Good morning, and welcome to the Prosperity Bancshares Legacy Texas Conference Call. Today, all participants will be in listen only mode. Please note, this event is being recorded. Now, I would like to turn the conference over to Charlotte Rasche. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to the Prosperity Bancshares LegacyTexas Financial Group Merger Announcement Conference Call. This call is being broadcast live over the Internet at prosperitybankusa.com and at legacytexasfinancialgroup.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, Chairman and Chief Executive Officer H.
E. Timanus, Jr, Vice Chairman Eddie Safady, President Asylbek Osmanov, Chief Financial Officer Randy Hester, Chief Lending Officer Merle Karnes, Chief Credit Officer and Bob Dowdell, Executive Vice President. Also with us from Legacy Texas are Kevin Hannigan, President and Chief Executive Officer Mae Stavenport, Chief Financial Officer and Scott Olmy, Chief Operating Officer. David Zalman will lead off with comments regarding the merger. He will be followed by Eddie Safdie, who will review highlights of the investor presentation available on the Prosperity Bancshares and LegacyTexas websites.
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, Chris. Before we begin, I would like to refer you to Page 2 of the investor presentation for disclaimers regarding forward looking statements and other information. Now, let me turn the call over to David Salmon.
Thank you, Charlotte, and thank everyone today for joining us. This is one of the most exciting times in our banking tradition here. We're very excited about it. I would say 3 things: bigger, better and stronger. It enhances our Dallas franchise.
It makes us a significant Texas franchise and it combines an asset generation bank with a core funded setting. It also deepens our bench of talent. It makes it gives us an efficient use of our excess capital and it still leaves us well positioned for further growth. And above all, as a shareholder, a bigger shareholder, it's an attractive financial benefit for all our shareholders. So it meets all the strategic requirements and financial requirements that we were looking in for a partner.
We're very excited about this deal. And so let me go ahead and turn this over to Eddie Zaffini.
Thank you, David. We're going to go through the slide deck and the relevant facts within. If you'll turn to Page 3 of the deck, it's a merger creates the 2nd largest Texas headquartered bank by deposits with $22,400,000,000 of deposits in Texas and pro form a assets of 31,700,000,000 dollars Pro form a ROAA in the top quartile among U. S. Banks between $20,000,000,000 $50,000,000,000 in assets for the most recent quarter provides increased scale for better positions the combined company for future opportunities, Significantly enhances our presence in the Dallas Fort Worth MSA which is the 4th largest in the U.
S. By population with 7,600,000 residents and it moves Prosperity Bank from number 20 to number 6 by deposit market share in the DFW MSA markets overall. Also will make us the number 2 Texas headquartered bank by deposit market share in the DFW area and number 1 bank by deposit market share in the affluent Collin County area, which includes the extremely fast growing cities of Plano and Frisco. We are complementary business cultures that combines our strong core deposit franchise of Prosperity with LegacyTexas' loan generating platform. It improves Prosperity's loan to deposit ratio from 61% to 71%.
It allows Legacy to replace the higher cost funding with core deposits. We have complementary business lines that will improve our operating leverage and the combined franchise to maintain rigorous risk management culture. Financially attractive, if you look at the 2020 EPS accretion approximately 10.3% assuming fully phased in cost savings, internal rate of return of approximately 20%, it's prudent deployment of our excess capital and still provides strong pro form a capital ratios. On Page 4, the stronger combined franchise in the first column, if you see the where it increases the scale of capacity with our total footings going to just about $32,000,000,000 with gross loans of $18,500,000,000 and deposits of 24 point $3,000,000,000 Page 5 of the deck gives you a summary of the transaction with the consideration of 0.528 shares of Prosperity and $6.28 cash for each legacy Texas share. This results in an 85% stock and 15% cash trade.
The transaction value is at $2,100,000,000 in aggregate consideration, which equates to about $41.78 per share. The implied transaction multiples are a 9.3% premium of legacy Texas closing price to 12.1x 2020 estimated consensus EPS and 2.16x tangible book value. The pro form a ownership will be 73 percent Prosperity and 27% LegacyTexas. This transaction also deepens our management bench. Kevin Hanigan will be CEO I'm sorry, current CEO and President of Legacy Texas will become the President and COO Texas will become the EVP and Director of Corporate Strategy at Prosperity.
