Charlotte Rasche - General Counsel David Zalman - Senior Chairman, CEO Tim Timanus - Chairman, COO David Hollaway - CFO Eddie Safady - Vice Chairman, Area Chairman, Central Texas Mike Epps - SEVP, Financial Operations, Administration Merle Karnes - Chief Credit Officer.

Ken Zerbe - Morgan Stanley Dave Rochester - Deutsche Bank Jennifer Demba - SunTrust Robinson Humphrey John Moran - Macquarie Capital Brett Rabatin - Piper Jaffray Brad Milsaps - Sandler O'Neill Scott Valentin - FBR Capital Markets Steve Moss - Evercore ISI Ebrahim Poonawala - Merrill Lynch Gary Tenner - DA Davidson Jon Arfstrom - RBC Capital Markets.

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

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' second quarter 2015 earnings conference call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H.E.

Tim Timanus Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Eddie Safady, President; Randy Hester, Chief Lending Officer; Mike Epps, EVP for Financial Operations and Administration; and Merle Karnes, Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter.

He will be followed by David Hollaway, who will review some of our recent financial statistics, and Tim Timanus will discuss our lending activities, including asset quality. Finally, we will open the call for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Cassia. 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 would like to welcome and thank everyone joining us for our second quarter 2015 earnings announcement. For the three months ended June 30, 2015, our net income was $71,932,000 compared with $75,506,000 for the same period in 2014.

Our net income per diluted common share was $1.03 for the three months ending June 30, 2015 compared with $1.08 for the same period in 2014. Our net income was impacted by lower loan accretion income that obviously reduces as loans that were purchased in recent acquisitions pay off.

Our core earnings, which are earnings excluding the purchase accounting adjustments, continued to grow.

Net income for the quarter ended June 30, 2015, excluding the purchase accounting adjustments, was $63,800,000, an increase of $4,191,000, or 7% compared with $59,609,000 in net income excluding the purchase accounting adjustments for the quarter ending June 30, 2014.

Our asset quality continues to be one of the best in the industry with non-performing asset ratio of only 19 basis points or $35,119,000. Our allowance for loan losses was $80,972,000 as of June 30, 2015, representing a very healthy coverage ratio.

Loans at June 30, 2015 were $9,114,000,000, a decrease of $193 million or 2.1% compared with the $9.3 billion at June 30, 2014. Our linked quarter loans decreased to $51 million or 6 basis points from the $9,166,000,000 at March 31, 2015.

Excluding the loans acquired in the recent F&M acquisition and the new production at the acquired banking centers since that acquisition date, loans at June 30, 2015 increased $228 million or 2.9% compared with June 30, 2014 and increased $7.7 million or 1 basis point on a linked quarter basis.

Our deposits at June 30, 2015 were $17 billion, a decrease of $279 million or 1.6% compared with $17,281,000,000 at June 30, 2014. Our linked quarter deposits decreased $559 million or 3.2% from the $17,561,000,000 at March 31, 2015.

Excluding the deposits assumed in the recent F&M acquisition and new deposits generated at the acquired banking centers since the acquisition date, deposits at June 30, 2015 increased $262 million or 1.7% compared with June 30, 2014 and decreased $403 million or 2.5% on a linked quarter basis.

The drop in organic deposits in the second quarter is not unusual for us. We experienced similar situations in prior years. We have over 500 municipalities that do business with us, and at this time of the year they have less in their accounts until their tax dollars come in at the end of the year.

Further, our agricultural customers have most of their money tied up in bills until the harvest. We believe that our organic deposit growth will be positive for the year at about 4%.

As most of you are aware, we decide to take a self-imposed hiatus from acquiring banks until we make sure that we properly integrated all of the larger acquisitions that we made over the past several years. We are comfortable with where we are with the integrations and are again pursuing acquisitions.

Texas has been the top state in job creation for the past decade and continues to produce opportunities in growth and employment, despite the struggling oil and gas industry. Texas payroll has increased by 16,700 workers in June 2015 while unemployment fell to 4.2%.

Refining petrochemicals and service industries are offsetting job losses in the oil industry. Employment in the health services and education sectors has also been strong. Austin continues to boom with an annual job growth rate of 6.6%. Texas is now America's top technology exporter, surpassing long-time leader, California.

