Good day, and welcome to the Prosperity Bancshares 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.
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares fourth quarter 2021 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, General Counsel of Prosperity Bancshares. Here with me today is David Zalman, Senior Chairman and Chief Executive Officer, H.E. Tim Timanus, Jr., Chairman, Asylbek Osmonov, Chief Financial Officer, Eddie Safady, Vice Chairman, Kevin Hanigan, President and Chief Operating Officer, Randy Hester, Chief Lending Officer, Merle Karnes, Chief Credit Officer, Mays Davenport, Director of Corporate Strategy, and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Tim Timanus, who will discuss our lending activities, including asset quality.
Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different from those in the forward-looking statements can be found in Prosperity Bancshares filings with the Securities and Exchange Commission, 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.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2021 conference call. The annualized return, excuse me, 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 31st, 2020, compared with $122.6 million at December 31st, 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, at December 31st, 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 continued 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 continued 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 interest income and an increased net interest margin. Our asset quality continues to be one of the strongest in the industry.
The non-performing assets totaled $28 million or 9 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 31st, 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. 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 Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31st, 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. 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 fourth quarter ended December 31st, 2021 was 2.91% compared to 3.26% for the same period in 2020 and 3.03% for the quarter ended September 30th, 2021. Excess liquidity during the fourth quarter 2021 impacted the net interest margin. Non-interest income was $35.8 million for the three months ended December 31st, 2021, compared to $36.5 million for the same period in 2020, and $34.6 million for the quarter ended September 30th, 2021. Non-interest expense for the three months ended December 31st, 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 30th, 2021. For the first quarter 2022, we expect non-interest expense to be in line with the current quarter or $118 million-$120 million. The efficiency ratio was 42.8% for the three months ended December 31st, 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 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 31st, 2021, the remaining discount balance is $13 million.
Due to the lower remaining discount balance, we expect a slowdown in the recognition of fair value loan income. The anticipated accretion for the next few quarter is expected to be around $1 million-$2 million. Also, during the fourth quarter 2021, we recognized $8.5 million in fee income from PPP loans. As of December 31, 2021, PPP loans had a remaining deferred fee balance of $7.1 million. As the forgiveness process is slowing down, we expect PPP fee income to be around $3 million-$4 million for the first quarter 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. With that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Tim.
Thank you, Asylbek Osmonov. 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, 2021. This represents approximately a 23% decrease in non-performing assets on a linked-quarter basis. The December 31st, 2021 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, 2021 is a 43% decline from $5,459,000 as of September 30, 2021. Since December 31st, 2021, $3,420,000 in non-performing assets have been put under contracts for sale, but there is no assurance that these contracts will close. Net charge-offs for the three months ended December 31st, 2021 were $807,000 compared to $15,697,000 for the quarter- ended 9/30/2021. No dollars were added to the allowance for credit losses during the quarter- ended December 31st, 2021, nor were any taken into income from the allowance. The average monthly new loan production for the quarter- ended December 31st, 2021 was $604 million.
Loans outstanding at December 31st, 2021 were approximately $18.616 billion, which includes approximately $170 million in PPP loans. The December 31st, 2021 loan total is made up of 38% fixed rate loans, 36% floating rate, and 26% variable rate. I will now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Betsy, can you please assist us with questions?
We will now begin the question- and- answer session. To ask a question, you may press Star then one on your touch tone 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.
Hey, thanks. Good morning, guys.
Good morning.
I heard the comments about how, you know, the LegacyTexas 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, you know how much is gonna potentially continue to shrink here?
Yeah, Brady, it's Kevin. I'll take the question. Left in that bucket, you know, 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. A couple ways to think about that. I think there's a core portfolio in there that probably sticks around, that might be $400 million or $450 million, several of which we have renewed and extended. They're what I would call core customer borrowers. I don't think the full $755 million 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 million, then $160 million, and then $205 million. The $205 million in the fourth quarter was elevated beyond what we had originally forecast. We thought it'd be about $120 million. After two quarters of hitting that forecast, like right on, I blew this one. You know, we were off by over $80 million on it. The good news here is it's almost over. I think the underlying production and underlying loan growth is gonna 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 pay off in this portfolio. My guess is in Q1, we end up with maybe $80 million or $100 million in reductions in that portfolio as opposed to these kind of $200 million, $240 million kind of numbers that we've had. It's coming. It's almost over. I do think it's a good news story in terms of future loan growth.
