Q4 2020 Prosperity Bancshares Inc Earnings Call
[music].
Good day and welcome to the prosperity Bancshares fourth quarter 2020 earnings conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing star and then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one on a touchtone phone.
To withdraw your question. Please press Star and then two please.
Please note that this event is being recorded I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you Scott.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares fourth quarter 2020 earnings Conference call.
This call is being broadcast live over the Internet at prosperity Bank USA Dot com and will be available for replay for the next few weeks I'm Charlotte Rushee Executive Vice President and General counsel of prosperity Bancshares and here with me today is David Zalman senior.
Chairman and Chief Executive Officer.
Hey, Tim to manage junior Chairman also back on Manav, Chief Financial Officer, Eddie Saturday 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.
He will be followed by ASO back Us Manav, who will review some of our recent financial statistics, and Tim to Madness, 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 Tom.
Before we begin let me make the usual disclaimers.
Certain of the matters discussed in this presentation may constitute forward looking statements for the purposes of the federal Securities laws and as such May involve known and unknown risks uncertainties and other factors, which may cause the actual results or performance of prosperity Bancshares.
To be materially different from future results or performance expressed or implied by such forward looking statements additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in prosperity bancshares filings.
With the Securities and Exchange Commission, including forms 10-Q, and 10-K and other reports and statements we have filed with the SEC.
All forward looking statements are expressly qualified in their entirety by these cautionary statements now let me turn the call over to David Zalman.
Thank you Charlotte I would like to welcome and thank everyone listening to our fourth quarter 2020 conference call prosperity reported some of the best results in our history much of the success is attributed to the dedicated associates of prosperity and legacy, Texas, who help make our combination with leg.
See Texas so successful.
Our annualized return on average assets average common equity and average tangible common equity for the three months ending December 31, 2020 work.
We made $1 six 3% on average assets, we made $8 nine 8% return on average common equity and we made a 19, 5% return on average tangible common equity.
Respectively, Prosperities efficiency ratio net gains excluding the net gains and losses on the sale of write down of assets on taxes was 47% for the three months ended December 32020.
Our net income was $137 million for the three months ended December 31, 2020, compared with $86 million for the same period in 2019. However, the net income for the fourth quarter of 2019 included a $46 4 million.
Our merger related expenses.
Our earnings per diluted common share were $1 or $1 48 for the three months ended December 31, 2020, compared with $1. One scent for the same period in 2019 and were impacted by the merger related expenses of 46 point for me.
Or 43 cents per diluted common share in the fourth quarter of 2019.
Our loans at December 31, 2020 were $20 2 billion, an increase of $1 4 billion or seven 4% compared with $18 8 billion at December 31 2019.
Our linked quarter loans decreased $548 million or two 6% from 27 billion at September 32020, primarily due to a $430 million decrease in PPP loans.
In addition, we continue to reduce loans identified at legacy, Texas that we determined to exit.
At December 31, 2020, the company had $963 million of PPP loans outstanding.
Our deposits at December 31, 2020 were $27 3 billion, an increase of $3 1 billion or 13% compared with $24 2 billion at December 31 2019.
Linked quarter deposits increased $901 million or three 4% from $26 4 billion at September 32020, we continue to see increased deposit balances. Some of the money is from stimulus payments and some from increased saving savings given the unknowns in the <unk>.
Economy.
This may begin to change as vaccinations increase and we returned to a more normalized daily lives.
Our asset quality, the nonperforming assets decreased $10 million or 14, 3% from the quarter ended September 32020.
Our nonperforming assets totaled $59 million or 20 basis points of quarterly average interest, earning assets at December 31, 2020, compared with $62 million or 25 basis points of quarterly average interest earning assets at December 31 2009.
<unk> and as mentioned $69 million or 24 basis points of quarterly average interest, earning assets as of September 32020.
With regard to acquisitions as mentioned in prior conference calls, we believe that the M&A activity will increase and we saw Pnc's acquisition of BBVA announced last quarter as well as two other large transactions.
Stock prices have risen which results in salaries being more active farther most banks are facing lower net interest margins and higher operating costs due to technology and other operational investments. We believe that these factors combined with the unknown regulatory burden going forward may cause more back.
Acres to explore the strategic alternatives, including a sale. We are open to exploring acquisition transaction. If it makes sense for our shareholders and is appropriately appropriately accretive to earnings.
With regard to the economy, Texas, and Oklahoma continue to benefit from a pro business attitude companies continue to move to Texas with HP and Oracle announcing our headquarters move and other companies such as Tesla announcing a major expansion into Texas also Samsung.
Recently mentioned, a $10 billion plant expansion in the Austin area.
The Federal Reserve Bank of Dallas has projected achieving a nationwide, 5% GDP growth by year end 2021, and an unemployment rate of four 5%, noting the first half of the year will be slower with an expected increase in the second half of the year, we believe.
Texas will have a higher growth rate and outperform other states over over the next several.
The next several years.
We expect that we will face several challenges over the next few years, such as higher tax rates that will affect income and continued low interest rates that will affect our net interest margin.
However, a steeper yield curve could help to mitigate both issues.
I would like to thank all our customers associates directors, a shareholders for helping build such a successful bank. Thanks again for your support of our company. Let me turn over our discussion to also back us Manav, our chief financial officer to discuss some of the specific financial results. We achieved also back on.
Thank you Mr. Zalman. Good morning, everyone net interest income before provision for credit losses for the three months ended December 31, 2020 was $257 6 million compared to $232 million for the same periods in 2019, an increase of 25.
$6 million or 11%.
