Good morning. Welcome to Prosperity Bancshares 4th Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Please note that 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 4th quarter 2019 earnings conference call. This call is being broadcast live over the Internet at prosperitybankusa.com and will be available for replay at the same location 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.
E. Timanus, Jr, Chairman Asylbek Osmanov, Chief Financial Officer Eddie Safady, Vice Chairman Kevin Hannigan, President and Chief Operating Officer Randy Hester, Chief Lending Officer Merle Karnes, Chief Credit Officer Mae Stavenport, 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 Osmanov, 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, Kate. 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, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements 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 Prosperity Bancshares filings with the Securities and Exchange Commission, including Forms 10Q and 10 ks and other reports and statements we have filed with the SEC. All forward looking statements are as 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 Q4 2019 conference call. The combination of Legacy Texas Bank and Prosperity Bank effective November 1, 2019, has been one of the most exciting times in Prosperity's history. The commonalities, the enthusiasm and strengths that both companies offer should not only result in asset growth, but should also enhance customer and associate opportunities and ultimately increase the shareholder value. We are excited about Prosperity's future opportunities.
We are proud to announce that Prosperity Bank has been rated in the top 10 of Forbes Best Banks in America for the 7th consecutive year and we are the highest rated Texas Bank the highest rated Texas based banks. Before we review the highlights for the quarter, I want to remind everyone that there are many moving parts in the results, including the following: 1, there was a onetime charge of $46,400,000 related to the merger 2, the merger was effective on November 1, 2019, so the 4th quarter results reflect only 2 months of income contribution $13,000,000 to $14,000,000 pretax in loan discount accretion. With regard to the financials, net income was $86,100,000 for the 3 months ending December 31, 2019, compared with $83,300,000 for the same period in 2018. Our earnings per diluted common share were $1.01 for 3 months ending December 31, 2019, compared with $1.19 for the same period in 2018 and were impacted by merger related expenses of $46,400,000 Further, net income was also impacted by higher loan discount accretion than we expect to have in future quarters. It should also be noted that earnings per share is calculated based on average shares outstanding, which were 85,573,000 for the 4th quarter.
We issued approximately 26,228,000 shares in the merger. However, those new shares were only outstanding for 2 months of the quarter. As of December 31, 2019, we had 94,000,746,000 shares outstanding. With regard to loans, loans at December 31, 2019 were 18,800,000,000 dollars an increase of $8,400,000,000 or 81.7 percent compared with $10,300,000,000 at December 31, 2018. Leased quarter loans increased $8,100,000,000 dollars or 76.6 percent from the $10,600,000,000 at September 30, 2019.
Obviously, the majority of the increase was from the legacy merger. Excluding loans acquired in the merger and new production by the acquired lending operations since November 1, 2019, loans at December 31, 2019, grew $218,000,000 or 2.1 percent compared with December 31, 2018, and decreased $84,000,000 or 80 basis points on a linked quarter basis. Average loans the average loans, excluding the impact of the merger, increased $407,000,000 or 4% during 2019. Deposits at December 31, 2019, were $24,200,000,000 an increase of $6,900,000,000 or 40.2 percent compared with $17,257,000,000 at December 31, 2018. Our linked quarter deposits increased $7,200,000,000 or 42% from $16,900,000,000 at September 30, 2019.
Excluding deposits assumed in the merger and new deposits generated at the acquired banking centers since November 1, 2019, deposits at December 31, 2019 increased $801,000,000 or 4.6% compared with December 31, 2018 and increased 1,100,000,000 or 6.7 percent on a linked quarter basis. Asset quality or nonperforming assets totaled $62,900,000 or 25 basis points of quarterly average interest earning assets at December 31, 2019, compared with $18,900,000 or 10 basis points of quarterly average interest earning assets at December 31, 2018, and $51,000,000 or 26 basis points of quarterly average interest earning assets at September 30, 2019. The increase during the Q4 2019 was primarily due to the merger. Prosperity continues to exhibit strong credit quality. With regard to acquisitions, although the legacy merger was effective in November, we are still working diligently on the operational integration of our 2 banks.
