Prosperity Bancshares, Inc. (PB) Q2 2013 Earnings Report, Transcript and Summary

Charlotte M. Rasche - Executive Vice President, General Counsel, Senior Executive Vice President of Prosperity Bank and General Counsel of Prosperity Bank David Zalman - Chairman, Chief Executive Officer, President, Senior Chairman of the Board for Prosperity Bank, Chief Executive Officer of Prosperity Bank and President of Prosperity Bank David Hollaway - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Chief Financial Officer of Prosperity Bank and Senior Vice President of Prosperity Bank H. E. Timanus - Vice Chairman, Chairman of Prosperity Bank and Chief Operating Officer of Prosperity Bank Chris A. Bagley - Chief Credit Officer

Rahul Patil - Evercore Partners Inc., Research Division Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Matt Olney - Stephens Inc., Research Division Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division Gary P. Tenner - D.A. Davidson & Co., Research Division

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note, this conference call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Ms. Charlotte Rasche.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Second Quarter 2013 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me with me today is David Zalman, Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Chris Bagley, our Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter and an update on our recently announced merger and acquisition activity. He will be followed by David Hollaway, who will spend a few minutes reviewing some of our recent financial statistics. And Tim Timanus will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Leo. [Operator Instructions] 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 fax a copy to you. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws 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 second quarter earnings announcement. I'm very excited and proud to be able to announce such positive results for the second quarter of 2013. We posted net earnings of $53,844,000 for the 3 months ended June 30, 2013, compared to $36,972,000 for the same period in 2012, which represents a 45.6% increase. Our diluted earnings per share for the quarter ended June 30, 2013, came in at $0.89, and that's compared to $0.78 for the same period last year, representing a 14.1% increase. Our asset quality continues to be one of the best in the industry with total nonperforming assets of $14,864,000, and a ratio of nonperforming assets to average earning assets of only 11 basis points for the second quarter of 2013 compared with 12 basis points for the second quarter of 2012. Our provision for credit losses increased during the quarter based on our allowance methodology, which includes numerous factors, such as loan growth. Our allowance for credit losses was $56,176,000 as of June 30, 2013, with nonperforming loans at $4,620,000 at the same day, representing a healthy coverage ratio. Loans at June 30, 2013, were $6,172,000,000, an increase of $2,222,000,000 or 56.3%, compared with the $3,950,000,000 at June 30, 2012. On a linked-quarter basis, loans increased $909 million or 17.3% from $5.2 billion at March 31, 2013. Looking at loan production on an organic basis, excluding loans acquired in acquisitions since the second quarter of 2012 and the new production at those acquired banking centers since the respective acquisition dates, loans at June 30, 2013, grew 7.8% compared with the June 30, 2012, at 3.7%, 14.6% annualized on a linked-quarter basis. We are pleased with the higher level of organic loan growth during the second quarter and we continue to see increased demand for new loans. Deposits at June 30, 2013, were $12.5 billion, an increase of $4.1 billion from 49% compared with the $8.3 billion at June 30, 2012. On a linked-quarter basis, deposits increased $795 million or 6.8% from $11.7 billion at March 31, 2013. Looking at only organic deposits, meaning excluding deposits assumed in acquisitions since the second quarter of 2012 and new deposits generated at those acquired banking centers since their respective acquisition dates, deposits at June 30, 2013, grew 5% compared with June 30, 2012, and decreased 2.1% or 8.4% annualized on a linked-quarter basis. The decrease in organic deposits for the quarter is not unusual for us. In fact, if you go back to the second quarter of 2012, you will see a similar situation. We have over 400 municipalities that do business with us at this time. And this time of year, they have less in their accounts until their tax dollars come in at the end of the year. We also experienced other customers using deposits to invest in their businesses and pay taxes. During the last quarter of 2012, we saw an increase in organic deposits of $538 million or 6.5%, 26% on an annualized basis. For the full year in 2011, we saw organic deposits increase 10.1% or $824 million, and then expected that we would see some of those deposits leave later in the year. Historically, our organic deposit growth has been approximately 4% to 6% annually. The net interest margin on a tax equivalent basis decreased to 3.43% for the 3 months ended June 30, 2013, compared with 3.55% for the same period in 2012, an increase from 3.42% for the 3 months ending March 31, 2013. Going forward, the steepening of the yield curve and our increasing loan volume should be a positive for our net interest margin. The 10-year bond has increased over 2.5% from 1.5% not that long ago, with no increases in short-term rates. While this is positive for our net interest margin, it will erode the unrealized gains we have had in the bond portfolio. However, since the majority of our bond portfolio is in the held-to-maturity category, any change in realized gains as rates increase should not affect our capital ratios. On July 1, 2013, Prosperity announced the signing of a definitive merger agreement with First Victoria National Bank Corporation and its wholly-owned subsidiary, First Victoria National Bank, headquartered in Victoria, Texas. First Victoria National Bank operates 34 banking offices. As of June 30, 2013, First Victoria National Bank, on a consolidated basis, reported total assets of $2.4 billion, total loans of $1.6 billion and total deposits of $2.1 billion. I could not be more excited about joining forces with all of the professionals at First Victoria National Bank. We have always had a great deal of respect for the bank and all of the people that have contributed to its success. We believe the combination will further strengthen our already strong management and operations team in South Texas and increase our ability to effectively compete and serve our customers. We look forward to all the new team members that will help Prosperity grow to the next level. First Victoria will add to Prosperity's Trust Department, which had approximately $1 billion in assets at June 30, 2013. First Victoria National Bank's Trust Department has approximately $500 million in assets, with locations in several cities, including The Woodlands, north of Houston, where Exxon is now building their headquarters. We believe the combination with First Victoria will help us expand the Trust business more rapidly into the Houston and Austin areas. Russell Marshall, who is First Victoria National Bank's CEO, will lead a new private banking group for us, which will cater to professional and higher net worth customers, providing them loans, brokerage and trust services. We remain on track to close the transaction in the fourth quarter of 2012. Again, we owe all of our success to our team of associates and board members who have helped grow the company in the right direction with all of their hard work, insight and dedication. And for that, I say thank you. We would also like to thank all of our customers for their business and loyalty to the bank. Thanks, again, for your support of our company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer. David?