Increase was primarily due to three months of combined bank earnings for the fourth quarter of 2020, resulting from the legacy merger on November one 2019.
And reduced cost of funds, partially offset by the decrease in loan discount accretion of $7 7 million.
The net interest margin on a tax equivalent basis was 349% for the three months ended December 31, 2020 compared to 366% for the same period in 2019 and 357% for the quarter ended September 32000.
20 <unk>.
Excluding purchase accounting adjustments the core net interest margin for the quarter ended December 31, 2020 was $3 two 6% compared to $3 two 6% for the same period in 2019 and $3 two 5% for the quarter ended September 30.
2020.
Noninterest income was 30.
$36 5 million for the three months ended December 31, 2020, compared to $35 5 million for the same period in 2019 and $34 9 million for the quarter ended September 32020.
Noninterest expense for the three months ended December 31, 2020 was $120 2 million compared to $156 5 million for the same period in 2019, which included $46 4 million in the merger related expenses.
On a linked quarter basis, noninterest expense increased $2 3 million, primarily due to salaries and benefits.
For the first quarter of 2021, we expect noninterest expense of $118 million to $120 million, which includes elevated employment related taxes per vested restricted stock.
The.
<unk> ratio was 48% for the three months ended December 31, 2020, compared to 58, 1% for the same period in 2019, which included $46 4 million in merger related expenses and 42% per the three months ended sept.
<unk> 2020.
We estimate fair value loan income for the first quarter of 2021 to be around $7 million to $10 million based on the current fair value discounts for each loan amortized over its remaining low and life.
This does not account for additional discount accretion income that may occur due to early loan pay downs or payoffs, which cannot be accurately estimated.
In the fourth quarter start on 'twenty, we recognized $10 million from the fair value loan amortization and an additional $6 million from early payoffs for a total of $16 1 million in fair value loan income.
The bond portfolio metrics at 12, 31, 2020 showed a weighted average life of two eight years and projected annual cash flows of approximately $2 4 billion and with that let me turn over the presentation to Tim to matters for some details on loans on asset quality.
Okay.
Hasselbeck.
Our non performing assets.
Order in December 31, 2020.
Totaled $59 million $570000.
Our 29 basis points of loans on other real estate.
Compared to $69 million $542000 or 33 basis points.
At September 32020.
This represents approximately a 14% decline.
The December 31, 2020 nonperforming asset total.
Was made up of $48 million $884000 in loans.
$93000 in repossessed assets.
And $10 million and $593000.
On other real estate.
Of the $59 million and $570000 in nonperforming assets.
$10 million $682000 or 18% are energy credits.
$10 million $147000 of which are service company credits.
$535000 or production credits.
Since December 31 2022.
$2 million $715000 and non performing assets.
Then put under contract for sale.
This represents approximately 5% of the nonperforming assets.
Net charge offs for the three months ended December 31, 2020 were $7 million $567000 from.
Paired to $10 million $570000 for the quarter ended September 32020.
No dollars were added to the allowance for credit losses during the quarter ended December 31 2020.
The average monthly new loan production for the quarter ended December 31, 2020 was $439 million.
Loans outstanding at December 31, 2020.
R $22 billion, which includes $963 $2 million in PPP loans.
The December 31, 2020 loan total is made up of 38% fixed rate loans, 38% floating rate loans and 24% resetting at specific intervals.
Now I'll turn it over to Charlotte Rasche, Inc.
Thank you Tim at this time, we are prepared to answer your questions. Tom can you. Please assist us with questions.
We will now begin the question and answer session.
To ask a question you May press Star and then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star and then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jennifer Denver with true Securities. Please go ahead.
Thank you good morning.
Good morning.
David It sounds.
Do you still have some legacy, Texas loans that you wish to exit out of that portfolio.
What kind of loan growth do you think we can expect from prosperity. This year based on what on the demand Youre seeing in the payoffs you expect.
I'm going to throw a number out here.
Kevin can jump in here, but I think theres, probably about $200 million still remaining of loans that we plan on exiting from the legacy transaction.
And I would say that.
From what we're seeing right now I think youre going to probably see a slower first half of the year.
And loan growth.
And probably we will pick up in the second half of the year and so we're shooting for about a 3% to 5%.
Organic growth rate for the next year.
And what would be left to exit out of that legacy portfolio.
So it would be left.
Joe.
But it's really it's really a combination I think.
So there might be one oil and gas fuel left exit.
With that.
Oil and gas portfolios from pretty good shape on the stage of the game.
The remaining $200 million across several portfolio Theres, some C&I stuff in there.
And there is some commercial real estate loans in there as well.
So add that.
All of the money that we had set aside for the PC day loans of tours are about over $400 million to start with.
The ones that we have gotten out of so far and most of the charge offs that you see even this quarter were from from those loans that we got out of but we actually had more money reserved that then then what we lost on them.
Again under the new seasonal accounting basically it was just moved from a specific reserve to more of a general reserve. So we actually picked up some money in those categories too.
Okay.
Second question is on mortgage lending how big.
Headwind do you think that's going to be going forward.
Horcoff line.
Okay.
Hi, Jennifer this is that are you talking about regular mortgage our mortgage warehouse.
Yes.
On the mortgage side and usually there is a slowdown in the fourth quarter, but we've actually seen a record month on number of applications. So it's very robust in Texas and.
65% of what we're seeing is purchase versus refi. So I think we're going to continue to see some pretty strong demand.
On the short term here interest rates are going to remain low in some areas probably on a slowdown would be from lack of inventory.
Yes, Jennifer I will handle it from a warehouse perspective.
