Charlotte Rasche - EVP and General Counsel David Zalman - Chairman and CEO Tim Timanus - Vice Chairman David Hollaway - CFO Randy Hester - Chief Lending Officer Mike Epps - EVP/Financial Operations and Administration.

Andrew Karp - FBR & Co. Ken Zerbe - Morgan Stanley Jennifer Demba - SunTrust Robinson Humphrey Brad Milsaps - Sandler O'Neill & Partners Brett Rabatin - Sterne, Agee & Leach, Inc. Abraham Kunwalla - BofA Merrill Lynch Gary Tenner - D.A. Davidson & Co. Matt Olney - Stephens Inc. Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Jon Arfstrom - RBC Capital Markets Peter Winter - BMO Capital Markets.

Good morning everyone, and welcome to the Prosperity Bancshares' Fourth Quarter 2014 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] Please also note today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Charlotte Rasche. Ma'am, please go ahead..

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' Fourth Quarter 2014 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. 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, Jamie. 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 joining us for our fourth quarter earnings announcement. I'm very excited to announce such positive results for the fourth quarter of 2014.

We posted earnings of $78.2 million for the three months ending December 31, 2014 and that's compared with $62.9 million for the same period in 2013, an increase of $15.2 million or 24%. Our diluted earnings per share for the fourth quarter of 2014 came in at $1.12, and that's compared with $0.98 for the same period last year, an increase of 14.3%.

The net interest margin on a tax equivalent basis increased to 3.8% for the year ended December 31, 2014 compared with 3.58% for the same period in 2013. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis increased to 3.29% for the year ending December 2014 from 3.2% for the same period ending in 2013.

Our Tier 1 leverage capital ratio stood at 7.69% at December 2014, compared to 7.4% at September 30, 2014. Our strong earnings continue to build capital rapidly. Loans and deposit growth was impacted by the acquisitions of First Victoria National Bank in November of 2013 and F&M Bank in April of 2014.

We continue to show strong organic loan growth excluding loans that were acquired in the First Victoria and the F&M Bank acquisitions and new production at the acquired banking centers since the respective acquisition dates.

Loans at December 31, 2014, grew $549 million or 8.9% compared with December 31, 2013, and increased $148 million or 2.2%, 9% annualized, on a linked-quarter basis. While we saw our loans decrease at the acquired banks, it is not unusual for us to meet out certain amounts that do not necessarily fit our risk appetite or pricing policy.

We continue to have record production in loans but still see a lot of paydowns. Tim will discuss this more in detail in his comments. Strong asset quality continues to be one of the core values of our banks.

Nonperforming assets totaled $36.9 million or 20 basis points of quarterly average earning assets at December 31, 2014, and that's compared with $50 million or 27 basis points of quarterly average earning assets at September 30, 2014. We continue to make progress with targeted loans identified in recent acquisitions.

We also saw a strong organic deposit growth excluding deposits assumed in the First Victoria and F&M Bank acquisitions and new deposits generated at the acquired banking centers since the respective acquisition days.

Deposits at December 31, 2014 grew $461 million or 3.5% compared with December 31, 2013, and increased 507 million or 3.9%, 15.6% annualized on a linked-quarter basis. Although our fundamentals are strong, our stock price has languished recently. We believe our stock price in due to invest per sentiment regarding the decrease in crude oil prices.

We have reviewed our energy credits and we must see any negative effects in the loan portfolio today. Although, we expect it may take six to nine months to fill the impact of lower oil prices. Our management team has been in banking since the 1980s and is familiar lending to the energy industry and in Texas and in Oklahoma.

Texas currently has low unemployment numbers and more diverse employment opportunities than it has in the past. While we expect job growth will be impacted by the lower oil prices, we believe that with the diverse and broader employment base, the Texas economy will continue to grow at a healthy pace.

I would like to thank all of our associates, director and customers for all their help in making our company the success it is. 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 December 31, 2014, was $177.8 million compared to $145.5 million for the three months ended December 31, 2013, an increase of $32.3 million or 22.2%.

This increase was primarily due to a 19.4% increase in average interest-earning assets for the same period. For the full year 2014, net interest income was $671.2 million compared to $498.9 million for 2013, an increase of $170.3 million or 34.5%. And again this increase is primarily due to a 25.9% in the average earning assets for the same period.

The net interest margin on a tax equivalent basis was 3.89% for the quarter ended December 31, 2014 compared to 3.82% for the same period in 2013 and 3.85% for the quarter ended September 30, 2014.

Excluding the purchase accounting adjustments, the net interest margin on the tax credit basis for the quarter ended December 31, 2014 was 3.25% compared to 3.35% for the same period of 2013 and 3.26% for the quarter ended September 30, 2014.

Noninterest income increased $4.9 million or 19.7% to $30.1 million for the three months ended December 31, 2014, compared to $25.2 million for the same period in 2013. This year-over-year increase was impacted by the F&M and First Victoria National Bank transactions.

