Charlotte Rasche - EVP and General Counsel David Zalman - Senior Chairman and CEO David Hollaway - CFO Tim Timanus - Chairman and COO.

Nick Grant - KBW Dave Rochester - Deutsche Bank Jennifer Demba - SunTrust Steve Moss - FBR Capital Markets & Co. Scott Valentin - Compass Point Peter Winter - Wedbush Securities Matt Olney - Stephens, Inc. Gary Tenner - DA Davidson.

Good day. And welcome to the Prosperity Bancshares Inc.'s Third Quarter 2016 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Charlotte Rasche. Ms. Rasche, please go ahead..

Thank you. Good morning ladies and gentlemen, and welcome to Prosperity Bancshares third quarter 2016 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 the call with a review of the highlights for the recent quarter.

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

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Alison. 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 for listening to our third quarter 2016 conference call. For the third quarter, we had impressive annualized returns on average tangible common equity of 16.79% and average assets returned of 1.27%.

Our earnings were $68.651 million for the third quarter of 2016 compared to $70.598 million for the same period in 2015. The loan discount increasing for the quarter ended September 30, 2016 was $7.620 million compared to $11.340 million for the same quarter of 2015, a decrease of $3.414 million.

Diluted earnings per share were $0.99 for the third quarter of 2016 compared to a $1.01 for the same period in 2015. As previously mentioned, loan discount accretion was $3.414 million, less for the reporting quarter compared to the third quarter of 2015.

Loans at September 30, 2000 were $9.548 billion, an increase of $343 million or 3.7% compared with $9.205 billion at September 30, 2015. Excluding the loans acquired in the Tradition Bank acquisition, loans increased $114 million or 1.25% compared with their level at September 30, 2015.

At September 30, 2016, oil and gas loans totaled $308 million or 3.2% of total loans compared with oil and gas loans of $405 million or 4.4% of total loans at September 30, 2015. The $96 million decrease represents a 23.7% decrease in oil and gas loans when compared to their level at September 30, 2015.

On a linked quarter basis oil and gas loans decreased to $19.4 million from $328 million or 3.4% of total loans at June 30, 2016. Our nonperforming assets at September 30, 2016 were $16,166,000 or 32 basis points of quarterly average earning assets compared to 52 million or 27 basis points of quarterly average earning assets at June 30, 2016.

Although nonperforming loans increased 7.5 million on a linked quarter basis. There was a $7 million reduction in early October. Tim will discuss this in more detail later in the call. Our nonperforming asset ratio is really one of the lowest in the industry and a solid asset quality.

A positive September 30, 2016 or 16,921,000,000 a decrease of $18.5 million when compared with 16,940,000,000 at September 30, 2015. Linked quarter deposits decreased 297 million are 1.7% from the 17.2 billion at June 30, 2016.

As mentioned in prior earnings call our deposits are the lowest for the year and the second and third quarters due to a seasonal decrease in deposit balances of the over 400 municipalities we do business with, as well as a decrease in the balances of our farm and ranch customers who are using their money to finish out their crops.

During recent quarters we have also noticed a reduction in deposit balances of both operators and royalty owners which we are attributing to -- of lower oil prices. In addition we made a decision to not bring in approximately $162 million in broker funds that were seen in previous acquisitions. 55 million of which occurred in the third quarter.

Higher costs CDs have also been reduced by approximately 160 million we're comparing their level at September 30, 2016 to September 30, 2015. At September 30, 2000 -- at September 30, 2016 less than 15% of our deposits are in certificates or other time deposits.

We have historically experienced a large increase in deposits in the fourth quarter of each year. With regard to acquisitions as we've indicated in prior quarters we continue to have active conversations with other bankers regarding the title acquisition opportunities.

We remain ready to be entered into a deal when it is right for all parties and is appropriately accretive to our existing shareholders. With the economy, the job creation in Texas has continued despite the challenges in the oil and gas industry.

