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spk09: Good day and welcome to the Prosperity Bank Shares fourth quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
spk00: Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' fourth quarter 2021 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, General Counsel of Prosperity Bank Shares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Tamanis, Jr., Chairman, Osobek Osmanov, Chief Financial Officer, Eddie Sapody, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Carnes, Chief Credit Officer, Maeve Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. David Zolman will lead off with a review of the highlights for the recent quarter. He will be followed by Osobek Osmanov, who will review some of our recent financial statistics, and Tim Tamanis, 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 Bank shares 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 Bankshare's filings with the Securities and Exchange Commission, including 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.
spk13: Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2021 conference call. The annualized return on average assets was 1.37%. The return on average common equity was 7.91%. And the return on average tangible common equity for the three months ending December 31st, 2021, were 16.2% respectively. Prosperity's efficiency ratio was 42.7% for the three months ending December 31st, 2021. Our net income was 126.8 million for the three months ending December 31st, 2021, compared to 137 million for the same period in 2020, a decrease of $10.3 million, or 7.5%. 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 $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 30, 2021. 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 1.4%. Our linked quarter loans, excluding the warehouse purchase program and PPP loans, increased $76.7 million, 1.8% annualized, from $16.6 billion at September 30, 2021. The structured commercial real estate loans we acquired in the legacy merger continue to decline as planned, which negatively impact overall loan growth. Without the reduction in the structured commercial real estate loans, growth would have 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 31st, 2021 were $30.8 billion, an increase of $3.4 billion, or 12.5%, compared with $27.4 billion at December 31, 2020. Linked quarter deposits increased $1.3 billion, or 4.5%, 17.9% annualized from $29.5 billion at September 30, 2021. Deposits continue to roll into the bank. However, CDs and other time deposits only account for 8.8% 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 in overnight investments with little earnings. As those are invested in higher rate securities, it should help support higher net income and an increased net interest margin. Our asset quality continues to be one of the strongest in the industry. The non-performing assets total 28 million or nine basis points of quarterly average earning assets at December 31st, 2021, compared with 59.6 million or 20 basis points of quarterly average interest earning assets at December 30, 2020, and 36.5 million or 11 basis points of quarterly average interest earning assets at September 30, 2021. The non-performing 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 in the event a transaction materializes and will be beneficial to our company's long-term future and increase shareholder value. We believe that Texas and Oklahoma 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 bank. 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 the growth. Our 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 hikes forecasted by the Federal Reserve. I would like to thank all our customers, associates, directors, and shareholders for helping build such a successful bank. Thank you for your support of our company. Let me turn over our discussion to Osobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
spk10: Osobek Osmanov 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 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 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 2.97% for the three months ended December 31st, 2021, compared to 3.49% for the same period in 2020 and 3.10% for the quarter ended September 30th, 2021. Excluding purchase accounting adjustments, the net interest margin for the quarter ended December 31, 2021 was 2.91% compared to 3.26% for the same period in 2020 and 3.03% for the quarter ended September 30, 2021. Excess liquidity during the fourth quarter of 2021 impacted the net interest margin. Non-interest income was $35.8 million for the three months ended December 31, 2021, compared to $36.5 million for that same period in 2020 and $34.6 million for the quarter ended September 30, 2021. Non-interest 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, non-interest expense decreased $300,000 from $119.8 million for the quarter ended September 30, 2021. For the first quarter of 2022, we expect non-interest expense to be in line with the current quarter, or $118 to $120 million. The efficiency ratio was 42.8% for the three months ended December 31, 2021, compared to 40.8% for the same period in 2020 and 42.3% for the three months ended September 30, 2021. During the fourth quarter of 2021, we recognized $5.4 million in fair value loan income. This amount includes $2.4 million from anticipated accretion, which is in line with the 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 quarters is expected to be around $1 to $2 million. Also, during the fourth quarter of 2021, we recognized $8.5 million in fee income from PPP loans. As of December 31, 2021, PPP loans had a remaining deferred fee balance of $7.1 million. As the forgiveness process is slowing down, we expect PPP fee income to be around $3 to $4 million for the first quarter of 2022. The bond portfolio metrics at 12-31-2021 showed a weighted average life of 4.2 years and projected annual cash flows of approximately $2.3 billion. And with that, let me turn over the presentation to Tim Tumanis, for some details on loans and asset quality. Tim.
