Prosperity Bancshares Inc (PB) 2016 Q2 法說會逐字稿

Welcome to the Prosperity Bancshares Inc.'s Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this conference is being recorded.

I would now like to turn the conference over to Charlotte Rasche. Ms. Rasche, please go ahead.

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I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer, H.E. Tim Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; and Merle Karnes, 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 who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, [Bionca]. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for 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 listening to our second quarter 2016 conference call. For the second quarter, we had impressive returns on average tangible common equity of 17.15% annualized. And on average assets, a return of 1.24%. Our earnings were $68,071,000 for the second quarter of 2016, compared to $71,932,000 for the same period in 2015, excluding purchase accounting adjustments, net income was $62.359 million for the quarter ended June 30, 2016. Compared with $63.800 million for the same quarter in 2015. This quarter's net income was impacted by a $6 million provision for credit losses, which is much larger than the provision for the second quarter of 2015. Diluted earnings per share were $0.98 for the second quarter of 2016, compared to $1.03 for the same period in 2015. Loans at June 30, 2016 were $9.650 billion, an increase of $535 million or 5.9% compared with $9.114 billion at June 30, 2015. Linked quarter loans were basically flat.

At June 30, 2016, oil and gas loans totaled $328.4 million or 3.4% of total loans, compared with oil and gas loans of $433.4 million or 4.8% of total loans at June 30, 2015. The $105 million decrease represents a 24% decrease in oil and gas loans (technical difficulty) June 2016 to June 2015. On a linked quarter basis, oil and gas loans decreased $34.4 million from $362 million or 3.8% of total loans at March 31, 2016. Our non-performing assets at June 30, 2016, were $52.130 million or 0.27 basis points of quarterly average earning assets, compared to $56.985 million or 29 basis points of quarterly average earning assets at March 31, 2016, a decrease of 8.5%.

Our non-performing asset ratio is one of the lowest in the industry and a sign of solid asset quality. Our deposits at June 30, 2016, were $17.219 billion, an increase of $217.5 million or 1.3% when compared with $17 billion at June 30, 2015. Linked quarter deposits decreased $653 million or 3.7% from $17.873 billion at March 31, 2016.

As mentioned in prior earnings calls, our deposits are the lowest for the year in the second quarter due to a seasonal decrease in deposit balances of the over 400 municipalities we do business with, as well as a decrease in the balances of our farm and ranch customers who are using their money to finish out their problems. We have historically experienced an increase in deposits in the fourth quarter of each year. In addition, when comparing deposits at June 30, 2016 -- March 31, 2016, part of the decrease was attributable to the maturity of higher-cost certificates of deposits assumed in prior acquisitions, on which we intentionally lower the rate at maturity. The average balance of certificates and other time deposits decreased from $2.888 billion at June 30, 2015, to $2.548 billion at June 30, 2016, a $340 million decrease. We continue to hear from bankers about the added regulatory requirements that are impacting our profitability and believe that these requirements combined with management and board fatigue, will continue to create opportunities for those that have the ability and the will to deal with these headwinds.

Prosperity operates in markets across Texas and Oklahoma, some of which have been impacted more than others by the downturn in the energy industry. During 2016, we had experienced growth in Central Texas, Bryan/College Station, Houston and Dallas and the Fort Worth areas, which have offset the markets affected more by the energy industry, such as West Texas, South Texas and Oklahoma.

We believe that we have seen the bottom in oil prices and at the energy industry should start experiencing job recoveries by the first quarter of 2017. I'm still amazed at the resiliency in the markets we serve. Austin, Dallas and San Antonio are three of the 10 fastest growing cities in the United States.

The Texas unemployment rate held steady in May 2016 at 4.4%, which is lower than the US rate of 4.7%. While the Oklahoma unemployment rate was 4.7% in May, in line with the US rate. Home prices in Texas continue to rise, partly due to solid demand and low inventories, while home prices in Oklahoma also rose slightly.