The Texas strategy of avoiding burdensome taxation and regulation continues to attract growing businesses and resulted in economic diversification. Again, we owe all of our success to our team of associates, past associates and Board members who have helped grow the company beyond our own expectations.

We would also like to thank all of our customers for their business and loyalty to the bank. Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer..

Thank you, David. Net interest income before provision for credit losses for the three months ended June 30, 2015 was $158.2 million compared to $174.1 million for the three months ended June 30, 2014. This change was primarily due to the decrease in loan discount accretion of $11.7 million.

The net interest margin on a tax equivalent basis was 3.39% for the quarter ended June 30, 2015 compared to 3.83% for the same period in 2014 and 3.57% for the quarter ended March 31, 2015.

Excluding the purchase accounting adjustments, net interest margin on tax approval basis for the quarter ended June 30, 2015 was 3.13% compared to 3.17% for the quarter ended March 31, 2015.

Non-interest income decreased $2.3 million to $30.3 million for three months ended June 30, 2015 compared to 32.6 for the same period in 2014 and on a linked quarter basis non-interest income increased $1.9 million.

Non-interest expense for three months ended June 30, 2015 was $79.7 million compared to $87.3 million for the same period of 2014, a decrease of $7.6 million and on a linked quarter basis non-interest expense increased $273,000.

The efficiency ratio was 42.4% for the three months ended June 30, 2015 compared to 42.9% for the same period last year and 41.8% for the three months ended March 31, 2015. As of June 30, 2015, the common equity Tier 1 capital ratio was 12.91% and the Tier 1 leverage capital ratio increased to 7.35%.

The bond portfolio metrics at 6/30 reflected weighted average life of 4.2 years and effective duration of 3.8 and projected annual cash flows were approximately $1.5 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality.

Tim?.

Thank you, Mr. Hollaway. Our non-performing assets at June 30, 2015 totaled $35,119,000 or 39 basis points of loans and other real estate which is basically equal to the March 31, 2015 total of $35,376,000 at 39 basis points.

The June 30, 2015, non-performing asset total was made up of $32,140,000 in loans, $173,000 in repossessed assets, and $2,806,000 in other real estate. As of today, $2,154,000 or 6% of the June 30, 2015 non-performing assets 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 June 30, 2015 were $491,000 compared to net charge offs of $1,049,000 for the quarter ended March 31, 2015, $500,000 was added to the allowance for credit losses during the quarter ended June 30, 2015, compared to $1,250,000 for the quarter ended March 31, 2015.

The average monthly new loan production for the quarter ended June 30, 2015 was $246 million compared to $216 million for the quarter ended March 31, 2015. This represents a 14% increase. Loans outstanding at June 30, 2015 were $9,114,000,000 compared to $9,166,000,000 at March 31, 2015.

The June 30, 2015 loan total is made up of 41% fixed rate loans, 36% floating rate loans and 23% variable rate loans. I will now turn it over to Charlotte, who will coordinate your questions.

Charlotte?.

Thank you, Tim. At this time we are prepared to answer your questions.

Cassia can you assist us with questions?.

Sure. Thanks. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Ken Zerbe of Morgan Stanley. Please go ahead. .

Great. Thank you. I guess first question is just in terms of the loan growth, I would say sort of a two part question.

One, if you can address the organic loan growth side, so the x-F&M, what you are seeing, why it's been fairly weak over the last quarter so, but also on F&M generally speaking, the decline if I look at over the last year, I think it’s something like 25% or 28%, down a fair bit again this quarter. How long does that run-off continue? Thanks..

Ken. This is David Zalman. I will take probably the second question first. On the F&M, I think when we first started posting their numbers in June, we said there would be about $400 million to $450 million in loans that probably would be outsourced or that we wouldn't have in the bank. And I think that we were pretty spot on.

If you looked at the time when we first announced the deal as to where we were with the first reporting date, there is a difference there too. But you have to remember too that when we do the fair value accounting, there was probably about $100 million that reduced and based on 2003 and the 10 accounting – 91, I’m sorry $91 million in 2003.

