Earnings Call Transcript - PB Q4 2021

Operator, Operator

Good day, and welcome to the Prosperity Bancshares' Fourth Quarter 2021 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Charlotte Rasche, General Counsel

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Fourth Quarter 2021 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, General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Senior Chairman and Chief Executive Officer; H. E. Tim Timanus, Jr., Chairman; Asylbek Osmonov, Chief Financial Officer; Eddie Safady, Vice Chairman; Kevin Hanigan, President and Chief Operating Officer; Randy Hester, Chief Lending Officer; Merle Karnes, Chief Credit Officer; Mays Davenport, Director of Corporate Strategy; and Bob Dowdell, Executive Vice President. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics and Tim Timanus, who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator. Before we begin, let me make the usual disclaimers. Certain matters discussed in this presentation may constitute forward-looking statements for purposes of 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-K and 10-Q and other reports and statements we have filed. 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 CEO

Thank you, Charlotte. I would like to welcome and thank everyone listening to our fourth quarter 2021 conference call. The annualized return on average assets was 1.37%. The return on average common equity was 7.91% and the return on average tangible common equity for the three months ending December 31, 2021 was 16.2%, respectively. Prosperity's efficiency ratio was 42.7% for the three months ending December 31, 2021. Our net income was $126.8 million for the three months ending December 31, 2021, compared to $137 million for the same period in 2020, a decrease of $10.3 million or 7.5%. The change was primarily due to a decrease in loan income and in loan discount accretion of $10.7 million. The net income, excluding the loan discount accretion was $124 million at December 31, 2020, compared with $120.6 million at December 31, 2021. The net income per diluted common share was $1.38 for the three months ending December 31, 2021, compared to $1.39 for the three months ending September 30, 2021. Our loans, excluding the warehouse purchase program and the PPP loans, loans at December 31, 2021, were $16.7 billion compared to $16.4 billion at December 31, 2020, an increase of $229 million, or 1.4%. Our linked quarter loans, excluding the warehouse purchase program and PPP loans, increased $76.7 million, or 1.8% annualized from $16.6 billion at September 30, 2021. The structured commercial real estate loans we acquired in the Legacy merger continued to come in as planned which negatively impacted overall loan growth. Without the reduction in the structured commercial real estate loans, growth would have been in the mid single-digit range. Another pressure point is a migration of completed construction loans into the secondary market, which provides for longer terms at fixed rates and no personal guarantees. With regard to deposits, our deposits at December 31, 2021, were $30.8 billion, an increase of $3.4 billion, or 12.5% compared with $27.4 billion at December 31, 2020. Linked quarter deposits increased $1.3 billion, or 4.5%, 17.9% annualized from $29.5 billion at September 30, 2021. Deposits continue to roll into the bank; however, CDs and other time deposits only account for 8.8% of total deposits with most of the growth in transaction accounts. Our bank has a strong core deposit base, with total cost of deposits at 12 basis points at quarter end. In today's market, deposits don't seem as valuable but as rates increase that will change. At year-end 2021, we had over $2 billion in overnight investments with little earnings. As those are invested in higher rate securities, it should help support higher net income and an increase in net interest margin. Our asset quality continues to be one of the strongest in the industry; the nonperforming assets total $28 million or nine basis points of quarterly average earning assets at December 31, 2021 compared with $59.6 million or 20 basis points of quarterly average interest earning assets at December 31, 2020 and $36.5 million or 11 basis points of quarterly average interest-bearing assets at September 30, 2021. The nonperforming assets decreased 53% year-over-year. The allowance for credit losses on loans, together with the allowance for off-balance sheet credit exposure, was $316 million at December 31, 2021. With regard to acquisitions, the bank mergers and acquisitions were strong in 2021. Investment banks did well; I believe that will continue in 2022. We continue to have talks with potential partners and are ready to execute in the event a transaction materializes and will be beneficial to our company's long-term future and increase shareholder value. We believe that Texas and Oklahoma will have a higher growth rate and outperform other states over the next several years. Companies and individuals continue to move to Texas and Oklahoma because of lower tax rates and a business-friendly political environment. And we believe that will continue, which should benefit our bank. We expect that companies will need more infrastructure and buildings, people will need more housing and consumer staples, and both will need banks to finance to grow. Our bank continues to show strong deposit growth, with over $3.4 billion added in 2021 and a strong return on assets of 1.37% and return on average tangible equity of 16.2%. Our asset quality continues to be one of the best in the industry. We predict loans will grow given the vibrant economy and the bank's net interest margin should improve going forward with potential rate hikes forecasted by the Federal Reserve. I would like to thank our customers, associates, directors, and shareholders for helping build such a successful body. Thank you for your support of our company. Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer to discuss some specific financial results we achieved.

