Prosperity Bancshares, Inc. (PB) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Prosperity Bancshares Inc.'s 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please accept our apologies, there have been some technical issues this morning. If you lose connection, please dial back into the call. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this conference is being recorded. I would like to turn the conference over to Charlotte Rasche. Ms. Rasche, please go ahead.

[Technical Difficulty] …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; Mike Epps, EVP for Financial Operations and Administration; and Merle Karnes, Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter. He will be followed by David Hollaway, who will review some of our recent financial statistics and Tim Timanus who will discuss our lending activities, including asset quality. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Bianca. 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 from those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now, let me turn the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone for listening to our second quarter 2016 conference call. For the second quarter we had impressive returns on average tangible common equity of 17.15% annualized and on average assets, a return of 1.24%. Our earnings were $68.071 million for the second quarter of 2016 compared to $71.932 million for the same period in 2015. Excluding purchased accounting adjustments, net income was $62.359 for the quarter ended June 30, 2016 compared with $63.8 million for the same quarter in 2015. This quarter’s net income was impacted by a $6 million provision for credit losses which is much larger than the provision for the second quarter of 2015. Diluted earnings per share were $0.98 for the second quarter of 2016 compared to $1.03 for the same period in 2015. Loans at June 30, 2016 were $9.650 billion, an increase of $535 million or 5.9% compared with $9.114 billion at June 30, 2015. Linked quarter loans were basically flat. At June 30, 2016 oil and gas loans, totaled $328.4 million or 3.4% of total loans compared with oil and gas loans of $433.4 million or $4.8 million of total loans at June 30, 2015. A $105 million decrease represents a 24% decrease in oil and gas loans when comparing June 2016 to June 2015. On a linked quarter basis, oil and gas loans decreased $34.4 million from $362 million or 3.8% of total loans at March 31, 2016. Our nonperforming assets at June 30, 2016 were $52.130 million or 0.27 basis points of quarterly average earning assets compared to $56.985 million or 29 basis points of quarterly average earning assets at March 31, 2016, a decrease of 8.5%. Our nonperforming assets ratio was one of the lowest in the industry and a sign of solid asset quality. Our deposits at June 30, 2016 were $17.219 billion, an increase of $217.5 million or 1.3%, compared with $17 billion at June 30, 2015. Linked quarter deposits decreased $653 million or 3.7% from $17.873 billion at March 31, 2016. As mentioned in prior earnings calls, our deposits are the lowest for the year in the second quarter due to a seasonal decrease in deposit balances of the over 400 municipalities we do business with, as well as a decrease in the balance of our farm and ranch customers who are using their money to finish out their crops. We have historically experienced an increase in deposits in the fourth quarter of each year. In addition, when comparing deposits at June 30, 2016 to those at March 31, 2016, part of the decrease was attributable to the maturity of higher cost certificates of deposits assumed in prior acquisitions, on which we intentionally lower the write at maturity. The average balance of certificates and other timed deposits decreased from $2.888 billion at June 30, 2015 to $2.548 billion at June 30, 2016, a 340 million decrease. We continue to hear from bankers about the added regulatory requirements that are impacting the profitability and believe that these requirements combined with management and board fatigue will continue to create opportunities for those that have the ability and the will to deal with these headwinds. Prosperity operates in markets across Texas and Oklahoma, some of which have been impacted more than other by the downturn in Energy industry. During 2016, we have experienced growth in Central Texas, Bryan/College Station, Houston and Dallas and Fort Worth areas, which have offset the markets affected more by the energy industry, such as West Texas, South Texas and Oklahoma. We believe that we have seen the bottom in oil prices and that the energy industry should start experiencing job recoveries by the first quarter of 2017. I'm still amazed at the resiliency in the markets we serve; Austin, Dallas and San Antonio are three of the two fastest growing cities in the United Sates. The Texas unemployment rate held steady in May 2016 at 4.4% which is lower than the U.S. rate of 4.7%. While the Oklahoma unemployment rate was 4.7% in May, in line with the U.S. rate, home prices in Texas continue to rise partly due to solid demand and low inventories, while home prices in Oklahoma also rose slightly. I would like to thank our whole team once again for a job well done. Thanks again for your support of our company. Let me turn over discussion to David Hollaway, our Chief Financial Officer to discuss some specific financial results we achieved. David?