Many individuals from both banks are involved in the project and is on track to be completed in June 2020. As you can tell from the news, bank mergers and acquisitions activity is robust. We continue to have conversation with other bankers regarding potential acquisition opportunities and are open to exploring a deal when it is right for all parties and appropriately accretive to our existing shareholders. I'd like to discuss we also have a share repurchase program. We announced today that our Board of Directors has authorized a share repurchase program under which the company can purchase up to 5% of its outstanding common stock, approximately 4,700,000 shares over the next year.
The Board's approval of this program reflects our continued confidence in Prosperity's future and our commitment to enhancing shareholder value. As has been our approach previously, management intends to repurchase shares only when the market conditions are favorable to do so. So overall, despite oil and gas prices remaining in the $55 to $60 per barrel range, Texas and Oklahoma continue to experience employment and population growth with many companies moving to these states because of a favorable tax environment and business friendly political climates. Consumer sentiment remains strong and the trend suggests a positive start to 2020. I would like to thank all of our customers, associates, directors and shareholders for helping build such a successful bank.
Thanks again for your support of our company. Let me turn over our discussion to Asylbek Osmanov, 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 3 months ended December 31, 2019 was $232,000,000 compared to $157,200,000 for the same period in 2018, an increase of $74,800,000 or 47.6 percent. The increase was primarily due to 2 months of legacy Texas net interest income and higher loan discount accretion in the 4th quarter 2019.
The net interest margin on a tax equivalent basis was 3.66% for the 3 months ended December 31, 2019 compared to 3.115 percent for the same period in 2018 and 3.16% for the quarter ended September 30, 2019. Excluding purchase accounting adjustments, the core net interest margin for the quarter ended December 31, 2019 was 3.26% compared to 3.1% for the same period in 2018 and 3.14% for the quarter ended September 30, 2019. The net interest margin for the quarter ended December 31, 2019 included only 2 months of legacy Texas net interest income. Non interest expense was $35,500,000 for the 3 months ended December 31, 2019 compared to $29,100,000 for the same period in 2018. The increase in non interest income was primarily due to 2 months of legacy Texas non interest income, partially offset by the sale and write down of assets.
Non interest expense for the 3 months ended December 31, 2019 was $156,500,000 compared to $80,800,000 for the same period in 2018. The increase was primarily due to merger related expenses of $46,400,000 2 months of legacy Texas expenses. Until the conversion sorry, until the system integration and conversion, we expect non interest expense to range around $120,000,000 to $125,000,000 per quarter. Those are excluding any additional merger related expenses. We expect to realize portion of the previously announced cost savings related to the merger beginning in the Q3 of 2020.
The efficiency ratio was 58.07 percent for the 3 months ended December 31, 2019 compared to 43.2% for the same period in 2018 and 43.7% for the 3 months ended September 30, 2019. Excluding merger related expenses, the efficiency ratio was 40.85 percent for the 3 months ended December 31, 2019. The bond portfolio metrics at Twelvethirty Onetwenty 19 showed a weighted average life of 3.42 years and projected annual cash flows of approximately $2,000,000,000 And with that, let me turn over the presentation to Timanus on some detail on loans and asset quality. Thank you, Hasselbeck.
Nonperforming assets at quarter end December 31, 2019 totaled $62,943,000 or 33 basis points of loans and other real estate. The December 31, 2019 non performing asset total was comprised of $55,684,000 in loans, $324,000 in repossessed assets and $6,935,000 in other real estate. Of the $62,943,000 in non performing assets, $15,811,000 or 25 percent are energy credits, dollars 15,487,000 of which are service company credits and $324,000 or production company credits. Since December 31, 2019, dollars 2,259,000 in other real estate has been put under contract to be sold. Net charge offs for the 3 months ended December 31, 2019 were $1,291,000 $1,700,000 was added to the allowance for credit losses during the quarter ended December 31, 2019.
The average monthly new loan production for the quarter ended December 31, 2019 was $496,000,000 Loans outstanding at December 31, 2019 were 18,845,000 dollars excuse me $18,845,000 The December 31, 2019 loan total is made up of 38 percent fixed rate loans, 34% floating rate and 28% variable rate loans. I'll now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Kate, can you please assist us with questions?
Yes.
We will now begin the question and answer session. Our first question is from Brady Gailey from KBW. Go ahead.
Hey, thanks. Good morning, guys.
Good morning.
Good morning.
