Prosperity Bancshares Inc (PB) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Prosperity Bancshares fourth-quarter 2014 earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note today's event is being recorded.

At this time, I would like to turn the conference call over to Ms. Charlotte Rasche. Ma'am, please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' fourth-quarter 2014 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 Holloway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Mike Epps, Executive Vice President for Financial Operations and Administration.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Holloway, who will review 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, Jamie. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Tracy Elkowitz at 281-269-7221, and she will send 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, and as such, may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

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

Now let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone joining us for our fourth-quarter earnings announcement. I'm very excited to announce such positive results for the fourth quarter of 2014.

We posted earnings of $78.2 million for the three months ending December 31, 2014, and that's compared with $62.9 million for the same period in 2013, an increase of $15.2 million or 24%. Our diluted earnings-per-share for the fourth quarter for 2014 came in at $1.12, and that's compared with $0.98 for the same period last year, an increase of 14.3%.

The net interest margin on a tax equivalent basis increased to 3.8% for the year ended December 31, 2014 compared with 3.58% for the same period in 2013. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis increased to 3.29% for the year ending December 2014 from 3.2% for the same period ending in 2013.

Our Tier 1 leverage capital ratio stood at 7.69% at December 2014 compared to 7.4% at September 30, 2014. Our strong earnings continue to build capital rapidly. Loans and deposit growth was impacted by the acquisitions of First Security National Bank in November of 2013 and F&M Bank in April of 2014. We continue to show strong organic loan growth, excluding loans that were acquired in the First Victoria and the F&M Bank acquisitions, and new production at the acquired banking centers since their respective acquisition dates.

Loans at December 31, 2014 grew $549 million or 8.9% compared with December 31 of 2013, and increased $148 million or 2.2%, 9% annualized on a linked quarter basis. While we saw loans decrease at the acquired banks, it is not unusual for us to move out certain loans that do not necessarily fit our risk appetite or pricing policy.

We'll continue to have record production in loans, but still see a lot of paydowns. Tim will discuss this more detail in his comments.

Strong asset quality continues to be one of the core values of our Bank. Nonperforming assets totaled $36.9 million or 20 basis points of quarterly average earning assets at December 31, 2014, and that's compared with $50 million or 27 basis points of quarterly average earning assets at September 30, 2014. We continue to make progress with targeted loans identified in recent acquisitions.

We also saw strong organic deposit growth, excluding deposits assumed in the First Victoria and F&M Bank acquisitions, and new deposits generated at the acquired banking centers since the respective acquisition dates. Deposits at December 31, 2014 grew $461 million or 3.5% compared with December 31, 2013, and increased $507 million or 3.9%, 15.6% annualized on a linked quarter basis.

Although our fundamentals are strong, our stock price has languished recently. We believe our stock price is due to investor sentiment regarding the decrease in crude oil prices. We have reviewed our energy credits and have not seen any negative effects in the loan portfolio to date, although we expect it may take six to nine months to feel the impact of lower oil prices.

Our management team has been in banking since the 1980's and is familiar lending to the energy industry, and in Texas and in Oklahoma. Texas currently has low unemployment numbers and more diverse employment opportunities than it has had in the past. While we expect job growth will be impacted by the lower oil prices, we believe that with the diverse and broader employment base, the Texas economy will continue to grow at a healthy pace.

I would like to thank all of our associates, directors, and customers for all of their help in making our Company the success it is. Thanks again for your support of our Company.

Let me turn over our discussion to David Holloway, our Chief Financial Officer.

Thank you, David. Net interest income before provisions for credit losses for the three months ended December 31, 2014 was $177.8 million compared to $145.5 million for the three months ended December 31, 2013, an increase of $32.3 million or 22.2%. This increase is primarily due to a 19.4% increase in average interest-earning assets for the same period.

For the full-year 2014, net interest income was $671.2 million compared to $498.9 million for 2013, an increase of $172.3 million or 34.5%. And again this increase is primarily due to a 25.9% increase in the average earning assets for the same period -- interest-earning assets for the same period. The net interest margin on a tax-equivalent basis was 3.89% for the quarter ended December 31, 2014 compared to 3.82% for the same period in 2013, and 3.85% for the quarter ended September 30, 2014. Excluding the purchase accounting adjustments, the net interest margin on a tax-equivalent basis for the quarter ended December 31, 2014 was 3.25% compared with 3.35% for the same period in 2013, and 3.26% for the quarter ended September 30, 2014.

Noninterest income increased $4.9 million or 19.7% to $30.1 million for the three months ended December 31, 2014 compared to $25.2 million for the same period in 2013. This year-over-year increase was impacted by the F&M and First Victoria National Bank transactions. For the full-year 2014, noninterest income was $122.9 million compared to $95.4 million for 2013, an increase of $27.5 million or 28.8%.

Noninterest expense for the three months ended December 31, 2014 was $84.8 million compared to $68.6 million for the same period in 2013, an increase of $16.2 million or 23.6%. And again, this increase was primarily impacted by the F&M and First Victoria National Bank transactions. For the full-year 2014, noninterest expense was $330 million compared to $247.2 million for 2013, an increase of $82.8 million or 33.5%.