Asylbek Osmonov, Chief Financial Officer

Thank you, Mr. Zalman. Good morning, everyone. Net interest income before the provision for credit losses for the three months ended December 31, 2021 was $244.8 million, compared to $257.6 million for the same period in 2020, a decrease of $12.9 million or more than 5%. The current quarter net interest income includes fair value income of $5.4 million compared to $16.1 million for the same period in 2020, a decrease of $10.7 million and PPP loan fee income of $8.5 million, compared to $13.2 million for the same period in 2020, a decrease of $4.7 million. The fourth quarter of 2021 net interest income, excluding the impacts of PPP loans, warehouse purchase program loans, and fair value loan income improved compared to the same results in the third quarter 2021. The net interest margin on a tax-equivalent basis was 2.97% for the three months ended December 31, 2021, compared to 3.49% for the same period in 2020, and 3.10% for the quarter ended September 30, 2021. Excluding purchase accounting adjustments, the net interest margin for the quarter ended December 31, 2021 was 2.91% compared to 3.26% for the same period in 2020, and 3.03% for the quarter ended September 30, 2021. Excess liquidity during the fourth quarter 2021 impacted the net interest margin. Noninterest income was $35.8 million for the three months ended December 31, 2021, compared to $36.5 million for the same period in 2020 and $34.6 million for the quarter ended September 30, 2021. Noninterest expense for the three months ended December 31, 2021 was $119.5 million compared to $120.2 million for the same period in 2020. On a linked quarter basis, noninterest expense decreased $300,000 from $119.8 million for the quarter ended September 30, 2021. For the first quarter 2022, we expect noninterest expense to be in line with the current quarter, or $118 million to 120 million. The efficiency ratio was 42.8% for the three months ended December 31, 2021 compared to 40.8% for the same period in 2020 and 42.3% for the three months ended September 30, 2021. During the fourth quarter of 2021, we recognized $5.4 million in fair value loan income. This amount includes $2.4 million from anticipated accretion, which is in line with the guidance provided last quarter, and $3 million from early payoffs. As of December 31, 2021, the remaining discount balance is $13 million. Due to the lower remaining discount balance, we expect a slowdown in the recognition of fair value loan income. The anticipated accretion for the next few quarters is expected to be around $1 million to $2 million. Also during the fourth quarter of 2021, we recognized $8.5 million in fee income from PPP loans. As of December 31, 2021, PPP loans had a remaining deferred fee balance of $7.1 million. As the forgiveness process is slowing down, we expect PPP fee income to be around $3 million to $4 million for the first quarter of 2022. The bond portfolio metrics at December 31, 2021 showed a weighted average life of 4.2 years and projected annual cash flows of approximately $2.3 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, 2021, totaled $28,088,000 or 15 basis points of loans and other real estate compared to $36,549,000 or 19 basis points at September 30, 2021. This represents approximately a 23% decrease in nonperforming assets on a linked quarter basis. The December 31, 2021 nonperforming asset total was made up of $27,156,000 in loans, $310,000 in repossessed assets, and $622,000 in other real estate. Of the $28,088,000 in nonperforming assets, $3,128,000 or 11% are energy credits, all of which are service company credits. The $3,128,000 as of December 31, 2021, is a 43% decline from $5,459,000 as of September 30, 2021. Since December 31, 2021, $3,420,000 in nonperforming assets has been put under contracts for sale, but there is no assurance that these contracts will close. Net charge-offs for the three months ended December 31, 2021 were $807,000 compared to $15,697,000 for the quarter ended September 30, 2021. No dollars were added to the allowance for credit losses during the quarter ended December 31, 2021, nor were any taken into income from the allowance. The average monthly new loan production for the quarter ended December 31, 2021 was $604 million. Loans outstanding at December 31, 2021 were approximately $18.616 billion, which includes approximately $170 million in PPP loans. The December 31, 2021 loan total is made up of 38% fixed-rate loans, 36% floating-rate, and 26% variable rate. I will now turn it over to Charlotte Rasche.