So I wanted to start on the deposit side. Prosperity had some really nice deposit growth, even if you exclude the acquired legacy Texas deposits. But then if you look on the legacy Texas side, if you look at where deposits were for that franchise as of June 30, it seems like deposits really were shrinking there. So it just seems like legacy Texas deposits have been shrinking pretty aggressively and Prosperity has been growing really nicely. So maybe just talk through the dynamics of what happened on the deposit side there?
Sure, Brady. This is Kevin. I'd say we're executing exactly as we thought we would as it pertains to the deposit side of the franchise with Prosperity continuing their historic strong growth in core deposits. As we looked at the legacy franchise and we can go back to when we announced the deal, we talked about the funding cost at legacy being higher and having about $600,000,000 to $700,000,000 worth of high cost deposits that we thought we would move off the balance sheet. We began to do that actually in earnest before the merger was even completed.
And the way we were looking at it was basically we looked at some high cost funding in our money market accounts and CDs and kind of compared that to what we could borrow money from the club. And to the extent we had deposits that were higher than that and didn't have any other valuable deposits associated with them, we priced those out of the bank. So I think in the Q4 and the last let's call it the last 4 months of last year, we probably chased off a little over $450,000,000 of legacy related deposits that had very high deposit funding cost. And again, that was part of our strategy from the outset. If anything, I would say we're ahead of the game and that we started earlier than we thought we would start.
So I view that as nothing but a positive for the company because we can find ourselves much cheaper with the deposits that we're generating today than the cost of those deposits.
Yes. I'd just mention that's what Kev just reiterate what Kevin said. That was always our intention when we put the banks together. And what made this combination so good, they had the loans and we were inundated with core deposits. And so we're just we're looking at the strengths of both sides and this just makes a lot of sense.
And just give a little bit color, this is Asselbeck. Legacy had about $250,000,000 or a brokerage deposit that's at high cost and we knew that once we brought in legacy, we would run them off. That's exactly what did. That would be one of the largest decreases we saw in legacy.
Historically, we've never participated in the brokered margin.
Yes, exactly right. And that's
All right. That's helpful. And then my second question is on tangible book value per share. It seemed to come in a little lower than I was modeling. I'm not sure if that's related to the legacy Texas deal.
I also noticed that it looks like the loan mark for legacy Texas came a little higher than the loan mark we talked about when you all announced the deal. I think on announcement it was around $175,000,000 of a loan mark and it looks like it came in at 294 dollars?
I'll start off and also if I could probably join it or Kevin. The $177,000,000 is the actual reserve mark. I think the rest of it comes from also like the
We call it the FAS 91 loans, which is a yield interest rate difference. So that mark, about $100,000,000 came from that loans, which we didn't model in our announcement. We were mainly focusing on the credit part of SOP-three loans.
I think when we were talking, we were really just looking what do we think the credit mark was going to be. And I think that we're still spot on on what we did there.
Okay. And then finally just CECL, I know we talked about an increase of about $20,000,000 $30,000,000 last quarter. Does that still feel like the right amount for CECL?
This is Merrill. I guess the range that we would estimate for the CECL reserve total will be between $340,000,000 $360,000,000 and that will be split half between the reallocation of the impaired loans that you can see on the balance sheet as of December 31, they'll be reclassified as purchased credit deteriorated or PCD on March 31. So that'll be just a reallocation within the loan block by debiting gross loans and crediting the reserve. And the other half of the change, about $130,000,000 will be actually a reallocation of capital to the reserve.
We're going to try to put it in English, if that's okay. We have our $80 something million in allowance for loan loss. The reserve that we had against the legacy, that actually comes back into it. We had about I'm just these are approximate numbers $20,000,000 or $30,000,000 I think that we're adding for our portfolio to CECL and then we're adding for the legacy portfolio to CECL. How much, Merle?
About for just the for the existing portfolio.
The performing loans only? Yes. It's going to be about 108,000,000
dollars So the total effect to capital would be what? It will
be about $130,000,000 decrease in capital that would be reallocated.
I think that's what they're looking for maybe, Brady.
And Brady, this is Oscar. But just to clarify, when we gave this $20,000,000 $30,000,000 guidance, that was only on prosperity books and because of the CECL impact and what Myrtle just provided, that's including the legacy books. So just want to clarify that point.