Thank you David. Net interest income before provision for credit losses for the three months ended June 30, 2016 was $158.467 million compared to $158.239 million for the three months ended June 30, 2015, an increase of $228,000 or 0.1%. The net interest margin on a tax equivalent basis was 3.37% for the quarter ended June 30, 2016 compared to 3.39% for the same period in 2015 and 3.48% for the quarter ended March 31, 2016. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis for the quarter ended June 30, 2016 was 3.19% compared to 3.13% for the same period in 2015 and 3.21% for the quarter ended March 31, 2016. Non-interest income decreased $1.8 million or 6% to $28.5 million for the three months ended June 30, 2016 compared to $30.3 million for the same period in 2015. Non-interest expense for the three months ended June 30, 2016 was $79.2 million compared to $79.7 million for the same period in 2015, a decrease of $500,000 or 0.6%. The efficiency ratio was 42.46% for the three months ended June 30, 2016 compared with 42.35% for the same period last year and 41.08% for the three months ended March 31, 2016. Our bond portfolio metrics at 6/30 showed a weighted average life of 3.8 years and effective duration of 3.6 and projected annual cash flows of $1.7 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave. As David Zalman previously mentioned, our nonperforming assets at quarter end June 30, 2016 were $52.130 million compared to $56.985 million at March 31, 2016 which was an 8.5% decrease. This represents 54 basis points of loans and other real estate at June 30, 2016 compared to 59 basis points at March 31, 2016. The June 30, 2016 nonperforming assets total was made up of $36.369 million in loans, $84,000 in repossessed assets and $16.677 in other real estate. Of the June 30, 2016 nonperforming asset total, $14.270 million are energy credits, or 27% of the total NPAs. This is broken down between $13.266 million of exploration and production credits and $1.004 million of service company credits. As of today, $6.069 million or 12% of the June 30, 2016 nonperforming assets total 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 March 31, 2016 were $5.888 million compared to net charge-offs of $11.670 million for the three months ended March 31, 2016. This was down 50%. $6 million was added to the allowance for credit losses during the quarter ended June 30, 2016 compared to $14 million for the first quarter of 2016. The average monthly new loan production for the quarter ended June 30, 2016 was $230 million compared to $250 million for the quarter ended March 31, 2016. Loans outstanding at June 30, 2016 were $9.650 billion compared to $9.654 billion at the end of the first quarter of this year which as David Zalman previously mentioned was flat. The June 30, 2016 loan total is made up of 41% fixed rate loans, 36% floating rate loans and 23% variable rate loans. These percentages are unchanged from March 31, 2016. I’ll now turn it over to Charlotte Rasche.

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

Thank you. [Operator Instructions] The first question comes from Dave Rochester with Deutsche Bank. Please go ahead.

Hey good morning guys. You guys continue to do a great job on the cost saves front. Can you just talk about what you expect for expenses going forward? Is this a good run rate here or are there other cost saves you think you can realize if you lower that a little bit?

This is Dave Hollaway. I think on the last conference call, I said, you know we thought the run rate would be between $80 million and $82 million, so obviously this quarter we come in at that low end a little bit better. And so yeah, I think around that $80 million is still a good run rate going forward.

Then just switching to loan growth, how do you guys think about that in the back half of the year? It seems like growth came in a little bit lighter than expected in the first half here, has the loan pipeline picked up at all, and are you looking for stronger growth near term?

