Prosperity Bancshares Inc (PB) 2013 Q2 法說會逐字稿

Good day everyone and welcome to today's program. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session.

(Operator Instructions).

Please note this conference call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Ms. Charlotte Rasche.

Thank you. Good morning ladies and gentlemen. Welcome to Prosperity Bancshares second quarter 2013 earnings conference call. This call is being broadcast live over the internet at www.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, Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Chris Bagley, our Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter and an update on our recently announced merger and acquisition activity. He will be followed by David Hollaway who will spend a few minutes reviewing some of our recent financial statistics and Tim Timanus 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, Leo, or you may e-mail questions to Investor. Relations@ProsperityBankUSA.com. I assume you have all received a copy of the earnings announcement we've released earlier this morning. If not, please call Tracy Elkowitz at (281)269-7721 and she will fax a copy to you. 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. As such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone joining us for our second-quarter earnings announcement. I'm very excited and proud to be able to announce such positive results for the second quarter of 2013. We posted net earnings of $53.844 million for the three months ended June 30, 2013, compared to $36.972 million for the same period in 2012, which represents a 45.6% increase.

Our diluted earnings per share for the quarter ended June 30, 2013, came in at $0.89 and that's compared to $0.78 for the same period last year, representing a 14.1% increase. Our asset quality continues to be one of the best in the industry, with total nonperforming assets of $14.864 million and our ratio of nonperforming assets to average earning assets of only 11 basis points for the second quarter 2013, compared with 12 basis points for the second quarter of 2012. Our provision for credit losses increased during the quarter, based on our allowance methodology, which includes numerous factors such as loan growth. Our allowance for credit losses was $56.176 million as of June 30, 2013, with nonperforming loans at $4.620 million at the same date, representing a healthy coverage ratio.

Loans at June 30, 2013, were $6.172 billion, an increase of $2.222 billion or 56.3% compared with the $3.950 billion at June 30, 2012. On a linked quarter basis, loans increased $909 million, or 17.3% from $5.2 billion at March 31, 2013. Looking at loan production on an organic basis, excluding loans acquired in acquisitions since the second quarter of 2012, and the new production at those acquired banking centers since the respective acquisition dates. Loans at June 30, 2013 grew 7.8%, compared with the June 30, 2012 and 3.7%, 14.6% annualized, on a linked quarter basis. We are pleased with the higher level of organic loan growth during the second quarter and we continue to see increased demand for new loans.

Deposits at June 30, 2013 were $12.5 billion, an increase of $4.1 billion or 49%, compared with the $8.3 billion at June 30, 2012. On a linked quarter basis, deposits increased $795 million, or 6.8%, from $11.7 billion at March 31, 2013. Looking at only organic deposits -- meaning excluding deposits assumed in acquisitions since the second quarter of 2012, and new deposits generated at those acquired banking centers since the respective acquisition days, deposits at June 30, 2013, grew 5%, compared with June 30, 2012 and decreased 2.1% or 8.4% annualized on a linked quarter basis.

The decrease in organic deposits for the quarter is not unusual for us. In fact, if you go back to the second quarter of 2012, you will see a similar situation. We have over 400 municipalities that do business with us at this time and at this time of the year they have less in their accounts until their tax dollars come in at the end of the year. We also experienced other customers using deposits to invest in their businesses and pay taxes. During the last quarter of 2012, we saw an increase in organic deposits of $538 million, or 6.5%, 26% on an annualized basis. For the full year in 2011, we saw organic deposits increased 10.1%, or $824 million and then expected that we would see some of those deposits leave later in the year. Historically, our organic deposit growth has been approximately 4% to 6% annually.

The net interest margin, on a tax equivalent basis, decreased to 3.43% for the three months ended June 30, 2013, compared with 3.55% for the same period in 2012, and increased from 3.42% for the three months ending March 31, 2013. Going forward, the steepening of the yield curve and our increasing loan volume, should be a positive for our net interest margin. The 10-year bond has increased over 2.5% from 1.5%, not that long ago, with no increase in short-term rates. While this is positive for our net interest margin, it will erode the unrealized gains we have had in the bond portfolio. However, since the majority of our bond portfolio is [entailed] to maturity category, any change in unrealized gains as rates increase, should not affect our capital ratios.