For the full year 2014 noninterest income was $122.9 million compared to $95.4 million for 2013, an increase of $27.5 million or 28.8%. Noninterest expense for the three months ended December 31, 2014, was $84.8 million compared to $68.6 million for the same period in 2013, an increase of $16.2 million or 23.6%.

And again, this increase was primarily impacted by the F&M and First Victoria National Bank transactions. For the full year 2014 noninterest expense was $330 million compared to $247.2 million for 2013 an increase of $82.8 million or 33.5%.

The efficiency ratio was 40.78% for the three months ended December 31, 2014, compared to 40.21% for the same period last year and 41.55% for the three months ended September 30, 2014. The bond portfolio metrics at 12/30 showed a weighted average life of 4.1 years, and projected annual cash flows of approximately $1.5 billion.

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

Tim?.

Thanks Dave. Our nonperforming assets at year end December 31, 2014, totaled $36,919,000, or 40 basis points of loans and other real estate, compared to $50,820,000 or 53 basis points at September 30, 2014 and $22,504,000 or 29 basis points as of December 31, 2013.

The December 31, 2014 nonperforming asset total was made up of $33,615,000 in loans, $67,000 in repossessed assets and $3,237,000 in other real estates. As of today, $4,681,000 or approximately 13% of the December 31, 2014 nonperforming asset total are under contract for sale but there can be assurance that those are under contract will close.

Net charge-offs for the three months ended December 31, 2014, were $3,201,000 compared to net charge-offs of $653,000 for the three months ended September 30, 2014. Net charge-offs for the year ended December 31, 2014 were $4,795,000 compared to $2,522,000 for the year ended December 31, 2013.

$6,350,000 was added to the allowance for credit losses during the quarter ended December 31, 2014 compared to $5 million for the third quarter of 2014 and $18,275,000 was added during the year 2014 compared $17,240,000 for 2013.

The average monthly new loan production for the fourth quarter ended December 31 2014 was $292,000 compared to $285 million for the third quarter ended September 30 2014. This represents a 2.5% increase on a linked-quarterly basis.

The average monthly new production for the year ended December 31 2014 was $260 million compared to $184 million for 2013. This represents a 41% annual increase. Loans outstanding at December 31 2014 were $9.244 million compared to $9.369 million at September 30 2014 and $7.775 million at December 31 2013.

The December 31 2014 loan total is made up of 42% fixed rate loans, 46% floating rate and 22% variable rate loans. 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. Jamie can you assist us with questions..

Our first question today comes from Scott Valentin from FBR. Please go ahead with your question..

This is actually Andrew Karp on the line for Scott.

Can you give some detail on the energy exposure in the loan book at the end of the quarter?.

We don't have that - do you have those numbers..

Basically we've got about $520 million that's just a round number in energy credits. About $220 million of that are production loans and about $300 million are service company loans. So that's about well over 5% of our total loan portfolio, that's energy related, it's about 5.6%..

Thank you.

And if I remember correctly, that's down a little bit from the concentration in the third quarter? Does that sound right?.

It is down a little bit. We've had some energy related credits pay offs. So that’s correct..

Thank you. And then just on the expense side, it looks like the salary and benefits expense was down from the third quarter.

Was there a reduction in headcount or is there something else that drove that?.

I think there was just in the bigger picture just some of the closure due to the merit pay that hit their target. So it was reduced in the fourth quarter. If you're looking forward, I would bring that number up just a little bit as we come into 2015..

Okay, great. Thank you..

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

I guess a couple of questions. The first one, continuing to see any guidance on the purchase accounting adjustments; obviously a little higher this quarter. Expect that to run off over time, but would love any quantification of the forward outlook..

I'll start first and sure somebody else will jump in. But again you’ve seen in the last two quarters about 28 million - and I'm talking specifically on the loan aspects of all you’ve seen about 28 million and of course that's broken down to what we call 91, but just a general cash flow that's comes off cash flow from the loans.

And then the 03 which is the credit impaired aspects of it all. And so when you look forward, and again I want to say, there is a lot of question, I want to drive you to the press release on Page 14 at the bottom of the page it shows what those remaining balances are.

But again, the question is, are we going to run 28 million per quarter going forward. I don't know if we could say that, because I've got 28 million in this past quarter roughly 12 million, 13 million of it is from the '03 credits but we were able to get out of some of these credits at a much better percents on a dollar than what we had anticipated.

And that would probably the economy, in some cases. And then as we look forward, and I guess we talked about this on the last quarter, our guidance going forward, we said on a quarterly basis, we saw anywhere from 18 million to 20 million in this loan fair value income per quarter would be a good loan number.

And so fewer years back and looking to the future, and if that were a true run rate, we’ll try looking at the first part of next year but this will deplete itself..