I do think the share will be some potential headwinds if we just look at the MBA mortgage bankers Association from forecasting for January.
Its predicted volume so I can't say that right.
That's not a slam it's really hard to do right in this business.
Rates dry rate.
Their forecast year over year will be down a little over 27%.
With about.
<unk> being down being probably would have and purchase volume being up.
Quite a bit so we'll see if it plays out that way I will tell you. We are in the period of the year were.
Seasonally low so coming off our best quarter ever where we entered it.
2 billion eight and change.
Balances last night's close out of about $2 billion two.
If I just look out across this first quarter I wouldnt be surprised if our our average balance for the quarter as from the 2.1.
Two $2.150 billion kind of range, so quite a bit off of the.
$2 $6 billion average.
The fourth quarter.
Across the group we are looking at.
Yes.
Iron from new talent within the group.
Our hope is to bring on some additional customers in.
Mitigate some of the industry loss in volume Bye bye.
I'm over some new folks.
Clients to bring with them.
Great. Thanks, a lot.
Okay.
The next question comes from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning, guys good morning.
Just a follow up on that loan growth commentary from earlier that 3% to 5% loan growth guide for this year is that net the $200 million run off and then are you expecting all that to run off this year.
The 3% to 5% would be including the run off I don't know that the way to really have the whole 200 out by the end of the year.
Maybe if you want me just to pick a number I'd say, maybe $100 million of it.
Okay, and then the warehouse level you were talking about the potential average for this quarter are you expecting that to effectively be the bottom for this year and to trend up in <unk>, which I think it normally does just given seasonality and whatnot.
We would expect those numbers to pick up January is just usually very weak across the country and we are this is a national program for us while Texas has remained pretty strong if I just look across the country and this isn't our portfolio.
He was going through the MBA statistics yesterday.
January's volume so far is weighted 76% towards the refis. So it's a typical January where the purchase volumes are off because of things that are usually closing in January with things that would have been bought in December and December is just not a big homebuyer issue you can imagine in this year, probably made worse by the pandemic.
So I actually think there is a chance we've seen our low volume for the quarter already.
We were down I think our low volume was $2 1 billion a couple of days ago.
From off of that bottom a little bit.
So I think February will be a little better Marshall payable better but on average this is going to be a down quarter.
Second quarter should be pretty good third quarter is usually our strongest quarter.
Okay I appreciate the color there on expenses I appreciated the guy there from the first quarter is that a decent run rate for the rest of the year or you get maybe a little bit of a step up in <unk> because I know you have the annual raises in that quarter.
Yes, I think the run rate that I gave for the first quarter.
118 to 120 is would be a good run rate from first quarter because of that some of the personnel expenses coming in because of restricted stocks I mean going forward I mean, probably on looking between 117 on 120, but it depends you know investing on our people and investing in the technology. So.
But I mean millions and millions there I mean, its not significant on if you consider our efficiency ratio at 48% I mean is the best in their class. So.
That.
Million he has knock on impact on efficiency ratio, but.
But the 118 on 120 is that what we're looking for their first quarter is primarily the expenses of the increase came from the salaries and again net.
Not unusual in the fourth quarter on especially lease we were generous with people.
And bonuses at the year end for the production and everything they did so at year end, our expenses were somewhat higher than value.
What day, we will run yes, we will.
Always if you follow us we've always said if we have good revenue will always reward our people and invest in ourselves. So that's what you saw on the fourth quarter were little bit elevated expenses.
Okay, Great and then maybe just one last one on capital you guys have a lot of that growth capital from the strongest capital generation capability out there. How active are you thinking you want to be with the buyback are you targeting any kind of.
Cap for the CET one ratio.
But youll try to stay below and then I appreciated the M&A comments as well I know you want to maintain some capital for that but if you could just maybe speak to the buyback first and then any kind of target CET. One ratio you might have and then on M&A, if youre seeing a lot more conversations happened in Texas and if that's the market, where we should expect you to announce something at some point.
Yes, there was a lot of questions I'll start with the first one I think as far as the capital goes.
Again.
We've always used it to be more opportunistic I don't think we've ever just gone out and said, okay, we're going to buy the whole, 5% starting today and by the end of the year, we'll have the 5%.
All done.
We do use it.
When it's the right time, and it's more opportunistic so I think that will continue with that the other capital <unk> again, maybe not everybody agrees with this that historically, we'd like to try to raise dividends on an annual basis and we've tried to use the excess capital for acquisitions. So that we can make.
We try to put we tried to put at least 20% 25% down when we when we do an acquisition Kevin Lin Let me do that this time, but we were able to buy some of it back when the price has got cheaper so that's kind of what <unk>.
I think thats just the way we will continue to do it and then the last question was.
M&A.
M&A, what we see.
Yes.
<unk>.
As I mentioned earlier, I think that as stock prices were coming back.
And I think that that makes people really consider wanting to do something I think that.
We're looking on the administration's talking about raising federal income taxes on the bank.
I know the money that we spend today just on technology is unbelievable not even counting on monthly vendor charges on the software in the <unk> and everything else, we probably spend a $1 million just on additional digital technology. Every every month. So I think those costs continue to go up and I think those are going to make people with the low interest.
Margins that are out there right now.
If you can't have an efficiency ratio I think that thats really going on that's really going to cause some companies to really pause and say should we do mergers of equals should we try to do a sale I think youll see more and more we I mentioned in prior conference in prior quarterly conference calls that we you would see a number of deals starting to happen or not thank you.
