Prosperity Bancshares Inc (PB) 2003 Q3 法說會逐字稿

My name is Chrissy. I will be the conference coordinator. (OPERATOR INSTRUCTIONS). Now I would like to turn the program over to one of your hosts today, Mr. Dan Rollins. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third-quarter 2003 earnings conference call. This call is also being broadcast live over the Internet at www.ProsperityBankTX.com, and will be available for replay at the same location for the next few weeks.

I am Dan Rollins, Senior Vice President of Prosperity Bancshares. And here with me today is David Zalman, President and Chief Executive Officer, H.E. Tim Timanus Jr., Executive Vice President and Chief Operating Officer, and David Hollaway, our Chief Financial Officer.

This morning, David Zalman will lead off with a review of our financial results for the third quarter 2003. He will also address some of the key factors impacting our performance along with the significant milestones of the quarter. He will be followed by David Hollaway, who will spend a few minutes reviewing some of our financial statistics. Tim Timanus will discuss our asset quality; and I will provide an update on the progress of our operational integration of our recently completed and pending acquisitions.

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, Chrissy. Or you may e-mail questions to contactus@ProsperityBankTX.com.

I assume you have all received a copy of our earnings announcement that we released earlier this morning. If not, please call Kara Smart (ph) at 713-693-9308, and she will fax a copy to you.

Before we begin, let me make our usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal security 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. On Forms 10-Q and 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

We are glad you've all decided to join us this morning; now let me turn our call over to Dave.

Thank you, Dan. I would like to start off by welcoming our newest partners in Dallas, Alfi Scherer, President and CEO, and his bank, First State Bank of North Texas. We announced the signing of a he definitive agreement on October the 6th to acquire First State Bank, and hope to have the deal close and operationally integrated before the end of the fourth quarter of 2003. First State has four banking offices in the Dallas area, with approximately 100 million in assets. Alfi Scherer has also been invited to join the board of Prosperity Banc. We would also like to again welcome D. K. (ph) and his team at MainBank (ph) in Dallas. We are scheduled to complete the acquisition of MainBancorp. and begin the operational integration of their bank within the next few weeks. MainBank also has four banking offices in the Dallas area, with approximately $178 million in assets.

Upon the confirmation of the MainBank and the First State Bank of North Texas transactions, Prosperity will have a total of 51 banking centers; 29 in the Houston in the CMSA, 11 in the Dallas area, and 11 in eight contiguous counties south and southwest of Houston. We are very proud of our progress in Dallas. During our conference call one year ago, we discussed our entry into the Dallas market. Today, just over one year later, we have a great team of bankers in Dallas, and will have grown to approximately 500 million in deposits when all announced deals have been completed.

The recognition we have received over the past few months has been very rewarding. We were flattered to have been recognized by the following business journals and newspapers this year -- Fortune magazine listed us in their annual ranking of America's 100 fastest-growing companies; U.S. Banker magazine listed us in their list of the top 100 publicly-traded mid-tier banks; Fortune's small-business magazine listed us in their annual ranking of America's 100 fastest-growing small companies; The American Banking Association's Banking Journal listed us as one of the best of the big banks -- the top 50 for 2003; and the Houston Chronicle again recognized us as one of the top 100 Houston companies.

Onto the numbers. The earnings per share for the third quarter was 34 cents per diluted share, and net income was $6,470,000, which represented a 14.5 percent increase over the same period last year. Net income for the nine months ended September 30, 2003 was $19,355,000, or $1.01 per diluted common share, an increase of $4,416,000 or 29.6 percent from the same period of 2002.

Our non-interest income was up 48.9 percent from the same quarter in 2002. At September 30, 2003, Prosperity showed growth in assets of 23 percent; growth in loans of 8.1 percent; and a 24.5 percent increase in deposits compared with their levels at September 30th, 2002.

With regard to the loans, we were very pleased that we were able to finish the quarter with over $700 million in loans. While our loans increased 8.1 percent or 52.5 million over last year's levels, it should be noted that we acquired 126 million in loans over the past twelve months as part of our acquisitions. Some quick arithmetic will tell you that we would be down $68 million if we had kept all of the loans we acquired. I am pleased to report today that we have been successful in outsourcing, losing, or liquidating the majority of loans we identified during our due diligence as not up to our credit standards. We continue to believe that industry-leading asset quality is one of our core strengths. Along this line, we witnessed our net charge-offs increased to $1,446,000 for nine months ending September 30, 2003 from $29,000 a year before. The large majority of all the charge-offs were from acquired loans.