So I mean, when it's all said and done, we'll have almost 1.7% reserve, which seems extremely high. Hopefully, we won't have to use it, but that's going to be a very high reserve and we understand that.
All right. Got it. That's very helpful. Thanks
guys. Our next question is from Jennifer Demba from SunTrust. Go ahead.
Thank you. Good morning.
Good morning.
Question on the net interest margin outlook. As you see it near term also back, you said the loan discount accretion is going to come down to around $30,000,000 Can you tell us what you're thinking about the net interest margin with those adjustments as well as deposit pricing?
Yes. Okay. So regarding to the what we expect near term regarding the fair value income on loans, we expect about $13,000,000 $14,000,000 as Mr. Zalman indicated and using our model, our top line or all in NIM coming up about between $345,000,000 $355,000,000 range. But if you look at a core basis, we're seeing around mid-330s for next few quarters.
So under the margin, regarding to the deposit cost, we came in consolidated bank kind of same level what we were in the 3rd quarter is due to these few things. We decreased some rates on our deposits. We were able to reprice high cost deposit from legacy at lower rate. So those combination of those brought our cost of deposit to 63 basis points 61 basis points, sorry, that's including non interest bearing deposits.
But again, I think if you have to take a range, I think that we're seeing anything between 345 and 355, maybe 350 in the middle. That's exactly the whole On a GAAP basis all in.
All in assuming expected fair value of $13,000,000 to $40,000,000 Okay.
And you said, I think in the results, you had a small loss on the sale of assets. Can you give us some color on that?
Yes. There was some fixed assets we just wrote down and due to the legacy, we have one property that we're going to sell or exit out of it. So we had to market down that property. So there was fewer properties.
It's just a building. Again, we had 2 offices close together. We're going to have to sell one of them. And again, we took a bigger mark than maybe it is. But if it is, we'll bring the rest of the money back into income.
But we didn't want to come back twice.
Exactly. So that's a one off thing in my mind.
Okay, great. Thank you. I'll let others jump in.
Thank you.
Our next question is from Brad Milsaps from Piper Sandler. Go ahead.
Hey, good morning.
Good morning.
I appreciate all the color. I wanted to follow-up on the expense guidance. It sounds like you're really kind of aiming for the back half of the year to really see some of the cost savings start to come through. It looks like you may picked up a few $1,000,000 sort of out of the gate, assuming maybe prosperity expenses were flat. Just maybe want to get a sense of the magnitude of what you think you could pick up in the back half of twenty twenty.
Do you expect to reinvest some of those savings that you outlined when you announced the deal, which I think were around 25% of legacy's expense base? Just kind of curious on how you're thinking about the back half?
Brandon, you're absolutely right. I think we did pick up a little bit of savings in the Q4 related legacy. But the majority of savings that we announced about 25% cost savings would come into second half of the year. So I mean that's I think when we will evaluate it, that's we are still in line to get 25% savings from the legacy. But for near term, I mean, we believe it's $120,000,000 to $125,000,000 Yes, if you look at Legacy's historical cost per quarter, they had annually was about 44 per quarter, so that 25%, we should get $11,000,000 per quarter savings that we're estimating.
Okay, so there's no plans to necessarily reinvest that. Most of that you feel like should fall out of the expense run rate in the 3rd Q4?
We always operated that if revenue supports will always let it loose a little bit to reinvest in the bank. So but for right now, we're just evaluating that part of it. But $25,000,000 savings, we should see that coming in second half of the year.
And second question for David. Your comments around your loan loss reserve is going to be quite massive relative to what you've had, particularly given the low loss rates you've had. I know there are a lot of moving parts with payoffs and what could happen to legacy book and your own book. But given that size of reserve, would you imagine your provisioning needs are going to be pretty minimal, all else equal in 2020 beyond?
I hope so. You would hope so. I mean, you never know. We put the reserve and it's not some when you put a reserve, it's not something you just pull out of the air. It's based on what you see.
And so hopefully, if we can do better than what we see, then I think that's absolutely right. And really, Kevin, you all have been able to move some of these loans already. You all have been doing a really good job of moving some of these, haven't you?