I think that's right David. Basically, there is two part to this, one number that, when the fair value your loans to start when you buy based on the interest rates and market value, that’s pretty consistent or to be consistent. The increase really came in the open end category where we recover.

If we did better than what we thought we would collect on some of the loans that we got to paid off..

That's right, the 3/10/30 number for third quarter was about $9 million and it went upto close to $14 million for the fourth quarter. So we had to pick up almost 5 million..

Got it. Okay. That helps. And then just second question, in terms of the runoff of the acquired loans, it was a little steeper than what we were expecting.

But how should -- at what point does the runoff actually get overwhelmed by the growth of the organic business? Like was there something unusual in this quarter, you know, that sort of led to acceleration of runoff? Or is it a fairly good pace that we should expect going forward?.

I think we talked about it earlier, I think we talked about $300 million to $400 million, maybe I think that, I think that - in our fundamentals and in our usual rates, there are organic growth.

If there's any disappointment, I think we need to -- we would like to see, when we look to June and we put days together, all loans together, again on top of my head was 9.3 billion.

And we said for the year, - our goal would be, our organic growth would be enough to offset the loss of the loans on the banks that we acquire, which meant we would try to state 9.3 billion. And in September quarter we actually increased to $9.360 billion again top of my head. And again this last quarter we’ve got to $9.244 billion.

So a little bit disappointing there but still - which in our opinion, was fantastic. We still think that we will have some runoff next probably around another $100 million and will probably –.

I think that's right. We've had basically for the quarter $274 million in loans that left us first Victoria and F&M. 47 million of that was First Victoria National Bank and 227 million approximately was F&M. There's probably some left to go on the F&M side.

I would be a little bit surprised if it was specific this much for the coming quarter but there is no guarantee. There are some loans there that we have targeted to may be move out. So that process is not over with yet..

Yes, I mean, especially you can even see when you compare our nonperforming last to this quarter and it was reduced by even 15 million to 16 million most of the loans came from the acquired banks.

And so that’s one of our primary focus on targeted loans to get out the ones that may not meet pricing or may not – right now not be the same credit metric..

Got you.

But you said you are in 2015 over the next four quarters, presumably the runoff would slow noticeably and you should overwhelm that with organic growth?.

Yeah. Absolutely. Yes, absolutely. Absolutely. The majority of it comes with the first six months to a year..

We agree with what you've just said if it doesn't turn out that way, then weren't just as surprised as you are..

All right. Thank you very much..

Our next question comes from Jennifer Demba from SunTrust Robinson Humphrey. Please go ahead with your question..

David, I have a question on energy losses for the industry. I'm wondering, is this a matter of just not if but when we will start to see credit downgrades for the energy companies after we see fourth-quarter and year-end financials? If -- assuming oil stays under, say, $50.

You see so many are closing, I'm going to be the first one to say that really we - we really don't know what the price of oil is going to be going forward or how long its going to be there. Our gut feeling is that, this is not necessarily an 80 situation but again oil at $100 of barrel we felt like that was a little higher to begin with.

We like to see oil maybe around $60 to $70 more. But having said all that, I've read a lot of articles and I've reasoned with lot of people say it, a lot of people say that that everything is great and we talked about all this before and nothing is going to happen. I just think that for us everyday situation is different.

I think that that's a little cavalier for us to say. We always -- when we do analysis, so we look at loans, and does it happen in the economy, how long it is going to effect it. Sometimes we see it that a lag period between six to nine months.

Now having said that, we lifted our oil credits and looking at it one by one oil and gas I think we so far we’ve only seen one loan. Doesn’t mean we won’t see more.

But we are certainly looking margin as we have on the loan which is to – what's led out, got less than where it was and again the customer was very helpful and brought in more properties and security.

So, I think if there is times like this, and days like this, I think we will see some repercussions, there is no pricing [indiscernible], you will people being laid off in the oil industry. So, I think you will see repercussions from this.

Having said that, historically I always tell to everybody that's been our company that you will like us in the good times but you will love us in the bad times. And so I think we are prepared for it. I think if that does happen, I think that we will take advantage of the situation but we will jump off something like that.

But I think it will have impact if you don't think this is what, I think you heard me in my comments you have a lot broader work force its more diverse, but to say that there is something not going to happen with the oil price if it stays down for a period of time that won't be the right way to look at it, I don’t think..

I might be able to help a little bit. Approximately 25% of our nonperforming assets at the end of the year were energy related credits. And of course we have no idea whether that percentage will hold through going forward or not it wouldn't surprise me if that percentage was an increase for.

But having said that, when we look at the credits have made up that 25% of the nonperforming assets, almost all of those had been identified by us and our due diligence as potential credit issues not all of them but almost all of them. So, to see these credits on the nonperforming asset list now is not a surprise to us..

But there is not that many of this..

But the total and just in round numbers was about 9.3 million which is about 25% of the MPAs at the end of the year..

