Prosperity Bancshares, Inc. (PB) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Prosperity Bancshares’ Third Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third quarter 2015 earnings conference call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'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; Eddie Safady, President; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; and Merle Karnes, our Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Emily. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Tracy Elkowitz at (281) 269-7221, and she will send a copy to you. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such, may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity’s 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. And I would like to welcome and thank everyone joining us for our third quarter 2015 earnings announcement. I am excited to announce that Prosperity's Board of Directors has decided to increase the dividend to $0.30 per share for the fourth of 2015, representing a 10% increase. The Board and Management appreciate our shareholders and are glad that we are able to show our appreciation with this increase. For the three months ended September 30, 2015 our net income was $70.598 million compared with $76.570 million for the same period in 2014. Our net income per diluted common share was $1.01 for the three months ending September 30, 2015, compared with a $1.10 for the same period in 2014. Net income was impacted by lower loan accretion income that reduces as loans that were purchased in recent acquisitions payoff. However core earnings, which we consider to be earnings not including purchase accounting adjustments continue to grow. Our net income per diluted common share excluding the purchased accounting adjustments was $0.92 for the three months ended September 30, 2015, compared with $0.84 for the three months ended September 30, 2014, this represents a 9.5% increase. Prosperity’s return on average tangible common equity for the three months ended September 30, 2015 was 19.3%. Our asset quality continues to be one of the best in the industry with a non-performing asset ratio of only 26 basis points and non-performing assets of $48.628 million at September 30, 2015. The increase in non-performing assets for the third quarter of 2015 was primarily due to one participation acquired in a recent acquisition. We can discuss this more in the question-and-answer portion of the call. But our management believes that we should be out of this loan by the first quarter of next year. Our allowance from credit losses was $81.003 million as of September 30, 2015 representing a healthy coverage ratio. Our loans at September 30, 2015 were $9.205 billion a decrease of $163 million or 1.7% compared with $9.369 billion at September 30, 2014. Although our loans decreased overall during the first nine months of 2015 primarily due to planned reductions at some of our acquired banks. Our third quarter results showed loan growth of 1%, 4% annualized, for the compared to the previous quarter ended June 30, 2015. Our deposits at September 30, 2015 were $16.940 billion, a decrease of $74 million or 0.4 basis points, compared with $17 billion at September 30, 2014. Deposits have been flat for the first nine months of 2015, but when comparing the third quarter of 2015 to the third quarter of 2014, Prosperity has been successful replacing over $500 million in higher cost time deposits at the acquired banks with more traditional transaction accounts. As we have previously stated deposits are historically low in the second and third quarters, and increase in the fourth and first quarters. Primarily due to the large number of public funds we service in their funding source. With regard to the acquisitions, we are excited to announce that we have received all the regulatory approvals necessary to complete the Tradition Bancshares acquisition, while the transaction is subject to Tradition’s shareholder approval and customary closing conditions we expect closing to occur on December 31, 2015. Our conversion and integration planning is underway and we appreciate and thank the team at Tradition for all of their help and support. We continue to pursue acquisitions, we have had and continue to have dialogues with the number of banks. There are over 50 banks in Texas alone that are over $1 billion in size. We look for banks with similar culture to ours, banks that have been in business for a longer period of time and banks that have a strong core deposit base. As we believe, these factors represent the real value in a bank. With regard to the economy, despite the employment declines in oil and gas extraction and the manufacturing sector the Texas unemployment rate fell to 4.1% in August and continues to be lower than the U.S. unemployment rate, which was 5.1%. Oklahoma’s unemployment rate inched down slightly in September to 4.4% compared with 4.6% in August, according to data recently released by the U.S. Labor Department, again lower than the U.S. unemployment rate to 5.1%. Housing starts continue to increase and re-sales continue to support strong pricing. However, we do see a reduction in loan applications primarily due to a slowdown in refinances. We owe all of our success to our team of associates, past associates and Board members who have helped grow the company beyond our own expectations. We would also like to thank all of our customers for their business and loyalty to the bank. Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer.