I would like to thank our whole team once again for a job well done. Thanks again for your support of our company. Let me turn of our discussion to David Hollaway, our Chief Financial Officer, to discuss some specific financial results we achieved. David.

Thank you, David. Net interest income before provision for credit losses for the three months ended June 30, 2016, was $158.467 million, compared to $158.239 million for the three months ended June 30, 2015, an increase of $228,000 or 0.1%. The net interest margin on a tax equivalent basis was 3.37% for the quarter ended June 30, 2016, compared to 3.39% for the same period in 2015 and 3.48% for the quarter ended March 31, 2016. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended June 30, 2016 was 3.19%, compared to 3.13% for the same period in 2015 and 3.21% for the quarter ended March 31, 2016.

Non-interest income decreased $1.8 million or 6% to $28.5 million for the three months ended June 30, 2016, compared to $30.3 million for the same period in 2015. Non-interest expense for the three months ended June 30, 2016. was $79.2 million, compared to $79.7 million for the same period in 2015, a decrease of $500,000 or 0.6%.

The efficiency ratio was 42.46% for the three months ended June 30, 2016, compared to 42.35% for the same period last year and 41.08% for the three months ended March 31, 2016. Our bond portfolio metrics at 6/30, showed a weighted average life of 3.8 years, and effective duration of 3.6 and projected annual cash flows were approximately $1.7 billion.

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

Thank you, Dave. As David Zalman previously mentioned, our non-performing assets at quarter-end, June 30, 2016 were $52.130, compared to $56.985 at March 31, 2016, which was an 8.5% decrease. This represents 54 basis points of loans and other real estate at June 30, 2016, compared to 59 basis points at March 31, 2016. The June 30, 2016, non-performing assets total was made up of $36.369 million in loans, $84,000 in repossessed assets and $15.677 million in other real estate. Of the June 30, 2016, non-performing assets total, $14.270 million for energy credits or 27% of the total NPAs. This is broken down between $13.266 million of exploration and production credits and $1.004 million of service company credits. As of today, $6.069 million, or 12% of the June 30. 2016, nonperforming assets total has been liquidated or under contract for sale, but there can be no assurance that those under contract for sale will close. Net charge-offs for the three months ended June 30, 2016 were $5,888 million compared to net charge-offs of $11.670 million for the three months ended March 31, 2016. This was down 50%. $6 million were added to the allowance for credit losses during the quarter ended June 30, 2016, compared to $14 million for the first quarter of 2016. The average monthly new loan production for the quarter ended June 30, 2016, was $230 million compared to $250 million for the quarter ended March 31, 2016. Loans outstanding at June 30, 2016, were $9.650 billion compared to $9.654 billion at the end of the first quarter of this year, which as David Zalman previously mentioned was flat. The June 30, 2016, loan total is made up of 41% fixed rate loans, 36% floating-rate loans and 23% variable-rate loans. These percentages are unchanged from March, 31, 2016.

I'll now turn it over to Charlotte Rasche.

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

Yes. We will now begin the question-and-answer session. (Operator Instructions) Dave Rochester, Deutsche Bank.

Hey, good morning, guys.

Good morning.

Good morning.

You guys continue to do a great job on the cost containment front. Can you just talk about what you expect for expenses going forward? Because it's a good run rate here, are there other cost saves you think you can realize that could lower that a little bit?

Yes. This is Dave Hollaway. I think on the last conference call, I said [run rate] be between $80 million and $82 million. So obviously, this quarter would come in at that low and a little bit better. And so, yes, I think around that $80 million mark is still a good run rate going forward.

Okay. And then, switching to loan growth, how do you guys think about that in the back half of the year? It seems like growth may have been a little bit lighter than expected in the first half here. Has the loan pipeline ticked up at all and are you looking for stronger growth near term?

