Prosperity Bancshares Inc (PB) 2004 Q1 法說會逐字稿

Good day. All sites are now on the line in a listen-only mode. I would now like to turn the call over to your speaker, Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning ladies and gentlemen. Welcome to Prosperity Bancshares first quarter, 2004 earnings conference call. This call is also been broadcast live over the Internet at www.ProsperityBank tx.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. 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 first three months of 2004. He'll be followed by David Hollaway, who will spend a few minutes reviewing some of our financial statistics. Tim Timanus will discuss our lending activities, including asset. And I will provide an update on our progress in the Dallas area with our recently-completed acquisitions. Finally, we'll 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, Janet. Or you may e-mail questions to InvestorRelations@ProsperityBanktx.com. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Cara Smart (ph) at 713-693-9308 and she will fax 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 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. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now, let me turn our call over to David.

Thank you, Dan. I would like to welcome and thank everyone that is listening and participating in our first-quarter conference call. I am very pleased to report that the first quarter of 2004 was another record quarter for our company.

High points of the quarter included record earnings. We earned $8,063,000 for the first quarter, compared to $6,389,000 in the first quarter of 2003, an increase of 26 percent. Our diluted earnings per share for the first three months of 2004 was 38 cents, compared to 33 cents for the same period in 2003, an increase of 15 percent. Our return on average common equity was 14.44 percent for the quarter. And our return on average assets for the quarter was 1.33 percent.

We have experienced much growth comparing this quarter to the same quarter last year. As of March 31st, 2004, are assets grew by 30 percent, our loans grew by 17 percent, and our deposits grew by 29 percent, when you compared with their levels at March 31st, 2003. We are very proud of our first-quarter performance and our ability to continue to grow and beat consensus estimates as well as our own estimates, especially in a time when a lot of other financial companies are finding it difficult to meet their growth objectives with the current low rate environment.

On asset quality, on March 31st, 2004 we reported nonperforming assets of $610,000, compared to $3,459,000 as of March 31st 2003. The continuing decline in nonperforming asset reflects our commitment to maintain a pristine asset quality we are known for.

We are focusing on internal growth this year with 51 locations, including 29 in the Houston area and 11 in the Dallas area. And with over 60 experienced lenders who serve as real bankers, we are well positioned to serve the two largest market in Texas. We recently introduced our treasury management product, which provided state-of-the-art cash management services, including balance and transaction reporting, electronic funds transfer, check imaging, electronic statements, and more through the convenience of the Internet.

With regard to acquisitions, I know it is somewhat unusual for us not to have announced an acquisition for the first quarter. We will, however, continue to look for acquisitions opportunities while our business model incorporates the acquisition strategy as a value added aspect which produces a much more rapid return to shareholders than the branching model. We realize there's more of a risk element to acquisitions. The later realization is hopefully mitigated by the number of successful transactions completed and the experience we gain from them.

It appears from the economic indicators that we are heading for a robust economy. GDP is growing at a rapid pace; housing starts and sales are still strong; and finally this month we got the job numbers everyone was waiting for -- 308,000 new jobs. This should do two things for us -- one, increase loan demand; and 2, see interest rates increase, which should be positive for us as well as most other financial institutions. We believe the Texas economy is moving in a very positive direction.

We feel very good about the first quarter and our outlook for 2004 is very optimistic. We feel at this time that our earnings for the year will trend more to the higher end of current analyst estimates if the first quarter is an indicator for the remainder of 2004. This is based on our belief that we will experience relatively stable or moderately higher interest rates and will not experience some tragic event around the world that may cause economic uncertainty.

Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our CFO, to provide some additional details on our financial results. David?

Thank you, David. As David had mentioned, our net income was up 26 percent year-over-year and 12 percent on a linked quarter basis. And our diluting earnings per share was up 15 percent year-over-year and 8.6 percent on a linked quarter basis. The drivers behind those numbers were the following -- deposits had grown 29.9 percent year-over-year, 1.9 percent linked quarter; the average earning assets were up 31 percent year-over-year and 6.5 percent on a linked quarter basis. And with the increase in the average earning assets, that drove our net interest income up 24.5 percent year-over-year and 5 percent on a linked quarter basis.

