from $16.4 billion on June 30, 2021. We saw loan growth throughout the company with the exception of the Dallas-Fort Worth area as we continue to reduce loans that were categorized as PCD loans at the time of the merger as well as loans in the nonrecourse structure commercial real estate category.

Excluding these categories, Dallas/Fort Worth continues to show solid growth and win some marquee deals in their area. Deposits on September 30, 2021, were $29.5 billion, an increase of $3 billion or 11.3% and compared with $26.5 billion on September 30, 2020. Our linked quarter deposits increased $341 million or 1.2%, 4.7% annualized from $29.1 billion on June 30, 2021. Deposits continue to increase, which we believe is due in part to the government benefits and programs implemented during the pandemic and more people saving to have a safety net after the recent events.

Our nonperforming assets totaled $36.5 million or 11 basis points of quarterly average interest-earning assets on September 30, 2021, compared with $69 million or 24 basis points of quarterly average earning assets on September 30, 2020, and $33 million or 11 basis points of quarterly average interest-earning assets on June 30, 2021. The reduction in nonperforming assets year-over-year is 47.4%. The allowance for credit losses on loans was $287 million or 1.73% of total loans when excluding Warehouse Purchase Program, and PPP loans on September 30, 2021. The allowance for unfunded commitments was $29.9 million on September 30, 2021, unchanged from prior periods.

This is a total reserve of $317 million. Our net charge-offs were $15.7 million for three months ending September 30, 2021. Net charge-offs included $4.6 million related to resolved PCD loans and $10.8 million related to a partial charge-off of one commercial structure real estate loan that was not a PCD loan and obtained through the acquisition. The PCD loans have specific reserves of $3.1 million, of which $2.2 million was allocated to the charge-offs and $944,000 was moved to the general reserve. Further, an additional $14.3 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve.

Overall, in the third quarter 2021, we resolved $54.9 million in acquired loans at $15.7 million in net charge-off and we leased $15.2 million to the general reserve. We have seen more, but with regard to acquisitions, we've seen more merger and acquisition transactions recently and believe that due to increases in technology and staffing cost, additional government regulations and succession planning concerns, there will be continued activity, especially if current market valuations continue. We remain ready to enter conversations and negotiations when it's right for all parties and is appropriately accretive to our existing shareholders.

The Texas and Oklahoma economies continue to benefit from companies reloading from states with higher taxes and more regulation. Texas is projected to increase jobs by 493,000 in 2021. This increase, combined with people moving to the state requires additional housing and infrastructure, a driver for loans and increased business opportunities.

We are seeing higher prices for most crops and higher oil prices, which should help the local economies. Inflation continues to be higher than we would like, but we hope that it will moderate next year as the Federal Reserve begins tapering its asset purchases as expected. We believe there are also signs that inventories are starting to increase and supply chains are improving, although it will take some time to stabilize and return to normal. Thanks again for your support of our company.

Let me turn over the discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some specific financial results we achieved. Asylbek?

Asylbek Osmonov -- Chief Financial Officer

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended September 30, 2021, was $248.6 million compared to $258.1 million for the same period in 2020, a decrease of $9.5 million or 3.7%. The current quarter net interest income includes $5.4 million in fair value loan income compared to $22.5 million for the same period in 2020, a decrease of $17.2 million. The third quarter 2021 net interest income, excluding the impact of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the second quarter 2021.

The net interest margin on a tax equivalent basis was 3.10% for the three months ended September 30, 2021, compared to 3.57% for the same period in 2020 and 3.11% for the quarter ended June 30, 2021. Excluding purchase accounting adjustments, the net interest margin for the quarter ended September 30, 2021, was 3.03% compared to 3.25% for the same period in 2020 and 2.96% for the quarter ended June 30, 2021.

Noninterest income was $34.6 million for the three months ended September 30, 2021, compared to $34.9 million for the same period in 2020 and $35.6 million for the quarter ended June 30, 2021. Noninterest expense for the three months ended September 30, 2021, was $119.8 million compared to $117.9 million for the same period in 2020. On a linked-quarter basis, noninterest expense increased $4.6 million from $115.2 million for the quarter ended June 30, 2021. The increase was primarily due to gain on sale of ORE of $1.8 million recorded during the prior quarter and higher current quarter salaries and benefits resulting from higher incentives. For the fourth quarter 2021, we expect noninterest expense to be in line with the current quarter or in the range of $118 million to $120 million.

The efficiency ratio was 42.3% for the three months ended September 30, 2021, compared to 40.2% for the same period in 2020 and 41% for three months ended June 30, 2021. During the third quarter 2021, we recognized $5.4 million in fair value loan income. This amount includes $3.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $2.1 million from early payoffs. We estimate fair value loan income from anticipated accretion for the fourth quarter of 2021 to be around $2 million to $3 million.