The efficiency ratio was 40.78% for the three months ended December 31, 2014 compared to 40.21% for the same period last year and 41.55% for the three months ended September 30, 2014. The bond portfolio metrics of 12/30 show the weighted average loss of 4.1 years and projected annual cash flows of approximately $1.5 billion.

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

Thanks, Dave. Our nonperforming assets at year-end December 31 totaled $36,919,000 or 40 basis points of loans and other real estate, compared to $50,082,000 or 53 basis points at September 30, 2014; and $22,504,000 or 29 basis points as of December 31, 2013. The December 31, 2014 nonperforming asset total was made up of $33,615,000 in loans; $67,000 in repossessed assets; and $3,237,000 in other real estate. As of today, $4,681,000 or approximately 13% of the December 31, 2014 nonperforming asset total are under contract for sale, but there can be no assurance that those under contract will close.

Net charge-offs for the three months ended December 31, 2014 were $3,201,000 compared to net charge-offs of $653,000 for the three months ended September 30, 2014. Net charge-offs for the year ended December 31, 2014 were $4,795,000 compared to $2,522,000 for the year ended December 31, 2013. $6,350,000 was added to the allowance for credit losses during the quarter ended December 31, 2014 compared to $5 million for the third quarter of 2014, and $18,275,000 was added during the year 2014 compared to $17,240,000 for 2013.

The average monthly new loan production for the fourth quarter ended December 31, 2014 was $292,000 compared to $285 million for the third quarter ended September 30, 2014. This represents a 2.5% increase on a linked quarter basis. The average monthly new loan production for the year ended December 31, 2014 was $260 million compared to $184 million for 2013. This represents a 41% annual increase.

Loans outstanding at December 31, 2014 were $9,244,000,000 compared to $9,369,000,000 at September 30, 2014 and $7,775,000,000 at December 31, 2013. The December 31, 2014 loan total is made up of [43%] fixed-rate loans, 36% floating-rate, and 22% variable-rate loans.

I will now turn it over to Charlotte, who will coordinate your questions.

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

(Operator Instructions) Scott Valentin, FBR.

This is actually Andrew Karp on the line for Scott. Can you give some detail on the energy exposure in the loan book at the end of the quarter?

We don't have that. Can you get those numbers? Oh, I can do it. Okay, go ahead, Tim.

Basically, we've got about a $520 million. That's just a round number in energy credits. About $220 million of that are production loans and about $300 million are service company loans. So, that's about a little over 5% of our total loan portfolio that's energy-related. It's about 5.6%.

Thank you. And if I remember correctly, that's down a little bit from the concentration in the third quarter? Does that sound right?

It is down a little bit. We had some energy-related credits pay off. So that's correct.

Thank you. And then just on the expense side, it looks like the salary and benefits expense was down from the third quarter. Was there a reduction in headcount or is there something else that drove that?

I think it was just, in the bigger picture, just some of the queries we do for merit pay that hit their target. So it was reduced in the fourth quarter. If you're kind of looking forward, I would bring that number up just a little bit as we come into 2015.

Okay, great. Thank you.

Ken Zerbe, Morgan Stanley.

I guess a couple of questions. The first one, continuing to see any guidance on the purchase accounting adjustments; obviously a little higher this quarter. Expect that to run off over time, but would love any quantification of the forward outlook.

No, I'll start first, and I'm sure somebody else will jump in. But again, you've seen in the last two quarters about $28 million -- and I'm talking specifically on the loan aspects of it all -- you've seen about $28 million. And, of course, that's broken down into what we call the -- we call it [91], but just the general cash flow that comes off the cash flows from the loans. And then the other [3], which is the credit impaired aspects of it all.

And so when you look forward and -- again, I want to say this because there will be a lot of questions -- I want to draw you to the press release on page 14 at the bottom of the page, that shows what those remaining balances are. But again, if a question is, are we going to run $28 million per quarter going forward, I don't know that we could say that. Because, of that $28 million in this past quarter, roughly $12 million, $13 million of it is from the [2003] credits, where we were able to get out of some of these credits at a much better percents on a dollar than maybe what we had anticipated.

And that would probably the economy, in some cases. And then as we look forward, and I guess we talked about this on the last quarter, kind of our guidance going forward, we said we're on a quarterly basis, we thought anywhere from $18 million to $20 million in this growing fair value income per quarter would be a good loan number. And so here we use that and look into the future. And if that were a true run rate, we're probably looking at the first part of next year that this would deplete itself.

I think that's right, David. Ken, the bank that we use today said there's two parts of this one number that when you fair value your loans to start when you buy them, based on interest rates and market value, that's pretty consistent or be consistent, and (inaudible) accounting in the open end category where we recover. If we did better than what we thought, we would collect on some of the loans that we got, were able to pay off.

Yes. That's right. The [3/10/30] number for the third quarter was about $9 million and it went up to close to $14 million for the fourth quarter. So we had a pickup of about almost $5 million.