We will also be adding senior management positions at Prosperity with Scott Olmi, Tom Swiley, Chuck Eichenberg and Aaron Shelby. The Board of Directors will increase to 14 by adding 3 members of Legacy Texas to the Prosperity Board. We have an anticipated closing of Q4 2019. We'll jump ahead then to Slide 10 on the key merger assumptions. You can see the standalone earnings per share for each company, Prosperity 2020 consensus at 5.05 and legacy at 3.44.
The synergies cost savings of approximately 25% of legacy Texas non interest expense base with 50% phased in during 2020 and 100% thereafter. For the purposes of this model, there were no revenue synergies included. The core deposit intangible will be 2% amortized over 10 years using a straight line methodology. Credit mark, pre tax gross credit mark of 2.2 percent of Legacy Texas gross loans or 175,000,000 dollars 97,000,000 net of loan loss reserve. This is 2.3 times legacy Texas loan loss reserve.
The estimated merger and integration cost, dollars 60,000,000 pre tax one time expense and this is fully reflected in the form a tangible book value per share at closing. The due diligence was comprehensive. Our focus was on credit quality, compliance, risk technology, operations, legal and regulatory. Our internal teams reviewed 67% of the Lacy Texas loan portfolio, which was 90% of all their loans over $3,000,000 in size, 100% of energy loans and 100% of loans rated watch or lower. Page 11, transaction multiples and financial impact.
On the left side, you can see the stock consideration of 85%, market premium of 9.3%, price to tangible book 2.16%, price to 2020 estimated earnings 12.1 times. The 2020 EPS accretion based on 50% phased in synergies of 6.6% and 2020 fully phased in of 10.3%. The tangible book dilution at close is 9.7% and using the crossover earn bag, it's a 4.5 year payback. However, for illustrative purposes, on the right hand side, had this been a 100% stock consideration, the tangible book value dilution would have been 4.7% and the crossover earn back would have been reduced to 3.5 years. Balance sheet at closing on the combined institutions will enjoy a 71% loan to deposit ratio, tangible common equity to tangible assets of 9.6%, common equity Tier 1 at 13.1% and total risk based capital of 14.1%.
And with that, I will turn it back to Charlotte Rasche.
Thank you, Eddie. At this time, we are prepared to answer your questions. Chris, can you please assist us with questions?
Today's first question comes from Jennifer Demba of SunTrust. Please proceed.
Thank you. Good morning. Good
morning, Jennifer. Good morning.
My first question is for Kevin. Kevin, just curious on why you're selling now and why Prosperity is a partner? And then I have a follow-up question as well.
Sure. Thanks for the call, Jennifer.
I'd say David and I started the conversation about this nearly 2 years ago, and it made sense then and it makes sense now. The only thing that's changed is our stock prices are a little different than they were 2 years ago. But in terms of relative value, which is all that matters here in the exchange ratio, that hasn't changed much at all during that period of time. So strategically it just makes so much sense to both of us. We realized that the first time we sat down and I've known David at least 10 years maybe longer.
I've gotten to know him a whole lot better in the last year. But putting these two franchises together, I'd say number 1, its size, its scale, its density, its market share in both Houston and Dallas, It's taking a loan generation franchise with a relatively high cost of funds that's had some bumpy credit issues as we as those of you who follow know with a fabulous core funded cheap deposit franchise, inexpensive deposit franchise, cheap sounds bad, that has great credit statistics. And as you know Jennifer, you've followed us as well. We were taking less risk anyhow and we were going to take even less risk going forward. So this was a perfect way to segue into where we were going ourselves anyhow.
So Dave and I have worked and teams have worked on this really, really hard to make sure we get the secret sauce right. And I don't think the timing or the strategic nature of it hasn't changed from day 1 to now. Prices moved around, but the exchange ratio has not.
Okay. Thank you. And my second question is for David. David, can you just talk about how you're going to merge the 2 companies' credit quality credit cultures together? And what level of balance sheet runoff you anticipate as you maybe exit some legacy loans that may not make sense in the future?