Charlotte Rasche, General Counsel

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

Operator, Operator

The first question comes from Brady Gailey of KBW.

Brady Gailey, Analyst

Hey, thanks. Good morning, guys. I heard the comments about how the Legacy Texas structured CRE still had a little bit of a negative impact on loan growth in the quarter. Can you just remind us how much is left in that bucket so we can know how much is going to potentially continue to shrink here?

Kevin Hanigan, President and COO

Yes, Brady, it's Kevin. I'll take the question; left in that bucket, when we did the merger, there was about $2.2 billion in that structured CRE book that has gone down to $755 million at year-end 2021. So a couple of ways to think about that. I think there's a core portfolio in there that probably sticks around that might be $400 million or $450 million, several of which we have renewed and extended. So they're what I would call a core customer of ours. So I don't think the full $755 million is going away anytime soon. For this year, we think maybe $300 million of that burns down so far less than burned down last year. Just to put a punctuation mark on what David was saying about loan growth being in the mid 6% range without the structure CRE pay downs. By quarter this year, Q1 net CRE structure portfolio went down $224 million then $249 million then $160 million and then $205 million. The $205 million in the fourth quarter was elevated beyond what we had originally forecast. We thought it would be about $120 million. And after two quarters of hitting net forecasts, like right on, I believe this one, we're off by over $80 million on it. But the good news here is it's almost over. So I think the underlying production and underlying loan growth is going to start manifesting itself in reported numbers. It won't be fully manifested this year because I think somewhere in the neighborhood of $300 million have yet to pay off in this portfolio. My guess is in Q1, we end up with maybe $80 million or $100 million in reductions in that portfolio as opposed to these kinds of $200 million, $240 million kind of numbers that we've had. So it's coming; it's almost over. I do think it's a good news story in terms of future loan growth.

Tim Timanus, Chairman

Yes. Unless that number, but I think is, if you know we exclude the PPP loans and the mortgage and the mortgage warehouse would be excluded that we could be in around six point something percent, I believe internal growth, probably organic growth. So that's good news.

Brady Gailey, Analyst

Okay, perfect. And Kevin, while I have you what is? How does the warehouse look next year? I mean, I know it's been coming down as that market has normalized; I think it was a little under $1.8 billion average for the fourth quarter. What do you think that looks like in 2022?

Kevin Hanigan, President and COO

Yes, fourth quarter, it averaged $1.7 billion - $1.73 billion. I think we will average in 2022, $1.450 billion.

Brady Gailey, Analyst

All right. And then I know you guys put out the new buyback a couple of weeks ago. Should we expect — and I think you guys do that annually, just to re-up the plan. But should we expect you guys to be active on the share buyback at this stock price? I think you guys bought back a little stock maybe in the third quarter last year, but do you expect to actually engage on that this year?

David Zalman, Senior Chairman and CEO

I don't have the numbers in front of me, Brady. But I think last year, we bought back around 700,000 shares at an average price of around $67. And you are right; I'll get the exact numbers for you. But I'm just talking from the top of my head. But you are right, we do renew that annually. But we do like to have that because if the market does go down, we do like to have the ability to buy back. If we ever did a merger or acquisition, sometimes the market doesn't like it initially. And this gives us an opportunity to buy back or stop as well. So it just gives us a lot of opportunities I think.