Thank you, David. Net interest income before provision for credit losses for the three months ended September 30, 2015 was $156.1 million compared to $175.7 million for the three months ended September 30, 2014. The change was primarily due to the decrease in loan discount accretion of $17.4 million. The net interest margin on a tax equivalent basis was 3.30% for the quarter ended September 30, 2015 compared to 3.85% for the same period in 2014 and 3.39% for the quarter ended June 30, 2015. Excluding the purchase accounting adjustments the net interest margin on a tax equivalent basis for the quarter ended September 30, 2015 was 3.10% compared with 3.13% for the quarter ended June 30, 2015. Non-interest income increased $1.6 million to $31.8 million for the three months ended September 30, 2015 compared to $30.2 million for the same period in 2014 a 5.3% increase. Non-interest expense for the three months ended September 30, 2015 was $76.4 million compared to $85.5 million for the same period in 2014 a decrease of $9.1 million or 10.6%. The efficiency ratio was 40.7% for the three months ended September 30, 2015 compared to 41.6% for the same period last year and 42.4% for the three months ended June 30, 2015. As of September 30, 2015 the common equity Tier 1 capital ratio was 13.37% and the Tier 1 leverage capital ratio was 7.65%. The bond portfolio metrics at 9/30 reflected a weighted-average life of 4.1 years, effective duration of 3.8 and projected annual cash flows of approximately $1.5 billion. With that, let me turn over the presentation to Tim for some detail on loans and asset quality. Tim?

Thank you, Dave. Our non-performing assets at September 30, 2015 totaled $48.628 million or 53 basis points of loans and other real estate. This is compare to $35.119 million or 39 basis points at June 30, 2015. The September 30, 2015 non-performing asset total was made up of $45.196 million and loans a $161,000 in repossessed assets and $3.271 million in other real estate. As of today $796,000 of the September 30, 2015 non-performing asset total have 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 September 30, 2015 were $5.279 million compared to net charge-offs of $491,000 for the three months ended June 30, 2015. $5.310 million was added to the allowance for credit losses during the quarter ended September 30, 2015 compared to $500,000 for the quarter ended June 30, 2015. The average monthly new loan production for the quarter ended September 30, 2015 was $320 million, compared to $246 million for the quarter ended June 30, 2015. This represents a 30% increase on a linked quarter basis. Loans outstanding at September 30, 2015 were $9.205 billion, compared to $9.114 billion at June 30, 2015. The September 30, 2015 loan total has made up a 41% fixed rate loans, 36% floating rate and 23% variable rate. I will now turn it over to Charlotte, who will coordinate your questions.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Bob Ramsey of FBR. Please go ahead.

Hey good morning, everyone.

Good morning.

First question I was hoping maybe you give a little bit more color around net charge-offs. I know you said that was sort of three C&I loans that drove the uptick, just any more detail you can give there. And then also talk about the increase in non-performing loans in the quarter.

This is Tim. I can help you with that I believe. As far as the charge-offs are concerned, it was basically three credits only one of which was an energy credit that was approximately $2 million. So out of the approximate $5.3 million and the net charge-off number about $2 million was one energy credit and the rest was non-energy. There were really only three credits involved in that total number basically. So it wasn't spread out over several credits. And as far as the increase in the NPA is concerned, its virtually a 100% of that increase is one credit a participation approximately $12 million and a participation that’s a medical complex in San Antonio Texas it's a hospital, Medical Office Building and a parking garage in this complex. So it’s really all one credit there was a participation that we received from an acquired bank.

I would add Tim, all of the charge-offs and all of the increase in the non-performing came from acquired banks.

That’s correct.

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

That’s correct.

Okay. With the $12 million loan that moved to non-accrual. Was there any market reserve set against it previously or is it – it’s just a $12 million credit?

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

Great. And then just touch on energy, I know you all give a dollar amount of energy loan exposure. I just I am curious is that purely E&P exposure or does that include everything sort of service related or companies do a fair amount of business with the energy industry does include midstream. Just curious what else might be energy it related out there?

Well for example out of the almost $49 million in non-performing assets at quarter end about $21 million of that number are energy credits and that's made up of about $12 million in E&P credits and $9 million in service company. So it’s really firstly 100% direct E&P and direct service company.

Okay. And just in terms of…

[indiscernible] answer the question. It’s very good the midstream of those numbers…

The numbers in the reports include [indiscernible] companies, the service companies and the midstream.

Okay, perfect. That’s what I was looking for clarity on. So that helps. And have you all broken out with the allowances that pertains the energy book?

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

Again, I guess I’d say out of $81 million in reserves there is about $7 million in specific reserves.

We have about $7 million in specific.

So there's a lot of room for flexibility I’d say.

Yes, we have the great flexibility I’d say.

