Earnings Call
Prosperity Bancshares Inc (PB)
Earnings Call Transcript - PB Q4 2020
Operator, Operator
Good day, and welcome to the Prosperity Bancshares Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.
Charlotte Rasche, Executive Vice President and General Counsel
Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' fourth quarter 2020 earnings conference call. This call is being broadcast live over the internet at prosperitybankusa.com and will be available for replay for the next few weeks. I'm Charlotte Rasche, 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 the 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, Tom. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such may involve known and unknown risks, uncertainties, and other factors, which may cause the actual results or performance of Prosperity Bancshares to be materially different from future results or performance expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different 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.
David Zalman, Senior Chairman and Chief Executive Officer
Thank you, Charlotte. I want to welcome and thank everyone for joining our fourth quarter 2020 conference call. Prosperity achieved some of the best results in our history, largely due to the hard work of our team at Prosperity and LegacyTexas, which contributed to the success of our merger. Our annualized return on average assets for the three months ending December 31, 2020, was 1.63%, with a return of 8.98% on average common equity and 19.5% on average tangible common equity. Prosperity's efficiency ratio, excluding net gains and losses on asset sales and taxes, was 40.7% for the three months ended December 31, 2020. Our net income for this period was $137 million, up from $86 million in the same quarter of 2019, although the 2019 figure included $46.4 million in merger-related expenses. Our earnings per diluted common share were $1.48 for the three months ended December 31, 2020, compared to $1.01 for the same period in 2019, impacted by those merger-related costs in the earlier quarter. As of December 31, 2020, our loans stood at $20.2 billion, an increase of $1.4 billion or 7.4% from $18.8 billion a year earlier. However, linked quarter loans decreased by $548 million or 2.6% from $20.7 billion on September 30, 2020, mainly due to a $430 million decline in PPP loans. We are also actively reducing loans identified at LegacyTexas that we plan to exit. At the end of 2020, we had $963 million in outstanding PPP loans. Our deposits reached $27.3 billion as of December 31, 2020, an increase of $3.1 billion or 13% compared to $24.2 billion the previous year, with linked quarter deposits rising by $901 million or 3.4% from $26.4 billion on September 30, 2020. We continue to observe growing deposit balances, partly due to stimulus payments and increased savings amid economic uncertainties. This trend may shift as vaccinations increase and we return to a more typical daily life. Our asset quality improved, with non-performing assets decreasing by $10 million or 14.3% from the previous quarter, totaling $59 million or 20 basis points of quarterly average interest-earning assets as of December 31, 2020, down from $62 million or 25 basis points a year earlier, and compared to $69 million or 24 basis points on September 30, 2020. Regarding acquisitions, we anticipate increased M&A activity, as highlighted by PNC's recent acquisition of BBVA and other significant transactions. Rising bank stock prices encourage sellers, and many banks are confronting lower net interest margins and higher operational costs related to technology investments. These conditions, along with potential regulatory pressures, may lead more bankers to consider strategic options, including sales. We are willing to explore acquisition opportunities that align with our shareholders' interests and enhance our earnings. On the economic front, Texas and Oklahoma continue to thrive, attracting companies like HP and Oracle, and Tesla's major Texas expansion is noteworthy. Samsung also announced a $10 billion plant expansion in the Austin area. The Federal Reserve Bank of Dallas forecasts a nationwide GDP growth of 5% by the end of 2021 and an unemployment rate of 4.5%, though growth is expected to be slower in the first half of the year, building momentum in the latter half. We believe Texas will experience a higher growth rate than other states in the coming years. While we anticipate challenges such as increased tax rates affecting income and continued low interest rates impacting our net interest margin, a steeper yield curve could help alleviate these issues. I want to express my gratitude to our customers, associates, directors, and shareholders for contributing to the success of our bank. Thank you for your continued support. I will now hand over the discussion to Asylbek Osmonov, our Chief Financial Officer, to cover some specific financial results we achieved. Asylbek?
Asylbek Osmonov, Chief Financial Officer
Thank you, Mr. Zalman. Good morning, everyone. Net interest income before provision for credit losses for the three months ended December 31, 2020 was $257.6 million, compared to $232 million for the same period in 2019, an increase of $25.6 million or 11%. The increase was primarily due to three months of combined bank earnings for the fourth quarter 2020, resulting from the Legacy merger on November 1, 2019, and reduced cost of funds, partially offset by the decrease in the loan discount accretion of $7.7 million. The net interest margin on a tax equivalent basis was 3.49% for the three months ended December 31, 2020, compared to 3.66% for the same period in 2019, and 3.57% for the quarter ended September 30, 2020. Excluding purchase accounting adjustments, the core net interest margin for the quarter ended December 31, 2020, was 3.26% compared to 3.26% for the same period in 2019 and 3.25% for the quarter ended September 30, 2020. Noninterest income was $36.5 million for the three months ended December 31, 2020, compared to $35.5 million for the same period in 2019 and $34.9 million for the quarter ended September 30, 2020. Noninterest expense for the three months ended December 31, 2020, was $120.2 million compared to $156.5 million for the same period in 2019, which included $46.4 million in merger-related expenses. On a linked quarter basis, noninterest expense increased $2.3 million, primarily due to salaries and benefits. For the first quarter of 2021, we expect noninterest expense of $118 million to $120 million, which includes elevated employment-related taxes for vested restricted stock. The efficiency ratio was 40.8% for the three months ended December 31, 2020, compared to 58.1% for the same period in 2019, which included $46.4 million in merger-related expenses, and 40.2% for the three months ended September 30, 2020. We estimate fair value loan income for the first quarter of 2021 to be around $7 million to $10 million, based on the current fair value discount for each loan, amortized over its remaining loan life. This does not account for additional discount accretion income that may occur due to early loan paydowns or payoffs which cannot be accurately estimated. In the fourth quarter of 2020, we recognized $10 million from the fair value loan amortization and additional $6 million from early payoffs for a total of $16.1 million in fair value loan income. The bond portfolio metrics at December 31, 2020 showed a weighted average life of 2.8 years and projected annual cash flows of approximately $2.4 billion. And with that, let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Tim?
