Prosperity Bancshares Inc
NYSE:PB
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Prosperity Bancshares Inc
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Good morning. Welcome to Prosperity Bancshares Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
I would like to now turn the conference over to Charlotte Rasche. Please go ahead.
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; May Stanford 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 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 the 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.
Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2019 conference call. Excuse me. 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 banks. Before we review the highlights for the quarter, I want to remind everyone that there are many moving parts in the results, including the following.
One, there was a one-time 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 two 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 pre-tax in loan discount accretion.
With regard to the financials. Net income was $86.1 million for the three 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 three months ending December 31, 2019, compared with the $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 two 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, 2018, and decreased $84 million or 80 basis points on a linked-quarter basis. 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 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 or non-performing 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 two 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 conversations 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 continued to experience employment and population growth, with many companies moving to these states because of the favorable tax environments 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.
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three 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 two 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 three 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 two months of LegacyTexas net interest income.
Noninterest income was $35.5 million for the three 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 two months of LegacyTexas noninterest income, partially offset by the sale and write-down of assets.
Noninterest expense for the three 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 the merger-related expenses of $46.4 million and two months of LegacyTexas 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 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 three months ended December 31, 2019 compared to 43.2% for the same period in 2018 and 43.7% for the three months ended September 30, 2019. Excluding merger-related expenses, the efficiency ratio was 40.85% for the three 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.
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 three months ended December 31, 2019 were $1.291 million. $1.700 million was added to the allowance for credit losses during the quarter-ended December 31, 2019. The average monthly new loan production for the quarter-ended December 31, 2019 was $496 million.
Loans outstanding at December 31, 2019 were $18.845 million -- excuse me, $18.845 billion. The December 31, 2019 loan total is made up of 38% fixed rate loans, 34% floating rate, and 28% variable rate loans.
I will now turn it over to Charlotte Rasche.
Thank you, Tim. At this time, we are prepared to answer your questions. Kate, can you please assist us with questions?
Yes. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brady Gailey from KBW. Go ahead.
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 just seems like LegacyTexas deposits have been shrinking pretty aggressively and Prosperity's has been growing really nicely. So maybe just talk to the dynamics of what happened on the deposits side there?
Sure, Brady. This is Kevin. I would say we're executing exactly as we thought we would, as it pertains to the deposits 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 with the 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 -- 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 four 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 and that we started earlier than we thought we would start. So I view that as nothing but a positive for the Company, because we can fund ourselves much cheaper with the deposits that we're generating today than the cost of those deposits.
Yes, I would just mention, -- just reiterate what Kevin said, that was always our intention, when we put the banks together and what made this combination so good. They had the loans and we were inundated with core deposits and so we're just -- we're looking at the strengths of both sides and this just makes a lot of sense.
And just give a little bit color. This is Asylbek. Legacy had about 250 or a brokerage deposit that was at high cost and we knew that once we brought in Legacy, we would run them off. That's exactly what we did. That would be one of the largest decreases we saw in Legacy.
Yes, historically we just -- we've never participated in the brokered market.
Yes, exactly right. And that's...
All right. That's helpful. And then my second question is on tangible book value per share. It seemed to come in a little lower than I was modeling. I'm not sure if that's related to the LegacyTexas deal, and I also 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. And it looks like it came in at $294 million?
I'll start off and Asylbek could probably join in or Kevin. The $177 million is the actual reserve mark. I think the rest of it comes from -- Asylbek?
The -- we call it FASB 91 loans, which is a yield diff -- yield rate -- interest rate difference on that market, about $100 million came from that loans, which we didn't model in our announcement. We were mainly focusing on the credit part of those SOP 03 loans.
And 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.
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?
This is Merle. I guess the range that we would estimate for the CECL reserve total will be between $340 million and $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. That will be reclassified as purchased credit deteriorated or PCD on March 31. That'll be just a reallocation within the loan block by debiting gross loans and crediting the reserve. And the other half of the change, about $130 million will be actually a reallocation of capital to the reserve.