Despite the fully expected loan decrease from the acquired banks, I am excited to note that our new loan production is at record levels with more lenders than ever; and Tim Timanus, our Chief Operating Officer, will go over that with you in just a moment.

With regard to deposits, as mentioned earlier, our deposit growth was 24.5 percent, including acquisitions. Our same-store 2003 annualized internal growth rate was 6 percent. It is also interesting to note that Prosperity Banc reported $374,877,000 in non-interest-bearing demand deposits at quarter end. When and maybe, I should say, if rates ever rise, these deposits will be a good source of increased earnings without additional interest cost.

Our non-performing assets continue to decline (ph) as we work through the loans that we have acquired over the past few years. Non-performing assets totaled $1,434,000 or 20 basis points for total loans at September 30th, 2003, compared with $2,564,000 or 38 basis points of loans, at December 31, 2002. Tim will also discuss this in more detail later.

Our net interest margin was impacted by new accounting rules, FASB 150, which Dave Holloway will go into in more detail in a minute. But more specifically, by increased amortization costs in our security portfolio, simply, the amount of premium paid for bonds in the investment portfolio that is paying off earlier than expected caused our amortization expense to increase faster than anticipated. For example, where we were amortizing $765,000 per month in February of '03, we recorded $1,271,000 in amortization expense in August, an increase of $506,000. The good news is we witnessed a decline in our amortization expense in September of $159,000 from the peak in August. And over the next couple of months, we should continue to see decreases in amortization expense if rates stay where they are or move up.

Our management team continues to be focused on building shareholder value. In fact, with a reported 32 percent insider ownership, the Prosperity Bancshares team is committed to building customer relationships with real bankers while building on the strengths of our organization.

Now let me turn the call over to David Hollaway, our Chief Financial Officer.

Thank you, David. Some additional highlights on the numbers. Average earning assets increased 3.5 percent linked quarter and 34.4 percent year-over-year. Our non-interest income increased sequentially -- 2.5 percent, not excluding gains on sales of assets this past quarter.

As David had mentioned, we do need to note that we adopted FAS 150, which simply means that the trust-preferred securities are now recognized as liabilities, and the expense is now recognized as interest expense instead of non-interest expense. This rule went into effect as of July 1st, 2003. And this will have an effect on our net interest margin and our non-interest expense totals, but it will not affect the net bottom-line.

On a linked quarter basis, operating expenses were down 7.4 percent. But to compare apples-to-apples, the third quarter number, if we include the trust preferred expense, as we historically reported, that would have been $10.4 million, which still would have been down on a linked quarter basis of 1.2 percent.

Our return on average assets and average equity for the quarter was 1.29 percent and 15.45 percent, respectively. The efficiency ratio on a linked quarter basis went from 50.7 percent to 50.3 percent. The net interest margin was 3.39 percent for the quarter, which includes the trust-preferred expense. Without the trust-preferred expense, the margin would have been 3.54 percent, down from 3.77 percent in the second quarter. And just to repeat again what David had mentioned earlier, one of the main reasons for the compression in the margin is the amortization expense in the bond portfolio. We included a chart in the press release highlighting the impact of this. It shows that during the first quarter, we were amortizing about 800,000 on average per month. And as rates fell, and paydowns quickened and amortization expense increased, you can see that we hit an all-time high of $1.27 million in amortization expenses in August. However, as rates have backed up, paydowns have slowed down, and will continue to slow. This will translate to a lower monthly amortization expense. And again, the chart illustrates this. As David mentioned, it shows September to be down roughly $150,000 from the August peak. Because there is a lag effect of when rates turn back up and the actual receipt of those payments and the related amortization expense associated with it, we should continue to see improvement in terms of our monthly amortization expense. What is hard to predict at this moment is exactly how much improvement we should see on a monthly basis. However, based on current rates, we will see improvement over the third-quarter amortization number of 3.5 million.