Tim Timanus, Chairman
Thank you, Asylbek. Our nonperforming assets at quarter-end December 31, 2020, totaled $59,570,000 or 29 basis points of loans and other real estate, compared to $69,542,000 or 33 basis points at September 30, 2020. This represents approximately a 14% decline. The December 31, 2020, nonperforming asset total was made up of $48,884,000 in loans, $93,000 in repossessed assets, and $10,593,000 in other real estate. Of the $59,570,000 in nonperforming assets, $10,682,000 or 18% are energy credits, $10,147,000 of which are service company credits and $535,000 are production credits. Since December 31, 2020, $2,715,000 in nonperforming assets have been put under contract for sale. This represents approximately 5% of the nonperforming assets. Net charge-offs for the three months ended December 31, 2020, were $7,567,000 compared to $10,570,000 for the quarter ended September 30, 2020. No dollars were added to the allowance for credit losses during the quarter ended December 31, 2020. The average monthly new loan production for the quarter ended December 31, 2020, was $439 million. Loans outstanding at December 31, 2020, were $20.2 billion, which includes $963.2 million in PPP loans. The December 31, 2020 loan total is made up of 38% fixed-rate loans, 38% floating-rate loans, and 24% resetting at specific intervals. I'll now turn it over to Charlotte Rasche.
Charlotte Rasche, Executive Vice President and General Counsel
Thank you, Tim. At this time, we are prepared to answer your questions. Tom, can you please assist us with questions?
Operator, Operator
Our first question comes from Jennifer Demba with Truist Securities.
Jennifer Demba, Analyst
David, do you still have some LegacyTexas loans that you want to exit from that portfolio? And what loan growth do you expect from Prosperity this year, considering the demand you are observing and the payoffs you anticipate?
David Zalman, Senior Chairman and Chief Executive Officer
I'm going to throw a number out here and Kevin can jump in here. But, I think there's probably about $200 million still remaining of loans that we plan on exiting from the Legacy transaction. And I would say that from what we're seeing right now, I think, you're going to probably see a slower first half of the year in loan growth and probably will pick up in the second half of the year. And so, we're shooting for about a 3% to 5% organic growth rate for the next year.
Jennifer Demba, Analyst
And what would be left to exit out of that legacy portfolio?
David Zalman, Senior Chairman and Chief Executive Officer
What would be left?
Kevin Hanigan, President and Chief Operating Officer
Yes. It’s Kevin. Jennifer, it's Kevin. It's really a combination. I think, there might be one oil and gas deal left to exit, but that oil and gas portfolio is in pretty good shape with the stages of the game. The remaining $200 million is across several portfolios. There's some C&I stuff in there, and there's some commercial real estate loans in there as well.
David Zalman, Senior Chairman and Chief Executive Officer
I'd also add that all the money that we had set aside for the PCD loans, which was about over $400 million to start with, the ones that we have gotten out of so far and most of the charge-offs that you see even this quarter, were from those loans that we got out of. But, we actually had more money reserved than what we lost on them. And again, under the new CECL accounting, basically, it was just moved from a specific reserve to more of a general reserve. So, we actually picked up some money in those categories too.
Jennifer Demba, Analyst
Okay. My second question is on mortgage lending. How big a headwind do you think that's going to be going forward for Prosperity?
Eddie Safady, Vice Chairman
Hey Jennifer, this is Eddie. Are you talking about regular mortgage or mortgage warehouse?
Jennifer Demba, Analyst
Both.
Eddie Safady, Vice Chairman
On the mortgage side, usually, there is a slowdown in the fourth quarter, but we've actually seen a record month in the number of applications. So, it's very robust in Texas. And about 65% of what we're seeing is purchase versus refi. So, I think, we're going to continue to see some pretty strong demand in the short term here. Interest rates are going to remain low. In some areas, probably any slowdown would be from lack of inventory.
