1/29/2025

speaker
Operator
Conference Operator

Good morning and welcome to the Prosperity Bank Shares fourth quarter 2024 earnings conference call. All participants will be in 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 your telephone keypad. 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.

speaker
Charlotte Rasche
Executive Vice President and General Counsel, Prosperity Bank Shares

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bank Shares' fourth quarter 2024 earnings conference call. This call is being broadcast live on our website and will be available for replay for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bank Shares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Tomanis, Jr., Chairman, Osobek Osmanov, Chief Financial Officer, Eddie Saffody, Vice Chairman, Kevin Hannigan, President and Chief Operating Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer, is unable to join us today. 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. 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 than those in the forward-looking statements can be found in our 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 Solman.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2024 conference call. Our net income was $130 million for the three months ending December 31st, 2024, compared with about $95 million for the same period in 2023, an increase of 34 million or 36%. The net income for diluted common share was $1.37 for the three months ended December 31st, 2024, compared with $1.02 for the same period in 2023, an increase of 34%. The changes were primarily due to an increase in net interest income and a decrease in the FDIC Special Assessment. Excluding the merger related expenses and the FDIC Special Assessment, each net of tax, net income was $111 million or $1.19 per diluted common share for the three months ending December 31st, 2023. So when comparing earnings for the fourth quarter of 2024 with the fourth quarter of 2023, excluding the merger related expenses and the FDIC special assessment, the net income increased $18.7 million or 16.8% and diluted earnings per share increased 18 cents or 15.1% for 2024. As previously mentioned, as our assets continue to reprice, Earnings and return on assets have increased. We expect this trend to continue in 2025. Our annualized return on average assets and average tangible common equity for the three months ending December 31st, 2024 were 1.31% and 13.5% respectively. Prosperity's efficiency ratio, excluding the net gains and losses on the sale, write downs, or write up of assets and securities was 46% for the three months ending December 31st, 2024. The net interest margin increased 30 basis points to 3.05% compared with 2.75% for the fourth quarter of 2023. As previously mentioned, we expect a higher net interest margin for 2025 as our assets reprice subject to certain assumptions. On January 21st of 2025, Prosperity Bank shares announced a stock repurchase program under which up to 5% or approximately 4.8 million shares of our outstanding common stock may be acquired over a one-year period expiring on January 21st, 2026 at the discretion of management. With regard to loans, the loans were 22.2 billion at December 31st, 24, an increase of 968 million, or 4.6%, compared with 21.2 billion at December 31st, 2023, primarily due to the merger with Lone Star Bank. Excluding the loans acquired in the merger, and new production at the acquired banking center since April 1st, 2024. Loans at December 31st, 2024 decreased 88 million compared with December 31st, 2023. Overall, when excluding the increase in loans due to the merger, loan growth was essentially flat in 2024. However, we did hear positive comments from our customers after the election. Time will tell. but we should experience organic loan growth in 2025 if our customers follow through with their positive momentum. We also disposed of or worked through a number of problem loans from the first capital acquisition, which reduced total loans. With regard to deposits, deposits were $28.4 billion at December 31st, 2024, an increase of $1.2 billion, or 4.4%. compared with $27.2 billion at December 31, 2023, primarily due to the merger. Linked quarter deposits increased $293 million, or 1%, 4.2% annualized, from $28.1 billion at September 30, 2024. Excluding the deposits assumed in the merger and new deposits generated at the acquired banking centers since April 1st, Deposits at December 31st, 2024 increased by 108 million compared with December 31st, 2023. Deposits started to normalize in 2024 with more deposits coming in than leaving the bank. Prosperity has a strong core deposit base with a low cost of deposits of 1.44% for the fourth quarter of 2024 compared with 1.53% for the third quarter of 2024, a decrease of nine basis points. Additionally, we have non-interest bearing deposits of 9.8 billion representing 34.5% of our total deposits. With regard to asset quality, our non-performing assets totaled 81.5 million are 23 basis points of quarterly average interest earning assets at December 31st, 2024, compared with 72 million or 21 basis points of quarterly average interest earning assets at December 31st, 2023. And 89 million or 25 basis points of quarterly average interest earning assets at September 30, 2024. The allowance for credit losses on loans and off-balance sheet credit exposure was $389 million at December 31, 2024. Prosperity continues to be interested in merger and acquisitions and will pursue a partnership when the transaction makes sense for the shareholders and associates of both institutions. Early indications show that banks are more open to merger transactions with the new administration as it appears that The agencies responsible for transaction approval will be more favorable for entertaining merger proposals. We're excited about the growth and future of our company. The Texas and Oklahoma economies are some of the best in the country. Texas has no state income tax and both Texas and Oklahoma have a business friendly political climate. The Texas population grew more than any other state in 2024 with the addition of 563,000 people, bringing the total population to 31.3 million. Further, according to Forbes in their July 2024 issue, there have been 209 corporate relocations to Texas since 2018. All of this bodes well for our future growth. Prosperity has a strong capital position that provides opportunities to participate in mergers and acquisitions. repurchase stock, or fund organic growth without the need for additional capital. We believe that our net interest margin should continue to expand to a more normal ratio as our assets continue to reprice, thereby increasing our earnings per share. We also have strong core deposits with 34.5% of our deposits in non-interest bearing accounts. I would like to thank all our customers, associates, directors, and shareholders for helping build such a strong, successful bank. Thanks again 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. Osobek.