I will take that. This is David Zalman. I think we started the first of the year saying that we were hoping to get at least a mid-digit growth around 5%. Obviously, for the first quarter, we grew flat. So we achieved that. Again, I think we even commented in the press release that we have certain markets that are doing extremely well and you look at the Dallas/Fort Worth, the Bryan/College Station and Houston and San Antonio, those markets are really growing. At the same time, and even Houston, we had about a 1.4% loan growth in Houston, I guess, because of the diversity that Houston has. But then, we were more impacted with around the South Texas area, West Texas and Oklahoma. So, I think, and again, oil, when it hit $24 in February, that was a pretty downer. We're still shooting and we're looking to be positive for the second half. I mean, we're still going to shoot for the 4%, 5% loan growth for the second half.

Okay. And have you seen any kind of pick up in the loan pipeline? Does that look pretty healthy on end of 3Q at this point?

When we started loan committee last week at 10:30 in the morning and I left at 7:30 at night. So, I'd say, yes. Now, we can (inaudible) from the payoffs, that's another story. But yes, we are busy.

David, you might need in that regard that June, the loan production for June did pick up quite a bit. For example, it really bottomed out in May at about $167 million and in June, we did $316 million. So there was a lot of difference between May and June. So obviously, we're hoping that what we saw in June is going to continue forward.

Okay. Great. That's good color. And then, just lastly on the NIM, [securities] NIM expense really didn't increase that much this quarter, but it looked like refi activity overall in the market is up a lot more in 3Q. So if you just talk about what your expectation is there, so that's (inaudible) NIM expense in 3Q and then with that backdrop, how you're thinking about the NIM trend next quarter.

Yes, this is Dave Hollaway again. That's right. That's exactly right. So the expectation is because of those factors to see that amortization pick up a little bit as we move into the third quarter, that will be up a little bit and then I still think that does have a little bit of impact on our NIM but I think even what you saw when I'm talking NIM, I'm excluding the purchase accounting impact there. So when you saw our NIM, last quarter, it was 3.21% and this quarter 3.19%, I believe, did lose a few basis points, that's probably how we think about the impact to the margin over the next few quarters, a couple basis points.

Okay. And then, if you haven't had the (inaudible) book at this point.

Total premium. I do not have that number.

Okay. And then, just lastly, where are securities reinvestment rates today?

I think we're probably -- this is David Zalman, we're probably looking around 1.8 to 1.9 on the mortgage-backed securities. We actually when we are buying tax-free instruments, which we repurchased, again we have a lot of municipalities to do business with this. We generally get a better yield on that, but Tim do you kind of have an idea of what our reinvestment rate on tax -free stuff is?

Well, on the tax-frees, we've been getting between 2% and 3% tax equivalent, that's pre-tax.

Pre-tax.

Yes. So we will be doing a lot better. So, let me -- generally, we're using probably a combination of tax-free, tax free stuff that we're buying and we try to deal directly with the municipality because we have something to do business with this. So we kind of mix it. So I'm hoping, I guess to give you kind of a fee, somewhere between 1.8% and 2% probably.

Okay. Great. That's great color, thanks guys.

Bob Ramsey, FBR.

Hey, good morning guys. It seems like the other income line had a pretty big drop quarter over quarter, just kind of curious of those anything unusual or what drove that decline?

Yes. It's David Hollaway, that's under the non-interest income. Yes. That other existing loans, just a bucket of miscellaneous, if you will, and what that will be just one-offs that we have of the stuff that flows through there and so this is just a quarter where all these little banks, so just wasn't many of them this quarter. So I don't know if there's anything specific we can point to, but it is what it is on that number. What I would add as color to that is we looked at the fee income overall, over the last few quarters, we're running $30 million, $31 million if all these little small one-time events are not going to be there, probably a good run rate going forward, I'd bring that back to maybe $29 million, $29.5 million, maybe that could help kind of the big picture though.

Okay, no, that definitely does help. And then, I was wondering if maybe you could share some thoughts on capital today, I guess as the stock price has risen, we saw the share repurchases slow, just curious about your buyback appetite or sort of what you're thinking on the M&A front, etcetera.