Kevin Hanigan, President and Chief Operating Officer
Yes, Jennifer, I'll take it from the warehouse perspective. I believe this year may present some challenges. According to the Mortgage Bankers Association's forecast for January, predicted volumes may drop. It's difficult to be certain in this business with fluctuating rates. Their year-over-year forecast indicates a decrease of just over 27%, with refinances halving and purchase volume increasing significantly. We'll see how that unfolds. We're currently in a seasonally low period. After achieving our best quarter ever, ending at over $2.8 billion, our balances closed last night at about $2.2 billion. Looking ahead to this first quarter, I wouldn’t be surprised if our average balance hovers around $2.15 billion, a noticeable drop from the $2.6 billion average in the fourth quarter. As a group, we are looking to bring in new talent. Our goal is to attract more customers and offset some of the industry volume losses by onboarding new clients.
Operator, Operator
The next question comes from Dave Rochester with Compass Point. Please go ahead.
Dave Rochester, Analyst
Just a follow-up on that loan growth commentary from earlier. That 3% to 5% loan growth guide for this year, is that net the $200 million runoff? And then, are you expecting all that to run off this year?
David Zalman, Senior Chairman and Chief Executive Officer
The 3% to 5% would include the runoff, and I’m not sure we will have the entire $200 million gone by the end of the year. However, if I had to estimate, I would say around $100 million of it.
Dave Rochester, Analyst
Okay. And then, the warehouse level you were talking about the potential average for this quarter, are you expecting that to effectively be the bottom for this year and to trend up in 2Q, which I think it normally does, just given seasonality and whatnot?
Kevin Hanigan, President and Chief Operating Officer
Yes. We would anticipate those numbers to increase. January tends to be slow nationwide, and this is a national program for us, though Texas has remained quite strong. Looking across the country, January's volume has so far been 76% geared towards refinancing. It's a typical January when purchase volumes are low because many transactions that close in January relate to properties purchased in December, which is generally not a peak home buying month. This year might be particularly impacted due to the pandemic. I believe we have already seen our lowest volume for the quarter, which was $2.1 billion a few days ago, and we have improved slightly from that point. Therefore, I think February will see some improvement, and March should also be better. However, overall, this quarter will likely be down. The second quarter should perform well, while the third quarter is usually our strongest.
Dave Rochester, Analyst
Yes. Okay. I appreciate the color there. On expenses, I appreciated the guide there for the first quarter. Is that a decent run rate for the rest of the year, or will you get maybe a little bit of a step-up in 2Q? Because I know you have the annual raises in that quarter.
Asylbek Osmonov, Chief Financial Officer
Yes, I believe the run rate I mentioned for the first quarter, which is between $118 million and $120 million, is appropriate for that period due to some personnel expenses related to restricted stocks. Looking ahead, I'm estimating a range of $117 million to $120 million. However, this estimate may vary as we continue to invest in our staff and technology. A fluctuation of $1 million in either direction isn't significant. Considering our efficiency ratio at 40.8%, which is top in our sector, that $1 million difference won't affect our efficiency ratio. Therefore, we are targeting a run rate of $118 million to $120 million for the first quarter.
David Zalman, Senior Chairman and Chief Executive Officer
It's primarily the expenses, the increase came from the salaries. And again, not unusual in the fourth quarter, and especially, we were generous with people in bonuses at the year-end for the production and everything they did. So, at year-end, our expenses were somewhat higher than what we will run.
Asylbek Osmonov, Chief Financial Officer
Yes. If you follow us, we've always stated that when we have strong revenue, we will reward our employees and invest in our business. This is reflected in the elevated expenses you saw in the fourth quarter.
Dave Rochester, Analyst
Yes, great. And maybe just one last one on capital. You guys have a lot of excess capital, some of the strongest capital generation capability out there. How active are you thinking you want to be with the buyback? Are you targeting any kind of cap for the CET1 ratio that you'll try to stay below? And then, I appreciate the M&A comments as well. I know you want to maintain some capital for that. But, if you can just maybe speak to the buyback first and then any kind of target CET1 ratio you might have? And then, on M&A, if you're seeing a lot more conversations happen in Texas and if that's the market where we should expect you to announce something at some point?
David Zalman, Senior Chairman and Chief Executive Officer
Yes, there are a lot of questions. I'll begin with the first one. Regarding capital, we've always taken an opportunistic approach. We haven't stated that we would buy the entire 5% starting today and finish it by the end of the year. We act when the timing is right. We plan to continue this strategy. Additionally, we aim to raise dividends annually and use any excess capital for acquisitions, targeting at least 20% to 25% down on those deals. However, this time, Kevin didn't allow me to do that. We managed to buy back some shares when prices were lower. This is our approach moving forward. The last question was...
Dave Rochester, Analyst
M&A.
David Zalman, Senior Chairman and Chief Executive Officer
As I mentioned earlier, I think that as stock prices have begun to recover, it prompts companies to consider new actions. We're observing discussions regarding potential increases in federal income taxes on banks. The money we are currently spending on technology is substantial, not including monthly vendor fees and software costs. We likely spend about $1 million each month just on additional digital technology. These costs are rising, which may lead companies with currently low interest margins to evaluate whether they should pursue mergers or consider selling. I anticipate an increase in such activities. In previous quarterly calls, I noted that we would witness a number of deals, and we've seen this with the BBVA and PNC deal, as well as the First Citizens and CIT deal, and the Huntington and TCF merger. Therefore, I believe these trends will continue in the future.
Dave Rochester, Analyst
Yes, great. So, no real target on the CET1 ratio at this point?