On July 1, 2013, Prosperity announced the signing of a definitive merger agreement with First Victoria National Bank Corporation and its wholly-owned subsidiary, First Victoria National Bank, headquartered in Victoria, Texas. First Victoria National Bank operates 34 banking offices. As of June 30, 2013, First Victoria National Bank on a consolidated basis reported total assets of $2.4 billion, total loans of $1.6 billion, and total deposits of $2.1 billion.

I could not be more excited about joining forces with all of the professionals at First Victoria National Bank. We have always had a great deal of respect for the bank and all of the people that have contributed to its success. We believe the combination will further strengthen our already strong Management and operations team in South Texas and increase our ability to effectively continue to serve our customers. We look forward to all the new team members that will help Prosperity grow to the next level.

First Victoria will add to Prosperity's trust department, which had approximately $1 billion in assets at June 30, 2013. First Victoria National Bank's trust department has approximately $500 million in assets with locations in several cities, including the Woodlands, north of Houston, where Exxon is now building their headquarters. We believe the combination with First Victoria will help us expand the trust business more rapidly into the Houston and Austin areas. Russell Marshall, who is First Victoria National Bank's CEO, will lead a new private banking group for us, which will cater to professional and higher net worth customers providing them loans, brokerage and trust services. We remain on track to close the transaction in the fourth quarter of 2012.

Again, we owe all of our success to our team of associates and Board members who have helped grow the Company in the right direction with all of their hard work, insight and dedication and for that, I say thank you. We would also like to thank all of our customers for their business and loyalty to the Bank. Thanks again for your support of our Company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer. David?

Thank you, David. Net interest income for the three months ended June 30, 2013 was $118.7 million, compared with $83.7 million for the same period in 2012, an increase of $35 million or 41.9%. This increase was primarily due to a 47.5% increase in average interest-earning assets.

Non-interest income increased $11.6 million or 85.1% to $25.3 million for the three months ended June 31 -- June 30, 2013 compared to $13.7 million for the same period in 2012. This increase was impacted by the American State Bank transaction which closed July 1, 2012, and only contributed to an increase in service charges related to deposit accounts that added new lines of business including trust and mortgage operations.

Non-interest expense for the three months ended June 30, 2013 was $61.3 million compared to $40.8 million for the same period in 2012, an increase of $20.5 million or 50.3%. This increase was also impacted by the American State Bank transaction, as well as the Coppermark transaction, which closed on April 1, 2013. Efficiency ratio was 42.5% for the three months ended June 30, 2013, compared to 41.9% for the same period last year and 42.4% for the three months ended March 31, 2013.

Non-interest bearing deposits at June 30, 2013 were at $3.28 billion and represented 26.2% of total deposits, up from 24.8% at June 30, 2012 and 25.6% at March 31, 2013. The loan deposit ratio at June 30, 2013 was 49.3% versus 47.1% at June 30, 2012 and 44.9% at March 31, 2013. Off the bond portfolio metrics at June 30 showed a weighted average life of 3.78 years and projected annual cash flows of approximately $1.8 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality, Tim?

Thank you. The Bank's nonperforming assets at the end of the second quarter totaled $14.864 million which is 24 basis points of loans and other real estate, as compared to $18.133 million or 34 basis points, at the end of the first quarter of this year. This represents a decrease of 18% in NPAs from the end of the first quarter of this year.

The June 30 nonperforming asset total is made up of $4.620 million in loans and $10.244 million in other real estate. There were no repossessed personal property assets. As of today, $2.270 million of the June 30, 2013 nonperforming asset total are under contract for sale. This represents 15% of the June 30, 2013 NPAs as being under contract for sale. We always have to mention that there's no guarantee that any of these contracts will close.

Net charge-offs for the three months ended June 30, 2013 were $1.423 million, compared to net charge-offs of $315 thousand for the first quarter of this year. $2.555 million was added to the allowance for credit losses during the second quarter, compared to $2.8 million during the first quarter of this year.

The average monthly new loan production, for the second quarter of this year, was $186 million, compared to $141 million for the quarter ended June 30 -- excuse me, quarter ended March 31, 2013. This is a 32% increase on a linked quarter basis. The average monthly new loan production for the entire year -- the 12 months ended December 31, 2012, was $138 million. So, the average monthly new loan production during the second quarter of this year represented a 35% increase over what was done during the calendar year 2012.

