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Edited Transcript of PB earnings conference call or presentation 29-Jan-20 4:30pm GMT

Q4 2019 Prosperity Bancshares Inc Earnings Call

Houston Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Prosperity Bancshares Inc earnings conference call or presentation Wednesday, January 29, 2020 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Asylbek Osmonov

Prosperity Bancshares, Inc. - CFO

* Charlotte M. Rasche

Prosperity Bancshares, Inc. - Executive VP & General Counsel

* David E. Zalman

Prosperity Bancshares, Inc. - Senior Chairman & CEO

* Edward Z. Safady

Prosperity Bancshares, Inc. - Vice Chairman

* H. E. Timanus

Prosperity Bancshares, Inc. - Chairman of the Board

* Kevin J. Hanigan

Prosperity Bancshares, Inc. - President, COO & Director

* Merle Karnes

Prosperity Bank - Chief Credit Officer

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Conference Call Participants

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* Bradley Jason Milsaps

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Jon Glenn Arfstrom

RBC Capital Markets, Research Division - MD of Financial Services Equity Research

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Peter J. Winter

Wedbush Securities Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good morning. Welcome to the Prosperity Bancshares Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [2]

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Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Fourth 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. "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, 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 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [3]

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Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2019 conference call. The combination of LegacyTexas 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 seventh consecutive year, and we are the highest rated Texas bank -- the highest rated Texas-based bank.

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: one, there was a onetime charge of $46.4 million related to the merger; two, the merger was effective on November 1, 2019, so the fourth quarter results reflect only 2 months of income contribution; and three, the net interest margin is elevated somewhat by a higher loan discount accretion income than we expect to have in future quarters. For the first quarter of 2020, we expect approximately $13 million to $14 million pretax in loan discount accretion.

With regard to the financials, net income was $86.1 million for the 3 months ending December 31, 2019, compared with $83.3 million 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 $46.4 million. 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 fourth 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 94,746,000 shares outstanding. With regard to loans, loans at December 31, 2019, were $18.8 billion, an increase of $8.4 billion or 81.7% compared with $10.3 billion at December 31, 2018. Linked-quarter loans increased $8.1 billion or 76.6% from the $10.6 billion 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 million or 2.1% compared with December 31, 2019, and decreased $84 million or 80 basis points on a linked-quarter basis.

Average loans -- the average loans, excluding the impact of the merger, increased $407 million or 4% during 2019. Deposits at December 31, 2019, were $24.2 billion, an increase of $6.9 billion or 42 -- 40.2% compared with $17.257 billion at December 31, 2018. Our linked-quarter deposits increased 7 billion -- $7.2 billion or 42% from $16.9 billion 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 million or 4.6% compared with December 31, 2018, and increased $1.1 billion or 6.7% on a linked-quarter basis.

Asset quality. Our nonperforming assets totaled $62.9 million or 25 basis points of quarterly average interest-earning assets at December 31, 2019, compared with $18.9 million or 10 basis points of quarterly average interest-earning assets at December 31, 2018, and $51 million or 26 basis points of quarterly average interest-earning assets at September 30, 2019. The increase during the fourth quarter 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 it 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 4.7 million 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 sites 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 Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [4]

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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 million compared to $157.2 million for the same period in 2018, an increase of $74.8 million or 47.6%. The increase was primarily due to 2 months of LegacyTexas net interest income and higher loan discount accretion in the fourth quarter 2019. The net interest margin on a tax equivalent basis was 3.66% for the 3 months ended December 31, 2019, compared to 3.15% 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 LegacyTexas net interest income. Noninterest expense was $35.5 million for the 3 months ended December 31, 2019, compared to $29.1 million for the same period in 2018. The increase in noninterest income was primarily due to 2 months of LegacyTexas noninterest income partially offset by the sale and write-down of assets. Noninterest expense for the 3 months ended December 31, 2019, was $156.5 million compared to $80.8 million for the same period in 2018. The increase was primarily due to merger-related expenses of $46.4 million and 2 months of Legacy Texas expenses.