In summary, the third quarter was a challenge in terms of earnings. But the reduction in operating expenses, the increases in fee income, and the increase in earning assets helped offset the surge in amortization expense in this past quarter.

Tim Timanus will now provide some detail on asset quality.

Thank you, Dave. Non-performing assets at September 30th, '03 totaled $1,434,000, or 0.20 percent of loans, repossessions, and other real estate, compared to $2,242,000 or 0.32 percent at June 30th '03. This represents a 36 percent decline in non-performing assets. The September 30th, '03 total was comprised of $617,000 in loans; $52,000 in repossessed assets; and $765,000 in other real estate. One-hundred percent of the nonperforming assets were assets of banks acquired by Prosperity since the beginning of 2002.

Net charge-offs for the three months ended September 30th, 2003 were $287,000. Compared to $754,000 for the three months ended June 30th, '03, or 62 percent decline. With regard to the generation of new loans, the average monthly production for the quarter ended September 30th, '03 was $29,330,000, compared to $25,235,000 for the second quarter of 2003. This represents a 16 percent increase.

I will now turn it over to Dan Rollins (inaudible) presentation.

Thanks, Tim. Let me talk just a few minutes about the acquisition pipeline. As you guys all know, we have now announced four acquisitions this year on top of five last year. And we've still got two acquisitions that are pending closing before the end this year. Dallas has been a great market for us. The team we've in Dallas, I think, is coming together very well. And with 11 locations and almost 500 million in deposits when we put all this together, we are really excited about the possibilities in that market.

MainBank has got a great team. The way things are falling into place from a culture, from our training, from an operational standpoint have just really been going very well, and that speaks well to the group of folks they've on the ground. We would anticipate closing that transaction here probably within the next 30 days. And then we will begin our computer conversion and our integration very shortly thereafter.

Our most recent announcement had to do with the First State Bank of North Texas and Alfi Scherer's team. And what a great organization that is. His organization was ranked as the number one top-performing community bank by the Independent Banker's Association in Texas, for escort banks in the 75 to 150 million size in 2001; and has consistently been ranked as one of the top performers in the ABA Banking Journal for ROE for escort banks. They've got a great customer-focused team. Having visited with those folks, that's going to be a great fit for us. And because this is a bank to bank transaction, it actually takes shorter time for us to get this all put together. We would anticipate that we would complete this transaction and begin our operational integration of that organization before the end of this year.

On the customer front, on our own side, we continue to be pleased with our progress on product sales and product generation. Year-to-date, through nine months, just total product sales into our customer base is up about 15 percent. The highlights in there would be our Internet users. Our Internet customer base continues to grow. We are up 24 percent year-to-date on Internet users. And some of us would say that's not a fee generator -- how do we make any money on those Internet customers. But that is good to tie those customers in with us. And on the fee side, our Royal Checking product, that is one of the big earners in the bank, that product base is up 18 percent year-to-date so far from the beginning of the year.

At this time, Chrissy, I think we would like to open the call up to questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Joe Stieven of Stifel Nicolaus. Please go ahead.

Good morning, guys. First of all, good quarter. The one question I had -- you touched on it a little -- was the loan growth. And let me sort of summarize it this way. You said there was a certain number of loans that you guys had earmarked as sort of move out, etc. And when you go through everything, it's sort of hard for us to find out what your true internal (indiscernible) is looking like. Can you guys comment on that a little bit? That's it. Thank you. Good quarter.

Thanks for the question, Joe. Holloway is looking for some numbers over here.

I'll jump in and Dan and Dave probably want to fill in. But we do track that and kind of look at both what is going on on the acquired banks over the last 12, 15 months, and what is going on at our locations prior to 2002. The reality is -- and that's what we call same-store growth -- and the reality is, those locations are growing this year on an annualized basis of about 6 percent -- just a little over 6 percent.