This is David Zalman. I'd say, yes, capital, once again, you can see our earnings were building capital rapidly, probably even after we pay our dividend, we're still around $200 million a year that we keep that we can either do something with and that's either to purchase stock back with or buy other banks, and I think that probably as our capital does build, I think Dave, we're probably over 8% now and again, we're building capital rapidly, I'd say is doing -- we were probably -- again, if our price ever goes down the way it did again, we'll definitely be in their bonds softening, no question about that. In fact, if it went down to where it was at first time, we would have bought that plus a whole another round of it, but having said that, probably on the acquisitions, we will probably start using a bigger cash portion than we had in the past or sometimes, we were using 15% to 20%, we may increase that to 45% and 50% to try to help, not get rid of capital but to use it more effectively and have better returns to our shareholders.

Okay. And I mean are you finding constructive conversations with potential targets? Are people open on prices that make sense as there are people willing to take a little bit more cash? I know a lot of sellers prefer stock. Just kind of curious how that dynamic is all going.

I think probably a month or so ago, Dave, (inaudible) seen the slowdown. We always have two or three deals people we are talking to us about and for a while there, it kind of went -- there wasn't hardly anything working again today. We do have a number of deals and people we talk to, but again it may or may not work, [days] are harder as sometimes you're pulling out some of these people to have built their loans very rapidly and when we go back in and do the due diligence, we have to address that. So there are bigger challenges sometimes right now. I think as far as the price goes, for the most part, if you're truly a seller, you can see the prices that people boast out there with the [average sale price list] obviously if you're in a very hot and dynamic market, you're going to demand a price better than that of just a regular market. So there is lot of stuff going on. On and on, I would say though, yes, there is stuff happening now. Whether or not we do a deal or not, what we're always going to do, I mean at -- again I mentioned this before, really that growth is not [a string or two]. When I started with the bank in 1986, our bank was $40 million in size and our bank now and ten associates today it's over $20 billion in size and over 3,000. So we will continue, I think timing just has to be wide. I don't think that we are ever going to do something because somebody wants us to do it and we won't, but we know that in time, there won't be something and it will be the right deal for us.

Okay. Great. Thank you very much.

Jennifer Demba, SunTrust.

Thank you. Good morning. As a follow-up to the last question on acquisitions, David, what are your thoughts on acquiring a bank with significant energy exposure with prices higher at this point?

We are not afraid of the energy exposure. The key to it is that you view market-to-market through proper value. So I think that we have a good qualified team. I think we can do the due diligence. So we're not afraid to look at something like that, you just have to call it right. I'd say there are risks, the risks probably in buying an energy portfolio is. If you think this is the bottom mean and that there is nothing going to be a lot of more downward price pressure, you're okay, but you still always have to take into consideration what if prices drop.

So it puts an [full] additional risk again but the long or the short of it is, we're not afraid of taking an energy bank and looking at it and pricing it right up. We will have our due diligence team is extremely good and extremely competent.

Thanks so much.

Steve Moss, Evercore ISI.

Good morning.

Good morning.

Just want to touch base on the energy balances here I know they're small these days, but just wondering if you could update us as to what the reserve is and what the discount on acquired loans is for acquired energy loans?

Merle has that information.

Yes, give me a second. The specific reserve -- well, the discounts themselves are $6 million, that's the fair value marks and the reserve allocation in addition to the marks is $11.1 million.

Okay. And then, in terms of --

And that reserve of $11.1 million is 3.74%.

Great.

And Merle, I would add to that. I mentioned earlier, this is Timanus that we had a little over $14 million in energy credits that were part of the June 30, nonperforming assets and that $14 plus million is marked at about 21%.

Okay. And in terms of the -- what was the energy charge-off this quarter and then also just wondering what are your -- any updated thoughts you may have about your Oilfield Services exposure at this point in the cycle?