And all of those rented by our due diligence - when we looked at the banks..

That's right. Almost of it were pre-identified. That’s correct..

How many loans is that $9 million?.

It looks like 8, 9, 10. 8, 9 to be exact..

Okay. Thank you Dave, I appreciate it..

Our next question comes from Brad Milsaps from Sandler O'Neill. Please go with your question..

Just curious, on the $520 million energy book, I know that F&M was maybe a bigger energy lender then you guys were.

Of the $520 million, can you give us a clue maybe on what percentage might already be marked, and how severe the marks might be to where you've got some embedded cushion there?.

Number one I think, it probably wasn't correct to say that F&M was [indiscernible]. We definitely added energy to the -- to our portfolio but I wouldn't say greater than what we had.

The second part of your question was what Brad?.

Yes, just to the extent that those loans would be marked that what percentage of them would be acquired and marked in that book to where you might have more cushion than, say, legacy prosperity energy loans?.

I don't know if I know the answer of what you’re asking?.

The total 3/10/30 mark on the books at the end of the year was $72 million. So, the most of it could be and if you do math there, it would be 19%..

I want to make sure I understand what Brad -.

14%. He was trying to get a handle on how many of these credits totaling 520 million are marked. Well we doubt it a total market at $72 million on the whole book of loans which we have. So that was all related to these energy credits and its not but a lot of it is and I don’t have that exact number it would be 14% -.

14% of what?.

Of the 520 million. The actual marks against those loans that's correct. It's probably under 10..

Okay. That's helpful. And then secondly, David, just to -- you mentioned the stock price and the release.

Just kind of curious what the pullback and where the valuation is now? How does it change, if any, your thinking about acquisitions, and how those pencil versus previously? And what are you seeing from potential targets in terms of how their expectations may or may not have changed with really the decline in all publicly traded Texas bank stocks?.

There's probably two answers to that number. Number one you have two different markets I think that you have banks that are publicly traded and banks that are not publicly traded. So, banks that are publicly traded I don’t know some know that it makes somewhat lot of difference because their stock is going down just like our stock is going down.

And if we look at bank its private, it probably does make a difference. But again the banks that are private are generally much smaller 500 million bigger dollar would be a bigger bank right there.

And I don’t know that it makes an impact as much because some of this maybe acquiring now to buy a $500 million or $1 million bank, that's a private company to do that on a cash basis. Overall, I think it changes valuations that doesn't change - I don't know if that necessarily changes to do deals or not do deals.

It maybe more impactful in my opinion for company's that might have been considering during IPO for example for their shareholders that they have one way to try to get a higher price. But somebody trying to doing us, taking our price where it is right now and their trading price you know they are looking for – they’re looking for the ways.

So I wouldn’t see that and it is holding us back..

Okay. Thank you..

Our next question comes from Brett Rabatin from Sterne Agee. Please go ahead with your question..

I wanted just to ask I guess first, just thinking about the Houston economy in particular, it seems like things are still holding up fairly well. I actually saw a pretty big office project this morning is going through.

But I was just curious if you guys are seeing anything in terms of pressure or anything on office space, or in particular in the central business district, where obviously energy players have a much bigger role in terms of leasing property?.

Brett at this point in time we really haven’t seen - I haven’t really seen any slow down, somebody else might jump in just a minute. On one hand I would rather - we still see projects that were slated to go.

I noticed I read in the Chronicle a couple of times where apartment projects that were slighted to go up, they are still going to go up within that I don't know if mixed or picked we will take a break a little bit and continue with their plans just to see how we do there.

As I told overall, we haven’t seen yet a lot of people feel that there is not going to be repercussions from that but - I think it will for people just to hold back a little bit. But again having said that, Texas in the prior five years from 2008 we feel 2013 was growing so much faster that most follow their states.

So moving at a healthy pace I'm not calling it healthy pace, may be better for us as long I think the pace that we were running at was far too high.

And in trying to hire people in some areas you couldn’t hire in terms of areas where oil and gas is similar the restaurants weren't open two times because they had dinner and lunch, because they wouldn't have enough time - wouldn't have enough people to serve you. And apartments were getting out of kilter.

So I think all in all nobody wants to see if things slow down but going at a healthy pace is much better in my opinion..

Okay.

And then I guess the other thing I was curious about was just given where bond yields are today in the market, what -- I guess, A, kind of what do you guys have in cash flow coming in the near-term? And then can it be -- how do you invest with prices where they are now in bonds going forward?.

It’s a big question. Fortunately in December we purchased - we always note that we did a lot of deposits spending into last quarter and those deposits turned week towards the year where the first [indiscernible]. And so we ended up purchasing $500 million or $600 million in December which pretty much to care a lot of the cash flow that came in.