And then I did want to ask about investments in terms of technology. Thanks.
You don't have any more that's just that. Yes. Jennifer, obviously, our bank is always focused on asset quality. It's always been a big deal for us. I mean, we really run a really plain vanilla bank bringing in core deposits and then lending them out and not taking as much asset risk.
I mean, that was our model. I think that legacy's model ran a little bit hotter than ours did. There's nothing wrong or right, it's just each one has their own model. So it is important. We will measure our credit cultures.
I would say that they did some things in different areas that we didn't do. So I think they'll change and we'll change. I think probably on a percentage basis, we'll change 25%. If you had to give me a number, I say 25% or 30%. That's what we would change as much as that.
So I think that Kevin mentioned earlier that their intent even if they wouldn't have joined us would to work more in trying to on their credit culture that they wouldn't take on as much risk. And so I think we both we're both making commitments. We'll take more risk. They'll take less risk. And I don't know how any better I can say that.
And so the second question again refresh my memory, Jennifer.
Investments back into the company for a larger balance sheet, specifically technology?
Yes. I mean, we're really excited because the scale helps us and I think that our pool of talent, I mean with Scott joining us too, he calls himself this a computer nerd even though he's an attorney. He really wants to focus on our IT, our technology and our digital footprint And I think that's going to be extremely helpful for us.
Okay. And I'll let others jump in. Thank you. Appreciate it. Thank you.
Our next question comes from Brad Milsaps of Sandler O'Neill. Please proceed.
Hey, good morning guys.
Good morning. Good morning, Brad.
Just curious, I mean, on paper, the banks coming together, very complementary balance sheets makes a lot of sense. Culturally, the 2 companies have been differently have been different over the years. Just curious kind of what types of lockups you have in place with the lenders at Legacy Texas? Just wanted to get a sense of how the companies can grow together as a combined entity.
Brett, this is Kevin. I'll take that one. In my view, the cultures of the company are very, very similar. And the culture is what we value, what's important to us, right? Not how we get there that we might have gotten here differently, but we both value growing our customer relationships, taking care of our clients, valuing our employees and achieving superior returns for our shareholders.
So to me that's culture and that's the culture of both legacy and prosperity. So we have no cultural issues. Prosperity has taken less risk. We have taken more and Dave and I have spent and this entire team that's here and probably 15 or other people, we probably spent 2 months on those kinds of issues trying to make sure we get it right. And as I said, I think David said it perfectly.
We were going to take less risk whether we did a transaction or not. So we are going to take less risk. And David and team are going to take a little more risk even by the very nature that they move from a 61% to 71% loan to deposit ratio. That is more risk weighted assets on the balance sheet. So that's a there is a higher level of risk taken just in the loan to deposit ratio alone.
In terms of lockups, the executive team, 6 of us signed 3 year lockup agreements contracts with the company. We went to our top tier lenders and every one of them signed up for a 2 year deal with a tail on it for non solicitation non compete. We kept it to about 20 some odd people on the first go around just because we got 2 publicly traded companies that we didn't want word to get out of this. It is our intention, it is my intention and I've told David I will get this done. We're going to go to the rest of our lenders and offer them contracts as well.
So we didn't do it at closing, but we both know we're going to go forward and that's a high list to do item over the next week or so.
Yes, I would add that this is a deal that just didn't happen overnight. As Kevin said, we spent 2 years, he and I getting to know each other. And I think that what makes us different too is our teams got know each other. Our teams spend a lot of time together. And I agree with Kevin that we all like each other.
I mean, if the cultural fit is there, I think the only difference is the risk that one is taking off the other, but we feel really good this deal.
And just as a follow-up, I know you guys you're assuming no revenue synergies, but what are the assumptions around changes you may make to legacy's balance sheet, whether that's reduction of wholesale borrowings, how you think about the warehouse business? And then as an add on to that, how much time did you spend sort of vetting each other's earnings estimates that are out there in light of what's happened with the yield curve since kind of last quarterly conference calls? Thanks.