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three-month end of December 31, 2024, was $267.8 million, an increase of $6.1 million compared to $261.7 million for the quarter-ended September 30, 2024, and increase of $30.8 million compared to $237 million for the same period in 2023. For the full year 2024, net interest income increased $70.1 million from $956.4 million in 2023, to 1.026 billion in 2024. Fair value loan income for the fourth quarter of 2024 was 3.6 million compared to 4.8 million for the third quarter of 2024. The fair value income for the first quarter of 2025 is expected to be in the range of 2 to 3 million. The net interest margin on a tax equivalent basis was 3.05%, for the three months ended December 31, 2024. This was 10 basis point increase compared to 2.95% for the quarter ended September 30, 2024, and 30 basis point increase compared to 2.75% for the same period in 2023. Excluding purchase accounting adjustments, the net interest margin for the three months ended December 31, 2024 was 3%. compared to 2.89% for the quarter ended September 30, 2024, and 2.71% for the same period in 2023. Non-interest income was 39.8 million for the three months ended December 31, 2024, compared to 41.1 million for the quarter ended September 30, 2024, and 36.6 million for the same period in 2023. Non-interest expense for the three months ended December 31, 2024 was $141.5 million compared to $140.3 million for the quarter ended September 30, 2024 and $152.2 million for the same period in 2023. Higher non-interest expense during the fourth quarter of 2023 was primarily due to FDIC's special assessment of $19.9 million. For the first quarter of 2025, we expect non-interest expense to remain flat and be in the range of 141 to 143 million. The efficiency ratio was 46.1% for the three months ended December 31st, 2024, compared to 46.9% for the quarter ended September 30th, 2024, and 55.6% for the same period in 2023. The bond portfolio metrics at 12-31-2024 have a modified duration of four and projected annual cash flows of approximately $1.9 billion. And with that, let me turn over the presentation to Tim Timanis for some details on loans and asset quality.

speaker
H.E. Tim Tomanis, Jr.
Chairman, Prosperity Bank Shares

Tim Timanis Thank you, Asilbek. Our non-performing assets headquarter in December 31, 2024. totaled $81,541,000, or 37 basis points of loans and other real estate, compared to $89,923,000, or 40 basis points at September 30, 2024. This is a 9% reduction in non-performing assets. Since December 31st, 2024, $2,825,000 of nonperforming assets have been put under contract for sale. The December 31st, 2024 nonperforming asset total was comprised of $75,836,000 in loans, $4,000 in repossessed assets, and $5,701,000 in other real estate. Net charge-offs for the three months ended December 31st, 2024 were $2,592,000 compared to net charge-offs of $5,455,000 for the quarter ended September 30th, 2024. This is a $2,863,000 decrease on a linked quarter basis. There was no addition to the allowance for credit losses during the quarter ended December 31st, 2024. No dollars were taken into income from the allowance during the quarter ended December 31st, 2024. The average monthly new loan production for the quarter ended December 31st, 2024 was $333 million compared to $259 million for the quarter ended September 30th, 2024. Loans outstanding at December 31st, 2024 were approximately $22.149 billion compared to $22.381 billion at September 30th, 2024. The December 31st, 2024 loan total is made up of 39% fixed rate loans, 31% floating rate loans, and 30% variable rate loans. I will now turn it over to Charlotte Rasche.