Loans outstanding at June 30, 2013 were $6.172 billion compared to $5.263 billion at the end of the first quarter. And as David previously mentioned, that represents a 17% increase. The loan total at the end of the second quarter was made up of 46% fixed-rate loans, 36% floating rate loans and 18% variable rate loans. Charlotte, I'll now turn it over to you to coordinate questions.

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

(Operator Instructions).

We'll take the question from the site of John Pancari of Evercore Partners.

This is Rahul Dutta on behalf of John. Just looking at the loan balances at Coppermark. It looks like, from March 31st, to June 30, the decline seems to be beyond the loan mark. Was that intentional? Maybe you could throw some color behind that decline?

I don't know that I understand the question.

I think the question was, that it appears to him that the decline in the outstanding balance of the loans was in excess of what the mark might've indicated. Am I correct? That's the question?

Right. At Coppermark, yes.

I would answer that and say that it's not unusual that whenever we merge with another bank, that we do see a reduction in loan dollar amounts. It's just simply loans that we might have identified that they may not typically fit our model, or something like that. It's not unusual to see as much over a year or two-year period, as much as a 15% to 20% decrease in the loans that a bank that joins us may have before they start picking back up.

Okay. Then, just in general, loan demand. Could you give us some color behind -- are you seeing an improvement in your markets, in terms of loan demand? Is loan growth coming, basically, from market share gains?

With Randy and Chris in here, they may want to jump in on this question. I do sit in at the loan committee meetings that we held on Thursday. I do think our loan demand looks robust.

Having said that, it's still very competitive out there, from what we're seeing. I'd have to say, overall, it does look more robust right now. You want to add something?

I think the loan demand is good and we are seeing loan request from really all sectors of the economy, with the exception that we don't see very many, what I refer to as large dollar, single-family residential lot development requests. We don't see very many large-dollar commercial loan requests for rental type spaces.

But we see a lot of owner-occupied requests on the commercial side. We see medium to small dollar request. Once again, we don't see a lot of large dollar requests. It's coming to us from all directions, but less so in those two areas.

All right. Lastly, how would you characterize the pay down activity this quarter? Has it been stable or has it improved?

The pay down activity is what I refer to as normal. It appears to have gone down on a linked-quarter basis. It's up a little bit from the average in 2012. But, it is down on a linked-quarter basis.

Thanks.

(Operator Instructions).

We'll move next to Jefferson Harralson of KBW.

What percentage of the Coppermark expense savings would you say hit this quarter?

That's a good question. (laughter) You know, historically, we've always targeted 20%, 25%, maybe even 30% in all these bills. So, the question is how much of that could we have realized in the first quarter? I would say at least half of it, maybe more.

I know where we're going on this is how much more is there going forward and I think there will be additional cost saves. But I don't want to leave the impression that there's another 30% for 25% like that. So, yes, there's a lot of it.

You can just do the numbers. You saw they were running at $8 million on a per quarter basis. So, you can kind of back into it to see where we're at today on the cost saves. I know that's not a pristine answer, but --

No, that's okay. In my follow-up I wanted to ask on the accretable yield being lower this quarter versus last quarter. And it seemed like it may have been higher, since you had Coppermark now in the numbers, in the first quarter with Coppermark in there. Can you just comment on what drove the change in accretable yield and why it might not have been a little higher?

I'll jump in in the big picture and one of the other folks in here might want to give you a little more detail. I would just paint the big picture and say, remember, as we are doing each one of these builds and it brings the fair market adjustments to them, each portfolio is different. One of the things that would impact us, and again, looking forward, you just have to give us consideration. I don't want to get too much in the weeds.

There are two buckets to these loan portfolios. There's the, what we call the FAS 91, which is the pure accretable and the old term of SOP -- SO3-3 loans which are more the credit issue. So what's happening, and I think this is specific to Coppermark versus some of the prior deals, there are more loans discounted from an SOP 03 perspective than say the FAS 91. And I think that's what you're seeing when you look at accretable yield.

I think, Chris might want to comment on that, but that would be my big picture observation.

I think David's actually right, Jefferson. The loan report portfolio's different. I think what we saw in ASP was, maybe, a quicker decline because we had a lower interest rate environment for the last few quarters that were driving some of the re-financings. Maybe less impact on the Coppermark so far, that is part of it too. The real answer is it's hard to predict exactly how the loan portfolios will react in terms of payoffs and refinancing.

Got it. Thanks, guys.

Our next question comes from Brett Rabatin of Sterne Agee.

Good morning. I was hoping to maybe get a little more color, David, around the securities portfolio thoughts going forward and with the lift in the 10-year, if you're going to be doing more reinvesting. You've also got First Victoria closing, which is pretty loaned up. Can you give us some thoughts, maybe, on how you're going to manage liquidity and if you will be doing a lot of reinvesting with the current yield -- current yield curve?

A lot of questions in there, but I would say, number one, you looked at it right. I mean with First Victoria National Bank, they have very little amount of money that they have in securities, most of their excesses are in loans.

For us, going forward, hopefully, we will continue to increase loans which will take over some of the liquidity. We have about $1.8 billion a year in cash flow off of our portfolio, with a 3.7 year average life. Our yield today is probably, what's our yield right now in the portfolio, Dave?

It was a 198.

198. So, it's pretty easy to see that the reinvestment that we would probably be reinvesting in would be somewhere around the 2.5% yield. So, that would be a pickup.

The good part is with interest rates going up, we can really see a better -- an increase in earnings, which we think is the right thing to do.

The downside to that is, where in the past you guys have seen over a $200 million gain in the portfolio, as interest rates have gone up, that unrealized gains rose, so we would want further interest rates to continue going up 200, 300 basis points. I think it would still be positive, very positive for the company, from an earnings perspective.

At the same time, you could see bigger unrealized losses in the portfolio paying on interest rates, parallel and non-parallel, I don't want to get into the weeds on all of that. But, you know you could see bigger losses, but for the most part, we think interest rates going up is a good thing for us. We do some stress analysis and we can look and even as interest rates go up 300 basis points, our effective duration on the portfolio is about 3.8 years. So, it will go up.

There will be some downside, downturn in the valuation of the bonds themselves. On the other hand, it's not an unreasonable, it's still relatively short compared to most bonds. We think it's a good thing.

Maybe a different way to ask the question is, aside from the discount accretion with the First Victoria deal, is it safe to assume the margin moves up 5, 10 basis points in the next quarter or two? Can you give some thoughts around the margin and how you see that playing out?

When you make that observation, are you including first Victoria in the numbers? Or --

First Victoria in the numbers, but maybe, sort of, taking out the discount accretion thought, or if you want to include it, that's fine, I guess. But just thinking about the margin from a topical perspective and how you guys are thinking about it.

What will be interesting is when you look at the First Victoria, if look at their call report this last quarter, their margin was like three -- I won't give this exact, it's like 393 or 395. So, I mean, they're lent up. As David said, they hardly have any securities. So, the loan/deposit ratio will increase.

If they're at 393 and we're at -- take the accretion out if you want, we're in the low threes. It should help our margin. Just a question of the wait and how much of our total portfolio will get that higher-margin that they bring to the table. So, it should have a positive bias to the margin.

Okay. Fair enough. Thanks for the color.

Our next question comes from Brad Milsaps of Sandler O'Neill.

Just a follow-up on Jefferson's question in regarding the expenses of Coppermark. On the flip-side, the fee income -- it looks like they were running closer to $3 million a quarter. You guys didn't pick up quite as much. Was there a component of mortgage in there, or is there something else that might be missing that might come online maybe in the third quarter or fourth-quarter?

I think that that had come before. If you are looking back at the call report, I thought I saw they were running, maybe, a little over $2 million a quarter in fee income.

The question is, we didn't really make any changes to the fee structure. Maybe David will jump in. I think it is what it is. So, I don't know there's anything new, quote-unquote, new coming online as we go forward.

We looked at the quarter internally. The fee income they generated wasn't -- it's not $3 million. Again, I'm not sure I agree with that number. It wasn't too far off from what they were running from what we saw.

I think it's safe to say that the performance from mortgage it softened some. But I don't think it was, from an overall standpoint, as significant enough number to make much difference. So, I don't think it's in mortgage.

(multiple speakers). That could impact a little.

Okay. Then, just maybe a bigger picture question as it relates to Oklahoma, now that you guys have been there, officially, for 90 days or more now after the deal is closed. Any observations or big differences between operating there or Texas? What you are seeing from loan demand perspective, pricing, just any color would be great.

We think that the whole group in Oklahoma really -- there's a certain period of time that when another bank merges with you, especially from the lending side, that it takes time to really get used to the policies and procedures and note areas and stuff like that.

I would say, overall, we're ecstatic with the Oklahoma group. They seem to be making a turn faster than most of the other banks that have ever joined us. They're positive, their attitude is so positive and they understand there's certain things that they might've done and certain things we would have done. Sometimes they're different. But they're beyond that and the management team and everybody there has just been really, I think, they're way ahead of schedule, quite frankly.

I think the only difference in the type of lending that we have seen from Oklahoma is compared to what I would describe as traditional Prosperity lending, is they have more of an oil and gas energy related effort than we historically have had. Now, that obviously changed for us when we acquired American State Bank a year ago. So, we have become accustomed to and comfortable with more energy lending over the last year.

So, I think what that translates to, is that with Coppermark coming on board, I don't think we've really seen anything that's different than what we've been seeing for the last year in anything that we're particularly uncomfortable with. The fact is, as David says, we're very happy with the performance of the people and how it's going.

Let me jump back in on your first question. As Zalman was reminding me, on the Coppermark deal, they had a subsidiary entity for a credit card area and that's what you're seeing in those numbers.

If you look back and the last year, seeing the $3 million non-interest fee income line, it's including that subsidiary. If you look at the first quarter that they reported, dropped down to $2 million. The big picture observation I would make is, when you're looking at that subsidiary, yes, they were generating that gross revenue, if you will, that showed up in non-interest income. But you have to factor in the expenses that went with it. If you were to pull that subsidiary out and look at it on a net-net basis, they weren't making, maybe, this is why I was confused, they weren't making maybe net $30,000 a month, maybe.

Okay. That's very helpful. I know, David, you guys were working on rolling out more cards throughout your franchise. Any update on that?

I would say, overall, it's looking very positive. Our marketing people have gone around the state to different regions in the state, and again, doing a lot of training, working with promotions to, when people refer a customer for our credit cards. In the bank, they get a certain dollar amount. And, secondly, if the customer actually re-approved the credit card they get a bigger amount. We're really focused on that.

I think Dave was actually referring to some of the merchant cards. In Oklahoma, they actually had subsidiary that processed credit cards for a number of different banks. That, he was probably referring more to that than us actually coming out with, with expanding our own credit card loan.

But all the above is true. I mean, they get -- as a subsidiary they had merchant credit card and what's going on on a ground-level is the merchant for companies across the country is not something we're going to do. The credit card part of the business, they're actually in the process of merging that into the operation that American State Bank had. And that's what Dave is talking about.

We're taking that whole credit card program and starting to introduce that bank-wide, they kicked off that program here in the last few weeks. If we can hit our customer -- our total customer base with over 500,000 accounts, I think there's huge opportunity for credit cards.

Thanks, guys.

More than just the individual credit card, we are focusing also on corporate cards, because we have so many commercial customers, especially in the energy business. If we can get them using our card, not that they would carry balances, but the transaction fees would generate a good source of income for us.

Great. Thank you.

(Operator Instructions).

We'll move next to Jennifer Demba of SunTrust Robinson Humphrey.

Question on the energy lending portfolio. I'm curious as to what the size is at this point and how you are approaching it. What you think the growth prospects are in the next two or three years? Thanks.

Hi Jennifer, it's Chris Bagley. The energy lending portfolio directly tied to improvement producing reserves, probably in the $70 million range, give or take. But, if you look at a market like Midland Odessa, I would say that every loan there is basically tied to the energy business. If you want to look at it from a risk perspective.

Oklahoma brought, and ASP, Coppermark and ASP both brought energy loans to our portfolio. Most of those were seasoned customers that they've known for a long time based on proven producing reserves with a conservative borrowing base that monitors the outstanding balance.

I would say that from a future business growth perspective, we're still learning and wrapping our arms around that kind of lending and we'll just assert the opportunities as they're presented. Right now, we think we seem like we have a good handle on the risk and it looks like a good component of the business for us. Does that help?