As of September 30, 2021, the remaining discount balance is $18 million. Also during the third quarter 2021, we recognized $13.4 million in fee income from PPP loans. As of September 30, 2021, PPP loans had a remaining deferred fee balance of $15.6 million, with the majority of these deferred fees to be earned in the next two quarters. The bond portfolio metrics at 9/30 2021 showed a weighted average life of 3.5 years and projected annual cash flows of approximately $2.6 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, Jr. -- Chairman

Thank you, Asylbek. Our nonperforming assets at quarter end, September 30, '21 totaled $36,549,000 or 19 basis points of loans and other real estate, compared to $33,664,000 or 17 basis points at June 30, '21. This represents approximately a 9% increase in nonperforming assets, which comes from one loan. The September 30, '21 nonperforming asset total, was made up of $36,73,000 in loans, $326,000 in repossessed assets and $150,000 in other real estate. Of the $36,549,000 in nonperforming assets, $5,459,000 or 15% are energy credits, all of which are service company credits.

The $5,459,000 as of September 30, '21 is a 35% decline from $8,378,000 as of June 30, '21. Since September 30, '21, $7,990,000 in nonperforming assets have been put under contracts for sale, but there is no assurance that these contracts will close. Net charge-offs for the three months ended September 30, '21, were $15,697,000 compared to $4,326,000 for the quarter ended June 30, '21. The $15,697,000 includes approximately $11 million charged off on one commercial credit secured by an office building.

No dollars were added to the allowance for credit losses during the quarter ended September 30, '21, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended September 30, '21, was $596 million. Loans outstanding at September 30, '21 were approximately $18,958 billion, which includes approximately $366 million in PPP loans. The September 30, '21 loan total is made up of 38% fixed-rate loans, 37% floating rate and 25% variable rate.

I will now turn it over to Charlotte Rasche.

Charlotte M. Rasche -- Executive Vice President/General Counsel

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question will come from Jennifer Demba with Truist. Please go ahead.

Jennifer Demba -- Truist -- Analyst

Thank you. Good morning. Wondering if you could give us some color on the $11 million charge-off during the quarter.

David Zalman -- Senior Chairman & Chief Executive Officer

Kevin, do you want to...

Kevin Hanigan -- President & Chief Operating Officer

Sure, Jennifer. This is Kevin. Let me handle that. It was out of our structured CRE portfolio, project in Houston, which survived the 5-year energy turned down and was weakened a bit out of the energy turndown. And coming out of COVID combined with a loss of a tenant, got us worried about the credit that's still current to this day, although there were some lateness in the last couple of months.

We elected to have it reappraised and charged down. I won't go into the exact numbers on it, because we're in the process of a final resolution of that credit. And I don't want to disrupt that process in any way, shape or form. I will tell you that, if you back up and look back at merger time out of that structured CRE portfolio, at the time of merger, we had a little over $500 million of structured CRE in Houston and about $91 million of that was in the energy corridor.

And you'll remember, Jennifer, back then from -- since you guys covered us, we were reporting on how that portfolio was doing throughout the energy crisis, particularly in the energy corridor. That portfolio has shrunk in the last two years from that $510 million to $177 million today. And what we have left in the energy corridor is a total of $17 million, down from $91 million.

So despite the massive, if you will, derisking of that portfolio in Houston, we had this one asset between the energy crisis and COVID just didn't make it. And look, they're current today. We have a cooperative borrower. We just took what we think is a prudent action of marking it down by a new appraisal and to a level we feel like we can deal with it.

David Zalman -- Senior Chairman & Chief Executive Officer

I think another real positive also is, even though it was a loan that we didn't set any money aside for a PCD loan, we have a bright guy named David Montgomery, who recovered about an extra $15 million in money that we did have set aside for PCD loans that we never had to use and we took back into the general reserve. So under CECL accounting, you don't get to see it, but if we were still accounting last year, where we were last year, you have a $15 million recovery too. So I think that's the positive thing about this.

Kevin Hanigan -- President & Chief Operating Officer

Yes. I mean, not all the PCD loans and the marks put on those, we had a little over $15 million, $15.2 million left over that went back into general and this was the bad guy on the ledger that you could weigh against that. So I don't think it's -- I don't think this is a wave of any way shape or form. It's a single asset that stumbled a bit.

David Zalman -- Senior Chairman & Chief Executive Officer

In prior deals, as you would see the same thing. Sometimes you might miss one and then you recover stuff that you didn't count in recovery. The only thing that's different the way things are right now is the way we presented under the CECL format. I would say going in the future and Merle's talked about this too, instead of having made a specific reserve for just one particular loan, have a reserve for a certain category of loans. In that way, generally, we've always done better. We've always done better than we've ever projected. And I think that will continue also.