Kevin Hanigan, President and COO

Yes, we bought back at $67, $87 on average last year.

David Zalman, Senior Chairman and CEO

And the share.

Kevin Hanigan, President and COO

It was 767,000 shares.

Brady Gailey, Analyst

And then we have not to say anything. And then just finally, for me, David Zalman, it's another quarter that we haven't seen an M&A deal announced for you guys. You've been kind of quiet for a while now. Do you feel like you're getting closer on the bank M&A side?

David Zalman, Senior Chairman and CEO

I've always said you'll run out of money before we run out of deals.

Brady Gailey, Analyst

All right. Thanks, guys.

David Zalman, Senior Chairman and CEO

I guess that was an answer.

Asylbek Osmonov, Chief Financial Officer

Yes, it was.

Kevin Hanigan, President and COO

Actually, I'm still thinking about an answer.

David Zalman, Senior Chairman and CEO

I think it was an answer.

Tim Timanus, Chairman

You will run out of money before we run out of deals.

Operator, Operator

The next question comes from Jennifer Demba of Truist.

Jennifer Demba, Analyst

Thank you. Good morning. I'm curious about NSF fees and what you guys think we'll be seeing over the next few quarters. A lot of banks have made changes to their programs and are going to see lower fees there, just wondering what you think. Are you — seeing the next several quarters?

David Zalman, Senior Chairman and CEO

It's a good question, Jennifer. We have talked about it; we looked at it a lot. We really haven't made any decisions. What we've noticed is if right now, most of our customers who are opening up accounts are actually coming from the banks that have lowered their fees. So that's what's ironic and crazy. So I don't see that people right now, the banks that are banking with us, that's not their main reason for coming up and opening checking accounts with us. It doesn't seem to be. That doesn't mean that one day it won't mean something. But I'd say right now we're still opening up a lot of accounts. We're still growing and I see to be coming from the banks that are offering the low overdraft fees and free checking accounts. And we also offer a lot of programs for our customers like overdraft protection; we have accounts that if you keep over a certain dollar amount your account is free, so we've already been catering to customers like that trying to get them to that point. But there's no question at some point, if we do lower it, I don't know that we would ever go free like the other guys. But if you lowered it to $15 or something, it would impact us. But again, we don't see that right now. I still don't even see that this year happening, quite frankly.

Operator, Operator

The next question comes from Brett Rabatin with Hovde Group.

Brett Rabatin, Analyst

Hey, good morning, everyone. It's Brett Rabatin with Hovde Group. I was curious; it seems to be quite a bit of moving parts with some of the loan portfolio and we're on the precipice of at least a couple of interest rate hikes probably in 2022. I was curious about how you guys are thinking about the margin? And given your asset sensitivity, where do you think you could potentially be towards the end of the year? And more so I'm just kind of thinking like, big picture, are you planning on two, three, four and how that might correlate to expenses going forward as well?

David Zalman, Senior Chairman and CEO

I think I can answer this. I think I heard you're quite; there was a little background noise when you were talking. So I hope, I think what you're saying — you're asking is how the potential rate increases will affect us. And again, I would say the potential rate increase will affect just like most banks, it'd be positive. And I always use the example, our bank is a little bit different because we have a big securities portfolio as well. So interest rates going up help us dramatically. But again, both our companies like trying to turn the Queen Mary around here in the parking lot. When interest rates go up, it doesn't go up right away; we see some effect right away, we see a better effect in six months; we see a real good effect in one year. And we see a dynamic effect in two years. So it just takes us a while as interest rates go up. But there's no question it helps the net interest margin dramatically. I mean, right now, your net interest margin is what we end up with 2.9 something this time; probably an average over the last 30 years, this has probably been more like 3.25 to 3.40. So hopefully, we'll get back somewhere to at least a minimum of 3.25 and hopefully better than that, that would be my thoughts.

