Prosperity Bancshares Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 29, 2025

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Prosperity Bancshares Fourth Quarter twenty twenty four Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' fourth quarter twenty twenty four 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 Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer H.

Speaker 1

E. Tim Timanus, Jr, Chairman Asilbek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer May Stavenport, Director of Corporate Strategy and Bob Dowdell, Executive Vice President. Randy Hester, our Chief Lending Officer is unable to join us today. David Zelman will lead off with a review of the highlights for the recent quarter. He will be followed by Asselbek Osmanov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality.

Speaker 1

Finally, we will open the call for questions. Before we begin, let me make the usual disclaimers. Certain

Speaker 2

of

Speaker 1

the matters discussed in this presentation may constitute forward looking statements for the purposes of the federal securities laws and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward looking statements can be found in 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 Zalman.

Speaker 3

Thank you, Charlotte. I would like to welcome and thank everyone listening to our conference call. Our net income was $130,000,000 for the three months ending Dec. 31, 2024 compared with for the same period in 2023, an increase of $34,000,000 or 36%. The net income per diluted common share was $1,.37 for the three months ended Dec.

Speaker 3

31, 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 specialist estimate. Excluding the merger related expenses and the FDIC specialist assessment, each net of tax, net income was $111,000,000 or $1,.19 per diluted common share for the three months ending Dec. 31, 2023. So when comparing earnings for the with the excluding the merger related expenses and the FDIC special assessment, the net income increased $1,870,000,0.0 or 16.8% and diluted earnings per share increased $0,.18 or 15.1% for 2024.

Speaker 3

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 Dec. 31, 2024 were one point three one percent and thirteen point five percent 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 Dec.

Speaker 3

31, 2024. The net interest margin increased 30 basis points to 3.05 compared with 2.75% for the As previously mentioned, we expect a higher net interest margin for 2025 as our assets reprice subject to certain assumptions. On Jan. 21, 2025, announced a stock repurchase program under which up to 5% were approximately 480,000,0.0 shares of our outstanding common stock may be acquired over a one year period expiring on Jan. 21, 2026 at the discretion of management.

Speaker 3

With regard to loans, the loans were $2,220,000,000,0.0 at Dec. 31, 2024, an increase of $9.68,000,000 dollars or 4.6% compared with $2,120,000,000,0.0 at Dec. 31, 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 1, 2024, loans at Dec. 31, 2024 decreased $88,000,000 compared with Dec.

Speaker 3

31, 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.

Speaker 3

With regard to deposits, deposits were $2,840,000,000,0.0 at Dec. 31, 2024, an increase of $120,000,000,0.0 or 4.4 percent compared with $2,720,000,000,0.0 at Dec. 31, 2023, primarily due to the merger. Linked quarter deposits increased $2.93,000,000 dollars or 1%, four point two % annualized from $2,810,000,000,0.0 at Sept. 30, 2024.

Speaker 3

Excluding the deposits assumed in the merger and new deposits generated at the acquired banking centers since April 1, 2024, Deposits at Dec. 31, 2024 increased by $108,000,000 compared with Dec. 31, 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 compared with 1.53% for the a decrease of 9 basis points.

Speaker 3

Additionally, we have non interest bearing deposits of $980,000,000,0.0 representing 34.5% of our total deposits. With regard to asset quality, our non performing assets totaled $8,150,000,0.0 or 23 basis points of quarterly average interest earning assets at Dec. 31, 2024 compared with $72,000,000 or 21 basis points of quarterly average interest earning assets at Dec. 31, 2023 and $89,000,000 or 25 basis points of quarterly average interest earning assets at Sept. 30, 2024.

Speaker 3

The allowance for credit losses on loans and off balance sheet credit exposure was $3.89,000,000 dollars at Dec. 31, 2024. 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.

Speaker 3

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 563000 people, bringing the total population to 31300000.0. Further, according to Forbes in their July 2024 issue, there have been two zero nine corporate relocations to Texas since 2018. All of this bodes well for our future growth.

Speaker 3

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.

Speaker 3

Let me turn over our discussion to Asobek Osmanov, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Asselbek?

Speaker 2

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended Dec. 31, 2024, was $26,780,000,0.0 an increase of $610,000,0.0 compared to $26,170,000,0.0 for the quarter ended Sept.

Speaker 2

30, 2024 an increase of $3,080,000,0.0 compared to $2.37,000,000 dollars for the same period in 2023. For the full year 2024, net interest income increased $7,010,000,0.0 from $95,640,000,0.0 in 2023 to $10,260,000,00.,000 in 2024. Fair value loan income for the was $360,000,0.0 compared to $480,000,0.0 for the The fair value income for the is expected to be in the range of $2,000,000 to $3,000,000 dollars The net interest margin on a tax equivalent basis was 3.05% for the three months ended Dec. 31, 2024. This was 10 basis point increase compared to 2.95% for the quarter ended Sept.

Speaker 2

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 Dec. 31, 2024 was 3% compared to 2.89% for the quarter ended Sept. 30, 2024 and two point seven one percent for the same period in 2023. Non interest income was 39800000.0 for the three months ended Dec.

Speaker 2

31, 2024 compared to $4,110,000,0.0 for the quarter ended Sept. 30, 2024, and $3,660,000,0.0 for the same period in 2023. Non interest expense for the three months ended Dec. 31, 2024, was $14,150,000,0.0 compared to $14,030,000,0.0 for the quarter ended Sept. 30, 2024 and $15,220,000,0.0 for the same period in 2023.

Speaker 2

Higher non interest expense during the was primarily due to FDIC special assessment of $1,990,000,0.0 For the we expect non interest expense to remain flat and be in the range of $141,000,000 to $143,000,000 The efficiency ratio was 46.1% for the three months ended Dec. 31, 2024 compared to 46.9% for the quarter ended Sept. 30, 2024 and fifty five point six percent for the same period in 2023. The bond portfolio metrics at have a modified duration of 4 and projected annual cash flows of approximately $190,000,000,0.0 And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality.

Speaker 4

Thank you, Asselbeck. Our non performing assets at Dec. 0 '30 01/00, '20 '20 04/00 totaled $81,541,000 or 37 basis points of loans and other real estate compared to $89,923,000 or 40 basis points at Sept. 30, 2024. This is a 9% reduction in non performing assets.

Speaker 4

Since Dec. 31, 2024, 02/00 08/00 '20 05/00 of non performing assets have been put under contract for sale. The Dec. 31, 2024 non performing 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 Dec.

Speaker 4

31, 2024, were $2,592,000 compared to net charge offs of $5,455,000 for the quarter ended Sept. 30, 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 Dec. 31, 2024.

Speaker 4

No dollars were taken into income from the allowance during the quarter ended Dec. 31, 2024. The average monthly new loan production for the quarter ended Dec. 31, 2024 was $3.33,000,000 dollars compared to $2.59,000,000 dollars for the quarter ended Sept. 30, 2024.

Speaker 4

Loans outstanding at Dec. 31, 2024 were approximately $221,490,000,00.,000 compared to $223,810,000,00.,000 at Sept. 30, 2024. The Dec. 31, 2024, loan total is made up of 39% fixed rate loans, 31% floating rate loans and 30% variable rate loans.

Speaker 4

I will now turn it over to Charlotte Rasche.

Speaker 1

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

Operator

We will now begin the question and answer session. Our first question today comes from Manan Kacelia with Morgan Stanley. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 2

Good morning. Good morning. Good morning.

Speaker 5

I wanted to touch on the NIM trajectory 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, long end is higher. So any thoughts on how you're feeling about NIM relative to last quarter?

Speaker 3

I think that 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 said somewhere between year end we should be around 3.25%, three point three five %. Is that right also, Beth? Yes, 3.25%,

Speaker 2

three point three zero % on average for 2025% and it will be a little bit higher at the exit in 2025%. Yes.

Speaker 3

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 Archstrom 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.

Speaker 2

So

Speaker 3

we feel good about it.

Speaker 5

I appreciate that. And then maybe to talk about loan growth a little bit, Could 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? I asked because your comments on the Texas market were fairly bullish. And at the same time rates are down, credits doing well.

Speaker 5

So what's stopping you from really leaning in here?

Speaker 3

Well, I'm going to let Kevin get in here in a minute too. But the bottom line, a lot of times is it was 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 maybe 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 $400,000,000 in a previous bank that we bought. So that's the other side to it too.

Speaker 3

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 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.

Speaker 3

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 6

Sure, David. Thanks. Look, I can appreciate the question given a little bit of shrinkage in earning asset growth in the of the year. As David said, we 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 $1,640,000,000,.00 I think in loans. And we have David is stable to say outsourced, chased off, failed to renew, whatever we want to call it, almost a quarter of that portfolio, right at $400,000,000 maybe a shade over $400,000,000 It won't be nearly as bad in the case of Lonestar, much better credit quality bank and a smaller footprint as well.

Speaker 6

It's $180,000,000,0.0 I think at the time we closed. So, I think we're at the end of that process as it pertains to those 2 acquisitions, which gives us a little more leeway to show some growth and have it stick onto 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.

Speaker 6

Customer sentiment is pretty good. It hasn't manifested itself yet, but I feel like it's coming.

Speaker 3

Yes. 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, already seeing some of the loans pick up already, some of the demand.

Speaker 3

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.

Speaker 6

I was going to add to 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. 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 going first.

Speaker 6

So we could approve a deal and may not fund under for six to nine months until they put their equity in. We do have a couple of nice expected to be highly funded revolvers coming in tomorrow. So it's a little more encouraging.

Speaker 4

Yes. I think all that is accurate. It's obviously very early in the year. We're not even to the January, yet. So the positive sentiment has plenty of time to manifest itself as we go into the year.

Speaker 4

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 5

That's all very helpful color. So maybe just to round out the discussion there between NIM and loan growth, to get to that three twenty five, 3 30 5 NIM that you have in your model, what kind of loan growth do you need to get there?

Speaker 2

On the for the model, we kept our balance sheet as essentially static, but what's the tailwind we have few variables that we know have positive NII and NIM impact for us. First of all, we have about $5,000,000,000 of loans, the principal pay down each year. So we say about 60% is more at a fixed rate, And I think the average was around $5.25 or so. So if we reprice that $5.25 to $7.25 to $7.50 at the current rate, there's a pickup more than 200 basis points on that loan alone. On the second part of it, our securities, we have about $190,000,000,0.0 cash flowing from securities, yielding us 2.06% for the So we either will be paying down our borrowing, which would have around 4.5, there's a pickup 2.5% there or we could reinvest in the bonds, which is at 5%.

Speaker 2

So those things positively impact our NII and margin.

Speaker 3

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

Speaker 2

But there's a shrinkage in that we're paying down our borrowing we have planned. So it includes paying down borrowing around $2,000,000,000 in borrowings by end of the year. Right.

Speaker 3

Great. Thank you so much.

Operator

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

Speaker 7

Thanks. Good morning.

Speaker 3

Good morning, John.

Speaker 7

I appreciate the shout out, David.

Speaker 3

Here's only guide 05:30 that emails me in the morning. I have 1 eye open anyway.

Speaker 7

Yes. All right. Ethel Buck, just to follow-up on the question 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 2s. Do you expect that to climb over the next year with some of these reinvestments that you're making?

Speaker 2

Yes. I think for right now, at least on our projection, we want to pay down continue to pay down the borrowing a little bit this year. So from $190,000,000,0.0 I think we're going to want to use about $900,000,000 to pay down the borrowing to get the borrowing around $2,000,000,000 So we're going to be reinvesting another $1,000,000,000 or we're going to put that money to loan growth. So either way, it's going to be positive for us. I know what we did purchase a little bit in the We purchased about $150,000,000 of security because we could get pretty good yield on it.

Speaker 2

I think we've got above 5%. So you can do the math. If you put $1,000,000,000 back at around 4% or around 5%, that would definitely benefit our yield on the securities.

Speaker 7

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

Speaker 3

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 and A right now. I think there should be, I mean, it seems like there's people out there that banks have been waiting a long time. I think they're interested.

Speaker 3

Our stock is at a good price too there. So I think there's more deals to be made. I think the regulators are out there. They're more have to approve deals. So I would like to wait and see now.

Speaker 3

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 and A and increase dividends also.

Speaker 7

Yes, 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 3

Right after the election, I had 3 phone calls. So stuff that we had worked on previously in some cases and in some cases new stuff. So 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.

Speaker 7

Okay. All right. Thank you. Appreciate it.

Speaker 3

Thanks, John.

Operator

The next question is from Catherine Mealor with KBW. Please go ahead.

Speaker 8

Thanks. Good morning. Good morning. You've enjoyed a 0 provision for the past two years. Just 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?

Speaker 8

Is this another year where it's feasible to still expect to be your provision in 2025?

Speaker 3

Well, we've got you can do the math. We have $3.89,000,000 dollars in the provision and we have $81,000,000 in non performing. And at those non performing, over half of that is in 1 of the core family residential loans. So I'd say if things don't change, we're pretty reserved for a lot of go unless something changes or some kind of black swan.

Speaker 8

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

Speaker 2

Yes. Our spot rate, I call it, for the deposit was 140. So it's 4 basis points less than our average for the quarter.

Speaker 8

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

Speaker 2

Thanks. Thank you.

Operator

The next question is from Peter Winter with D. A. Davidson. Please go ahead.

Speaker 9

Thanks. I was wondering, Kevin, you always provide good guidance for the mortgage warehouse. I was just wondering, 1, where do you think it comes in, in the 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 6

Yes. We have been fortunate, I guess, and let's hope I can keep the trend going of being close to right on the warehouse. Just as a level set for everybody, we averaged in the 01/00 01/00 03/00 07/00 and I think we said on the call somewhere we'd do somewhere between $150,000,000,0.0 and $110,000,000,0.0 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 $9.52,000,000 dollars from that $11,370,000,00.,000 of last quarter.

Speaker 6

And then last night, we closed at $8.00 $0.5,000,000 dollars So it's been a pretty weak Jan. 0 or part of Jan. 0, in particular the last seven or eight days. I think that $8.00 $5,000,000 of last night goes lower before it gets higher. So, I think for the quarter, we may average $8.25 and if things go well, $8.50.

Speaker 6

I do know we have a couple of new clients that are in the pipeline. Again, I looked at 1 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 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 the quarter.

Speaker 6

1 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.

Speaker 6

So, out longer, it really depends on rates where the when mortgage rates are, they're a little high. And I'd say as we look across our mortgage portfolio and Eddie is 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 it's expected to be a relatively weak quarter, but that's not atypical for It's a matter of fact that's more the natural thing than anything else. But in general, the business has been a little weak.

Speaker 3

Kenny, would you like to say anything?

Speaker 10

No, I agree with what Kenny 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 the 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.

Speaker 10

So, I think this is the slow season, of course, and then we'll have a better date of what's happening towards the end of the

Speaker 6

Yes. 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 0, which should be pretty typical of the way the business has operated forever.

Speaker 9

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, you guys did a very good job managing deposit costs on the way up.

Speaker 9

Thanks.

Speaker 3

I would say to start with the deposit costs. We never where a lot of banks really went really, real far started paying high rates. We never really went and paid really, really high rates. We paid with the competitive rate, but we never did pay more than the market. So I would say from that standpoint, we really controlled our cost.

Speaker 3

We probably had 1 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.

Speaker 3

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.

Speaker 3

As far as deposit growth, historically in normal times, we always used to run 2% to 4% organic growth rate. Again, we're just excited that rate 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 2.52.5%. Two point five %. So again, I'm hoping that we'll get there.

Speaker 3

We should. I'm hoping to get back to more normalized deposit growth rate. And so that's kind of what we're looking for right there.

Speaker 2

Just to add on that, even we don't have a rate cut coming in and but we do have a special CD rate that we did cut the rates. We pretty much did 100 basis point data on that for each 100 phase cut, we did 100 cuts. So there was going to be repricing over time. So we just saw some repricing happen in the We'll continue to see that in the 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 going to mature within twelve months. So you can see there's still opportunity to reprice those specialty at lower rate because we did decrease it.

Speaker 2

So we're going to benefit our NII as well even if we don't have we don't see any FedRAMP type.

Speaker 3

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

Speaker 9

Got it. Thanks for taking the questions.

Operator

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

Speaker 11

Hey, thanks for taking the question guys. On the investment securities portfolio, David or also Beck, 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 3

Historically, our portfolio, we tried to as long as I've been here for twenty five years or so, we've always the primary product that we buy is a fifteen year fully amortized mortgage backed security that has anywhere. It used to have about a three point five 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 we'll buy some other products for CRA and shake it up a little bit.

Speaker 3

But the majority of the product has always been 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 more of this as rates gone up, we kind of sucked wind for the last couple of years. But now, finally, that's turning and that's what you're seeing right now. We'll probably still keep that same strategy.

Speaker 3

It never looked good when rates went up and you had this loss in the portfolio. But we've been through 2 or 3 of these deals right now. And it is nice to see that it does work and it does come out over time. So if we stick with that strategy, you may not hit a home run, but you always be in the right place.

Speaker 2

That's right, Matt. So we did buy $150,000,000 in the I think yield end up being average about $5,050,000,.00

Speaker 11

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

Speaker 2

Yes, I think so if you look at beyond during the in 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 in and maybe the I would say, of the year.

Speaker 2

And if I had to guess right now, based on our analysis, I think that on the second half, expense is going to go up about 1% to 2%, maybe 1% to 1.5% in the second half. When I say that based on that 141% to 143% range that I'm providing, that you can see 1 or 1.5 up to 2% increase on the quarterly basis, more like on the second half of the year.

Speaker 11

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

Operator

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

Speaker 3

Hi. This is John Raut on for Jared. Good morning.

Speaker 2

Good morning.

Speaker 12

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 a commercial customers? Are there any pickup in CRE activity?

Speaker 3

And then just resin mortgage too, how is

Speaker 12

that doing with rates would be higher?

Speaker 3

Kevin, you want to take that?

Speaker 6

Yes. I'd say a lot of the current fundings where you can count on approving a loan and getting funding, that's usually going to be in the C and I 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. And that book got to be a pretty good size relative to our balance sheet.

Speaker 6

And strategically, we kind of said we ought to slow that down. It's got above $8,000,000,000 I don't know what's it I didn't look at last night's number, but it's probably $820,000,000,0.0 or $830,000,000,0.0 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 on or fully on or fully off. But I think in terms of the volume we add this year, it will be less single family related.

Speaker 6

I don't know if Tim or anyone to add to that thought.

Speaker 4

You're exactly correct. At least that's our attitude and our forecast at this

Speaker 3

point in time and I don't see that changing.

Speaker 12

Okay, perfect. That's good color. And then just back on M and A, what are some hallmarks, I guess, of what you would be interested in terms of like the size, location, whether it's like balance sheet metrics like capital levels or loan to deposits, kind of both potential targets that you're considering?

Speaker 3

I guess I could get an email, give you a list of them, I guess, but we've got problems. But I really don't look we really don't look at it like that. I mean, we look at a bank for potential M and A. First of all, we look at the bank. Is it a core bank?

Speaker 3

We look at the people. Are the people going to be with us or going to stay with us? And can we make a deal that really is accretive so that we're not just building size that we're really that it's going to be accretive for us and it will be good for the people joining us at the same time. So again, I've always said that we always like Texas, we're here. So we'll always like that the most.

Speaker 3

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 1000000000 bank. If we go to another state, it has to be something where there I always said at least in the top 5 market share that they own that state because you just need that for advertising dollars and everything else. But we really look at the bank and the people and the core deposits more than anything else, in our opinion, you can have you can always get loans, you can always hire some donors and you can go build as many loans as you really want.

Speaker 3

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. Did we lose you, John?

Speaker 12

Sorry. Just 1 other quick 1 for me. The fee income guidance for $38,000,000 to $38,000,000 range recently. Is that any upside to that in 2025 or should we expect similar level?

Speaker 2

Yes, I think it's going to stay the same. There might be 1 off stuff happened 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 quarter, couple of years, you saw the increase there. So we are focused on the trust fee. We like our trust business.

Speaker 2

So hopefully we'll continue to grow our trust department and the fee on that.

Speaker 12

Okay, great. Thank you so much.

Operator

The next question is from Bill Carcache with Wolfe Research. Please go ahead.

Speaker 13

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.

Speaker 13

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 6

I'll take

Speaker 12

this 1.

Speaker 6

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 BBB 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.

Speaker 6

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 3

I would also say, Kevin, I mean, a lot of people talk about capital markets and nontraditional 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.

Speaker 6

Yes, we've lost a few that we wanted to.

Speaker 8

That's right.

Speaker 13

Right. Yes, that's really helpful. And so then essentially they just haven't been borrowing and maybe could you would you characterize like 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 will get a little bit perhaps bounce in growth. Is much of that would you say pent up from sort of deferred or delayed borrowing?

Speaker 6

No, 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. What we're seeing is people buying out partners 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 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.

Speaker 6

And so I think it's just good old blocking and tackling businesses is coming back.

Speaker 13

Got it. That's helpful.

Speaker 3

Yes. In terms of better blocking and tackling business, that's what we're looking at.

Speaker 13

Yes. No, that's great. Helpful color. And then finally, if I can squeeze in 1 last 1, 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 3.25% to 3.35 NIM range that you're expecting in terms of NII?

Speaker 2

Yes. I think we continue to see increase in NII coming quarters. And I think the variables of which I was describing early on re pricing 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 maturing today, they're going to be repriced 200 basis 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.

Speaker 2

And in the last piece is CD repricing. We talked about special CD that 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 13

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

Operator

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

Speaker 1

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.

Operator

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

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Earnings Conference Call
Prosperity Bancshares Q4 2024
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