Let me try to put it in English, if that's okay. We have our $80-something million in the 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, $30 million, I think that we're adding to our portfolio to CECL, and then we're adding for the Legacy portfolio to CECL, how much, Merle?
Well, for…
Just for the existing portfolio, not for...
The performing loans only?
Yes.
It's going to be about $108 million.
So the total effect to capital would be what?
It'll be about $130 million decrease in capital that will be reallocated.
I think that's what they're looking for maybe, Brady.
And Brady, this is Asylbek. Just to clarify, when we gave this $20 million, $30 million guidance, that was only on Prosperity books. And because CECL impact and what Merle just provided, that's including the Legacy book. So, just want to clarify that point.
So, 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, high reserve and we understand that.
Our next question is from Jennifer Demba from SunTrust. Go ahead.
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?
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, 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 are seeing around mid 3.30s for next few quarters, so on that the margin.
Regarding to the deposit cost, we came-in in consolidated bank kind of same level what we were in the third quarter, due to these few things. We decreased some rates on our deposits. We were able to re-price the high-cost deposit from Legacy at lower rate. So those combination of those brought our cost of deposit to 63 basis points -- 61 basis points, sorry, that's including non-interest bearing deposits.
And again, I think, if you would have to take a range, I think that we're seeing anything between 3.45% and 3.55%, maybe 3.50% in the middle.
That's exactly how we...
On a GAAP basis all-in.
All in assuming the expected fair value of $13 million to $14 million.
Okay. And you said, I think in the results you had a small loss on the sale of assets. Can you give us some color on that?
Yes, there was some fixed assets we just wrote down and due to the Legacy, we have one property that we're going to sell or exit out of it. So we have to mark it down that property. So there was few properties.
And it's just a building. Again, we have two offices close together and we are going to have to sell one of them. And again, we took a bigger mark than maybe it is. But if it is, we'll bring the rest of the money back into income. But we didn't want to come back twice.
Exactly. So that's a one-off thing in my mind.
Our next question is from Brad Milsaps from Piper Sandler. Go ahead.
I appreciate all the color. I wanted to follow up on the expense guidance. It sounds like you're really kind of aiming for the back half of the year to really see some of the cost savings start to come through. It looks like you may 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 were around 25% of Legacy's expense base just kind of curious on how you're thinking about the back half?
Brad, you're absolutely right. I think we did pick up a little bit of savings in the 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 evaluated that, that was still in line to get 25% savings from the Legacy, and but for near-term, I mean, we believe it's $120 million to $125 million.
Yes, if you look at the Legacy's historical cost per quarter, they had the, annually was -- about what, $44 million per quarter. So the 25%, we should get $11 million per quarter savings. That's we are estimating.
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?
I mean, we always operated that, if you know 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.
And second question for David, your comments around your loan loss reserve is going to be quite massive relative to what you've had particularly given the low loss rates you've had. I know there are a lot of moving parts with pay-offs and what could happen to Legacy book and your own book, but given that size of reserve, would you imagine your provisioning needs are going to be pretty minimal, all else equal in 2020 and beyond?
I hope so. You would hope so. I mean, you never know, we put the reserve and it's not some -- when you put a reserve, it's not something you just pull out of the air, it's based on -- it's based on what you see. And so, hopefully if we can do better than what we see, then I think that's absolutely right. And really, Kevin, you have been able to move some of these loans already. You have been doing a really good job of moving some of these, haven't you?
Yes, particularly on the energy side, Brady, I guess we ended up, September, if we go back to September with reserve base loans of $512 million, we put a massive effort in the fourth quarter into reducing particularly the stressed energy loans. So that production portfolio dropped by $145 million in the quarter. And I would say about $120 million of that were consistent of the most stressed credits within the entire portfolio. So we got the biggest, the baddest and the worst, are off our books.