You had $100 million there. And then you had a lot of non-performing assets that were still on the non-performing asset list. Today probably over half or 50% to 60% of the loans on the non-performing list are from F&M, so as those get down those will still reduce too, hopefully they'll reduce.

So that said, I think that we are pretty stabilized right there. I think that we are inline in what we said. Loan growth, when you look at our loan growth even from the first half of the year, I would say that basically there is probably things that we think would happen. Let me just kind of give you some color.

Normally you would think with the oil and gas industry that Houston would have been probably the one that would have been mostly impacted. It was just to the contrary. Houston had the best production that we saw at around $74 million, an increase in business. So they did extremely well.

On the other hand, we have the West Texas market which would include Midland and Odessa and we lost probably through the first half, probably $16 million just in two credits and again one company was bought out by [National Oil] [ph] and of course, our customer did very well out of the deal.

Then another customer had an equipment company and they were bought out. So we lost business there at that point. Then we lost business in Oklahoma City. So the Houston market was great. Central Texas was okay. Dallas was okay. So in South Texas, we lost in the South Texas which is more in shale play too.

So because we are so diversified and throughout the State of Texas, I think we saw, you know, this different parts happening. When you go back to the – again, at the first of the year, we started off good. Oil prices dropped to $45. Everybody got psychologically impacted. Then it came back up, and then you have the weather.

But again, I am not going to make excuses. We are not happy where we are at with the loan growth. I will say this that we see a lot in our pipeline. I am excited about it. And we have been through this a lot of times and again there is a lot of -- the terms and conditions that we are looking at a lot of stuff sometimes.

We are not jumping into the market. At our state of the game, we have not seen all the different markets, sometimes I think that especially from a shareholder's perspective if you are not trading with stock on a day-to-day basis, sometimes you need to be cautious at different times in the market.

And preservation of capital and income is just as important to us as growth sometimes, but again, it's just a perspective that you have. So I hope that gave you some color..

No, it did. That was very helpful. I think it was last quarter you may have mentioned I believe [F&M] [ph] was 8% on an organic basis is kind of what you are targeting? Even that's excluding F&M.

Is that still -- do you still think that's a fair broad target to shoot for or just the environment might bring that down a little bit?.

I think basically, okay, excluding F&M was 8%. Right now I hate to make any promises because we didn't live up to what we said we were going to do this time. I would tell you that I don't know again trying to say there is going to be 8%, or even 5% would mean you know a 13% or 14% annualize in the second half. I don't know that that's realistic.

On the other hand again still may not believe it, but the proof will be in the pudding and how we look the next third and fourth quarter. But we are start shooting for the 5%..

Got it. Okay. Then just last question on expenses. It looks like very good expense control, mostly on salaries.

Was there anything unusual on that? I mean is the $80 million expense number is that a good go forward number?.

Hey, Ken. This is David Hollaway. Yes, we talked about this in the last quarter. And I think when we talked in detail, I was guiding. We talk about – and I think I said we guide to 82 to 84 and obviously that didn't hold when we got to this quarter. But I think we had two quarters we are running around $80 million.

That would tell me fundamentally we've got our hands around a number of things and can be running at full efficiency here. So I will try it again and I will say maybe the range going forward on a quarterly basis could be 80 to 82, instead of – we are at 82 to 84..

Perfect. All right. Thank you very much..

Your next question comes from Dave Rochester of Deutsche Bank. Please go ahead..

Good morning guys..

Good morning..

Just following up on that expense question. It looked like the other expense line was up a bit around 2 million.

What drove that increase and are you expecting that to drop back to the 1Q level?.

Yes. I mean that's one of those moving parts. That's what I was kind of alluding to before because in that other – gets to what you think – other things, it could be legal expenses, professional fees, fraud on losses of debit cards and on and on.

And I think really this quarter that run rate – again, my crystal ball doesn't tend to be the most pristine. But I would tell you this quarter number should be more reflective of what we are doing going forward. But, I would just say on an ongoing basis that's a better number.

But again, one quarter here and there, it could get up and down just because of the nature of those kinds of expenses. They'll go up and down..

Sure. Understood. Thanks.

And then can you just talk about the strength you saw in Houston you were talking about? What loan types you were seeing that strengthened? Does your outlook assume that that strength continues?.

This is David. I don't have think – I don't have a break down of just what category it is. I think it's probably all categories. I do think Houston will continue to grow. I think it's very dynamic what we are seeing in Houston today.

And again, if you read so many different journals that Texas [is seen as] [ph] the world when you are really here things are still really going very good. Housing probably has a two month or three month supply, very low housing inventory. House prices still continue to go up. People are spending money.

And even though we don't like the price, they will get the pump that's probably really pushing other people. And again, different parts in the state when you look at – Dallas is not nearly effective as much and Austin is a world all to its own. So it continues to grow and it's extremely bustling.

So I think overall you will still see growth in Houston, Dallas, Austin and Central Texas. I think you still probably will see a slowness probably naturally depending on oil prices, but we are not forecasting them to go up any time soon or great going. So I think you still see a more slower area in West Texas, South Texas and probably Oklahoma City.

Tim?.

That's all correct. I would clarify that the growth in all categories in the Houston market really does not include direct energy loans. There were very few if any direct energy loans made in the Houston market. It was all categories other than direct energy lending..

Got you. Understood. That makes sense. Appreciate the color.

And switching to your deposit growth guidance, you were just talking about, I just want to make sure, I heard you right that you are expecting 4% deposit growth for the year for 2015 including the run off that you have seen from F&M, or is it excluding that?.

No. Excluding F&M. Excluding it..

Got you. Perfect. And then just a little housekeeping.

Can you give us the amount of accretion that came from the 2003 loans this quarter?.

Yes. I mean, that break down was roughly 13.6 for the quarter and of that 10 million of it was related to what we call 91 so the balance would have been the 2003 items..

Great. All right. Thanks guys. I appreciate it..

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

Thank you. My question was just asked. Thanks..

Jennifer your line is open..

They just covered my questions. Thank you..

Oh okay, sure. The next question comes from John Moran of Macquarie Capital. Please go ahead..

Hey, good morning, guys..

Good morning..

I just want to circle back on the – a follow up on the purchase accounting accretion and the NII. I think last quarter you guys were saying total would run $16 million to $18 million or so based on what you were seeing per quarter over rest of 2015.

Is that still a good number going forward or does the 13.6 change the look there?.

This is a point that we do really want to be very clear on because you are right. We were going higher [indiscernible] but as you have seen on the loan side where we have this intense discussion about these loans reducing at the acquisitions. This is the other side of it. As these loans are giving out that's what -- one sense was pumping those numbers.

So absolutely this will slow down because from one perspective we have been cleaning out the portfolio. And I do want to be clear on this as we are certainly not guiding forward at that higher level. There is no way. There is 13.6 until this quarter.

But what I would tell you is we need to look forward and that number needs to come down to around $10 million to $10.5 million going forward. We are just not getting same amount of fair value discount accretion on these loans and a lot of them paid off and gone..

So you would expect it to hit the $10 million to $10.5 million kind of back half of this year or is that kind of into 2016 and we'll have kind of I guess a glide path down?.

I think again we don't have – crystal balls can only be so crystal. But I would tell you what we think today based on what we are seeing if that $10 million to $10.5 million, what's happening because of slow down, this is going to stand longer. So if you look at our press release I think in the 91, there is still roughly $68 million.

So $60 million is bad as a guide, if it's $10 million a quarter, we are talking seven quarters. I don't know if it would be linear but we should be in that ballpark as we go forward..

Got it. That's helpful. Thanks. And then maybe just a quick update on what you guys are seeing in the energy book, what that stands at today and I assume that SNC exam results are incorporated into Qs print here..

I will start off. And again the numbers that we give sometimes in March may be a little bit different than they are in June. And the reason being as we get into this and we get stratification even done closer.

I think last time in March, we gave you a number of about $212 million in E&P loans and in the service industry I think we gave you a number around $301 million. In that $301 million included businesses that do business with the oil industry or have over 30% of their income from the oil and gas industry.

So today we're going to break it out a little bit better for you, continue to break it out and refine it just a little bit better. Today we have $218 million in E&P loans, $215 million in the service industry. So that's $433 million right there.

We have another $69 million in what I refer to as businesses that deal with the oil industry that maybe have over 30% of their income from the oil industry. And I think that's a pretty conservative number at $69 million. I mean 30% is pretty conservative. So if you add all of them together you are $502 million.

If you want to look just at E&P and the service industry direct loans to the industry it's $433 million..

Okay.

And then I guess of the $433 million, how much of that is SNC and was the SNC examine – and guys you have results of that incorporated into Q numbers here right?.

Yes. Again, one of our primary goals when we do acquisitions is to try to get out of most of the shared national credits or a lot of the shared national credits and participation that we don't feel as comfortable with. And so I think we did go through the shared national credit exam. I don't think anything really was a whole lot different.

There is two loans. One was classified. We had it classified and reserved already. And then there was another small loan. Ed, you want to jump in to help me. Thanks..

Yes. There were two loans in the shared national credit exam that were oil and gas that were classified in the exam. We already have them on our watch list as classified credits. One of them was an acquired loan where we have about a 73% mark against that loan.

The other one is – well, we had one loan – second relationship we had two loans, one of which we had a mark on, the other of which we had a specific reserve against. The combination of the marking is specific reserve were about 35% of the loan now..

What do you think both total balances were on both loans? Wasn't very much..

$6 million..

Does that include the reserve we had on it or after the reserve? So take the reserve out..

That's on our books now..

So that's about 4 million.

So it’s about $4 million on the books..

$4 million left on the books..

Yes. After the margin. When he is talking about these two loans that's about $4 million..

The rest of the shared national credits were all passed..

Right. I would say that when we look in the service industry, we did downgrade one loan out of the West Texas market in the service industry and again it's not non-performing that we did downgrade it by one notch. That was a $30 million credit.

Is that right?.

Correct. .

Okay. Thank you very much for the color there. I really appreciate it..

The next question comes from Brett Rabatin of Piper Jaffray. Please go ahead..

Hey guys. Good morning..

Good morning..

I wanted to just follow up a little bit on that if you guys had any color around, you talked about the energy and what – you went through the SNC review.

How much of the portfolio at this point if you have it is classified or how do you guys kind of view your watch list in that area?.

I think we just went over that less than just a minute ago over that..

Well, I am curious on a percentage basis of the portfolio how much of it would be classified if you have that number..

On the shared national credits? All shared national credits; I think you just mentioned it wasn't $4 million. I think its $4 million..

So those are the only loans -- that's the only loans that are on criticized or classified out of the portfolio?.

This is Merle. Let me see if I can help you with some numbers. We have about $35 million in total non-performing assets. I think about $32 million to $33 million of that is non-performing loans. And of the non-performing loans oil and gas represents about $13 million..

That's correct. If you look at our $35 million in NPA, about $13 million of that are energy credits and that's broken down basically about $11 million in exploration and production credits and about $2 million in service company credits..

Would it be fair to say we did most – all of that from acquired banks..

Yes, and virtually all..

Absent that number relating to the $35 million non-performing assets we really don't have any significant additional dollars quote on the watch list out of the energy portfolio. To date most of those credits are performing..

Okay. That's what I was looking to, so I refer my confusion on that..

First, I didn't understand. It was a good question..

I just want to add another piece of perspective. Of that portion of the acquired oil and gas loans that are on the non-performing list, the vast majority of those have 2003 marks against them..

That's a good point too. Yes..

That's right. On average those marks are about 50% to 60%..

Overall?.

I am talking about overall..

In the total portfolio as it relates to oil and gas I don't have that number right off the top of my head but it would be similar..

Okay. And then I guess the other thing I was just curious about was just thinking about your past acquisitions and obviously loan growth is a bit of a struggle right now.

But I know you kind of have done some acquisitions that included some trust operations and maybe fee income generation potential and I was just curious if you guys can give an update on maybe if you can bolster the fee income growth side of the equation and any thoughts on some of those businesses on that side?.

Yes. This is Mike Epps. As you know with the ASB acquisition. We acquired the trust department. And we also acquired another piece of a trust department when we acquired First Victoria. Those two combined departments have done extremely well for us and we continue to grow.

If I look at the overall growth of our trust department since the combination of ASB and First Vic together on that. I think we are growing at about 5% to 6% rate and more in the process of expanding that department throughout the – our first print on a very select basis by doing that.

So that we can get to – it will be more on a -- throughout the – our whole banking system.

We also acquired ISO sponsorship program with ASB and that is -- where we sponsor various entities into the MasterCard/Visa network on an overall basis they have consistently provided us with revenue and where the growth of that has been kind of flat mainly because of consolidation in industry, it continues to still produce at levels that have been extremely good from an overall fee generation standpoint.

And also finally, the last two things as you know -- with ASB, we also have a small credit card department that we have continued to grow and expand throughout our footprint also. It has done well for us.

What else? Am I missing anything?.

To add maybe a little more direction and color to it, Mike, correct me if I am wrong. And these are just approximate numbers now. But for this current fiscal year, Mike, I would anticipate that the trust department would bring to the bottom line at least $2.5 million, maybe $3 million..

Yes, sir. .

Then credit card..

It would be a little over a million..

It would probably be about a million maybe a little over. ISO same thing, little over a million, about a million. Our home loan center which is our mortgage operation that sells product into the secondary market, little over a million there and then our brokerage 900,000 to 1 million. Those are just ballpark..

And that’s after tax..

Right. Who knows whether that will hold or not but that's kind of our guess right now..

Okay. Great. Appreciate the color..

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

Hey, good morning..

Good morning..

Dave or David, I just wanted to follow up on credit quickly on -- particularly as it relates to provision, maybe a little lower the last quarters kind of relative to your two or three before that.

I know organic growth been a little slower but kind of curious any thoughts around kind of your provisioning levels going forward? I mean you guys have probably best the credit metrics in the business, but just a little lower than kind of I had been looking for and kind of any thoughts going forward would be helpful..

Let me see here. We have $35 million in non-performing assets and we have 80 something million in provision. So that's maybe 2.5x or 3x. I guess you could have five or six. I don't know. I am being a little bit facetious. I think that we are well reserved of anything as I have mentioned before in prior conversations. It's hard for us.

We still have accountants and we have this methodological, it's something that's methodology that's we go by and we have to follow and even that sometimes we go around and around even with our accountant and stuff sometimes when we have too much in it. So we feel we are real good.

In fact, I think that again when you look at $35 million and you look at $80 million in provision, I mean I don't know that there is any other bank that has a deal like that..

Yes. Our net charge offs for the quarter average two basis points..

Yes. Absolutely. No, I mean you guys have some of the best in the business. Just it was much higher last year and there has really been no change. So it was just one to follow..

I think last year too, again, we made some bigger acquisitions and we had a lot of clean up to do and a lot of work. So we were using a lot of that too at the same time. I hope and I feel that we are toward the end of that..

Great. Thank you, guys..

The next question comes from Scott Valentin of FBR Capital Markets. Please go ahead..

Good morning, everyone. Thanks for taking my question. Just regard to -- I guess they call it core margin ex-accretable yield. Dave, I appreciate the color on the accretable yield, but it was down a little bit linked quarter.

I mean do you foresee barring any change in interest rates? Do you foresee that kind of continuing to grind lower or do you think it can hold out where it is?.

Yes. I think as we mentioned earlier we definitely want to look at that number. It was higher last quarter, was 13.6 this quarter. And that's what exactly what we were saying as we do need to look at that coming down. And we are saying between $10 million and $10.5 million per quarter..

Scott, maybe I was confused.

Were you comparing the core earnings to core earnings from quarter-to-quarter, is that what you are asking?.

Yes. I’m sorry. I was struggling with core NIM. I think the core NIM was down 3 basis points from the first quarter. Just wondering rates are going to go up or down.

But if we keep the current rate environment is that core NIM ex-accretable yield, is that core NIM kind of stay here or does it grind a little bit lower?.

Oh, okay. That makes more sense. I mean I think that's right. I think what we will say over the next few quarters is stable to a few basis point lower, just depends on what's going on with two things here. One, what are we doing growing our loan book? Here is what is interesting too.

We haven't covered this topic yet but if you look at where the ten year yield is these days, it is a lot better than where we are at six months ago or five months ago. Six months ago we were getting 180, 170, when we are having to go back in and buy.

If we are going forward to do that, we are actually in a better position because I think David can jump in here but I think 220, 225..

I think one less not long ago had 237, so I mean it's a lot better..

So that will help us as we move forward. I think it's interesting as we sit here today and it looks like things are becoming clearer in terms of how we can see things going forward. And I think from that aspect with the tender going up and stuff that we buy we are going to get a better yield on it..

Right..

Where we still forecast about a billion and a half to roll out over the next 12 months from the securities portfolio, right?.

Yes..

Okay. Thanks. It's helpful. And then quick housekeeping.

The merchant payment $1.5 million is that related to the ISO or is that something else?.

Mike?.

No. That was related to agreement with one of the credit card companies. It was not related to the ISO sponsorship..

I think we are talking about a million and a half. And I know that some people have talked about that but there is probably not a quarter that goes by that. We don't have a few million dollars in either gain or sale or loss on sale or something like that. I mean I don't think that's really too extraordinary really..

Okay. Fair enough. And then on Houston, I mean one of the concerns people have, I think [indiscernible] concern when talking to investors is the Houston office market and that concerns about they can see rates increasing and obviously pressure on rents and values.

Just wondering in terms of your Houston exposure, do you have break what percent of that is commercial real estate would be in office..

Do you have anything?.

I don't have a specific number for you, but I can tell you it's very, very little. We have a very, very little small exposure to office. We obviously some owner occupied office loans but in terms of non-owner occupied, it's not material..

And I think that's right. I mean I think that probably the office space may have maybe more of a harder time on the other end. We see some of the projects that might have been going on switching to probably multi-family or retail. So we are seeing a change in what people are really building now to..

Okay. And one more final question just on the M&A segment. Any preference on geography? I know you guys are obviously in Oklahoma now.

But how does the economy and impact of energy affect your decision on M&A in terms of geography?.

You are the first guy that asks the M&A question. Congratulations today. M&A, we are going to again, if we are in Oklahoma, we are in Texas, surrounding states like Louisiana and things that are contiguous to us, we are only before we went to Oklahoma ten miles from the Oklahoma board, we are probably only ten miles away from the Louisiana border.

We like Texas. We still think there is a preference here in Texas and if we can build in Oklahoma that would be preference too. I think that if you are going to see us there will be more opportunities.

I don't know that we'll land the well deals that we would like to deal but our goal is to increase our assets in M&A by at least 10% of our assets a year which would be around $2 billion. And so that might be made up of one or two acquisitions a year..

Okay. But, I guess I mean does the current environment -- you mentioned certain geographies in Texas. I think you mentioned Oklahoma City not doing as well because of energy and I think it was Odessa and Midland are not doing too well because of energy.

Those geographies off the table in terms of M&A or is there a price you guys would look at that and kind of look past the current quarter because of energy?.

I think quite to the contrary. It may provide opportunities for us when times are like this..

So in terms of people more willing to sell, but the environment I guess the outlook maybe potential quite a quality problems or credit deterioration, I wouldn't dissuade you from doing a deal in those weaker markets or more energy dependent markets?.

No. We grew from a few years ago from $10 billion to over $20 billion. And I would say that we did due diligence and we looked at almost 90% to 100% of the loans on the banks that we buy. We don't really send other people in there. We do it ourselves.

And I would tell you that out of everything that we looked at even going into this crisis situation -- I say crisis. Looking at oil and gas where it is today, I think we might have missed one loan in West Texas and it wasn't oil and gas loan. It was a loan on a campus on a nursing home. And at the time we looked at it. I think that it was good.

It's just one of the big contributors pulled out. And again, I don’t think so. I have confidence that we do know what we are looking at. I know a lot of times when we go into a bank and on our final days when we meet with management and we go over the loans, I wouldn't say it's a hostile environment, but there is a lot of controversy going on.

And so most of the time, it's a non-believing. But generally, I would tell you, I don't know that we have ever called it wrong really..

Okay. Thanks very much..