Yeah. I don't have that number, but I think it's, if you know, exclude the PPP loans and the mortgage, and the mortgage warehouse would be excluded, that we could be around 6% point something, I believe, internal growth probably or organic growth. That's the good news.
Yeah, 6.8% for the quarter and 6.4% for the year.
Okay.
Brady, total payoffs in that CRE, structured CRE portfolio for 2021, $781 million. Remaining balance, $755 million.
Okay, perfect. Kevin, while I have you, 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?
Fourth quarter, it averaged $1.773 billion. I think, you know, we will average in 2022, $1.45 billion.
All right. I know you guys put out the new buyback a couple of weeks ago. You know, should we expect. I think you guys do that annually just to re-up the plan. Should we expect you guys to be active on the share buyback, you know, at this stock price? I think you guys bought back a little stock maybe in the third quarter last year. Do you expect to actually engage on that this year?
I don't have the numbers in front of me, Brady, but I think last year we bought back around 700,000 shares at an average price of around $67. You are right, I'll get the exact numbers for you. I'm just talking from the top of my head. You are right, we do renew that annually. 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 or acquisition, sometimes the market doesn't like it initially, and then this gives us an opportunity to buy back our stock as well. It just gives us a lot of opportunities, I think.
Yeah, we bought back at a $67.87 on average last year.
How many shares was?
It was 767,000 shares.
My memory's not too bad either.
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?
I've always said we'll run out of money before we run out of deals.
Okay. All right. Thanks, guys.
I guess that was an answer.
That was.
Actually, I'm still thinking about it.
I think it was an answer.
You will run out of money before you run out of deals, I can assure you.
The next question comes from Jennifer Demba of Truist. Please go ahead.
Thank you. Good morning.
Good morning.
I'm curious about NSF 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 gonna see lower fees there. Just wondering what you think, see in the next several quarters.
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 noticed is if, you know, right now, most of our customers are opening up accounts are actually coming from the banks that have lowered their fees. So that's what's ironic and crazy. So I don't see that people 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.
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 checking accounts. 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. We've already been catering to customers like that, trying to get them to that point. 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. If you lowered it to $15 or something, it would impact us. Again, we don't see that right now.
I still don't even see that this year happening, quite frankly.
Thanks, David.
The next question comes from Brett Rabatin with Hovde Group. Please go ahead.
Hey, good morning, everyone. This is actually Ben Gerlinger in for Brett.
Good morning.
I was curious. There seems to be quite a bit of moving parts with some of the loan portfolio, and then we're on the precipice of at least a couple interest rate hikes probably in 2022. I was curious on how you guys are thinking about the margin and given your asset sensitivity, where you think you could potentially be towards the end of the year. More so I'm just kind of thinking like bigger picture, are you planning on 2, 3, 4, and how that might correlate to expenses going forward as well?
I think I can answer this. I think I heard you. There was a little background noise when you were talking, so I hope. I think what you're saying, you're asking, is how the potential rate increases will affect us. Again, I would say the potential rate increases will affect us just like most banks. It'll be positive. I always use the example, our bank is a little bit different because we have a big securities portfolio as well. Interest rates going up helps us dramatically. 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.
Mm-hmm.
It just takes us a while as interest rates go up. There's no question it helps the net interest margin dramatically. I mean, right now, your net interest margin is, what do we end up with, 2.9% something this time?
You know, probably an average over the last 30 years, it's probably been more like 3.25%-3.40%. You know, hopefully we'll get back somewhere to at least, you know, a minimum of 3.25% and hopefully better than that.
Yeah.
That would be my thoughts.
Brett, I'm gonna 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. You know, as you mentioned, yeah, we are on the asset sensitive position, which is gonna 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 towards, you know, putting that into 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.
Definitely loan growth that we project, you know, will help us on that aspect of it. 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. If you're looking trend on the December, and I looked at number today for January, slowing down. We project that, you know, our premium amortization gonna drop to $14 million-$15 million this quarter. That's gonna be positive what we had in the fourth quarter.
Actually, yeah.
Yeah. 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. That's gonna be, you know, a little bit headwind. If you look in the core or super core and, you know, as I stated before, it's looking positive, especially in the increased rate environment. It's gonna be good.