That I think you saw that with the BBVA P&C deal also in the last quarter you saw the first citizens CIP deal you saw also the Huntington the Tcf deal. So the answer to question is I think you are going to continue to see that going forward.
Yes.
So no no real target on the CET one ratio at this point.
Now imagine allied capital to like having a lot of capital.
Yes.
Yeah, and then taxes as where you think.
The target the next target will be I would imagine it would be but just one.
On a tax rate Youre talking on Texas, Texas, and Oklahoma is always our first choice because thats, just where were located but again I've always said that if there is a deal somewhere in another market, where it's big enough and it has to be big enough, where it has enough market share the strength.
Between one and five top market share in a certain area and its a well run bank has got good asset quality. It's got good core deposits. That's been there a long time it wasn't built overnight, it's something we would look at it probably.
Okay, great. Thanks, guys appreciate it.
Okay.
Yes.
The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.
Alright, great. Thanks.
Question on <unk>.
The day.
I think you've outlined breath at very end of it.
On your last statement kind of what Youre looking for but are there any in terms of like products like are there any products.
I have a potential target that youre more interested in or something that is kind of a deal breaker on the opposite side that you.
Want to look at a bank, if they had X y or Z.
Products. Thanks.
<unk>.
I think as we get bigger what we would do and what we wouldn't do changes all the time I mean before our deal with legacy if you ask me when we jump into mortgage warehouse I would have to pause and lead you to jump into some of the syndication that they do and I think.
I think we feel a lot more comfortable with legacy and Kevin Kevin's group that has experience in that so I think we're open to more deals that we wouldn't have done in the past I am sure. There are some deals that there may be just a deal killer I haven't really don't know you guys might want to jump in is there a deal killer that we that we just wouldn't look.
Something on them.
I don't know what it would be off the top of my head from asset quality would be hard hurdle to get over but in terms of products, though in the fundamentals of what <unk>.
Does I don't know is there any deal killers out there are done on I think that Randy mentioned asset quality, but one thing that we have been good at after that how many of these transactions.
We are able even if somebody does is on asset quality issue. We are we have been able to go in and look at it and make the right judgments on that so.
I think we have experienced on that but to answer the question.
I can't think off the top of my head that they're just a deal killer on one deal now.
On the play Okay, well if somebody had a.
Net income generating business assets.
So if we look at one thing I'd like an ILEC and in our bank is I really like the asset management business a trust business I would if there is an opportunity for that that would certainly be something I would like us to expand in.
Got it okay. It makes sense and then just my follow up question.
Looking at the provision expense and also share on slide 17, do you guys have.
Yes, it's sort of tough to guess, whether it's going to be zero or 10% in any given territory $10 million in any given quarter.
And obviously I saw that you did increase the reserve it looks like on more of a qualitative basis can you just talk about how youre thinking about provision expense going forward I think most other banks are talking about pretty aggressive reserve release over the course of this year as the economy slowly gets better.
I guess if that were the case, we'd probably also drive at least a zero provision.
Provision, if not something lower than zero for you guys would love to hear your thoughts.
Yes, we have noticed I've seen a lot of banks that are releasing funds are reversing in releasing funds already.
We talked about it we still think that it's premature to do something like that I think going forward. It may be what my thoughts are is that thanks.
Stay like they are and continue to improve the way they have I would probably lean maybe not.
I hate I hate to see are.
We hate to.
Mike earnings because of putting money back and forth like that it's just not something that we're used to we're like we like consistency. So I would say if anything we're probably more on a basis that you may not see as putting money into reserve rather than releasing reserves going forward unless something unless something changes and we have some challenges were not aware of.
<unk>.
Got it alright, thank you very much.
Sure.
The next question comes from Brady Gailey with K BW. Please go ahead.
Yeah. Thanks, Bob I wanted to start with the PPP impact I know you said.
PPP loans were down around $430 million.
So what was the spread income impact from PPP. If you combine from 1% yield and then the acceleration on the fees what was that impact the spread income in the fourth quarter.
David This awful back I'll give you some information so we saw pick up in the forgiveness on the fourth quarter, which generated some additional fee income from PPP. So if you compare to what we've had the last quarter of just normal amortization. So this quarter, we have made about additional $7 $7 million above the normal on.
Amortization on PPP fee, so thats, what we saw on the fourth quarter.
So an additional seven point so if you look at.
If you look at the entire PPP bucket.
I'd, yet what that number was in the fourth quarter.
The total I think the total including there I am just kind of give you the numbers related to the fee only and you can calculate the 1%.
Interest the total PPP was about $2 million, which is about $6 million is all just amortization normal amortization, we have for past few quarters.
About $7 million, so from total of $13 million.
Okay great.
Yes on a real excited to see you guys do your next your next acquisition can you just remind us.
What do you focus on when you're pricing led to year on year.
Or is it a certain threshold of EPS accretion or a limit of.
Tangible book value dilution or is that earn back our IRR youre looking.
To determine how much you can pay what do you focus on.
Determined the price.
Let's say first instead of just focusing on the price.
We probably focus on on.
I would tell you the target.
We really want to join with us.
A lot of people.
To me.
I've said this before the cheapest banks whoever has been the worst banks, we've ever bought the ones. We pay the most for have always been some of the better banks. So I think we.
Focus first on what makes sense, what will really enhance our value, which will make us prettier or more attractive to to the street and so then once you look at that then I think we go back and we look at something that we've always focused on in this bank.
Somebody asked the question now it may not be as important that we focus on core deposits.
Do they really have core deposits. If you look at our bank. We only have maybe 12 per 10 or 12% of our money in certificates of deposits a restaurant in checking accounts and money market accounts core transaction accounts on a daily basis. So we really feel that is the real value of it and then when we get that piece down we really go into the accretion we'd like.