I'll take that. This is David Zalman. I think we started the first of year saying that we were hoping to get at least mid-digit growth around 5%. Obviously for the first quarter, we grew flat, so we didn't achieve that. I think we even commented in the press release that we got certain markets that are doing extremely well, think of Dallas Fort Worth and Bryan/College Station and Austin and San Antonio those markets are really growing. At the same time, and even Houston we had about a 1.4% loan growth in Houston I guess because of the diversity Houston has. But then, we were more impacted with around the South Texas area, West Texas and Oklahoma. So, I think, and again, well, if you get $24 in February, that was a pretty downer. We're still shooting and we're looking to be positive for the second half. I mean we're still going to shoot for the, you know the 4% to 5% loan growth for the second half.

Okay. And are you seeing any kind of pick-up in loan pipeline? Does that look pretty healthy going into preview at this point?

Well we started loan committee last week at 10.30 in the morning and I left at 7.30 at night. So, I'd say yes. We can get our -- from the payoffs. That's another story. Yes, we are busy.

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

Okay Great. And securities from that extent really didn't increase that much this quarter, but it looked like refi activity overall in the market is up a lot more in 3Q. Could you just talk about what your expectation is there for that that securities being to that extent in 3Q and then with that backdrop, how are you thinking about the NIM trending next quarter?

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

Okay. Then do you happen to have the dollar amount of premiums that you've got on the MBS at this point?

Total premium, I do not have that number.

And then just last, where are securities reinvestment rates today?

This is David Zalman. We're probably looking around 1.8 to 1.9 on the mortgage backed securities. We actually -- you know what we're buying tax free instruments which we participate and we have a lot of municipalities who are doing business with us. We only get a better yield on that, Tim, do you kind of have an idea what our reinvestment rate on tax-free stuff is?

Well on the tax free, we've been getting between 2% and 3%...

Tax included?

That's pre-tax. So, we'll be doing a lot better.

So, I mean, generally we're using probably a combination of tax free and stuff that we're buying and we try to deal directly with the municipalities because we have some many to do business with us, so we try to mix it. I'm hoping -- I guess declines, a feel somewhere between 1.8% and 2% probably.

The next question comes from Bob Ramsey with FBR. Please go ahead.

Good morning guys. It seems like the other income line had a pretty big drop quarter-over-quarter. Just kind of curious if there is anything unusual or what drove that decline?

This is Dave Hollaway, that's under the non-interest income. Yes, the other as you know it's just a bucket of miscellaneous if you will. And you know that will be is just one-off, so we have of stuff that goes through there. And so, it's just a quarter where all these little things, so just wasn't many of them this quarter. So, I don't know that there is anything specific we can point to. It is what it is on that number. What I would add is color to that, as you look at the fee income overall the last few quarters were running $30 million to $31 million, it's -- all these little small one-time events are not going to be there, prior good run rate going forward, I'd bring that back to maybe $29 million to $29.5 million, maybe that would help kind of in the big picture way.

Okay. That definitely does help. Then I was wondering if maybe you could share some thoughts on capital today. I guess as the stock price has risen, we've saw the share repurchases slow. Just curious about share buyback appetite or sort of what you are thinking on the M&A front et cetera?

This is David Zalman. I'd say its capital. Again, you can see our earnings. We're building capital rapidly probably even as we pay our dividend, we're still around $200 million a year that we keep and we continue to do something with, and I see there to purchase stock back with or buy other banks, and I think that probably as our capital does fuel, I think Dave we're probably 8% now, and again we're building capital rapidly. I would say this, during --probably, again our price there goes down the way it did again, we'll definitely be in there buying stock. There's no question about that. If it went down to where it was at first time, we would have bought back plus a whole another round of it. Having said that, probably on the acquisitions, we're probably start using bigger cash portion than we have in the past where sometimes we were using 15% to 20%, we may increase that to 45% and 50% to try to help. That's not to get rid of capital, but to use it more effectively and having better returns to our shareholders.