The Department of Labor reported last week that Texas added 38,300 jobs in September and the Federal Reserve Bank of Dallas projected a 1.2% overall employment growth for Texas in 2016. Also the number of operating rigs grew to 553 last week from a low of 404 in May 2016. Oklahoma continues to diversify in aerospace, healthcare and other industries.

I will like to thank our whole team once again for a job well done. Thanks again for your support of our company. Let me turn over the discussion to David Hollaway, our Chief Financial Officer discuss some of the specific financial results we achieved..

Thank you, David. Net interest income before provision for credit losses from the three months ended September 30, 2016 was 154.1 million compared to 156.1 million for the three months ended September 30, 2015, a decrease of $2 million or 1.3%.

Excluding the purchase accounting adjustments, net interest income for the three months ended September 30th, 2016 was $146.9 million compared to $146.4 million for the same quarter last year, an increase of $500,000.

Also note that the fair value loan discount accretion totaled $7.6 million for the third quarter and looking ahead, we're projecting that that should run between $5 million to $7 million per quarter.

The net interest margin on a tax equivalent basis was 3.29% for the quarter ended September 30th, 2016 compared to 3.30% for the same period in 2015 and 3.37% for the quarter ended June 30th, 2016.

Excluding purchase accounting adjustments, the net interest margin on tax equivalent basis for the quarter ended September 30th, 2016 was 3.14% compared to 3.10% for the same period in 2015 and 3.19% for the quarter ended June 30th, 2016.

Note that the net premium amortization securities was $11.3 million this quarter compared to $10.4 million in the second quarter of 2016.

In the quarter, September was the highest month at $4.1 million and we believe based on the facts as of today, we think total net premium as amortization for the fourth quarter will be similar to the third quarter with October matching the September amount and then declining in November and December.

Non-interest income decreased $2.1 million to $29.7 million for the three months ended September 30th, 2016 compared to $31.8 million for the same period in 2015, an increase $1.2 million or 4.3% on a linked quarter basis.

Non-interest expense for the three months ended September 30th, 2016 was $79.5 million compared to $76.4 million for the same period in 2015, an increase of $3.1 million or 4% and up $241,000 on a linked quarter basis.

The efficiency ratio was 43.26% for the three months ended September 30th, 2016 compared with 40.17% for the same period last year and 42.46% for three months ended June 30th, 2016. The bond portfolio metrics at 930 showed the weighted average life of 3.7 years expected duration of 3.54 and projected annual cash flows of approximately $1.7 billion.

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

Tim?.

Thank you, Hollaway. To amplify what David Zalman has already said, let me repeat that our non-performing assets at quarter end September 30th, 2016 totaled $60.166 million or 63 basis points of loans and other real estate as compared to $52.130 million or 54 basis points in June 30th, 2016. This represents a 15% increase.

The September 30th, 2016 non-performing asset total was made up of $43.850 million in loans, $36,000 in repossessed assets, and $16.280 million in other real estate. Of the September 30th, 2016 non-performing asset total, $24.345 million are energy credits, or 40% of the total.

This is broken down between $16.616 million exploration and production credits and $7.729 million service company credits. As of today, $6.797 million or 11% of the September 30th, 2016 non-performing asset total has been liquidated or under contract for sale.

Actually all this amount has been sold and the net proceeds received by us except $470,000 that remain under contract and as we always say we can make no assurances that those under contract will close.

Net charge-offs for the three months ended September 30th, 2016 were $241,000 compared to net charge-offs of $5.888 million for three months ended September 30th, 2016. This represents a 96% decline.

$2 million was added to the allowance for credit losses during the quarter ended September 30th, 2016 compared to $6 million for the second quarter of 2016. The average monthly new loan production for the quarter ended September 30th, 2016 was $221 million compared to $230 million for the quarter ended June 30th, 2016.

Loans outstanding at September 30th, 2016 were $9.548 billion compared to $9.650 billion at June 30th, 2016. The September 30th, 2016 loan total is made up of 41% fixed rate loans, 36% floating rate loans, and 23% variable rate loans. These percentages are unchanged from September 30th, 2016. I'll now turn it over to Charlotte Rasche..