Yes. Particularly on the energy side, Brady, I guess, we ended up September, if we go back to September with reserve based loans of $512,000,000 We put a massive effort in the Q4 into reducing particularly the stressed energy loans. So that production portfolio dropped by $145,000,000 in the quarter. And I would say about $120,000,000 of that were consistent of the most stressed credits within the entire portfolio. So we got the biggest, the baddest and the worst are off our books.
So the way I think about that is we mitigated the risk of those loans through the mark. We eliminated the risk of those loans by getting off the books. And in 100% of those cases, we did it at values better than the marks we put on them, which helped add to the accretion number in the Q4. So there's been a massive de risking of the energy book. We're not done yet.
We probably have another $50,000,000 or so at least to go in the energy portfolio based upon what we know today. That number could grow if energy prices back up. But as we sit here today, we've made substantial progress. We still have some more to go in particular on energy. We have talked historically about moving off somewhere in the neighborhood of $500,000,000 worth of total loans off the legacy books.
That will take anywhere from a year to a year and a half to do. We've made the most progress early on the most stressed assets.
And the faster we can do that, the better for us because again, I didn't even know if I want to get into this. But the $400,000,000 that we have $400,000,000 in loans that really they're performing, but still when they're in what do you call it PC what? PCD. PCD, we still don't we don't accrue income on them and we won't take that income in until we collect those loans. So it's really beneficial for us.
That helps us with about another $18,000,000 or so in income once we get those either in or out.
Great. Thank you, guys. Helpful.
Thank you.
Our next question is from Peter Winter from Wedbush Securities. Go ahead.
Good afternoon. I was just wondering, just following up on that question about loans, how much I guess you've targeted $500,000,000 and you wanted to exit. I'm just wondering how much is left and how you're thinking about loan growth in 2020?
I think that basically we've said this before that you probably won't see any growth on the legacy side because the growth because we're trying to outsource the $400,000,000 to $500,000,000 on prosperity side, we'll still be shooting for the 5% that we have been for the last couple of years. I think the last 2 years, we didn't hit quite 5%. We hit 4% the year before. And I think we averaged about 4% growth this year, but got killed in the last quarter. But I think so you're probably looking around $500,000,000 increase for overall for the bank or maybe 2.5 percent if you look at it that way.
On a combined basis?
Right.
Okay. And
then I'm just wondering big picture, David, how are things trending in loan committee? Are you finding that the 2 companies are kind of on the same page from a risk tolerance standpoint?
Well, I'm going to I'll let Kevin jump in. But for me, it's better than anything beyond my ever I thought it could be. I mean, sometimes I see Kevin in the loan committee and he's asking the questions before I ask him, but it would be my same exact questions. But again, knock on wood, something can always go wrong, but the reason is I can't say how successful this thing has really become because of the people at Legacy. I mean they're really on the team.
I think we're I really maybe I'm maybe not you, I feel really great about it, but I'll Kevin jump in.
No, it's the same. I think we came into this with our lenders and there's about 50 or 53 of them, all knowing we were going to reduce the risk of our loan portfolio, whether we did a merger or not. They had been aware of that for the better part of a year. With Prosperity, that risk has been clearly defined and it doesn't include that $400,000,000 or $500,000,000 worth of loans which were outsourcing. I think you can read out of that.
The remaining $7,500,000,000 worth of loans are probably closer to the middle of the fairway than maybe most of the world thinks about when they think about these 2 banks together. So I'd say it's business is normal. I mean, the expectation of our lenders is we need to move off the loans that we've all identified. And if you can find and structure good loans and bring them to loan committee, they're going to get done.
Yes, Peter, I'd say I was at loan committee and their Chief Credit Officers turned our down. So there you go. Sam or Dave, one of them, they voted against our loan. So they may be tougher than we are right now.
We might clarify that. Peter, this is Tim Timanus. There are 3 legacy people on our loan committee now, 2 in addition to Kevin. So it's Kevin and 2 of his solid credit quality type folks and they've been extremely helpful and everything's really working very well.
That's helpful. And then just one final question on the core margin. You talked about it being like the 3.30 range for the next few quarters. It does seem like that there's a lot of opportunities to optimize the balance sheet as you bring the 2 companies together that the core margin could trend upwards. I'm just wondering if you could talk about the quarterly trend.