Well, in round figures, the energy portion of the charge-off was about $3 million of the almost $6 million. So it's about half. And my answer on the service side would be that it's as far as our customers are concerned, most of them seem to be holding their own, so to speak. I mean obviously, everybody's nervous about the marketplace and where it's been, and whether or not it's going to improve, but we haven't seen certainly any disasters in the service sector, do you agree with that [model].

We haven't seen a disaster at this point in time. I'd just make the observation that most of these guys that have been through the cycle before are well aware that they need to have some liquidity in their back pocket to ride the next downturn. And so that's really one of the things that has cushioned the lesser level of adversity for the service companies and if prices stay down for a long period of time that liquidity does have a limit. So really to keep this and seeing prices stay up in the hopefully moving next year to the 50 to 60 range.

Yes, if there is an consolation, I think that you've had Exxon and Schlumberger, both cited that we have hit the bottom and we have the Dallas, that reserve, economists feeling that basically that we should have hit that bottom in that growth in that whole industry, at least on the upstream, the exploration part should start increasing in 2017. So having said that, you still had some people that were in this that are (inaudible) still may not make it but if anything there are some positive [zones out there].

Okay, thank you very much.

Brett Rabatin, Piper Jaffray. Joe Fenech, Hovde Group.

Good morning. Guys, you talked about your expectations for NIM for this next quarter. Just looking beyond that, assuming you get the pickup in loan growth you talked about but also assuming maybe rates sort of hanging out here where they are, do you think you can limit that NIM compression, say over the intermediate term to that few basis points per quarter? I'm talking core NIM or is there a point where we see a more noticeable drop in the margin, if we settle here with rates where they are?

Yes, let me back that up a little bit. So when we're talking about, over the next few quarters or let's say between now and the end of the year, we see a few basis points impact to the margin, few basis points per quarter, just want to be a little clear on that, but over 12 months, you would have a few more additional basis points challenge.

But to your point, that's absolutely right. If you can get a net loan growth, 3%, 4%, 5%, that absolutely will mitigate some of that the downward pressure on that margin or bring it back. I mean we're pretty neutrally balanced and so with any kind of loan growth, that will help. Now, having said that, I don't want to give the impression that we have a 3% to 4% loan growth (inaudible) jump 10 basis points. I'm not saying that either.

But a decent level of loan growth, it sounds like, would be enough to hold NIM relatively stable even if rates stay where they are, is what I'm hearing, is that fair?

That's right, that's right. It just depends on how much loan growth we have and the new rates that we're putting them on at.

Okay. And then, David Zalman, just anecdotally, I was talking to a small bank in the Midland-Odessa area and the takeaway there from that conversation was that, that market seems to be dealing with recessionary-type conditions in that market and the comment was that oil prices at this level just aren't high enough to avoid some significant problems in markets like that, that are more energy reliant.

Would you agree with that assessment based on what you guys are seeing and if so where do you draw the line in which markets do you put in sort of that recessionary-type condition, even with oil prices where they are today and which markets are sort of more immune to it and sort of muddle through here with where we are?

I'd probably respectfully disagree with the smaller bank. I think that is West Texas, Midland-Odessa impacted, definitely impacted, but at this price, I think if you want to be anywhere in the oil and gas industry, that's where you want to be. So it's one of the best markets. I mean they can produce oil and gas cheaper than any of us, but I'm sure they're looking at probably some smaller service companies that they have. And again, when you look at something like that, it is difficult for them. Most of them have used a lot of their cash and so they're probably having a tougher time, probably having tougher time making payments, but I will say this, we've looked at a couple of the service industries over there and actually we've seen this last quarter an uptick in their -- the end balances that they're keeping with and some improvement to their P&Ls. --. I would just say that instead of just the Bank is thinking about recessionary conditions, they probably have a lot of customers that have still on the balance sheet, drilling contractors, pipe suppliers that type of thing. That's what we saw the [1980s] or so, the ones that were most impressed in that we are -- we did have a lot of drilling, a number of drilling contractors, you are probably more impacted than anybody else's.