Until the conversion -- sorry, until the system integration and conversion, we expect noninterest expense to range around $120 million to $125 million per quarter. Those are excluding any additional merger-related expenses. We expect to realize a portion of the previously announced cost savings related to the merger, beginning in the third quarter of 2020. The efficiency ratio was 58.07% 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% for the 3 months ended December 31, 2019. The bond portfolio metrics at 12/31/2019 showed a weighted average life of 3.42 years and projected annual cash flows of approximately $2 billion.

And with that, let me turn over the presentation to Tim Timanus on some detail on loans and asset quality.

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H. E. Timanus, Prosperity Bancshares, Inc. - Chairman of the Board [5]

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Thank you, Asylbek. Nonperforming assets at quarter end December 31, 2019, totaled $62.943 million or 33 basis points of loans and other real estate. The December 31, 2019, nonperforming asset total was comprised of $55.684 million in loans, $324,000 in repossessed assets and $6.935 million in other real estate. Of the $62.943 million in nonperforming assets, $15.811 million or 25% are energy credits, $15,487 million of which are service company credits and $324,000 are production company credits.

Since December 31, 2019, $2.259 million 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 million. $1.7 million was added to the allowance of credit losses during the quarter ended December 31, 2019. The average monthly new loan production for the quarter ended December 31, 2019, was $496 million.

Loans outstanding at December 31, 2019, were $18.845 million -- excuse me, $18,000,845,000 (sic) [$18,845,346,000]. The December 31, 2019, loan total is made up of 38% fixed-rate loans, 34% floating rate and 28% variable-rate loans.

I'll now turn it over to Charlotte Rasche.

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [6]

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Thank you, Tim. At this time, we are prepared to answer your questions. Kate, can you please assist us with questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brady Gailey from KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So I wanted to start on the deposit side. Prosperity had some really nice deposit growth, even if you exclude the acquired LegacyTexas deposits. But then if you look on the LegacyTexas 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 LegacyTexas deposits have been shrinking pretty aggressively and Prosperity's has been growing really nicely. So maybe just talk through the dynamics of what happened on the deposit side there?

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [3]

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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 million to $700 million 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 fourth quarter in the last -- let's call it, the last 4 months of last year, we probably chased off a little over $450 million 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 in 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 fund ourselves much cheaper with the deposits that we're generating today than the cost of those deposits.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [4]

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Yes. I'd just mention, that's what -- 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.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [5]

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And just give a little bit color, this is Asylbek. Legacy had about $250 million of a brokerage deposit that was at high cost. And we knew that once we brought in Legacy, we would run them well. That's exactly what did, that would be one of the largest decreases we sold Legacy's...

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [6]

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Yes, historically, we just -- we've never participated in the brokered market.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [7]

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Yes, exactly right. And that's...

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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All right. That's helpful. And then my second question is on tangible 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 LegacyTexas deal. I also have noticed that it looks like the loan mark for LegacyTexas 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 million of a loan mark. It looks like it came in at $294 million.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [9]

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I'll start off. And Asylbek could probably join it or Kevin. The $177 million is the actual reserve mark. I think the rest of it comes from -- Asylbek, the...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [10]

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The -- we call it the 591 loans, which is what yield...

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [11]

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Interest rate, yes.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [12]

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The interest rate difference, so that mark -- about $100 million came from that loans, which we didn't model in our announcement. We were mainly focusing on the credit part, SOP 03 loans.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [13]

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I think when we were talking, we were really just looking, what we think the credit mark was going to be. And I think that we're still spot on, on what we did there.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [14]

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Okay. And then finally, just CECL. I know we talked about an increase of about $20 million, $30 million last quarter. Does that still feel like the right amount for CECL?

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Merle Karnes, Prosperity Bank - Chief Credit Officer [15]

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This is Merle. I guess the range that we would estimate for the CECL reserve total will be between $340 million to $360 million. 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 it'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 million will be actually a reallocation of capital to the reserve.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [16]

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I'm 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 million or $30 million, 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?

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Merle Karnes, Prosperity Bank - Chief Credit Officer [17]

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Well, for...

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [18]

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Just the -- for the -- just the portfolio, not the...

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Merle Karnes, Prosperity Bank - Chief Credit Officer [19]

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The performing loans only?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [20]

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Yes.

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Merle Karnes, Prosperity Bank - Chief Credit Officer [21]

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It's going to be about $108 million.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [22]

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So the total effect to capital would be what?