Thank you, Tim. At this time, we're prepared to answer your questions. Alison can you please assist us with questions..

Hey good morning guys..

Good morning..

Good morning..

Good morning..

You mentioned earlier about having a little more activity in your M&A discussions, and I was wondering if you mind discussing kind of the ideal profile for your targets at this point with a little additional stability in oil markets.

Your economy is doing pretty well, does it make more sense to look at distress transaction at this point?.

Nick, this is David Zalman. I think the answer to that is we would look at either of them. What we look for in U.S., I think the first part of your question is what's an ideal situation.

The type of partner we look at are banks that really -- are really traditional banks that have been around for a long time, that have good core deposits, that have good core customers, and just basically core. It doesn't mean that we wouldn’t look at some of the other tops of banks.

For the most part, again, we're looking at a partner that really is a lot like us and probably people that really want to stay onboard with us once they join the bank and so it maybe a little bit different than maybe just to go out and just do a bunch of M&A. We're just not really into doing something like that.

But again we're not opposed to looking at banks that might have some issues and we feel like we can -- I think our experiences shown in the past that we actually can go into banks no matter if they had some troubles or not, I think we can identify those issues and we can mark-to-market those.

So, that -- I guess the answer to that that doesn't scare us..

Okay, great. Thank you guys..

Thank you..

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

Hey, good morning guys..

Good morning..

Good morning..

Just wondering if you had an update on the loan pipeline this quarter and how that compare to how you're going in the last quarter.

It sounds like pay down activity remained elevated, are you thinking the trends to persist or are you seeing that slowdown a little bit this quarter?.

I think to answer that you have to look at -- really look at place during this most recent quarter. The month of July was a slow month for us. We booked about $179 million in loans in July and if you look at that in relation to the average monthly production for the second quarter this year was $230 million.

We were way below in the month of July what the average was for the second quarter. As you look at August and September, we picked up above what the average was for the second quarter. Once again that average for that second quarter was 230 million. In August, we booked 243 million and in September we booked 241 million.

So August and September exceeded the average for the second quarter, but July was down. So where are we now? So based on what we see, things seem to be relatively stable out there in the marketplace. It’s not dynamic in terms of its growth nor is it dynamic in terms of problems, so I think it's steady.

I would certainly hope we would improve on 221 million as an average, will we go back to where we were at the end of 2015.

I don’t know, I think a lot of that depends on the oil and gas industry and the commercial real estate industry, but I am optimistic that the fourth quarter will be better in terms of loan production than this third quarter, so I hope that it gave you some color on your question..

I don’t think it’s a little -- this is David Zalman. Everything that Tim has said is accurate. We’ve also experienced elevated pay downs probably just a like of a lot of our other peer groups have had paid out of the same time.

So I think that combined with the oil and gas industry where you look that we are $100 million down year-over-year $20 million of that.

So we at the beginning of the year, we projected that we would like to have 4% to 5% growth in organic loans and I think when I did the calculation you listen to anyone I talked to at the beginning of conference call I said we are about 323 million or 3.7% of year-to-year, but again if we pull out the traditions acquisition we are more like 100 or something million.

But again we add 100 million plus oil and gas comes down 100 million. I think, all-in-all, it’s not where we wanted to be, but again to where we were a year or two ago everybody thought that the -- Texas is going to follow-up into the Gulf of Mexico because of the oil and gas industry. I think, we have done pretty good.

Going forward, I think that things will get better, I think you're starting to see oil and gas coming back, there seems to be a good moral with everybody and I think you should start seeing hiring again in the fourth quarter, I think that oil and gas companies and actually will really pickup in the first quarter of 2017.

I think things are pretty good going forward, I think we’ve weathered some pretty difficult time still -- still showing growth even going some pretty difficult times and I think going forward that it certainly going to get better.

So I think you saw the job and the job numbers for September for Texas they were 38,000 people, which I thought was really good, so I'm kind of excited and I think we weathered the storm pretty good and I think going forward it looks better. Long answer but I wanted to give you some color..

