Prosperity Bancshares, Inc. (PB) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prosperity Bancshares' First Quarter 2015 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Ms. Charlotte Rasche. Please go ahead, Ma'am.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' First 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'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. Tim Timanus Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Mike Epps, Executive Vice President for Financial Operations and Administration and Merle Karnes, Chief Credit Officer of Prosperity Bank. 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, [Rocco]. 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'd like to welcome and thank everyone for listening to our first quarter 2015 conference call. I'm excited to share with everyone the great results we had in the first quarter. I'm also much honored to announce Prosperity Bancshares inclusion into the 2014 Keefe, Bruyette & Woods honor roll. To qualify for this honor, the company must maintain extraordinarily high quantitative metrics for the last ten years; 25 banking institutions posted a ten year record worthy for admission to this year's KBW honor roll. Okay some of our successes this quarter include are quarterly earnings increased in $73,641,000 on the first quarter compared to $67,137,000 for the same period, in the prior year; an increase of $6,500,000 or 9.7%. The diluted earnings per share were $1.05 for the first quarter 2015 compared to a $1.01 for the same period in the prior year and that's a 4% increase. Loans at March 31, 2015 were $9,166,000,000, an increase of $1,414,000,000 or 18.2% compared with the $7,782,000,000 at March 31, 2014, primarily due to the addition of the F&M. Our long growth was impacted by the acquisition of F&M. But excluding loans acquired any acquisition, a new production at the acquired banking centers since the acquisitions day, our legacy loans at March 31, 2015 increased $273 million, 3.5% compared with March 31, 2014. And increased $6,471,000; 10 basis point -- a 30 basis point on annualize on our linked quarter basis. Our loans decreased $85 million at F&M; some of these loans were identified to move based on risk appetite or pricing. As a point of interest and on a positive note our Huston region showed almost a 10% annualized growth rate with Austin and Dallas, also showing good growth, unfortunately other region do not show the growth. Our non-performing assets at March 31, 2015, we are $35,376,000 or 19 basis points at quarterly average earning assets. One of the lowest in the industry and a sign of strong asset quality. Our non-performing loans, we're up from March 2014 and majority of the increase is from recent bank acquisitions. A positive March 31, 2015 were $17,561,000,000 an increase of $2,101,000,000 or 13.6% compared with $15,460,000,000 at March 31, 2014. Primarily due to the addition of F&M. Excluding deposits assumed in the acquisition and new deposits generated at the acquired banking centers, since the acquisition day, our legacy deposits at March 31, 2015 increased $396 million or 2.6% compared with March 31, 2014 and increased 226 million or 1.4%, 5.8% annualized on a linked quarter basis. F&M saw a decrease $358 million from the prior quarter during the fourth quarter 2014, a large public fund deposit of approximately 300 million came in at year end and then the funds were dispersed earlier in the first quarter. Going over $10 billion in assets brought on new challenges from a regulatory standpoint with extra cost, policies and procedures. We have taken on the challenges to succeed and think we're now prepared to move forward with organic growth, mergers and acquisitions. We continue to hear from bankers about the added regulatory requirements that are impacting the profitability. We believe that these factors combined with management and board [indiscernible] will continue to create opportunities for those that have the ability and will to deal with these headwinds. Despite a lot of press and article concerning the demise of the Texas and Oklahoma we are not seeing that as evidenced by the loan growth we had in the Houston market and other major metro areas. Although jobs are being reduced in the oil related fields we still see good economics in other areas. People continue to move to Texas and Oklahoma maybe not as many as the last couple of years but still many because of the state’s [spreading] business climate with no state income taxes and friendly regulatory and legal legislation favoring business. In Houston and other areas during March we saw home sales climb after February sales decline. Sales of family homes rose 3.8% year-over-year. Products are still reaching record high as well. Many forecasters are projecting Texas will double in size by the year 2050. We do think that Texas is more diversified than it was in 1980 and the resiliency is showing. In 1980 the population in Texas was 14.2 million people, today its 27 million people. In 1980 the work force was 7 million people and today the work force is 13 million people. In conclusion we think the regions we are located in are and will be dynamic growth markets relative to future. Again 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 over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved.