H. E. (Tim) Timanus, Jr. -- Chairman

I think we might emphasize also just for clarity, that the main reason we took the step that we did on this one credit is that two major tenants have given notice that they're not going to renew their leases. I believe those two tenants are current right now, but they're going to be moving out soon. And the owner of the building has not been able to find a replacement for those two tenants.

When they do move out, it appears that the building will not have an NOI sufficient enough to make out payments. So that's why we chose to do what we did. And once again, at the time that we joined forces with Legacy, this building was doing well in terms of its NOI. So there wasn't any reason to put a mark on it at that time.

David Zalman -- Senior Chairman & Chief Executive Officer

And on the other hand, you give other people to lease it again. This is a nicer building. It goes from being a negative field timing. This isn't a dumb building. It's a really nice building. So it's -- I don't think there's any question that they'll find some more people to lease. It's just a matter of time really. But again, according to what we need to do, we did what we needed to do.

Kevin Hanigan -- President & Chief Operating Officer

Correct.

Jennifer Demba -- Truist -- Analyst

Thank you.

Operator

Our next question will come from Brady Gailey with KBW. Please go ahead.

Brady Gailey -- KBW -- Analyst

Hey, thanks. Good morning, guys.

Kevin Hanigan -- President & Chief Operating Officer

Good morning.

Brady Gailey -- KBW -- Analyst

It was great to see Prosperity reengage in the buyback. I know the stock is a little higher today versus the average price that you repurchased in the third quarter. And I know you guys can be somewhat price-sensitive. But your capital is growing and you haven't announced an M&A deal in a while. So how should we -- and you increased a dividend, too, which was nice to see. How should we think about additional buybacks and dividend increases from here? Do you become less price-sensitive on the buyback, just given the amount of excess capital that Prosperity has now?

David Zalman -- Senior Chairman & Chief Executive Officer

Well, I guess, you could say, we did become more less prices than the last one we bought. It was in the $40 range paying $67. We're stepping out now. But the answer to the question is, I think we are making good money. We did raise the dividend. I think that we are going to be opportunistic. My personal feeling is, I think our stock is still a real buy today. I think that it's -- I think the overall answer will be, yes, we'll probably be less sensitive to the price. Not that we'll be -- not that we would pay anything or don't let me go that far. But again, we think it's a good buy, I say, I like that.

Brady Gailey -- KBW -- Analyst

All right. And then maybe one for Kevin, just on the mortgage warehouse. Earlier in the year, it was -- and last year it was such a robust level. And now it's coming down to that kind of $1.8 billion level. Is that -- are we at a normalized level? Or do you think that longer term, we should think about the warehouse continuing to slip a little bit?

Kevin Hanigan -- President & Chief Operating Officer

Yes. Brady, I'd say normalized with the caveat of normalized in terms of seasonality as well. So here we ended -- I think the average for the quarter was $1.836 billion. October has been pretty good to us. It's averaged a little bit better than that. It's been close to $1.855 billion throughout October. But due to seasonality. And again, this assumes rates stay basically close to where they are or go up slightly. I think we end the year probably closer to $1.5 billion, maybe $1.550 billion. And the average for the quarter will be closer to $1.7 billion to $1.750 billion.

Brady Gailey -- KBW -- Analyst

All right. That's helpful. And then last one from me...

Kevin Hanigan -- President & Chief Operating Officer

$100 million of where we are today -- where we were in Q3.

Brady Gailey -- KBW -- Analyst

Yes. Okay. And then the last one for me. Accretable yield took a pretty big step down. I heard your comments how you only have $18 million left in that bucket. Besides, to me, it seems like it's time to refill that bucket. You guys have been pretty quiet on the M&A front. I know we saw the happy deal, which was a big deal in Texas that I thought may have made sense for Prosperity. But David, just an update on M&A conversations, how they're going? Do you think you're getting closer to anything? Just what's the latest on your M&A strategy?

David Zalman -- Senior Chairman & Chief Executive Officer

I think there's more M&A out there. There's no question. I mean, when you look at -- when you looked at regulations and CMB talking about, especially for larger banks having to report all the dynamics that you would for a home loan, making it more of a commodity than a loan, a price at trying to retain people, and talent going up. I mean all those things considering more regulatory burden. I think there's going to be more.

We did participate in the Happy deal. I think that probably, it was really just a couple of us. And Johnny got that, I think our price that we bid, we might have even been just a tad high or a couple of cents higher per share or something like that. I don't know that for sure. But again, they went with Johnny because one of the main things they wanted to do is they wanted to be able to keep their name and that would have been -- become very hard and difficult for us to do because we have banks surrounding their banks and you couldn't have a Prosperity bank in one corner of town and a Happy State Bank in the other.