David Zalman, Senior Chairman and Chief Executive Officer
No. I like capital. I like having a lot of capital.
Dave Rochester, Analyst
Yes. And then, Texas seems to be where the next target will be. I would imagine it would be, but I wanted to hear your thoughts.
David Zalman, Senior Chairman and Chief Executive Officer
Texas and Oklahoma is always our first choice because that's just where we're located. But again, I've always said that if there is a deal somewhere in another market where it's big enough, and it has to be big enough or has enough market share that's ranked between 1 and 5 top market share in a certain area, and it's a well-run bank, and it's got good asset quality, it's got good core deposits, it's been there a long time, it wasn't built overnight, it's something we would look at, probably.
Operator, Operator
The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.
Ken Zerbe, Analyst
Actually, I had a similar question on M&A. I think, you outlined right at the very end of your last statement, kind of what you're looking for. But, are there any in terms of like products, like are there any products that have a potential target that you're more interested in or something that is kind of a deal breaker on the opposite side that you wouldn't even want to look at the bank if they had X, Y or Z products? Thanks.
David Zalman, Senior Chairman and Chief Executive Officer
As we grow, our approach to potential deals continuously evolves. For instance, prior to our partnership with Legacy, I would have been hesitant to consider entering the mortgage warehouse space or participating in certain syndications they handle. Now, with Legacy and Kevin's experienced team, we feel more confident exploring opportunities we previously wouldn't have considered. While there are still certain deals that may be non-starters for us, I'm not immediately aware of any specific examples. Perhaps you want to share if there's a type of deal that would definitely be off the table for us?
Kevin Hanigan, President and Chief Operating Officer
I don't know what it would be off the top of my head.
Randy Hester, Chief Lending Officer
Yes. Asset quality would be a hard hurdle to get over.
Kevin Hanigan, President and Chief Operating Officer
But in terms of products though and the fundamentals of what a bank does. I don't know if there are any deal killers out there.
David Zalman, Senior Chairman and Chief Executive Officer
I don't think there is a clear deal killer. Randy mentioned asset quality, but we've been effective in assessing and making informed decisions even when asset quality issues arise. I believe we have sufficient experience in this area. To directly answer the question, I can't recall any specific deal killer at the moment.
Randy Hester, Chief Lending Officer
Somebody has a nice deep income-generating business, I think that would be a plus to something we look at.
David Zalman, Senior Chairman and Chief Executive Officer
One thing I appreciate in our bank is the asset management business, specifically the trust business. If there is an opportunity to expand in that area, I would certainly like us to pursue it.
Ken Zerbe, Analyst
Got it. Okay, that makes sense. I have a follow-up question. Looking at the provision expense and the information on slide 17, it's difficult to estimate whether it will be zero or $10 million in any quarter. I noticed that you increased the reserve, seemingly on a qualitative basis. Can you discuss how you plan to approach provision expense going forward? Other banks mention a significant reserve release this year as the economy gradually improves, which could potentially lead to at least a zero provision, if not something lower for your bank. I would appreciate your thoughts on this.
David Zalman, Senior Chairman and Chief Executive Officer
Yes, we have observed that many banks are already reversing and releasing funds. We have discussed this previously and still believe it may be premature to take such actions. Looking ahead, if the current conditions remain stable and continue to improve, I would likely prefer to avoid making changes to our earnings due to fluctuations in reserves. We value consistency in our approach. Therefore, unless there are unforeseen challenges, it’s more probable that we won't be adding to our reserves rather than releasing them going forward.
Operator, Operator
The next question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey, Analyst
I wanted to start with the PPP impact. I know you said PPP loans were down around $430 million. So, what was the spread income impact from PPP? If you combine the 1% yield and then the acceleration of the fees, what was that impact, the spread income in the fourth quarter?
Asylbek Osmonov, Chief Financial Officer
Hey Brady, this is Asylbek. I'll give you the information. So, we saw a pickup in the forgiveness in the fourth quarter, which generated some additional fee income from PPP. So, if you compare it to what we had last quarter of just normal amortization to this quarter, we have made about additional $7.7 million above the normal amortization on PPP fee. So, that's what we saw in the fourth quarter.
Brady Gailey, Analyst
Okay. So, an additional $7.7 million. So, if you look at if you look at the entire PPP bucket, any idea what that number was in the fourth quarter?
Asylbek Osmonov, Chief Financial Officer
The total related to the fee is approximately $13 million, which includes about $6 million for normal amortization from previous quarters and around $7 million in addition. So, in total, it's $13 million.
Brady Gailey, Analyst
Okay, great. I know we're all excited to see you guys do your next acquisition. Can you just remind us what you focus on when you're pricing a deal? Is it a certain threshold of EPS accretion or a limit of tangible book value dilution, or is it earn back or IRR? When you're looking to determine how much you can pay, what do you focus on to determine the price?