Asylbek Osmonov, Chief Financial Officer

And, Brett, I'm going to add a little bit more detail. You are right; there's a lot of moving pieces when it comes to margin, and our net interest income, as you mentioned, yes, we are under an assets sensitive position, which is going to benefit in the interest rate increase environment. But they also use — if you look at our balance sheet, we have more than $2 billion of cash sitting right now not earning maybe 15 basis points. So we're working toward putting that in the bond portfolio. I think if I checked, we're getting like 175 on the bond portfolio. So with a cash flow we get from the bond portfolio plus utilizing the excess liquidity we have that should also help with our net interest income, and definitely loan growth that we project will help us on that aspect of it. And the other thing that we saw on the premium amortization on the bond portfolio, that it's, we had $16 million in the fourth quarter. But if you're looking trend on the December, and I looked at the number today for January slowing down, so we project that our premium amortization is going to drop to $14 million to $15 million this quarter, that's going to be positive what we had in the fourth quarter. Yes, but also, as mentioned, there's also the headwind a little bit, if you look at our PPP loan is winding down and our fair value income is winding down. So that's going to be a little bit of headwind. But if you look at from the efficiency ratio, as we grow our income and revenue line, I think efficiency ratio should kind of stay stable from that perspective, and our efficiency ratio is 42%, 43% is best in class. So, even with the increase in expenses, we continue to grow our revenues; efficiency ratio should stay kind of relatively stable.

Operator, Operator

The next question comes from Dave Rochester with Compass Point.

Dave Rochester, Analyst

Hey, good morning, guys. So quick follow-up on that expense commentary. So you talked about comp potentially going up a $1 million to $2 million on a quarterly basis. But you mentioned offsets. Does that mean you're expecting that overall expenses won't go up by that much in 2Q or beyond?

Asylbek Osmonov, Chief Financial Officer

I think when I said we are working toward — I mean when we're looking kind of turning every stone to see where we can get savings. I don't think our savings is going to offset all the expenses. So I think the net, when I say $1 million to $2 million, I think it's going to net increase.

Brett Rabatin, Analyst

Got you. Okay, great. And then just switching to the loan growth outlook; as you look out for 2022, I appreciated the color on the potential runoff and the structured book. I was just curious on a core loan basis, if you think you can hit that mid single-digit range or something higher than that as the recovery unfolds here.

David Zalman, Senior Chairman and CEO

I think we're still sticking to the mid single-digit range 5% to 6%, probably is what we're looking for this year.

Brett Rabatin, Analyst

Perfect. And then on the security side, you mentioned plugging some of that cash into the securities book, and you talked about the reinvestment rate or purchase rates in at 1.75% range. That's decently higher than it's been. And it's definitely accretive to the book, how aggressive are you guys thinking about getting in the first part of the year here? I mean, are we thinking maybe another $1 billion or so in growth?

David Zalman, Senior Chairman and CEO

I would say we're — we have so much money rolling off of that portfolio; we actually invested $500 million or $600 million last month, and I'd likely purchase about $400 million or $500 million this June. But there's still $2.5 billion in there today. But you are seeing as I'm more if the yields are actually a little bit higher than even what Asylbek is at, at least the last few days, I mean, the product we've been buying is going anywhere from 1.8% to 1.85% to 2% if we're willing to do an agency CMO. We really haven't been willing to do the agency CMO, but it's looking, that's not looking too unattractive if we can get our money back on an average of four years. So I think that you were; we're going — we are not going to throw it all in at one time. But we're going to start investing. I mean, we're not going to leave $2 billion, $2.5 billion in overnight at 15 basis points; we're going to start it. And we can do that because we have so much money rolling off even as rates go higher, which I think they are, there's always going to be plenty of money to reinvest. And you see we have so much money rolling off and money coming in. We have a lot of money coming in all along.

Brett Rabatin, Analyst

Sounds good. Maybe just one last one on the margin. What are you guys expecting in terms of NIM expansion from the first 25 basis point rate hike at this point?