spk12: Thank you, Auselbeck. Our non-performing assets at quarter end December 31st, 2021 totaled $28,088,000, or 15 basis points, of loans and other real estate, compared to $36,549,000, or 19 basis points, at September 30th, 21. This represents approximately a 23% decrease in non-performing assets on a late quarter basis. The December 31st, 21 non-performing asset total was made up of $27,156,000 in loans, $310,000 in repossessed assets, and $622,000 in other real estate. Of the $28,088,000 in non-performing assets, $3,128,000, or 11%, are energy credits, all of which are service company credits. The $3,128,000 as of December 31st, 21, is a 43% decline from $5,459,000 as of September 30th, 21. Since December 31st, 21, $3,420,000 in non-performing assets have been put under contracts for sale, but there is no assurance that these contracts will close. That charge-off for the three months ended December 31st, 21, were $807,000 compared to $15,697,000 for the quarter ended 9-30-21. No dollars were added to the allowance for credit losses during the quarter ended December 31st, 21, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended December 31st, 21, was $604 million. Loans outstanding at December 31st, 21 were approximately $18.616 billion, which includes approximately $170 million in PPP loans. The December 31st, 21 loan total is made up of 38 percent fixed rate loans, 36 percent floating rate, and 26 percent variable rate. I will now turn it over to Charlotte Rasche.
spk00: Thank you, Tim. At this time, we are prepared to answer your questions. Betsy, can you please assist us with questions?
spk09: We will now begin the question and answer session. To ask a question, you may press star, then 1 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, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Brady Gailey of KBW. Please go ahead.
spk07: Hey, thanks. Good morning, guys. Good morning. I heard the comments about how the legacy Texas structured CRE still had a little bit of a negative impact on loan growth in the quarter. Can you just remind us how much is left in that bucket so we can know how much is going to potentially continue to shrink here.
spk06: Yeah, 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 structured CRE book. That is down to $755 million at year end, 2021. So a couple of ways to think about that. I think there's a core portfolio in there that probably sticks around that might be 400 or 450 million, several of which we have renewed and extended. So they're what I would call core customer bars. So I don't think the full 755 is going away anytime soon. For this year, we think maybe 300 million of that burns down, so far less than burned down last year. Just for... to put a punctuation mark on what David was saying about loan growth being in the mid-6% range without the structured CRE paydowns. By quarter this year, Q1, that CRE structured portfolio went down $224 million, then $249, then $160, and then $205. The $205 in the fourth quarter was elevated beyond what we had originally forecasted. We thought it would be about 120, and after two quarters of hitting that forecast, like right on, I blew this one. We were off by over $80 million on it. But the good news here is it's almost over. So I think the underlying production and underlying loan growth is going to start manifesting itself in reported numbers. It won't be fully manifested this year because, again, I think somewhere in the neighborhood of $300 million has yet to to pay off in this portfolio. My guess is in Q1, we end up with maybe 80 or 100 million in reductions in that portfolio, as opposed to these kind of 200, 240 million kind of numbers that 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.
spk13: Yeah, I don't have that number, but I think if you really exclude PPP loans in the mortgage warehouse, but if you excluded that, we'd be in around 6. something percent, I believe, of internal growth, probably, or gain growth. So that's the good news.
spk06: Yeah, 6.8 for the quarter and 6.4 for the year. So, Brady, total payoffs in that structure of CRE portfolio for 2021, $781 million. Remaining balance, $755 million.
spk07: Okay, perfect. And, Kevin, while I have you, what is... How does the warehouse look next year? I mean, I know it's been coming down as that market has normalized. I think it was a little under $1.8 billion average for the fourth quarter. What do you think that looks like in 2022?
spk06: Yeah, fourth quarter, it averaged $1.773 billion. I think we will average in 2022 $1.450 billion. All right.
spk07: And then I know you guys put out the new buyback a couple of weeks ago. Should we expect, and I think you guys do that annually 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?
spk13: I don't have the numbers in front of me, Brighton, but I think last year we bought back around 700,000 shares at an average price of around $67. And you are right. I'll get the exact numbers for you, but I'm just talking from 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 go down, we do like to have the ability to buy back. If we ever did a 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.
spk10: Yeah, we bought back at $6,787 on average last year. How many shares? It was 767,000 shares. My memory's not too bad either.
spk07: And then just finally for me, you know, David Zalman, it's another quarter that we haven't seen, you know, an M&A deal announced for you guys. You've been kind of quiet. for a while now. Do you feel like you're getting closer on the bank M&A side?
spk13: I've always said, we'll run out of money before we run out of deals. Okay.
spk07: All right. Thanks, guys.
spk11: I guess that was an answer. Actually, I'm still thinking about it.
spk14: I think it was an answer. You will run out of money before you run out of deals.
spk09: The next question comes from Jennifer Dumba of Truist. Please go ahead.
spk01: Thank you. Good morning. I'm curious about SF fees and what you guys think you'll be seeing over the next few quarters. A lot of banks have made changes to their programs and are going to see lower fees there. Just wondering what you think in the next several quarters.
spk13: It's a good question, Jennifer. We have talked about it. We've looked at it a lot. We really haven't made any decisions. You know, what we've noticed is, you know, right now most of our customers that are opening up accounts are actually coming online. from the banks that have lowered their fees. So that's what's ironic and crazy. So I don't see that people right now that are banking with us are really, that's not their main reason for coming up and opening checking accounts with us. It doesn't seem to be. That doesn't mean that one day it won't mean something. But I'd say right now, you know, we're still opening up a lot of accounts. We're still growing. And they seem to be coming from the banks that are offering the, you know, the lower, Overdraft fees and free check accounts. And we also offer a lot of programs for our customers like overdraft protection. We have accounts that, you know, if you keep over a certain dollar amount, your account's 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 go free like the other guys, but if you lowered it to $15 or something, It would impact us, but again, we don't see that right now, and I still don't even see that this year happening, quite frankly.
spk01: Thanks, David.
spk09: The next question comes from Brett Rabitin with Hothby Group. Please go ahead.
spk02: Hey, good morning, everyone. This is actually Ben Gerlinger on for Brett. Good morning. I was curious. You seem to be quite a bit of a moving part with some of the loan portfolio, and then we're on the precipice of at least a couple of interest rates hikes, probably in 2022. I was curious on how you guys are thinking about the margin and given your asset sensitivity, where do you think you could potentially be towards the end of the year? And more so, I'm just kind of thinking like, Bigger picture, are you planning on two, three, four, and how that might correlate to expenses going forward as well?
spk13: I think I can answer this. I think I heard you. There's a little background on when you're talking, so I hope. I think what you're asking is how the potential rate increases will affect us. And, again, I would say the potential rate increases will affect us just like most banks. It will be positive. And I always use the example, our bank is a little bit different because we have a big securities portfolio as well. So interest rates going up helps us dramatically. But again, our company is like trying to turn the Queen 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 effect in two years. So it just takes us a while as interest rates to go up, but it would be, there's no question it helps the net interest margin dramatically. I mean, right now your net interest margin is, what did we end up with, 2.9 something this time? You know, probably an average over the last 30 years has probably been more like 3.25 to 3.40. So, you know, hopefully... Hopefully we'll get back somewhere to at least, you know, a minimum of three and a quarter and hopefully better than that. That would be my thoughts.
spk10: 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 or net interest income. As you mentioned, yeah, we are in 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 earning maybe 15 basis points. So we're working toward putting that in the at the bond portfolio. You know, I think if I checked, we're getting like 175 on bond portfolio. So with the cash flow we get from the bond portfolio plus utilizing the excess liquidity we have, that should also help with the net interest income. And definitely the loan growth that we project, you know, will help us in that aspect of it. And the other thing that we saw on the premium amortization on bond portfolio that it's, you know, we had 16 million on the fourth quarter But if you look in trend on December, and I looked at number today for January slowing down, so we project that our premium amortization is going to drop to $14 million to $15 million this quarter. That's going to be positive what we had in the fourth quarter. Yeah, but also, as mentioned, there's also, you know, the headwind a little bit. If you look at our PPP loan is winding down and our fair value income is winding down, so that's going to be, you know, a little bit headwind. But if you look in the core or super core, and, you know, I stated before, it's looking positive, especially in the increased rate environment, so it's going to be good.
spk13: I think you probably asked about the expenses, too. Am I wrong on that?
spk02: Yeah, no, I was just kind of thinking, like, obviously... There's wage inflation and competitive dynamics, and more specifically in Texas with an even hotter economy. I was curious what you're thinking about your core expense base, and then if your revenue is increasing, are you willing to have the expenses go higher, or is that just going to purely turn into better operating levels?
spk10: Yeah, if you look at our expenses, what we project for the first quarter at least is going to be to stay in line with the what we did in the fourth quarter and the range 118, 120, as I mentioned earlier. But if you go beyond the first quarter, we have our, you know, toward the middle of the second quarter, we usually have our salary increases, normally our like annual merit increase. And we see there that, you know, it's probably going to increase our expenses about $1 million to $2 million on quarterly basis. that you'll 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 revenue line, I think efficiency ratio should kind of stay the stable, you know, from that perspective. And our efficiency ratio, as you know, 42%, 43% 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.
spk02: Gotcha. Okay. Well, that's helpful. I appreciate it, guys.
spk09: The next question comes from David Rochester with Companies Point. Please go ahead.
spk05: Hey, good morning, guys. Good morning. Just a quick follow-up on that expense commentary. So 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 in 2Q or beyond?
spk10: Yeah, when you 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 savings is going to offset all the expenses. So I think in the net, when I say $1 million to $2 million, I think it's going to net increase.
spk05: Gotcha. Okay, great. And then just switching to the loan growth outlook, 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 mid-single-digit range or something higher than that as the recovery unfolds here.
spk13: 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.
spk05: Perfect. And then on the securities 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?
spk13: 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 month. But there's still $2.5 billion in there today. But you are seeing it buy more. You know, the yield's actually a little bit higher than even what Ossilbeck is at, at least the last few days. I mean, 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 we're going – 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 $2, 2.5 billion in – overnight at 15 basis points. 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 rolling off and money coming in. You know, we have a lot of money coming in all at once.
spk05: 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?
spk10: When we looked at it, I think it's since, like we mentioned earlier, 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 down the road six or 12 months. First 25, we'll see some, but it's not going to be.
spk13: I don't think it will be. It's not going to be that significant. It's going to take us six to 12 months to really see significant changes. Okay.
spk10: All right. Thanks, guys. Thanks.
spk09: The next question comes from Graham Dick with Piper Sandler. Please go ahead.
spk08: 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?
spk10: It is seasonal. So if you attract us, usually end of the year we get excess liquidity from public funds. And 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 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 grew strong in this last quarter, too.
spk13: Was it $300 million or something?
spk10: No, core deposits grew $900 million. Oh, $900 million. Just in the quarter. In the quarter. That's not that low, $900 million. Yeah, $900 million in the quarter plus $400 million. Oh, my.
spk13: That's a lot.
spk08: Okay, thanks. And then, Kevin, I heard you mention 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.
spk06: You know, I'd like to say there isn't continued pressure because there always seems to be pressure. We're down to, what, the wave average coupon of 312 on the portfolio, I think, for the fourth quarter. We're fighting on every basis point. I mean, literally, if somebody wants a reduction, you know, they'll start at 20 or 25 basis points, and we'll start at, like, three or four, try to reset their mind. So I think it could drift a little lower, but not like it's been going lower. I think the increase in rates is going to finally take some of the pressure off, the yield pressure off the warehouse.
spk08: Okay, great. That's all from me. Thanks, guys.
spk14: Thank you.
spk09: The next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk04: Thanks, Maureen. I appreciate the color on the commercial real estate runoff and kind of how that translates into 2022. David, you flagged kind of some increased takeouts in the construction book. So I'm just wondering how that kind of commitment levels and expectations lay out for 2022. And then I 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? giving growth in that segment versus the third quarter.
spk06: If 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.
spk12: I don't have a specific number on that, but as it relates to the question on the construction book, that fluctuation is normal. That's just the way it occurs. Fund up, projects get stabilized and typically they're taken to the market and refinanced on a non-recourse basis or they're sold. So the key is replacement of those assets and the markets that we operate in are still good. We don't see any reason, even with some increased rates, to dampen the demand for development and construction funds in any significant way. 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 for us.
spk06: Yeah, Gary, this is Kevin. You know, in the month of December, we booked a bunch of relatively large construction commitments that I think we'll start funding here in the first quarter. So we'll take more projects we get. I think we're expecting some pretty good outstandings from throughout the course of this year.
spk12: 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. Thank you.
spk09: The next question comes from Peter Winter with Webhook Securities. Please go ahead.
spk03: Good morning. David Dentier 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?
spk10: Yeah, 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 with you.
spk03: No problem. Then second here, what are you assuming in terms of deposit betas in terms of asset sensitivity?
spk10: In our asset sensitivity, we have our betas on the interest-bearing deposit, about 36 basis points. But if you look back historically, when in 2015 to 2017 or 18, when Fed increased rates, if you look at actual, our betas actually came in lower. We were calculating it was about 22 basis points per 100 rate increase. We included a little bit of being conservative in our model, but in reality, we had 22 basis points in 2015 to 2017.
spk13: I think with the amount of liquidity that all banks have right now, those betas are going to be a lot less.
spk10: Absolutely right. For the economy to absorb so much liquidity, it probably will be there, so the beta is probably going to be even less than it was back in 2015 to 2018.
spk03: Perfect. Appreciate the call. And then one last one. Just any guidance in terms of a long-term expense outlook with 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.
spk10: 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 at two quarter and probably stay there. Because the main increase, as mentioned, is the merit increase in the middle of the second quarter. And beyond that, it's kind of hard to say. But, you know, inflationary pressure is there. We see every day. So we have to deal with it. And I think inflation is going to impact us.
spk03: Great. We appreciate the call.
spk09: The next question comes from Matt Olney with Stevens. Please go ahead.
spk15: Hey, good morning and thanks for taking the question. First, just a clarification. Also back, 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?
spk10: Sorry, it's $8.5 million. PPP fees for the fourth quarter of 2021 were $8.5 million. And you're right, $13.2 million was in the fourth quarter of 2020. Got it.
spk15: Okay. Thanks for that. And then as far as the long growth outlook, mid-single digits, 5% to 6%, I think we covered that the structured theory could be a little bit of a headwind. Any commentary on what types of loan growth will drive the positive growth in 2022? Drive the deposit growth? That's what I thought you said. I'm sorry. Drive the positive growth that will offset the structural theory headwinds. Thank you.
spk12: Okay. Kevin, you may feel differently, but I don't see – a fundamental change in our mix of loans. I mean, we've got decent demand in all categories.
spk06: I think maybe mortgage is not as robust as it was last year. It will still be solid. Right. And January was very solid. And CNI and construction on real estate and real estate projects. Those are the three categories we're looking to for the growth.
spk12: Right. I just don't see any overwhelming material fundamental change in those percentages of our portfolio.
spk06: Yeah, but Matt, if we can skew it, with mortgage being down a little bit, if we can skew it towards the other categories, that's good for margin. Think about our added new volume 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 CNI, we'll benefit a bit from margin expansion by just a shift.
spk12: That's correct.
spk13: That would help that interest margin. And with the economy, again, you never know if the board 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 fixed enough, these companies should be drawing more money. They 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.
spk03: Okay.
spk15: That's helpful. And then I guess following up on Kevin's commentary around the warehouse pricing and thinking about if we do get higher interest rates in the back half a year, 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?
spk13: That's fair, Matt. Yes. And I think the reason for that is probably our rates are probably a little bit better than they are at other banks. And so if people are banking with us just because of longer-term relationships where some of the other banks may get some immediate, you know, I don't know, they will have to go down as much, but we won't, you know, we won't go up as much either.
spk15: And just lastly, thinking about credit quality, the allowance ratio at Prosperity still looks really high. Any thoughts on if you'll need any provision expense in the near term?
spk13: Like $300 million in reserve and $20 How much? $29 million. I don't see it right now.
spk15: All right. Well, I'll ask you again next year, or maybe the year after.
spk14: Hopefully the answer will be the same next year. All right. Thanks. Congrats, guys. Thanks.
spk09: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
spk00: 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. The conference is now concluded.
spk09: Thank you for attending today's presentation. You may now disconnect.
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