Q4 2021 Prosperity Bancshares Inc Earnings Call
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I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you.
Good morning, ladies and gentlemen, and welcome to prosperity Bancshares' fourth quarter 2021 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 General counsel.
<unk> Bancshares and here with me today is David Zalman, Senior Chairman and Chief Executive Officer.
Hey, Tim to manage junior Chairman also Backhouse, Manav Chief Financial Officer Andy.
Eddie <unk>, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy has started chief lending officer Merle.
Merle Karnes, Chief Credit Officer May seven <unk> director of corporate strategy, and Bob Dowdell Executive Vice Presidents.
David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by also backups Manav, who will review some of our recent financial statistics, and Tim to manners, 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.
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 from those in the forward looking statements can be found in prosperity Bancshares filings with the Securities and Exchange Commission include.
<unk> forms 10-K, and 10-Q and other reports and statements. We have filed 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 2021 conference call.
The annualized return.
Usually on average assets was 137%.
The return on average common equity was 791% and return on average tangible common equity for the three months ended December 31, 2021, or 16, 2% respectively.
Prosperities efficiency ratio was 42, 7% for the three months ending December 31 2021.
Our net income was $126 8 million for the three months ending December 31, 2021, compared to $137 million, whereas the same period in 2020, a decrease of $10 3 million or seven 5%.
The change was primarily due to a decrease in loan income and in loan discount accretion of $10 $7 million.
The net income excluding the loan discount accretion was 124 million at December 31, 2020, compared with 120 to $122 6 million at December 31 2021.
The net income per diluted common share was $1 38 for the three months ending December 31, 2021 compared to $1 39.
For the three months ending September 32021.
Our loans, excluding the warehouse purchase program and the PPP loans loans at December 31, 2021 were $16 7 billion compared to $16 4 billion at December 31 2020.
An increase of $229 million or one 4%.
Our linked quarter loans, excluding the warehouse purchase program.
<unk> loans increased $76 7 million.
One 8% annualized from $16 6 billion at September 32021.
The structured commercial real estate loans, we acquired in the legacy merger continuing to come in as planned which negatively impacted overall loan growth.
Without the reduction in the structured commercial real estate loans growth would've been in the mid single digit range.
Another pressure point is the migration of completed construction loans into the secondary market, which provides for longer terms at fixed rates and no personal guarantees.
With regard to deposits our deposits at December 31, 2021 were <unk> 38 billion, an increase of $3 4 billion or 12, 5% compared with 27 4 billion at December 31 2020.
Linked quarter deposits increased one 3 billion or four 5% 17, 9% annualized from $29 5 billion at September 32021 deposits continued to roll into the bank, However, Cds and other time.
<unk> only accounts for eight 8% of total deposits.
With most of the growth in transaction accounts.
Our bank has a strong core deposit base with total cost of deposits at 12 basis points at quarter end.
In today's market deposits don't seem as valuable but as rates increase that will change at year end 2021, we had over $2 billion and overnight investments with little earnings.
Those are invested in higher rate securities. It should help support higher net income and an increase net interest margin.
Our asset quality continues to be one of the strongest in the industry. The nonperforming assets totaled 28 million or nine basis points of quarterly average, earning assets at December 31 2021.
Paired with $59 6 million or 20 basis points of quarterly average interest earning assets at December 32020.
And $36 5 million or 11 basis points of quarterly average interest, earning assets at September 32021, the nonperforming assets decreased 53% year over year.
The allowance for credit losses on loans together with the allowance for off balance sheet credit exposure was $316 million at December 31, 2021.
With regard to acquisitions, the bank mergers and acquisitions were strong in 2021 investment banks did well I believe that will continue in 2022, we continue to have talks with potential partners and are ready to execute any event a transaction materializes.
It will be beneficial to our company's long term future and increase shareholder value.
We believe that Texas, and Oklahoma, we will have a higher growth rate and outperform other states over the next several years companies and individuals continue to move to Texas, and Oklahoma because of lower tax rates and a business friendly political environment and we believe.
That will continue which should benefit our bag, we expect that companies will need more infrastructure and buildings people will need more housing and consumer staples and both will need banks to finance to grow.
<unk> Bank continues to show strong deposit growth with over $3 4 billion added in 2021, and a strong return on assets of 1.37% and return on average tangible equity of 16, 2%.
Our asset quality continues to be one of the best in the industry, we predict loans will grow given the vibrant economy and the bank's net interest margin should improve going forward with potential rate hogs forecasted by the federal reserve I would like to thank all of our customers associates directors and shareholders for <unk>.
<unk> Bill such a successful bank.
Thank you 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.
Thank you Mr. Zalman. Good morning, everyone net interest income before provision for credit losses for the three months ended December 31, 2021 was $244 8 million compared to $257 6 million for the same period in 2020.
A decrease of $12 9 million or four 5%.
The current quarter net interest income includes fair value income of $5 4 million compared to $16 1 million for the same period in 2020, a decrease of $10 7 million and PPP loan fee income of $8 5 million compared to $13 2 million for the.
Same period in 2020, a decrease of $4 7 million.
The fourth quarter of 2021 net interest income excluding the impacts of PPP loans warehouse purchase program loans and fair value loan income improved compared to the same results in the third quarter 2021.
The net interest margin on a tax equivalent basis was 297% for the three months ended December 31, 2021 compared to 349% for the same period in 2020 and $3 one zero percent for the quarter ended September 32.
'twenty one.
Excluding purchase accounting adjustments the net interest margin for the fourth for the fourth for the quarter ended December 31, 21 was 291% compared to $3 two 6% for the same period in 2020 and 3.0% to 3%.
For the quarter ended September 32021.
Excess liquidity during the fourth quarter 2021 impacted the net interest margin.
Noninterest income.
$35 8 million for the three months ended December 31, 2021, compared to $36 5 million for the same period in 2020 and $34 6 million for the quarter ended September 32021.
Noninterest expense for the three months ended December 31, 2021 was $119 5 million compared to $120 2 million for the same period in 2020.
On a linked quarter basis noninterest expense decreased 300000 from $119 8 million for the quarter ended September 32021.
For the first quarter 2022, we expect noninterest expense to be in line with the current quarter or $118 million to $120 million.
The efficiency ratio was 42, 8% for the three months ended December 31, 2021 compared to 48% for the same period in 2020 and 42, 3% for the three months ended September 32021.
During the fourth quarter of 2021, we recognized $5 4 million and fair value loan income.
This amount includes $2 4 million from anticipated accretion, which is in line with our guidance provided last quarter and $3 million from early payoffs.
As of December 31, 2021, the remaining discount balance is $13 million.
Due to the lower remaining discount balance we expect a slowdown in the recognition of fair value loan income the anticipated accretion for the next few quarter is expected to be around $1 million to $2 million.
Also during the fourth quarter 2021, we recognized $8 5 million in fee income from PPP loans.
As of December 31, 2021, PPP loans had a remaining deferred balance of $7 1 million as the forgiveness process is slowing down we expect PPP fee income to be around two I'm, sorry, $3 million to $4 million for the first quarter of 2022.
The bond portfolio metrics at 12, 31, 21 showed a weighted average life of four two years and projected annual cash flows of approximately $2 3 billion and with that let me turn over the presentation to Tim to matters for some details on loans and asset quality.
Thank you you asked about.
Our nonperforming assets at quarter end December 31, 2021.
<unk> totaled $28 million $88000.
15 basis points of loans and other real estate.
Compared to $36 million.
$549000 or 19 basis points at September 32001.
This represents approximately 23% decrease in nonperforming assets on a linked quarter basis.
The December 31, 21 nonperforming asset total.
It was made up of $27 million.
$156000 in loans.
$310000 in repossessed assets and.
$622000 in other real estate.
Of the $28.088 million in nonperforming assets.
$3 million $128000 or 11% are energy credits all of which are service company credits.
The $3 million $128000 as of December 31, 21 is a 43% decline from $5 million $459000 as of September 32001.
Since December 31, 21, $3 million $420000 and nonperforming assets have been put under contracts for sale, but there is no assurance that these contracts will close.
Yes.
Net charge offs for the three months ended December 31 21.
$807000 compared.
Compared to $15 million $697000 for the quarter ended 930, <unk> 'twenty one.
No dollars were added to the allowance for credit losses. During the quarter ended December 31, 21, nor were any taken into income from the allowance.
The average monthly new loan production for the quarter ended December 31, 21 was $604 million.
Loans outstanding at December 31, 21 were approximately $18 six $1 $6 billion, which includes approximately $170 million in PPP loans.
The December 31, 21 loan total is made up of 38% fixed rate loans.
36% floating rate and 26% variable rate.
I will now turn it over to Charlotte Rasche.
Thank you Tim.
At this time, we are prepared to answer your questions. Betsy can you. Please assist us with questions.
We will now begin the question and answer session.
I'll ask a question you May press Star then one at this time.
Thank you Andy Speakerphone, please pick up your handset before pressing you Keith.
If anytime your question has been addressed and you would like to withdraw your question. Please press star two.
At this time, we will pause momentarily to.
Okay.
Yes.
The first question comes from Brady Gailey of <unk>. Please go ahead.
Hey, Thanks, Good morning, guys good morning.
I heard the comments about how the legacy, Texas structured CRE still add a little bit of a negative impact.
Loan growth in the quarter can you just remind us how much is left.
That bucket, so we kind of so we can know how much.
Theres going to potentially continue to shrink.
Yes Brady.
It's Kevin I'll take the question left in that bucket.
When we did the merger there was about $2 2 billion in that structure and CRE book that is down to $755 million at year end.
2021 so.
A couple of ways to think about that.
I think theres, a core portfolio in there that probably sticks around it might be 400 or $450 million.
Several of which we have renewed and extended so there.
What I would call core customer of ours. So I don't think the full 755 going away anytime soon.
This year, we think.
Maybe $300 million of that.
Burns down so far worse than burned down last year.
<unk>.
Just for.
Sure.
To put a punctuation mark on what David was saying about loan growth being in the mid <unk>.
6% range.
The structure CRE payoffs paydowns.
By quarter. This year Q1 that CRE structured portfolio went down $224 million and 249.
160, and then 205 <unk> hundred five in the fourth quarter was elevated beyond what we had originally forecast we thought it would be about 120.
After two quarters of that forecast like right I believe this one.
We were off by over $80 million on it.
The good news here is it's almost over.
So I think the underlying production in underlying loan growth is going to start manifesting itself in reported numbers.
We fully manifested this year, because again I, just think that somewhere in the neighborhood of $300 million as yet.
To pay off in this.
Portfolio.
My guess is in Q1, we ended up with maybe 80 or $100 million.
In <unk>.
Reductions in that portfolio as opposed to these kind of 200 $240 million kind of numbers.
We've had so it's coming it's almost over.
I do think it's a good news story in terms of future loan growth.
That number but I think it.
<unk>.
When we exclude the PPP loans and the mortgage and the mortgage warehouse that would be excluded that we'd be in around six point something percent I believe.
Internal growth probably organic growth.
So thats a good news, yes, six eight for the quarter and six four for the year.
So very good total payoffs in that CRE structure CRE portfolio of 121 $781 million remaining balance of 755.
Okay, perfect and Kevin while I have you what waters.
How does the warehouse look next year I mean, I know, it's been coming down as that market normalizes I think it was a little under $1 8 billion average for the fourth quarter. What do you think that looks like in 2022.
Yeah fourth quarter.
Averaged $1 773.
Hi, Thank you.
We will average in 2022 1 billion and $4 50.
Alright.
I know you guys put out the new buyback.
A couple of weeks ago should we expect.
And I think you guys do that just to re up the plan, but should we expect you guys to be active on the share buyback.
At this.
Stock price I think you guys bought back a little stock maybe in the third quarter last year, but do you expect to actually engage on that this year.
I don't have the numbers in front of me, Brian , but I think last year, we bought back around 700000 shares at an average price of around $67 and EUR right I'll get the exact numbers for you, but it's I'm just talking about the top of my head, but you are right. We do renew that annually, but we do like to have that because if the market does.
<unk> go down we do like to have the ability to buyback if we ever did.
Our merger acquisition, sometimes the market doesn't like it initially and this gives us an opportunity to buy back our stock as well. So it just gives us a lot of opportunities I think we bought back six months to 787 on average lost share and the share. It was 767000 shares and then later on Tuesday.
Yes.
And then just finally for me.
David It's another quarter that we haven't seen an M&A deal announced for you guys you've been kind of quiet for a while now do you feel like Youre getting closer on the bank M&A side.
I've always said Youll will run out of mining equal we run out of deals.
Okay, Alright, thanks, guys.
I guess that was an add.
Sure.
I'm still thinking about it.
<unk> was an answer either new England.
Running out of money before you run out of deals.
Yeah.
The next question comes from Jennifer Gunther.
Please go ahead.
Thank you good morning.
I'm curious about.
And what you guys think you'll be seeing over the next few quarters.
A lot of banks have made changes to their programs that are going to see lower fees. There just wondering what you think.
How do you see in the next several quarters.
It's a good question, Jennifer we have talked about it we looked at it a lot.
We really haven't made any decisions.
<unk>.
What we've noticed is.
Yes.
Okay.
Right now most of our customers are opening up accounts are actually coming from the banks that have lowered their fees. So that's what's ironic and crazy. So I don't see that people like now.
That banks that are banking with us are really that's an author main reason for coming up in opening checking accounts with us it doesn't seem to be that doesn't mean that one day. It won't it won't mean, something but I'd say right now we're still opening up a lot of accounts, we're still growing and I seem to be coming from the banks that are offering the.
The lower overdraft fees and pre check it Kathryn and we also offer a lot of programs for our customers like overdrafts.
Protection, we have accounts that if you keep over a certain dollar amount here accounts free so we've already been catering to customers like that trying to get them to that point, but.
There's no question at some point, if we do lower it I don't know that we would ever Gulf re like the other guys, but if you lowered it to $15 or something.
Would impact us, but again, we don't see that right now I still don't even see that this year happening quite frankly.
Thanks, David.
Yes.
Okay.
The next question comes from Robert <unk> with <unk>. Please go ahead.
Okay.
Hey, good morning, everyone was largely upon growing our off.
Good morning.
Just curious.
Seems to be quite a bit of moving parts.
With some of the loan portfolio and then we're on the precipice of it.
But at least a couple of interest rates hikes, probably in 'twenty two I was curious.
Are you guys are thinking about the margin.
Given your asset sensitivity, where do you think could potentially be towards the end of the year and more so I'm just kind of thinking bigger picture are you planning on 234, and how that might correlate to.
Going forward as well.
I think I can answer this I think I heard you quite there's a little background on when Youre talking to so I hope I think what you are saying that you're asking is how the potentials and rate increases will affect us and again I would say that.
Rate increases will affected just like most banks it will be positive.
And I'll use. The example of our bank is a little bit different because we have a big securities portfolio as well so.
Interest rates Glenn helps us dramatically.
But again art or are companies like trying to turn to clean Mary around here in the parking lot when interest rates go up it doesn't go up right away, we see some effect right away, we see a better effect in six months, we see a real good effect in one year and we see a dynamic affecting two years. So it just takes us.
While as interest rates to go up but it would be if there is no question that helps to net interest margin dramatically I mean right now your net interest margin is where we ended up at two nine something this time.
An average over the last 30 years, there's probably been more like three and a quarter to $3 40. So.
And hopefully hopefully, we'll get back somewhere to at least.
A minimum of three in a quarter and hopefully better than that.
And Brett I'm going to add a little bit more detail you're right. There's a lot of moving pieces. When it comes to margin. Our net interest income as you mentioned, yes, we on the asset sensitive position, which is going to benefit in the interest rate increase environment, but also if you look at our balance sheet, we have more than $2 billion of cash sitting right now not Darren.
Maybe 15 basis points, so we're working towards putting that into at the bond portfolio I think if I checked we're getting like 175 on bond portfolio. So with our cash flow, we get from the bond portfolio plus utilizing the excess liquidity that we have that should also help with that net interest income and definitely the loan growth.
We project will help us with that.
Aspect of it and the other thing that we saw on the premium amortization on the bond portfolio that we had $16 million in the fourth quarter, but if youre looking trend on December and I looked at the number today for January is slowing down so we project that.
Our premium amortization kind of dropped to $14 million to $15 million. This quarter, that's going to be positive what we had in the fourth quarter.
Yes, but they also have mentioned that Theres also the headwind little bit if you look at our PPP alone is winding down and our fair value income is winding down so that's going to be.
A little bit headwind, but if you look at the core or Super Court.
I stated before it is looking positive and especially in the increased rate environment. So it's going to be good.
I think you probably asked about the expenses to am I wrong on that yes.
I was just kind of thinking like obviously.
There is wage inflation and competitive dynamics and more specifically in Texas with even.
Even hotter economy.
If you're I was Karen I'm curious, what you're thinking about your core expense base and then your revenue is increasing.
Are you willing to have the expenses go higher or is it just kind of purely turn into better operating leverage.
Yes, if you look at on our expenses, what we project for the first quarter at least that's kind of been stay in line with what we did in the fourth quarter in the range of 118 120, <unk> as I mentioned earlier, but if you go beyond the first quarter, we have our towards the middle of the second quarter, we usually have our salary increases more normally.
Our like Merit annual Merit increase and we see there.
That is probably going to increase our expenses about 1 million to $2 million on quarterly basis that youll see maybe starting on the second quarter, but there's other things we're working to reduce expenses as well so should offset somewhat there, but if you look at from the efficiency ratio as we grow our income and <unk>.
Speaker 1: income and revenue line, I think efficiency ratio should kind of stay stable, you know, from that perspective. And our efficiency ratio, as you know, 42, 43 percent is best in class. So even with the increase in expenses, if we continue to grow our revenue, efficiency ratio should stay kind of relatively stable. Gotcha.
Revenue line I think the efficiency ratio should kind of stay stable from that perspective, and our efficiency ratio as you know of $42, 43% as a best in class.
Even with the increase in expenses as we continue to grow our revenues and efficiency ratio should stay relatively stable.
Got you Okay. That's helpful color I appreciate it guys.
Speaker 2: The next question comes from David Rochester with Company Health Point. Please go ahead. Hey, good morning, guys. Good morning. Just a quick follow-up on that expense commentary. You talked about comp potentially going up a million to two million on a quarterly basis, but you mentioned offsets. Does that mean you're expecting that overall expenses won't go up by that much?
The next question comes from David Rochester with company. Please go ahead.
Hey, good morning, guys.
Morning.
Just a quick follow up on that expense commentary. So you talked about comp potentially going up 1 million to $2 million on a quarterly basis, but you mentioned offsets does that mean youre expecting that overall expenses won't go up by that much.
Speaker 1: in 2Q and beyond? Yeah, when we say we're working toward, I mean, we're looking kind of turning every stone to see where we can get savings. I don't think that savings gonna offset all the expenses. So I think in the net, when I say one to 2 million, I think it's gonna net increase.
And <unk> I think we're beyond.
When we say we're working towards we I mean, we're looking kind of turning every stone to see where we can get savings I don't think that savings are going to offset all of the expenses. So I think in the net when I say $1 million to $2 million I think it's going to net increase.
Speaker 2: Gotcha. Okay, great. And then just switching to the loan growth outlook, you know, as you look out the 22 appreciated the color on the potential runoff and the structured book. I was just curious on a core loan basis. If you think you can hit that that mid single digit range or something higher than that, as the recovery unfolds here.
Gotcha, Okay great.
And then just switching to the loan growth outlook as you look out to 'twenty two I appreciated the color on the potential runoff in the structured book I was just curious on a core loan basis. If you think you can hit that mid single digit range or something higher than that.
Recovery unfolds here.
I think we're still sticking to the mid single digit range, 5% to 6% probably is what we're looking for for this year.
Speaker 3: I think we're still sticking to the mid single digit range 5 to 6% probably is what we're looking for for this year.
Speaker 2: Perfect. And then on the security side, you mentioned plugging some more of that cash into the securities book, and you talked about the reinvestment rates or purchase rates in that 175 range. That's decently higher than it's been, and it's definitely accretive to the book. How aggressive are you guys thinking about getting in the first part of the year here? I mean, are we thinking maybe another billion or so in growth?
Perfect.
And then on the security side you mentioned.
Plugging some more of that cash into the Securities book and you talked about the.
Reinvestment rates or purchase rates of that $1 75 range, that's decently higher than it's been and it's definitely accretive to the book how aggressive are you guys thinking about getting.
The first part of the year here or are we or are we thinking maybe another $1 billion or so in growth.
Hi.
Speaker 3: I would say we invested, you know, we have so much money that rose off of that portfolio. We actually invested $500 million or $600 million last month, and I think we purchased about $400 million or $500 million this June , but there's still $2.5 billion in there today. But you are seeing, as I'm more, you know, the yield is actually a little bit higher than even what Oslo Beck is at, at least the last few days.
I would say.
The investments we have so much money that wells off of that portfolio, we actually invested <unk> $500 million, our $600 million last month, and I think we purchased about four or $500 million as Jane but there is still $2 $5 billion in there today, but you are seeing is by more.
The yields actually a little bit higher than even what also back is that at least the last few days.
Speaker 3: The product we've been buying is going anywhere from 1.8, 1.85 to 2% if we're willing to do an agency CMO. We really haven't been willing to do the agency CMO, but it's looking, that's not looking too unattractive if we can get our money back on an average of, you know, four years. So, you know, I think that you're, we're going.
The product, leaving bonds going anywhere from.
One a $1, 85% to 2% if we're willing to do.
And agency CMO, we really haven't been willing to do the agency CMO, but.
It's looking that's not looking too unattractive, if we can get our money back on an average of four years. So.
I think that we're going.
Speaker 3: We're not going to throw it all in at one time, but we're going to start investing. I mean, we're not going to leave two, two and a half billion in overnight at 15 basis points. We're going to start again. And we can do that because we have so much money rolling off, even as rates go higher, which I think they are. There's always going to be plenty of money to reinvest. It just seems we have so much money going off and money coming in. You know, we have a lot of money coming in.
Not going to throw it all in at one time, but we're going to start investing I mean, we're not going to lead to $2 5 billion in.
Overnight at 15 basis points, we're going to start with and we can do that because we have so much money rolling off even as rates go higher which I think they are.
There is always going to be plenty of money to reinvest and youll see that we have so much money coming off and money coming in we have a lot of money coming in.
Speaker 2: Sounds good. Maybe just one last one on the margin. What are you guys expecting in terms of NIM expansion from the first 25 basis point rate hike at this point?
Sounds good maybe just one last one on the margin what are you guys expecting in terms of.
NIM expansion from the first 25 basis point rate hike at this point.
When we looked at I think it's since like we mentioned earlier it takes a slower because we have some fixed loans and especially with our fixed loan investment portfolio. It takes time. So we will see impact on the first 25, but it's not going to best significant as you go with the down.
Speaker 1: When we looked at, I think it's since like we mentioned earlier, you know, it takes us slower because we have some fixed loans and especially with our fixed loan investment portfolio, it takes time. So we'll see impact on the first 25, but it's not going to be as significant as you go with down the road. Six or 12 months.
Down the road six or 12 months. So first one if I will see some but it's not kind of the I don't think it will be.
Speaker 3: 1st 25 we'll see some, but it's not going to be significant. It's not going to be that significant. It's going to take us 6 to 12 months to really see significant changes.
I'm going to be that significant it's going to take us six months to 12 months to real estate significant changes there.
Okay, Alright, thanks, guys. Thanks.
Thanks.
Yes.
Speaker 4: The next question comes from Graham <expletive> with Piper Sandler. Please go ahead.
The next question comes from Graham <expletive> with Piper Sandler. Please go ahead.
Okay.
Speaker 5: Hey everybody, most of my questions have been answered, but just a quick question on liquidity. Looks like average balances were a bit higher quarter over quarter, even while you guys still bought a modest amount of bonds. Can you remind me if any of this quarter's inflows were seasonal or related to public funds maybe?
Hey, everybody most of my questions have been answered, but a quick question on liquidity.
Looks like average balances were a bit higher quarter over quarter, even while you guys still bought a modest amount of bonds.
Can you remind me if any of this quarters inflows were seasonal or related to public funds maybe.
Speaker 1: It is seasonal, so if you attract us, usually end of the year we get access liquidity from public funds, and if you, historically, we've grown about $400 million. Same with this case, in December we had public funds increase about $400 million. That's where you see additional liquidity. But with public funds, what you also see, we also have increase in January when the tax payments happen, proper tax payments, so we see some public funds growing in January as well. Our quarter positive even grew.
It is seasonal so if you attract us usual end of the year, we get to access liquidity from public funds and the fuel, which historically, we've grown about $400 million.
St. Louis This case in December was had public funds increase about $400 million. That's why you see additional liquidity, but with public funds. What you also see we also have increases in January when the tax payments happen property tax payments. So we see some public funds growing in January as well our core deposits even grid.
Speaker 3: strong in this last quarter, too. Was it $300 million or something? No, core deposit growing $900 million. Oh, $900 million. Yes, sir. Just in the quarter. In the quarter. That does not sound like crazy. $900 million. Yes, $900 million in core plus $400 million. Oh, my.
Strong quarter, two was at $300 million on the core deposit grow and $900 million.
And plus just in the quarter in the quarter does not sell increasing $900 million 900 core plus four hottest demand.
Mhm.
Absolutely.
Speaker 5: Okay, thanks. And then Kevin, I heard you mentioned the warehouse outlook in terms of balances, but just kind of wanted to get a little color on where you see the yield trending from here. I guess, towards higher rates.
Okay. Thanks, and then Kevin I heard you mentioned the warehouse outlook in terms of balances, but just kind of wanted to get a little color on where you see the yield trending from here.
I guess to move towards higher rates.
Speaker 6: You know, I'd like to say there isn't continued pressure because there always seems to be pressure. We're down to what wave average coupon 312 on the portfolio. I think for the 4th quarter.
I'd like to say there isn't continued pressure because there always seems to be pressure, we're down to what.
The average coupon of $3 12 on the portfolio I think during the fourth quarter.
Sure.
Speaker 6: We're fighting on every basis point. I mean, literally, if somebody wants a reduction, you know, they'll start it at 20 or 25 basis points and we'll start at like 3 or 4 and try to reset their mind. So, I, I think it could drift a little lower, but not like it's been going lower. I think the, the increase in rates is gonna finally take some of the pressure off the yield pressure off the warehouse.
We're fighting on every basis point, I mean, literally if somebody wants a reduction.
Started.
125 basis points and will started like three or four.
I tried to reset their mind.
So I think a good drift a little lower but not like it's been going lower.
The increase in rates is going to.
Finally take some of the pressure off.
The yield pressure off the warehouse.
Okay, Great. That's all for me thanks, guys.
Thank you.
Speaker 4: The next question comes from Gary Tenner with DA Davidson. Please go ahead.
The next question comes from Gary Tenner with da Davidson. Please go ahead.
Thanks, Good morning.
Speaker 2: Thanks, Maureen. I appreciate the color on the commercial real estate runoff and kind of how that translates into 2022. David, you'd flag kind of some increased...
I appreciate the color on the commercial real estate runoff and kind of how that translates into 2022, David you had flagged some increase.
Speaker 2: takeouts in the construction book. So I'm just wondering how that kind of commitment levels and expectations lay out for 2022 and then apologize if I missed it but did you mention or can you tell us where the C&I utilization rates were in the fourth quarter given growth in that segment versus the third quarter?
Take outs in the construction book.
Just wondering how that.
Kind of commitment levels and expectations for 2022, and then apologize if I missed it but did you mentioned or can you tell us where the C&I utilization rates were in the fourth quarter given growth in that segment versus the third quarter.
Speaker 6: The utilization was up a little bit in CNI. I don't have the exact number, but it has been picking up over the last couple of quarters. Tim may have the number.
Utilization was up a little bit in C&I I don't have the exact number but it has been picking up over the last couple of quarters typically have the numbers.
Speaker 3: I don't have a specific number on that, but as it relates to the question on the construction book.
I don't have a specific number on that but as it relates to the question on the construction book.
Speaker 3: That fluctuation is normal. It's a group-aid per fund up. Projects get stabilized and typically they're taken to the market and they can be financed on a non-recourse basis or they're sold. So the key is replacement of those assets.
That fluctuation is normal.
Sure.
Yes.
Projects get stabilized and typically they are taken to the market.
Enhanced on a nonrecourse basis are theyre sold.
The key is replacement of those assets.
Speaker 3: And the markets that we operate in are still good.
And the markets that we operate in are still good.
Speaker 3: We don't see a reason, even with some increased rates.
We don't see a reason even with some increase.
Speaker 3: that dampened the demand for development and construction funds in any significant way. So we think we're going to be able to replace those dollars ongoing. So I don't see a big net change in that regard.
Dampened the demand for development.
The development and construction fronts any significant way. So we think we're going to be able to replace those dollars ongoing so I don't see a big a big net change in that regard for US Yes. Gary. This is Kevin in the month of December we booked a bunch of relatively large construction commitments.
<unk>.
I think we'll start funding here in the first quarter.
So.
Speaker 3: I think we're expecting some pretty good outstandings from throughout the course of this year. That's right. There's always a lag time because the borrower's equity goes in first. So their down payment, so to speak, has to get utilized and then we start to fund. So there's always a time lag there.
Okay.
Projects, we did.
I think we're expecting some pretty good outstandings from throughout the course of this year.
Right.
As always a lag time because of the borrower's equity goes in first so their down payment. So to speak has to get utilized and then we start to fund so.
There is always a time lag there.
Okay.
Okay.
Speaker 4: The next question comes from Peter Winter with Wedbook Securities. Please go ahead.
The next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Speaker 7: Good morning, David Dinta here filling in for Peter Winter. Just a couple of follow-ups. The first being, are overdraft fees included in NSF fees or is it in deposit service charges? And if so, how much is that?
Good morning, David here filling in for Peter Winter, just a couple of follow ups. The first being our overdraft fees included in NSF fees or is it in deposit service charges and if so how much is that.
Yes, the overdraft fee included in NSF fees, I don't have any breakdown specific but it's.
Speaker 1: The overdraft fee included in NSF fees, I don't have any breakdown specific, but it's a significant amount there. I don't have any specifics there, sorry. I could get back to you.
It's a significant amount there I don't have any specifics there sorry.
Got it backwards.
Speaker 7: No problem. Then second here, what are you assuming in terms of deposit betas in terms of asset sensitivity?
No problem and then second here.
What are you assuming in terms of deposit betas in terms of.
Connectivity.
Speaker 1: In our asset sensitivity, we have our betas on the interest earned or interest bearing deposit about 36 basis points.
And our asset sensitivity, we have our betas on the interest earned on interest bearing deposit about 36.
36 basis points, but if you look back in the historically when in 2015 to 2017 or 18 one.
The increased rates if you look at the actual our beta is actually came in lower we were calculating it was about 22 basis points per 100 rate increase so we.
It includes a little bit about.
Being conservative in our model, but in reality, we had 22 basis points in 2015 to 2017.
Speaker 3: I think with the amount of liquidity that all banks have right now.
With the amount of liquidity that all banks have right now.
Speaker 1: year those betas are going to be a lot less absolutely right here for economy to absorb so much liquidity probably will be there so the beta is probably going to be even less than we was back in 15 to 18.
Those betas are going to be a lot less obsolete providers here.
Economy to absorb so much liquidity it probably will be there. So the beta is probably going to be even less than there was back in 2015 to 18 months.
Speaker 7: Perfect. Appreciate the call. And then one last one. Just any guidance in terms of a long-term expense outlook with the inflation pressures in the market? I know you mentioned a bit of an increase in 2Q, but I was just wondering kind of anything beyond that.
Perfect I appreciate the color and then one last one just any guidance in terms of long term expense outlook with our inflation pressures in the market I know you mentioned.
A bit of an increase in <unk>, but I was just wondering kind of anything beyond that.
Speaker 1: Yeah, I think it's kind of hard to go beyond when you go long term, but you know, starting second quarter, we see expense going up a million a quarter and probably stay there because the main increase, as mentioned, is a merit increase in the middle of the second quarter. And beyond that, it's kind of hard to say, but you know, inflational pressure is there, we see every day, so we have to deal with it. And I think the inflation is going to impact us.
Yes, I think it's kind of hard to go beyond when you go long term, but starting the second quarter, we see expenses going up $1 million or two.
At quarter end, probably stayed there because the main increase as mentioned is a merit increase in the middle of the second quarter.
And beyond that it's kind of hard to say, but inflationary pressures that we see every day. So we'll have to deal with it then.
Thank you.
Inflation going to impact us.
Great I appreciate the color.
Speaker 8: The next question comes from Matt Olney with Stevens. Please go ahead. Hey, good morning, and thanks for taking the question. First, just a clarification. Also, Beck, I think you mentioned that PPP fees in the fourth quarter was $5.8 million. Did I get that right? And does that compare apples to apples with the $13.4 million in the third quarter?
The next question comes from Matt Olney with Stephens, Inc. Please go ahead ma'am.
Hey, good morning, and thanks for taking the question.
First just a clarification also back I think you mentioned the PPP fees in the fourth quarter was five 8 million did I get that right and does that compare apples to apples with the $13 4 million in the third quarter.
Speaker 1: Sorry, I'm 8.5 million PPP fees for the fourth quarter 2021 were 8.5 million and you're right 13.2 million was in the fourth quarter 2020.
Alright.
$8 5 million PPP fees for the fourth quarter, 2021 were $8 $5 million and Youre right $13 2 million was in the fourth quarter of 2020.
Got it okay.
Speaker 8: Thanks for that. As far as the long growth outlook, mid-single digits, 5 to 6 percent, I think we covered that the structured CRE could be a little bit of a headwind. Any commentary on what types of long growth will drive the positive growth in 2022.
Thanks for that and then.
As far as the loan growth outlook mid single digits, 5% to 6% I think we covered that the structured theory it could be a little bit of a headwind any commentary on what types of loan growth will drive the positive growth in 2022.
Speaker 3: drive the deposit growth? That's what I probably said. I'm sorry, drive the positive growth that will offset the stronger theory headwinds. Thank you. OK. Kevin, you may feel differently, but I don't see.
Drive the deposit growth, that's what I thought he said well I'm sorry drive the positive growth that will offset the straw theory headwind. Thank you.
Okay.
Kevin you may feel differently, but I don't see.
Speaker 6: fundamental change in our mix of loans. I mean, we've got decent demand in all categories. I think it will be maybe mortgage is not as robust as it was last year. It'll still be solid. Right. And January was very solid.
Fundamental change in our mix of loans I mean, we've got decent demand in all categories I think there'll be maybe mortgage just not as robust as it was last year. It will still be solid right in January was very solid.
C&I and construction on real estate and real estate projects. Those are the three categories. We're looking to for growth right I, just don't see any overwhelming material fundamental change.
And those percentages of our portfolio yes.
If we can skew it with mortgage being down a little bit skewed towards the other categories. That's good for margin.
R R added new volume.
Speaker 3: in the last quarter, when it was a mortgage product, the coupon was about 3% and it was a non-mortgage product, the coupon was about 4%. So if mortgage tails off a little bit and we pick it up on real estate and C&I, we'll benefit a bit from the margin expansion by just a shift. That's correct. That would help the net interest margin.
In the last quarter.
It was a mortgage product coupon was about 3% and it was a non mortgage products. The coupon was about 4% so.
If mortgage tails off a little bit and we pick it up on <unk>.
Real estate and C&I.
We'll benefit a bit from the.
For margin expansion, but just a shift that's correct that would help the net interest margin.
Speaker 3: And with the economy, again, you never know if a war is going to break out or another variant comes or anything like that, but excluding those crazy things, the economy is really good in Texas. It continues to grow. Companies are moving in. You know, if we can finally get supply chains fixing that, these companies should be drawing more money.
With the economy again.
Or is it a breakout or another very tons or anything like that but excluding those crazy things.
The economy is really good in Texas. It continues to grow companies are moving in.
If we can finally get supply chain fixing at these companies should be drawing more money.
Speaker 3: He should have a more vibrant economy, so I think you're right, I think that will move more to a C&I than what we had in the past, and I think you'll see the mortgages go down.
You should have a more vibrant economy. So I think you're right I think that will move more towards C&I than what we had in the past and I think youll see the mortgages go down.
Okay.
Helpful and then.
Following up on kevins commentary around the warehouse pricing and thinking about if we do get higher interest rates in the back half of the year.
Speaker 8: It sounds like we shouldn't expect any lift on the yields on those mortgage warehouse balances, but instead more just flatten out. Is that fair?
It sounds like we shouldn't expect any lift on the yields on the ligament, which warehouse balances, but instead more just flatten out or is that is that fair.
It's fair, Matt, Yes, I think that I think the reason for that is probably our rates are probably a little bit better than they are at other at other banks.
The core banking with us just because of longer term relationships, where some of the other banks might get some immediate.
Can you I don't know if that will have to go down as much but we won't.
It will go up as my team there right.
And just lastly, thinking about credit quality the allowance ratio at prosperity still looks.
Really high any any thoughts on.
If youll need any provision expense in the near term.
Like $300 million in reserve in 'twenty.
Eight 9%.
$29 million I don't see it right now.
Yes.
Alright, well I'll ask you again next year.
Yes.
Hopefully we love about the answers are we saying next year.
Yes.
Alright, Thanks, Congrats guys. Thanks.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Charlotte Rasche for any closing.
Speaker 9: This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rashi for any closing remarks. Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Thank you.
Thank you. Thank you, ladies and gentlemen for taking the time to participate in our call. Today. We appreciate your support of our company and we will continue to work on building shareholder value.
Keith.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker 4: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.