The decrease, as David talked about, Joe, when we go into do do-diligence, as you've heard us talk about before, our normal routine is to go pretty deep into the loan portfolio and identify anything and everything that may not fit with the type of lending and the type of organization that we like to run. And we are willing to take the time necessary to clean some of that up. And you've seen that through the non-performing numbers. Non-performing numbers spiked up to 38 basis points -- I think was the peak on a basis point -- $3.5 plus million at one point. We're down now. And as Tim mentioned, I think we're heading in the right direction. 99.9 percent of that is coming out of these acquisitions. And we continue to see that we are kind of -- what I would think is kind of cleaning up the tail end of that process.

Okay. And when you are talking to your senior officers out in the field, are they telling you that from a macro-perspective that they expect these type of numbers? Are these numbers starting to improve because of the economy? Just sort of a bigger picture question, regarding the feel that you are hearing from your own officers out in the field?

Your question is towards -- as Tim was saying -- our loan pipeline in new loans is bigger than it has ever been. And your questioning kind of the why, why do the officers think that is?

Yes. Just a little bit. Yes.

Well you know, again, we can only be (indiscernible) and look at the numbers. And Joe, based on the numbers, it just seems like as far as new production, we are doing more than we ever have. Now, I don't know if that's just because we have more lenders out in the field, or we're getting more locations, or just what. But overall, I think there is somewhat of a lag effect sometimes. I mean, the economy does seem to be getting better right now. But you know, just a few months ago, a lot of people were saying -- were talking this inflation and the economy going backwards -- but a lot of times the type of people that we bank, we can see it a lot earlier. We are banking the people that are in manufacturing or the people that sell boxes and that kind of thing. So we kind of see when the economy is starting to pick up. I think basically what we see is that the economy is picking up some.

Let me just touch on your other issue. I realize and recognize from an analyst's standpoint how hard and frustrating it must be. Because when you look at our numbers, it is hard to really realize -- it is really hard to understand -- is the bank really growing in loans? Or is it not growing in loans? I also realize that you as analysts have to depend on the numbers that we are giving you. Are they correct or not correct? So, trying to look at us and growing at the same time, but still going back into the loan portfolio, and pulling out or getting rid of loans that we fully expected to are fully identified, is not something that you guys can get your arms around. The only way that you can probably do that is if we gave you our numbers after we did a do-diligence. And I don't think (indiscernible) we could do that. I do recognize and realize that you guys are having to depend on what we say and what we are telling you what our real loan growth is.

Asset strength -- asset quality -- is a core strength of our company. I think you'll continue to see us want to be very strong on asset quality.

That's great. Good quarter again, guys.

Our next question comes from Scott Alaniz of SAMCO Capital Markets. Please go ahead.

Good morning, gentlemen. You are doing better than the Cubs. A couple of questions -- first following up on Joe's question about the loans and so forth. When you shed these loans from the acquired banks, what's the market like for those types of loans, for the credits that you all would pass on? And has the market for those types of loans changed any in the last several months?

Dan may want to address this more because he's been working with some of the banks we're just acquiring right now. But just as an example, we saw, Dan, what about $30 million -- we're paying on something about $30 million of one loan pool to another company here in Texas. And we are getting a little over 80 cents on the dollar on that pool. We have another pool that's going out that we're looking at that may be 7 to $10 million. And that pool probably has credits that may have a bankruptcy involved in them. Or there is a bigger apartment project or something like that. And the price dropping on that is a lot less. It is anywhere from 60 to 75 cents on the dollar. So that is kind of what we are seeing out there in the market really.

And David was talking about acquisitions that we haven't closed yet, obviously. But as we've tried to put these things together, Scott, you've got two options. David is addressing the front side -- we can wholesale sell the loans, and what does that cost? And we can also just work with customers as things renew to, you know, find a way to put them into a direct SBA lender or some other asset-based lender or to some lender that maybe has less -- doesn't view credit quality in the same set of glasses that we read with.

And that's a hard thing for us to answer as to what's the market like out there. I can tell you that there continues to be, in my opinion, some irrational participants in some of the markets. So we've been able to move some of that stuff out that we would think would be potential problems.

I don't know, Dan, if it is really irrational. I think different companies take on different risk structures. If you look at our net interest margin, it's so razor thin that we don't really have a lot of room for the risk tolerance. You can look at another bank that may have 100 basis points better than us in net interest margin; their loan to deposit ratio is a lot greater, and they charge more, they take more risk. You know, I think it's just a question of what kind of bank you are really running -- or financial company that you're running, and that's just where we are at.