Thank you, David. Net interest income before provision for credit losses for the three months ended March 31, 2015, was 162.9 million compared to 143.7 million for the three months ended March 31, 2014, an increase of 19.2 million or 13.4%. This increase was primarily due to a 14.5% increase in average interest-earning assets for the same period. The net interest margin on a tax equivalent basis was 3.57% for the quarter ended March 31, 2015 compared to 3.62% for the same period in 2014 and 3.89% for the quarter ended December 31, 2014. Excluding purchase accounting adjustments the net interest margin on a tax equivalent basis for the quarter ended March 31, 2015 was 3.17% compared to 3.25% for the quarter ended December 31, 2014. Non-interest income decreased 243,000 or 0.8% to 28.4 million for the three months ended March 31, 2015 compared with 28.7 million for the same period in 2014. Non-interest expense for the three months ended March 31, 2015 was 79.5 million compared to 71.1 million from the same period in 2014, an increase of 8.4 million or 11.8%. This increase was primarily due to the F&M transaction. The efficiency ratio was 41.8% for the three months ended March 31, 2015 compared with 42% for the same period last year and 40.8% for the three months ended December 31, 2014. The bond portfolio metrics at March 31st showed a weighted average life of 4.09 years and effective duration of 3.85 and projected annual cash flows of approximately 1.5 billion. And with that let me turn over the presentation to Tim Timanus for some details on loans and asset quality. Tim?

Thank you, Dave. Non-performing assets at March 31, 2015 totaled $35,376,000 which is 39 basis points of loans and other real-estate compared to $36,919,000 or 40 basis points at December 31, 2014. The March 31, 2015 non-performing asset total was made up of $32,220,000 in loans, $146,000 in repossessed assets and $3,010,000 in other real estate. As of today $2,569,000 or approximately 7% of the March 31, 2015 non-performing assets total have been liquidated are under contract for sale. As we always say there can be no assurance that those under contract for sale will close. Net charge offs for the three months ended March 31, 2015 were $1,049,000 compared to net charge offs of $3,201,000 for the three months ended December 31, 2014. $1,250,000 was added to the allowance for credit losses during the quarter ended March 31, 2015 compared to $6,350,000 for the fourth quarter of 2014. The average monthly new loan production for the quarter ended March 31, 2015 was $216 million compared to $292 million for the quarter ended December 31, 2014. This represents a 26% decrease. Loans outstanding at March 31, 2015 were $9,166 billion compared to $9,244 billion at December 31, 2014. The March 31, 2015 loan total is made of 42% fixed rate loans, 36% floating rate and 22% variable rate. 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. [Rocco] can you assist us with this.

We will now begin the question-and-answer session [Operator Instructions]. Our first question comes from Dave Rochester of Deutsche Bank. Please go ahead.

David I was just wondering, what is your outlook on expenses in 2Q because you had a big drop across the categories in the first quarter. Do you see these levels snapping back at all in 2Q?

I mean it’s a good question because in prior quarters we’ve said we wanted to try to hold at these prior levels but again we just [pry] this perfect storm once and we’ve had a lot of experience in the fourth quarter we were able to really be streamlining this first quarter, but I would not commit, we just couldn’t committed that we’ll bring along 79 million per quarter going forward. But what I would tell you is, if we have to do better we will and at a good run rate 82 to 84 and I like -- we might be able to spot the difference and do it but there are a lot of things you have to remember, we’re running at these levels it can’t be sustainable over the long haul because we have to incur extents for generating new revenue, so I kind of say it that way if it helps.

Understood, that does help. That other expense line was down a lot is there anything that was one time in that, we should pull out or?

There was multiple things and I’ll give you examples things such as again we always talked about all those consulting and professional fees we were incurring over the last 18 months as we grew, it seems like you have to hire consulting for everything to validate this, a lot of things. We’re think a processing creating on internal strenuous senior audit firm, out sourced to in stores and they’re not there, so they have outsourcing working. So we incurred quite a bit of dollar expense in the fourth quarter on that kind of thing and that was probably one of the major drivers of OTC as it drops from quarter-to-quarter and that’s why I have some optimism going forward where we don’t have to incur these consulting professional fees for the myriad of things coming our way from a regulatory perspective.

And just on the accretion outlook, when do you think that is going to substantially roll off because you just updated on the timing there and then if you have the breakdown in the first quarter as to what part of that was scheduled versus credit recovery that’d be great.

And this is a big point to make because this is where we see a kind of a change here overall. I forgot what we’re seen for prior quarters, we’ve kind of just given a number I forgot what [indiscernible] know, 16 or 18 or 17 to 18, but we do want to revise, it’s based on what we saw this past quarter because we believe going forward a better run rate and this again is a best guess estimate it’s a huge amount of signs, but we think 15 million is probably a better number, quarterly number going forward and that breakdown in the first quarter to kind of give the perspective what was total roughly 19.6 million total accretion of that roughly 9 million of it came from the old [indiscernible]. And I would point out to you, it was a unique point of interest when you’re looking at our press release I forgot what page number it is but look at that change in the balance on the [SOPO3] or through 2030 whatever we call it. What’s interesting we see is that balance change from year end $20 million and yet we only recognize midterm marginally half that. So is that telling you is kind of what we’ve been saying all along. You can’t assume all that money is going to come back to us as income. That’s kind [indiscernible] we’ve tried to make all along, sometimes we’ll get out of these credits and we’re getting on at that market and that’s a good thing.

And this 15 million you are talking about going forward does that include again ongoing assumption about credit recoveries of the O3 accretion?

Yeah we figure we’ll get something this quarter, it’s just not going to be material.

And then if you could just talk about your margin outlook going forward, it looks like you invested some of the excess cash and securities I was just wondering if that’s going to help support the NIM or if you’re still looking for maybe a little bit of pressure?

I think you know the story on our NIM has been pretty similar quarter after quarter and so right through when you look at this quarter it’s off little bit more, but that’s hit the nail on the head. You saw our average deposits just go up significantly this quarter on average they were up about 459 million and that’s actually why we couldn’t just we have sit in cash on demand, we didn't wind it out, so we did predict securities, obviously if you're going into securities to 2% and not when you're out, that impact to the margin that I called mix some money probably had [indiscernible]. Approximately 5 basis points impacted to amend this quarter. But what I'd say is it’s the same store. If we don't have this mix of money change and we're going forward again I think you will see kind of the stable margin and other interests stable, but if there is no loan growth, the couple of basis point change every quarter and that’s what you saw up to this quarter until we had this mix of money enter the picture.

Our next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Just in terms of the loan growth, just looking at balances on a -- if I remember right last quarter you mentioned of I think it was 5% to 8% growth including the runoff of F&M, do you still think that's reasonable estimate or do you need to revise that lower given the weaker loan growth this quarter?

Let me give you just a little bit color Ken, from my opinion, January was -- it started off extremely good, February came again I don't like to make excuse but weather got really bad and probably more so than anything the early article from Wall Street journal Daily Press as we went down in the low 40s, it really just -- it clicked everything at a standstill I think in February. We started coming back in March and I thought we saw long demand at least at loan committee increasing but again didn't get put on the books and probably won't until April, so I'd like to state, I still feel good where we’re at right now, I think the economy is still pretty good. Again you have to take any consideration normally we do on about 8% organic loan growth when we include F&M, we said okay if you take that into consideration we’ll probably on about a 5% loan growth as well when you consider the loan which were lost over there so. I’d still like to stick with that [strategy], I think it's real possible.

Okay. Just back on the margin, look at the loan yield [XPAA] we found about 7 basis points, I totally get the fact that, the higher cash balances or mixed in this security would have pressures that margin on an all end basis. But was that 7 basis points of loan yield compression kind of in line with your expectations or is that little bit worst? As I think last quarter you mentioned that, we shouldn't see a significant dollar pressure on margin but it seems like big number on the loan side.

I don't know, who will give you comment, Ken. [indiscernible] it might expect our expectation or not, where we're at in the rate cycle, loans are not going on [indiscernible] these days. I mean on average in a while, depending what kind of loans you do sort of 20s sort of 30s, somewhat delta it's going to come down whether it’s 3 as 4 who knows? But the way I’ll say it is, at some points we've got feel in that loan growth which could help us right, so we just had to add that pressure, reinvesting all this cash back into securities accrual versus [indiscernible] in quarter. You can see that's going to impact on margin.

I would mention Ken, just to add some color again, Ken this is David, the encouraging part we saw almost a 10% organic loan growth rate in our Houston metro market and Dallas and Austin also had pretty good growth. What hurt us this time is West Texas again with -- which is natural. You had the oil and gas, and the thing that really propped up West Texas a lot was the Midland area and then we also had south Texas, so you had west Texas, it was down. You had south Texas that was down, we had the Oklahoma markets that were down, but I think it was very encouraging that the major markets -- major metro markets are still showing growth and so I think that's a good sign.

Yes, Ken, this is Tim, I might also mentioned just from -- I guess a global competitive perspective that it seems as though first quarter of this year that we're seeing really more competitive pressure then we have in the last several quarters. It certainly been there prior to this quarter but the uptick in competitive pressure was pretty significant. It seems as slow most financial executions had no concerns about loaning dollars out lower brand. So almost every loan that we look at that’s of any size, the reports we’re getting from our people in the field are that the competition has just really become even more intent. So, we don't know where that's going to head? Those things don't ever last forever because those banks that loan with those kind of margins end up not making any money and then bad things happen to them. But those bad things don't happen overnight sometime it takes while the work the tray way through the system. So, just wanted you to know that that’s one issue with the loan yield pricing and Ken, last piece of cover I’ll give you, is that again when we talked about some major metros markets really you haven’t seen the growth and I’d say it mainly west Texas and south Texas didn’t, Bear in mind that west Texas and south Texas still has pretty big add to loan portfolio and again then really don't start drawing up until this first quarter.

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

David just want to follow up on the expense question, I think you alluded to in the release that part of the expenses reduction was helped by some finalized fair value adjustments. Just curious how large those were and are those sustainable or is that more kind of sort a onetime adjustment and it would snap back in future quarters, as those reversed out?

I mean specifically I don’t know they were that large but they’re onetime events the final onetime events on the F&M transaction underlying that you see the fair value as on the depreciation line and then I think there is a hard to see, if I recall correctly those [indiscernible], so they want it significant. Some of that things, they did happen, they were onetime events.

So altogether they weren’t big numbers, okay. And then secondly David Zalman just you alluded to M&A activity in your opening remarks. Just curious if you could update us on what you’re seeing in terms of pricing expectations that the probability of or the hope that you guys getting maybe something done this year. Just any update on -- or additional color on M&A environment would be greatly appreciated.