Got it. Okay. That helps. And then just second question, in terms of the runoff of the acquired loans, it was a little steeper than what we were expecting. But how should -- at what point does the runoff actually get overwhelmed by the growth of the organic business? Like was there something unusual in this quarter, you know, that sort of led to acceleration of runoff? Or is it a fairly good pace that we should expect going forward?

No. I think that -- I think when we talked about it earlier, I think we talked about $300 million to $400 million leading. I think that's in line. I think if there's any -- our fundamentals and our numbers were great in our organic growth. If there's any disappointment, I think we need to -- we would like to see.

When we looked in June, and we put all the banks together and all the loans together, I think we -- again, I'm talking off the top of my head -- it was about [$9.3 billion]. And we said for the year our goal would be our organic growth would be enough to offset the loss of the loans on the banks that we acquire, which meant we would try to stay at $9.3 billion.

But in the September quarter, we actually increased to $9,360,000,000, again, off the top of my head. And in, again, this last quarter, take it out to [$9,244,000,000]. So a little bit disappointed in that but still there was (inaudible) loan growth, which in our opinion, was fantastic. We still think that we will have some runoff next year, probably around another $100 million that will probably -- you know, that will not be there.

I think that's right. We had basically for the quarter $274 million in loans that left us from First Victoria and F&M. $47 million of that was First Victoria National Bank and $227 million approximately was F&M. There's probably some left to go on the F&M side. I would be a little bit surprised if it was this much for the coming quarter, but there's no guarantee. I mean, there are some loans there that we have targeted to maybe move out. So, that process is not over with yet.

Yes, I mean, especially you can even see when you compare our nonperforming last quarter to this quarter, it was reduced by [either $15 million or $16 million]. Most of the loans on the nonperforming came from the acquired banks. And so that's one of our primary focuses is those targeted loans to get out the ones that may not meet pricing or may not be the same credit metrics.

Got you. But you said you are in 2015 over the next four quarters, presumably the runoff would slow noticeably and you should overwhelm that with organic growth?

Yes, absolutely. Absolutely. The majority of it comes with the first six months to a year of the merger.

Right. We agree with what you just said. If it doesn't turn out that way, then we are just as surprised as you are.

All right, thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

David, I have a question on energy losses for the industry. I'm wondering, is this a matter of just not if but when we will start to see credit downgrades for the energy companies after we see fourth-quarter and year-end financials? If -- assuming oil stays under, say, $50.

You know, we see so many articles and I'm going to be the first one to say that really -- we really don't know what the price of oil is going to be going forward or how long it's going to be there. Our gut feeling is that this is not necessarily an [1980] situation but again oil at $100 a barrel, we felt like that was a little high to begin with. We'd like to see oil maybe around $60 to $70 mark.

But having said all that, I've read a lot of articles and I read what a lot of people say, and a lot of people say that everything is great. It will come to all of this before, nothing is going to happen. I just think that for us, every situation is different. And I think that's a little cavalier for us to say. We always -- when we do our regression analysis and we look at loans, and when something happens in the economy and how long does it take to affect it.

Sometimes we see a (inaudible) accurate between 6 to 9 months. Now having said that, we looked at our oil credits and we are looking at it one by one. The oil and gas, I think, so far we've only seen one loan. Doesn't mean we won't see more. And we're still looking for that where the amount of margin that we have on the loan to what's left out, got less and more (inaudible). And again the customer was very helpful and brought in more properties and secured it.

So I think if there is times like this and studies like this, I think you will see some repercussions. There's no question you'll see repercussions. You'll see -- you already see people being laid off in the oil industry. So, I think you will see repercussions from this.

Having said that, historically, I've always told everybody that has been with our Company that you will like us in the good times but you will love us in the bad times. And so I think that we're prepared for it. I think that if that does happen, I think that we will -- I don't want to say take advantage of the situation, but we will jump on something like that.

But I think that it will have impact. Again, I don't think this is what it was in the 1980s. I think that's what you heard me in my comments saying that we have a lot broader work for us, it's more diverse. But to say that there's not something not going to happen with the oil prices if they stay down for a period of time, that wouldn't be the right way to look at it, I don't think.

Jennifer, I might be able to help a little bit. Approximately 25% of our nonperforming assets at the end of the year were energy-related credits. And of course we have no idea whether that percentage will hold true going forward or not. It wouldn't surprise me if that percentage doesn't increase for a while.

But having said that, when we look at the credits that made up that 25% of the nonperforming assets, almost all of those have been identified by us and our due diligence as potential credit issues. Not all of them but almost all of them. So, to see these credits on the nonperforming asset list now is not really a surprise to us.

But there's not that many, I mean.

No. The total just in round numbers was about [$9,300,000], which is about 25% of the [NPA's] at the end of the year.

And all of those were identified in our due diligence when we looked at the Bank.

That's right. Almost all of them were pre-identified. That's correct.

How many loans is that $9 million?

Just a second. 1-2-3-4-5-6-7 -- looks like 8, 9, 10. I believe 9 to be exact.