I appreciate that. And then switching to the securities part, you have some one-offs this quarter, I know you guys are good at timing these things when comes to buying but just wondering if you think rates are in place now you are might take that deposit growth you are going to get in next quarter saw that in the securities growth.

Yes, probably our net interest income is down this quarter and part of that is probably due to some decisions normally our security portfolio they are such a large run off in the portfolio and we usually buy in advance so that and sometimes, we may be buying $600 million or $800 million bonds ahead of the time with step rose off.

We didn't leverage up the balance sheet this quarter that effect is probably Dave may comment more about $2 million or $3 million earnings right there combined with the improvisation on the portfolio probably affect us probably about %4 million.

I think, yes, I mean, we really thought that based everything interest rates would gone up they didn't go up, so probably wasn’t a good call, but I think going forward, we will be buying will probably go back to the way we used to do things leverage up a little bit more in buy in advance the way we used to do with the earnings.

Dave you want to jump in on this..

No, I think that’s spot on. Liquidity will start flowing in here in next few weeks; we will definitely try to jump ahead and get some.

Where you guys see investments rate these days -- purchase rates?.

Again it’s changed anywhere from 1.8% to 2% I think. It's down a little bit to where it was not that long ago, but again today, the tenor look I haven’t looked today, but I think you're going to -- if you're investing right now, I think we're looking at 1.8% to 2% probably. We found the sorting of the curve and that's just one of the challenges there.

I think our average life today probably in our whole portfolio is only probably about three and a half days, am I right on this one -- 37 in relations to -- real short portfolio..

All right. Great. Thanks for the color guys. Appreciate it..

Our next question will come from Jennifer Demba of SunTrust. Please go ahead..

Thank you. Good morning..

Good morning..

Good morning..

David, have you -- are you surprised we haven't seen more deals in Texas over the last few months since oil has gone up and people have more confidence in the economy in Texas and the energy portfolios?.

I would say it's not from a lack of seen deals because we really have seen quite a few deals. I don't know that I have the right number in front of me, but we've probably talked on four or five different deals and that sounds kind of crazy because you would think at one of those deals, we would been able to make it happen.

Again, there's probably still some talks going, but I don't want to leave the market to believe that there's something in the top that we're going to announce that we don't have that. But again we're talking to a number of people.

But some things just didn't fit, either it was maybe a publicly-traded company or something and the prices that are out there that they're getting right now. Sometimes they are trading 17 and 18 times earnings and we're trading at 13 and 14, that makes a difference.

I think there's different dynamics even in publically traded deals and in private deals at the same time, but still not been able to do it back. I think that we're one of the few banks that really can do it and have the ability to do it. So, I don't see that there won't be a deal, it's just a matter of time in my opinion..

Thank you..

Our next question will come from Steve Moss of FBR. Please go ahead..

Good morning..

Good morning..

Good morning..

I wanted to start with charge-offs and exceptionally well this quarter, but what are you thinking for credit quality and charge-offs going forward here?.

This is Tim. It was exceptionally low for the quarter. So, it's probably unrealistic to think that it's going to stay at $200,000 to $300,000. Having said that, we don't foresee a big tick-up.

I mean we can always be surprised just like anybody else, but we had significant charge-offs for us, the first quarter of this year in round numbers just under $12 million and then the second quarter net charge-offs of about $5.9 million rounded. I would guess maybe $2 million something like that. But that's just a guess.

But there's nothing terribly concerning that we're saying right now..

I would say this year we provisioned more and charged off more than we've done in history. But again, we went through some pretty difficult times. I think the amount that we provisioned is elevated compared to normal times the way we run our bank. But again I don't know that will change and tell what I think we still have to be cautious.

I mean somebody would a question why did you increase provision for loan losses by several dollars, are you charged off this quarter? And we only charged off $200,000 and I think it's because you have to be cautious and you have to look at that something that has changed your turnaround But at some point in time, I think the elevated amount we should get back to a more normalized rate maybe hopefully next year..

Okay.

And then just wondering where are new origination yields versus book yield for your loan portfolio there?.