Well, somebody else may want to jump in, but I mean those are just what if questions. But I think for sure everything that you're saying, I think the longer we go, we'll be able to optimize a lot of things. I mean, you've got $125,000,000 note or debenture that legacy had that actually matures at the end of this year. So I mean that really adds to the bottom line. I talked just a minute ago about the $400,000,000 that we really don't accrue on.
It accrues, but again, we don't take it in the income. I think the repricing that we see going forward, for them and for us, I think there's just a lot of synergies, I think.
That's exactly right. This is also back. I mean, first thing we did, they had about $15,000,000 transfer for it with higher cost. We paid that off. And what Mr.
Zama mentioned that we have this subordinate notes that we can call at the end of 2020 that would help definitely with the margin. And we are looking through those different items. As I mentioned earlier, we have about $2,000,000,000 cash inflow from the bond portfolio. We could reinvest or use that funding to fund some warehouse or the loans. So there's a lot of levers we can pull and we're going through that and we're working through them, but definitely we should probably have some kind of positive impact on NIM.
This will continue our plan.
Yes. And the final piece of that is we're not done repricing liability side, the deposit liability side at legacy. There's still work to be done. Much has been done, but there's more to be done. So there's opportunities throughout the balance sheet if you think about it for us to work on improving.
Got it. Thanks very much for taking my questions.
Our next question is from Ebrahim Poonawala from Bank of America Securities. Go ahead. Good morning, guys.
Good morning.
I guess just one first follow-up, I guess this time on the GAAP margin. So you mentioned the $13,500,000 or so in accretion in the next quarter. Is like outside of like any one off prepayments, if you can talk to about how that should trend over the rest of the year? And if we can even into next year, like should we see a steady decline? And if you can quantify what the pace of the decline would be?
Yes, I agree with you. The range where the guidance we give you, that's a more quarter. But as you know, the loans gets paid off and through the maturity, that fair value will decrease over a year or 2. So that's exactly right.
What are we looking in total accretion we think for the 1st year, dollars 50,000,000
So if you look at for $50,000,000 on total for 1st year, but I think it's going to be a little bit higher in the first one and then a little bit slows down in subsequent quarters.
Just keep in mind, we're giving you numbers. But in my history and experience with this, it's very lumpy. I mean, sometimes we're giving you this and then we collect a loan that we didn't know if we would collect or not and that comes back into income. And hopefully, those are good things, but it could be very lumpy. We're giving you one number, but it could be it could end up being a lot different too.
So completely
agree with that.
I appreciate that David. And I think when we think about that 50 and I know it's a lot there like what's the level of reset if you think about 2021? Does that 50 fall by half or any sense of what will be remaining after the end of the year?
Yes. If you look at our model and the way we're projecting, think in 2021 it will be half of what about $25,000,000 to maybe $30,000,000 but definitely it's going to drop off.
Got it. That's helpful. And just moving on the expense side, so the $120,000,000 to $125,000,000 guidance you gave, there's about $11,000,000 of savings if we get all the savings. Do we get to that low $110,000,000 type of expense run rate by the Q4? Or do you think there might be still a little more work to be done in 4Q, so we don't see that until next year?
So I mean based on what we see right now and this all depends on the integration, right? Most of the cost saving comes from integration of the system, consolidating our branches. So we should see that in the second half of the year, but definitely I believe we're going to see that $11,000,000 savings coming in the Q4 of
this year. Maybe Q3.
Yes, starting Q3, but if you're looking at Q4, definitely we're going to get that
savings.
Understood. And if I can sneak one in, David, for you. You actually are slightly surprised by your outlook on doing more M and A. Just talk to us in terms of the opportunity set that you're seeing today. Are these larger banks, smaller banks?
And should we still expect staying within Texas in terms of looking at additional M and A opportunities?
Well, Texas is good. Texas and Oklahoma is good. We talked about it. When we did the deal with legacy, I think I mentioned in calls, we were dealing with 2 or 3 different banks at one time. And we went for a long time and didn't do anything.
And finally, we pulled the trigger and legacy and us joined up. But there were still some opportunities out there that we were working on that again, our first concern, I wouldn't say concern, but our first objective is to get this completely fully integrated in June. But as good as it's going right now and I guess something can always happen, but if it keeps going as good as it's going right now, I think by the end of next year, there is a possibility of another deal, possible.