So the way I think about that is, we mitigated the risk of those loans through the mark. We eliminated the risk of those loans by getting off the books, and in 100% of those cases, we did it at values better than the marks we put on them, which helped add to the accretion number in the fourth quarter. So it's -- there has been a massive de-risking of the energy book. We're not done yet.
We probably have another $50 million or so at least to go in the energy portfolio based upon what we know today. That number could grow if energy prices back up, but as we sit here today, we've made substantial progress. We still have some more to go, in particular on the energy. We have talked historically about moving off somewhere in the neighborhood of $500 million worth of total loans off the Legacy books. And that will take anywhere from a year to year-and-a-half to do. We've made the most progress early on the most stressed assets.
And the faster we can do that, the better for us, because again, I didn't even know, if I want to get into this, but of this, the $400 million that -- we have $400 million in loans that really, they're performing, but still when they're in, what do you call it, PC what?
PCD.
PCD. We still don't, we don't accrue income on them and we won't take that income in until we collect those loans. So it's really beneficial for us. That helps us with about another $18 million or so in the income once we get those either in or out. So…
Our next question is from Peter Winter from Wedbush Securities. Go ahead.
I was just wondering, just following up on that question about loans, how much, I guess you've targeted $500 million and you wanted to exit. I'm just wondering how much is left and how you're thinking about loan growth in 2020?
I think that basically we've said this before that, you probably won't see any growth on the Legacy side, because the growth -- because we're trying to outsource or -- 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 two years we didn't hit quite 5%, we hit 4% the year before, and I think we averaged about 4% growth this year, but got killed in the last quarter. But I think, so you're probably looking around $500 million increase for -- overall for the bank or maybe 2.5% if you look at it that way.
On a combined basis?
Right.
Okay. And then I'm just wondering, big picture, David, how are things trending in loan committee? Are you finding that the two companies are kind of on the same page from a risk tolerance standpoint?
Well, I'm going to -- I'll let Kevin jump in. But for me, it's better than anything beyond my ever I thought it could be. I mean sometimes I see Kevin in the loan committee and he's asking the questions before I ask him, but it would be my same exact questions. But again, knocking on the wood, something can always go wrong, but the reasons, it's I can't say how successful this thing has really become because of the people at Legacy. I mean they are really on the team, I think we are -- I really, maybe I am -- maybe I feel really great about it. But I'll let Kevin jump in.
No, it's the same. I think we came into this with our lenders, and there is about 50 or 53 of them, all knowing we were going to reduce the risk of our loan portfolio, whether we did a merger or not. They have been aware of that for the better part of the 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 that the world thinks about when they think about these two 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, we've all identified and if you can find and structure good loans and bring them a loan committee, they're going to get done.
Yes, Peter, I'd say, I was at loan committee and their Chief Credit Officers turned our loan down. So there you go a Medavante they voted against our loan. So they may be tougher than we are right now.
We might clarify that. Peter, this is Tim Timanus. There are three Legacy people on our loan committee now, two in addition to Kevin. So it's Kevin and two of his solid credit quality type folks and they've been extremely helpful and everything has really been working very well.
That's helpful. And then just one final question on the core margin, you talked about it being like the 3.30% range for the next few quarters. It does seem like that there is a lot of opportunities to optimize the balance sheet as you bring the two companies together, that the core margin could trend upwards. I'm just wondering if you could talk about the quarterly trend?
Well, somebody else may want to jump in. But I mean those are just what-if questions. But I think for sure, if everything that you're saying, I think the longer we go, we'll be optimize -- we'll be able to optimize a lot of things. I mean, you've got a $125 million note or debenture that Legacy had, that actually matures at the end of this year. So I mean that really adds to the bottom line.
I talked just a minute ago about the $400 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, I think there are just a lot of synergies, I think.
That's exactly right. This is Asylbek. I mean the first thing we did, they had about $50 million trust preferred with higher cost. We paid that off. And what Mr. Zalman mentioned that, we have this subordinate note 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 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 is 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, as we continue our plan.