I don't know that I have that available. I don't know the exchange loss..

Well, Dave correct me if I'm wrong, but before the accretion adjustment, I told you alone since about 4.82% -- 4.50% that's after the accretion. It was 4.82% before the accretion. Well, I can say unfortunately they were not getting 4.82% across the border on all the loans..

Okay..

The competition just won't allow it. Be that right or be that wrong. We're holding our own in terms of yields. I would say that only average of what we're booking is closer to 4% that it is 5%..

If you're just averaging it out, I'd just add, this is Dave Hollaway just adding a little color. I'd say anywhere from 4 and 4.75. I think that's right. It's closer to 4 than 5. Is it a little north of 4? Yes and maybe..

Okay, got you.

And then more broadly on the Houston economy, wondering you guys mentioned sometimes pickup, but what are you seeing in terms of commercial real estate, are you having an increased concerns or does that seem to have stabilized at this point?.

I think from commercial real estate there's a number of different types of commercial real estate. I think when you look at commercial real estate and retail, it is doing extremely good right now. It's really hot. Then I think there's a multi-family. The multi-family where a lot of people thought that there was just so much over building.

There has been lot of building, but again, we don't see rents really going down that much, I've got a couple of friends that even work with the bank and their kids graduated from college and trying to get apartment. So, inside the loop around the [Indiscernible] where our main office is -- used to be.

The rents aren’t coming down that much, but they are given sometimes two to three months of free rent, so I guess that adds into -- most of these people build these apartments, try to get a lease and then clip, so it's kind of play right there.

I think from the commercial real estate side, the office space, there's probably -- that's probably the most through the deal. Again I don't have the numbers in front of me, but I think it's about 85% occupancy rate.

But again I'll let via Exxon Mobil that built a huge campus for 10,000 people out in the Woodlands, that took some people out of the downtown area and then the oil and gas companies that were planning to build new buildings haven't. So, that's probably the part that hadn’t done quite as good.

I don't think it's gone to Helen and hand basket either and what's really funny is when I'm marketing and I talk to some of the investment firms, they think that are not all here in Houston, they don't think that that's all the negative that we have the space available in the commercial office space because they feel like we've missed out on some larger companies moving in because we've never really had enough office space for somebody big to take that.

But again it’s a spin, but I thought I throw it out, sounds good anyway.

Tim, do you have some comments?.

Well, I've got a few stats that maybe will help amplify that a little bit. Right now it appears that the office vacancy rate is about 20%, but that includes available sublease space. So when you take the sublease space that's not in default, its being -- the tenants are paying the rents. They just have it listed for being sublet.

If you take the sublease space out, I think it does get it closer to 15% vacancy rate. The good news is that the multi-family occupancy rates has actually got a little bit better, especially on the Class A. The occupancy rate right now is about 90% and it was looking like it was going to be closer to 80%. Class B has held up better throughout all this.

It's about 93% occupancy. As David mentioned, retail continues to be pretty decent. There's a 5% to 6% vacancy rate in retail. And single-family continues to look good. There's a four month inventory of houses across Houston. So, that's a pretty good statistic. And on the apartments and commercial real estate of that nature is really a mixture of things.

I mean we see one project, its maybe having a little difficulty in occupancy and they are having to either lower their rents or give a few three months free rent on the front end. Others are doing much better than that.

We're aware of one fairly new apartment project that recently hold in Houston area at $200,000 per unit, which is a price for Houston. So, it's a mixed bag so to speak. You have to look where in the city the projects are and what they are. But it appears to be actually getting a little better as supposed to be getting worse right now..

Great. Thank you very much..

Welcome..

Our next question will come from Scott Valentin of Compass Point. Please go ahead..

Thanks. Good morning everyone..

Good morning..

Just a quick question.

In terms of loan, you mentioned you picked up in the back half of the third quarter, but just geographically, is it really different from geography-to-geography, is Houston weak and Dallas-Fort Worth, San Antonio, Austin all strong and that kind of reflects the overall growth for bank?.