This is Ed. Reiterating that we send our own team and when we at the portfolio whether it was an energy issue or not. If we look at it. We go in and if it doesn't look right, we walk from the deal..

That's right. .

Appreciate the color. Thank you..

The next question comes from Steve Moss of Evercore ISI. Please go ahead..

Good morning..

Good morning..

I have guess follow up one question on the M&A topic here is kind of give color around the level of M&A discussions you are having today versus three or six months ago?.

I don't know that I understood the question, Steve..

Level of discussion, magnitude of the discussion..

Are you having more discussions?.

I wouldn't say more discussions. I think we have been pretty active in the last three to four months when we got back into it. So I think it's about normal..

Okay.

Then with regard to Brad's question about the loan loss provision, just wondering if you have thoughts about potential for credit migration from the energy portfolio and how that might impact provisioning going forward?.

As we mentioned earlier, the migration that we saw was one service industry loan that we went from. Again, it wasn't sub-standard. It was a $30 million credit. So far I mean based on what we see right now, we again knock on wood because I am not saying it will always be like this, but right now everything looks pretty good.

Even in the industry where it is today. I don't see a whole lot of changes, if that's -- I'm trying to come up with the answer..

Got it. Okay. Well, thank you very much..

[Operator Instructions] The next question comes from Ebrahim Poonawala of Merrill Lynch. Please go ahead..

All my questions were asked and answered. Thank you..

The next question comes from Gary Tenner of DA Davidson. Please go ahead..

Thanks. Good morning. Just a quick question on the loan production. Tim you ran through the monthly production numbers for second quarter versus first quarter.

Any way you could break those out through Texas versus Oklahoma production?.

I don't have that hard number, but I think it's safe to say that most of that was Texas..

Well, right, which I would have figured.

But as you kind of look at your friends in Oklahoma with having been there now for over a year through the First acquisition now about a year with F&M what's the kind of trend there in terms of production in the Oklahoma market?.

Well, just in terms of overall trend, Oklahoma City is rebounding a bit. And our people there are starting to bring in more new loans to look at. So it's not as strong as we would like. But it has turned around. And they are bringing more in. And that even holds true for Tulsa.

They have not turned the corner to the extent that Oklahoma City has, but we are starting to see some new loan production and it is typically the case for the last year Tulsa was focused on holding onto existing customers, as they should be. But we are starting to see a little turn around on that.

So neither one of the primary Oklahoma markets are where we want them to be right now, but they're improving and their production is improving. But, most of what you see is still coming from Texas..

Okay. Thanks very much..

The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead..

Good morning..

Good morning..

I have a follow up to a follow up to a follow up on M&A.

Just maybe David Zalman, I guess why do you think you haven't been able to announce a deal? Is it just -- you have been back in the market for a couple of quarters and it is just a pipeline issue, or is there something else that is going on that makes you nervous? Or is the pricing too high? What are the barriers that you are seeing?.

Again, I don't know that we have been out looking for two quarters, but I would say that at least in the last three to four months we really have gone out and pursuing it. And I think you will see something..

Okay. So it's not a question of if. It's when. And it is more of -- you are seeing some things that are attractive to you and it's your potential to be back on the trend..

Generally they don't happen. You are in this business. I mean even once you make first contact and start contacting people it's deep at best, I mean at best, once you even make a deal you are talking about romancing and kissing and all that stuff and that takes a while. Then you start due diligence and that takes a while.

And then once you do the due diligence – excuse me a minute. There is something on. Then you have due diligence. So once you have due diligence and you talk about the loans. And then after the loans everybody talks about the contracts that they want. Under best scenario, I think it takes three months once you even make the hard contact..

Okay. It's not really an issue of price or regulatory or anything like that. It's just the pipeline takes a while to adjust..

Stay tuned..

Good. And then you have kind of touched around this on Houston.

But are you essentially saying Houston growth potential hasn't changed at all at this point?.

I do think it's changed. I think it's better. I think it's good. I mean we are really seeing Houston really at least based on the last quarter it's been the shining star for us. It continues to grow and get better all the time for us..

Okay. All right. Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Charlotte Rasche for any closing remarks. Thank you..

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

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