So that's the deal that I think. But again, we were one or two or three people that really got to look at the bank. So we're continuing to look -- we're looking at other deals. We've worked on some deals that come around that you're not expecting in the short term. And then we continue to work on deals that we've been working on two, three and four years. So it's not a question, if it's going to happen, just a question of when it's going to happen.

Brady Gailey -- KBW -- Analyst

Okay. Got it. Good luck. Thanks.

Operator

Our next question will come from Dave Rochester with Compass Point. Please go ahead.

Dave Rochester -- Compass Point -- Analyst

Hey, good morning, guys.

David Zalman -- Senior Chairman & Chief Executive Officer

Good morning.

Dave Rochester -- Compass Point -- Analyst

Just want to start on the loan trends. I was wondering how the pipeline looked at quarter end, what the trend was there versus the prior quarter. And then I saw the runoff in CRE shrank a little bit this quarter. I was just wondering if you're better able to offset that structured CRE runoff now with new business or the amount of runoff you're expecting has shrunk a little bit and then where you think that stabilizes?

Kevin Hanigan -- President & Chief Operating Officer

Yes. Go ahead, Tim.

H. E. (Tim) Timanus, Jr. -- Chairman

I think the deal flow is steady. It's not dramatically increasing, and it's certainly not falling. So I think we should be able to maintain our position and actually have a little growth on top of that. As an example, there was a major announcement just recently in Houston that one of the, what I would call premier apartment developers and owners here in Houston has sold their entire portfolio, which is 20-plus properties in the billions of dollars.

And as far as I know, this is the first time that outside money of that size and that consequence has invested in Houston in two or three or so years. So that purchaser obviously thinks that there's a future in the apartment market in Houston. That's just an example of how things seem to be turning around. So I don't think there's any reason to be pessimistic about the deal flow. Kevin, you may comment...

Kevin Hanigan -- President & Chief Operating Officer

I would echo what Tim says. I think the pipeline is strong. We grew roughly 3.5% in Q2 and 5.3% in Q4. Specific to your question, Dave, some of that was aided by slightly lower structured CRE payoffs in the quarter. We had about $100 million of payoffs in the quarter.

If you recall from the last quarterly call, I said I thought maybe we'd do $200 million in Q3 and $200 million in Q4. So the 5.3% was a combination of slightly better production and slightly better results on the CRE payoffs. I think as we go through that structured CRE portfolio, I would say, rather than $200 million in payoffs in Q4, I've lowered the expectation of that down to $130 million. So we're nearing the end of the shrinkage of that portfolio, which is helping on the loan growth side.

Also specific to your question, we are seeing some funding up of revolvers on our C&I book and usage is higher than it's been in a long time, a couple of years as companies are recovering, carrying more levels of receivables and when they can get inventory, overstocking inventory for fear of it being short in the future. So there is some of that going on. In the first three weeks of October, in C&I alone, our C&I balances are up $55 million, which is an awfully good start to the quarter.

And I think for the economy in general, when we start seeing revolver usage pick up on the C&I companies, and we're seeing it real time, particularly in the last couple of weeks. That's not just good for us. That's good for the US economy. I mean it's -- to me, that's a tell-tale sign that things are firming up. And it would also be a tell-tale sign of I think, we can put up another mid-single-digit growth quarter in the fourth quarter and into the first quarter of next year. So I think we're feeling a little bit better about our growth prospects.

David Zalman -- Senior Chairman & Chief Executive Officer

And I think the other thing, again, if you didn't have the -- we wouldn't have had the structured real estate running off, our growth rate will be probably in the 7%...

Kevin Hanigan -- President & Chief Operating Officer

Almost 8%.

David Zalman -- Senior Chairman & Chief Executive Officer

8% range. So I think we're doing pretty good. You followed us for a long time and you've seen now when different companies we merged with and joined, we get out of a certain, maybe, we'll get out of a certain risk deal, maybe get into a different risk deal. But again, I think our growth was good and even considering what the structured real estate that reduced being near 8% that, we had some pretty -- I thought we did pretty good.

And to me, it looks pretty good. When I look through out the whole state, I think we saw growth really in every area of the state, so -- and even Oklahoma. So I think we feel pretty good where we're at.

H. E. (Tim) Timanus, Jr. -- Chairman

Yes, the growth was -- Central Texas and Houston, but it was a little bit of everywhere, you're right.

David Zalman -- Senior Chairman & Chief Executive Officer

But again, if you look in Dallas and you added back the structured real estate, you would have seen good growth there.

Kevin Hanigan -- President & Chief Operating Officer

That's correct. That's right.

David Zalman -- Senior Chairman & Chief Executive Officer

I believe we...

Dave Rochester -- Compass Point -- Analyst

I thought you got some...