Well, it does vary. Obviously, West Texas probably lags, certain parts of South Texas lag and that's all directly related to the issues in the energy interest. Dallas continues to be strong. Houston continues to be decent. Austin continues to be strong. East Texas has never been what you called dynamic, but it's been stable.

Bryan College Station has been strong for that area. So, there is a mixture of performance that's related to geography, but we haven't seen any real changes in that regard really throughout this year so far..

I think Dallas and Oklahoma has been weaker too..

They have been..

I think you could always say I mean Dallas, Austin, San Antonio, maybe San Antonio as much as the Dallas, Austin, Central Texas are really vibrant; South Texas, West Texas, the Permian Basin and Oklahoma weaker.

But I think the thing we see is surprising is our Houston loan where they are not up as much as maybe Austin and Dallas and they are still about 2% inquiry. So that's pretty lead time..

Loan demand out of Houston is decent. Obviously, we like there to be better, but it's not bad. And we don't see any change in that. If anything we see it getting maybe a little bit better..

Okay. And then on [Indiscernible], it was headwind this quarter, again some one-off in the energy portfolio. We're hearing that terms are getting better for bank's perspective, better covenants, more hedging.

Just wondering you guys reengage on energy lending and start growing that book anytime soon, or are you waiting for maybe higher prices of oil and more stability?.

I guess we're mixed on it. I mean we're in the oil and gas business. I think the old-line customers affected from the service industry where you really can take a bunch -- lot of new people on. So, we’re going to stick with them.

We've always been with them and so I think they are in a little different position, they have all made it through the most part or service guys. The differences really had several the dollars in the checking accounts now they used a lot of it, and are may be asking more lines of credit now, but we think they have done good.

I think the production side is something that we got more through acquisitions that we made in probably Oklahoma and West Texas. I think that really strong, strong customers -- that some of the challenges we see and we'll just have to overcome sometimes is the revolving lines of credit.

Sometimes when we look at the revolving line of credit from a collateral standpoint, they look extremely good because the way you look at them, you give them about half price and half-life and from a collateral standpoint, they look good.

But we have to get it in our heads and get over this situation because when it comes back to paying the loan back, they don't necessarily have the money to pay the loan back, because they are taking that money to operate with.

So, we like historically to maybe if there is a field and somebody is going to develop, we would prefer to put the money out there, have the collateral and then it pays back over a certain period of time and not necessarily just an open revolving line.

So, I think we have to get our arms around, doing -- which customers we want to give this revolving line of credit in perpetuity and then the ones that we want to some kind of payback. But I guess the answer to the question is we're not looking to dive into it full-scale yet on the production side..

And I would add to what David has said that it's really difficult to look at the credits from a profit and loss statement perspective because everybody’s P&L numbers have suffered during this period of time. But it is possible to look at it from a balance sheet perspective and that's what we’re trying to do.

Most people's balance sheets have suffered, but you still have borrows out there, they have some reasonable level of the liquidity remaining, have true net worth remaining and when you add to that management that’s been in business for quite some time, that’s been through the cycles they really understands how it works those are the credits that we would hopefully have a chance to embrace and maybe expand a little bit.

So I think what David said is all completely accurate related to the big picture, but we’re not pulling away, but we are not jumping with both feet. We are trying to look at balance sheets and evaluate credit-by-credit where we think we can put on good core customer..

Right. I appreciate that color.

Just one final question, just on margin, I think about the future margin several puts and takes I guess, it sounds like there is still some pressure on loan yields with new yields coming in below where the portfolio is? And I guess, you’re going to increase the leverage to securities portfolio that pipe a little pressure on margin and that sound like the purchase accounting accretions is coming down as well so something margin will be coming down but maybe with securities portfolio growth and loan growth coming back, you can get net interest income to grow, is that a fair assessment?.

I think that is a good overview and the way think about it and also the other little variables is if we do get the loan growth and if its more than putting money back in securities that’s also a positive to a margin in addition to this net interest income..

Okay. Thanks very much..

Operator:.

.:.

Good morning.