This month we really haven’t purchased anything and primarily because the 10 year has gone down. But I think probably by the next month or so we’ll probably wait just a little bit to try to see if the 10 year goes still back. If that does what they said they were going to do, that should see the 10 year back up a little bit..

Okay. Thanks for the color..

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

I guess just in terms of all questions on organic growth, and I guess as we look into 2015 and the repercussions, as David talked about, from the lower energy sector, how concerned are you in terms of being able to sort of offset this -- the loss in the acquired portfolio with organic growth? Or what's the downside, I guess, to loan growth as we look into the year, if oil prices stay where they are today?.

Abraham this is David. It's so hard because we are still a loan committees right now and our loan committees are left until late in the evening and we are having higher - we are seeing more production more than we ever had. And having said that, we still take into consideration something.

So we are predicting for next year I think that’s where everybody is looking for. We think we will still - this maybe the unusual because a lot of people think there is going to be a slow down - your loans will go down but what we seen right now we are seeing - about an 8% loan growth – 8% to 10% organic loan growth.

But we’ll keep in mind, we certainly may still have got $100 million or so that we would loose at the banks that we acquired this prior year. So, we are doing out a number between 5% and 6% that's what we are looking at, when you taking the loans that we lost and then putting out organic growth back then..

No, that's very clear. Thank you very much. And then just in terms of one follow-up question on the topic of M&A.

Do you think oil prices, even from publicly traded banks have seen their stocks go down recently -- do you think they need to feel the pain before their willingness to merge with a buyer increases? And that could be more of a second half or even a 2016 event to pursue in the next three to six months?.

I would think that if there won't be trade bank, and you are merging with a bank like ours that most of us are pretty sophisticated and they will see that if the banks stocks go up, and they keep our bank stock because we’re trading stock, they'll do just as good with us as if they had stayed on. So, I don’t see that it’s something difficult.

Not that you are talking about bigger deals, you’re talking about smaller deals, that may be the some impact, if you're talking about $500 million deal or something like that, it's more on a cash basis.

But banks that are publicly traded I think it’s pretty easy for them to see that if our stock goes up, their stock would have gone up, our stocks would have gone up with even better. So, I don’t see that as an detriment, no..

And just in terms of – I know, it's never predictable but in terms of those larger deals that could move the needle for you guys, what's the likelihood of that based on the conversations that you are having, and the activity that you are seeing, just in terms of call volumes and such?.

We've seen some small deals, we have it done.

First of all to be frank, you know a couple of years ago from 10 million to 20 billion we put ourselves on the self employment side easily where we wouldn’t acquire any banks for a year making sure that our back rooms were in operation, any additional added growth from a regulatory environment just growing from over $10 billion.

There was a lot of things that we had to do. We had to increase our BSA, you had to put up your internal audits, you had to deal with Dodd-Frank asset sensitivities and all of that stuff. I feel we’ve done a very good job with that. I think now that we’re now ready to look at different deals.

And so, I think moving forward this year we will start looking at some deals. We have no guarantees but we’ll be out there trying to do get some deals. .

Got it. Thanks for taking my questions..

Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question..

Guys, you've talked about the accounting benefits, percent of benefits on the loan side for this quarter. On the funding side, though, there's a pretty big benefit on the fund deposits.

Can you talk about the lumpiness there compared to the last few quarters, and what we might expect going forward?.

Yeah, big picture, and this is not unusual for our bank. If you go back and look at every fourth quarter you see a big influx of deposits. And this year wasn't any different. As we said on prior quarters, we bank a lot of public NV such as school districts and I think we have counties and things of that nature. [indiscernible] say close to 500.

And so as I click in tax receipts, you see a surge of money come back in the fourth quarter. And then what happens is as the year goes on, they start utilizing the money, deposits go out. It’s really interesting when you look at our Bank and you look at an annualized basis at year end to year end.

Our overall growth generally comes out at 4% to 6% and that’s why when we see this lumpiness in the fourth quarter, we have to time discount that we are not truly growing it up to 16%..

I think you asked the question about the interest expense was down – was the acceleration of asset in – that we make adjustment was about $2 million..

I'm sorry Gary, was that the question?.

Yes. That's exactly what I was asking..

On the accounting side, there is all these acquisitions, we have to go through our fair value. Accounting and one more thing is interesting – its always been required to do on a CD book. And it was just in these two last acquisitions compared with last six we’ve done, lot bigger in terms of the CD books number one.

And just the composition of the CD book in the right side pay, you have upto 12 months to deal - to fill the cycle that we’re doing. So when you think about this, you can see the lumpiness in the fourth quarter that's reflective of catch up for the year.

But the bigger question is, what are we looking as we go forward and I think from these two deals I guess it’s a discount to the expense going forward, we’re talking about another million dollars from this other than credit over 2015..

David is it fair to say that we come up with numbers on fair value and then we go to outside source to confirm that, what the true value of the loan value and deposits are, and when we have our own accounts to look at it.