I would also add to that I think we have to look at it really on a credit card credit crisis, if you look at some of these fairly new companies and by that I mean once this started 2010, 2011, 2012, 2013 along there. If I start with a lot of leverage. They're probably not doing very well right now.

And the customers have been around a longer period of time and it led to some of these cycles. They are less impacted by itself. Is it a catastrophe for some gas, is it a catastrophe for all of defiantly not, it's difficult for us. But --treatment into oil and gas flow (inaudible) maybe a lot easier to deal with hearing 3% compared to 15%, so that maybe some psychological is fact we have seen. That's correct.

Brett Rabatin, Piper Jaffray.

Hi guys, good morning.

Good morning.

Good morning.

Wanted to, I guess, just kind of go back to the loan growth question, and obviously, profitability is holding up really well.

Because we really haven't gone out and tried to hire good people or teams of people and just bringing over a whole group of business like that works. I think we're still on that capacity. On the other hand, where we are out there right now interviewing Dan, trying to recruit additional lenders every day and we're meeting with them with lunch and we are trying to expand our lending right now with good people and trying to get people in some of the markets that we should be doing better in that we're not doing better in that are having harder times. So the answer to the question is yes, we're out there trying to really recruit vendors right now.

Okay. And then, I'm just curious, David, you've always run with pretty tight capital and I don't think I've ever seen you with 8% TCE. With everything that's happened regulatorily, what do you view as sort of the right ratio that you're managing to and kind of what that number might be?

You're right. I mean, I remember the days when we were even buying banks with 3% and 4% capital. So 8% is just -- this is a whole new paradigm for me. But having said that, the regulators -- we try to get -- we're big rightly or wrongly trying to get some of the best ratings you can get where we have regulatory sales and capital is one of their main deals right now and I think they like to see -- they like 8%, but again, I think they love you to have 10% capital. I don't know that we will be there at 10%. But I would say that will work again we're building capital by over 1% a year just because the retention of the earnings that we have -- I think you'll see capital continue to build but at the same time, I think that I mentioned earlier in the comments that we may use -- on acquisitions, we may use more cash than we've had in the past and try to put that to use. We just have to make a decision as a bank, do you want the highest regulatory rating, you can and meet their expectations or do you want to work a little bit less, sometimes, that's his question. We have to ask ourselves --.

Okay, great appreciate the color.

Matt Olney, Stephens Inc.

Hey, thanks, good morning guys.

Good morning.

Good morning.

Hey, just want to go back to the discussion on the securities reinvestment rates. I know historically, you guys have been focused on mortgage-backed securities. Is that still what you're reinvesting or are you shipping into other type of securities? I'm just trying to understand if you're tweaking your securities strategy at all, whether it's type of security or duration or anything different from previous years.

Matt, this is David. I would say the answer to that short is no. On the other hand, sometimes, we have a team in there now where I used to do the whole thing and so likely spend more time on it. So they can find some stuff that has a little bit different spend, maybe where we were trying to buy stuff like that, a three to five-year average life, when you start off with. Sometimes you are throwing deals out there where we might have a 20-year MBS that might have had some age on it and they can get a better yield.

We're looking at stuff like that instead of maybe just a new direct purchase from Fannie Mae or Freddie Mac (inaudible) from two, so we're looking at that wins, sometimes we try to buy when the yields are higher and we know, for example, in December, that probably our deposits will increase, who knows? They increased so much last year, but let's just use $400 million or $500 million, so we'll start looking into the 10-year treasury is yielding more, we will buy more now preparing for that coming in the future. So I mean we do look at timing, but again, we're not trying to call rates, we're trying to -- we're just trying to, have an average life or major sides [going for down] we still [like] decent return, again we're not trying to call rates and we're bonding every market, but we do, I'll say just that we are putting on more [immiscible] stuff that we had in the past, but sometimes that even goes into the loan portfolio, because we're dealing directly with the municipality sometimes now.