Understood. Thanks for taking my questions.
Thank you.
Our next question is from Michael Rose from Raymond James. Go ahead.
Hey, thanks for taking my questions. Just wanted to start off, we've seen fair amount of consolidation in M and A activity, a lot of lender dislocations. Can you guys just talk about, A, how you're defending against people trying to pick some of your lenders off and then maybe any hiring plans that you guys may have to kind of capitalize on some of the disruption? Thanks.
Michael, this is Kevin. There is obviously a lot of disruption. We're opportunistic when we look about hiring people, but we want to make sure they fit. We spend a lot of time on making sure the fit makes sense and that goes even through walk us through the kind of portfolio you have, how it's priced, how it's structured. So we're deliberate about it, opportunistic about it.
In terms of I've had time to get out amongst the markets and meet some folks. There's a lot of long tenured employees here. As we turn to the legacy side, our 50 plus lenders, all but one of those is under a contract. So people can call, but
they're not
going to have much success. And our folks are happy. So I'm not as worried about retention for us. And again, on the opportunity side, we're deliberate. We're going to make sure it fits and they can produce in this environment before we pull the trigger.
That doesn't mean we won't. And we're always talking to folks, but we're deliberate about making sure the fit is somebody that's going to last.
And I would add just as a general culture of our bank, we've not really gone out. I know sometimes it's opportunistic, but we try not to go out when somebody is having issues to try to hire their people. Now it doesn't mean that we wouldn't hire their people if those people come to us directly. But as far as us going and soliciting the situation in another bank that's having issue that hasn't been the way we've done business in the past.
Okay. That's helpful. And maybe just one follow-up for me now that you've had, I guess, a couple of months to kind of look at numbers on a combined basis and kind of the opportunity set. Any greater color on what you may see as some potential revenue synergies as this gets more integrated and are you able to provide any quantification at this point? Thanks.
I think there are a few possibility. Let's talk about our trust department. Legacy didn't have trust department that will be beneficial for us because we're picking up good territory in the Dallas Fort Worth area. There's opportunity for there. And there's other opportunities that we can expand from the non interest income side of it.
I mean to quantify, we don't have that quantification, but
there are
a few things we can do related to legacy.
I think just overall and size is not everything, but overall we'll be larger in the Dallas market than we will be in the Houston market where in the past we've only been a little over $1,000,000,000 $1,500,000,000 or so. So I think that presents a lot of opportunities. It's a great market just like Houston is. I mean, we're still very excited about Houston, but being bigger in a larger city really helps to get business. So I think just a lot of synergies there, it adds a lot.
And just to piggyback on that question, are there any technology investments that you have planned that would eat into the potential cost savings that you laid out for the deal? I think there's a commercial loan system you guys are putting into place, etcetera.
Well, we just switched our core server to Fiserv. I mean our Commercial. Commercial Fiserv. But and again, we've done a lot at SaaSASE server, our Internet banking. Our main Internet banking.
But again, mostly we went on the platform of Fiserv, but we were on a number of different platforms to begin with. Exactly. And that took us about a year to really get in place.
Yes, exactly right, because we started the process of upgrading our, treasure management in Internet banking before the acquisition. So now we converted the system and we'll be getting ready to convert legacy in June. But those are
I do think it's technology in the future. I mean there's only a few aggregators out there once Fiserv, Jack Henry and that. And I think in the future banks one of the reasons banks are going to merge and consolidate is because the aggregators, I don't know that they're offering a good enough product that is going to really be that's going to carry banks, larger banks through. And I think in the future banks may have to consider going in house and even doing some of their own coding and engineering. I just think that's going to have to it may be.
And I think that's really what is pushing more and more banks together like that.
Yes. Michael, this is Kevin. I think the consensus of those of us in the room is that $11,000,000 is going to be realized or the vast majority of that will be realized tax affected through the income statement. We're not expecting a whole lot of dilution or reallocation of that money.
I think that's right. Also back, I mean really the technology expenditures that we see coming, I mean they're basically already in our budget and they're taken into consideration as far as all these numbers are concerned.
And because of this integration that we're switching this treasury management, Internet banking, we've been working for years. So that's already building in our financials.