Thank you, David. Net interest income for the 3 months ended June 30, 2013, was $118.7 million compared with $83.7 million for the same period in 2012, an increase of $35 million or 41.9%. This increase was primarily due to a 47.5% increase in average interest-earning assets. Noninterest income increased $11.6 million or 85.1% to $25.3 million for the 3 months ended June 31 -- June 30, 2013, compared to $13.7 million for the same period in 2012. This increase was impacted by the American State Bank transaction, which closed July 1, 2012, and only contributed to an increase in service charges related to deposit accounts, with added new lines of business, including trust and mortgage operations. Noninterest expense for the 3 months ended June 30, 2013, was $61.3 million compared to $40.8 million for the same period in 2012, an increase of $20.5 million or 50.3%. This increase was also impacted by the American State Bank transaction as well as the Coppermark transaction, which closed on April 1, 2013. The efficiency ratio was 42.5% for the 3 months ended June 30, 2013, compared to 41.9% for the same period last year and 42.4% for the 3 months ended March 31, 2013. Noninterest-bearing deposits at June 30, 2013, were $3.28 billion and represented 26.2% of total deposits, up from 24.8% at June 30, 2012, and 25.6% at March 31, 2013. The loan deposit ratio at June 30, 2013, was 49.3% versus 47.1% at June 30, 2012, and 44.9% at March 31, 2013. The bond portfolio metrics at 6/30 showed a weighted average life of 3.78 years and projected annual cash flows of approximately $1.8 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you. The bank's nonperforming assets at the end of the second quarter totaled $14,864,000, which is 24 basis points of loans and other real estate, as compared to $18,133,000 or 34 basis points at the end of the first quarter of this year. This represents a decrease of 18% in NPAs from end of the first quarter of this year. The June 30 nonperforming asset total is made up of $4,620,000 in loans and $10,244,000 in other real estate. There were no repossessed personal property assets. As of today, $2,207,000 of the June 30, 2013, nonperforming asset total are under contract for sale. This represents 15% of the June 30, 2013, NPAs as being under contract for sale. We always have to mention that there's no guarantee that any of these contracts will close. Net charge-offs for the 3 months ended June 30, 2013, were $1,423,000 compared to net charge-offs of $315,000 for the first quarter of this year. $2,555,000 was added to the allowance for credit losses during the second quarter compared to $2,800,000 during the first quarter of this year. The average monthly new loan production for the second quarter of this year was $186 million compared to $141 million for the quarter ended June 30 -- June -- excuse me, quarter ended March 31, 2013. This is a 32% increase on a linked-quarter basis. The average monthly new loan production for the entire year, the 12 months ended December 31, 2012, was $138 million. So the average monthly new loan production during the second quarter of this year represented a 35% increase over what was done during the calendar year of 2012. Loans outstanding at June 30, 2013, were $6,172,000,000 compared to $5,263,000,000 at the end of the first quarter. And as David previously mentioned, that represents a 17% increase. The loan total at the end of the second quarter was made up of 46% fixed rate loans, 36% floating rate loans and 18% variable rate loans. Charlotte, I'll now turn it over to you to coordinate questions.