The M&A again pricing in our deal is a little bit difference and the pricing just if you’re used to M&A buying -- just trying to buy banks. I mean most of our -- I would say the majority of our deals that we do are negotiated deals and so we’re talking with banks that are willing to stay with us, that they’re people willing to stay within and sign contract and so some times the pricing isn’t that significant as it maybe if were just trying to bid bank and buy bank. Having said that, we have seen opportunities in small banks that are $400 million and $500 million in size and we’ve seen some bigger banks that we haven’t done, we’re still talking to a number of people of course our hope would be that we could do one bigger one. If we can’t do a bigger one we may have to piece together three smaller deals $500 million to $800 million apiece or something like that. But we’re definitely looking, but again I want to reassure everybody we don’t want to buy just to buy something. Again I mentioned this to everybody we are a lot on our own lot of our own stock and just to be bigger and to put more work on everybody and it’s not as important as trying to get earnings and increasing earnings per share, with the ability of a great franchise and so that’s our focus, we’ll continue to do that. Again we’re not going to get jump on anything but I would say that we are definitely interested in mergers and acquisitions.

Our next question comes from Abraham Kunwalla of Bank of America, Merrill Lynch. Please go ahead. Abraham your line is live.

Maybe on another call.

And our next question comes from Jennifer Demba of SunTrust Robinson Humphrey. Please go ahead.

This is Michael Young on for Jennifer. Just wanted to get an update on sort of your asset sensitivity and what your thoughts were there. I know you’re a little bit liability sensitive at the end of the year. But as we approach our potential rate rise, are you trying to increase your asset sensitivity?

You know again we’ve probably going back to last 20 years our strategy really had some trend. We had -- probably had $1.5 billion that roll off of the bond portfolio every year, you probably have a large amount of loans that roll of every year our change in price are just a pay down and basically we maintained, Dave I didn’t bring this in economy but I think we probably have about 3.8 year duration, I don’t know if that’s still the same, about 3.9 year average life and again we just rolled down the curve. So I don’t think that we haven’t changed of what we buy and I guess the bottom line to answer your question is I don’t think well much has changed.

[Indiscernible] anything short or rise just.

Yeah, I think that we’re out this time and it is probably maybe not the right thing to do. We probably three or four years ago should have extended the which rise in durations and again we didn’t, of course I don’t think now’s the time to extend those durations or average last amounts of, we’re pretty much sticking where we’re at.

We’re going to stay closer than to [neutral] again just to reiterate $1.5 billion and $2 billion plus cash flow is coming off your assets, it’s a lot of cash flow and reinvested rate start moving up about taking on a lot of extension based [indiscernible].

And on the other side, on fee income little bit lower obviously, seasonal factors there but particularly with some of the service charges and [NFF] fees, are there any large shifts in terms of -- is it customer behavior or any pricing differences on your end or is it just the seasonal factors at all date throughout the rest of the year?

I would answer that so it’s not anything that we’ve done and it looks like it’s seasonal and the only thing I could point to is that if you look back to last year at the same time when we came from fourth quarter to first quarter we saw the exact same trend so that would show you that its seasonal and again we haven’t done anything, change pricing [indiscernible].

Dave and I’ve talked about it earlier this morning, I said there customer account that’s been lowered or something. Like that and the fact the matter is there haven’t been any change like that but just it’s either seasonal or peoples change in attitude on service charges.

And kind it’s too early in the quarter but none of this means much of anything but we do see the churn being up a little bit and as again [indiscernible].

I think this quarter is always achieving lower quarter on [indiscernible].

[Operator Instructions] Our next question comes from Scott Valentin of FBR & Company. Please go ahead.

I guess I was surprise it’s been this long since someone asked energy questions, so I’ll break the ice. In terms of the portfolio clearly Houston is kind of I guess ground zero for energy concerns, just wondering what the portfolio breakdown is for Houston between -- if you could break it out on or by multi-family, or retail or office?

This is Tim; I think Houston pretty much parallels companywide numbers in that regard. There aren’t -- if your question is more specific to the energy side they’re not that many direct energy credits in the Houston market itself, if that answers your question.

I guess you're seeing, David Zalman you refer to the journal articles you’ve seen about office space going up in Houston and the amount of capacity and number of vacancies. And I am just curious if you see any activity or you speak to borrowers what they’re thinking in terms of their future plans?

It's probably changed I think once again and I’ll let Merle really give you the numbers on where we’re at on E&P productions loans in our service loans and then I’ll give you some color too. There were a couple of companies even as far as probably three months ago that we’re planning of building new buildings. I think they have put those plans on hold now, the oil companies. So, when you look at office building that -- again this is just my gut, I don’t have anything factual to back this up with, I’d say that your -- probably your office building just showing down as building and I’ll tell you apartments are probably slowed down and probably you're seeing increase in retail space.

You have anything to tell on the energy side, I mean if I see you guys have done to the extent you have [P&Ps] done out at borrower base calculation, just wondering how those have shaped up, if you have done those?

The overall portfolio for oil and gas production and services about 500 million roughly, it's about $200 million producers, just to have little bit from what it was at the end of the year. Really in terms of apparent risk it really is out seeding the increase from last quarter. We actually have had well I guess about 12 of our producers that were initially over advance that reduced output significantly and the ones that are over advanced today have plans in place to take care of those. We really don’t have the insignificant issues either today, [indiscernible].

I just have a little bit color for you, I talks sometimes to the service providers, the people that have the backing trucks, from the [indiscernible] so forth and we try to watch them and make sure that most of all if our something is not we’ve all be waiting the most products set when we make a loan, certainly put it on a payback depending on what it is. So then everybody seems to continue to make their payments, they’re not running behind, on the other hand they are not making as much money as they were previously either.

So would it be fair to say that in their $500 million portfolio no change in -- certainly no change in the overall risk categories and any past dues in that 500 million or is that -- they are all current?

Well to put it in maybe a little additional perspective for you, Merle mentioned the redetermination on the borrowing basis. After all that was addressed fairly seeing round numbers about $9 million that remained outside of the borrowing base requirements which is only about 4% of the E&P loans and those borrowers that make up that $9 million are all in what I would call constant communication with, they’ve all assured us that they are going to rectify the problem. Some of the loan agreements we have with them actually give them six months to bring the borrowing base back into compliance. Some of them have already paid down against those dollars that we’re out of compliance, some think already pledged additional producing properties to bring it closer to into compliance. So everyone I’m appears to be working with is whether this is logical, they’re making it their asset base to see what additional properties they can pledge to this, they are making it their existing liquidity and their sources of liquidity to see what they can do in terms of pay down. So sense right now is that all these borrowers are responding reasonably and at this point in time I don’t think we have any major concerns about them, but time will tell.

You asked about past three years of them, we have not seen an uptick in past 3 years of related to then oil and gas portfolio.

And one final question David Zalman you mentioned M&A, I mean would you look at energy sensitive market or is that kind of off limits right now until things get better?

No, I think we would look at a market like that again, it depends on the buying, it depends on what demand to know that thing and it depends on the earnings per share and if it’s accretive or not accretive I still think that Texas and Oklahoma and the surrounding sectors are good markets, I wanted to wait, if you looked into maybe six or nine months ago when this first started, even I wanted to jump in and say I think things are going to be okay, I wanted to see it. I think that we have seen it, I think that we’re doing pretty good, we’re surviving and I think Texas overall is this, you know we have probably 300,000 jobs last year; you’re not going to see [indiscernible] new jobs this year. I think that the Federal Reserve has put out something the other day and said for the first quarter I think that we had 21,000 new jobs for the first quarter. So we’re probably going to still end up 100,000 to 115,000 jobs created in the state of Texas and again I don’t know that’s going to outpace all the other sites that we’ve had in the past but it’s still pretty good, it’s still pretty dynamic. So we feel pretty good about it firmly right now.

Our next question comes from John Moran of Macquarie. Please go ahead.

Just a quick follow up on the energy book, I think if I am remembering correctly it’s about 6% of loans at the end of the year and 5 -- if I’m doing the math right 5.5% or so here so maybe the book went down a little presumably on pay downs so just wondering if you had an outlook there for the full year? I know some of your competitors are saying it will shrink a bit but others are seeing good opportunity out there and try to pick share and write some business?

You’re right your percentages right now the energy portfolio is about 5.5% of our total loan portfolio. One of the obvious reasons that new loan production was down for the quarter is that we’re getting virtually no new loan production out of the energy sector. Our Midland Odessa offices are dealing fine in terms of asset quality, they’ve had no payment defaults but there just aren’t any new projects ready to speak of that are seeking funding there is very low new equipment being purchased. So, the quarter was certainly flat in that regard. And I personally don’t see a change in that for a while. I think it’s going to be a while before we see new energy projects taking funding and the requirement for new capital to get back with and those kinds of things. So the energy in the market certainly hadn’t fallen off the map, but it’s not aggressively moving forward either for all the obvious reasons. So, I would personally think it’s going to be flat throughout.

I would also add to that Tim that it’s become more competitive believe it or not and on the E&P loans we had a really good credit $20 million credit and from big three banks, I won’t name which ones, but one of them are -- we give it 60% margin on the value and we usually maybe extend a loan for maybe a year to two years the bigger bank came back and offered this company a little bit credit and offered the company gave them a 7% margin the loan to value and extended the line three years and reduced the rate to LIBOR plus. So, you would think everybody wouldn’t want to be in this business but some banks are slightly in a different position. I am not saying they’re wrong a lot if they’re really get in and they’re big in it, they think now is the time to really jump into it. So you’re seeing some competition from the bigger banks too.

I think all of that is correct it goes back to my comment earlier about the uptake and competitive pressure that uptake is across the board, it doesn’t exclude the energy market so it’s out there, you’re right.

That’s interesting and I appreciate the color there And maybe I mean understanding that it sounds like West Texas, South Texas, maybe Oklahoma is slowing down, they’ll be flattish. Is it fair to say that the existing loan book sort of parallel the deposit footprint or would it be more correct to assume that you guys drive a greater percentage of loans out of the metro market?

I can jump in but I think we are relationship bank and I think where the loans are is where our deposits are they move hand in hand really.

I think for the most part that’s 100% correct, that’s right.

And then the last one that I had was just kind of a [sticky-type] detail on premium amortization did you guys see that pick up this quarter? And do you have any kind of an outlook there just given what’s gone one with some volatility in the tenure?

It did pick up and based on what we’re seeing to that, I think that’s probably a good run rate based on distinct [indiscernible], that seems to change every three weeks, you’re crystal ball’s probably as good as ours,

Our next question comes from Jefferson Harralson of KBW. Please go ahead.

Mine have been answered, but I appreciate the call, thanks.

Our next question comes from Abraham Kunwalla of Bank of America Merrill Lynch. Please go ahead.

Just got a follow-up question, given Dave what you just talked about the competitive pressures in terms of loan growth. If I got this correct, you still that think you can get 5% to 6% year-over-year growth for the year. I am just wondering what gives you that confidence and where you think that growth will come from in order to repair sort of the things that you outlined earlier.

I think my optimism comes from being in the loan committee and having a hand on experience and I see even yesterday we started at 10.30 in the morning and we finished at 6 O' Clock in the evening 5 and 6 O' Clock in evening. So we still see a lot of demand, and again I think we can still do that.

And just on a separate topic I know it’s hard to predict M&A but how likely do you think it is that we could go through this year without doing a deal?

I think to answer your question to start with, I mean it’s really hard to predict sometimes you think -- you work on deal and you think the deal is just at hand and it could fall apart and then other times you get a call no Sunday afternoon at 2 O' Clock and say hey, are you interested in talking with me. So, I really can’t give you any color on that, I would just tell you that we are really open to it and we are working to try to do something.

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

We thank all of our speakers for today’s presentation. Today’s conference has now concluded. We thank you all for attending. You may now disconnect. Have a wonderful day.