Do we do want to have some accretion incretion us do deals just to do deals are not that important to get to a bigger size. So accretion is a bigger deal and then I think the last time that we look at our.
How long will it take us to get our premium back that we paid premium above and beyond the book value, we like to get that money back in three to five years too. So it's kind of a <unk> lay of looking at it but that's just the way we look at it.
Okay.
Alright, great. Thanks, guys.
Okay.
The next question.
Question comes from Peter Winter with Wedbush Securities. Please go ahead.
Hi, good afternoon.
Hello.
I wanted to ask about the on.
Our core margin.
It's what the outlook is for the core margin.
Especially with per ton of the reinvestment rates on the securities portfolio.
The vessel back so if you look at our core margin in the fourth quarter. It held up very well and we were at 326 compared to low in the third quarter 325 of course, there was few items that helped us to keep.
Additional PPP fee repricing of the deposits as we did in the fourth quarter and then also if you look at net interest income you saw that.
And an additional $1 billion on our security portfolio. So it is kind of looking next few quarters on next quarter.
Still a lot of moving pieces.
When it comes to the projecting the core NIM and.
I mean, while I see that there is still pressure down pressure from there.
On a rate environment on the liquidity, but theres a lot of positive that going towards the next few quarters.
I mean I'll give you a few examples to consider for example, we.
In January we reduced.
Yield on our.
Deposits again, so thats going to help us with our margin and if you look at our term deposits I mean, we have about $2 $4 billion in CD getting route price next 12 months, that's going to be positive with it and I think that the biggest question is that the liquidity we have on our books.
Keep investing in the securities and now.
And we know that second round of PPP common.
Some of that's going to be used towards that which kind of.
Have better yields than we would if we would put those liquidity towards the bond portfolio and if you look at the longer term as we noticed you know our goal is to grow loans at 3% to 5%. So if you grow loans I mean at the higher yield definitely going to be a good to toward the margin. Overall. So I know I gave you a lot of variables, but it's kind of a.
Hard to predict specific because of such so many moving pieces, yes, I mean, I don't think we're like any other bank Peter I mean, the low low interest heels impact us and it creates a lower net interest margin into to overcome that you got to you have to increase loans or there has to be a better yield curve and on.
We were doing everything we can to cut or are the rates that we pay on money.
Money market accounts, our Cds on all of that but I don't think that were any different than anybody else in.
There has to be two things one interest rates have to go up or there has to be a better yield curve relief so to speak or you have to take the money that trillium bonds and make loans with it.
Okay. That's helpful.
Can you talk about fee income.
Nice growth.
Two quarters in fee income I'm, just wondering what the outlook.
Is that.
For 2021.
The fee income I think you have.
To break it out to different parts to it like on the NSF fees I think there's still room to progress because we're still coming out from the.
The pandemic or we're in the middle of pandemic. So the NSF fees are they now back into the levels, we had pre <unk>.
Covid.
On the other parts of our mortgage income is just seasonality as we discussed on earlier based on the volume, but I think that should continue to be strong as we see the volume so mortgage right now and then.
Our goal is to grow our trust in our line Trust income. So if we continue grow our trust department in the assets under management that should grow trust income. So there is some of them. It's there's room for improvement on some of them would stay the flat so but I think we are.
Comfortable what we see right now with the room going up a little bit.
Got it okay. Thanks for taking my questions.
Hmm.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, everyone just wanted to get some color around the monthly loan production looks like it was flat should we expect that.
So I guess, what we expect that to progress as we move through the year given the commentary early on.
And in the call, but it also looks like the employee count was up from the first time on a while looks like it was up what are you just wanted to get the expectation for lending hires I know theres, a fair amount of dislocation in and around your markets and.
What the what the outlook could be for hiring.
Michael This is Tim.
David to say, it's always a bit difficult to make those projections, but.
I think what we see right now.
Yes.
Not a lot of upward growth for the next quarter.
And then starting after that.
A better environment throughout the rest of the year.
We still have the virus.
We still have.
Customers.
While they're open and they're making it so to speak they.
We're not really doing all that well certainly not as well as they would like to.
So the.
The demand for.
For borrowing.
I think a lot depends on those factors on how quickly they improve the other side of the coin is.
If things.
Get much worse and maybe they will maybe they won't.
But if they get much worse think youll start to see.
Some asset bargains out there in the marketplace.
And you might very well see.
People notice that and we want to take advantage of it so there could be an uptick in.
The demand for loans to purchase assets that are in the view of the buyer.
What depressed so you've got a little of both of that possibly on the horizon.
We don't see anything that makes us think that the.
The volume of loans that we're booking is going to drop off significantly.
I guess, if we should have.
A very significant and material worsening of the virus situation and more shutdowns of businesses. Then all bets are off but we don't see that right now.
So.
We see kind of a slow recovery between now and the end of the year.
So it was that.
Alex I would just add in that.
The.
Right now I think there's a real possibility with what's going on in this current administration.
You could see a real come back in the oil and gas industry too I think that could be helpful. This year.
Texas is a very diverse place everybody is moving to Austin, everybody their mothers or an <unk> there but.
On that area. It continues to grow on the other hand, Dallas is doing good you have a lot of people from California and that continues to grow Houston. This last year actually lost about 300000 jobs at the beginning of the year.
Really gotten back about 150000 jobs, but as they as they cut off the pipeline and I cutoff fracking in different parts of the country. You can really see oil prices go back up and pretty significantly in my opinion and I think create.