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

[Operator Instructions] We'll take a question from the site of John Pancari of Evercore Partners.

This is Rahul Patil on behalf of John. Just looking at the loan balance at Coppermark, it looks like from March 31 to June 30, the decline seems to be beyond the loan mark. Was that intentional and -- or maybe you could give us some color behind the decline?

I don't know that I understand the question, do you?

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

Right. At Coppermark, yes.

I want to answer that and say that it's not unusual that whenever we merge with another bank and we do see a reduction in loan dollar amounts that are just simply loans that we might have identified that would then may not particularly fit our model or something like that, but it's not unusual to see as much over a year to a 2-year period as much as a 15% to 20% decrease in loans that a bank that joined us may have before they start ticking back up.

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

With Randy and Chris here, they may want to jump in on this question. I do sit in at the loan committee meetings that we held on Thursday. I do think our loan demand looks robust. Having said that, it's still very competitive out there from what we're seeing, so -- but I'd have to say overall, it does look more robust right now. You want to say something?

Negative.

I think the loan demand is good. And we're seeing loan requests from, really, all sectors of the economy, with the exception that we don't see very many, what I refer to as large dollar single-family residential lot development requests, and we don't see very many large dollar commercial loan requests for rental-type spaces. But we see a lot of owner-occupied requests on the commercial side, we see medium to small dollar requests. But once again, we don't see a lot of large dollar requests. So it's coming to us from all directions, but less so in those 2 areas.

Right. And the just lastly, how would you characterize the paydown activity this quarter? Has it been stable or has it improved?

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

[Operator Instructions] We'll move next to Jefferson Harralson of KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: What percentage of the Coppermark expense savings would you say hit this quarter?

That's a good question. Historically, we've always targeted 20%, 25% maybe even 30%, in all these deals. So the question is, how much of that could we have realized in the first quarter? I'd say, at least half of it, maybe more. I know what we're doing on this is how much more is there coming -- going forward and I think there will be additional cost saves. But I don't want to leave the impression that there's another 30% or 25% like that. So yes, I mean, there's a lot of it. You can just do the numbers, you saw they were running at $8 million on a per-quarter basis. So you can kind of back into it to see where we were at today on the cost saves. I know that's not a pristine answer, but... Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: No, that's okay. And my follow-up, I wanted to ask on the accretable yield to be in lower this quarter versus last quarter, and it seemed like it may have been higher since you had Coppermark now in the numbers and the first quarter with Coppermark in there. Can you just comment on the, I guess, what drove the change in accretable yield and why it not had been a little higher?

I'll jump in, in the big picture and the other folks in here might want to give you a little more detail. But I would just paint the big picture and just say remember, as we're doing each one of these deals and it brings the fair market adjustments to them, each portfolio is different. And one of the things that will impact this -- and again, looking forward, you just have to give us consideration. And I don't want to get too much in the weeds, but there are 2 buckets to these loan portfolios. There is what we call the FAS 91, which was the pure accretable and there's the old term of SOP S -- 03-3 loans, which are more of a credit issue. So what's happening, and I think this is specific to Coppermark versus some of the prior deals, there are more loans discounted from an SOP 03 perspective than say, the FAS 91. And I think that's what you're seeing when you look at accretable yield. I think Chris might want to comment on that, but that would be my big picture observation.