Yes, there were so many questions. The earning estimates were, gosh, telling you guys, I don't know how many times, we vetted theirs, they vetted ours, we looked at different scenarios if this happens, if that happens. So we feel very good with the earnings estimates we've played, Fairview's strategy. Yes, the wholesale funding brokerage deposits around $800,000,000 There's really no reason for us to keep that. We have a lot of core instead of paying 2.5% for money, ours is 60 or 70 basis points.
So a lot better funding, so that should help us. Yes, we did look at the warehouse lending. Merle Karnes actually did the review on the warehouse lending. And it looks it's not something we did, but it looks good and we're going to spend some time with it. So we're excited about that.
I think that there's a credit mark, I think of about $175,000,000 And so you will see if that's the credit mark, that means that there's more loans in total dollars with that. So that is something that we will try to out source over the 12 months in period of time. So you'll see that. So you'll see some reduction on that. At the same time, our bank continues to grow loans organically 5% to 6%.
And I think that legacy teams will grow that too.
Great. Thank you guys for the color.
Thanks.
The next question comes from Ken Zerbe of Morgan Stanley. Please proceed.
Great. Thanks. Just going back to those higher cost legacy funding, where do you see NIM at closing of the banks? I mean, we can kind of say Q1 2019, if that's easier. And also kind of what does that assume for how quickly you can pay off some of the higher cost funding?
Those are questions I just don't have available right now. I mean, we can get back with you. But obviously, the net interest margin after you get through with the get rid of the higher funding deposits should increase. And our net interest margin should increase just because again our bond portfolio of $9,000,000,000 the yield on that's lower than what we can reinvest in. So in and by itself that helps us over and I've said this in prior conference calls that in and by itself will help our net interest margin over the next 12 24 months in and by itself.
But overall it should increase obviously.
And I wouldn't just go to the funding cost of the broker deposits. We fund that warehouse business with federal home loan bank borrowings
of roughly
2.5%. Those are easy to get out. Those are generally very short term borrowings, week to 2 weeks. So that's a significant part of the funding side of LegacyTexas is going to change for the benefit of both companies and the margin.
Okay, great. And then from a capital perspective, the CET1 ratio still fairly high, just over 13%. Where do you guys where does Prosperity, I believe, want to stay from a capital perspective? Like where are you comfortable being?
Well, again, I think we have more capital even after this deal than we've ever had. I think that you'll see us. I think we still want to use our capital. I think that to continue to increase dividends over time. And we want to continue to be a player and build our business organically and use that capital to build it organically and through M and A in the future.
Okay. And then just last question. In terms of loan growth, I guess, are there so there's a multipart question here, but are there any loan categories at Legacy Texas that you would like to either run down or run off over time? And also kind of I know you mentioned legacy was a bit more of an asset generator than you guys were. Like how do you envision loan growth on a combined basis kind of once the deal gets integrated?
First of all, I think that as mentioned earlier, I think the credit mark was primarily in 2 categories and that was in the energy area and in healthcare. So those are loans that we'll have to work out over a period of time. I'd say going forward that are again always the 1st year you're not going to see growth I don't think in loans as much. We'll grow. We're growing organically.
Both of us have grown 5% or 6% organically. But again, trying to outsource the loans on the books, you may not see that total together. So I think that's for the 1st year. I think going after that, we're hoping to shoot around the 6% to 7% organic growth.
Okay, great. Thank you very much.
Today's next question comes from Brady Gary of KBW. Please proceed.
Hey, good morning guys.
Good morning.
If you look at the level of net accretable yield right now, I think it's running around $2,000,000 to $3,000,000 a quarter for Prosperity. I mean with this deal, I know CECL will happen right after this deal closes in 1Q 2020. But do you expect any material changes or a material tick up in the level of accretable yield?
This is Asselbeck. Yes, Brady, this is Asselbeck.
For the CISL exchanges, you know, they're accounting for the accretable yield. As we're going to expect $2,000,000 to $2,000,000 for this year, but CECL will change related to the credit mark. Once we cross this January 1, the credit mark we have on these acquired loans, that flips to the allowance. That's not going to come in as an income like it used to be. But we're going to have this discount or premium on the good loans.