We have to stay focused on what we do best and who we are.

Right. The second question deals with the bond premium amortization. And I'm really glad that you included this table in the supplements. That's very helpful. I think this is a theoretical discussion question. As we look out over the next year or so under either a flat rate scenario or a rising rate scenario, clearly you're going to benefit from a decrease in bond premium amortization. But are there other factors that offset that? Maybe just talk a little bit about the potential financial impact.

Well, Scott, again, you always hit the nail right on ahead. Probably your real question is, how much in earnings will we improve via decreased earnings -- the amortization expense being lowered? You know, that's just such a hard number to give you. And we don't want to mislead somebody. But potentially, again, and this is not factual, so you know, we could possibly look at another, you know, Dave, 2 to $300,000 a month, potentially, in less interest expense if rates stay where they're at or go up.

What you're really saying is based on the current rate environment (indiscernible), and what we're seeing in the rates are trading (ph) on five-year on ten-year bond. That's kind of why we put the chart in. I just want to kind of fill in some of what David is saying. Again, obviously, there is going to be some good benefits that is going to fall to the bottom line. And kind of what I was trying to say -- maybe I can say it a different way -- if rates are trading kind of in the range where they were in the first quarter of this year, you would kind of want to assume, if everything else is being equal, that that amortization run should kind of mirror what was going on during that period of time. Now, having said that, things change. We are growing. In direct answer to your question, what are some of the negatives? With such huge cash flow, we're reinvesting this money at probably lower rates then what they were on the books for 15, 18 months ago. So, there will be some mitigating yield, if you will on the security portfolio against the gains that we recover from less amortization. But, you now, can we quantify that today and say what it's going to be for the next 12 to 18 months? That is an awfully hard call to make looking at them today.

Yes, I think so Dave. To the best of our knowledge, we feel, again, if rates stay where they are at or they go up, we should see a pretty good -- well, some significant uptick in the net interest margin, basically.

Our (indiscernible) cent crystal ball from the 99 cent store is not very clear on this subject.

Well, lastly, the data processing costs dropped $80,000 from last year. I guess you're at roughly $450,000 a quarter, despite the increased size of the Company. Could you talk a little bit about what your outlook is for that expense line?

It also dropped 200,000 from last quarter. Quarter-over-quarter on a linked quarter basis, it went from 660 to 453.

Yes, Scott, that will continue to improve because kind of as we've talked about over the last few quarters, we did go in-house in converting our data processing back in the mid-July -- was it Dan? July 11 I think it was. And so, that was probably mid-quarter. So we will definitely see some additional savings there when we roll through this next quarter, comparing fourth quarter to third quarter.

I didn't talk about our conversion again, Scott. But we continue to kind of smooth out the rough spots along the way, post that conversion. We are pleased with the technology and the software and the hardware that we have in place. There are some really nice features in that product that's going to allow us to do even more than we're doing today from a customer standpoint. And you're obviously focused on what is happening to the bottom line, which is also a benefit to us.

And what's nice about being in-house like this at this point is scalability. As Dan had mentioned, there are two more banks coming online in the fourth quarter. And in our past life, before going in-house, there would have been incremental expense associated with putting those banks on our system. Today, we don't need to take on any additional expense to be able to process the volumes of these two banks.

Terrific. Thank you, gentleman.

Thank you, Scott.

Our next question comes from Carl Dorf (ph) of Dorf Asset Management. Please go ahead.

Good morning. Staying with the securities, what I was wondering is the average maturity on your security portfolio, and a potential offset in either realized or unrealized potential security losses in a raising interest rate environment. Could you touch on that?

Carl, I don't know if I really understood the question. I guess basically, you are just asking probably two questions -- one, what is our average life? And two, what happens if interest rates go up, I guess.

Average life and effective duration I think was one. And then the (indiscernible) question is, what's happening to the premium -- to the unrealized gain in the portfolio today that's a million something dollars in assets. And I think your question, Carl, was what happens to that in a rising rate environment?

How much of that -- in other words, are you carrying at held for sale, which would have to be reflected, you know, immediately? How are you breaking it out? And what is the average maturity overall across the board?