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

Our next question comes from Brett Rabatin of Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: I was hoping to maybe get a little more color, David, around the securities portfolio, thoughts going forward and with the lift in the tenure, if you're going to be doing more reinvesting and you've also got First Victoria closing, which is pretty loaned up. Can you give us some thoughts maybe on how you're going to manage liquidity and if you'll be doing a lot of reinvesting with the current yield curve?

Okay. A lot of questions in there, but I would say, number 1, you did -- you looked at it right. I mean, with First Victoria National Bank, they had very little amount of money that they have in securities. Most of their excesses are in loans. For us, going forward, hopefully, the -- we will continue to increase loans, which will take over some of the liquidity. We have about $1.8 billion a year in cash flow off of our portfolio, with a 3.7-year average life. Our yield today is probably -- what's our yield right now in the portfolio today?

It is at 1.98%.

1.98%. So it's pretty easy to see that the reinvestment that we would probably be reinvesting in would be somewhere around the 2.5% yield. So that would be a pickup. So the good part is, with interest rates going up, we can really see a better increase in earnings, which we think is the right thing to do. The downside to that is, where in the past, these guys have seen over a $200 million gain in the portfolio as interest rates have gone up, that unrealized gains rose. And so even going further, as interest rates continue going up 200 and 300 basis points, I think it will still be positive, very positive for the company from an earnings perspective. At the same time, you could see bigger unrealized losses in the portfolio, depending on the interest rates go, and if they're parallel and not parallel, shoot, I don't want to get into the weeds on all of that, but you could see bigger losses. But for the most part, we think interest rates going up is a good thing for us. Our -- we do some stress analysis and we do to look in -- even if the interest rates go up 300 basis points, our effective duration on the portfolio is about 3.8 years. So it will go up, there will be some downside, downturn in the valuation of the bonds themselves. On the other hand, it's not unreasonable. It's still relatively short, I think, compared to most bonds. So we think it's a good thing. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: That's not -- maybe a different way to ask the question is that aside from the discount accretion with the First Victoria deal, is it safe to assume the margin moves up 5, 10 basis points in the next quarter or 2? Or can you give us maybe some thoughts around the margin and just kind of how you see that playing out?

That -- when you make that observation, are you including First Victoria in the numbers or... Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Yes, First Victoria in the numbers, but maybe exclude -- maybe sort of taking out the discount accretion thought or if you want to include it, that's fine, I guess. But just sort of thinking about the margin from a topable perspective and how you guys are kind of thinking about it.

Yes. I mean, what will be interesting is when you look at the First Victoria -- if you look at their call report this last quarter, their margin was like 3% -- I won't get this exactly, it's like 3.93% or 3.95%. So I mean, and theirs went up. I mean, as David said, they hardly have any security. So I mean, the loan deposit ratio will increase. If they're at 3.93% in we're at -- take the accretion out, if you want, we're in the low 3s. It should help our margin. You would -- just to the question of the weighting, how much of our total portfolio will get that higher margin that they bring to the table. So it should have a positive bias to the margin.

Our next question comes from Brad Milsaps of Sandler O'Neill. Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division: Just to follow-up on Jefferson's question with regard to the expenses of Coppermark, maybe on the flip side, the fee income, it looks like that they were maybe running closer to $3 million a quarter, you guys didn't tick up quite as much. Just was there a component of mortgage in there or is there something else that might be missing, that might come online maybe in the third quarter or fourth quarter?

Yes. I think that it came out before. If you look back on the -- if you're looking back at the call report, I thought I saw they're running maybe a little over $2 million a quarter in fee income. But I -- the question is, we never really make any changes to their fee structure. I mean, maybe David can jump in. I think, it is what it is. So I don't know if there's anything "new" coming online as we go forward. But it shouldn't have been -- we looked at the quarter internally, the fee income they generate wasn't -- it's not $3 million. Again, I'm not sure I agree with that number, but it wasn't too far off from where they were running from what we saw.