Additionally, our noninterest income increased 37 percent year-over-year and 10 percent on a linked quarter basis. The increases reflect the increased growth in our deposit accounts and the income that they generate. And this would include things such as service charges, debit card income, insufficient fees, ATM service charges. Our noninterest expense increased 25 percent year-over-year and was flat on a linked quarter basis. The year-over-year increase is mainly due to all the acquisitions that we closed recently.

Efficiency ratio was 50.6 percent for this past quarter, down from 53.69 percent in the fourth quarter. And this is a reflection of our continued integration of our recent acquisitions.

Net interest margin tax equivalent for the quarter was 3.63 percent, compared to 3.68 percent in the fourth quarter. We need to note that this ratio now includes the dividends on a trust preferred. If we were calculating it the old way without the trust preferred, you would get a comparative of 3.78 percent this past quarter, compared to 3.84 percent in the fourth quarter.

We are in a slightly asset-sensitive position, and would benefit, as many others would, from an increase in rates. In fact, it is more beneficial to us when a ten-year and five-year trade at the current rates of approximately 434 and 337 respectively, versus where they were about a month ago at 369 and 264.

All in all, we continue to follow our model of growing earnings by increasing our deposit base, maintaining pristine asset quality, keeping expenses under control, which is reflected by the 50 percent efficiency ratio, and integrating our acquisitions into our templates.

And with that, I will turn it over for some detail on asset quality to Tim Timanus.

Thank you, Dave. Nonperforming asset at quarter-end, March 31st, '04 totaled $610,000, or .08 percent of loans, repossessions and other real estate, compared to $967,000, or .13 percent at December 31st, '03, and $3,459,000, or .53 percent a year ago at March 31st, '03. This represents a 37 percent decrease in nonperforming assets from year-end '03, and an 82 percent decrease from a year ago.

The March 31st, '04 nonperforming asset total was comprised of $525,000 in loans, $5000 in repossessed assets, and $80,000 in other real estate. Net charge-offs for the three months ended March 31st, '04 were $5000, compared to $172,000 for the three months ended December 31st, '03, or a 97 percent decline.

With regard to the generation of new loans, the average monthly production for the quarter ended March 31st, '04 was $26,914,000, compared to $26,492,000 for the fourth quarter ended December 31st, '03. This represents a 1.6 percent increase.

I will now turn it over to Dan Rollins to continue our presentation.

Thanks, Tim. I want to spend just a few minutes reviewing our continuing progress in Dallas over the last year. During February, we completed the operational integration of our most recent Dallas acquisitions, that being the First State Bank of North Texas. If you remember, we entered the Dallas market October 1st of '02, a little less than 17 months ago. During this relatively short period time, we've completed the rebranding process and operation integration of 11 full service banking centers. Mark LeVorne (ph), our Dallas area Chairman, and his team have done a remarkable job of laying a strong foundation in Dallas to support our future growth objectives there.

In addition, we recently began a multimedia advertising campaign in the Dallas area to increase the visibility of our bank. We have a great team of customer-focused bankers in Dallas and are looking forward to great things in north Texas. At this time, I would like to open the call up to questions. Janna?

(OPERATOR INSTRUCTIONS). Bain Slack, KBW.

Hello, good quarter. I wanted to ask a question on the loan portfolio and see if you could give a little bit more color on what you had in the press release. Total loans look flat, but looks like you had some significant growth in the C&I. I wonder if you could help, I guess, break that down, not only among locations, and how much of that is coming from the new acquisitions versus your existing acquisitions. But also, maybe explain what exactly is rolling off and what is coming on and maybe what to expect for the rest '04?