Okay. That's helpful. And then, shifting over towards the fee income discussion, you gave us some good commentary on the other fee income, but besides that, there were some, few at a lines and looks little bit soft and that's at the [counter fee] trust income, any commentary you can give us on some of those items for this quarter?

On the NSF incomes, I think if you just look back in all the course, that's just been a, down trend over the last few quarters, that's just the nature of the education of the customer and where the regulatory environment is, that the expectation of that going up. I don't think should be there. Trust income, yes, that's something that was impacted, it's not a lot, maybe went down little bit here in the last few quarters impact a little bit, some of the business that they handle.

I would say the same thing for the brokerage income but again these are such small portions of our bank. Even though we had this quarter, we had downtrend I don't like what expect that one throughout, they're smaller for like an increase of business again they have been threatening long at that, [forgotten] assets under management trust, is not that much when (inaudible) fell back into the bank, it's a huge upside.

I think our assets under management (inaudible) about $1.700 billion, somewhere around there. So they've increased somewhat, but again, I think that some of their earnings have been impacted to with oil and gas. I represent a lot of people in the oil and gas industry of ours when people get leases on their properties and stuff like that and there was some pretty good money made in that and that's slowed down, they were probably impacted by that as well.

The penetration into our major market side Dallas and east and west Houston.

We've hired some people of eastern and Dallas but again, as far as giving it really ramped up. We've not there yet.

Thank you.

Scott Valentine, Compass Point. I'm sorry, the question is from John Rodis, FIG Partners.

Good morning, guys.

Good morning.

Do you guys have the level of unfunded energy commitments at the end of the quarter?

That will be a Merle question, it should be in our press release also, shouldn't it?

What we had an outstanding was approximately $328 million and the potential can -- much they're attached to that would take it up to $484 million.

So, that would be unfunded plus outstanding $484 million.

Yes.

Okay. David how we just could you maybe just follow-up, your thoughts on yield accretion going forward. So, I think last quarter you talked about maybe being around $7 million to $8 million a quarter.

Right. And I think we want to stay on that. I mean, I guess that in this last quarter, it was a little higher than that, but I mean the precision. I think the $7 million to $8 million a sold the number going forward based on what we still have outstanding.

Okay, makes sense. And then, David Zalman, maybe just a follow-up question on M&A, your thoughts on how big of a deal do you think you could do today, all things equal?

Again, I think throwing stuff like this out there because everybody gets all lathered up. We're really -- as you grow then you prepare for acquisitions, you make sure that (inaudible) can really grow, sometimes even doubling your size but a $10 billion deal is not unreasonable for us if we really wanted to do one.

And you feel you have sort of the infrastructure in place to account for something like that?

Absolutely, the last couple of years, I mean that's really all we've been doing is building infrastructure. When I look at the amount of money we're spending on the regulatory BSA, modeling, DFAS, node areas and Houston, -- on the trade the people but we would like it, but that's been alright -- network where we really have been focused on his building that infrastructure handle the next growth stage we have.

Okay, makes sense. Thanks guys.

Scott Valentin, Compass Point.

Good morning, everyone. Thanks to take my question.

Good morning

Just quickly on -- regarding oil, I know David has only mentioned the bottom is in for oil, just curious if oil will start retreating, it's come down from $50, it's in the low 40s today. Is there a price again where you guys get concerned a little bit on either loan demand or credit performance?

I think that again, you can almost read anything you want anywhere at any time about oil and have an opinion from anybody, but some people think that oil for the most part will be -- it could even go down to $41, beep where it makes a move back up into the $50 and $60 range. But from everybody we talk to from economists to the oil and gas industry to that Reserve Bank of [Dawson], their positions and I think most of us all feel that it probably is going to land somewhere in 2017 around $50 to $60 range and I think that's what we're counting. But you're right, I mean oil went down to $25 or $30 again, we would have another downturn. I mean there's no question.