I think it's safe to say that the performance for mortgage, it softened some, but I don't think it was, from an overall standpoint, a significant enough number to make much difference. So it's -- I don't think it's in mortgage. That could impact it a little bit, but not sure of the number. Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division: Okay. Okay. And then just maybe a bigger picture question. As it relates to Oklahoma, now that you guys have been there, well, officially, for 90 days or more now after the deal is closed, any observations or big differences between operating there or Texas, or kind of what you're seeing from loan demand perspective, pricing? Just any color would be great.

Well, we think that the whole group in Oklahoma really, there's a certain period of time that when another bank merges with you, especially from the lending side, that it takes their time to really get used to, the policies and procedures in those areas and stuff like that. I would say, overall, we're stacked with the Oklahoma group in that they really -- they seem to be making a turn faster than most of the other banks that have ever joined us. I mean, their attitude is so positive and they understand there are certain things that they might have done, there are certain things that we would have done, that sometimes they're different. But they're beyond that, and the management team and everybody there has just been really -- I think they're way ahead of schedule, quite frankly.

And I think the only difference in the type of lending we have seen from Oklahoma is compared to what I would describe as traditional Prosperity lending is they had more of an oil and gas energy-related effort than we historically have had. Now that obviously changed for us when we acquired American State Bank 1 year ago. So we have become accustomed to and comfortable with more energy lending over the last year. So I think what that translates to is that with Coppermark coming on board, I don't think we've really seen anything that's different than what we've been seeing for the last year and anything that we're particularly uncomfortable with. In fact, as David says, we're very happy with the performance of the people and how it's going.

Let me jump back in on your first question. As Zalman was reminding me on the Coppermark deal, they had a subsidiary entity for a credit card area, and that's what you're seeing in those numbers. If you look back in the last year, seeing the $3 million noninterest fee income line, it's including that subsidiary. If you look in the first quarter, they reported dropdown to $2 million. But the big picture observation I would make is, when you're looking at that subsidiary, yes, they were getting that gross revenue, if you will. It showed up in noninterest income, but you have to factor in all the expenses that went with it. And if you were to pull that subsidiary out and look at it on a net-net basis, they weren't making -- maybe this is what -- why I was confused, they weren't making maybe net $30,000 a month maybe. Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's very helpful. And I know, David, you guys were working on kind of rolling out more cards kind of throughout your franchise. Any update on that?

I would say, overall, it's looking very positive. Our marketing people have gone around the state, to different regions in the state and again, doing a lot of training, came out with promotions to -- when people refer a customer for our credit card in the bank, they get a certain dollar amount. And secondly, if the customer actually -- we approve the credit card, they get a bigger amount. So we're really focused on that. I think Dave was actually referring to some of the merchant car we -- in Oklahoma, they added some subsidiary in Oklahoma -- they actually had a subsidiary that processed credit cards for a number of different banks. And that's how -- he was probably referring to more than that us actually coming out and expanding our own credit card line.

But all of the above is true. I mean, they had -- as a subsidiary they had merchant credit card. And what's going on, on a ground level is the merchant for companies across the country is not something we're going to do. But the credit card part of the business, they're actually in the process of merging that into the operation that American State Bank had, and that's what David's talking about. We're taking that whole credit card program and then starting to introduce that bank-wide. They kicked off that program here in the last few weeks. So I mean, if we can hit our customer -- our total customers base of over 500,000 accounts, I think there's huge opportunity with the credit cards.

We're going to [indiscernible] and I think more than just the individual credit card, we're really about to seeing also [ph] on corporate cards because we have so many commercial customers, especially in the energy business, that if we can get them using our cards, not that they would carry balances, but the transactions fees would generate a good source of income for us.

[Operator Instructions] We'll move next to Jennifer Demba of SunTrust Robinson Humphrey.

Question on the energy lending portfolio. Curious as to what the size is at this point and how you're approaching it, and what you think the growth prospects are in the next 2 or 3 years.