Good morning..

Just back on M&A, I'm just wondering, are you having discussions with other banks outside of Texas and what markets are you also considering?.

Like we said in the past, our first and foremost will always be in Texas or Oklahoma because that’s where our franchises right now and it’s just -- its convenient and it saves money when you can do it, in the markets, so that's our first and primary market. Yes, we have talked to banks outside of Texas and Oklahoma and we will continue to do that.

I don’t think you will see us in California or New York City, but banks that are close to us or that we deal, we can put together and the kind of bank is.

To me the kind of bank is probably more important than the location is the kind of bank when I say is more Tradition bank with core customers, retail and commercial customers long time in core deposits that’s the kind of bank that we are looking at.

So, if we can find that kind of bank and not necessary a bank that we call build to sale that's little over overnight and a bunch of people from another bank put a bunch of loans on. I think it's more the color of bank is probably more important where it’s located really..

And what about size if you're looking outside of Texas and Oklahoma, does that play a role?.

For us size, again I don’t want to bow, don't take this wrong way or arrogant, but size doesn't bother me as much we starting off as a bank with $40 million and assets when we started, we bought a lot of banks that was big as we were, I mean it is not saying a lot when you buy a $40 million bank and 40 million.

Throughout our history, sometimes we would buy bank as large as us or half the size of us and we were able to deal with it. So that that doesn't necessarily scare us really I don’t think.

And just on a separate question and just on a expense I am just wondering what the outlook is on expense for the fourth quarter, am just wondering myself, do you have any flexibility on the expense if maybe the revenues come in a little later than maybe expected?.

This is Dave Hollaway. I don’t think in the fourth quarter I really think that you will see too much of the reduction expenses. I think the last two quarters we’ve seen as the least think I’ve got this right now the last two quarters , but certainly have somewhere between 79 and 80 you have seen...

Based on bonus….

You think that down in fourth quarter that's probably on the table..

So you are going to push them so hard Peter I'm not going to get any kind of bonus here..

We can't have that.

No, no..

Okay. Thanks very much..

Thanks..

Our next question will come from Matt Olney of Stephens, Inc. Please go ahead..

Hey, thanks. Good morning. Just wanted to follow-up on that last question on expenses, but take it beyond the fourth quarter.

As you guys looked into 2017, are there any larger any requirements that you guys are thinking about for over next year?.

When you say -- Matt, when you say requirements, are you talking like regulatory type thing or whether you--.

Well, yes, anything outside of regulation technology, anything that's going to be higher than it has been in the past?.

No, I think we’re constantly upgrading things. Stuff from a regulatory perspective, stuff we coming, it is going to have some additional class, but nothing outside.

I think just in the general way that you've seen us over the years grow I think we'll be able to cover those costs, but looks challenges in front of us, but I don't its anything outside per se..

No, I think more to the expense of that continue to see like to see monthly report spending money on hiring new people to make loans and deposits. It looks like we hire more and more people every month just for backing regulatory purposes. So, that's a disappointment.

On the other side, I don't see that really jumping out or increasing dramatically and really we already spend a lot of money on our technology, we're spending $500,000 to $600,000 every month on new technology. So, that's our biggest expense and I think that's where our focus will continue to be..

Okay. That's helpful.

And then David Zalman going back to the discussion about deposits, would you still expect that surge to happen in the fourth quarter of this year? And I just ask because your commentary about some of the pressure from some of your customers that are effected by oil and gas fee and some deposit outflows, just trying to understand how big of an impact that could be in the fourth quarter?.

When I look and see -- when I try to look at it and I try to break it down, there's no question we'll have a huge deposit growth in the fourth quarter. But it's still going to -- I think issue of public funds are probably want to look at it at the beginning of the year to now we're probably 400 million plus down.

The real question would be we let go about $160 million in broker funds. So, that will have an impact and I think there will be an impact from oil and gas customers and agricultural customers. I think that that could possibly have an impact -- I think have an impact I'm going to say anywhere from $100 million to $200 million.