David Zalman -- Senior Chairman & Chief Executive Officer

Go ahead, Dave.

Dave Rochester -- Compass Point -- Analyst

Go ahead. I was just going to say, probably had some good growth in energy. I was just wondering what your outlook was on that, if you saw some good opportunities there. We should expect to see more of that.

David Zalman -- Senior Chairman & Chief Executive Officer

Well, we may be crazy probably, but we may -- we have a big client in the Midland-Odessa area and the customer has been with us for probably 30 years. And he has about as much money in checking as he does borrow from us, but again, he borrowed -- he bought a piece of Exxon. Exxon was selling some of their percentage out there. And he bought a big percentage. And of course, today, it looks like he's almost doubled his money. So that was a big one. And then...

Kevin Hanigan -- President & Chief Operating Officer

Well, that was -- look, that was just shy of $100 million, Dave. And net of that, we grew $60 million. So the portfolio outside of that single transaction actually shrunk $40 million.

H. E. (Tim) Timanus, Jr. -- Chairman

Right. We've always said we're not turning our back on that industry. We're just trying to be selective and prudent in what we do. And I think that's going to continue to be the case.

David Zalman -- Senior Chairman & Chief Executive Officer

And again, we try to focus what we've tried to say we'll grow and try to even grow more with the customers that have been for 30 years that really guaranteed to know sort of in, that a big part of it to stay on as guarantors stuff like that. And that's just exactly what we're doing, the old-time players that buy when everything is down. That's who we're really focusing on right now. Some of those bigger clients like that.

Dave Rochester -- Compass Point -- Analyst

Yes. Okay. Well, that $130 million that you mentioned in terms of expected runoff in the structured book, is that pretty much it, is that wrapping up?

Kevin Hanigan -- President & Chief Operating Officer

I think in terms of materially, there are always going to be something dropping up, but it will be not the big numbers that we've had. That thing shrunk almost $1 billion in two years.

Dave Rochester -- Compass Point -- Analyst

Yes. Yes.

Kevin Hanigan -- President & Chief Operating Officer

It's good to be near the end of it. And I think, like I work for a guy who has been in Dallas for the last 22 years. Maybe Dallas could help participate in the loan growth story here going forward.

Dave Rochester -- Compass Point -- Analyst

Good. Maybe if I can just get one last one in on deposit growth. I know that's generally really strong in the fourth quarter. It's your strongest quarter of the year. And you normally have more deposit growth than loan growth in that particular quarter, not to make any comment on loan growth for 4Q, but normally, deposit growth is pretty robust.

I was just wondering, given where the curve is today, it's a little bit better than it was for the last quarter, what your thoughts are in terms of growing the securities book, it looked like you grew that a decent amount in 3Q. So just curious where purchase yields were for the quarter, where they are today, if any notable change there, what your thoughts are on that growth going forward?

David Zalman -- Senior Chairman & Chief Executive Officer

Yes, you're absolutely right. In fact, usually in the third quarter, in normal times, we go negative sometimes in deposit growth. But I guess there's just so much money out there right now. We're still about 11% when you look at year-over-year and over 4% for the quarter. But you will see our deposits really shoot up in the fourth quarter, and you'll see that.

And again, we're not -- when there was really a decent spread or a yield curve, there would be times and we would even borrow sometimes up to $2 billion from the Federal Home Loan Bank because we have so much money rolling off that we would buy in advance and take advantage of that situation. Because rates where they were and went so low, we quit doing the $2 billion, in fact that doubt that we have any money.

We're actually -- we now be probably over $1 billion in over there instead of purchasing from it. So we're not being aggressive buying back right now. We are buying because we have so much money that rolls off every year. We're continuing -- we're not making any big moves, and we'll continue buying it as the money comes in. Hopefully, our real hope is that we can continue to increase loans and put more money into the loan category really.

H. E. (Tim) Timanus, Jr. -- Chairman

Yes. Our ability to...

Dave Rochester -- Compass Point -- Analyst

Go ahead, sorry.

H. E. (Tim) Timanus, Jr. -- Chairman

Our ability to acquire and retain deposits is still good and strong. We don't have any problem seeing customers wanting to bring money to us. If rates start to go up materially, I suspect that's going to change somewhat because some of the high rate payers that finally had to get out of the market will probably get back in.

But we've been through those circumstances before, and we can deal with it -- we really got any problem. So I think deposits are solid down probably will be for a while. All of our deposits are core to -- I mean, for the most part are core. We don't go out. We hardly had any CDs left and almost all of our growth is coming from core customers really.

David Zalman -- Senior Chairman & Chief Executive Officer

That's correct.

Dave Rochester -- Compass Point -- Analyst

Yes. And where are you seeing those securities yields today?

David Zalman -- Senior Chairman & Chief Executive Officer

I think they're closer to probably a 1.5 is what we're shooting for. That's what we'll see.

Kevin Hanigan -- President & Chief Operating Officer

1.4.

Dave Rochester -- Compass Point -- Analyst

That's not where the book yield is right now. So not really dilutive at this point?

David Zalman -- Senior Chairman & Chief Executive Officer

No.

Dave Rochester -- Compass Point -- Analyst

That's great. All right. Thanks, guys.

Operator

Our next question will come from Peter Winter with Wedbush. Please go ahead.

Peter Winter -- Wedbush -- Analyst

All right. Good morning. I wanted to ask on the lending environment. I know it's always competitive, but can you talk about what's happening in the portfolio in terms of new loan yields versus loans maturing?

H. E. (Tim) Timanus, Jr. -- Chairman

Yes. It is extremely competitive, especially from a pricing standpoint. The yields that we book today are on the low end, 2.75%, on the high end, 4.5%. And we're trying to get a three in front of as much as we can. Some of the better, stronger credits that's becoming more and more difficult, but that's in general, the spread that we're seeing.

Peter Winter -- Wedbush -- Analyst

Well, I think generally, we know what this month, the quarter of our loan average was [Indecipherable] you said or something?

Asylbek Osmonov -- Chief Financial Officer

Yes. I think around 4%, I think.

H. E. (Tim) Timanus, Jr. -- Chairman

Well, I was referring to new loans that we're putting on.

David Zalman -- Senior Chairman & Chief Executive Officer

Right. What -- you have that number, didn't you right now?

Asylbek Osmonov -- Chief Financial Officer

Yes, I have it. I think it's around 4%, if I...

Kevin Hanigan -- President & Chief Operating Officer

Just under.

David Zalman -- Senior Chairman & Chief Executive Officer

Just under 4%?

Asylbek Osmonov -- Chief Financial Officer

Yes. five and 4%.

Peter Winter -- Wedbush -- Analyst

That's the average for the third quarter, just under 4%?

David Zalman -- Senior Chairman & Chief Executive Officer

Yes. That's right.

Peter Winter -- Wedbush -- Analyst

Okay. And then if I could ask, if I think about Prosperity, one of the strengths is that ability to manage expenses. But going through earnings, we've been hearing a lot of discussion about inflation pressures as we move into next year. And I was just wondering, could you talk about some of those inflation pressures that you're seeing and maybe how you're thinking about expense growth next year?

Asylbek Osmonov -- Chief Financial Officer

Yes. Yes, we do see the pressure because we deal a lot with the vendors, and we see quite a lot of pressure, not just from the vendors, but also from the HR side of it, there's a lot of people coming in and trying to get our employees. But overall, there's a lot of things that we're doing, right? I mean, we're putting a lot of technology, right? There's a lot of spaces that you could replace some manual work that would do or employ with the automation that we're focusing a lot. We have a lot of projects going on that side of it. So that should reduce some expenses related to after this inflationary pressures we have.

If you look at from the -- well, the good thing what we have, we have long-term contracts in place for the significant expenses. So there's no much pressure on that side of it. So we were able to manage that. But when it comes to expenses, we're looking at all aspects of it, right? We're looking at the branches, we're looking at the automation, certain processes that I already described.

And hopefully, as we implement those processes in place that should offset some expenses, increase in the -- due to the inflationary. So when I look at next two quarters, I think the projection I gave $118 million to $120 million, I think that should stay at least quarter 2. And by that time, some processes we're working on, it should bear some fruits.

David Zalman -- Senior Chairman & Chief Executive Officer

There's no question inflation is there, Peter, and we're watching it. We're watching it very strong. And we're going to try everything we can to -- even that may cost us money from the technology side to automate more. And I would say there's also positions in the company and jobs where we've had -- let me say this, the things that maybe branches are something that we didn't look at in the past that were not profitable or certain areas of the bank that weren't profitable, we're going to fix that because you just have to in these kind of times, and that's where we hope to do it. So...

Kevin Hanigan -- President & Chief Operating Officer

Yes. Last thing I would add is, I think about this in a broader context, sometimes looking at our customer base and they've got, they got rising wages just like we all do, but they have also another component of their struggles here, which is, they're rising input costs, whether that's steel or the product they're getting. And every company is dealing with that except for banks.

When you think about our input costs, it's our wages and cost of money. And cost of money is still going down for us. If you look at the cost of our deposits, it's still trending down, and I think it will trend down again in the fourth quarter. So we're just dealing with the wage pressure part of it and not having to deal with the other input costs. So I think financial services is relatively less affected by input costs than just about any other industry in America.

David Zalman -- Senior Chairman & Chief Executive Officer

And have a lasting contract is a big deal. -- our big stuff is really locked in.

Peter Winter -- Wedbush -- Analyst

For long-term contracts.

Charlotte M. Rasche -- Executive Vice President/General Counsel

Yes.

Peter Winter -- Wedbush -- Analyst

That's great. And then if I could just sneak in one more. Just the core margin had a really nice increase. And I'm assuming a lot of that was driven by the repricing of the public funds. And I'm just wondering how much is left? And maybe, if you could just talk about what the core margin looks like for next quarter?

Asylbek Osmonov -- Chief Financial Officer

So if you look at -- it's kind of hard to give exactly what is going to look like next quarter, but I'll give you some variables that probably will help you to get there. If you look at our PPP fee income was $13.4 million this quarter, which was up from the second quarter. That's why you see kind of uptick on the net interest income. And if you look at our core loan growth, we had pretty good loan growth with 5.3% annualized in the third quarter. So if you look at the, well, I call it, super core and net interest income, that's excluding the PPP, Warehouse and fair value, it has improved compared to second quarter.

So if you're looking for the next quarter, we should continue to improve that core, super core NII. And then you just have to adjust for the guidance what I gave on the fair value income and the PPP fee, because on the fees, we have, what, $15.6 million deferred fee left. And I think the way it kind of slows down, we think it's going to be more like two quarters before we recognize most of it. So I think that variables can give you kind of guidelines where we're heading related to net interest income.

H. E. (Tim) Timanus, Jr. -- Chairman

And you mentioned public funds. I can give you a little color on that, that might be helpful. At the end of the June '21 quarter, our average interest expense on public funds was 71 basis points. At the end of September, this most recent quarter, it had decreased to 33 basis points.

And between now and midyear 2023, we have several hundred million in public funds that are going to reprice. And at this point in time, the public funds that are repricing are typically being done, in the 10 to 20 basis points range. So we're going to see, I believe, continued decreases in public fund costs.

Asylbek Osmonov -- Chief Financial Officer

Yes. So definitely, I think looking for -- at least on the fourth quarter, our interest expense will definitely be a little bit lower than what we had in the third quarter, just because of the repricing of the public funds.

David Zalman -- Senior Chairman & Chief Executive Officer

Peter, that super core is trademark, if we're going to use that.

Peter Winter -- Wedbush -- Analyst

I'll send over a fee. Thank you. That's all I had. Thanks very much.

Operator

[Operator Instructions]. Our next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks, good morning, everyone.

H. E. (Tim) Timanus, Jr. -- Chairman

Hey, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Just a couple of follow-ups. Do you guys feel like Texas loan growth is accelerating at this point? It's obviously much stronger than a lot of other areas of the country. But do you feel like it's accelerating, it can accelerate into 2022?

Kevin Hanigan -- President & Chief Operating Officer

I do -- this is Kevin. This is again, a personal opinion and just what I feel from it being in the market everyday. I do think it's accelerating. I think we're going to go through an interesting phase when the supply chain breaks free, and we get back to a more normal.

I think what we'll see because of pent-up demand, we're going to see a short period of maybe hyper growth, as people pull through products that they've been waiting for. And I think that will give us -- it's good now, it will go really good for that temporary period of time and then they back up a little bit once we get through the backlog of the pent-up demand, if that makes sense to you.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes.

Kevin Hanigan -- President & Chief Operating Officer

So I think the industry is going to see better growth than we've seen followed by really good growth when we pull through the supply chain issues, and then it moderates from there.

H. E. (Tim) Timanus, Jr. -- Chairman

And I agree with that. And I think one thing to add to it that we need to focus on is, what really happens in the energy side of the Texas economy and Oklahoma's too, for that matter. If these increased prices really are sustainable, that's going to start having a trickle effect throughout the entire economy. I think it's a little -- personally I think it's a little too soon to make the call on that. But obviously, things have changed dramatically in just a few months in terms of the price of oil and natural gas, all of which helps Texas and Oklahoma.

David Zalman -- Senior Chairman & Chief Executive Officer

Well, I think Texas is going to be better than most of all other states, just...

Kevin Hanigan -- President & Chief Operating Officer

In migration.

David Zalman -- Senior Chairman & Chief Executive Officer

Just through the migration. You look at the number of people that are coming, the apartments you have to build, the homes you have to build, the infrastructure and really with the current administration that hates fossil fuels, I can see nothing but an increase in that. So I was talking to some people -- actually, this is what I wanted to hear yesterday when I was sitting in the eye doctor's office, the guy that was -- he has oil service company and they're as busy as they can be.

And so people are in the service side of it, so things are really picking up. And I don't think you'll see a lot of people jumping into the business like you did in the old days, you have the older people, the older companies that have been there. And you'll see, I think the price will go up because they're just -- there won't be as much drilling, there will be just a supply and demand.

And then another thing that with this inflation is, Texas still produces a lot of crops. I mean you've got a cotton that's selling at higher than I've seen it for 10 years, probably $1.10 a pound or something, corn, milo. So you've got commodities going up. You've got oil and gas going up, you've got people moving in. I mean, it's -- the stars are aligned, I think.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And David, I asked you about this a couple of quarters ago. How do you think about higher rates in your business model? On one hand, you're growing the securities portfolio. And I would imagine you have -- your thinking you have to be a little bit careful and protect yourself. But on the other hand, two thirds of your loan portfolio is levered to higher rates. Just how do you think about the balancing act between those two forces?

David Zalman -- Senior Chairman & Chief Executive Officer

So I want to make sure I understand the question. Your question is what exactly, I don't know that I got it.

Jon Arfstrom -- RBC Capital Markets -- Analyst

I just want to -- how do you think about extension risk in the portfolio, putting money to work at lower rates. And then on the other hand, it sounds to me like you're expecting higher rates, which should be very positive for the earnings trajectory of your company.

David Zalman -- Senior Chairman & Chief Executive Officer

Really, it sounds crazy, but we really don't try to call the rates. If you look at our loan portfolio, we have about a three-year turnover. I mean it all rose. And really, when you look at our bond portfolio, it rose about every three or four years.

H. E. (Tim) Timanus, Jr. -- Chairman

3.5 years.

David Zalman -- Senior Chairman & Chief Executive Officer

3.5 years. So really, we're not trying to call rates. I think higher rates will help us dramatically. I mean, when you -- when we -- our models at least our models say they will, I mean, our model show that 100 basis points does OK for us, but 200 basis points really shows a lot of -- a lot of growth. So I think that we're going to continue buying like we do. I think as the money comes in, we'll continue to buy. I don't think we're going to try to position ourselves. There are times when we see spikes that we may buy more than we normally would. And I think that will continue. But again, I don't think that we're going to try to call rates.

And the thing that will help us the most, I don't know that the Fed can raise interest rates as fast as everybody thinks they can, at least on the -- at least from the prime rate perspective, I mean, you've got a stock market that's extremely high. You've got one to four family residential loans and homes that are selling, and those had like 20% increases sometimes in Texas. So they can't just go to the prime rate and just raise it extremely faster. They could blow the economy.

On the other hand, they can get rid of the tapering and drive up the 10-year yield and get an extra 100 basis points in there, kind of that way, I think that's the way should be done. Of course, they don't pay me to say what they quote or that is my opinion. Hopefully, that we can raise the tenure, have a real spread on the tenure and get a little bit higher yield there and they'll start raising the prime rate shortly in little bits and thereafter. But I think it does look positive. Yes.

Kevin Hanigan -- President & Chief Operating Officer

And I would add, one thing the premium amortization drops dramatically.

Asylbek Osmonov -- Chief Financial Officer

Yes. That would definitely. And from other sense, I think it's not as much of a worry because if you look at our bond portfolio, we generate like $2.6 billion in annual cash flow that will be invested to the either loans or one portfolio from that 10 point, we have so much cash flow coming in.

David Zalman -- Senior Chairman & Chief Executive Officer

Well, I don't know that anybody has brought that up. Our amortization cost on our portfolio, just sky walking in this quarter too. I mean, hopefully, when that slows down, that would be a real plus for us.

Asylbek Osmonov -- Chief Financial Officer

Yes. I mean this quarter, we had $15.1 million amortization. And based on our readings it seems like it should slow down. I don't know, it's going to be that significant, but even slows down to $14 million, that's extra $1 million there.

David Zalman -- Senior Chairman & Chief Executive Officer

I remember when it was $8 million.

Asylbek Osmonov -- Chief Financial Officer

It was last year.

David Zalman -- Senior Chairman & Chief Executive Officer

Yes. Of course, you have a bigger portfolio too. But still needs to go from $8 billion to -- $15 million, $18 million to $15 million, it's a lot.

Kevin Hanigan -- President & Chief Operating Officer

That's better quarter.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. All right. Thanks for the help. I appreciate it.

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 -- Executive Vice President/General Counsel

Thank you, Matt. 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.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Charlotte M. Rasche -- Executive Vice President/General Counsel

David Zalman -- Senior Chairman & Chief Executive Officer

Asylbek Osmonov -- Chief Financial Officer

H. E. (Tim) Timanus, Jr. -- Chairman

Kevin Hanigan -- President & Chief Operating Officer

Jennifer Demba -- Truist -- Analyst

Brady Gailey -- KBW -- Analyst

Dave Rochester -- Compass Point -- Analyst

Peter Winter -- Wedbush -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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