Overall, Chris, what do you think our total energy -- I know you can say well, when you're in those areas everything is related to energy. But when you look at different services like the vacuum truck business and other areas of the energy business, what do you have off the top of your head, what our total energy loans are?

I don't have that off the top of my head. I will tell you that we're slicing and dicing those numbers as we go forward. Some of that, there's just noise in the data because we've done two pretty large acquisitions and some of that information is not available when it came over in conversion. We are in the process of cleaning some of that up and will have better numbers on a go forward basis.

I think Coppermark had somewhere between $100 million and $150 million in directly related energy credits when they joined us.

There is improvement, primarily more production than anything.

I think that's accurate. That is right.

Midland Odessa has service industries --

Well, they have more of a combination --

Combination.

Right.

What it means going forward, Jennifer, I think that's a hard question. The energy market in business in both Texas and Oklahoma is very good and has been. So, it's a little hard for me, personally, to think it can get much better. Anything can get better, anything can decline. But, it's literally booming right now.

So, I don't know that there's a whole lot of significant upside just in the market, it's self, getting better. In the areas that we operate, as good as it is, there are only so many customers in the business. We have a very adequate share and percentage of those customers right now. So the question is, how many other customers might join us.

Then, would we go to other marketplaces. In other words, would be go to somewhere other than Texas and Oklahoma? That becomes very iffy there. So, I don't see a huge immediate increase in the energy business for us.

I think we would say we maintain what we have and grow on a onesie, twosie basis.

Exactly.

It's not our intention to really higher a whole energy Department and grow the energy Department like that. I think we're happy with what we have and the growth that we get from it. We're not going to make an all-out attempt just to build an energy department.

I think that's exactly correct.

Thank you. That's very helpful.

Our next question comes from Matt Olney of Stephens.

David, you mentioned earlier the impact of higher rates and how it's good for the bank, in general. What's your opinion about higher interest rates on your M&A strategy? What does this mean for the outlook of some of the potential sellers out there in your core footprints?

When I go back and looked, I don't know that higher rates have really impacted the M&A or at least the pricing that we use in our models or anything like that. I would say that, maybe, from the sellers perspective, higher interest rates may be able to help to keep somebody from selling, perhaps. Because, you should see net interest markets pick up.

Right now, with the way it is right now, the net interest margins were so thin and going so far down and the regulatory burden, not only us, but everybody has, it's almost impossible to really stay in business as a smaller entity. From their perspective, it may be bigger if their earnings could pick up. But again, most of the smaller banks, for the most part, at least the ones we're looking at, they already have the majority of their assets in loans and not in securities. So I don't know just how much that would actually help them.

I think, more than anything on the M&A said, it's going to continue to drive the M&A side, is just a regulatory burden. In my whole career, I've never seen the amount of regulatory burden that we're seeing right now. I mean, it's costing -- the amount of money were you're spending for models and stress testing and the new buzzword with all the regulators, quantitative, quan-analysis, I mean, it's just -- they have a model policy, for all the regular models.

It's going to such an extreme and this is something that Washington wants. I don't know if the smaller banks are getting put through this, but I would think that even in their amounts per loan loss calculations, their stress testing, their asset liability models, it's just unbelievable. To hit everything they would want, you would need a nuclear scientist. You would never have a real practical aptitude.

That's something that it is. I think that's probably a bigger burden on things than anything else right now that I can tell.

Okay. Thanks, David.

(Operator Instructions).

Our next question comes from John Arfstrom of RBC Capital Markets.

Just a follow-up on that one, David. What is the acquisition appetite? It seems like you got a pretty good fundamental, organic growth and margin story going. Curious if you're going to sit back and ride this for a while, or you're ready to go again?

Well, we always have to be careful, because last time I said we weren't going to do anything for six months and somebody said well, you did something. But, we really did wait six months last time before we announced the first Victoria that went back to the comments we did.

You know, I'm going to be a little bit more cautious in saying that I think that there's certain premier banks that we've worked on for years, a lot of years. I would say that if one or more of those banks do become available, I think that we would probably still do a deal. We would still make something happening and again, that's pending a couple of things that we feel, that our backroom operations are in good shape, our loan areas, our deposits functions, our accounting functions. And probably more so than that, that the regulators would bless it at the same time, in today's world, you almost have to get their blessing if it's a big deal, or $2 billion plus, or something like that.