Okay. Thank you, David. I appreciate it.

Brad Milsaps, Sandler O'Neill.

Just curious, on the $520 million energy book, I know that F&M was maybe a bigger energy lender then you guys were. Of the $520 million, can you give us a clue maybe on what percentage might already be marked, and how severe the marks might be to where you've got some embedded cushion there?

Number one I think it probably wasn't correct to say that F&M was (inaudible). We definitely added energy to the -- to our portfolio but I wouldn't say that it was bigger than what we had initially.

The second part of your question was what, Brad?

Yes, just to the extent that those loans would be marked that what percentage of them would be acquired and marked in that book to where you might have more cushion than, say, legacy prosperity energy loans?

I don't know that I know the answer to what you are asking. Does anybody know what it is?

The total [3/10/30] mark on the books at the end of the year was $72 million. So the most it could be would be -- we'll do the math here -- would be what, 19%?

So you're saying -- I want to make sure I understand what Brad is asking here.

14%.

You're saying, Tim, it's 14% --?

Well, we can see you're trying to get a handle on how many of these credits totaling $520 million are marked. Well, we've got a total mark of $72 million on the whole book of loans that we have. So, if that was all related to these energy credits -- and it's not, but a lot of it is, and I don't have that exact number -- it would be 14%.

14% of what?

Of the $520 million. (multiple speakers) Yes the actual marks against those loans, that's correct.

It's under [10].

It's probably under [10], yes.

Okay. That's helpful. And then secondly, David, just to -- you mentioned the stock price and the release. Just kind of curious what the pullback and where the valuation is now? How does it change, if any, your thinking about acquisitions, and how those pencil versus previously? And what are you seeing from potential targets in terms of how their expectations may or may not have changed with really the decline in all publicly traded Texas bank stocks?

There's probably two answers to that number. Number one you have two different markets I think. You have banks that are publicly traded. You have banks that are not publicly traded. So, banks that are publicly traded, I don't know if it really makes a whole lot of difference, because their stock has gone down just like our stock has gone down.

If you're looking at a bank that's private, it probably does make a difference. But again, the banks that are private are generally much smaller -- $500 million [might be to $1 billion] would be a bigger bank right there. And I don't know that it makes an impact as much because somebody that may be acquiring them to buy a $500 million or [$1 billion] bank, that's a private company, it would be hard for them to do that on a cash basis anyway.

So overall, I think it changes valuations but doesn't change account -- doesn't necessarily changes if people are going to do deals or not do deals. It may be more impactful in my opinion for a company that might've been considering doing an IPO for example there for their shareholders, that they may want to wait to try to get a higher price. But somebody trying to join us taking out price from where it is right now in their trading price, because they are looking for the uptick anyway. So I wouldn't see that as holding us back.

Okay, thank you.

Brett Rabatin, Sterne, Agee.

I wanted just to ask I guess first, just thinking about the Houston economy in particular, it seems like things are still holding up fairly well. I actually saw a pretty big office project this morning is going through. But I was just curious if you guys are seeing anything in terms of pressure or anything on office space, or in particular in the central business district, where obviously energy players have a much bigger role in terms of leasing property?

Brett, at this point in time, we really haven't seen -- I don't think we've really seen any slowdown. Somebody else might want to jump in, in just a minute. On the one hand I would rather -- we still see projects that were slated to go. I noticed I read in the Chronicle a couple of times where apartment projects that were slated to go up, they are still going to go up. But then I almost wish that people would take a break a little bit instead of continuing with their plans, just to see how we do that.

I think overall, to answer your question directly, we haven't seen yet a lot of people feel that there is not going to be repercussions from that. But I think it would be prudent for people just to hold back a little bit. Having said that, Texas in the prior five years from 2008 until 2013 was growing so much faster than most all other states in the Union.

So, just growing at a healthy pace -- and I'm going to call it a healthy pace -- may be better for us in the long run. I think the pace that we were running at was far too high. And in trying to hire people in some areas you couldn't hire, and some of the areas where oil and gas is located, some of the restaurants weren't open two times because they had dinner and lunch, because they wouldn't have enough time -- wouldn't have enough people to serve you. And apartments were getting out of kilter. So I think all in all nobody wants to see anything slow down, but running at a healthy pace is much better, in my opinion.

Okay. And then I guess the other thing I was curious about was just given where bond yields are today in the market, what -- I guess, A, kind of what do you guys have in cash flow coming in the near-term? And then can it be -- how do you invest with prices where they are now in bonds going forward?

It's a good question. You know, fortunately, in December, we purchased -- you know we always know that we get a lot of deposits coming in, in the last quarter. And in those deposits tend to, we think, towards the year, at least for the first two quarters going out. And so we ended up purchasing $500 million or $600 million in December, which pretty much took care of a lot of the cash flow that came in.

This month we really haven't purchased anything and primarily because the 10-year has gone down. But I think that probably by next month or so, we'll probably wait just a little bit and try to see if the 10-year does go back up. If the Fed does what they said they were going to do, that should send the 10-year back up a little bit, at least back to where it was, we would hope.