I think he probably asked about the expenses too. Am I wrong on that?
Yeah, no, I was just kind of thinking like, obviously, there's wage inflation and competitive dynamics and more so specifically in Texas with even hotter economy. I was kind of 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 it just gonna purely turn into better operating leverage?
Yeah, if you look at our expenses, what we project for the first quarter at least, it's gonna be staying in line with what we did in the fourth quarter in the range $118 million-$120 million, as I mentioned earlier. 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, more normally our like merit, annual merit increase. We see there that, you know, it's probably gonna increase our expenses about $1 million-$2 million on quarterly basis that you'll see maybe starting on the second quarter. There's other things we're working to reduce expenses as well, so should offset somewhat there.
If you look at from the efficiency ratio, as we grow our income and revenue line, I think efficiency ratio should kind of stay stable, you know, from that perspective. Our efficiency ratio, as you know, 42%-43% is best in class. Even with the increase in expenses, as we continue to grow our revenues, efficiency ratio should stay kind of relatively stable.
Gotcha. Okay. Well, that's helpful color. I appreciate it, guys.
The next question comes from David Rochester with Compass Point. Please go ahead.
Hey, Good morning, guys.
Good morning.
Just a quick follow-up on that expense commentary. You talked about comp potentially going up $1 million-$2 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?
I think, yeah, when we said we're working toward, I mean, we're looking kinda turning every stone to see where we can get savings. I don't think savings gonna offset all the expenses. I think in the net, when I say $1 million-$2 million, I think it's gonna net increase.
Gotcha. Okay, great. Just switching to the loan growth outlook, you know, as you look out to 2022, appreciated the color on the potential runoff in the structured book. 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.
I think we're still sticking to the mid-single- digit range, 5%-6% probably is what we're looking for this year.
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, you know, in the first part of the year here? I mean, are we thinking maybe another $1 billion or so in growth?
You know, we have so much money that rolls 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.
In January.
There's still two and a half billion dollars in there today. You are seeing us buy more. You know, it's actually a little bit higher than even what Asylbek Osmonov is at least the last few days. I mean, the product we've been buying is going anywhere from 1.8%, 1.85%- 2% if we're willing to do an agency CMO. We really haven't been willing to do the agency CMO. It's looking. That's not looking too unattractive if we can get our money back on an average of four years. You know, I think we're not gonna throw it all in at one time, but we're gonna start investing.
I mean, we're not gonna leave $2.5 billion in overnight at 15 basis points. We're gonna start. 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 gonna be plenty of money to reinvest. It just seems we have so much money flowing off and money coming in. You know, we have a lot of money coming in all the time.
Sounds good. Maybe just one last one on the margin. What are you guys expecting in terms of NIM expansion from the first 25 basis point rate hike at this point?
When we looked at, I think it seems like we mentioned earlier, you know, it takes us slower because we have some fixed loans and especially with our.
Yeah.
Fixed loan investment portfolio. It takes time, so we'll see impact on the first 25, but it's not gonna be as significant as you go with, you know, down the road, six or 12 months. First 25, we'll see some, but it's not gonna be,
I don't think it will be.
Significant.
It's not gonna be that significant. It's gonna take us 6-12 months to really see significant changes. Yeah.
Okay. All right. Thanks, guys.
Thanks.
The next question comes from Graham Dick with Piper Sandler. Please go ahead.
Hey, everybody. Most of my questions have been answered, but just a quick question on liquidity. Looks like average balances were, you know, 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?
It is seasonal. If you look at us, usually end of the year, we get excess liquidity from public funds. Historically, we've grown about $400 million. Same with this case. In December, we had public funds increase about $400 million. That's why you see additional liquidity. With public funds, what you also see, we also have increase in January when the, you know, tax payments happen, property tax payments. We see some public funds growing in January as well.
Our core deposits even grew strong in this
Yeah.
Last quarter too. Was it $300 million or something?
No. Core deposits grew $900 million.
900.
Yes, sir. Plus,
Just in the quarter.
In the quarter.
That's not public. $900 million.
Yeah, $900 in core + $400 in-
Oh, my. That's a lot.
Okay. Thanks. Kevin, I heard you mention the warehouse outlook in terms of balances, but just kinda wanted to get a little color on where you see the yield trending from here, I guess as we move towards higher rates.