That's going to come through accretion going forward. But at this time, it's not going to be as much as the credit mark. So that has to be I mean, we have not we have to go through the process doing the fair evaluation of the loan, but it will have some impact in 2020, but not as significant as it used to
be a pre CECL world. Yes, the accretable mark is primarily the rate margin. Yes, exactly. And you're not going to have a mark really for 'three or loan loss because that's going to go back into the reserves. Exactly.
So again, I would say that we didn't take any of that into consideration with our projection.
Yes, for the projection, CECL will impact that. So we do not take into account.
So none of that's considered in our accretion number we're giving you. Yes, it just shouldn't be a material number going forward.
It should be extremely material.
I always thought of the voodoo accounting anyway.
All right. And then David Zalman, I've heard you say in the past like, hey, we're on the lookout for M and A deals once we announce one, one that may not necessarily hold us back from continuing to look for opportunities and continuing to be active. I mean, this deal is obviously a big deal for Prosperity. How do you think about the timeline as far as when you're back interested in looking at additional M and A?
Well, first of all, I don't want to scare the market and say that we're going to dump in it. Tomorrow, we're going to announce another deal. Having said that, this is a big deal. We take it very seriously. We look at so many scenarios.
We know all the things that can happen. We've done 42 deals. By far. This is the biggest deal. So we look at all of those deals.
I think this is going to be probably a little bit easier because it's all located in Dallas market. You've got 42 locations and we're there already. So our people working together should be faster. I would say that we still want to be in the M and A market and I would put it like this, it probably in 5 years we'd like to be about $50,000,000,000
All right.
Thanks guys.
Our next question comes from Michael Rose of Raymond James. Please proceed.
Hey, good morning, guys. Just wanted to follow-up on some of the balance sheet changes that you have planned. And maybe I don't know if you have it in front
of you, but what does
the interest rate sensitivity look for you guys on a combined basis? Obviously, I would assume a little bit more asset sensitive given Kevin's balance sheet, but just any numbers you could share would be great.
This is Asselbeck. We looked at the combined bank, and I think we're going to continue to be a neutral and maybe slightly asset sensitive. But from what we see in the legacy and what we have ours, we've been in that position and I don't think it's going to be any significant change going forward, but I would say neutral to a little bit of asset sensitive.
Okay, that's great. As a follow-up, just lender hires, Kevin, I think you have 55 lenders. Is there plans for the combined company to hire more lenders, whether it be in the Dallas market or Houston market?
I think the companies are always interested in adding talent when it's available. So business as usual for both of us. So if there's good talent available, we'll go get it and vice versa. As I said before, job 1 is getting the rest of our lending team legacy and trying to get them under contract like we have for our leadership team.
Okay. One final one for me. Was there any interest rate marks or any other marks or was it just the credit mark?
Right now when we did, we went mainly the credit marks of 175,000,000
dollars The no interest rate mark.
Okay. All right. Thanks for taking my questions.
Thanks, Michael.
The next question comes from Brett Rabatin of Piper Jaffray. Please proceed.
Hey, guys. Good morning.
Good morning.
I wanted to ask on the expense savings assumptions. David Solomon, your history, you're combining 2 pretty efficient companies. And David Solomon, your history has been one of being able to really do a great job pulling out expenses from deals. Can you maybe just talk about the expense savings assumptions in this deal? And I know some of it's back office, but any color that you could provide around the 25% would maybe help?
Yes. I'm going to let Asselbeck answer, but I'm just going to answer it more broadly that yes, we're still always focused and I think Mayes is really committed to work with Osselbeck and Cullen and they have a plan on the 25% cost savings and I think we'll really be focused on that and we should be able to do that better. And so, Asafo, do you want to go into more detail? Yes.
I'll give a little bit to highlight on the cost savings or synergies. I mean, primarily synergy would be from the similar footprint from Dallas Fort Worth area and we're going to have some efficiency gain from consolidating some of the back office operations and functions, which includes like integration of our information technology system and data processing. And the last one, I would say cost savings would be eliminating some of those outside consultants and some duplicative services. So those mix up the majority of the cost save, what we expect to be about 25%.