David Zalman, Senior Chairman and CEO

When we looked at, I think it's since like we mentioned earlier, it's takes us lower because we have some fixed loans, and especially with our fixed loans investment portfolio; it takes time. So we'll see an impact on the first 25, but it's not going to be significant as you go down the road, 6 or 12 months. So, the first one if I will see some but it's not going to be — I don't think it will be — it's not going to be that significant. It's going to take us 6 to 12 months to really see significant changes.

Operator, Operator

The next question comes from Graham Dick with Piper Sandler.

Graham Dick, Analyst

Hey, everybody, most of my questions have been answered but some quick question on liquidity. Looks like average balances were a bit higher quarter-over-quarter, even while you guys still bought a modest amount of bonds. Can you remind me of any of this quarter's inflows where it's seasonal or related to public funds maybe?

Asylbek Osmonov, Chief Financial Officer

It is seasonal. So if you tracked us, usually end of the year we get access to liquidity from public funds. And if you look, historically, we've grown about $400 million same as this case in December, we've had public funds increased about $400 million. That's why you see additional liquidity. But with public funds, what you also see we also have increases in January when the tax payments happened — property tax payments. So we see some public funds growing in January as well.

David Zalman, Senior Chairman and CEO

Our core deposits even grew strong in this last quarter too, was it $300 million or something?

Asylbek Osmonov, Chief Financial Officer

No, core deposits grew $900 million.

David Zalman, Senior Chairman and CEO

It's a lot.

Operator, Operator

The next question comes from Kevin.

Kevin Hanigan, President and COO

Yes, Gary, this is Kevin. In December, we secured several significant construction commitments that we expect to begin funding in the first quarter. This will have a modest impact, and we anticipate having strong outstanding commitments throughout the year.

David Zalman, Senior Chairman and CEO

That's right. There's always a lag time because the borrowers' equity goes in first. So their down payment so to speak, has to get utilized and then we start to fund. So there's always a time lag there.

Operator, Operator

The next question comes from Peter Winter with Wedbush Securities.

Unidentified Analyst, Analyst

Good morning. This is David for Peter Winter, and I have a couple of follow-up questions. First, are our overdraft fees included in NSF fees or categorized under deposit service charges? If they are included in those, how much do they amount to?

Asylbek Osmonov, Chief Financial Officer

Yes, the overdraft fee is included in NSF fees. I don't have any breakdown specific, but it's a significant amount there. I don't have any specifics there. Sorry. I could get back with you.

Unidentified Analyst, Analyst

No problem. Then the second here. What are you assuming in terms of deposit betas in terms of asset sensitivity?

Asylbek Osmonov, Chief Financial Officer

In our asset sensitivity, we have our betas on the interest earned or interest-bearing deposits about 36 basis points. But if you look back historically, when in 2015 to 2017 or '18, when Fed increased rates, if you look at actual our beta, they actually came in lower; we were calculating it was about 22 basis points per 100 rate increase. So, we included a little bit of being conservative in our model, but in reality, we had 22 basis points in 2015 to 2017.

David Zalman, Senior Chairman and CEO

I think with the amount of liquidity that our banks have right now, those betas are going to be a lot less — especially for the first year.

Asylbek Osmonov, Chief Financial Officer

Absolutely right.

David Zalman, Senior Chairman and CEO

Yes, for the economy to absorb so much liquidity, probably will be there. So the beta is probably going to be even less than it was back in '15 to '18.

Unidentified Analyst, Analyst

Perfect. Appreciate the color and then one last one on just any guidance in terms of long-term expense outlook with inflation pressures in the market? I know you've mentioned a bit of an increase in 2Q but I was just wondering kind of anything beyond that.

Asylbek Osmonov, Chief Financial Officer

Yes, I think it's kind of hard to go beyond when you go long term. But then starting second quarter, we see expenses going up a $1 million or $2 million at quarter end, probably stay there because the main increase, as mentioned as a merit increase in the middle of the second quarter. And beyond that, it's kind of hard to say, but inflationary pressures are there we see every day. So we have to deal with it and think the inflation is going to impact us.