So if there's a big number that comes down the road, it's going to be a real surprise. I agree with that.
Very clear. Thank you for taking my questions.
Our next question is from Jon Arfstrom from RBC Capital Markets. Go ahead.
Thanks. Good morning, everyone.
Good morning, David.
Good morning.
David, one of the comments you made on loan growth, you said you got killed last quarter on growth. Can you just expand on that a little bit and talk a little bit about what happened?
Yes. I mean basically the payoffs in the last quarter were just unbelievable. We saw a lot of our a number of our large projects go into final financing where they mostly from insurance companies where they were offering fixed rates for longer periods of time, cash out and no personal guarantee. So we couldn't really hold our customers. It was good for our customers.
That's what's supposed to be working. And then we saw other deals just being sold. Eddie, you may want to give some color on it at all.
I know this Q4, there was
a lot of activity in the 4th quarters, people trying to close deals before year end. And as David indicated, there is a lot of competitive product out there on the non bank sources on refinancing. The non recourse seems to be a very big carrot as you could well imagine and if that availability is there, plus a cash out component, longer amortizations and a good rate. So and we're in some very dynamic markets in Houston, Dallas and Austin. People are coming in and projects are selling where there might have been a little bit more stickiness to it where there would be a longer period to get to stabilization.
We're seeing those properties sell a bit faster than we've recognized in the past. So Q4 was just very active on all fronts and the payoffs and refinances.
Okay, good. That's helpful. And then, Tim, you talked about the monthly production average of almost $500,000,000 I'm guessing December might be a little bigger than that. And I compare that to what you talked about last quarter. And I'm just it seems to be fairly ratable with the balance sheet size increase.
But I'm just curious when you guys look at the pipelines today, can you talk a little bit about geography and size and type and if it's any different than what you saw a quarter ago before the merger closed? Does that make
sense? It does. Just to put it in perspective, as I said earlier, the average monthly production for the full quarter was $496,000,000 and that was essentially 2 $71,000,000 on the prosperity side $225,000,000 on the legacy side. And that is for the full 3 months of the quarter on the legacy side. We expect that legacy is going to pull up to the prosperity line and maybe even surpass it as you can probably expect.
Anytime there's a combination of companies like we've had, sometimes it takes the eye off the ball a bit and it takes the lenders a while to get back to normal, so to speak. So I think we've had some of that. There hasn't been any dramatic change in the marketplaces that we operate. As Eddie mentioned a minute ago, the competition is fierce, has been, probably always will be, I guess. But when I look at the month of December, it was not particularly a strong month.
But then when you look at the legacy numbers, October was the worst of their 3 months. So it's hard to size it up and hard to predict. I don't see a whole lot different for the next quarter actually than what we're saying right now occurred in the 4th quarter. I don't know whether I'm completely helping you or not, but
Yes, that helps.
I would say that this year, the last quarter was terrible, the year before it was good. So I think you almost have to look at it on an annual basis. That may be a little slower, like you said, this Q1. But I would kind of stick with the 4% to 5% is what I would think.
That's right. And I guess the one thing we can say with certainty at this point in time is we don't see any economic deterioration in the geographies that we operate in. Now something could happen tonight that could cause that to change. That's just the way the world works. But right now everything seems stable and consistent.
Okay. That helps. And then last one, David, for you or maybe Kevin. Just given the larger balance sheet, I wanted to follow-up on M and A. Won't hold you to it, but is there anything that doesn't make sense in terms of size?
Meaning is there kind of a minimum cutoff that you look at today with a balance sheet of over $30,000,000,000 to maybe pre merger before you might consider that you wouldn't consider today? I want to $100,000,000 bank
there, a lot of people would say you shouldn't mess with that. $100,000,000 bank there, a lot of people would say you shouldn't mess with that. On the other hand, it may be something that we would consider. It's in a market, if you told me we were going to go to another state and buy a $1,000,000,000 bank, I'd have to say that probably wouldn't make a whole lot of sense. If we move to another state, we'd have to be able to become a major player there within a short period of
time. Okay. Yes. Logical. That makes sense.
Thanks. Thanks, guys.
This concludes our question and answer session. I would now like to turn the conference back over to Charlotte Rusche for closing remarks. Go ahead.
Thank you, Kate. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.