And then, just on loan originations, just wondering it sounds like it's more of a weak demand scenario during the quarter where just -- it sounds like what was picked up in June but it was weak there early in the quarter. Any changes in the way you're approaching lending geographically or for product type, maybe de-emphasizing multi-family or any other product.?

Well, I would say you're looking when we say weak demand, it's probably -- again, you got to look at our whole deal, the state is so big, I mean basically certain areas like Dallas-Fort Worth, Austin, San Antonio, (inaudible) they even used to have a 1.4% increase in loans. But again, we're also in areas that are in South Texas and West Texas and in Oklahoma where our growth in those areas just offset. So, I guess, a positive but you can say, we have a hedge. So, our hedges worked anyway if you want to look at it from a positive spin. But for the most part, we're -- again, we're not going out and buying some asset-based lending group or something like that, that's not on the agenda. But we are focused on building loans and we want to build loans. We want to build good loans. And so, I mean that is our focus, for sure.

And then, just a follow-up, I mean, were there any underwriting changes, so let's say in the oil-intensive areas like South and West Texas, Oklahoma, did you guys tighten the underwriting standards or limit certain products versus where it was pre the energy or oil price decline?

I don't think that you -- we try not to overreact. I mean, I think I've been in banking 30 something years and it's not good for the customers. It's not good for the bank to overreact. Sometimes, I think probably a year or so back when some of the customers were having some harder times where if they had 24 months left on their equipment knows we might have extended on to the 36 or 40 months or something like that. We might have made some adjustments on the deal to help the customers. And again, we continue to do that. We think you have to stick with these guys and you can dump everybody and get out of the business right now, but when things get back to in a normalized fashion, your reputation will be hurt and you won't have a business either.

Thanks for the color.

(Operator Instructions) Gary Tenner, D.A. Davidson.

Thanks, good morning. Just wanted to clarify something from the press release, where you talked about net charge-offs being driven by the energy credit as well as an ag credit. In the net charge-off detail, it seems to show a net recovery on ag and then a larger consumer charge-off?

I would say that the -- when I refer to it as ag, probably, there was still a -- again, I don't have the exact amount, but from the charge-off we had last quarter, there was still about $1 million in the overgraph that was charged off and that's probably what you're seeing the differentiation on that. Merle, you would say?

The charge-off on the ag is related to deposit account that was overdrawn. And I think for reporting purposes, those (inaudible).

Okay. I don't know if you caught that, Gary, or not.

Yes, I did. I did. (multiple speakers). And then, just one follow-up. In terms of core loan yields, pretty flat this quarter and down only I think 10 basis points or 11 basis points year-over-year. So you've managed to hold the yields there pretty well. Can you talk about what the new loan yields were, maybe looking at the 300 million odd of production in June?

Again, this may be a reason why sometimes, we're not growing as fast as some of our peer groups are. We do try to maintain margin. I think that it's very important to maintain a margin. I mean tomorrow for example, we wanted to put on a $1 billion or $2 billion of loans and we (inaudible) to go out and buy some shared national credits and get a 2% yield, we could increase the portfolio by $2 billion or $3 billion and some people that are in the investment community would think that's great, right, when you're a long-term shareholder, you take a different view. We really want to maintain our margin even in the event that we don't grow as fast and we lose business sometimes, we just think that that's real important and I look at it personally from a shareholder perspective, sometimes, you say, well, some of these other banks have 80% and 90% loan to deposit ratio and you don't ask him, why don't you go back and look inside, well, what if they make one return on assets and what if they made return on tangible capital and inevitably, we outperformed all the majority of those banks making 1.24% return on assets and 17% return on tangible capital. So I think that we're doing it right because we're growing, making the money and not taking on as much risk. So that's just the nature of our Company really.

Yes, and I wasn't questioning it from a growth perspective, really just getting -- trying to get an idea of what the origination yields were here in the second quarter.

I saw that as an opportunity to allow out some things that I wish.

Thanks, guys.

Thank you.

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

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

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