Great. That’s helpful. One question outside energy and I’ll turn it over to whoever is next. But just fee income looks like you guys had a nice uptick this quarter on the deposit fees and service fees. Just kind of curious if you could comment on what you are seeing driving that strength?

This is Dave Hollaway. I mean I think it’s just a natural progression, what you see in our bank historically is the fee income begins to pickup at the back half of the year. I mean we are not doing anything different or special in terms of deposits to the customer. So I think that just a natural.

Okay, great. Thank you.

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

Hey, good morning guys.

Good morning.

Good morning, Dave.

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

Yes, it’s similar. This is David, again. I think it’s similar. It seems like quarter-after-quarter we had some lumpy things and they do flow through that specific item, same thing this past quarter, there is probably $1 million roughly, what we would call non-recurring things. But it seems like as you noted every quarter we have these things can drop in there.

It was about a $1 million.

Correct.

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

Yes, that’s assessments and all that's included, but what’s really impacting that if you thinking about this big picture in a way that these assessments are, this is just part of that ongoing that you’ve seen a change in our loan mix, sometimes these assessments was higher around those risk ratings in terms of the fee assessments on. And I’m specifically talking about loans themselves this reduction of loans expectation we had don’t require the same kind of assessments that just…

Bottom line is lower risk rating in the loan portfolio.

That’s right. It’s driving that down and should keep the quarter down going forward.

Okay, so this should be a good run rate then.

It should be.

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

I got to answer this question every quarter. I don’t know you guys can believe me, but maybe we could say in a couple of different ways. One of the things on our expense run, it’s truly driven by our revenue, the gross revenue generation. As you guys see our loan growth starts picking up and we start generating more net interest income. I think you that will allow us to begin to increase these expenses, but if we have to run time, this what you see in this quarter is probably what we are going to try to manage our ways towards. If you take the – you actually take the loan discount fair value out of these numbers that adjusted efficiency ratio this quarter, 42.9% something of that nature. Historically, that’s about where we were on that’s the best we can do. So just the short answer to your question is we are going to try to – what you see in the third quarter, that’s when we’re going to try to maintain our run rate going forward, but they qualify those revenues – gross revenues pickup we may…

Okay. Great. Thanks guys.

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

Hi guys, good morning.

Good morning, Brett.

Good morning.

I guess first just wanted maybe David to get some color on how you feel about Houston these days and maybe just your thoughts on the economy there and how you see things progressing?

Well, if I pickup the New York Times and Wall Street Journal sometimes in the morning, but all in all I think basically if you read my economic comments the unemployment rates and first of all there has been a reduction in jobs in oil and gas and manufacturing industry throughout the Texas and Oklahoma. At the same time a lot of those jobs where picked up by the petrochemical industry, the medical industry and based on number of other so – but when comparing our unemployment rate to the rest of the United States we are still at 4.1% for Texas compared to 5.1% for the United States and also in Oklahoma the same thing, we are below where the unemployment rate here so. [Gloom and doom] that everybody says that I think there is definitely issues with oil and gas industry where that is again, but again when I talk to a lot of the people and we are talking about selling their home that are on the market. They continue to tell me there's a rapid resell for those homes and sometimes that the asking price and getting offers in a very good period of time. And so overall, I think you could say there is a slowdown because of the oil and gas industry, but overall I would step that our economy against almost anybody else in the United States.

Okay, and I appreciate the color on the press release on commercial real estate become by MSA, just thinking about loan growth those will go into 4Q in next year there is a pipeline suggest a similar level of growth going forward and maybe you guys can talk a little bit about your expectations and or pay-offs an issue around 3Q?

I have to say right now again I’m very excited what we see in the pipeline. Again, but all comes through banks are look pretty good and again there two things happening, one pay downs and slowdown again some of the banks with some of the loans that we had on the acquired banks especially the non-performers were finally trying to get down and other sell some more that the reduction in those loans are not a significant and even those banks have started to grow loans again. So that’s combined with a lot of push that we appointed Eddie Safady as our President of the holding company together with Bob Benter and Bob Dowdell they are specifically task with growing the bank organically and working with our area Chairman and President and I think from setting a loan committee I can tell that’s really paid off I see some really, really good things happening right now. So we are right now are overly optimistic or pretty excited what things looks right now. Now, having said that we do a big acquisition or something like that I’m not saying there is an acquisition out there, but if something – that changes our focus some time, but right now we are at and trying to be able to loans and grow organically, it feels good to me right now.