Operator, Operator

The next question comes from Matt Olney with Stephens Inc.

Matt Olney, Analyst

Hey, good morning, and thanks for taking the question. First, just a clarification. Asylbek, I think you mentioned that PPP fees in the fourth quarter were $5.8 million. Did I get that right? And does that compare apples-to-apples with the $13.4 million in the third quarter?

Asylbek Osmonov, Chief Financial Officer

Sorry, I'm — it's $8.5 million, PPP fees for the fourth quarter 2021 were $8.5 million. And you're right; $13.2 million was in the fourth quarter 2020.

Matt Olney, Analyst

Got it. Okay, thanks for that. And then as far as the loan growth outlook mid single digits, 5% to 6%. I think we covered that the structured theory could be a little of a headwind. Any commentary on what types of loan growth will drive the positive growth in 2022?

Tim Timanus, Chairman

Drive the deposit growth?

Kevin Hanigan, President and COO

That's what I thought he said.

Matt Olney, Analyst

Well, I'm sorry, drive the positive growth that will offset the structured theory headwind, thank you.

Tim Timanus, Chairman

Okay. Kevin, you may feel differently, but I don't see a fundamental change in our mix of loans. I mean, we've got decent demand in all categories.

Kevin Hanigan, President and COO

I think it'll be maybe mortgage just not as robust as it was last year; it will still be solid.

Tim Timanus, Chairman

Right.

Kevin Hanigan, President and COO

And January was very solid. And C&I and construction on real estate and real estate projects right. Those are three categories we're looking to for further growth.

Tim Timanus, Chairman

Right. I don't — I just don't see any overwhelming material fundamental change in those percentages of our portfolio.

Kevin Hanigan, President and COO

Yes, but, Matt, if we can skew it with mortgage being down a little bit, we can skew it towards the other categories. That's good for margin. Think about our added new volume in the last quarter, when it was a mortgage product that the coupon was about 3%. And it was a non mortgage product the coupon was about 4%. So if mortgage tails off a little bit, and we pick it up on real estate, and C&I, we will benefit a bit from the margin expansion by just a shift.

Tim Timanus, Chairman

That's correct. That would help the net interest margin.

David Zalman, Senior Chairman and CEO

And with the economy, again, you never know where it's going to break out or another varying terms or anything like that, but excluding those crazy things. The economy is really good in Texas. It continues to grow; companies are moving in. If we can finally get supply chains fixed, and as these companies should be drawing more money, we should have a more vibrant economy. So I think you're right; I think that will move more towards C&I than what we get in the past. And I think you'll see the mortgage just go down.

Matt Olney, Analyst

Okay, that's helpful. And then, I guess following up on Kevin's commentary around the warehouse pricing and thinking about if we do get higher interest rates in the back half of the year. It sounds like we shouldn't expect any lift on the yields on those warehouse balances but instead more just flatten out. Is that fair?

Kevin Hanigan, President and COO

That was fair, Matt, yes.

David Zalman, Senior Chairman and CEO

And I think the reason for that is probably our rates are probably a little bit better than they are at other banks. And so the people are banking with us just because of longer-term relationships where some of the other banks may get some immediate, I don't know, they'll have to go down as much, but we won't, it won't go up as much either.

Kevin Hanigan, President and COO

Right.

Matt Olney, Analyst

And just lastly, think about credit quality, the allowance ratio at Prosperity still looks really high. Any thoughts on if you'll need any provision expense in the near term?

Tim Timanus, Chairman

Like $300 million in reserve and 29 million, I don't see it right now.

Matt Olney, Analyst

All right. Well, I'll ask you again next year or maybe the year after that.

Tim Timanus, Chairman

Hopefully, we will answer we say next year also.

Operator, Operator

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

Charlotte Rasche, General Counsel

Thank you. Thank you, ladies and gentlemen for taking the time to participate in our call today. We appreciate your support of our company, and we will continue to work on building shareholder value. Thank you.

Operator, Operator

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