Yes. The majority of the cost savings are really data processing, all their outsourcing functions and things like that. Yes, we're not missing with anything with regard to sales and the people that are out there in the front lines. I agree.
Okay. And then 2 on just two follow ups. 1, was this a negotiated deal? Or was there an auction process with multiple bidders? Can you give any color on that?
I'll answer it first. Kevin
and I
have been negotiating on this thing for 2 years. So I
would definitely say, Kevin. Look,
we knew the strategic sense of this 2 years ago and every time we hit a bump, we found
a way through it.
David and I would just sit down, our teams would sit down and we'd say this is where we're stuck, how do we get through this. We all focused on just getting through it. I would say a big part of negotiation is David wanted to deploy more capital with more cash in the transaction. And in our side, our Board was interested in 100% stock. So he might have liked to have had 20% or 25% cash in this deal which would have levered the capital a bit more and we were so excited about the deal.
We wanted to stock. So that conversation took a long period of time and we settled kind of in the middle of the 85.15.
Yes, I think that's right.
Okay. And then just lastly, David Zelman, you mentioned you could reinvest your securities portfolio at higher yields in the present level. And I think you were like at 2.43% last quarter. I'm just curious what you're looking at in terms of investing in the securities portfolio world at these days?
Because rates have been so much lower, the last few deals that we bought, it's a little bit different. We always bought the 15 year product. I think we this last couple of times, we really bought the agency floaters that really and I guess because people thought maybe interest rates are going to go down, we were pretty getting pretty good. I think we probably bought $100,000,000 $200,000,000 and got around 3%.
Okay.
They're more short term in nature. The bond final state of maturity probably 5 years or so.
Okay. Appreciate all the color. Thank you. Sure.
The next question comes from Gary Tenner of D. A. Davidson. Please proceed.
Thanks. Good morning.
David, you mentioned a couple
of times that you all
have been talking about this deal for a couple of years now. If you go back a couple of years, legacy by most accounts would have been viewed as, call it, a double digit loan grower, well above what Prosperity was doing at that period of time. Was that would that have been a major hurdle, maybe for both of you in terms of doing a deal 2 years ago given the disparate growth rates that you had been versus where things look like they shake out in 2019 2020?
I would say this, I think we were spending time with Kevin. I was spending time with other people at the same time, some other banks. But I always thought that the Dallas deal for us, if we're going to do a deal right now, I always felt that the legacy deal would be the most strategic for us because of the things that we said it enhances so much of our Dallas market, enhances the
Texas franchise and makes us worth more and they did.
On the other hand, I and understand where we're going forward. I think that if we would have just did something 2 years ago and they were going on the track, they're going and we were going on the track, We had to come to grips that what we're willing to do to bend and they had to kind of track on what they were going to do. I mean it's pretty simple. Kevin, you may want to say.
No. And really if you think about it Gary, the last 2 years we have grown slower. We were single digits 2 years ago. We were single digits last year, we're 5%, 6% this year. So as we were going through and you know since you followed us, we were going through this de risking process and the growth rates were hampered or tampered down muted if you will by getting out of syndicated lending particularly in the oil and gas space and some other things.
So that was never really an issue. We both kind of looked at each other in line and said, I need to take less risk and that we knew we needed to do that. And so the 5%, 6%, 7% growth rate, we were both comfortable with as were our teams.
And I think I'll go back to what Kevin said earlier. I think our people culturally are like what we're all alike. I think banks and it's not a wrong or right model, but every bank has a model that it follows and one takes more risk, maybe one doesn't take as much risk. I just with the ownership that I didn't want to start over in life again and the risk we're willing to take. And we've been able to take the risk and have lower risk because we've made the returns.
We've made the 1.5% return on assets. And so truthfully, if we couldn't have made the returns for shareholders the way we were making them, we would have had to take more risk. It's just the model that you use. So that's what I would say.
Okay, great. Thank you. And then just one follow-up. I think it's been asked to some degree before, but given the mortgage warehouse yield around 5%, it's still well above the securities yield. Is there consideration to using that as a bit more of a liquidity portfolio, maybe kind of moving some of the securities portfolio into that line of business?