Okay, and then just since you mentioned the FDIC expense and you guys consider but follow or rebuild or reserve are 1.35?

Say that again I didn’t catch…

Yes, the FDIC yesterday came out and proposal out to increase the deposit incurrence fund, two and then the level of 1.35% is obviously quite a bit below that and sort of the analysis they did suggested it might impact average banks by about 3% from net income perspective for banks there than $10 billion and you guys considered. That is all and you are thinking about expenses?

We haven’t looked at again the calculation, my hope would be as we are driving these loans that acquire higher risk range if you will hopefully that can offset of this, but we haven’t put the pencils and papers yet.

Sure, Brett, I haven’t even seen that and you are ahead on me and not really I haven’t seen now.

Okay, I share to you guys. Thanks for the color.

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

Good morning. David, you partially touched on this in your answer to the last question, but just to clarify the term in loan growth this quarter would you say its more a reflection of sort of a noticeable term in the operating environment more broadly or is it – it sound like it’s more a turn for the company internally or maybe some new production starting to outstrip the run off in some of the newer markets and some of the companies you brought on board last three years, is that how you characterize it?

I think that’s an exactly. I don't know that can characterize the whole two states of Oklahoma and Texas but for us I mean two things happening less runoff and more push for organic growth in the company.

Okay, I think that's exactly right. This quarter is - the first quarter of this year that our new loan production exceeded the runoff. So we’re seeing a significant turnaround in this third quarter in that regard. So let's hope the trend continues.

And also you had the highest production we’ve ever had $320 million.

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

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

Again this is Dave. And again on the last three quarters I said we are where we are at. But at this time, we should – this should be the run rate. I mean just to try squeeze out anymore efficiencies, I think we are there.

David or Tim I guess with respect to acquired energy loans is there a segment of that portfolio as a whole that you're watching that you’ve identify they could eventually migrate the substandard reclassified status under certain conditions maybe loans that aren’t marked are currently classified but if the duration of this energy situation persists. Is there a segment that sort of right on the line of becoming a potential issue and if so. What would you ballpark the size of that segment to be?

Let me start on that and Merle jump into. We have done re-determination of our E&P loans and again I think with the exception of just a couple we’re in pretty good shape there. They might have been two larger ones that might have been in excess one with the million marked loans and not only excess of the million, but again the customer is able to bring more assets and cover that. So for that part I think we feel pretty good with against the area that you always have to look at I think in oil and gas lending right now, the stuff that may pop up is more than service industry. So Tim do you want to comment on that.

I think everything you said is - is correct. It really depends on how prolonged the situation is a lot of the E&P customers hedge their production and those hedges are going to start running off the next calendar year over the course of 2016, there are a few that are hedged into the early 2017, but it's safe to say the most of those hedges will be off by the end of the calendar year 2016. So you have to assume that’s going to put some additional pressure on the situation. As David said really we fared pretty well so far on the borrowing base re-determinations. Our customers have either had the liquidity to pay the loans down to get in compliance with those re-determination's or they've had free and clear assets that they could pledge producing assets. That they could pledge to bring things into compliance, but obviously if this thing continues let's say foryears, liquidity after a while runs off and free and clear assets after a while get pledged. So you hit the bottom of the barrel at some point in time. We don’t think we’re anywhere close to that right now. But once again the whole key is, how long does this thing last. And we don’t know, nobody knows.

I think what we see right now they are manageable but to think that, to think you are not going to have any losses would be that would be a responsible to so. So again if you have to ask me what a number was I don’t know if it’s $5 million, $10 million what I see out there right now, we have to throw some number out there I don’t know Merle you have some kind of comment on that.

Most of the comment so far have been related towards the producers. But there is a lag effect between the decrease in oil prices and the impact of the service businesses. And we’re just now beginning to see some downward migration of our credit rates - increase in risk in the service area and David mentioned it’s $5 million maybe $10 million I might be a little more conservative and say it would be $5 million to $15 million. Potentially on the worst case basis.

But right now we have no idea, I mean we don’t see it right now.

It’s definitely not visible in terms of specific loss identified today. Something is coming we just don’t know…

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

But the bottom line right now at this point in time, we have very few defaults in the service company, outside of it.

Negligible.

Yes, and almost none. But as David said to assume that that would stay the case if this thing becomes more prolonged and/or price really drops to $20, $30 a barrel, all bets are off. So we are constantly watching it, that's best we can do.