Where In the past, we used to do the deals and we do the deal and then file an application. So, there's a lot more going into it right now. I think there's just a lot -- long answer short -- we would still be interested in doing deals if it's the right deal that makes a lot of sense.

Then, another question. Earlier in your prepared comments, you talked about customers using deposits to invest in businesses -- in their businesses as just kind of one of the trends impacting deposits. How prevalent is that? You mentioned a few factors. Curious how much weight you would put on that?

I think it's two things. I really think it's one that they increase tax burn for the small businessman and higher professionals and individuals, that's the burden that's taking, I don't know, you're probably one of those rich guys -- I know I see it -- your taxes have gone up dramatically. I think that, probably, I would say half -- again, I don't know that this is accurate exactly, but I'm trying to give you some kind of color on it.

I think, out of the 100 and something million that we were down this quarter in deposits, I would say half of it actually related to what I would call municipalities, which is normal. And I would say the other half really went to a bigger portion to pay taxes and invest in the businesses. I think half of that. I don't know if that's enough color or not.

That helps. It's just looking for more color on that and that helped.

It's probably more so the historical decline the public funds. We see it this time every year.

Right.

They collect their taxes several months ago and now they're spending the money. It's going out. That's very normal. We always see outflows in April when everybody pays their taxes. That's very normal.

I think there's more this year, from what I can tell.

Well, from a personal standpoint yes.

I can speak to that personally.(laughter).

But, do see people that seem to be wanting to really start using some of their money. I don't know if that's going to the stock market or to the businesses or who knows what. It seems to be a little bit more.

I think the economy, where we operate is good. The investment environment is not good on fixed income basis and hasn't been. I think people are taking their money and doing other things with it.

Basing some of that on, and I don't want to beat this thing to death, but, we saw so much in the last quarter of last year. We had like, again, I'm off talking off the top of my head. I had it in my notes earlier about a 26% annualized growth for the year. We had a 10% organic growth rate.

I don't see the growth rate and deposits as much this year as we had last year. A year in, that will change, and we'll get a big scoop in here. But, again, I don't think you'll see the big organic gains that you had in the prior year or two. And that's what leads me to believe there's more people using their money all the time, because the business is still good.

Okay. Just one solo question. I'm assuming the Prosperity Bank US instead of Prosperity Bank Texas is just to accommodate Coppermark? There's nothing more to that?

That's exactly right. When we came up with our deal it was Texas, but it doesn't look very good in Oklahoma to have Texas on your dot com.

Okay. No Prosperity Bank Worldwide?

Bank of the World. No, not yet. (laughter).

All right. Thanks for the time.

Our next question comes from Gary Tenner of D.A. Davidson.

Guys, I don't know if I missed this in your prepared remarks. Just a question on bond premium amortization, it looks like it was down about $4 million versus the first quarter. If rates stay stable, near the current levels, where would you project that declines to, say, in the back half of the year?

I wish I had that crystal ball. That's driven -- you can see that's just a change from one quarter to the other, purely driven by interest rates and the impact on the prepayments speeds and cash flows. So, you can make all kinds of assumptions of where rates are and how that will impact it.

I guess the big picture answer here, probably not going to be the best answer, is based on where we're at today, it should continue to be low and it's possible it could continue to reduce. I can't tell you another $4 million per quarter. I don't think that's realistic.

Again, probably -- I would say with no change, you can expect where we're at, or do you think it wouldn't be as much?

I don't think it would go down even more.

I wouldn't say it would go down more, but I think you could use what you have this quarter --

Absolutely.

I think that there's a possibility that it could slowdown more. Our paybacks, with the $7 billion or $8 billion that we have, just to give you some kind of color on this, we're getting $1.8 billion a year back off of the portfolio. If interest rates go up 300 basis points, that drops to $1.2 billion, $1.3 billion a year. There is definitely slowdown when interest rates go up.

The bias is to continue to improve, it's hard to make the cost of how much it will be over the next six months.

Okay. I appreciate the color.

And there are no further questions at this time.

Thank you, Leo. Thank you, ladies and gentlemen. We appreciate you 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. Thank you very much.

This concludes our conference call for today. You may now disconnect your lines and everyone have a great day.