Well, I think that's what we said earlier. I We'll move our liquidity and as our bonds mature, we'll move that into funding that instead of buying that agency bonds primarily. That's I mean, to me, that's the real benefit right there. Instead of getting 3%, you're getting 4.5% or 5%.
And given the overall larger balance sheet sorry, I was going to ask given the overall larger balance sheet and now mortgage warehouse is around 5%, 6% on a pro form a basis, would there be interest in growing that business more aggressively than maybe legacy has done historically?
The first part of this conversation is that it is a good hedge against low longer term rates, right? The 4.91 weighted average coupon on that book of business in the last quarter is pretty attractive. One of the things to realize is it's a new business for Prosperity. David and his team haven't met my leadership team up into the lending ranks. They've met all the executive team and the credit side of the bank.
And the next process here is for them to learn more about some of the businesses we're in that they're not in and understand the risks in the warehouse business, the fraud risk and way the risk returned of all of that. So I think as David said, they've looked at the business so far, they like it. They need to meet the leadership and learn more about the business from a hands on perspective, see how the back office works and then we'll make a decision about how big that portfolio should be.
Yes, I think that's a good answer. I mean, we just we have to get comfortable where we're at. I wouldn't tell you that we would grow it or decline it, I mean, reduce it. But again, we just we want to get our hands and get better understanding of it. And Kevin has promised me that he's going to teach me.
All right, guys.
Thank you.
Thank you. Thank you.
Our next question comes from Ebrahim Poonawala of Merrill Lynch. Please proceed.
Mr. Manawal,
your line is open. Hello.
Yes, sorry about that.
I just wanted to follow-up in terms of just to make sure we heard you correctly when you talked about asset runoff on the deposit side. You mentioned about $800,000,000 of broker deposits and federal home loan debt that you would look to run off and replace with prosperity deposits. On the asset side, similarly, should we expect could you quantify in terms of what dollar amount of loans you expect to run off as you move through the deal next year?
Again, I don't think I can give you an exact number on that. It's just historically, there is a transitioning period, especially on the loans with the credit mark. I mean, if you have 170 $1,000,000 in the credit mark, that's just a credit mark, which means there may be a total of $500,000,000 right there that we'd have to probably But at the same time, we should be generating our own organic growth every year. So you may not see the growth because the organic growth we're doing will probably make up in this 1st year loans that we may be outsourcing. But again, moving our loaner deposit ratio from 60 percent to 70 something percent, that's a pretty good trade off.
It just we need to we just all need to feel comfortable where we're at once all said and done.
Understood. And just take a step back, David, in terms of those of us who follow Prosperity for a long time, you mentioned bigger, better, stronger, but it also looks like this deal is very different from historically what we've been used to from Prosperity, acquiring a bank, getting cost synergies and running off a good amount of the loan book of the acquirer. Talk to us just in terms of is that the right way to think about this deal in terms of the strategically positions Prosperity to become much more formidable bank from an organic growth perspective when we think about lending lines, etcetera?
Well, I think I would disagree with your statement to begin with. I mean, we had one bank that we purchased where we had to get rid of a lot of the assets. It just had to that was part of it. If you look at our other banks that we've had with First Victoria today, they're stronger and better than when we bought them. We're rolling the bank in West Texas, the American Bank.
So there have been some banks with that, but again that was in the DNA when we bought them and that's when we started. I think we spent a lot of time on this. And again, I think as you get bigger also, you might take on some different lending than you hadn't had in the past. And so it is a learning process, but we're all committed to go forward with this and keep it and build to buy.
Got it. Thanks for taking the questions.
And our next question comes from Matt Olney of Stephens. Please proceed.
Hey, thanks. Good morning, guys. We've been discussing a number of balance sheet remixing opportunities of the combined bank of funding the warehouse differently, paying down higher cost debt. All these things make sense. I'm trying to figure out is all this remix fully assumed in that 10% EPS accretion?
Or would some of that remix be incremental to that 10% number?
No, we didn't take any of that into consideration.