The average life that we have right now is 4.15 years. The effective duration that we have as of September 30th, 2003, is 3.14 years. And as mentioned earlier, as interest rates go up, our model shows that our earnings should increase. On the other hand, there is no question where we had -- probably a $20 million in gain in our total portfolio AFS and HTM (ph) a few months ago. You will see that as interest rates go up, decrease. So, it's kind of a two-edged sword. I mean, our earnings should increase if interest rates go up. On the other hand, the real gain that you had or the unrealized gain that we had will go the other way, and probably even show up as a larger negative number depending on how high interest rates go.

And Carl, in fact, most of our portfolio is in (ph) held (ph) in maturity, meaning that the impact on equity, either from a gain or loss perspective, hasn't been as significant as you might have thought based on $1 billion portfolio. The majority of it is in (ph) held in maturity and doesn't get marked-to-market.

When you played with this portfolio, what kind of an average -- an increase in interest rates -- would you need to before that gain would swing into the negative territory?

Carl, you are so tough. You know, I haven't played with that to see when it will go negative. As of today, even with the increases that we've had, we are still positive probably about $8 million or so but -- on total portfolio. But again, I think, if interest go up 200 basis points, it's definitely going to swing negative. A hundred, we're probably somewhere neutral; 200, you're negative; and 300, you're going to probably get pretty negative; it could be pretty substantial, on the overall portfolio. Now, as Dave mentioned earlier, most of you guys don't see it because the majority of our portfolio is in held to maturity. So, the AFS won't be impacted that dramatically.

Thank you, guys.

(OPERATOR INSTRUCTIONS). Our next question comes from Andy Borrmann of SunTrust Robinson. Please go ahead.

Hi. This is Jennifer Demba. I'm sorry if you've already covered part of this, but, I jumped on late. David Zalman, can you kind of comment on what you plan in merger activity over the next maybe one to two years? You've done a lot of mergers over the last year and half. Do you expect that pace to continue? What do you see in the M&A environment?

Jennifer, you watched us for probably the last couple of years. And as Dan said, we did, what, five transactions last year. We have four on the table this year. You know, it's a big part of our model. Our model is really one of M&A and the other part of it is internal growth. And so to answer your question more directly, I see us going forward and doing more acquisitions. You know, when we jumped into the Dallas market last year, we bought our first bank -- was Bank of the Southwest; it was about $100 million in size. I think there might have been some skepticism by management at that point saying, well, you're just going to buy $100 million bank, and then you're going to just leave. And I said, no, we will commit that within a three-year period, we will be at least $500 million in size. Needless to say, within one year, we became $500 million in size. And so, even when we did our initial public offering in 1998, some of the people that were buying our stock -- they said well, how big will you be? And I said well, we're about 300 million at the time; and I said well, in five years, we will be at least a billion. So in five years, were 2 billion. So it seems likely we're doubling what our projections are. Going forward, we are, you know, we are going to continue to expand from a predominantly -- primarily we are looking at the Dallas market. But I would also have to say that, you know, we're looking at all opportunities. And there may even be bigger transactions in the works at some point in time. We might want to see a bigger transaction than just maybe a $100 million transaction.

How big a deal would you potentially do, David?

You know, the biggest deal that we've ever done really was when we were about 600 million or $700 million in size. We did a merger, an acquisition with Heritage Bank (indiscernible) Commercial Bancshares. They were about our size at 600 million. So, we're pretty comparable. I don't think we could do an acquisition bigger than us, let me say that. But I think if there's a bank that's out $2 billion in size, I think we could handle that.

We've a great team, Jennifer. You've watched us in the past. This is Dan. Working through the acquisitions, the integration that we do, the culture, the computer system, the training, the rest of the pieces of that puzzle that we continue to play with. My answer is, you know, we're opportunistic. So, where there's opportunities, we want to look at those opportunities. It would certainly be nice if somebody handed us a 5 6, $700 million bank somewhere that would be a great fit for us. As you well know, those are few and far between. So you kind of take the opportunity when you get an opportunity. I talked a little bit earlier -- I don't know if you were on -- about Dallas. And we just continue to be very pleased with what we've been able to do in Dallas. Our Dallas team -- the team of bankers that are up there -- are doing a great job with the banks that are closing in this quarter and coming on board with us -- what a great group of folks that will be. And we continue to believe there's further opportunity in that market and other markets here in Texas.