Okay. Thanks for the color.

[Abraham Kunwalla], Bank of America Merrill Lynch.

I guess just in terms of all questions on organic growth, and I guess as we look into 2015 and the repercussions, as David talked about, from the lower energy sector, how concerned are you in terms of being able to sort of offset this -- the loss in the acquired portfolio with organic growth? Or what's the downside, I guess, to loan growth as we look into the year, if oil prices stay where they are today?

Abraham, this is Dave. You know it's so hard because we are still at loan committees right now, and our loan committees are lasting until late in the evenings, and we're having higher -- we are seeing more production than we ever have. And having said that, we still take into consideration something late.

So what we're predicting for next year and I think that's what everybody's looking for. We think we'll still -- and this may be unusual because a lot of people would think is if there is going to be a slowdown, you would -- your loans would go down -- but from what we see right now, we're still predicting about an 8% loan growth. Usually about an [8% to 10%] organic loan growth. But keep in mind we said we may still have about $100 million or so that we would lose at the banks that we acquired this prior year.

So we are throwing out a number between 5% and 6% (inaudible) from when you take into the loans that we lost and (inaudible) our organic growth (inaudible). Is that right, David?

And then as (inaudible) from where we are at in terms of oil and gas and the impact to the economy?

That's right.

No, that's very clear. Thank you very much. And then just in terms of one follow-up question on the topic of M&A. Do you think oil prices, even from publicly traded banks have seen their stocks go down recently -- do you think they need to feel the pain before their willingness to merge with a buyer increases? And that could be more of a second half or even a 2016 event to pursue in the next three to six months?

You know, I would think that if they are a publicly traded bank and they are merging with a bank like ours, most of them are pretty sophisticated. And they will see that if the bank stocks go up and they keep our bank stock, because we are trading stock, they'll do just as good with us as if they had stayed on their own.

So I don't see that as something that's a bigger deal, not when you're talking about bigger deals. If you're talking about smaller deals that may be some impact. If you're talking about a $500 million deal or something like that, it's more on a cash basis. But banks that are publicly traded, I think it's pretty easy for them to see that if our stock goes up, their stock -- if their stock would've gone up, our stock would've gone up, and maybe even better. So I don't see that as a detriment, no.

And just in terms of (inaudible) it's never predictable but in terms of those larger deals that could move the needle for you guys, what's the likelihood of that based on the conversations that you are having, and the activity that you are seeing, just the number of call volumes and such?

Abraham, we have seen some smaller deals we haven't done. First of all, let me say we grew from a couple of years ago from $2 billion to $3 billion. And we put ourselves on the self-employment side easily where we wouldn't acquire any banks for a year, making sure that our back rooms were in operation, any additional added growth from a regulatory environment just growing from over $10 billion.

There was a lot of things we had to really do. You have to increase your BSA. You have to prep up your internal audit. You have to deal with Dodd-Frank asset sensitivities and all that. So we -- I feel like we've done a very good job of that. I think now that we are ready to look at separate deals. And so I think we'll grow -- this year we'll start looking at some deals. And again, no bigger teams but we probably will be out there trying to do some deals.

Enjoyed it. Thanks for taking my questions.

Gary Tenner, D.A. Davidson.

Guys, you've talked about the accounting benefits, percent of benefits on the loan side for this quarter. On the funding side, though, there's a pretty big benefit on the fund deposits. Can you talk about the lumpiness there compared to the last few quarters, and what we might expect going forward?

Yes, I mean, big picture and this is not unusual for our Bank. If you go back and look at every fourth quarter, you see a big influx of deposits. And this year wasn't any different. And as we said on prior quarters, we bank a lot of public entities such as school districts, in I think we have counties and things of that nature. (inaudible) say close to [500]. And so as we are collecting our tax receipts, you see a surge in [net income] back in the fourth quarter.

And then what happens as the year wears on, they start utilizing that money and the deposits go out. So it's really interesting when you look at our bank and you look at it on an annualized basis year-end to year-end, here [our] growth generally comes out at 4% to 6%. And that's why when we see this lumpiness in the fourth quarter, we have to kind of discount that. We're not truly growing at some 16% annualized rate.

I think he's asking about the question about the interest expense was down on -- with the acquisition of assets in First Victoria National Bank that we made an adjustment of about $2 billion.

I'm sorry, Gary, was that the question?

Yes. That's exactly what I was asking. (multiple speakers)

On the accounting side, with all these acquisitions, you know we have to go through our fair value accounting. And one of the things was interesting is it's always been required is you have to do it on a CD book. And it was just in these two last acquisitions compared with the last six we've done, a lot bigger in terms of our CD books, number one. And just the composition of their CD book and the rates they pay, you have up to 12 months from the deal to get your fair value set. And that's exactly what we're doing.

So when you think about this, you do see the lumpiness in the fourth quarter. That's reflective of the [kids] up for the year. But the bigger question is what are we looking at as we go forward. And I think from these two deals, that -- I guess it's a discount to the expense going forward. We're [projecting] about another $1 million from this over 2015.