Yes, and the final piece of that is is we're not done repricing the liabilities side, the deposit liabilities side at Legacy, because there is still work to be done. Much has been done, but there is more to be done. So there is opportunities throughout the balance sheet, if you think about it, for us to to work on improving.
Our next question is from Ebrahim Poonawala from Bank of America Securities. Go ahead.
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 it like outside of like any one-off prepayments? If you can talk too about how that should trend over the rest of the year? And if we can, even into next year, like should we see a steady decline? And if you can quantify what the pace of the decline would be?
Yes, I agree with you. The range we -- the guidance we'll give, that's a more first or second quarter. But as you know the loans gets paid off and due to the maturity, that fair value will decrease over a year or two. So that's exactly right.
What are we looking in total accretion, we think for the first year, $50 million?
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 higher than the first one and then kind of little bit slows down in subsequent quarters.
Just keep in mind, we're giving you numbers, but in my history and experience with this, it's very lumpy. I mean, sometimes we're giving you this, and then we collect a loan that we didn't -- 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 one number, but it could be -- it could end up being a lot different too. So...
Completely agree with that.
Appreciate that, David. And I think when we think about that $50 million and I know it's a little loud there like what's the level of reset, if you think about 2021? Does that $50 million fall by half? Or any sense of what will be remaining after the end of the year?
Yes, if you look at our model and the way we're projecting, 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.
Got it. And that's helpful. And just moving on the expense side. So the $120 million to $125 million guidance you gave, there is 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 next year?
So I mean, based on what we see right now, this all depends on the integration, right? Most of the cost saving comes around the 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.
Maybe third quarter.
Yes, starting the third quarter, but if you're looking at fourth quarter, definitely we're going to get that.
Understood. 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 are 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?
Texas is good. Texas and Oklahoma is good. We talked about it. When we did the deal with Legacy, I think I had mentioned in calls, we were dealing with two or three different banks at one time. And we went for a long time and didn't do anything. And finally, we pulled the trigger and, Legacy and us joined up.
But there were still some opportunities out there that we were working on, that again, our first concern, I wouldn't say concern, but our first objective is to get this completely fully integrated in June. But as good as it's going right now and I guess something can always happen, but if it keeps going as good as it's going right now, I think by the end of next year, there is a possibility of another deal, possible.
[Operator Instructions] Our next question is from Michael Rose from Raymond James. Go ahead.
Hey, thanks for taking my questions. Just wanted to start off. We've seen fair amount of consolidation in M&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? Thanks.
Michael, this is Kevin. There is obviously a lot of disruption. We're opportunistic when we look about hiring people, but we want to make sure they fit. 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, 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 among the markets and meet some folks, there's a lot of long-tenured employees here. As we turn to the Legacy side, our 50-plus lenders, all but one of those is under a contract. So people can call, but they're not going to have much success. And our folks are happy. So I'm not as worried about retention for us.
And again on the opportunity side, we're deliberate. We're going to make sure it fits and they can produce in this environment before we pull the trigger. That doesn't mean we won't, and we're always talking to folks. But we're deliberate about making sure the fit is somebody that's going to last.
And I would add just as a general culture of our bank, we've not really gone out. And that was sometimes it's opportunistic, but we try not to go out when somebody is having issues to try to hire their people. Now, it doesn't mean that we wouldn't, hire their people, if those people come to us directly. But as far as us going and soliciting the situation in another bank that's having issue, that hasn't been the way we've done business in the past.
Okay. That's helpful. And maybe just one follow-up for me. Now that you've had a, I guess a couple of months to kind of look at the numbers on a combined basis and kind of the opportunity set. Any greater color on what you may see as some potential revenue synergies as this gets more integrated and are you able to provide any quantification at this point? Thanks.
I think there are a few possibility, let's talk about our trust department. The Legacy didn't have trust department that will be beneficial for us, because we are picking up good territory in the Dallas-Fort Worth area. There is opportunity for there. And there is other opportunities that we can expand from the noninterest income side of it. I mean to quantify, we don't have the quantification, but there are a few things we can do related to Legacy.