And I think - and there was some question whether we – those write on the CD were higher and money in our cost and its just a normal true up really at year..

I just think it's another process, these are some of the larger deals, you get it built up, you run it, and you step back and you test and file and its just took all of it to get it done..

Yes. Appreciate that. And then just quickly on the fee income lines, kind of flat sequentially, but some -- it looks like continued positive progress on the trust business, as you've kind of expanded that across your footprint.

Can you talk about success on the fee income initiatives post the acquisitions?.

If you just look at the numbers they probably speak by themselves. If you look two or three years ago, our other income fees have been compared to other banks is very, very low.

Going forward I think that, we have not only fee income from trust partners, we have fee income from growth ratio, fee income round what we call as sponsorship and ISO sponsorship for ATM. We have wealth management, mortgage banking what we did have.

I think that we added a lot of services then we didn’t these years ago with I think if you’re going to see those side is growing at very good pace I think..

The percentage of those fee income initiatives of the total percentage of revenue are still smaller. Actually when you are looking at what happened this quarter versus fourth quarter last year, you can see there has been tremendous growth in it relatively speaking and I think we will continue to see that going forward.

They’ve all got their feet on the ground and now they are all starting to move forward..

You know I really think I have been cautioned fee income goes up a large amount that it will continue going up the loss amount fee income, there is a lot of expense that goes with the fee income that you generate. I mean you have home mortgage lending; you have brokerage and really generate a lot of fees.

There is also a lot of expense that gets paid down on commissions and stuff too..

Are you saying that margins are not as good as they….

No it’s not. The margins aren’t quite as good as they are in the traditional banking. That’s the only thing I think some people miss sometimes..

Okay guys. Thank you..

Our next question comes from Matt Olney from Stephens. Please go ahead with your question..

Hey thanks, good morning. I wanted to ask about the outlook for the core margin. I believe last quarter you talked about the core margins depending upon future loan growth, and if you had seen the loan growth that could kind of stabilize.

Does that still hold true or with a flatter yield curve, lower reinvestment rates, are we going to see that core margin pale off throughout 2015?.

Well lot of questions inside that question. So lets kind of break that down a little bit. Yes, we did say you know we thought that the margin would be relatively stable on that any loan growth helps that naturally would give us positive buyer. So, I think that still holds true.

And then yes, you know it’s the rates the short term rates are coming up or I’ll say it differently you see that 10 new yields where it is today compared to where it was a few months ago, that would create a little bit more of a headwind, but again, I don’t think we are talking about a significant impact to that margin.

In other words, that you know clearly investing three four months ago at 220 and now we are going to reinvest at a particular number 190 as an example that would tend to create a little bit of headwind if you will on the margin. But again, I don’t think it would be significant as we look forward, it wouldn’t be a positive for the doubt..

Yeah I mean to be a headwind but you are not really [indiscernible] so where would the impact I mean you held that you could offset that could be – with the loan growth..

Yeah, so it’s all in. Now somebody asked a question earlier about that’s dealing with the tax rate portfolio we’ve always been opportunistic of receiving’s and we again we see as the 10 year as the example, so you can see that jumping around every two or three months.

So maybe if this thing spikes back up here you will see up jump in opportunistic and tried to soak up some of that future cash flow coming there..

Okay. Thank you..

Our next question comes from Jefferson Harralson from KBW..

I think my securities portfolio question was just answered. I'll go to my accretable yield question, like it seems to do every quarter.

But how much is still -- I'm looking at this chart, but how much of accretable yield is left to come through the spread income, if credit works out exactly like we think it is for the next couple of years? How much is ought to come through?.

Okay and so again when just looking at the chart if we can break it down overall total [indiscernible] that’s on page 14.

So the overall grants are – everything on the books as of [12,31] [ph] 161 million and then now we want to break that down and so specific to your question, of that 161 there is $89 million left over that’s their 310, 20 that’s the accretable yield we are talking about that will come in based on the cash flows from the loans and then going to another roughly $72 million from these old treaty marks.

Now we can’t sit here and say for all of $72 million from the old treaties would come back in income. That’s so far we have been very good at collecting those balances there is no guarantee, but if all goes well some of that will come back in income as we look forward.

So now it’s just a mathematical exercise right, you mean you’ve got the numbers and what do we assume on a quarterly basis and what are we going to assume comes to us a quarter basis. You can see that generally speaking this will probably expire from the first part of next year, first couple of quarters..

But you already said David maybe this is wrong when we said the 310 to 20 number, [indiscernible] the base that we call 91 sometimes.

Even when we look at it easily it has about a three year average life and so would you say just to help whether this is right or not could you ease the 89 million and say that it has a right two year average like still..

Two years, we didn’t give even two years for that cause I was looking for a 45 million in yield which is 10 million a quarter; I don’t think that’s right up. That’s why I am saying this will expire in the first or second quarter of next year..