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Merle Karnes, Prosperity Bank - Chief Credit Officer [23]

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It'll be about $130 million decrease in capital that will be reallocated.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [24]

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I think that's what you're looking for, maybe, Brady.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [25]

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And Brady, this is Asylbek. Just to clarify, when we gave this $20 million to $30 million guidance, that was only on Prosperity books because of the CECL impact, and what Merle just provided, that's including the Legacy books. So just want to clarify that point.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [26]

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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.

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Operator [27]

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Our next question is from Jennifer Demba from SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Question on the net interest margin outlook. As you see it near term, Asylbek, you said the loan discount accretion is going to come down to around $30 million. Can you tell us what you're thinking about the net interest margin with those adjustments as well as deposit pricing?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [29]

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Yes. Okay. So regarding to the -- what we expect near term regarding the fair value income on loans, we expect about $13 million, $14 million, as Mr. Zalman indicated, and using our model, our top line or all-in NIM coming up about between 3.45% and 3.55% range. But if you look at a core basis, we're seeing around mid-3.30s for next few quarters, so on the margin. Regarding to the deposit cost, we came in, in consolidated bank, kind of, same level what we were in the third quarter, and it's due to a few things. We decreased some rates on our deposits. We were able to reprice the high-cost deposit from Legacy at lower rate. So those combination of those brought our cost of deposit to 63 basis points -- or 61 basis points, sorry, that's including noninterest-bearing deposits.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [30]

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And again, I think if you'd have to take a range, I think that we're seeing anything between 3.45%, 3.55%, maybe 3.50% in the middle?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [31]

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That's exactly -- it's all in.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [32]

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On a GAAP basis all in.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [33]

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All in, assuming expected fair value of $13 million to $14 million.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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Okay. And you said, I think in the results, it had a small loss on the sale of assets. Can you give us some color on that?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [35]

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Yes, that was some fixed assets we just rolled down. And due to the Legacy, we have one property that we're going to sell or exit out of it. So we have to market down that property. So there was a few properties.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [36]

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It's just a building. Again, we had 2 offices close together, and we're going to have to sell one of them. And 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.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [37]

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Exactly. So that's a one-off thing in my mind.

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Operator [38]

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Our next question is from Brad Milsaps from Piper Sandler.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [39]

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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 have picked up a few million dollars, 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 '20? Do you expect to reinvest some of those savings that you outlined when you announced the deal, which I think was around 25% of Legacy's expense base? Just kind of curious on how you're thinking about the back half.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [40]

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Bradley, you're absolutely right. I think we did pick up little bit of saving in fourth quarter related to 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 evaluate it, that's -- we're still in line to get 25% savings from the Legacy. And -- but for near term, I mean, we believe is $120 million to $125 million. Yes, if you look at the Legacy's historical cost per quarter they had -- annually was 1 -- about what, $44 million per quarter, so that 25%, we should get $11 million per quarter savings that we're estimating before that.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [41]

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Okay. So there's no plans to necessarily reinvest that? That most of that you feel like should fall out of the expense run rate in the third and fourth quarter?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [42]

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We always operated that if revenue supports, we will always let it loose little bit to reinvest in the bank. So -- but for right now, we're just evaluating that part of it, but 25% savings, we should see that coming in second half of the year.

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Bradley Jason Milsaps, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [43]

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And second question for David. Your comments around your loan losses are always 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 in the 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 and beyond?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [44]

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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 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, have been doing a really good job of moving some of these, haven't you?

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [45]

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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 million. We put a massive effort in the fourth quarter into reducing, particularly distressed energy loans. So that production portfolio dropped by $145 million in the quarter and I would say about $120 million of that were -- consisted 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 for 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 fourth quarter. So it's -- there's been a massive de-risking of the energy book. We're not done yet. We probably have another $50-or-so-million 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've talked historically about moving off somewhere in the neighborhood of $500 million worth of total loans off the Legacy books. That will take anywhere from a year to 1.5 years to do. We've made the most progress early on the most stressed assets.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [46]

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And the faster we can do that, the better for us because, again, I didn't even know if I wanted to get into this. But of this, the $400 million that we have, $400 million in loans that really -- they're performing, but still, when they're in, what you call it? A PC, what?