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

I think probably not [indiscernible] category seems to slow down. We always have two or three deals peaks were talking to us about, and for a while there, it kind of went, and there is hardly anything working again today. We do have a number of deals and people we talk to, but again it's may or may not work -- maybe their partners is, sometimes you are pulling out, some of these people who have built their loans very rapidly and when we got back to them, we have to address that. So, there are bigger challenges sometimes right now. I think as far as the price comes, for the most part if you are truly in center, you can see the prices that people post out there with the average sell prices. Obviously, if you are in a very hot and dynamic market, you are going to demand a price better than that, just a regular market. So, there's a lot of stuff going on. On and on, I would say though, yes, there is stuff happening now, whether or not we do it, what we'll always do it. Again, I mentioned this before really that growth is not a stranger to us. When I started with the bank in 1986, our bank was $40 million in size, and our bank now, and so 10 or 12 years later, we're $20 billion in size and now we're 20,000, so we'll continue, I think timing, it just has to be wide. I don't think we ever won't just do something because somebody wants us to do, and we won't. But we now hope that in time there will be something, be the right deal for us.

The next question comes from Jennifer Demba with SunTrust. Please go ahead.

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

We're not afraid of the energy exposure. The key to it is to, the key to it is to, that you market-to-market the proper value. So, I think that we have a good qualified team. I think we can do due diligence, so we're not afraid to look at something like that. You just have to call it right. I think there is -- the risk probably in buying an energy portfolio is, you know if you think this is a bottom-mean and if there is not going to be lot more downward price pressure, you know you are okay, but you still always have to take into consideration what if prices drop. So, it puts an additional risk again, but the long and short of it is, we're not afraid to taking an energy bank and looking at it and price. I feel like our due diligence team is extremely good extremely competent.

The next question is from Steve Moss with Evercore ISI. Please go ahead.

I want to touch base on energy loans. See I know they are small these days, but just wondering if you could update us as to what the reserve is and what the discounts on acquired loans is for acquired energy loans?

Merle, you have that information.

Bear with me a second. The specific reserve, the discount themselves are $6 million. That's fair value marks and the reserve allocation in addition to the marks is $11.1 million.

Okay.

That reserve of $11.1 million is 3.47%.

Right.

Merle, I would add to that, I mentioned earlier, this is Tim Timanus that we had little over $14 million in energy credit that were part of the June 30, non-performing assets and that $14 million is marked at about 21%.

In terms of -- what was the energy charge-off this quarter? And then also just wondering what are your -- any updated thoughts you may have about your oilfield services exposure at this point of the cycle?

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

We haven't seen disaster at this point in time. I just think the observation, most of these guys that have been through the cycle before were well aware that they need to have some liquidity, that pocket to ride the next downturn, and so that's really one of the things that has cushioned the lesser lever of adversity for the services companies. If the prices stay down for a while, for either time, that liquidity does have a limit. So, really the key to this is seeing prices stay up in the, hopefully moving next year with $50 to $60 range.

Yeah. They are seeing consolation I think that you've had Exxon and Schlumberger both say that we have hit the bottom and you have the Dallas Federal Reserve economist feeling that basically that we should have hit that bottom and that job growth in that all industry, it looks on the upstream, the exploration part should start increasing in 2017. So, having said that, you still have some people that were in this that are currently, you know that are marginal, which they may not make it. But if anything, there are some politics on, I think.

I'm sorry the next question is from Joe Fenech with Hovde Group. Please go ahead.

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

Yeah, I mean let's certainly back that up a little bit. So, when we're taking about over the next few quarters, let say between now and end of the year, we see a few basis points impact to the margin, you know not few basis points per quarter. Just want to be able to clear on that. The 12 months, you'd have a few more additional basis points challenge. But to your point, that's absolutely right. If you can get net loan growth, 3%, 4%, 5%, that really will mitigate some of that downward pressure on that margin. It will bring it back. I mean we're clearly, mutually balanced and so with any kind of loan growth, that will help. Now having said that, I don't want to give the impression that we have a 3% to 4% loan growth and also our NIM is going to jump 10 basis points. I'm not saying that either.

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

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

Then David Zalman, just anecdotally, you know was talking to a small bank in the Midland-Odessa area, and the takeaway there from that conversation was that, that market seems to be dealing with recessionary, seems to be recessionary type conditions in that market. And the comment was that oil prices at this level just aren't high enough to avoid some significant problems in markets like that that are more energy reliant. Would you agree with that assessment based on what you guys are seeing? And if so, where do you draw the line and which markets do you put in sort of that recessionary type condition you know even with oil prices where they are today and which markets are sort of more immune to it and sort of muddle through here, with where we are?

I'd probably respectfully disagree with the smaller bank. I think that, is West Texas and Midland-Odessa impacted? Definitely impacted, but at this price, I think if you want to be anywhere in the oil and gas industry, that's where you want to be. It's one of the best markets. I mean that can produce oil and gas cheaper than any other place. But I'm sure they are looking at probably some smaller service companies that they have, and again, when you look at something like that, it is for the -- most of them have used a lot of their cash and you know, so they are probably having a tougher time, probably having tougher time making payments. But I will say, as we looked at a couple of the service industries over there, and we actually -- we've seen this last quarter, an uptick in their demand and their demand balances that they are keeping with us and some improvements in their P&Ls. Merle, do you have some input on that?

I would just say that, if that Odessa bank is thinking about recessionary conditions, they've probably had a lot of customers who had steel [ph] on their balance sheet, drilling contractors, pipe suppliers, that type of thing. That what we saw in the 80s, those are the ones that are most adversely impacted.

I think you do have a lot of drilling, a number of drilling contractors, you are probably more impacted than anybody else.

I would also add to that. I think you have to look at it, really on a credit by credit basis. If you look at some of these fairly new companies, and by that, I mean ones that started 2010, 2011, 2012, 2013 are all in there. If they started with a lot of leverage, they are probably not doing very well right now. And the customers that have been around a longer period of time and have lived through some of these cycles, they are less impacted by it. So, is it a catastrophe for some? Yes. Is it a catastrophe for all Odessa? May not. It's difficult for all.

I hope they also -- a banker's attitude really depends on percent to do oil and gas loans. You know it may be a lot easier to deal if you are having 3% compared to 15%, so that maybe some cycle [indiscernible] impact there too.

That's correct too.

The next question is from Brett Rabatin with Piper Jaffray. Please go ahead.

Wanted to, I guess just, kind of go back to a loan growth question and obviously profitability is holding up really well. And David Zalman, you've been reluctant to hire lending teams and what not in the past. Are guys considering any new lending lines of business or adding people on the lending platform to kind of help that growth profile?

Basically you are right in your first comment, and in that we really haven't gone out and try to hire groups of people or teams of people, and just bring over a whole group of business like that. I think we're still in that capacity. On the other hand, we're -- we are out there right now interviewing and trying to recruit additional lenders every day, and we're meeting with that with lunch and we are trying to expand our lending force right now with 50, and trying to get people in some of the markets that we should be doing better in that we're not doing better in. They're having harder times, and we think the answer to the question is, yes, we're out there trying to really recruit lenders right now.

Then, I'm just curious David, you've always gone with pretty tight capital I've ever seen you with 8% TCE. With everything that's happened regulatorily, what do you view is sort of the right ratio that you are managing to kind of what that number might be?

Yeah, well, I remember the days when we even buying banks with 3% and 4% capital, so 8% is just -- it's a whole new paradigm for me. But having said that, the regulators, we try to get, we're big right there wrongly trying to get them the best rate you can get, we have regulatory things [ph]. And you know capital is one of their main deals right now, and I think they like to see, they like 8%, but again I think, we'd love you to have 2% capital. I don't know that we'll be there 10%, but I would say that we're -- again we're building capital by over 1% a year just because of the retention of the earnings that we have. So, I think you will see capital continue to build, but at the same time, I think that what I mentioned earlier in the comments that, we may use on acquisitions, we may use more cash than we've had in the past and try to put that to use. We just have to make a decision as a bank, deal with the higher regulatory rating you can and meet their expectations, or do you want to work a little bit less, that's just questions we have to ask ourselves in time.