David Zalman, Senior Chairman and Chief Executive Officer
I would say that instead of just concentrating on the price, we focus on our target and the right partners we want to connect with. In my experience, some of the least expensive banks we've acquired have turned out to be the worst investments, while those we spent more on have generally been the better choices. Therefore, we prioritize evaluating what truly enhances our value and makes us more appealing to investors. Once we have that clarity, we consider our longstanding emphasis on core deposits. It's essential to assess whether the institution has substantial core deposits. For our bank, only around 10% to 12% of our funds are in certificates of deposits; the majority are in checking and money market accounts, which are critical for daily transactions. This core transactional base is where we see real value. Once we have that aspect secured, we delve into accretion, as we like to achieve it. Simply pursuing deals for the sake of expansion isn't as vital as ensuring we have meaningful accretion. Lastly, we evaluate how long it will take to recoup the premium we paid above the book value, as ideally, we aim to recuperate that amount within three to five years. Though it may seem unconventional, that’s our perspective on the matter.
Operator, Operator
The next question comes from Peter Winter with Wedbush Securities. Please go ahead.
Peter Winter, Analyst
I wanted to ask about the core margin. Just what the outlook is for the core margin, especially with the kind of the reinvestment rates on the securities portfolio.
Asylbek Osmonov, Chief Financial Officer
This is Asylbek. In the fourth quarter, our core margin performed well, holding at 3.26% compared to 3.25% in the third quarter. There were several factors that contributed to this stability, including additional PPP fees and the repricing of deposits during the fourth quarter. We also saw an increase in net interest income, adding an additional $1 billion to our securities portfolio. Looking ahead to the next few quarters, there are many factors to consider when projecting the core NIM. While there may be some downward pressure from the rate environment and liquidity, there are also numerous positive aspects to consider. For instance, we reduced the yield on our deposits in January, which will benefit our margin. Our term deposits, amounting to about $2.4 billion in CDs, will also reprice over the next 12 months, which should have a positive impact. The biggest question remains the liquidity on our books. We continue to invest in securities, with some of the second round of PPP funds likely allocated to these investments, which may provide better yields compared to placing liquidity in the bond portfolio. From a longer-term perspective, our goal is to grow loans at a rate of 3% to 5%. Growing loans at higher yields will ultimately support our margin. I understand I’ve presented many variables, making it difficult to predict specifics given the numerous moving parts.
David Zalman, Senior Chairman and Chief Executive Officer
Yes, I don't think we're like any other bank. The low interest yields affect us and result in a lower net interest margin. To address this, we need to either increase loans or improve the yield curve. We're doing everything possible to reduce the rates we pay on money market accounts or CDs, but we are similar to others in the industry. For improvement, either interest rates need to rise, or we need a better yield curve, or we have to use funds typically allocated to bonds for loans.
Operator, Operator
The next question comes from Michael Rose with Raymond James. Please go ahead.
Michael Rose, Analyst
I just wanted to get some color around the monthly loan production. It looks like it was flat. Should we expect that to progress? I guess, would expect it to progress as we move through the year, given the commentary earlier in the call. But, it also looks like the employee count was up for the first time in a while. It looks like it was up 40. I just wanted to get the expectation for lending hires? I know there's a fair amount of dislocation in and around your markets. And what the outlook could be for hiring? Thanks.
Tim Timanus, Chairman
Michael, this is Tim. Needless to say, it's always a bit difficult to make those projections. But, I think what we see right now is not a lot of upward growth for the next quarter, and then starting after that, a better environment throughout the rest of the year. We still have the virus. We still have customers that while they're open and they're making it, so to speak, they're not really doing all that well, certainly not as well as they would like to. So, the demand for borrowing, I think, a lot depends on those factors and how quickly they improve. The other side of the coin is, if things get much worse, and maybe they will, maybe they won't, but if they get much worse, I think, you'll start to see some asset bargains out there in the marketplace, and you might very well see people notice that and want to take advantage of it. So, there could be an uptick in demand for loans to purchase assets that are in the view of the buyer somewhat depressed. So, you've got a little of both of that, possibly on the horizon. We don't see anything that makes us think that the volume of loans that we're booking is going to drop off significantly. I guess, if we should have a very significant and material worsening of the virus situation and more shutdowns of businesses, then all bets are off. But, we don't see that right now. So, we see kind of a slow recovery between now and the end of the year.
David Zalman, Senior Chairman and Chief Executive Officer
I believe there is a genuine opportunity for a resurgence in the oil and gas sector, influenced by the current administration's actions. This year could be beneficial for the industry. Texas is a diverse state, with many people relocating to Austin, leading to ongoing growth. Dallas is also thriving, attracting numerous individuals from California. Although Houston faced a loss of about 300,000 jobs at the start of the year, it has since recovered around 150,000 positions. However, with restrictions on pipelines and fracking in various regions, I anticipate a significant rise in oil prices, creating further opportunities for Texas. Regarding hiring, we have expanded our workforce, particularly in the trust department, which was originally centered in West Texas and South Texas. Our goal is to enhance our presence in the Houston and Dallas areas, and we are also addressing recent regulatory challenges by allocating more staff to compliance roles.
Michael Rose, Analyst
That's very helpful. Maybe just one quick follow-up. I'm sorry if I missed it. But, how much of the remaining PPP forgiveness fees are left at this point?
Asylbek Osmonov, Chief Financial Officer
Yes. At the end of the year, we had about $21 million of PPP fee left to recognize, and which we believe probably going to be the most first or second quarter with the way of forgiveness going right now.