Fair enough.

The only thing I would say are probably in a better position than anybody else.

Well, we have less than 5% of our total loans in E&P and service and so – and that’s ratcheting down. So we think it’s manageable, that’s correct.

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

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

Okay, thank you guys.

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

Hi, thanks. Good morning, guys.

Good morning.

I want to go back to the strong loan production that you guys talked about on the strong pipelines. I’m curious if you do anything different today than you haven't done in the past, whether it’s increasing loan size or different loan type, additional lenders, anything that to speak off.

I think if that is I mean as you again we’re not trying to get into the terms and conditions of a lot of group out there. And again I’m not even saying that we’re being that much more flexible, but we are trying to grow loans. And I would say the other thing it really changes as you grow the size of your – we are getting larger request. And I think that's probably the change in the dynamics more than anything, in your loan sized bank, a lender may carry $10 million or $30 million portfolio. As you get to our side some of the lenders are starting to carry $100 million plus portfolio and that’s because they are seeing bigger loans. So I guess you have bigger loans, so we hope that we are underwriting them good. So I think that’s where it’s coming from prominently.

And we are also very focused on trying to increase our lending staff with the appropriate people. We have hired some new lenders over the last year. So we are continuing to look for quality lenders. So hopefully that’s going to payoff as we move on down the road.

Yes, this is truly one of the first times. In the last year and a half or two years we are not focused on trying to work on banks that have been acquired. We are getting them where we want them to be and really trying to build organically, historically when we can build organically we are pretty good at it. But again we never had, this is really been the first year, we really been able to really building and go out that way.

That’s right. And David it’s also correct on the larger credits, we have seen an increased opportunity to look at larger credits. I don’t want to get ahead of ourselves, but for example that loan committee yesterday, we approved a $50 million credit that we think is a very good credit. Now we may or may not get it. The loan officer thinks we have an excellent chance of getting that loan. But I can’t make prediction on that, but that’s an example. We approved a $100 million credit not long ago. So we are told we all going to get, maybe we will, maybe we won’t. So we are starting to see credits of that size and those two that I just missed the $50 million and the $100 million approved to be very good solid credit.

Okay that’s helpful guys, thank you. And then as a follow-up David Hollaway I don’t think anyone asked a question here on purchase accounting accretion. So I’ll ask it I think it was about $10 million this quarter kind of inline with when you get last call what’s the outlook from here?

Yes, I think that’s a good observation as we are looking at what's left and where we are going I think we do need to sort of repeat or looking out of roughly so our thought is about $10 million per quarter.

Thank you.

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

Hey good morning guys.

Good morning John.

Hey, just a real quick another kind of ticky-tack around the margin, any premium amortization change in that a linked quarter or sort of a look forward on that and then anything going on in the securities book with respect to duration or changes in what you guys might be looking to kind of reinvest in?

I’ll take part of that, when you are saying amortization you are taking about the pre-amortization on the bond portfolio, correct.

Yes, correct.

And so it’s been slow down a little bit and that’s what we saw, we were last the quarter prior to this we are totaling at 15.5, next quarter we came in 14.8 so there was a little bit of a slow down. I think that 14.8 that’s probably what we see today that’s probably good loan rate at this point. In terms of the - what were buying on David.

No, haven’t changed model at all same bond, some duration, same average life our only help is that we can start taking some of the money out of the bond portfolio and put into the loan portfolio that really help the net interest margin going forward.

Got it. And then just kind of circling back on loan growth and some of the commentary there I think last quarter you guys have sort of being saying 5% to 8% would be the target, organically it looks like we are through some of the run-off of the acquired book, is that still a good way to think about it I mean this quarter was sort of 4% annualized so kind of the bottom end of that range what do you kind of thinking about that. And then with the change I guess you just alluded to take a look at some bigger pieces of business and being position to kind of win that. For example the $100 million credit, is that something that you guys would portfolio entirely or deeper sort of participate some of that out and how should we kind of think about that?