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [47]

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PCD.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [48]

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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 million or so in the income once we get those either in or out, so.

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Operator [49]

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Our next question is from Peter Winter from Wedbush Securities.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [50]

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I was just wondering, just following up on that question about loans. How much, I guess, you've targeted $500 million you wanted to exit. I'm just wondering how much is left? And how you're thinking about loan growth in 2020?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [51]

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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 million to $500 million. 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 had 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 million increase for overall for the bank or maybe 2.5% if you look at it that way.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [52]

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On a combined basis?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [53]

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Right.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [54]

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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?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [55]

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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 loan committee, and he's asking the questions before I ask them, 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 let Kevin jump in.

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [56]

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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, may have 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 million or $500 million worth of loans, which we're outsourcing. I think you can read out of that. The remaining $7.5 billion 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 as 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.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [57]

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Yes, Peter, I'd say I was at loan committee and their Chief Credit Officers turned our loan down. So there you go. Sam or Dave, one of them, they voted against our loans. So they may be tougher than we are right now.

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H. E. Timanus, Prosperity Bancshares, Inc. - Chairman of the Board [58]

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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 has really been working very well.

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Peter J. Winter, Wedbush Securities Inc., Research Division - MD of Equity Research [59]

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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.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [60]

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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 million note or debenture that Legacy had that actually matures in 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 million 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, there -- I think there are just a lot of synergies, I think.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [61]

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That's exactly right. This is Asylbek. I mean first thing we did, they had about a $15 million trust preferred with higher cost. We paid that off. And what Mr. Zalman mentioned that we have is subordinate notes that we can call at the end of the 2020 that would help definitely with the margin. And we are looking through those different items.

As you -- as I mentioned earlier, we have about $2 billion cash inflow from the bond portfolio. We could reinvest or use that funding to fund some warehouse or the loans. So there are 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.

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [62]

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Yes, and the final piece of that is we're not done repricing the 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 is opportunities throughout the balance sheet, if you think about it, for us to work on improving.

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Operator [63]

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Our next question is from Ebrahim Poonawala from Bank of America Securities.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [64]

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I guess just one first follow-up. I guess this time on the GAAP margin, so you mentioned the $13.5 million or so in accretion in the next quarter. Is -- like the -- outside of, like, any one-off prepayments, if you can talk to about how that should trend for 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 that decline would be?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [65]

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Yes, I agree with you. The range -- the guidance we give, that's more on the first or second quarter. But as you know, the loans gets paid off and due to maturity, that fair value will decrease over a year or 2. So that's exactly right.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [66]

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What are we looking in total accretion, we think, for the first year, $50 million?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [67]

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So if you look at for $50 million on total first -- for first year, but I think it's going to be a little bit of a higher in the first one and then slows -- kind of little bit slows down in the subsequent quarters.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [68]

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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 the 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.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [69]

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Completely agree with that.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [70]

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Appreciate that, David. And I think when we think about that $50 million, and I know it's a bit loud there? Like what's the level of reset, if we think about 2021? Does that $50 million fall by half? Or any sense of what will be remaining after the end of the year?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [71]

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Yes, if you look at our model and the way we're projecting, I think in 2021, it will be half of what -- about $25 million to maybe $30 million, but definitely, it's going to drop off.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [72]

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Got it. That's helpful. And just moving on the expense side. So the $120 million to $125 million guidance you gave, there's about $11 million of savings if we get all the savings. Do we get to that low $110 million type of expense run rate by the fourth quarter? Or do you think there might be still a little more work to be done in 4Q, so we don't see that until the next year?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [73]

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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 million savings coming in the fourth quarter of this year.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [74]

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Maybe, third quarter.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [75]

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Yes, starting the third quarter, but if you are looking at fourth, definitely, we're going to get that savings.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [76]

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Understood. And if I can sneak one in, David, for you. You -- actually, I was slightly surprised by your outlook on doing more M&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&A opportunities?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [77]

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Look, Texas is good. Texas and Oklahoma is good. We talked about it. When we did the deal with Legacy, we -- I think I'd 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 -- there are 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.