You know, I'd like to say there isn't continued pressure 'cause there always seems to be pressure. We're down to, what? A weighted average coupon of 3.12 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 to try to reset their mind. I think it could drift a little lower, but not like it's been going lower. I think the increase in rates is gonna finally take some of the pressure off the yield pressure off the warehouse.
Okay. Great. That's all for me. Thanks, guys.
Thank you.
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Morning. I appreciate the color on the commercial real estate runoff and kind of how that translates into 2022. David, you had 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. Then apologies if I missed it, but did you mention or can you tell us where the C&I utilization rates were in the fourth quarter, given growth in that segment versus the third quarter?
Utilization was up a little bit in C&I. I don't have the exact number, but it has been picking up over the last couple of quarters. Tim may have the numbers.
Well, 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 works. They fund up, projects get stabilized, and typically they're taken to the market and refinanced on a non-recourse basis or they're sold. The key is replacement of those assets. The markets that we operate in are still good. We don't see any reason, even with some increased rates, that dampen the demand for development and construction funds any significant way. We think we're going to be able to replace those dollars ongoing. I don't see a big net change in that regard for us.
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. It'll take more projects we get, but, I think we're expecting some pretty good outstandings from throughout the course of this year.
That's right. There's always a lag time because the borrower's equity goes in first. Their down payment, so to speak, has to get utilized and then we start to fund. There's always a time lag there.
Thank you.
The next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Good morning, David Dent here filling in for Peter Winter. Just a couple of follow-ups. The first being, are overdraft fees included in NSF fees or is it in deposit service charges? If so, how much is that?
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.
Okay.
I could get back with you.
No problem. Second here, what are you assuming in terms of deposit betas, in terms of asset sensitivity?
In our asset sensitivity, we have our betas on the interest earned or interest-bearing deposit about 36 basis points. If you look back in history, you know, when in 2015-2017 or 2018 when, you know, 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, you know, being conservative in our model, but in reality, we had 22 basis points in 2015-2017.
I think with the amount of liquidity that all banks have right now, those betas are going to be a lot less.
Absolutely right.
at least for the first year.
Yeah. For the economy to absorb so much liquidity, probably it'll be there, so the beta's probably gonna be even less than we was back in 2015-2018.
Perfect. Appreciate the color. 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.
Yeah, I think it's kind of hard to go beyond when you go long- term. You know, starting second quarter, we see expense going up $1 million or $2 million a quarter and probably stay there because the main increase, as mentioned, is a merit increase in the middle of the second quarter. Beyond that, it's kind of hard to say, but you know, inflation pressure is there, we see every day, so we have to deal with it. I think the inflation is gonna impact us.
Great. Really appreciate the color.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey, good morning, and thanks for taking the question. First, just a clarification. I think you mentioned the 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?
Sorry, it's $8.5 million. PPP fees for the fourth quarter 2021 were $8.5 million. You're right, $13.2 million was in the fourth quarter of 2020.
Got it. Okay. Thanks for that. As far as the loan growth outlook, mid-single- digits, 5%-6%, I think we covered that the structured CRE 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 he said.
I'm sorry, drive the positive growth that will offset the structured CRE headwinds. Thank you.
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.
I think maybe mortgage is not as robust as it was last year. It'll still be solid.
Right.
January was very solid. C&I and construction on real estate and real estate projects. I think those are the three categories we're looking to for the growth.
Right. I don't see any overwhelming material fundamental change in those percentages of our portfolio.
Yeah. 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%. If mortgage tails off a little bit and we pick it up on real estate and C&I, we'll benefit a bit from the margin expansion by just a shift.
That's correct. That would help the net interest margin. With the economy, again, you never know where it's gonna 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, and I think companies should be drawing more money, we should have a more vibrant economy. 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.
Okay, that's helpful. 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 of the 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?
That's fair, Matt. Yes.
Okay.
I think the reason for that is probably our rates are probably a little bit better than they are at other banks, and so the 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, I'm like you, 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.
Right. 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?
With $300 million in reserve and 20. How much in-
$29 million.
$29 million, I don't see it right now.
All right. Well, I'll ask you again next year, or maybe you're out.
Hopefully, we will. Hopefully, the answer we'll see next year.
All right, thanks. Congrats, guys.
Thanks.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.