And 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 it's just a lot of synergies there. It has a lot.
And just to piggyback on that question. Are there any technology investments that you have planned that would eat into the potential cost savings that you laid out for the deal? I think there is a commercial loan system you guys are putting into place etc.?
Well, we just switched our core server to Fiserv, I mean our...
Commercial.
Commercial to Fiserv. But, and again, we -- we've done a lot to assess a server or...
Internet banking.
Internet banking, but again, mostly we went on the platform of Fiserv, but we were on a number of different platforms to begin with.
Exactly.
And that took us about a year to really get in place. So...
Yes, 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 as those...
I do think its technology in the future. I mean there's only a few aggregators out there, once Fiserv, Jack Henry & At., I think in the future, banks -- one of the reasons banks are going to merge and consolidate is because of the aggregators, I don't know if they're offering a good enough product that is going to really be a -- 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, they might be. And that's -- I think that's really what is pushing more and more banks together like that.
Yes, Michael, this is Kevin. I think the consensus of those of us in the room is that $11 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 money.
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 are taken into consideration.
Correct.
As far as all these numbers are concerned.
And because of this integration that we switch in this treasury management, internet banking we've been working for years. So that's already built-in in our financials.
So if there is a big number that comes down the road, it's going to be a real surprise.
I agree with that.
Very clear. Thank you for taking my questions.
Our next question is from Jon Arfstrom from RBC Capital Markets. Go ahead.
David, one of the comments you made, loan growth, you said you had killed last quarter on growth. Can you just expand on that a little bit and talk a little bit about what happened?
Yes, I mean, basically the pay-offs in the last quarter were just unbelievable. We saw a lot of our -- well, a number of our large projects go into final financing, where they mostly from insurance companies, where they were offering fixed rates for longer periods of time, cash-out and no personal guarantee. So we couldn't really hold our customers. It was good for our customers. That's what's supposed to be working. And we saw other deals just being sold. Eddie, you may want to give some color on it, if at all?
Fourth quarter, there was a lot of activity in the fourth quarter as people were trying to close deals before year-end. And as David indicated, there is a lot of competitive product out there on the non-bank sources on refinancing. The non-recourse seems to be a very big carrier, as you could well imagine and if that availability is there, plus the cash-out component, longer amortizations and the 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 pay-offs and refinances.
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 increased, but I'm just curious when you guys look at the pipelines today, can you talk a little bit about geography and size and type? And if it's any different than what you saw a quarter ago before the merger closed? Does that makes sense?
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 three 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 is 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 three months. So it's hard to size it up and hard to predict. I don't see a whole lot different for the next quarter actually than what we're saying right now occurred in the fourth quarter. I don't know whether I'm completely helping you or not, but...
Yes, no, that helps.
I would say that, this year, the last quarter was terrible, the year before it was good. So I think you always 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.
That's right. And I guess the one thing we can say with certainty at this point in time is, we don't see any economic deterioration in the geographies that we operate in. Now something could happen tonight that could cause that to change. That's just the way the world works. But right now, everything seems stable and consistent.
Okay. That helps. And then last one, David for you or maybe Kevin. Just given the larger balance sheet, I wanted to follow up on M&A, won't hold you to it, but is there anything that doesn't make sense in terms of size, meaning is there kind of a minimum cut-off that you look at today with the balance sheet of over $30 billion to maybe pre-merger before you might consider, that you wouldn't consider today?
I want to be careful, because if we are in, if you tell me Dallas or Houston or Austin and there is a $500 million or $600 million bank there, lot of people would 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, if 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 would have to say that probably wouldn't make a whole lot of sense. If we move to another state, we have to be able to become a major player there within a short period of time
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.
Thank you, Kate. Thank you, ladies and gentlemen for taking the time to participate in our call today. We appreciate the support that we get for our company and we will continue to work on building shareholder value.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.