Operator, Operator
The next question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Brad Milsaps, Analyst
You guys have addressed most everything. I did want to ask on some of the deposit accounts. You mentioned that you cut those rates again in January. I noticed that interest-bearing demand, costs have stayed fairly stable at 38 basis points for really three consecutive quarters. Is this kind of the quarter we'll begin to see those come down? You've certainly got plenty of liquidity, but curious if there's some other contractual reason maybe that those have kind of remained sort of stable, when others may have seen more contraction?
David Zalman, Senior Chairman and Chief Executive Officer
Asylbek may be able to provide more insight. However, I believe it remained stable mainly due to our recent implementations from the last quarter. The lack of decrease you observed may be attributed to contractual obligations, which Asylbek mentioned we should be able to address throughout this year.
Asylbek Osmonov, Chief Financial Officer
Yes, exactly. I do see some decrease happening this quarter, definitely due to costs. There are also public funds with contractual agreements that will remain until they expire, most of which start in the second half of the year. Regarding the specific interest-bearing deposit, I do see a slight decline this quarter.
Brad Milsaps, Analyst
Okay, great. And then, just kind of a bigger picture question. Would you guys ever consider the possibility of maybe buying some of the production out of the mortgage warehouse to sort of supplement loan growth, or would it be that most of that production would be maybe too long a duration of kind of what you want to put on the balance sheet? You've kind of got that great resource and at a time when you need some loans. Just kind of curious if that is something you considered from a strategic standpoint, or maybe there's something I'm missing there that would preclude you from doing that?
Kevin Hanigan, President and Chief Operating Officer
Yes, this is Kevin. We have considered it, Brad. It really depends on the costs associated with the gains on sales that our clients are currently enjoying, which significantly affects the yield. It's just not appealing enough. We'd prefer to focus on increasing our production in whole loan generation.
David Zalman, Senior Chairman and Chief Executive Officer
Yes. I think, the thing that we've done, Brad, is instead of selling off the production that we do in our Company, and Eddie, you may give us some numbers more on this, on this production. Instead of selling the loans, we've been keeping those loans in-house, and that's what we've been doing.
Eddie Safady, Vice Chairman
That's right. We're keeping probably 88% of everything that we're originating now and putting into portfolio. And we produced about $2 billion in mortgage loans last year. So, one of the bright spots in growth on the line items in the loan portfolio have been in the residential mortgage side.
David Zalman, Senior Chairman and Chief Executive Officer
On the other hand, we've had a lot of pay down.
Eddie Safady, Vice Chairman
We have, a lot.
Operator, Operator
The next question comes from Matt Olney with Stephens. Please go ahead.
Matt Olney, Analyst
I just want to circle back on the loan growth discussion and specifically on construction loans. I think, they were down around $100 million this quarter. I would love to hear more details about the portfolio with respect to the timing of the paydowns, but also the new commitments you're adding. I'm just trying to appreciate that this book could continue to contract, or are there new commitments that are coming on that could help stabilize that? Thanks.
Kevin Hanigan, President and Chief Operating Officer
Yes. I'll take a stab at it. I actually think it's more likely to grow, but not a lot, because we always have things that get to the end of construction and flip out. But, we approved quite a few really high-quality construction deals last year. One big commercial office building that had to have somewhere in the magnitude of $140 million of equity go in before we ever funded a dime, I think they've got the A4 built, and we will start funding into that pretty good-sized loan within the next week or two, because they've now put in their $140 million of equity so far. And then, we had a couple of multifamily deals we approved or student housing deals we approved throughout the year that I would expect those will be funding up. So, I think between that and our homebuilder group, I think that that construction-related portfolio probably has north for the year.
David Zalman, Senior Chairman and Chief Executive Officer
Some of the significant paydowns you observed throughout the year likely came from the multifamily projects we committed to in previous years. Those projects are finally completed and have reached a level of occupancy where they can be transferred to another party without personal guarantees, which is probably why you noticed some payoffs. I anticipate that things won't rapidly change due to COVID, but in other states, there may not be as much multifamily construction ongoing. However, in Texas, I expect to see continued multifamily projects because of the influx of people moving to the state.
Eddie Safady, Vice Chairman
I think, it's also important to point out that on our construction loans, we typically don't balloon those loans with the maturity right at the end of construction. They typically roll over into a permanent repayment. That doesn't mean that those loans stay with us throughout the entire permanent repayment term because they a lot of times can find a lower rate, and as David mentioned, without recourse financing source. But what it does mean is they typically stay with us a little while. So, they don't pay off right at a termination of the construction project. So, we typically have a little lead time there for...
David Zalman, Senior Chairman and Chief Executive Officer
I think that's correct. Customers appreciate the flexibility we offer compared to other banks that simply require them to complete their construction loan within two years and then exit. Instead, after the two years or whatever the timeframe may be, we allow the loan to transition into a repayment feature. This provides construction clients with significant flexibility, which I believe they value as well.
Matt Olney, Analyst
Okay, great. That's helpful. And then, I also wanted to dig in on some of the balance sheet movements in the fourth quarter. Obviously, some really strong deposit growth, but we saw the securities balance increase quite a bit. Love to hear more about the details of some of the purchases in the fourth quarter and expectations for the size of the securities portfolio from here? Thanks.