Are you seeing a larger pool of willing buyers, now, David, given the rate environment is so challenging? Sellers, I'm sorry.

Yes. You confused me just a little bit. Yes, sellers, that's true. I think the sellers, it has picked up. I think the challenge with the net interest margins and just the change in accounting laws and just the economy -- the regulatory environment -- we're starting to see the smaller banks really starting to move more than they had been, really.

Thanks.

You're welcome. Thank you, Jennifer.

Our next question comes from Lee Calpo (ph) of Acadia Research. Please go ahead.

Jennifer took care of my first question, so if I could ask the second one. At year-end, you're at least have an even nicer footprint than you do now with the 11 locations in Dallas, 29 in Houston and 11 in other areas. I'm wondering, for the first part of the question, if you think you can leverage it to grow loans faster next year than you did this year if the current economic conditions persist. And number two, are you excited about any areas of your footprint more so than others in terms of loan growth in 2004?

The second part was, are we excited about what to the footprint?

Any particular area -- Dallas, vis-a-vis Houston, vis-a-vis the other locations in terms of loan growth faster than others in 2004?

Let me talk about Dallas just a minute. This is Dan. From a Dallas standpoint, again, the team we have in Dallas is young and new to us. And quite frankly, two of the five acquisitions up there aren't really even along with us for the ride yet. But looking at the group that's up there from a loan production side, I think there is great opportunities for us in the Dallas market next year. And we would expect that, in the Dallas market particularly, with an increased number of lenders and more locations, we will be able to do and generate more loans in the Dallas market in the current environment. Our team of lenders continues to be focused. I think we would expect that the loan volume and the production numbers that Tim talked about earlier would continue to rise bank-wide. But certainly, the opportunity for us is in Dallas. From a footprint standpoint, I think the question was, are we focused on Dallas for footprint expansion or anywhere else? And my answer, David -- you can jump in here -- would be, we are an opportunistic buyer. And as an opportunity presents itself, if it presents itself in the Dallas market, that's a good thing for us. If it were to present itself somewhere else in the state of Texas that made good sense for us, I think we would want to look at that also. The potential number of sellers in Dallas is just so great, that's where we've been able to do the best job.

I agree with everything you're saying, Dan. Our focus is primarily in the metropolitan market in Houston and Dallas. But again, if an opportunity arose in San Antonio, for example, or Austin or Corpus (ph), we would definitely be willing to go to those markets as well.

Okay. Quickly then, to clarify two. The first part of my question -- with the more attractive footprint that you're going to have, entering '04 in more areas, do you think it is going to be easier for you to leverage your loan growth as a whole throughout the entire franchise to try to change the composition a little bit more in favor of loans as we go into hopefully rising rates at some point, vis-a-vis securities?

The answer to that is, hopefully, yes. We have approximately 60 lenders right now. Obviously, with each acquisition we add additional lenders. We've had a concentrated focus in terms of sales effort, calls, marketing, etc. over the past year. And we anticipate continuing that. So we are very hopeful that our loan production will increase. Obviously, the economy has a lot to do with that. But as David Zalman said earlier, our sense of it is that at worst, the economy is even right now. And actually we sense that it is improving in our areas. So, if that holds true for the next year or so, we are optimistic about loan growth.

My overall viewpoint is -- and again, I don't have factual numbers for you -- but as you become larger and you have advertising campaigns, and you start advertising campaigns in Dallas and throughout the state, and in state publication, you just become more visible, and the opportunities really arise from probably some larger customers that we didn't have before that are willing to do some business with us. And so, the answer that I have to that question is yes, as you do become larger, you become more visible throughout the state; you do get more attention and you do get more opportunities.

Great. Thanks for your answer. Good job.

(OPERATOR INSTRUCTIONS). Gentlemen, it appears we have no further questions.

Thank you, Chrissy. Thank you, everyone for participating. We certainly appreciate all of your interest in our company. We look forward to talking to everyone again soon. Thank you. Good bye.

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