David, it's fair to say that we come up with numbers on fair value when we do a bank. And then we go to an outside source to confirm that what the true value of the loans and deposits are. And then we have our own accountants to (inaudible) look at it. And then I think we get some question whether we -- those rates on the CDs were higher in money than our cost. And it's just our normal true-up really at year-end.

I just think it's the normal process. These just happened to be larger deals. I mean we -- you get it built up, you run it and you step back and you test it, and you validate it. And it just took all year to get it done.

Yes. Appreciate that. And then just quickly on the fee income lines, kind of flat sequentially, but some -- it looks like continued positive progress on the trust business, as you've kind of expanded that across your footprint. Can you talk about success on the fee income initiatives post the acquisitions?

Well, I think if you just look at the numbers, they probably speak for themselves. If you look two or three years ago, our other income fees have been compared to other banks is very, very low. Going forward, I think that now you have the fee income from trust departments. You have fee income from growth rates. You have fee income from what we call sponsorship and ISO sponsorship for ATMs.

We have wealth management. So mortgage banking where we didn't have. So, I think that we've added a lot of services that we didn't have a few years ago, that I think you're going to continue to see those things grow at a pretty good pace.

Yes, I mean, again, there's still in terms of total, a percentage of gross fee income initiatives as a total percentage of revenues, they are still small, but absolutely. I mean you're looking at what happened this quarter versus fourth quarter last year, you can see there's been tremendous growth in it, relatively speaking. And I think we'll continue to see that going forward. They've all got their feet on the ground and now they are all starting to move forward.

The only thing I would caution, fee income goes up a lot of times and will continue going up a lot of times. Fee income, there's a lot of expense that goes with the fee income that you generate. I mean you have home mortgage lending, you have brokerage and really generate a lot of fees. There is also a lot of expense that gets paid out on commissions and stuff too.

Are you saying that margins aren't as good as (multiple speakers) --?

No, it's not. The margins aren't quite as good as they are in the traditional banking. That's the only thing I think some people miss sometimes.

All right, guys. Thank you.

Matt Olney, Stephens.

I want to ask about the outlook for the core margin. I believe last quarter you talked about the core margins been upon future loan growth. And if you had some good loan growth it could kind of stabilized. Does that still hold true? Or with the flatter yield curve, lower reinvestment rates, are we going to see that core margin tail off throughout 2015?

A lot of questions inside that question. So let's kind of break that down a little bit. Yes, we did say -- we thought that the margin would be relatively stable and that any loan growth would actually give us a positive bias. So I think that still holds true.

And then, yes, if the rates, the short-term rates are coming [up], or to say it differently, you see the 10-year yield where it is today compared to where it was a few months ago, that would create a little bit more of a headwind. But again I don't think we're talking about a significant impact to that margin.

In other words, that if you are reinvesting three or four months ago at [220] now we are going to reinvest it -- so pick a number [190] as an example, that would tend to create a little bit of headwind, if you will, on the margin. But again I don't think it would be significant as we look forward. So, it wouldn't be a positive. Let's put it that way.

Yes, I mean it would be (inaudible) you're not repricing the whole portfolio, you'll be pricing [$1.5 million] of cash flow. It's -- it would be impacting and you would hope that you could offset -- that could be a degree with the loan growth, you would think.

Yes, so it's all in. And somebody asked the question earlier but that's in dealing with a professional from a portfolio, we've always been opportunistic as we see these -- and I think you'll see some (inaudible) yield as an example. You see that jumping around every two or three months. So if this thing spikes back up here, you'll see us jump in opportunistic and try to soak up some of that future cash flow coming in.

Okay. Thank you.

Jefferson Harralson, KBW.

I think my securities portfolio question was just answered. I'll go to my accretable yield question, like it seems to do every quarter. But how much is still -- I'm looking at this chart, but how much of accretable yield is left to come through the spread income, if credit works out exactly like we think it is for the next couple of years? How much is ought to come through?

Okay. So again, looking at that chart, we can break it down. Overall total (multiple speakers) on page 13, so the overall grand total of everything on the books as of 12/30 -- $161 million. And then now we'd want to break that down. And so specific to your question, I've got $161 million. There's $89 million left over, that's for [3/10/20]. That's the accretable yield we're talking about. But would come in based on the cash flows from the loans.

And then there's another roughly $72 million from these [03] marks. Now, we can't sit here and say all that $72 million from the [03's] will come back in income. That's so far, we've been very good at correcting those balances. There's no guarantee. But if all goes well, some of that will come back in income as we look forward.

So now it's just a mathematical exercise, right? I mean, you've got the numbers that we'd assume on a quarterly basis. Whatever you want to assume comes to us in a quarterly basis. You can see that, generally speaking, this will probably expire coming up in the first part of next year, first couple of quarters of (multiple speakers) 2016.