Great. Appreciate the color.

The next question is from Matt Olney with Stephens, Inc.

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

Matt, this is David. I would say the answer to that short is no. On the other hand sometimes we have a team in there, now where I used to be the whole thing, and so basically you spend more time on it. So, they can find some stuff that has a little bit difference, then maybe what we would kind of our stuff with a, you know a three to five year average life when you start off with. Sometimes there are some of the deals out there where we might have a 20 year MBS that might have had some age on it, and they can get a better year. We're looking at stuff like that, and so maybe just a new direct purchase from the federal home, from Fannie Mae or Freddie Mac if you buy a lot direct from the two. So, we're looking at that, we some time, we -- you know we try to buy when the yields are higher and we know for example that -- we know for example in December that probably our deposits will increase. Who knows, it sounds like flat here, but let's just use $400 million or $500 million. So, you know we'll start looking at price of that 10-year treasury is yielding more bond, more now preparing for that coming in the future. So, I mean we do look at timing, but we're not trying to call rates, we're trying --we're just trying to have an average life if interest rates go up or down, we still make a good decent return. We're not trying to call later, we're buying in every market. So, we do -- I will say this, we are putting on more municipal stuff that we have in the past, but sometimes that even goes into the long portfolio, because we're dealing directly with the municipalities some times.

Shifting over towards the fee income discussions, you gave some good commentary on the other fee income, but besides that there were some few other lines that looked little bit soft in asset fees, card fees, trust income, any comment you can give us on some of those items for this quarter?

This is Dave Holloway. On the income, I think if you just look back out some of the quarters, there's actually just been superb downtrend over the last few quarters. That's just the nature of what we're in with the education of the customer and where the regulatory environment is at, that expectation of that going up, I don't think you should be there. Trust income, yeah, I mean that's something that was impacted, it's a not a lot. It went down little bit here in the last few quarters, impact a little bit of some of the businesses that they handle. I would say the same thing for the brokerage income. But again, these are such small portion of our banks. Even though they have this quarter where they've had a downtrend, I don't know I would expect that going forward. I mean there are small enough, where they can increase their business again. Dave, correct me if I'm wrong, I've forgotten the assets under management, trust is not that much, you have opportunity to process that back into the bank. It's key…

I think our assets under management in Trust are about $1.7 billion, somewhere around that. They've increased somewhat, but again I think that some of their earnings are getting impacted too. With oil and gas, they represent a lot of people in the oil and gas industry as far as when people get leases on the properties and stuff like that. And there was some pretty good [indiscernible] and that slowed down, and probably impacted by that if you will.

But our penetration into our major market say Dallas and Houston are still wide open. We have not made that. We hired some people in Houston and in Dallas, but again as far as getting it really wrap-up, we've not. We're not there yet.

I'm sorry, the question is from John Rodis with FIG Partners. Please go ahead.

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

That would be a Merle question. It should be in our press release. I have it, Merle is right here.

What we had outstanding was approximately $328 million and the 22 commitments that are attached to that would take it up to $484 million.

So that would be unfunded plus outstanding $484 million?

Yes. David Hollaway, just could you maybe just follow-up your thoughts on yield accretion going forward, because I think last quarter you talked about maybe being around $7 million to $8 million a quarter?

Well, I think I want to stay on that. I guess that in this last quarter it was a little higher than that, but I mean with precision, you know I think the $7 million to $8 million is still a good number going forward based on what we still probably left outstanding.

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

Again, I think doing stuff like this out there, then everybody gets all laddered up. We're really -- as you grow and you prepare for acquisitions, you make sure that for example make sure technology and your backrooms can really grow, sometimes even doubling your size, but a $10 billion deal is not unreasonable for us if you really wanted to do one.

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

Absolutely, the last couple of years, I mean it's really all we've been doing is building infrastructure. When I look at the amount of money we're spending on, you know regulatory BSA modeling, DFAS, note areas and all of this stuff. I could go on and on change the people, but you would like it. But that -- in our IT, I mean that's what we really have been focused on building infrastructure to handle the next growth stage that we have.