Okay. And just a few more modeling questions. As far as the Durbin impact, what was the Durbin impact you assumed
for this?
In our model, we assumed about $5,000,000 the loss from the turbine.
And what about any type of normalized provision expense from the legacy Texas side?
I just don't think we're there yet right now. Especially with
the CECL, what's coming on online January 1, it's we need some time to analyze those impact, all of that.
We have so many moving parts. We're working on our CECL program and the good part is they were working on their CECL program. We both have the same vendors and so we just that will make a lot of difference on how that all works. Exactly right.
And then circling back on that pro form a loan to deposit ratio, 71%. I can't recall when Prosperity has operated that high as ever. And it sounds like you could remix that balance sheet to make a little bit higher. I'm curious at what level you would be comfortable operating that ratio at?
I think we've always said even when we're at conferences that our goal was to get up between 65% 75%. So I mean, I think we're still there.
And then just lastly for me, slipping back to the loan growth commentary. I've heard a few different numbers, I think mostly in the 5% to 7% range. Can you clarify, is that a gross number that doesn't include any kind of pay downs the 1st year? Or is that more of a net number that you expect the 1st year?
So you have 57, call it 6%. So you got 6% growth and that doesn't include the pay down. I mean, what that includes the pay downs, but it doesn't include the loans that we have to outsource to get out of the bank.
Understood. Okay. Thanks for the color.
Thanks.
And our next question comes from Jon Arfstrom of RBC Capital Markets. Please proceed.
Thanks. Good morning.
Good morning, John.
Just back on revenue synergies, if you could maybe point to the top 1 or 2 areas you see revenue synergy potential?
This is Askelbeck. For the model, we didn't consider any revenue synergies, but we know that legacy brings the loans that will help us in the revenue side, but we did not model anything in our calculation.
I think maybe the potential on the revenue side, while number models, I always look what legacy screened weak for loan to deposit ratio, cost of funds and fee income were the 3 things if I screened us and looked at us objectively
that we
needed to fix and this fixes all three of those. Maybe the biggest potential revenue synergies is we have a ton of middle market companies, a handful or more of those sell every year at some pretty nice prices. They typically call us to place money into a trust or wealth management program and we don't have that. So that ends up going somewhere else and I think there's a great opportunity for us to capture that business going forward.
I think that's right and we want to focus on building our trust assets more in the Houston and Dallas market anyway.
Okay. That's helpful. David, in the loan review, you talked about how expensive it was and maybe oil and gas and healthcare. There's some work to do there, but anything else stand out in your mind, anything else worth pointing out?
I think that they besides mortgage warehouse that we didn't do, they have a product that has about $2,000,000,000 in commercial real estate that they operate differently than we did. I mean, they primarily focused with about a 35% down payment after the renovation to the project. And then these were just projects that they would loan money on and then fix them up and then sell them at about a 3 year average life. So, Kevin and I are talking about some of the terms that they had on that. So there may be some tweaks on that.
Again, we'll have to work with his lenders on that and see what they can do. So and we're committed to tweaking it a little bit.
Okay. And then last question, you talked about this aspirational $50,000,000,000 in 5 years. Does being $30,000,000,000 in assets versus $20,000,000,000 in assets change your thinking on M and A
at all in terms of
the future?
John, as I mentioned before, I really I think size is important. I mean, I can't say it's not. I mean, I can set how great it was to be bigger in Dallas and Texas because I do think it helps your franchise. But really when we look at deals, I personally don't want to do deals just to be bigger. I really look at it from a shareholder.
How much more money am I going to earn? That's the way I look at it. And I really focus on our stock trading at this price and on this multiple, but I'm more focused on the earnings than anything else. I mean, I think franchise is important. I think size is important.
I think you need to be there. But our goal is to increase earnings per share for directors also at the same time.
Okay. All right. Thank you.
This concludes our question and answer session. At this time, I would like to turn the conference back over to Charlotte Rasche for any closing remarks.
Thank you, Chris. Thank you, ladies and gentlemen, for taking the time to participate in our call today. We are very excited about this transaction with LegacyTexas and appreciate the support that we get for our company. Thank you.