What we always say, Dave, and maybe this is wrong, when we said the [3/10/20] number accretion, basically what we call [91] sometimes, usually when we look at, it usually has about a three-year average life. And so would you say, just to help him -- and I don't know if this is right or not -- could you use the $89 million and say it has a [right] two-year average life spill?

Two year -- we wouldn't get two years for that, I mean, for [$45 million] a year, which is $10 million a quarter. I don't think that's right. That's why I'm saying this will expire in the first or second quarter of next year.

Yes. Maybe a year and a half. Year and a half. And I think it would be a mistake to assume you'd collect any of the $72 million. I mean, maybe we will, maybe we won't.

Right. So maybe you do -- you bring in a good portion of the $89 million over the next kind of three quarters, and then you just leave the $72 million alone and whatever comes in from that is gravy?

I think you'd probably have to split it over four quarters. And then -- I think there will be -- maybe I'm too optimistic, but I think there will be some recoveries. But again, I don't know how you would kind of maybe put that in your model. I mean, to think that you would collect all the $72 million I think would be a mistake, to say that maybe you did collect half of it or a little bit less than half, may be more probable, I think. Depending on the economy.

Our Chief Lending Officer is sitting here and he's optimistic about it. (multiple speakers) We have to be pragmatic about it all. (laughter)

Well, that's probably going to do it very well for me, thank you. And now just -- is there a time when it's just time to stop buying bonds? I mean you guys are waiting on the sidelines now, but at some point, you'd say, okay, you've made a lot of money as rates have come down, by just continuing to program, even though it seemed like we were always at a bottom. But is it -- I guess, when or is it -- are we now at the time where you'd say, okay, let's just shrink this portfolio now?

Well, first of all, you have to ask the question where do you put the money if you don't put it in the bonds? And so, the other outside to that is to put it in the loans. So, yes, I mean, our whole wish is that we could put more money into the loan side. But again, that doesn't happen overnight. And I've said this before, where we have been in, even from the time we started the Bank, if you wouldn't have the acquisitions, we'd like to see a longer deposit ratio more like the 75% loan to deposit ratio. And that would take care of a lot of those issues.

You know, what's interesting and I'll say this -- this is probably unpopular to say this, but we still value core deposits. I mean, but still at the end of the day, that's what drives the Bank. And so you'd have to say if you wanted to shrink the bond portfolio, I guess you are not putting into loans, that would infer you have to shrink your funding base. But we have core deposits.

And here's what's interesting. You go back and you look at 12/31, that CD percentage of our total book is now [done] at 17%. So you can see us working in these acquisitions and they are starting to become more and more like us, in terms of the percentage of CDs to total noninterest to total. So this is core deposits. So at the end of the day, somewhere along the way, this is value.

Well, I think it is. I mean, our whole cost of funds are probably less than 25 basis points, aren't they, David?

Yes.

That's in front of me. So, yes, when you have a core deposits, you can make money off of it whether you put it into loans or for bonds.

So that's about 20 basis points across the board.

Okay. All right. Hey, thank you, guys.

Jon Arfstrom, RBC Capital Markets.

Dave Zalman, you talked about your loan committee meetings still starting early and going late. Have you seen any changes in demand?

You know, truthfully, we can't -- I've not seen any change in demand. I've seen the loan committee become more thoughtful, I think. I think that we want to put loans out so much that sometimes we were being more aggressive, I think. Right now knowing what's in front of us, where we are looking more at somebody really wants a land and development loan, or somebody that wanted to build an apartment complex or something like that, I think we are seeing people being more thoughtful.

But I'd have to say right now -- again, this is just right now -- the loan demand has been very good. And we are still producing a lot of business. Tim, do you want to just --?

I think that's right. So far the demand has held steady and has been good.

(inaudible) number [$292 million] --?

That's right.

That's a lot.

But with all that's going on in the energy sector, it's a little hard to believe that it's going to stay quite that same way. But we just don't know. There are so many factors at play. And we hear a quote, one expert saying they think the price of oil and gas is going to go up within 60 days, and others say it's five years before it happens. So it's all over the map.

I hate to use this term but I mean I guess we have to use the term cautiously optimistic. I think we are optimistic as we think with the volume that we see. And of course at the same time, we have to be cautious and take into consideration where we're at and where we may be going.

That's exactly right. I mean we are just trying to look at each loan request on its fundamentals. And I think it is safe to say that -- you used the term thoughtful. I think that's appropriate. We are certainly trying to be thoughtful when it comes to the credit requests there to energy companies, b-day production or service.

We are looking at those credits personally. But there are a lot of companies out there that have good strong balance sheets that are in the energy business that can withstand these low prices for an extended period of time. Some of them have hedged. A lot of them have hedged, so you're not going to see maybe negative results for them for one quarter to up to a year. So you just have to look at each one on its own and be careful.

I think what we are paying more attention to than anything, and we always have in our portfolio, and I think that's why we do exceptionally good in the very tough times, but even more now as we're looking at credits, and people that want to do things and expand. We're trying to go with the people that are not overleveraged. We're trying to go with people that if there is a downturn, that they have liquidity or other stuff they can get their hands on liquidity, to withstand a downturn.