speaker
Charlotte Rasche
Executive Vice President and General Counsel, Prosperity Bank Shares

Thank you, Tim. At this time, we are prepared to answer your questions. Our call operator, Gary, will assist us with questions.

speaker
Operator
Conference Operator

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today comes from Manan Ghasalia with Morgan Stanley. Please go ahead.

speaker
Manan Ghasalia
Analyst, Morgan Stanley & Co.

Hi, good morning.

speaker
Operator
Conference Operator

Good morning.

speaker
Manan Ghasalia
Analyst, Morgan Stanley & Co.

Good morning. I wanted to touch on the NIM trajectory from here. Can you update us on what your models are telling you? I know we've had a couple of cuts taken out of the forward curve. The long end is higher. So, any thoughts on how you're feeling about NIM relative to last quarter?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

I think we're still on track to what we said last quarter. I don't remember exactly what I said in here, but I think we've said somewhere between year end, we should be around 325, 335. Is that right also back in there?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, 325, 330 on average for 2025, and it'll be a little bit higher at the exit in 2025.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Yeah, I mean, I think we feel good with the net. I mean, if everything goes, there's no black swan out there. I'll steal some material from John Armstrong this morning in an email where he said, the Queen Mary has turned... the corner and we got the blinker switch on and we're about to hit the Southwest freeway. So we feel good about it.

speaker
Manan Ghasalia
Analyst, Morgan Stanley & Co.

I appreciate that. And then, you know, maybe to talk about loan growth a little bit, can you expand on your comments that you are hearing more positive sentiment from clients and maybe what that means for loan growth over the next few quarters? You know, I ask because your comments on the Texas market were fairly bullish and At the same time, rates are down, credit's doing well. So what's stopping you from really leaning in here?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Well, I'm going to let Kevin get in here in a minute, too. But the bottom line, a lot of times, what's really hard for you guys to see, too, is that as we buy banks, we still, a lot of times, the loans that are in the bank may be not up to the same quality that we have. And so it takes us a while. Just for example, over the last acquisition, where you guys see just maybe a small loan increase, you don't see that maybe we outsourced or replaced probably $400 million in a previous bank that we bought. So that's the other side to it too. On the other hand, there has been a lot of growth in Texas, at least from a population standpoint. But overall, you still didn't see massive, massive growth in, I think, from anybody on the loan side. And again, we've never been a bank that's really been I'd say we'd go after double-digit loan growth. That's not our deal. I mean, I think we're close to around a 78% to 80% loan-to-deposit ratio. Again, I don't know that we'd ever want to be 100% loan-to-deposit ratio. So that's just some of the factors there. But, Kevin, you may want to jump in.

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

Sure, David. Thanks. I can appreciate the question, given a little bit of shrinkage in earning asset growth in the fourth quarter of the year. As David said, on the first capital acquisition alone, and if we go back and just look at the timing of that acquisition, at the time it closed, that bank had $1.6 billion, I think, in loans. And we have, as David would say, outsourced, chased off. failed to renew, whatever we want to call it, almost a quarter of that portfolio, right at $400 million, maybe a shade over $400 million. It won't be nearly as bad in the case of Lone Star, a much better credit quality bank and a smaller footprint as well. It was $1.8 billion, I think, at the time we closed. I think we're at the end of that process as it pertains to those two acquisitions, which gives us a little more leeway to show some growth and have it stick on the balance sheet. I still don't think it's going to be robust. I do think it will be low to mid single-digit kind of growth. Things are improving. Customer sentiment is pretty good. It hasn't manifested itself yet, but I feel like it's coming.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Yeah, I think all of those are just, those are all comments. And even though you're still seeing a lot of growth, at last year, business people still didn't feel as comfortable with the administration and all the regulatory burden that they were getting, and they just didn't feel as good. So we'll see. We already see loan committees and what we're seeing, and Tim may comment on this, We're already seeing some of the loans pick up already, some of the demand. So we'll see. I mean, again, something could change, but it does seem to be the momentum and the people do want to grow and want to do something. And we seem to be at the right place at the right time. That's all.