Jennifer, it's Chris Bagley. The energy lending portfolio, directly tied to proven producing reserves, probably in the $70 million range, give or take. But if you look at a market like Midland/Odessa, I would say that every loan there is basically tied to the energy business. You want to look at it from a risk perspective. Oklahoma brought -- and ASB -- Coppermark and ASB both brought energy loans to our portfolio and most of those were seasoned customers that they've known for a long time based on proven producing reserves, with the conservative borrowing base that monitors the outstanding balance. I would say that from a future business growth perspective, we're still learning and wrapping our arms around that kind of lending and we'll just assess the opportunities that represent it. Right now, I mean, we think we see like we have a good handle on the risk and it looks like a good component of business for us. Does that help?

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

I don't have that at the top of my head. I will say that we're slicing and dicing those numbers as we go forward. Some of that -- there's just some noise in the data because we've done 2 pretty large acquisitions. And some of that information is not available when it came over in convergence. So we're in the process of cleaning some of that up. And we'll have better numbers on a go-forward basis.

Well, I think Coppermark had somewhere between $100 million and $150 million in directly related energy credits when they joined us. But there's improvement, primarily more production than anything else.

I think that's accurate. That's right.

And where Midland/Odessa has a service industry...

We'll have more of a combination.

A combination?

Right. And what it means going forward, Jennifer, that's -- I think that's a hard question that the energy market and business in both Texas and Oklahoma is very good and has been. So it's a little hard for me, personally, to think it can get much better. I mean, anything can get better, anything can decline, but it's literally booming right now. So I don't know that there's a whole lot of significant upside just in the market itself getting better. And in the areas that we operate, as good as it is, there are only so many customers in the business. And we have a very adequate share in percentage of those customer right now. So then the question is, how many other customers might join us? And then would we go to other marketplaces? In other words, would we go to somewhere other than Texas and Oklahoma? And that becomes very iffy there. So I don't see a huge immediate increase in the energy business for us.

I think what he was saying is we would maintain what we have in growth on a onesie and twosie basis, but it's not our intention to really hire a whole energy department. They didn't grow the energy department like that. I think we're happy with what we have and the growth that we get from it. But we're not going to make an all-out attempt and just to build an energy department.

I think that's exactly correct.

Our next question comes from Matt Olney of Stephens.

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

When I go back and look, I don't know that higher rates have really impacted the M&A or at least the pricing that we use in our models or anything like that. I would say that maybe, from the seller's perspective, higher interest rates may be able to help to keep so many from selling perhaps, because you should see net interest margins pick up. And right now, with the way it is right now, the net interest margins were so thin and going so far down and what the regulatory burden is not only us, everybody has. It's almost impossible to really stay in business as a smaller entity. So from their perspective, it may be bigger if their earnings can pick up. But again, most of those smaller banks, for the most part, at least the ones we're looking at, they were -- already have the majority of their assets in loans and not in security. So I don't know just how much that would actually help them. I think more than anything on the M&A side that's going to continue to drive the M&A side, it is just a regulatory burden. In my whole career, I've never seen the amount of regulatory burden that we're seeing right now. I mean, it's just costing -- amount of money you're spending, for models and stress testing and the new buzz where -- with all the regulators quantitative -- good quant analysis and any -- it's just they're -- they got a model policy for all the revenue [ph] models. I mean, it's just going through such an extreme, and this is just something that Washington wants. And I don't know if the smaller banks are getting through this, but I would think that given their allowance for loan loss calculations, their stress testing, their asset liability models, it's just unbelievable. If you take everything that we want, you would need nuclear scientists to compare your [indiscernible] would never have a real practical aptitude, but that's something that it is. And I think that's probably a bigger burden on banks than anything else right now that I can tell.

[Operator Instructions] Our next question comes from Jon Arfstrom of RBC Capital Markets.

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

Well, we always have to be careful because last time, I said we weren't going to do anything for 6 months and somebody said, "Well, you did something." But we really did wait 6 months the last time before we announced the First Victoria that go back to the comments that we did. I'm going to be a little bit more cautious in saying that I think that there are certain premier banks that we worked on for years, a lot of years. And I would say that if one or more of those things do become available, I think that -- and we would probably still do the deal. I mean, we still make something happen again, that's depending on a couple of things, if we feel that our backroom operations are in good shape, our loan areas, our deposit functions, our accounting functions and probably more subtle than that, that the regulators would bless it at the same time too in the days where you almost have to get their blessing and it's a $1 billion deal or $2 billion plus or something like that, where in the past, we used to do the deals and we do the deals and then we file an application. So there's a lot more going into it right now and I think that there's just a lot. But long answer short, we would still be interested in doing deals, of course, if it's the right deal and makes a lot of sense.

And then another question. Earlier in your prepared comments, you talked about customers using deposits to invest in businesses, in their businesses that's just kind of one of the trends impacting deposit. How prevalent is that? You mentioned a few factors, but curious how much weight you would put on that.

I think it's 2 things. I really think it's one, the increased tax burden for the small businessmen and in higher professionals and individuals, that's being a burden that's taken, I don't know, you're probably one of those rich guys. I know the highest you get, your taxes have gone up dramatically. And I think that probably, I would say half of the -- and again, I don't know if this is just accurate exactly that you're trying to -- I'm trying to give you some kind of color on to that space. Out of $100-something million that we were down this quarter in deposits, I would say half of it actually related to what I would call immediate accounting, which is normal. And I would say, the other half really went to a bigger portion to pay taxes and invest in their businesses, so I think half of that. I don't know if that's enough color or not.

Yes, that helps. It's just -- looking for more color on that and that helped.

It's probably more so the historical decline in the public funds. I mean, we see it this time every year. They collect their taxes several months ago and now they're spending the money, so it's going out. So that's very normal. And we always see outflows in April when everybody pays their taxes. So I mean, it was very normal.

I think there's more in this year. From what I can tell [indiscernible]

Well, from a personal standpoint, yes.

Yes, I can speak for that. I can speak to that personally. But I do see people that seem to be wanting to really start using some of their money. I don't know if that's going to the stock market or to their businesses or just what -- it seems to be a little bit a bit more.

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

And on facing some of that on and I don't want to beat this thing to death, but we saw so much in the last quarter of last year. We had like a -- again, I'm not talking on the top of my head, I had it in my notes earlier, about a 26% annualized growth. I think, for the year, we had a 10% organic growth rate. So I don't see the growth rate in deposits as much this year as we had last year. A year in and out of China you won't get a big scoop in here. But again, I don't think you'll see the big organic gain that you had in the prior year or 2. And that's what leads me to believe there's more people using their money, because the business is still good.

Okay, okay. And just one follow-up question. I'm assuming the Prosperity Bank U.S. instead of Prosperity Bank Texas is just to accommodate proper market, there's nothing more to that?

That's exactly right. When we did came up with our deals with Texas, but it doesn't look very good up here in Oklahoma, to have Texas on here as dotcom, so.

Okay. No Prosperity Bank Worldwide?

Bank of the world? Yes. No, not yet, no.

Our next question comes from Gary Tenner of D.A. Davidson. Gary P. Tenner - D.A. Davidson & Co., Research Division: Guys, I don't know if I missed this in your prepared remarks, but just a question on bond premium amortization. It looks like it was down about $4 million versus the first quarter. If rates stays stable, near the current levels, where would you project that declines to, say, in the back half of the year?

I wish I had that crystal ball. I mean, that's driven -- and you can see that, that just that change from one quarter to the other pretty is purely driven by interest rates and the impact on the prepayment speeds and cash flows. So you can make all kinds of assumptions of -- to where rates are and how that will impact. And I guess the big picture answer here, probably not going to be the best answer is, based on where we're at today, it should continue to be low and it's possible it could go -- it could continue to reduce. I can't tell you another $4 million per quarter. I don't think that's realistic. And David, you have...

Again, I'm probably -- I would say, with no change, you could kind of expect where we're at. I mean, or you think it wouldn't be as much?

I think it will go down even more.

No. I don't know -- I wouldn't say that we go down more, but I think you could use what you have this quarter, absolutely. I think, well, there's a possibility that it could slow down more. I mean, our paybacks, I mean, with the $7 billion or $8 billion that we have and just to give you some kind of color on this, we're getting $1.8 billion a year back off of the portfolio. But with interest rates going up 300 basis points, it drops to $1.2 billion, $1.3 billion a year. So there's definitely a slowdown when interest rates go up.

As the biases continue to improve, it's hard to make the cost to how much more it will be over the next 6 months.

And there are no further questions at this time.

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

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