Yes. Maybe a year and a half. Year and a half. And I think it would be a mistake to assume any of the 72 million I mean maybe we will or maybe we won’t..

Right.

So maybe you do -- you bring in a good portion of the $89 million over the next kind of three quarters, and then you just leave the $72 million alone and whatever comes in from that is gravy?.

I think probably it’s another four quarters and then you know I think it won’t be negative maybe too optimistic but I think there will be some recoveries but again, I don’t know how you would, I don’t know how you put that in your model, I mean the fact that you [indiscernible] 2 million I think would be a mistake to say that maybe you if you collect half or bit a less of even maybe more probable I think..

Right..

And picking on the economy..

Our Chief Lending Officer is sitting here and he’s optimistic about it. You know we have to put some, be pragmatic about it all..

Well, that's probably going to do it very well for me, thank you.

And now just -- is there a time when it's just time to stop buying bonds? I mean you guys are waiting on the sidelines now, but at some point, you'd say, okay, you've made a lot of money as rates have come down, by just continuing to program, even though it seemed like we were always at a bottom.

But is it -- I guess, when or is it -- are we now at the time where you'd say, okay, let's just shrink this portfolio now?.

Well you personally get to ask the question where do you put the money if you don’t put it in the bonds and so you know that outside of that is to put in the loans. So you guys are – our whole wish is that we could put you know more money to the loan side but again it doesn’t happen overnight.

And you know I’ve said this before where we have been with from the time we’ve started the bank we wouldn’t have the acquisitions but you know we like to see a loan to deposit ratio more like the 75% loan to deposit ratio and that would take care of a lot of those issues..

You know what’s interesting and this I’ll say this, this is probably unpopular I would say this that we still value core deposits.

I mean still at the end of the day that’s what drives the bank and so you would have to say if you want to shrink the bond portfolio I guess you are not putting into loans that would infer you have to shrink your funding base but we have core deposits and here’s what’s interesting if you go back and look at [12.31] [ph], that CD percentage of our total book is now again at 17%.

So you can see us working in these acquisitions and they are starting to become more and more like us, in terms of the percentage of CDs to total non-interest to total. So this is core deposit. So at the day of day, somewhere along the way this is values..

Well, I think it is, I mean, our cost of funds are probably less than 25 basis points [indiscernible] so yeah, when you have a core deposit, you can make money off of it whether you put it into loans of or for bonds..

So that’s about 20 basis points across the board..

Okay. All right. Thank you guys..

Thanks..

Our next question comes from Jon Arfstrom from RBC Capital Markets. Please go ahead with your question..

Dave Zalman, you talked about your loan committee meetings still starting early and going late.

Have you seen any changes in demand?.

You know, firstly I can’t – I’ve not seen any changes in demand. I’ve seen the loans committee become more thoughtful of bank.

I think that we want to put loans out so much that sometimes we would be more aggressive I think right now knowing within front of us, we’re really looking more and somebody really won’t say, the land and development loan and somebody that wanted to build an apartment complex or something like that.

I think, we’re seeing people being more thoughtful, but I’d to say, again, as to just right now the loan demand hasn’t been very good and we’re still producing lot of business..

I think that’s right so the demand has held steady and has been good..

Is it $292 million average per month..

That’s right..

So that’s a lot..

That’s right. But with all of its going in the energy sector it’s a little hard to believe that its going to stay like that same way. But we just don’t know. There’s so many factors to play and we hear one expert saying and I think the price of oil and gas is going to go up within 60 days and other say its five years before it happen.

So it’s all over the map..

I think I hate to use this term, but I mean, I guess yet to use the term cautiously optimistic. I think we are optimistic with the volume that we see and the forth at the same we have to be cautious and take into consideration where we're at and where we're at and where we may be going..

That's exactly right. I mean, we just try to look at each loan request on its fundamentals, and I think it is safe to say that you used the term thoughtful I think that's appropriate.

We're certainly trying to be thoughtful when it comes to the credit requests that are to energy companies, be they production or service we're looking at those credits closely. But there are a lot of companies out there that have good strong balance sheets that are in the energy business.

They can withstand the slow prices for an extended period if time. Some of it hedged, a lot of is hedged so you're not going to see may be negative results for them for one quarter to upto a year. So you just have to look at each one on its own and be careful..

I think more attention to than anything and we always have in our portfolio and I think that's why we did exceptionally good in the very tough times, but even more now as we're looking at credits and people that want to do banks and expand. We're trying to know with the people they're not overleveraged.

We're trying to know with people that if there is a downturn, but they have liquidity or other stuff, they can get their hands on liquidity withstand a downturn. And that's nearly our primary focus right now and trying to help our customers, not only who want to come in to us but our existing customers.

Our bank has been a lot different than a lot of banks. A lot of banks put on loans and they want those loans to -- wouldn't have to revolving on to credit, the perpetuity, they like that. We've always been different. Our customers that come in, we try to encourage the customers to be at some point in time in the [indiscernible] it's good.