A lot of it depend, well first of all let me answer the first question about the royalty, I think again this year is almost I’m hoping to even do a little bit better and hope we’ll do a little bit better in the last quarter, but next year I mean I think we are going to see from minimum of 8% to 10% and hopefully will be better than that. The larger credits I think they are unique and special and by itself, if I think the $100 million are which – is a hospital district that has probably about $400 million in assets and about a third of that is in liability and of course the reason we probably keep all of that if we get it because it probably average $30 million or $40 million in the checking account but they have real special in unique advantage in that if they don’t make as a Monday they have ability to keep tax and raise tax so we probably keep that front. In a target let say everyone is different the other $50 million that we approved the other day is one of the three banks and it’s a prime credit. So that one is I don’t that you great at AAA, but it at least the AA we will probably keep all of that.

Great and that’s correct.

And then there is probably another loan in the Dallas market that’s $50 million on a high-rise a great tenant on that, we’ll probably keep that – that’s the intention right now yes.

Great, that’s helpful. And I do have one last kind of housekeeping one around energy book, did you guys – and sorry if I miss this did you disclose what classified, criticized was on that book this quarter and how that migration may have played out linked quarter?

Well the NPAs are about $21 million, they are about 44% of our total approximately $49 million in NPAs is that answers your question.

I guess the percentage is total oil and gas what we are at $400 million it’s about 5% right, which I think is kind of the industry standard right now. If I am right, if that’s the industry standard and that’s what I have read then we are right inline with that.

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

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

Yes, I think that’s helpful from a sort of qualitative perspective. I appreciate it guys, thanks.

Our next question is from Steve Moss of Evercore ISI. Please go ahead.

Good morning.

Good morning.

Good morning.

I was wondering just a follow-up on the oil field services side. Could you give us a little colors to what kind of revenue decline, you are observing from your customers?

I don’t know that we can have the answer to that…

If you look at the producers, [indiscernible] from what they were a year ago.

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

You said there is probably a pretty dramatic decline in revenue, but there is also been a dramatic decline in expenses at this time.

That’s right. And if I had the ballpark number and decline, I would say it’s between 20% and it was 40% on the revenue side.

You don’t have anything to…

We don’t have anything hard to back that up, that just got feel on my part.

Okay. And just wondering in terms of the oil field service business, could you give little colors to what type of businesses you are running through within that space?

It’s all across the board. I mean obviously we don’t have people like Halliburton and Schlumberger as customers, it’s smaller to mid-size companies, but its work over rigs, its hauling companies. For example, we have a very good customer in West Texas that has a fleet of hauling drugs and they go after the field and pick the oil up, it’s not connected to pipelines and there been this of course sale pretty well because regardless of the price the producers have to take it out the field and send it somewhere. So we have people that – red lights for oil field, we have just mechanical services, we have fueling companies I mean it’s all across the board.

You probably have other company they follow the saltwater and acting drug services, we work over ways that’s you go back into I think we only have a one drilling company and have about two drilling companies and have about two rigs, a lot more rigs, but I mean it’s really two companies.

So we have very few drilling credits.

Okay got you. And just one other question separately I was wondering could you quantify the size of your public fund deposits at this point?

Size meaning the total dollars are those which you are talking about.

Yes.

Yes, thinking on the average in this past quarter we have couple piece of information for that, we have a little over 500 public funding so they are getting up to about two point in the could be exact on this but close to $2.7 billion roughly?

But the normal run rate on that would be 1.5 to 2.

Now you got 500 entities so…

But we will take some more well, that’s true.

Okay, thank you very much. I appreciate it.

[Operator Instructions] Our next question is from Jennifer Demba of SunTrust. Please go ahead.

Hello, this is Michael Young in for Jennifer. David I was just curious about your interest potentially in stepping outside of Texas or another M&A deal obviously you did two in Okalahoma back in 2013, 2014 so just curious about thoughts there?

Sure, again our first focus will probably be Texas like I said that’s over a 50 banks, over a $1 billion in size here in Okalahoma with - so actually will be Texas and Oklahoma build the franchise that we have in those two states but we would step out the other states, again mostly those that may be joining us again we probably would step out to buy a $500 million bank or even a $1 billion bank in another state, but if we saw that we could be with in the top five market share within a reasonable period of time and we would consider that to only in joining states.

And I guess kind of similar any interest in more of a scratch and dent bank. I know it is not been and though necessarily in the past but does that shift in the current economic environment?

What’s the scratch and dent bank?

Bank with higher NPAs or under pressure maybe some capital.

Generally we are probably more focused on one with hair on effect would come from the FDIC or that would be some regulatory help, trying to maybe going and jumping in one that’s far off maybe a little bit of a scratch for us.

Okay thanks. End of Q&A

Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks.

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

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