But overall, I still think you'll see us grow deposits -- you're really making me step out here, but I'd say $400 million, $500 million Dave..

That's going to be an issue, because last year you were over $800 million. I don't think it will be $800 million this year..

No, because of the stuff. I would tell you as oil and gas does come back and people get back together even agricultural -- even cattle prices are down, probably half of where they were. So, I think people over time get more used to the expenses just like they did in the oil and gas business and they will start building balances again.

So, I think we'll have a big surge. It may not be as big as we have in the prior years..

Okay, that's helpful. Thank you..

[Operator Instructions] Our next question will come from Gary Tenner of DA Davidson. Please go ahead..

Thanks. Good morning. I had a follow-up on the loan growth and I appreciate the detail on the monthly loan production. I guess my question is this the full quarter loan production was call it $25 million to $30 million lighter than the June quarter.

But obviously period on loans came down quite a more, so payoffs for a greater headwinds here in the third quarter.

Can you talk about the payoffs and maybe give us a sense of whether what you're seeing is true line pay-downs versus refi and other bank and to the degree you're seeing loans move from Prosperity to other banks, is it he pricing, is it structure that's kind of causing that loss?.

I'll start out and then I'm sure David has some comments also. You're essentially correct and what you said. Just in round numbers as we've announced our production on the average for the three months was $221 million and our burn rate was about $255 million. That burn rate of $255 million was up from the second quarter burn rate of about $231 million.

So, I would suspect we're going to see a lower burn rate for the fourth quarter. A lot of the loans we see leave us are loans that we would like to have leave us and David has consistently mentioned that quarter-to-quarter. When banks join us, right or wrong way there some credit that we're just not comfortable with.

And while it's always an issue when an earning asset moves out, we feel like it's better for our shareholders in the long run that some of these do move out. So, that's always the driving force. We do not have many loans that leave us that are being refinanced by another lender, unless there are loans we want to see leave the bank.

So, that's not something historically that we have suffered from. Now, new loan production is very competitive and we lose loans all the time to banks that have more liberal underwriting et cetera. But existing loans to be paid off by another bank just on refinance. That normally doesn’t happen unless we have encouraged the credit to leave.

So, the burn rate hurt us this past quarter, my best guess is that burn rate will be less for the next quarter, maybe two quarters going forward and hopefully we'll see a little pick up in loans on the balance sheet..

Yes, I don't think we lose loans on a competitive basis at least existing customers if they try to go somewhere else and they are good, we're not going to lose them delusional right. We may not get a loan that we're competing against with somebody because their terms and conditions are so much less than us, that's a whole different story.

But for the most part, a lot of loans that went down are loans that we try to get out. We're not as big in the participation to share national credits and we raved to get out some of those credits and I don't think there's anything wrong with that.

I think there's one loan that was about $10 million oil and gas loan quite frankly that we -- it got classified by our internal loan review to a special mention or a substandard and so we wanted to put -- having just revolving line that we talked about previously.

We want to kind of put it back on some type of four, five year payback and before we know it, another bank took us out of that. So, I don't know that's necessarily bad, just a difference in philosophy really..

Okay. Thanks for that color. And just one follow-up really on the same topic.

The loan decline at Tradition was about $5 million this quarter, so as you talk about loan that you've acquired that you don't mind getting out of -- are you still seeing any sort of outside pressure at acquisitions you made prior to the Tradition deal that you're not reflecting on your press release any more?.

Tradition's -- their portfolio as very similar to ours. We don't see any big -- any run off in there really. I mean I think $5 million is really nothing when you change one bank to another bank extremely good.

The challenges are always when some of the larger banks that we thought where they had, they shared national credits to participation in club loan, club accounts, and stuff like that. I think there are still some of that out there.

I don't know if that's $100 million or $150 million, there's probably still that out there that we have marked that if we can get out, we probably will overtime..

I think that's right..

All right. Thanks guys..

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over at Ms. Charlotte Rasche, Executive Vice President and General Counsel for any closing remarks..

Thank you, Alison. Thank you ladies and gentlemen for taking 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 your lines..