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

Tim, I was going to add that I've seen a preview of what's coming in for loan committee tomorrow. I generally get a preview of what's coming in on a Tuesday, and we've got some nice things coming in, and particularly nice in that they're not all construction loans that take a while to fund up. We do a construction loan, require all the equity to go in first so we could approve a deal and may not fund under it for six to nine months until they put their equity in. We do have a a couple nice, expected to be highly funded revolvers coming in tomorrow. So it's a little more encouraging.

speaker
H.E. Tim Tomanis, Jr.
Chairman, Prosperity Bank Shares

Yeah, I think all that is accurate. It's obviously very early in the year. We're not even to the end of January yet. So the positive sentiment has plenty of time to manifest itself as we go into the year. So We have a lot of conversations with existing borrowers that might want to do more and potential borrowers. So I'm optimistic that we should have a pretty decent growth.

speaker
Manan Ghasalia
Analyst, Morgan Stanley & Co.

That's all very helpful, Kala. So maybe just to round out the discussion there between NIM and loan growth, to get to that 325, 335 NIM that you have in your model, what kind of loan growth do you need to get there?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

For the model, we kept our balance essentially static. But what's the tailwind? We have a few variables that have positive NII and NIM impact for us. First of all, we have about $5 billion of loans that principal pay down each year. So we say about 60% is more at the fixed rate. And I think the average was around 525 or so. So if we reprice that $525 to $725 to $750 at the current rate, there's a pickup more than 200 base points on that loan alone. On the second part of it, our securities, we have about $1.9 billion cash flowing from securities. The yielding is 2.06% for the Q4. So we either will pay down our borrowing, which would have around 4.5%. There's a pickup 2.5% there. Or we could reinvest in the bonds, you know, which is at 5%. So those things positively impact our NII and margin.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

But the bottom line is that those numbers we're giving you, that's based on static and no growth at all, right? Yeah.

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

But there's a shrinkage in that we're paying down our borrowing as we planned. So it includes paying down borrowing around down to $2 billion in borrowings by end of the year. Right.

speaker
John Rowan
Analyst, Barclays

Great. Thank you so much.

speaker
Operator
Conference Operator

The next question is from John Arstrom with RBC Capital Markets. Please go ahead.

speaker
John Arstrom
Analyst, RBC Capital Markets

Thanks. Good morning. Good morning, John. I appreciate the shout-out, David.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Here's only guy 530 that emails me in the morning.

speaker
John Rowan
Analyst, Barclays

I have one eye open anyway. Yeah, yeah.

speaker
John Arstrom
Analyst, RBC Capital Markets

All right. Just to follow up on the comments on the securities portfolio yield, that 2.06, what do you think that looks like in a year? It's kind of been stubborn and stuck around the low twos. Do you expect that to climb over the next year with some of these reinvestments that you're making?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, I think for right now, at least on our projection, we want to continue to pay down the borrowing a little bit this year. So from $1.9 billion, I think we're going to want to use about $900 million to pay down the borrowing to get the borrowing around $2 billion. So we're going to be reinvesting another billion dollars or we're going to put that money to long growth. So either way, it's going to be positive for us. I know what we did purchase a little bit in the Q4, we purchased about $150 million of security because we could get pretty good yield on it. I think we've got about 5%. So you can do the math. If you put a billion back at around 4% or around 5%, that would definitely benefit our yield on the securities.

speaker
John Arstrom
Analyst, RBC Capital Markets

Good. Fair enough. David, any thoughts on the repurchase appetite? Are you inclined to sit on capital and see what happens on M&A, or do you want to be more active on the repurchase?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

I would rather wait. I think this is going to be a... We've been waiting a long time. I would like to save the money for the M&A right now. I think there should be. I mean, it seems like there's people out there, the banks that have been waiting a long time. I think they're interested. Our stock is at a good price too. So I think there's more deals to be made. I think the regulators are out there that are more apt to approve deals. So I would like to wait and see. Now, having said that, if our stock price went the other way, we would definitely jump in and do something. But for the most part, I would like to save it for some M&A and increase dividends also.

speaker
John Arstrom
Analyst, RBC Capital Markets

Yep. Okay. And you're saying the sellers are now coming to the table? I know the buyers are pretty excited, probably including you, but you're saying the sellers seem to be a bit more willing to come to the table now?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Right after the election, I had three phone calls, so stuff that we had worked on previously in some cases and in some cases new stuff. So, you know, again, you don't know that it's ever going to just jump out there, but it does seem like there's people on both sides that want to do something. Okay.

speaker
John Arstrom
Analyst, RBC Capital Markets

All right. Thank you. Appreciate it.

speaker
Operator
Conference Operator

Thanks, John. The next question is from Catherine Mueller with KBW. Please go ahead.

speaker
Catherine Mueller
Analyst, KBW

Thanks. Good morning.

speaker
Operator
Conference Operator

Good morning.

speaker
Catherine Mueller
Analyst, KBW

You've enjoyed a zero provision for the past two years. Is there a level where your reserve gets to where you feel like you need to start provisioning for growth or your credit outlook has been so strong? Is this another year where it's feasible to still expect a zero provision in 25?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Well, you can do the math. We have $389 million in the provision, and we have $81 million in non-performing. And at those non-performing, over half of that is in one-to-four family residential loans. So I'd say if things don't change, we're pretty reserved for a while to go unless something changes or there's some kind of black swan.

speaker
Catherine Mueller
Analyst, KBW

Okay, great. And then on the margin, just back to deposit costs, is there a way to think about where you ended the quarter in deposit costs just as a gauge for where we may start the first quarter of 2025?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, our spot rate, I call it, for the deposit was 140. So it's a full basis point less than our average for the quarter.

speaker
Catherine Mueller
Analyst, KBW

Okay, that's great. All right, thank you. Nice quarter, guys.

speaker
Operator
Conference Operator

Thank you. The next question is from Peter Winter with DA Davidson. Please go ahead.

speaker
Peter Winter
Analyst, DA Davidson

Thanks. I was wondering, Kevin, you always provide good guidance for the mortgage warehouse. I was just wondering... One, where do you think it comes in in the first quarter? And then just how you're thinking about the outlook for the year versus the industry outlook, which is kind of assuming mid-teen growth.

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

Yeah, we have been fortunate, I guess, and let's hope I can keep the foresight. keep the trend going of being close to right on the warehouse. Just as a level set for everybody, we averaged in the fourth quarter a billion 137 and I think we said on the call somewhere we'd do somewhere between a billion 50 and billion one. So it turned out just slightly better than the upper side of what we thought. In further context, I looked at the numbers through last night And so quarter to date, the average is down to 952 from that billion 137 of last quarter. And then last night we closed at 805 million. So it's been a pretty weak January or latter part of January, in particular the last seven or eight days. I think that 805 of last night goes lower before it gets higher. So I think for the quarter, Well, we may average $825,000, and if things go well, $850,000. I do know we have a couple of new clients that are in the pipeline. Again, I looked at one of them on Tuesday. So we're hoping to add a couple of clients this year with some of the dislocations in the market and some of the folks who've gotten out. I think Independent Bank up the road said, With their merger closing, I think they've exited the business. So there have been some opportunities to grow it. It's really hard for me to go out much beyond a quarter. One of the things we do maybe that gives us a leg up on how we do it quarter to quarter, it takes from application volume, and we can keep track of application volume, From application to closing, these things are generally six or seven weeks. So you know where you stand, and it's pretty easy to project out six or seven weeks from now. The R squared on that is really high based upon what we do. So out longer, it really depends on rates, where the mortgage rates are. They're a little high, and I'd say if we look across our mortgage portfolio, and Eddie's on the call too, he might talk about how we're doing with our own single-family whole loan book. It's been tougher out there. So I expect it to be a relatively weak quarter, but that's not atypical for Q1. As a matter of fact, that's more the natural thing than anything else. But in general, the business has been a little weak.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Eddie, would you like to say anything?

speaker
Eddie Saffody
Vice Chairman, Prosperity Bank Shares

No, I agree with what Kevin says. The mortgage rates have stayed higher for longer than some people had assumed. I think anticipation of refinancing has been pushed out a bit more. But what we actually do see is a little bit of an increase in a cash-out refi, which seems a little counterintuitive. But as people are looking to consolidate debt, it's cheaper to go into the new mortgage than continue paying the credit card rates and the like. So I think this is the slow season, of course, and we'll have a better gauge of what's happening towards the end of the first quarter.

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

In general, I've always said in this business, and I've been around it for a really long time, things are generally weak between Thanksgiving and the Super Bowl. And then after the Super Bowl, it starts picking up again. So that's why I think it's going to continue to be weak for the next couple of weeks. And then we'll see if we get a little pickup in March, which would be pretty typical the way the business is operated forever.

speaker
Peter Winter
Analyst, DA Davidson

Got it. I appreciate all the color. As a follow-up question, can you just talk about the outlook for deposit growth this year? And then secondly, if the Fed were to stop lowering rates, is there much more room to lower deposit costs? I mean...

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

guys did a very good job managing deposit costs uh on the way up um thanks i i would say to start with the deposit uh the deposit we never where a lot of banks really went really real far started paying high rates we never really you know we never really went and paid really really high rates we we paid which was a competitive rate but we never did pay more than the market so I would say from that standpoint, we really controlled our costs. We probably have one of the lowest cost of funds of any bank that are core deposits. At the same time, a number of other banks were going out and buying broker deposits and even paying 5% for money. We never did that. So probably we lost some of that money that might have stayed with us. But I think what we have right now is a real good core book. We have good core customers. I would say that we probably couldn't go down as much as some of the other people could go down. But having said that, if rates do go down, we do have some room on the money market account. And we also offered a special CD, four-month CD that's at 4%. And so I think we have a couple of categories that we could cut. We just may not be able to cut as much as everybody else. As far as deposit growth, you know, historically in normal times, We always used to run 2% to 4% organic growth rate. Again, we're just excited that the deposits aren't going out of the bank like they were, that they actually came back positive. I think this year we're using, in our budget, what, 2% or 2.5%? 2.5%. So, again, I'm hoping that we'll get there. We should. I'm hoping to get back to a more normalized deposit growth rate. And so that's kind of what we're looking for right there.

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Just to add on that, even we don't have a rate cut coming in, but we do have a special CD rate that we did cut the rates. We pretty much did 100 base point beta on that for each 100 Fed cut. We did 100 cuts. So those are going to be repricing over time. So we just saw some repricing happen in the fourth quarter. We'll continue to see that in the first quarter. But if you look at just for numbers purposes, we have about 77% of our CD going to mature within six months. And 92% of our CD are going to mature within 12 months. So you can see there's still opportunity to reprice those special CD at a lower rate because we did decrease it. So we're going to benefit our NII as well, even if we don't have, we don't see any fed red kite.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

We've kept the CD product short. We've not really offered rewrites on the real long term. So that should help us.

speaker
Matt Oney
Analyst, Stephens Inc.

Got it. Thanks for taking the questions.

speaker
Operator
Conference Operator

The next question is from Matt Oney with Stevens. Please go ahead.

speaker
Matt Oney
Analyst, Stephens Inc.

Hey, thanks for taking the question, guys. On the investment securities portfolio, David Rosselbeck, I think you mentioned earlier that the bank has been buying or is close to buying some newer investment securities. Any more color on those products that you're looking at with respect to yields and duration?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Historically, our portfolio, we've tried to, you know, as long as I've been here for 25 years or so, we've always, the primary product that we buy is a 15-year fully amortized mortgage-backed security that has anywhere, it used to have about a three and a half year life that extended to five as interest rates went up. Now, the rates are extended, but we pretty much stay with that. We pretty much stay with that product. We'll also buy You know, we'll buy some other products for CRA and shake it up a little bit. But the majority of the product has always been, you know, we never try to call rates. We just try to put the money that we didn't have in loans into the portfolio. And so we made money as rates went down, when we had the mortgages. As rates gone up, we kind of sucked wind for the last couple years. But now, you know, finally that's turning – And that's what you're seeing right now. We'll probably still keep that same strategy. It never looked good when rates went up and you had this loss in the portfolio. But, you know, we've been to two or three of these deals right now. And it is nice to see that it does work and it does come out over time. So if you stick with that strategy, you know, you may not hit a home run, but you'll always be in the right place.

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

That's right, Matt. So we did buy $150 million in the fourth quarter. I think yield ended up being average about 505.

speaker
Matt Oney
Analyst, Stephens Inc.

Okay, that's helpful. Thank you for that, Keller. And then going back to the expense commentary, I think also back you gave us a number for the first quarter to expect. Just beyond the first quarter, are there any other initiatives, technology upgrades, or any other projects that could add some incremental pressure to that beyond the first quarter? Or should we just continue to assume that low single-digit range we've seen now for a while?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, I think so. If you look at beyond first quarter, in second quarter, we usually have our annual merit increase. That's where you see some pickup on expenses. But we do constantly work on different projects. Technology is always evolving and improving, so it costs money to that. So I do see some expenses increase on the starting second quarter and maybe second half, I would say, of the year. And if I had to guess right now, based on our analysis, I think that on the second half, expenses are going to go up about 1% to 2%, maybe 1% to 1.5% in the second half. When I say that I'm based on that 141 to 143 range that I'm providing, that you can see it. one or one and a half, up to 2% increase on the quarterly basis, more like on the second half of the year.

speaker
Matt Oney
Analyst, Stephens Inc.

Understood. Okay. All right. Thank you, guys.

speaker
Operator
Conference Operator

The next question is from Jared Shaw with Barclays. Please go ahead.

speaker
John Rowan
Analyst, Barclays

Hi, this is John Rowan for Jared. Good morning.

speaker
John Rowan
Analyst, Barclays

Good morning. Just digging into loan growth a little bit more. seeing some pickup in demand and activity. What buckets of loan growth is that in? Is that commercial customers? Are there any pickup in CRE activity? And then just resident mortgage too, how's that doing with rates moving higher?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

Kevin, you want to take that?

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

Yeah, I'd say a lot of the current fundings where you can count on approving a loan and getting fundings, that's usually going to be in the CNI or the mortgage buckets, right? Whereas the construction buckets take a while to fund up. So in terms of the activity level, I'd say it's across the board, but we've been much more cautious about adding on the single family book. That book got to be a pretty good size relative to our balance sheet and strategically we kind of said we ought to slow that down. You know, it's got above $8 billion. I don't know what's it – I didn't look at last night's number, but it's probably $8.2 or $8.3 billion. So we did kind of slow that down. You don't ever stop it. You can't – it's not a business you can turn the spigot fully on or fully off. But I think in terms of the volume we add this year, it will be less single family related. I don't know if Tim or Eddie want to add to that thought.

speaker
H.E. Tim Tomanis, Jr.
Chairman, Prosperity Bank Shares

You're exactly correct. At least that's our attitude and our forecast at this point in time. And I don't see that changing.

speaker
John Rowan
Analyst, Barclays

OK, perfect. That's good color.

speaker
John Rowan
Analyst, Barclays

And then just back on M&A, what are some hallmarks, I guess, of what you would be interested in in terms of, like, the size, location, whether it's, like, balance sheet metrics, like capital levels or loans or deposits of potential targets that you're considering?

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

I guess I could get an email and give you a list of them, I guess. But... You know, we really don't look at it like that. I mean, we look at a bank or a potential M&A. First of all, we look at the bank. Is it a core bank? We look at the people. Are the people going to be with us? Are they going to stay with us? And, you know, can we make a deal that really is accretive so that we're not just building size, that it's going to be accretive for us and it will be good for the people joining us at the same time? Again, I've always said that we always like Texas. We're here, so we'll always like that the most. But again, we'll still look in other places. We'll still look in other places. Again, I mentioned this before. We probably won't go to another state and buy a billion-dollar bank. If we go to another state, it has to be something where they're, I've always said, at least in the top five market share that they own that state. Because you just need that for advertising dollars and everything else. We really look at the bank and the people and the core deposits more than anything else. In our opinion, you can always get loans, you can always hire some gunners, and you can go build as many loans as you really want. What we really like to see is a bank that's been around for some time that has core deposits and the people are willing to grow with us.

speaker
Matt Oney
Analyst, Stephens Inc.

Did we lose you, John? Oh, sorry.

speaker
John Rowan
Analyst, Barclays

Just one other quick one for me. Sure. The fee income guidance for 38 to 38 million range recently, is that any upside to that in 2025 or should we expect similar level?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, I think it's going to stay the same. There might be one-off stuff happen during the quarter that we don't know. But while we try to continue to grow our trust and brokerage fee, as you saw the past couple of years, you saw the increase there. So we are focused on the trust fee, like our trust business. So hopefully we'll continue to grow our trust department and the fee on that.

speaker
John Rowan
Analyst, Barclays

Okay, good. Thank you so much.

speaker
Operator
Conference Operator

The next question is from Bill Carcacci with Wolf Research. Please go ahead.

speaker
Bill Carcacci
Analyst, Wolfe Research

Hi there. Thank you for taking my questions. First, I wanted to follow up on your loan growth comments. Some of the bigger banks have suggested that tight credit spreads have been a constraint to loan growth as many borrowers have been accessing funding via debt capital markets. And I think there's a suggestion that loan growth could remain a little bit soft as long as capital markets remain this open. Can you give some color around what percentage of your customer base has been able to tap that capital markets for funding versus those that are largely reliant on bank lending and really have simply just not been borrowing?

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

I'll take this one. It's pretty rare for our customer base to be even thinking about accessing debt funds or other things. Now, there is a segment in the upper end of what I would call our middle market group you might call that triple B minus kind of larger credits and some smaller than that that do have access to debt funds. And that's a relatively small portion of our overall book of business. So they are active. We see and hear about how active they are, particularly from those larger clients we have, but it just isn't, it really isn't in the wheelhouse of most of our customers.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

I would also say, Kevin, I mean, a lot of people talk about capital markets and non-traditional banks getting into lending, but I don't think that we've ever lost a customer to a non-bank lender that we didn't want to. I may be wrong on that.

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

We've lost a few that we wanted to. That's right.

speaker
Bill Carcacci
Analyst, Wolfe Research

Yeah, that's really helpful. And so, So then essentially they just haven't been borrowing. And maybe could you, would you characterize like, you know, how much is essentially pent up? You talked about like the optimism that you sense and like expectations maybe after kind of the Super Bowl later in the year, we'll get a little bit perhaps bounce and growth. Is much of that, would you say, pent up from sort of deferred or delayed borrowings?

speaker
Kevin Hannigan
President and Chief Operating Officer, Prosperity Bank Shares

Now, I don't think it's pent up. And just to be clear, the Super Bowl was related just to single-family mortgage and the mortgage warehouse business, not to other lines of business. But what we're seeing is people buying out partners, you know, of their own business or expanding within their own business where they've been kind of on the sidelines themselves. And if anything, really ever since COVID, they've been more paying down and than advancing up on lines of credit. And I think that's starting to shift around where we're seeing some inventory builds and some receivable builds. And so I think it's just good old blocking and tackling businesses is coming back.

speaker
David Zalman
Senior Chairman and Chief Executive Officer, Prosperity Bank Shares

That's helpful. That's going to turn to better blocking and tackling business. That's what we're looking at.

speaker
Bill Carcacci
Analyst, Wolfe Research

Yeah, that's great. Helpful color. And then finally, if I can squeeze in one last one, given the debt pay down and other moving parts that impact NIM and make it harder to kind of tell exactly what's happening from a revenue perspective, could you frame how to think about that 325 to 335 NIM range that you're expecting in terms of NII?

speaker
Osobek Osmanov
Chief Financial Officer, Prosperity Bank Shares

Yeah, I think we continue to see an increase in NII common quarters. And I think the variables which I was describing early on, repricing our securities from 206 to around 4.5% to 5%, our fixed loans that we're going to be maturing this year through prepayment, which is mature today, they're going to be repriced 200 base points. So all of those are going to continue to help us with NII standpoint, even our margin, including margin. But that's a tailwind. And the I think last piece is a CD repricing. We talked about special CD that, you know, 77% of it's maturing in six months. They're going to be repricing lower on the CDs. So all of those are going to help with NII specifically.

speaker
John Rowan
Analyst, Barclays

Got it. Very helpful. Thank you for your thoughts.

speaker
Bill Carcacci
Analyst, Wolfe Research

Appreciate it.

speaker
Operator
Conference Operator

This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

speaker
Charlotte Rasche
Executive Vice President and General Counsel, Prosperity Bank Shares

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.

speaker
Operator
Conference Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Disclaimer

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Q4PB 2024

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