Asylbek Osmonov, Chief Financial Officer
As we consider security, we experienced growth of nearly $1.1 billion in the fourth quarter, while our purchases exceeded $1.8 billion, which resulted in a net change due to the accelerated payoffs. Our investments are primarily comprised of fixed-rate instruments, given the liquidity we had. Even after those, we maintained $1 billion in liquidity due to the paydowns of PPP loans and similar items. Regarding our securities, we are targeting a return of about 1% to 1.25%.
David Zalman, Senior Chairman and Chief Executive Officer
Yes. The growth in the securities department will largely depend on our loan performance. If we see a $3 billion increase in deposits without a corresponding increase in loans, those funds will need to be allocated to the securities area. We are hopeful for an increase in loans, which would allow us to utilize a portion of that growth effectively. Although we experienced loan growth this year, if we exclude the PPP loans and mortgage warehouse loans, our core loans likely declined by around 4%. We aim to improve that. However, future loan demand will be a key factor. Our recent purchases may differ from our future investments. Currently, most of our purchases are government agency products, including some variable rate CMOs that yielded low returns of around 50 to 60 basis points. We chose not to commit to long-term fixed assets during this time. We’ve invested in a mix of 15 and 20-year mortgage-backed securities, which overall yielded just over 1%. Many banks are seeking longer 30-year products for slightly higher yields, but we’ve avoided that. The average life of our investments isn’t significantly different whether we buy 15, 20, or 30-year products, particularly if interest rates remain stable. However, if rates were to rise by 100 to 300 basis points while invested in a 30-year product, the average life could extend up to 12 years, which presents substantial risk. A decline of 25% in such products further complicates things, and we are unwilling to take on that level of risk. Currently, variable rate CMOs and agency investments are not favorable, and we may avoid them. Instead, we will likely return to more traditional mortgage-backed securities, where we are currently yielding about 1%.
Asylbek Osmonov, Chief Financial Officer
Yes. I mean, if you look at our deposits, I mean, we increased $900 million in the fourth quarter. So, we just didn't want to leave in the Fed’s earning 10 basis points. That's what we're putting...
David Zalman, Senior Chairman and Chief Executive Officer
I mean, right now, on checking accounts, we're paying, what, 0.01 or something like that. I think our check on our $1 million money market account, we're paying 10 basis points or 15?
Asylbek Osmonov, Chief Financial Officer
I think, about 15 basis...
David Zalman, Senior Chairman and Chief Executive Officer
That's if you have $1 million plus. Below that, you're 10 or 5 basis points.
Asylbek Osmonov, Chief Financial Officer
Well, most of them 5 to 10.
Operator, Operator
The next question comes from Bill Carcache with Wolf Research. Please go ahead.
Bill Carcache, Analyst
David, I wanted to follow-up on your comments about the M&A environment and what Prosperity is looking for. I wanted to ask if you could comment on the other side, what sellers are looking for, more specifically? Have you seen any change in the way that sellers are thinking about financial versus strategic value? Meaning, are you finding sellers who are more interested in locking arms with you, even if they can extract as much financial value as they ideally would like to? So, they can't exactly go writing off into the sunset, but they're willing to give up some of that more immediate financial upside for the potential that comes from being part of a bigger organization with a strong track record, where they have an opportunity to create greater value over time. Where would you say we are within those two extremes, from your discussions?
David Zalman, Senior Chairman and Chief Executive Officer
In the past, people were inclined to join us because they appreciated the quality of our assets and our consistent earnings growth. They were willing to choose us over others based solely on our earnings performance. However, I cannot provide a definitive answer today as I believe some factors may change with potential increases in capital gains tax by the administration. While I haven't seen any evidence of this yet, I suspect that if tax rates remain unchanged until the end of next year, we may see more individuals interested in maintaining a cash position than before. This might occur simply because the prospect of a 20% capital gain as opposed to a 40% rate could be appealing to them. I can't state for certain that this will happen, but it is certainly something a seller might consider.
Bill Carcache, Analyst
Got it. That's very helpful. And then, a separate topic. When we think back to the last reserve cycle, there were various points where investors got excited about increasing exposure to asset sensitivity and rising rates, only to be disappointed as rate hike expectations kept getting pushed further out into the future. Overall, we were in that sort of cycle for about seven years. I know it's not the same environment, and the reasons you observed today are very different. But, I was hoping you could discuss any parallels or differences that you see and what a longer or shorter reserve cycle means for Prosperity?
David Zalman, Senior Chairman and Chief Executive Officer
Well, I think, a longer cycle that we're in right now, I mean in low interest, it's never good for us or for any other bank. I think, the real question is, it's not a question if rates are going to rise, it's just when they're going to rise. And I think the Federal Reserve, they primarily say, unless we have 2% inflation that they're not going to raise rates. So, I think, first of all, you have this issue where you get up to the 2% inflation. And really, you would think with all the money that we're pouring to the deal and all the stimulus at some point, there has to be. But, even after that takes place, which is some time from now, then there is a tapering off period, $7 trillion of bonds that they've been buying treasury bills and mortgage-backed securities. And that takes about a year to taper off to that. So, at best, I think, we're still some time away before we see higher interest rates. And I think you're going to be in a lower interest rate environment for, I'd say, at least a year or so for sure.