The next question is from Scott Valentin with Compass Point. Please go ahead.

Just quickly on -- regarding oil, I know David Zalman mentioned that the bottom is in for oil. Just curious if oil will start retreating, if it comes down from $50, it's in the lows $40s today, is there price again where you guys get concerned a little bit on loan demand and credit performance?

Well I think again, you can almost read anything you want anywhere at any time about all having an opinion from anybody. But some people think that oil for the most part will be, it could even go down to $41 before it makes some impact to the $50 and $60 range. But most from everybody we talk to from economist to the oil and gas industry, Reserve Bank at Dallas and their positions, and you know I think most of us all feel that, you know that it's probably is going to land somewhere in 2017 around $50 to $60 range. I think that's what we're counting. But you are right. I mean, if oil was down to $25 or $30 in it, you have another downturn. I mean there is no question.

Then just on loan originations, just wondering, it sounds like it's more of a -- I mean a weak demand scenario during the quarter or just sounds like borrowers picked up in June, but it was weak early in the quarter. Any changes in the way you are approaching lending geographically or product type, maybe deemphasizing multi-family or any other product?

Well, I'd say, when we say weak demand, it's probably, again you to look at our hold in the other state is so big, I mean certain areas like Dallas, Fort Worth, Austin, San Antonio, Bryan/College Station, even Huston had a 1.4% increase in loans. Again, then we're also in areas that are in South Texas and West Texas, in Oklahoma where our growth in those areas just stop set. So, I guess the part that you can say we have a hedge. So our hedges were -- any way, if you want to look at it from a positive spin. But for the most part we're -- again we're not going out and buying some asset base lending group or something like, that's not on the agenda, but we are focused on building loans and we're going to build loans. We're going to build good loans, and so, I mean that is our focus for sure.

Then just a follow-up, I mean was there any underwriting changes. So, in the oil intensive areas like South and West Texas, Oklahoma, did you guys tighten the running standards, or limit certain products versus where it was pre-energy or oil prices decline?

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

[Operator Instructions] The next question is from Gary Tenner, DA Davidson.

Just clarify something from the press release where you talk about net charge-offs being driven by the energy credit as well as an add credit in the network of detail, it seems to show a recovery on ag and then a larger consumer charger-off?

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

The charge off on the ag is related to positive count that is over grown, I think for reporting purpose, as well up into the consumer.

I'm not sure you caught that Gary?

I did. Then just one follow-up, in terms of core loan yields, pretty flat this quarter and down only I think 10 or 11 basis points year-over-year. So, you've managed to hold yields there pretty well. Could you talk about what the new loan yields were, maybe look at the $300 million odd of production in June?

Again, this maybe a reason why sometimes we're not growing as fast as some of our peer groups are. We do try to maintain margin. I think it's very important to maintain a margin. I mean tomorrow for example if we wanted to put on $1 billion or $2 billion of loans and new loan district, we'll go out and buy some share and national credits, you can get a 2% yield. We could increase the portfolio by $2 billion or $ 3 billion. I mean some people that are in the investment community, they've got straight. We are a long-term shareholder, you take a different view. We really want to make -- we really want to maintain our margin even in the events that -- even in the even that we don't pull this fast or are we losing business sometimes, we just say if that's real important. And I look at it personally from a shareholder perspective, sometimes you say well, some of these other banks have an 80% and 90% loan to deposit ratio, and then you don't -- and actually, well why don't you go back and look and say, what did they make on return on assets, and what did they make return on tangible capital, and inevitably we outperformed all the majority of those banks making 1.24% return on assets and 17% return on tangible capital. So, I think that we're doing it right, because we're growing, making the money and not taking on much risk. So that it. That's just the nature of our company really.

I wasn't quite, from a growth perspective really just getting, trying to get an idea of what originations yields were here in the second quarter?

Well, I saw that as an opportunity to add something.

Thanks guys.

Yeah.

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

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

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