Create more more opportunities for Texas as well as regarding the hiring I think that we have hired additional people. We've one of the areas that we've hired people in is in the Trust Department.
We are spending extra money to really improve our trust department was primarily based on the West Texas area.
And the Lubbock area, and then the South Texas area, Victoria, and we're really trying to make it.
Brent be more prominent.
Prominent in the Houston and the Dallas area. So we're hiring people in those categories too we also.
BSA and some of the regulatory burdens that they've had recently forced us into just putting more people into those to those regulatory spaces that we didn't have in the past.
That's very helpful. Maybe just one quick follow up I'm, sorry, if I missed it but how much of the remaining PPP forgiveness fees are left.
At this point.
At the end of the year, we've had about 20 $21 million.
PPP fee last day recognized on which we believe is probably going to be most first or second quarter.
They are forgiven is going right now.
Perfect. Thanks for taking my questions.
The next question comes from Brad Millsaps with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
You got the adjustments everything I did want to ask on some of the deposit accounts you mentioned that.
<unk>.
As rates again in January I noticed that interest bearing demand costs have stayed fairly stable at 38 basis points for really three consecutive quarters are.
Is this kind of the quarter will begin to see those come down you've certainly got plenty of liquidity, but curious if there is somebody other contractual reason maybe that those have kind of remained.
Sort of stable, what others may have seen more contraction.
Also back may be able to jump in but yes, I think it stayed up primarily you should see the what we put into effect here in the last quarter, but you probably didn't see the decrease because of contractual obligations I think that that also back was talking about that we should throughout this year be able to get out of exactly I see some definitely because of the cost we see some.
Decrease happening this quarter and there is other things as public funds, we have contractual agreements those going to stay a little bit until the contracts expire, which most of them on majority of starting in the second half of the year, but but if the question related to the.
Specific.
Interest bearing deposits I do see a little bit going down this quarter.
Okay, Great and then just kind of a bigger picture question.
Would you guys ever consider the possibility of maybe.
Buying some of the production out of the mortgage warehouse to sort of supplement loan growth or would it be that most of that production would be maybe too long a duration of kind of what you want to put on the balance sheet, you've kind of got that great resource.
Time, when you need some loans just kind of curious if that is something you considered from a strategic standpoint, or maybe there's something I'm missing there that would preclude you from doing that.
Yes. This is Kevin you know not that we haven't thought about the brand it's just it.
It all depends on how much we got away from the gain on sales.
On.
And our clients are giving pretty nice gain on sales numbers at this stage of the game, which dilutes that yield enough.
Just not attractive enough, we'd rather just continue to ramp up our production on loans.
Whole loan generation side of the defense and I think the thing that we've done.
<unk> instead of selling off the production that we do in our company and Eddie you might give us some numbers more on this how much production instead of selling the loans, we've been keeping those loans in house and that's what we've been doing that's right.
Keeping probably 88% of everything that we're originating now and putting in the portfolio.
And we produced about $2 billion in mortgage loans last year, so one of them.
On sponsor and growth on our line items on the loan portfolio had been in the residential mortgage side on the other hand, we've had a lot of pay down.
We have.
On that a lot thats the total.
Great. Thank you guys.
Mhm.
Okay.
The next question comes from Matt Olney with Stephens. Please go ahead.
Thanks, Good morning, I, just wanted to circle back on the loan growth discussion and specifically on construction loans I think they were down around $100 million. This quarter would love to hear more details about the portfolio with respect to the timing of the pay downs.
But also the new commitments, you're adding I'm just trying to appreciate at this book could continue to contract on.
Or are there new commitments that are coming on that could help stabilize that.
Yes, I'll take a stab at it.
I actually think.
It's more likely to grow but not a lot because we always have things.
We ended construction and flip out.
But we approved quite a few.
Really high quality construction deals last year.
One big commercial office building you had to have somewhere in the magnitude of 140 have equity go in before we ever funded a dime on I think.
I think they've got the eight four built and we will start funding into that.
Pretty good sized loans within the next week or two because they've now putting their 140 on equity so far.
And then we had a couple of multifamily deals we approved or student housing deals we approved throughout the year.
I would expect those will be those will be.
The funding up swap.
I think between that and.
Our homebuilder group I think net construction related portfolio.
Probably has north from here and some of the big Paydowns that you saw throughout the year I think we are probably from the multifamily is that we had committed in prior years. They finally got built got to an occupancy rate where they could take it to the to another party without personal guarantees and Thats, probably what you saw some of that that pay off so.
I think it probably.
I don't think things are just going to jump out there right away with with Covid in it but I think we're.
Other states you probably wouldn't see as much multifamily still being built I think in Texas, you probably will continue to still see multifamily projects being weak just because you've got so many people moving to the state of Texas I think for the most part.
It's also important to point out that.
On our construction loans, we typically don't.
Balloon those loans with maturity right at the end of construction that typically rollover into a permanent repayment.
That doesn't mean that those loans stay with us throughout the entire permanent repayment term.
Because.
A lot of time can find a lower rate and as David mentioned without recourse.
Financing and so on.
But what it does mean is they typically stay with us a little while so they don't they don't pay off right.
A termination of the construction project. So we typically have a little lead time there.
I think thats right the customers like the Optionality, where other banks just say okay. You've got this construction loan for two years, you got to do it and you got to get out we actually at the end of two years or however, long. It is we make the loans just continues to go into a payback feature and so it gives the construction people a lot of Optionality and I think that's what they like to.
Okay. Great. That's helpful. And then also wanted to dig in on some of the balance sheet movements in the fourth quarter, obviously, some really strong deposit growth, but we saw the securities balance increased quite a bit.
Good to hear more about the details of some of the purchases in the fourth quarter and expectations for the size of the securities portfolio from here. Thanks.
If you look at security as you can see on the net we are growing about.
Almost 1 billion won.
On the fourth quarter, while we purchased more than that.
Can we push on almost $1 8 billion.
Which the net came out because of that.
Speed up with C of paying off so I mean, the investments of course, we're bringing we're doing a combination of some are variable rate and but theres little bit not much but most of them were doing fixed rate.
We use because of the just liquidity we had.
Even with that we still have we still have $1 billion liquidity because of them pay.
Pay downs on the PPP loans.
And such so, but if you look at our securities I mean were putting about 1% y on a quarter.
Thanks to the growth in the Securities Department areas, just going to be really a function of what we don't have in loans. I mean, if you had $3 billion increase in deposits and you Didnt increase loans I mean, it would have to go into the securities area and basically we hope that we can increase loans and use a portion of that increase with it.
We did have loan growth this year.
You really take out the PPP loans, However, and you took out the.
The mortgage warehouse, probably core loans were down probably around 4% hopefully we can build that but again I think it's just going to be a function of what our loan demand is going to be and as far this last year.
We bought may not be what we're buying in the future.
We bought some variable rate almost everything that we're buying us government agency product and so basically we bought some CMO as a variable rates that were we werent, yielding very much 50, or 60 basis points, but we didnt want to lock in to real long term fixed assets in this kind of period of time, we bought a combination of <unk>.
On your mortgage backed securities maybe some 20 year mortgage backed securities a combination probably yielded overall a little over 1% on that deal and so that's kind of what we've been doing I mean, there is a real tendency right now for banks to really stretch out and gone by that 30 year product and try to get a 130 to 140 yield.
We haven't done that I mean, if you look at the average life on them not much of a difference of an average life. If theres not a rate increase I mean, they're probably still had about a four or five year average life, whether you bought a 15 20 or 30, but the deal that kills you is if interest rates go up.
One to 300 basis points.
And you are buying the 30 year product youre going to extend your average life to 12 years, but more than that.
<unk> is there is a 25% decline if you buy that 30 year product and we've just not been willing to accept that kind of risk and I don't think that we would be willing so long and short of it the variable rate CMO agencies are not very good right now I don't know that you can even get to 40 to 50, so were probably out of that we're probably going to stick bag just to our traditional.
Mortgage backed securities, where we were at about 1% right now I mean, if you look at our deposits, we increased $900 million in the fourth quarter. So we just didn't want to leave.
Fed, earning 10 based upon Thats why we put in I mean, right now on checking accounts were paying less 0.01 or something like that on I think on our checks on our $1 million of money market account were paying 10 basis points or 15.
15, basically that's if you have a $1 million plus will be low youre at your 10 or five basis points also from $5 a day or so.
That's kind of an overall color and flavor admiral that helps or not.
Yeah, that's perfect. That's very helpful. Thanks on the commentary guys.
Okay.
The next question comes from Bill <unk> with Wolfe Research. Please go ahead.
Thank you and good morning, everyone. David I wanted to follow up on your comments about the M&A environment at what price.
<unk> is looking for I wanted to ask if you could comment on the other side, what what sellers are looking for more specifically.
Have you seen any change on the way that sellers are thinking about financial versus strategic value meaning are.
Are you finding sellers, who are more interested in locking arms with you even if they can extract as much financial value.
We would like to so yeah.
You can't exactly go writing off into the sunset, but they are willing to give up some of that more immediate financial upside from the potential that comes from being part of a bigger organization with a strong track record.
They have an opportunity to create greater value over time.
Or would you say we are within those two extremes from your discussions.
I can tell you in the past what people were willing to join us.
Because they like the asset quality and the consistency of our growth and our earnings and they were willing to maybe go with us instead of somebody else. Just if it was just the just based on just on an earnings deal today I'd have to tell you I don't have the exact answer because I think some of that's going to change what the administration may be raising capital gang.
Tax.
In the future you may see again I haven't seen it yet.
I assume that.
If they don't change along until the end of next year. There may be some more people more interested in taking more of a cash position than they would have in the past simply because as I can get a 20% capital gains instead of a 40% capital gains that may be of interest to them now I can't tell you that that's that's going to happen to me if our et cetera. That's just.
Would be something that I would think of.
Got it.
Helpful and then separate topic, when we think back to the last reserve cycle. There are various points, where investors got excited about increasing exposure to asset sensitivity in rising rates only could be disappointed as rate hikes expectations kept getting pushed further out into the future and overall, we're net sort of cycle for about seven years.
Not the same environment and the reasons, we observe today are very different but I was hoping you could discuss any parallels or differences that you see on what a longer or shorter cycle means for prosperity.
Well I think our longer cycle that we're in right now I mean in low interest it's never good for us or for any other bank I think the real question is it's not a question if rates are going to rise, it's just when theyre going to rise.
I think the fed reserve bank, primarily site, unless we have 2% inflation that they're not going to raise rates. So I think first of all you have this issue where you get up to the 2% inflation really you would think with all the money that we're reporting to the deal and how the stimulus at some point there has to be but even after that takes place which is.
Some time from now then there is a tapering off periods are 700 million.
Bonds that they have been buying treasury bills on mortgage backed securities and that takes about a year to taper off to that so it at best I think.
We're still sometime away before we see higher interest rates and I think youre going to be on a lower interest rate environment for.
I would say at least a year so for sure.
Understood and then lastly, if I could squeeze in one more on can.
Can you guys discuss how youre thinking about the tail risk in CRE and this and the cycles specifically in your portfolio.
I can probably handle it.
Got some vs Kevin on that.
Very close contacts.
J O L on some some of the bank.
Okay.
Texas and commercial real estate, mostly on office.
And they're not very encouraged.
Commercial office.
They actually think we're going to begin with probably a two year readjustment.
Essentially rough period of time as we stabilize into.
Just how many people continue to work from home where share offices, where there is they go into the office two days a week.
Somebody else used that same office from the other three days.
Sure.
They looked at arrangements like that.
The biggest names on the business.
Bigger than that.
Net up to 15% on the workforce.
Following to that flex category, where theyre not permanent office employees are sharing on loss from somebody.
And you can you can imagine.
The fallout of that to trickle down effect that has on vacancies and then rents. So they think we're going to go through a pretty tough two year adjustment period.
We are particularly cautious, particularly cautious on.
Commercial office space, you've got to be something special.
I mentioned, a really big one we have earlier and I would tell you. It's not we're not worried about that it's the it's a single channel is a household name public company that you would all recognize really well, which made us net.
Total of equity being put into the deal.
Made us very comfortable with that deal.
Going to be a rare deal on the commercial real estate side.
The flip side on that as were comb on our portfolio's, London book and through the ones that we.
Good suffer the most.
<unk>.
In those circumstances.
And we're looking on what we call.
And move on here earlier, we can unfortunately.
As you.
Underwriting history of the company is to have a ton of equity on the front end.
So even our stress deals don't look too bad.
To us I would also comment.
I'm just thinking off the top of my head I think other states.
That have been shut down for longer period of time in states, where people are moving out are probably going to have a harder time with commercial real estate, where some of our commercial real estate may be picked up by all the new companies being moved in all the time. So I think we'll be in a better position than some of those real total brewery.
I think there's little doubt, we're going to continue to benefit from people migrating from California. It seems like the east coast is moving to Florida.
Doug on the West coast is picking spots in Texas and so.
I don't see that trend stopping.
<unk>.
That is very helpful color. Thank you all so much for taking my questions.
As a reminder, if you have a question. Please press star and then one to be joined into the queue.
Our next question comes from John Armstrong with RBC capital. Please go ahead.
Okay.
Thanks for hanging on to the end here with me I, just I had a couple of follow ups.
Touched on one of them on the uncoated and migration that Texas do you feel like Thats accelerating.
Visible to you.
And just be curious, which which are your strongest markets at this point.
I don't think Theres any question I mean, it's you just pick up the newspaper.
Again, I mentioned it a little bit in the comments that we had that you had HP moved their headquarters to Houston Oracle moved their headquarters to Austin Tesla is building a huge position in the Austin area.
Elon Musk actually is even move there Samsung just announced last week that haven't announced yet patent announced yet there are content content on for probably a $10 billion plan expansion there that Carla mentioned to me earlier Theres Another company from California, Ervin, California, It's a financial company Thats moving to Dallas.
<unk>.
I mean, it's just daily.
Moving on I think that the ones that are going to be impacted more probably the ones impacted the best is probably Austin. It seems like everybody wants to be at the crazy place.
And I can and I have two homes, Eric <unk>, two so I can't say anything, but but thats, where somebody wants to be so I think youll see probably a lot of the more growth with regard to technology pictures, and moviemaking and stuff like that and the entertainment industry I think Dallas Youre seeing a lot of people move to the Dallas market from.
And you also so I think youll see that.
HP will help the Houston market, but I think probably Dallas, and Austin will probably benefit more.
And I think then then probably Houston oil from that.
So that just might just overall thoughts on it.
Okay. Thank you realized from one.
Dallas perspective, we've got Charles Schwab, moving on I forgot about that DFW area and Hoover building, our second headquarters in Dallas.
Midtown area of Dallas, those were both pretty big numbers are pretty good jobs.
And going back from commercial real estate.
Office space.
There's only one thing that really matters for office based on that as job growth and job.
Job growth you can handle their office space and serves.
Okay.
To me. This is obviously a secular not cyclical I guess as a way to say it again.
I think that migration banks tend to go where the growth is and you alluded to P&C.
Net interest in Texas.
Yes.
To more honest good competition and more buyers from Morgan, Texas banks curious, if youre kind of seeing it in the competitive environment, maybe like we saw on energy prior to 15, and 16, where a lot of harvest food banks came in or are you starting to see that on do you think more buyers are going to show up eventually.
Yes.
I think it's obviously people then they don't want to go where the growth assets. That's an obvious answer I mean, I think yes, you will see more competition I think it also makes us more valuable as a company also.
You're one of the bigger players in the in the state So I think that.
Youll have people coming in and they want to expand and.
It's just obvious that they're going to go where the growth is that's where banks are going to go really.
And then just last thing just a small question, but you've done a lot of deals <unk> been through a lot of cycles on taxes on regulation book.
Set aside rates too.
Bank taxes and regulatory changes.
From the historically brought solar is out on the woodwork from here.
Fair enough.
Tip sellers over.
Yes, I think yes, absolutely I've seen guys.
There are people that have worked their whole lives in an industry and theyre just considered.
Tightens on the industry the people that have respected in.
At some point something just hits on.
Had it just isn't.
And I think it does yeah.
Yeah.
Well, thanks for taking the time I appreciate it sure.
This concludes our question and answer session.
I would now like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you.
Thank you, ladies and gentlemen for taking the time to participate on our call today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
Okay.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
[music].
Yeah.