And that's primarily our primary focus right now in trying to help our customers, not only the ones coming to us but our existing customers. Our bank has been a lot different than a lot of banks. A lot of banks put on loans and they want those loans to -- it wouldn't matter with revolving lines of credit in perpetuity. They'd like that.

We've always been different. Our customers that come in, we try to encourage the customers to be, at some point in time, independent of us. It's good -- in fact, they leave their deposits with us but then they become independent and view it as kind of -- we're still trying to encourage that philosophy for our customers, that we're really not investing with them, that we're lending to them.

And that's our philosophy. And I think that's what we tried and encouraged in the past, and that's what we encourage going forward. I don't know if that helps or not, that color.

Did I lose you? I think we might have lost you.

His line has disconnected. (Operator Instructions) Jennifer Demba, SunTrust Robinson Humphrey.

Dave, a question on what is the acquisition pipeline right now? Is it fairly robust? Or how would you describe it at this point?

I think right now that we have a couple of smaller banks come to us is -- about $500 million in size. We haven't made the decision of yes or no. We don't know that we may consider one and maybe not the other. And we are trying to remedy that to maybe (inaudible) you know again I'm not saying it's a well idea, but we are trying to look at something that will be more meaningful that will really impact our earnings. And that's kind of what we are focused on maybe going forward this year.

Okay, thanks.

(Operator Instructions) Peter Winter, BMO Capital Markets.

The -- just going back to the energy exposure, of the $100 million that is -- that you still have to run off from the acquired banks, how much of that is energy-related?

Peter, I don't have the breakdown of that. I don't know that we have it either but that may be $900 million or so. The type of loans that we really are that we are not as interested in is really stuff that our club credits more so, as in some that may be and some that may not be. But I don't have the exact number for you.

Do you know of the runoff this quarter from the two acquired banks how much is energy-related? And then secondly, of the exposure to energy, how much is from the acquired banks versus legacy is Prosperity?

Probably as a better answer for the first one, I think probably more like $100 million has been energy from the F&M group and the others -- do we have the breakdown? Do you have the breakdown?

50% of the production with that is from acquisitions is frankly we were at about [300] before. That has it at about [283], what is it, Tim?

Well, I think the question is, how much of the energy credits have come from the two most recent acquisitions? Very little first pick is the answer. So, that leaves F&M. So you've got F&M on one side and then you've got what we received from the American State Bank, and continue to move forward with on that side, and Coppermark. And I think it's close to 50/50, with American State Bank and is Coppermark being about 50% and F&M being about 50%.

Do you think that's about right?

No. On the production side would probably be a little over 50% from F&M.

Like 60%? It's 55%.

55% is not all that much. But on the services side, it would be significantly smaller. It's probably going to be probably 15% and maybe another 5% to 8% out of First Victoria.

Yes, so I would say is what Peter is trying to get his hands around, if there's $300 million on the production side and we are saying 50% of that was from -- and it's still 50% in terms of F&M, so $150 million in top of market Coppermark, including Coppermark, was just F&M. So it was $150 million there.

A little less than that. Both of the numerator and denominator were smaller than that. But it would be about $50 million.

So then the $200 million that's in service as long as it may be was really only 15% of that, would be related to the F&M deal primarily. So probably you're talking about $30 million of the $200 million, so then $170 million was ours basically.

Does that help, Peter?

It does. Just -- but basically of the total exposure, it's about 50/50 from acquisitions and then legacy prosperity? Just in terms of the total exposure?

If you look at the total energy exposure and you break it down between producers and services, F&M is about 50% of the producers, a little more than 50%; and on the services, F&M is about 15% and maybe another 5% to 8% out of -- yes.

I'm going to try to say something that needs to be made clear. Just out of, say, $500 million in energy loans, rounding numbers, $300 million of it is production loans, and $200 million of it was service loans. So out of the $300 million (multiple speakers) --

$220 million is production and $300 million maybe --

Services. (multiple speakers)

Oh, was it? (multiple speakers) Okay.

$220 million for these.

Are you sure? ?

Yes.

Okay.

Okay, so we're saying $220 million is production loans and you're saying 50% of that is through F&M?

50% to [55%].

50% to 55%. So we're saying $100 million is probably (inaudible) --?

Yes.

And so 15% of that (multiple speakers) --

15% to 20%. So what it amounts to out of the total $520 million credits that are energy-related, about $150 million of that is F&M.

Yes. That's the right round number.

Does that help, Peter?

It does. And the American State? Well, I'm good. I'm good. I'll follow-up off-line.

On the legacy side, we didn't have much of an energy business; certainly on the production side, we didn't, before American State Bank joined us. So, really all of the production loans -- it's safe to say that almost all the production loans that are not F&M came from American State Bank and Coppermark.

Got it. Okay.

And don't take away that we are saying that all the $150 million of the credits from F&M on the energy side are bad loans. They are not; we're not saying that.

Right. Right. It's only 9% of the total portfolio, R&K. Okay. Thanks very much.

And ladies and gentlemen at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks.

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

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.