Bill Carcache, Analyst
Understood. And then, lastly, if I could squeeze in one more. Can you guys discuss how you're thinking about the tail risk in CRE in this cycle, specifically in your portfolio?
Kevin Hanigan, President and Chief Operating Officer
I can probably handle it because I have very close contacts at JLL and some major firms in Texas, particularly in commercial real estate, mostly in offices, and they aren't feeling optimistic about commercial office space. They believe we might be facing a readjustment period of about two years, which could be challenging as we adapt to how many people will continue to work from home or share offices, with some going into the office two days a week while others use the same office for the other three days. The leading companies in the sector fear that as much as 15% of the workforce may fall into this flexible arrangement, where they are not permanent office employees but are sharing spaces. The consequences of this could significantly affect vacancies and rents. They expect a tough two-year adjustment period ahead, so we are being particularly cautious about commercial office space, looking for something exceptional. I mentioned a major deal we have, and I'm not worried about that specific one since it's a single tenant, a well-known public company, and we've put a lot of equity into it, making us comfortable with the investment. However, such opportunities will be rare in commercial real estate. On the other hand, we are reviewing our portfolios to identify which properties might struggle under these circumstances, and we are considering moving out early if possible. Fortunately, our company has a strong underwriting history, which means even our more challenging investments don't appear too problematic for us.
David Zalman, Senior Chairman and Chief Executive Officer
I would also comment, I'm just thinking off the top of my head, I think, other states that have been shut down for longer periods of time, and states where people are moving out are probably going to have a harder time with commercial real estate where some of our commercial real estate may be picked up by all the new companies being moved in all the time. So, I think, we'll be in a better position than some of those will, probably.
Operator, Operator
Our next question comes from Jon Arfstrom with RBC Capital. Please go ahead.
Jon Arfstrom, Analyst
I had a couple of follow-ups, and you just touched on one of them on the inflated, in migration to Texas. You feel like that's accelerating, and is it visible to you? And just be curious, which are your strongest markets at this point?
David Zalman, Senior Chairman and Chief Executive Officer
I don't think there is any question. You just need to look at the newspaper. As I mentioned briefly earlier, HP has moved its headquarters to Houston, Oracle has relocated to Austin, and Tesla is establishing a significant presence in the Austin area. In fact, Elon Musk has also moved there. Samsung just announced last week that...
Eddie Safady, Vice Chairman
Had announced they are contender for probably...
David Zalman, Senior Chairman and Chief Executive Officer
Yes, they announced they are a contender for a $10 billion plant expansion. Kevin mentioned earlier that another company from Irvine, California, a financial firm, is relocating to Dallas. People are moving every day. I think the ones who will be most positively impacted are probably in Austin. It seems like everyone wants to be in that vibrant area. I have two homes there, so I can't complain; that's the place to be. I anticipate a lot of growth in technology, film production, and the entertainment industry. In Dallas, there are also many people relocating from California. I believe HP will support the Houston market, but I think Dallas and Austin will likely benefit more than Houston from these shifts. Those are my overall thoughts on the situation.
Kevin Hanigan, President and Chief Operating Officer
From a Dallas perspective, we've got Charles Schwab moving in that area, and Uber building their second headquarters in the Dallas Midtown area of Dallas. Those are both pretty big numbers, pretty good jobs. And going back to commercial real estate office space, there's only one thing that really matters for office space, and that's job growth. You've got job growth, you can handle your office space concerns.
Jon Arfstrom, Analyst
So, to me, this is obviously, secular, not cyclical, I guess, is a way to say it. And I think that migration, banks tend to go where the growth is, and you alluded to PNC. I'm just having an interest in Texas. Does this lead to more out-of-state competition and more buyers and more Texas banks? Curious if you've kind of seen it in the competitive environment, maybe like we saw in energy prior to '15 and '16, where a lot of out-of-state banks came in? Are you starting to see that? And do you think more buyers are going to show up eventually?
David Zalman, Senior Chairman and Chief Executive Officer
Yes, I believe people will naturally pursue opportunities in growth areas, which is a straightforward observation. I expect we will face increased competition, but this also enhances our value as a company. We are among the larger players in the state, so I anticipate that others will want to enter and expand in this market. It's clear that banks will gravitate towards where the growth is happening.
Jon Arfstrom, Analyst
And then, just last thing, just a small question. But you've done a lot of deals and been through a lot of cycles on taxes and regulation, but set aside rates, do you think taxes and regulatory changes, have they historically brought sellers out of the woodwork but enough to tip sellers over?
David Zalman, Senior Chairman and Chief Executive Officer
Yes. I think, yes, absolutely. I've seen guys or people that have worked their whole lives in an industry and they're just considered titans of the industry, the people that I've respected. And they, at some point, something just hit them and says, I've had it. This is enough. And I think it does. Yes.
Operator, Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Charlotte Rasche for any closing remarks.
Charlotte Rasche, Executive Vice President and General Counsel
Thank you. 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.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.