They make their deposits with us [indiscernible] we still try to encourage that philosophy for our customers that who are -- that we're really not investing with it that we're lending to and that’s our philosophy.

I think that's what we tried and encouraged in the past and that's what we encourage going forward, I don't know if that helps or not [indiscernible].

[Operator Instructions] We do have a follow-up question from Jennifer Demba from SunTrust Robinson Humphrey..

Dave, a question on what is the acquisition pipeline right now? Is it fairly robust? Or how would you describe it at this point?.

I think about now that we have a couple of smaller banks come to us that's about $500 million in size. We haven't made the decision yes or no. We don't know that we're -- we may consider one and maybe not the other.

That we're trying to really look at maybe -- again, I'm not saying one of the other, we're trying to look at something that will be more meaningful that would really impact our earnings. And that's kind of work we'll be doing quarter-on-quarter this year..

Okay. Thanks..

[Operator Instructions] We do have an additional question from Peter Winter from BMO Capital Markets. Please go ahead with your question..

The -- just going back to the energy exposure, of the $100 million that is -- that you still have to run off from the acquired banks, how much of that is energy-related?.

Peter, I don't have the breakdown of that. I don't know that we have it in front of us. That maybe $500 million or so. In type of loans that we really are -- that we're not interested in is really step that are club credits more so and some of that may be and some of that may not be direct. But I don't have the exact number for you..

Do you know of the runoff this quarter from the two acquired banks how much is energy-related? And then secondly, of the exposure to energy, how much is from the acquired banks versus legacy is Prosperity?.

Probably have a better answer for you for the Barcelona I think, probably more like $100 million has been energy from the F&M group and the others. Do we have the breakdown? Well, we have the breakdown….

50% of the projection about [indiscernible].

We will be right back, $300 million for….

It has about too many….

It's close to 50/50.

What is Tim?.

Well, I think the question is how much of the energy credits had come from the two most recent acquisitions..

Very little..

First Vic..

That's the answer. So that leaves F&M, so you've got F&M on one side and then you've got what we received from the American State Bank and I'll continue to move forward with on that side and Coppermark. And I think it's close to 50/50 with American State Bank and Coppermark being about 50% and F&M being about 50%..

[indiscernible] have those numbers?.

You do think that's about right?.

On the production side you'd probably little over 50% from F&M. That's like 60%....

55%..

55%, it's not much..

But on the services side it would be significantly smaller. It's probably going to be probably 15%..

It's F&M?.

F&M..

And maybe another 5% to 8% out of First Vic..

Yes. So I would say really as of $300 I think what Peter is trying to get his views around here. If there's $300 million on the production side then we're saying 50% of that was from -- that its still 50% of F&M, so $150 million; and in Coppermark including Coppermark not just F&M..

Just F&M..

$150 million there..

[indiscernible].

Both numerator and the denominator were smaller, exactly..

And so then the $200 million that’s in service loans that maybe that really longer, 15% of that would be related to -- because we need F&M deal primarily. So probably you're talking about $30 million of the $200 million, so $170 million was ours basically.

Is that give you -- does that help, Peter?.

It does.

Just -- but basically of the total exposure, it's about 50/50 from acquisitions and then legacy prosperity? Just in terms of the total exposure?.

If you look at the total energy [indiscernible] and you break it down between producers and servicers. Back to them it's about 50% of the producers or more than 50%, and on the servicers F&M is about 15% and maybe another 5% to 8% out of First Vic..

I'm going to try to say it so that he quickly [indiscernible] $500 million in energy models around in numbers. $300 million of it was production loans and $200 of it was service loans. So out of the $300 million….

$320 million is production, $300 million in service..

So is it about -- all is just [indiscernible].

$320 million for lease.

Are you sure?.

Yeah. Okay, so saying $220 million is production loans..

Right..

And you're saying 50% of that is F&M..

50% to 55%..

50% to 55%, so I would say $100 million is probably still from F&M, and then for the service industry loan there's you said $300 million..

Yes..

And so 15% of that….

15% to 20%..

15%..

So what are the maths to add the total $520 million credits that are energy related or about $150 million of that is F&M?.

Yes. That's right..

Does that help, Peter?.

It does. And the American state? I'm good. I'll follow-up offline..

Well, on the legacy side, we didn't have much of our energy business, certainly, on the production side we didn't before American State Bank joined us. So really all of the production loans -- its safe to say that that almost all of the production loans that are not F&M came from American State Bank and Coppermark..

Got it. Okay..

And don't take away that we're saying that all $150 million of the credits from F&M on energy side are bad loans, because I'm not saying bad..

Right, right. So 90% of the total portfolio are [indiscernible] okay. Thanks very much..

Bye Peter..

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over for any closing remarks..

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

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines..