Prosperity Bancshares Inc (PB) 2015 Q3 法說會逐字稿

Good morning and welcome to the Prosperity Bancshares third quarter 2015 earnings covered call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Charlotte Rasche, please go ahead.

Thank you. Good morning ladies and gentlemen. Welcome to Prosperity Bancshares third quarter 2015 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 am 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; Eddie Safady, President; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; and Merle Karnes, our Chief Credit Officer.

David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, 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, Emily. 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 for joining us for our third quarter 2015 earnings announcement. I am excited to announce that Prosperity's Board of Directors has decided to increase the dividend to $0.30 per share for the fourth quarter of 2015, representing a 10% increase. The Board and Management appreciate our shareholders and are glad that we are able to show our appreciation with this increase.

For the three months ended September 30, 2015, our net income was $70.598 million, compared with $76.570 million for the same period in 2014. Our net income per diluted common share was $1.01 for the three months ending September 30, 2015, compared with $1.10 for the same period in 2014. Net income was impacted by lower loan accretion income that reduces as loans that were purchased in recent acquisitions pay off. However, core earnings, which we consider to be earnings not including purchased accounting adjustments, continued to grow. Our net income per diluted common share, excluding the purchased accounting adjustments, was $0.92 for the three months ended September 30, 2015, compared with $0.84 for the three months ended September 30, 2014. This represents a 9.5% increase. Prosperity's return on average tangible common equity for the three months ended September 30, 2015 was 19.3%.

Our asset quality continues to be one of the best in the industry, with a nonperforming asset ratio of only 26 basis points, and nonperforming assets of $48.628 million at September 30, 2015. The increase in nonperforming assets for the third quarter of 2015 was primarily due to one participation acquired in a recent acquisition. We can discuss this more in the question and answer portion of the call. But, our Management believes that we should be out of this loan by the first quarter of next year. Our allowance for credit losses was $81.003 million as of September 30, 2015, representing a healthy coverage ratio.

Our loans at September 30, 2015 were $9.205 billion, a decrease of $163 million, or 1.7%, compared with $9.369 billion at September 30, 2014. Although our loans decreased overall during the first nine months of 2015, primarily due to planned reductions at some of our acquired banks, our third-quarter results showed loan growth of 1%, 4% annualized, for the compared to the previous quarter ended June 30, 2015.

Our deposits at September 30, 2015 were $16.940 billion, a decrease of $74 million, or 0.4 basis points, compared with $17 billion at September 30, 2014. Deposits have been flat for the first nine months of 2015. But when comparing the third quarter of 2015 to the third quarter of 2014, Prosperity has been successful, replacing over $500 million in higher cost time deposits at the acquired banks with more traditional transaction accounts. As we have previously stated, deposits are historically low in the second and third quarters, and increase in the fourth and first quarters, primarily due to a large number of public loans we service in their funding source.

With regard to acquisitions, we are excited to announce that we have received all of the regulatory approvals necessary to complete the Tradition Bancshares Acquisition. While the transaction is subject to Tradition's shareholder approval and customary closing conditions, we expect closing to occur on December 31, 2015. Our conversion and integration planning is underway and we appreciate and thank the team at Tradition for all of their help and support.

We continue to pursue acquisitions. We have had, and continue to have, dialogue with a number of banks. There are over 50 banks in Texas alone that are over $1 billion in size. We look for banks with similar culture to ours. Banks that have been in business for a longer period of time and banks that have a strong core deposit base, as we believe these factors represent the real value in a bank.

With regard to the economy. Despite the employment declines in oil and gas extraction and the manufacturing sector, the Texas unemployment rate fell to 4.1% in August and continues to be lower than the US unemployment rate, which was 5.1%. Oklahoma's unemployment rate inched down slightly in September to 4.4%, compared with 4.6% in August, according to data recently released by the US Labor Department. Again, lower than the US unemployment rate of 5.1%.

Housing starts continue to increase and re-sales continue to support strong pricing. However, we do see a reduction in loan applications, primarily due to a slowdown in refinances. We owe all of our success to our team of associates, past Associates and Board Members who have helped grow the Company between beyond our own expectations. 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.

Thank you, David. Net interest income before provision for credit losses for the three months ended September 30, 2015 was $156.1 million, compared to $175.7 million for the three months ended September 30, 2014. The change was primarily due to the decrease in loan discount accretion of $17.4 million. The net interest margin on a tax equivalent basis was 3.30% for the quarter ended September 30, 2015 compared to 3.85% for the same period in 2014, and 3.39% for the quarter ended June 30, 2015. Excluding the purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended September 30, 2015 was 3.10%, compared to 3.13% for the quarter ended June 30, 2015.

Non-interest income increased $1.6 million to $31.8 million for the three months ended September 30, 2015, compared to $30.2 million for the same period in 2014, a 5.3% increase. Non-interest expense for the three months ended September 30, 2015 was $76.4 million, compared to $85.5 million for the same period in 2014, a decrease of $9.1 million or 10.6%. The efficiency ratio was 40.7% for the three months ended September 30, 2015, compared to 41.6% for the same period last year and 42.4% for the three months ended June 30, 2015.

As of the September 30, 2015, the common equity Tier 1 capital ratio was 13.37%. And, the Tier 1 leverage capital ratio was 7.65%. The bond portfolio metrics at 9/30 reflected a weighted average life of 4.1 years, effective duration of 3.8 years and projected annual cash flows of approximately $1.5 billion. With that, let me turn over the presentation to Tim, for some detail on loans and asset quality. Tim?

Thank you, Dave. Our nonperforming assets at September 30, 2015 totaled $48.628 million, or 53 basis points, of loans and other real estate. This is compared to $35.119 million, or 39 basis points, at June 30, 2015. The September 30, 2015 nonperforming asset total was made up of $45.196 million in loans, $161,000 in repossessed assets and $3.271 million in other real estate. As of today, $796,000 of the September 30, 2015 nonperforming asset total have been liquidated, or are under contract for sale. There can be no assurance that those under contract for sale will close.

Net charge-offs for the three months ended September 30, 2015 were $5.279 million, compared to net charge-offs of $491,000 for the three months ended June 30, 2015. $5.310 million was added to the allowance for credit losses during the quarter ended September 30, 2015, compared to $500,000 for the quarter ended June 30, 2015. The average monthly new loan production for the quarter ended September 30, 2015 was $320 million, compared to $246 million for the quarter ended June 30, 2015. This represents a 30% increase on a linked-quarter basis. Loans outstanding at September 30, 2015 were $9.205 billion, compared to $9.114 billion at June 30, 2015. The September 30, 2015 loan total is made up of 41% fixed rate loans, 36% floating rate and 23% variable rate. I'll now turn it over to Charlotte who will coordinate your questions.

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

Thank you.

(Operator Instructions)

Our first question is from Bob Ramsey of FBR. Please go ahead

Good morning. First question, I was hoping you would give a little bit more color around net charge-offs. I know you said it was 3C and I loans that drove the uptick, any more detail you can give their? And then, also, talk about the increase in nonperforming loans in the quarter.

This is Tim. I can help you with that, I believe. As far as the charge-offs are concerned, it was basically three credits only one of which was an energy credit that was approximately $2 million. So, out of the approximate $5.3 million in the net charge-off number, about $2 million was one energy credit and the rest was non-energy. They were really only three credits involved in that total number, basically. So, it wasn't spread out over several credits.

And as far as the increase in the NPAs is concerned, virtually 100% of that increase is one credit. A participation, approximately $12 million in a participation that's a medical complex in San Antonio, Texas. It is a hospital, a medical office building and a parking garage in this complex. So, it was really all one credit. There was a participation that we received from an acquired bank.

I would add too, all of the charge-offs and all the increase in the nonperformance came from the acquired bank.

That is correct.

And all of them were participations, with the exception of one.

Okay. With the $12 million loan that moved to nonaccrual, was there any marker reserve set against it, previously? Or, is it just a $12 million credit?

It was not marked, previously. It appeared to be a good credit. The group of physicians behind it had done three or four similar transactions, historically all of which had worked well. The total cost of the project was about $100 million, and they put about $30 million to $35 million of their own money into it. So, there was quite a bit of borrower equity in it. On the outset, it looked like a reasonable credit. They ran into problems with trying to collect insurance from Medicare and Medicaid and from private insurers and, it created a downward spiral, in that guard. We think we have good chance of getting out of this credit without much loss.

Great. And then, just to touch on energy. I know you won't give a dollar amount of energy loan exposure. I am just curious, is that purely E&P exposure? Or, does that include everything service related, where companies do a fair amount of business with the energy industry? Does it include midstream? I'm just curious what else might be energy-related out there?

Well, for example, out of the almost $49 million in nonperforming assets at quarter end, about $21 million of that number are energy credits. That is made up of about $12 million in E&P credits and $9 million in service companies. It is virtually 100% direct E&P and direct service company.

Okay and just in terms -- go ahead.

I'll offer to answer the question. It varied because of midstream of no -- those number's include the midstream --

The numbers in the report include producing companies, the service companies and the midstream.

Okay, perfect. That is what I was looking for clarity on. That helps. Have you all broken out what the allowance is, that pertains to the energy book?

We do not have a specific breakdown. We include it in our overall C&I estimate. And, basically, we allocated more of the reserve towards the C&I portfolio, out of the better quality alternative portfolios that we hold.

I would say, out of $81 million in reserves, about $7 million in specific reserves.

We have about $7 million in specific reserves.

There is a lot of room for flexibility.

Oh, yes. We have a great flexibility.

Great, that is helpful. One question outside energy, and I will turn it over to whoever is next. Fee income, it looked like you guys had a nice uptick this quarter on the deposit fees and service fees. Just kind of curious if you could comment on what you're seeing driving that strength?

This is Dave Holloway. I think it is a natural progression. What you've seen in our bank, historically, is the fee income begins to pick up at the back half of the year. We're not doing anything different or special, in terms of deposit [terms] of customers. Think is just natural.

Okay, great, thank you.

Our next question is from Dave Rochester of Deutsche Bank. Please go ahead.

Good morning, guys.

Good morning, Dave.

Good morning.

Back on the fee income side, I also noticed other income was up a little bit more this quarter, even though I think you had a lumpy item in the last quarter. Can you just talk about anything lumpy you have got in there this quarter?

This is David, again. I think it is similar. It seems like quarter after quarter, we have some lumpy things. They do flow through that specific item. Same thing this past quarter. There is probably $1 million, roughly, of what we would call nonrecurring things. But it seems like, as you have noted, every quarter we have these things to drop in there. But, that's what it was.

It is about $1 million?

Correct.

Okay. Then, on the expenses, I noticed the FDIC line was down a little bit this quarter. Does that decrease reflect a true-up? And, should be expect to see that rebound, or is that a new run rate going forward?

Yes, that is assessments. And all of that is included. What is really impacting that is, if you think about this big picture in the way that these assessments are, this is just part of that ongoing that you've seen a change in our loan mix. Sometimes, these assessments are higher around our risk ratings, in terms of what the assessments on. And, I'm specifically talking about loans, themselves. This reduction of loans, this participation we've had, don't require the same kind of assessment that just the regular type do.

Bottom line, it's lower risk rating in the loan (multiple speakers) insurance rate.

It's driving that down. And should keep pulling it down going forward.

So, this should be a good run rate then?

It should be.

Okay. And then I guess, just a bigger picture question on expenses. If you can just update us on what you think the range could be as to go forward into 4Q. You beat the range this quarter, not a huge surprise there. What do you think about next quarter?

Well, I have got to answer this question every quarter. I've been wrong for three quarters. I don't know if you guys could believe me. But, maybe I could say it a couple different ways. One of the things in our expense run, it is truly driven by our revenue, the gross revenue generation. As you guys see, our loan growth starts picking up and we start generating more net interest income. I think that will allow us to begin to increase these expenses. If we have to run tight, what you see in this quarter is probably what we're going to try to manage our way towards.

If you actually take the loan discount for value-added numbers, that adjusted efficiency ratio is, of course, 42.9% or something of that nature. Historically, that is about where we have run. That is the best we can do. I guess the short answer to your question is, we're going to try. What you see in the third quarter, we're going to try to make that our run rate going forward. But, we'll qualify if those revenues pick up and we make -- it'll bring us up a little bit.

Okay, great. Thanks guys.

Our next question is from Brett Rabatin of Piper Jaffray, please go ahead.

Hi, guys. Good morning. First, I just wanted, David, to get some color on how you feel about Houston these days. And maybe, just your thoughts on the economy there, and how you see things progressing.

It depends if I pick up the New York Times or the Wall Street Journal sometimes in the morning. But all in all I think, basically, if you want my economic comments, the unemployment rate -- first of all, there has been a reduction in jobs in the oil and gas and manufacturing industry throughout Texas and Oklahoma. At the same times, a lot of those jobs were picked up by the petrochemical industry, the medical industry and a number of others. But, when comparing our unemployment rate to the rest of the United States, we are still at 4.1% for central Texas, compared to 5.1% for the United States. And also in Oklahoma, the same thing. We are below where the unemployment rate is.

So, the gloom and doom that everyone says -- I think there is definitely issues with the oil and gas industry, and where that is. But, again, when I talk to a lot of the people, and we're talking about selling their homes that are on the market. They continue to tell me there is a rapid resale of those homes. And, sometimes, at the asking price and getting offers in a very quick period of time. Overall, you could say there is a slow down because of the oil and gas industry. But, overall, I would still put up our economy against almost anybody else's in the United States.

Okay. I appreciate the color in your press release, on commercial real estate breakdown by MSA. Just thinking about loan growth as we go into 4Q and next year, does the pipeline suggest a similar level of growth, going forward? Maybe you guys can talk little about your expectations, were payoffs an issue at all in 3Q?

I have to say right now, again, I'm very excited at what we see in the pipeline. Again, if it all comes through, the bank's going to look pretty good. And again, there's two things happening. Once paydowns have slowed down against some of the banks with some of the loans we had at the acquired banks, especially the non performers. We are finally trying to get down on those, there's still some more. But, the reduction in those loans are not as significant and even those banks have started to grow loans again.

So, that combined with a lot of push. We have appointed Eddie Safady as our President of the Holding Company, together with Bob Benter and Bob Dowdell. They're specifically tasked with growing the bank organically, and working with our area Chairman and President. And I think, from sitting in loan committee, I can tell that is really paid off. I see some really good things happening right now. We are, right now, without being overly optimistic, we're pretty excited where things look right now. Having said that, will we do a big acquisition or something like that? I'm not saying there is an acquisition out there. But, if something -- that changes our focus, sometimes. But right now where we're at in trying to deal with the loans and grow organically, it feels good to me, right now.

Okay. And then, since you mentioned the FDIC expense. Have you guys consider the proposal to rebuild the reserve to1.35%?

Say that again, I didn't catch what you're asking.

So, the FDIC yesterday came out, they have a proposal out to increase the deposit insurance fund to a minimum level of 1.35%. It's, obviously, quite a bit below that. The analysis they did suggested it might impact average banks by about 3% from a net income perspective for banks bigger than $10 billion. Have you guys considered that at all, when you're thinking about expenses?

We have not looked at it yet. And, it runs through the conclusion. My hope would be is, we are driving these loans that require higher risk ratings, as you know. Hopefully that can offset some of this. But, we haven't put the pencil to the paper yet.

Truth is, Brett, I haven't even see that. So, you're ahead of me on that. I haven't seen that.

Okay. Thanks for the color.

Our next question is from Joe Fenech of Hovde Group, please go ahead.

Good morning. David, you partially touched on this in your answer to the last question. But, just to clarify the turn in loan growth this quarter, would you say it is more a reflection of a noticeable turn in the operating environment, more broadly? Or, it sounds like it's more a turn for the Company, internally, with maybe some new production starting to outstrip the runoff in some of the newer markets of some of the companies you brought on board the last three years. Is that how you would characterize it?

I think that's it exactly. I don't think I can characterize the whole two states of Oklahoma and Texas. But for us, two things happening: less runoff, and more push for organic growth in the Company.

Yes, I think that is exactly right.

This quarter is the first quarter this year that our new loan production exceeded the runoff. So, we have seen a significant turnaround in this third quarter in that regard. Let's hope the trend continues.

And also, you have the highest production we've ever had, at $320 million

That's correct. That's by far the highest we've ever had.

Okay. And with where you stand today on the expense line, again, you touched on it earlier. But, would you say that you've pretty much, at this point, rung out the cost synergies you are likely to see from bringing together all the acquired platforms, and everything else? Or, is there still room to get better, both with the legacy Company and some of the new additions to the franchise?

Again, this is Dave. Again, on the last three quarters I've said, we are where we are at. And this time, this should be the run rate. I hope to try to squeeze out anymore efficiencies, I think we're there.

David or Tim, with respect to acquired energy loans. Is their a segment of that portfolio, as a whole, that you're watching, that you've identified that could eventually migrate to substandard or classified status under certain conditions? Maybe loans that are not marked or currently classified? But, if the duration of this energy situation persists, is there a segment that is that sort of right on the line of becoming a potential issue? And, if so, what would you ballpark the size of that segment to be?

Let me start on that. I may even ask Merle to jump in. But, we had done a redetermination of our PNP loans. And again I think, with the exception of a couple, we're in pretty good shape there. There might have been two larger ones that might've been in excess of -- one was $1 million, one was another one in excess of $1 million. But again, the customer is able to bring more assets in to cover that. For that part, I think we feel pretty good with. Again, the area that you always have to look at I think, is in oil and gas lending right now. The stuff that may pop up is more in the service industry. I don't know if Tim or Merle want to comment on that.

I think everything you said is correct. It really depends on how prolonged this situation is. A lot of the PNP customers hedge their production. And those hedges are going to start running off next calendar year, over the course of 2016. There are a few that are hedged into early 2017. But, it's safe to say that most of those hedges will be off by the end of the calendar year 2016. So, you have to assume that is going to put some additional pressure on the situation. As David said, really, we fared pretty well, so far, on the borrowing base re-determinations.

Our customers have either had the liquidity to pay the loans down to get in compliance with those re-determinations, or they've had free and clear assets that they could pledge, producing assets that they could pledge, to bring things into compliance. But obviously, if this thing continues, let's say for years, liquidity after a while runs off. And free and clear assets, after a while, get pledged. You hit the bottom of the barrel at some point in time. We don't think we're anywhere close to that right now. But, once again, the whole key is how long does this thing last? We don't know. Nobody knows.

I think what we see right now, they're all manageable. But, to think you're not going to have any losses would be, that would be -- that would be irresponsible, too. So again, if you have to ask me what a number was, I don't know if it's $5 million, $10 million, what I see out there right now. If we have to throw some number out there. I don't know, Merle, do you have some kind of comment on that?

Most of the comments so far have been related toward the producers. But, there is a lag affect between the decrease of oil prices and the impact on the service businesses. And, we're just now beginning to see some downward migration of our credit grades. In other words, an increase of risk in the service area. And, David mentions $5 million, maybe $10 million. I might be a little more conservative and say it'd be $5 million to $15 million potentially, on a worst-case basis.

Right now, we have no idea.

It's definitely not visible in terms of specific loss identified today. Something is coming, we just don't know (multiple speakers).

I think what we're trying to say, we don't see something right here on the horizon, the next quarter or the quarter after that. We just don't know. But, to think that it's not going to affect these somehow would be a mistake.

But the bottom line, right now at this point in time, we have very few defaults in the service company side of it. Almost none. But as David says, to assume that that would stay the case -- if this thing becomes a more prolonged and/or price really drops to $20 or $30 a barrel, all bets are off. We are constantly watching it. That is the best we can do.

We're probably in a better position than anybody else.

Well, we have less than 5% of our total loans in E&P in service. And that's ratcheting down. We think it's manageable. That is correct.

Okay, fair enough. And then, last one from me. David, how about the Outlook for M& A relative to 90 days ago, would you say conversations are picking up? Or are they more muted, given the market drop right now, with energy.

Again, we have had dialogue with a number of banks. And I would say, I think it's active for us. Again, I wouldn't say that we're in a deal with anybody, or there is a commitment coming down the pipe tomorrow or the next month. But, there has been a lot of activity. Again, for us, we have reached a certain size where we're $20 billion-something in size. And, just to grow to grow is probably not as important to us right now as what does it mean to the bottom line, the accretion, and also the people joining us in the culture? There will be a deal. But, again, it is something that really has to be accretive to us. It has to be a culture with us, and have the ability to grow. We can almost -- where we stand right now, we can almost make money growing as good organically, or if we need to switch over to M&A, I think we're positioned to do any side.

Okay, thank you guys.

Our next question is from Matthew Olney of Stephens Inc., please go ahead.

Thanks, good morning guys.

Good morning.

I want to go back to the strong loan production that you guys talked about on the strong pipelines. I'm curious if you're doing anything different today than you haven't done in the past. Whether it's increasing loan size or different loan types, additional lenders, anything at all to speak of.

I think that there is. Again, we are not trying to give in to the terms and conditions of a lot of the group out there. And again, I'm not even saying that we're being that much more flexible. But, we are trying to grow loans and I would say the other thing that really changes, as you grow to the size we are, we are getting larger requests. I think that is probably changing the dynamics more than anything.

When you are a one size bank, a lender may carry a $10 million or $30 million portfolio. As you get to our size, some of the lenders are starting to carry $100 million plus portfolios. And, that's because they are seeing bigger loans. I guess you have bigger loans. We hope that we are underwriting them good. I think that is where it's coming from, primarily.

And, we all are also very focused on trying to increase our lending staff with the appropriate people. We have hired some new lenders over the last year, or so. We are continuing to look for quality lenders. So, hopefully, that is going to pay off as we move on down the road.

Yes, Matt. This is truly one of the first times in the last year and half or two years that we're not focused on trying to work on banks that have been acquired, and getting them where we want them to be and really trying to do it organically. Historically, when we can build organically, we are pretty good at it. But, again, this has really been the first year we've been able to really build and go at it that way.

That's right. And David is also correct on the larger credits. We have seen an increased opportunity to look at larger credits. I don't want to get ahead of ourselves but, for example, at loan committee yesterday we approved a $50 million credit that we think is a very good credit. Now, we may or may not get it. The loan officer thinks we have an excellent chance of getting that loan.

But, I can't make a prediction on that. But, that is an example. We approved a $100 million credit not long ago that we are told we are going to get. Well, maybe we will maybe we won't. We are starting to see credits of that size. Those two that I just mentioned, the $50 million and the $100 million, appear to be very good, solid credits.

Okay, that is helpful guys. Thank you. And then as a follow-up, David Hollaway, I don't think anyone has asked the question yet, on purchased account increase accretions. So, I'll ask it. I think it was about $10 million this quarter, in line with what you guessed last call. What is the outlook from here?

I think that is a good observation, as we're looking at what is left and where we're going. I think we do need to repeat, we're looking at roughly -- our thought is it will hit about $10 million for a floor.

Thank you.

Our next question is from John Moran of Macquarie, please go ahead.

Good morning, guys. Just a real quick ticky-tack one around the margin. Any premium amortization or change in that linked quarter, or sort of a look forward on that? And then, anything going on in the securities book, with respect to duration or changes in what you guys might be looking at to reinvest them?

I'll think part of that. When you are saying amortization, you're talking about the premium amortization on the bond portfolio, correct?

Yes, correct.

It did slow down a little bit. That is what we saw. We were, at the quarter prior to this, we're at the totaling in at 15.5. This quarter we came in at 14.8. So, there was a little bit of a slowdown. I think that 14.8, that is probably what we see today. So, that's probably a good run rate at this point, in terms of what we're buying today.

Haven't changed the model at all. Still buying the same things, same duration, same average life. Our only hope is that we can start taking some of the money out of the bond portfolio and put into the loan portfolio. That would help the net interest margin move forward.

Got it. And then, just circling back on loan growth and some the commentary there. I think last quarter, you guys have been saying 5% to 8% would be the target, organically. It looks like we're through some of the runoff in the acquired books. Is that still a good way to think about it? This quarter was sort of 4% annualized, kind of the bottom end of that range. What are you thinking about that?

And then, with the change, I guess, you just alluded to, taking a look at some bigger pieces of business and being positioned to kind of win that. On, for example, the $100 million credit is that something that you guys would portfolio entirely? Or, do you sort of participate some of that out, and how should we think about that?

A lot of it depends -- First of all, let me answer the first question about the growth. Again, this year is almost over. I'm hoping to even do a little bit better. I hope we do a little bit better in the last quarter. But next year, I think we're going to shoot for a minimum of 8% to 10% and hopefully we'll do better than that. The larger credits, I think they are unique and special by itself. I think the $100 million that we referred to is a hospital district. It has about probably $400 million in assets and about a third of that is in liability. And, of course, the reason we'll probably keep all of that if we get it is because, you'll probably average $30 million or $40 million in the checking account. They have a real special, unique advantage in that, if they don't make as money, they have ability to keep tax and raise taxes. So we'll probably keep that one.

It's hard to say here, everyone is different. The other $50 million loan that we approved the other day is one of the big three banks. And it's a prime, prime credit. On that one, I don't know if you'd grade it AAA, but it's at least the AA. We would probably keep all of that too.

I agree. That is correct.

And then, there is probably another loan in the Dallas market that is $50 million, on a high-rise. There's a great tenant on that, and we'll probably keep that too.

That is the intention right now, yes.

Great that's helpful. I do have one last housekeeping one, around the energy book. Sorry if I missed this. Did you disclose what classified criticized was on that book this quarter? And, how that migration may have played out in the quarter?

The NPAs are about $21 million. They are about 44% of our total, approximately $49 million in NPAs, if that answers your question. I guess as a percentage of total oil and gas, what are we at, $400 million?

About 5%.

About 5%, which I think is about the industry standard, right now. If I'm right, if that is the industry standard and that is what I've read, then we are right in line with that.

Okay, but in terms of what might be just slipping in grading, into classified and criticized, versus pure NPA?

Well, as we said a little while ago, most of our energy credits seem to be holding their own. We have a very few delinquencies on the service loans. And the vast majority of our E&P customers are adequately addressing their redetermination issues. Right now, there is not any hard evidence to start moving credits in that direction. That is today. Tomorrow is a new day. I hope I'm answering your question.

I think that is helpful from a qualitative perspective. I appreciate it, guys. Thanks.

Our next question is from Steve Moss of Evercore ISI.

Good morning.

Good morning.

I was wondering, just to follow up on that oilfield service side, could you give us a little color as to what kind of revenue decline you are observing from your customers?

I don't know that we can have the answer to that. Do you, Merle?

You can look at the producers, divide by two from what they were a year ago.

It's easy on the producers. I don't think we have a hard number for you. Obviously, there is a revenue decline across the board. And from our perspective, it hasn't been significant enough, yet, to interfere with their ability to make payments to us. So, I guess that's kind of the bottom line.

There's probably a pretty dramatic decline in revenues, but there's also the been a dramatic decline in expenses at the same time.

That's right. And, if I had to ballpark a number in decline, I would say it's between 20% and, at worst, 40% on the revenue side.

But, we don't have anything factual.

We don't have anything hard to back that up. That is just gut feel on my part.

Just wondering, in terms of the oilfield service business, could you give a little color as to what type of businesses you are lending to within that space?

It's all across the board. Obviously, we don't have people like Halliburton and Schlumberger as customers. It's smaller to midsize companies. But, it's workover rigs. It's hauling companies. For example, we have a very good customer in West Texas that has a fleet of hauling trucks. And they go out to the field and pick the oil up, it's not connected to pipelines. Their business is, of course, has held pretty well. Because regardless of the price, the producers have to take it out of the field and send it somewhere.

So, we have people that rent lights for oilfields. We have just mechanical services. We have fueling companies, it is all across the board.

Probably roustabout's. You probably have other companies that haul off the saltwater, truck services. Workover rigs, if you go back into -- I think we only have one drilling company that has about two drilling companies, and have two rigs. It's a lot more rigs but it's really two companies.

That's right. So, we have very few drilling credits.

Okay. Got you. And, one other question, separately. Wondering, could you quantify the size of your public funds deposits at this point?

Size meaning the --

The amount.

-- total dollars, is that what you are talking about?

Yes.

I think on the average, in this past quarter, we have a couple pieces of information for that. We have a little over 500 public fund entities. So now you get up to about -- I'm not going to be exact on this but it will be close, $2.7 billion roughly?

But, the normal run rate on that would be 1.5% to 2%, wouldn't it?

Well, you've got 500 entities.

Well, we picked some more up, that's true.

Thank you very much, I appreciate it.

(Operator Instructions)

Our next question comes from Jennifer Demba of SunTrust. Please go ahead.

Hello, this is Michael Young in for Jennifer. David I was curious about your interest, potentially, in stepping out side of Texas for another M&A deal. Obviously, you did the two in Oklahoma back in 2013/2014. So, just curious about thoughts there.

Sure. Again, our first focus would probably be Texas. Like I said, there's over 50 banks over $1 billion in size, here. And in Oklahoma with -- well, actually, it would be Texas and Oklahoma, build a franchise that we have in those two states. But, we would step out to other states. Again, mostly those that may be adjoining us. Again, we probably wouldn't step out to buy a $500 million bank, or even a $1 billion bank in another state. But, if we saw that we could be within the top five market shares, within a reasonable period of time, then we would consider that to one of the adjoining states.

And I guess, similarly, any interest in more of a scratch and dent bank. I know that is not been the M.O., necessarily, in the past. But, does that shift in the current economic environment?

What's a scratch and dent thing?

A bank with higher NPAs, or under pressure from capital.

One with hair on it.

Generally, we are probably more focused on one with hair on it, if it would come from the FDIC. Or, that would be some regulatory help. Trying to make it go in and jump in one that is that far off may be a little bit of a stretch for us.

Okay, thanks.

Knowing there are no further questions, this concludes our question-and-answer session. I'd like to turn the conference back over to Charlotte Rasche for any closing remarks.

Thank you, Emily. And, 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'll continue to work on building shareholder value.

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