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Operator [78]

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(Operator Instructions) Our next question is from Michael Rose from Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [79]

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Just wanted to start off, we've seen a fair amount of consolidation and M&A activity, 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?

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [80]

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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. It's -- 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 and how it's structured. So we're deliberate about it, opportunistic about it. In terms of retention of people, I think Prosperity, their retention over the years has been outstanding. As I've gone, 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. It 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.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [81]

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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 the issue, that hasn't been the way we've done business in the past.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [82]

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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?

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [83]

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I think there are a few possibility. Let's talk about our trust department. The 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 noninterest income side of it. I mean to quantify, we don't have that quantification, but that -- there are a few things we can do related to the legacy.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [84]

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Yes, I think just overall, 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 billion, $1.5 billion 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 there's just a lot of synergies there. It adds a lot.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [85]

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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, et cetera.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [86]

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Well, we just switched our core server to Fiserv. I mean our...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [87]

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Commercial.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [88]

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Commercial to Fiserv. But -- and again, we -- but we've done a lot, assess the server. Our...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [89]

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Internet banking.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [90]

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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.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [91]

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Exactly.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [92]

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And that took us about a year to really get in place.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [93]

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Exactly right because we started the process of upgrading our treasury management and 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...

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [94]

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I do think of technology in the future, I mean there's only a few aggregators out there once Fiserv, Jack Henry and that. 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 that's -- I think that's really what is pushing more and more banks together like that.

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Kevin J. Hanigan, Prosperity Bancshares, Inc. - President, COO & Director [95]

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Yes, Michael, this is Kevin. I think the consensus of those of us in the room is that $11 million 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 moving.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [96]

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I think that's right, Asylbek. 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.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [97]

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But -- correct.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [98]

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As far as all these numbers are concerned. So...

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [99]

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And because of this integration that we're switching this treasury management, Internet banking, we've been working for years. So that's already built in our financials.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [100]

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So if there's a big number that comes down the road, it's going to be a real surprise.

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Asylbek Osmonov, Prosperity Bancshares, Inc. - CFO [101]

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I agree with that.

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Operator [102]

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Our next question is from Jon Arfstrom from RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [103]

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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?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [104]

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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 the way it's supposed to be working. And then we saw a lot of other deals just being sold. Eddie, you may want to give some color on it at all? Like the...

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Edward Z. Safady, Prosperity Bancshares, Inc. - Vice Chairman [105]

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Just fourth quarter, there was a lot of activity in the fourth quarter, people trying to close deals before year-end. And as David indicated, there is a lot of competitive product out there on the nonbank sources on refinancing. The nonrecourse seems to be a very big carrier, as you could well imagine, and if that availability is there, plus the 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 fourth quarter was just very active on all fronts in the payoffs and refinances.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [106]

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Okay, good. That's helpful. And then, Tim, you talked about the monthly production average of almost $500 million. 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, if that makes sense?

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H. E. Timanus, Prosperity Bancshares, Inc. - Chairman of the Board [107]

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It does. Just to put it in perspective, as I said earlier, the average monthly production for the full quarter was $496 million, and that was essentially $271 million on the Prosperity side and $225 million 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, any time 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 seeing right now occurred in the fourth quarter. I don't know whether I'm completely helping you or not. But...

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [108]

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No, that helps.

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [109]

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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 first quarter, but I would kind of stick with the 4% to 5% is what I would think.

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H. E. Timanus, Prosperity Bancshares, Inc. - Chairman of the Board [110]

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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.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [111]

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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&A that you would consider?

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David E. Zalman, Prosperity Bancshares, Inc. - Senior Chairman & CEO [112]

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I want to be careful because if we're in -- you're telling me Dallas or Houston or Austin and there's a $500 million or $600 million bank there, a lot of people will say, you shouldn't mess with that. On the other hand, it may be something that we would consider if it's in a market you tell me we were going to go. If you tell me we're going to go to another state and buy a $1 billion bank, I'd have to say that probably wouldn't make a whole lot of sense. If we move to another state, we have to be become -- be able to become a major player there within a short period of time.

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Operator [113]

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

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Charlotte M. Rasche, Prosperity Bancshares, Inc. - Executive VP & General Counsel [114]

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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.

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Operator [115]

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