Thanks, Bain. Let me try -- that was a lot of questions. A couple of things to point out. Loans were basically flat, quarter-over-quarter. And what we had put in the press release is the biggest growth area, when we cut through the portfolio and the categories that you see in our call reported in our Qs. C&I loans were up six or $7 million, which represents about a 30 percent annual growth number. The one-to-four family loans are down a little bit. Consumer loans are down a little bit. Our ag portfolio, which is seasonable, was up a little bit and it should be up again in the next quarter. Our home equity product, with the new home equity lines of credit in Texas that's relatively new, is also up a little bit.

But in answer to your question, I think, on overall, we continue to transition into a more commercial-based bank, and I think you can see that in the emphasis that Tim is talking about in our production numbers and in the transition from our more consumer-based, home-based into commercial and commercial real estate portfolio.

Where that is coming from, I think, is across the board. Certainly the acquisitions that we have made in the last couple of years have opened up some new markets for us and we've got some lenders on the ground that are producing good loans in those areas. But we also have transitioning in those loan portfolios as they transition from the bank that was there before into the quality and type of loan that we are looking for. So you have seen some transition in those portfolios that would probably be the issue of what is causing the loan portfolio to be flat.

Did I answer all your questions?

Yes. Can you also maybe just describe the type of loan within the C&I portfolio that you're putting on the books currently in terms of structure, maybe in price, as a general trend?

I think that the large majority of the C&I loans are going to be prime-based floating loans. They are true business lines. The are equipment lines. They are facilities that would allow our customers to take care of whatever their business needs may be. I'm not sure that we can buttonhole and say that all of them are a certain type or a certain rate structure. But the large majority of them in that category are going to be floating rate, prime-based loans.

Okay. And I guess a follow-up on the final question, looking forward, looking at the pipeline now and looking forward -- I guess, we expect this sort of to continue on the C&I side, and maybe if you could give colors as to the other portions of the portfolio, in terms of consumer and mortgage as well?

I think that the emphasis that we have placed with our team and David, and Tim and Peter Fisher, our Chief Lending Officer, Randy Hester, have all been talking to our team on a regular basis about producing business and where we can go out and find that. And certainly, the C&I portfolio, the construction portfolio, the commercial mortgage portfolio is where we are seeing the most activity. It is where we have had the most success in bringing customers into the bank. That does not mean that we are ignoring the other areas, but our consumer portfolio is primarily small consumer loans that would be vehicle, recreational equipment, those type of loans. And quite frankly, with 1.0 (ph) to a high of 1.9 percent rates being offered by manufactures, that business has been difficult for us. And you can see a 4 or $5 million drop-off in that portfolio just in the quarter.

On the one-to-four family side, that is a big part of our business; always has been. We are not moving away from that, but in the first quarter there was a big dip in rates again; there was some refi activity. And I think we continue to see some movement in that portfolio. Not that we don't want to continue having that, I just don't think it will grow at the same pace that the rest of the portfolio will grow.

Bain, I think a lot of it depends, really too, at the time and the economy that we are in. You know, if we keep growing the way we are and jobs keep growing, I think you're going to see the different types of loans. Like your inventory loans, people will start borrowing for inventory. Loans that were traditionally have been maybe making some development loans for home loan developments, where you are financing maybe 100 lots for somebody and interest rates go up, that part of the equation may go down. But other parts of the economy are going to be on all cylinders. Manufacturing, for example, you'll see more manufacturing people having to borrow on receivables (ph) inventories. And so, as the economy picks up, I think you will see a change in the type of even the commercial or C&I loan that we do also.

This morning's chronicle talks about the housing sales, used housing sales, existing housing sales in Houston being at record all-time highs, much higher than even the local folks had anticipated. And so, certainly, the housing market is driving some of the economy down here.

Right. Thanks for the color. That's good.

Scott Alaniz, Sandler O'Neill.

Good morning, gentlemen. A few questions. First relates to the level of expansion that is going on in Dallas and Houston by a number of banks. And what I want to know is -- obviously, when banks come into a market, there's only so many quality bankers in a particular market. And I would like to know what steps Prosperity has taken, or is taking, to lock up its employees, if you will. And secondly, I would like to know if you all are beginning to see some wage inflation or an acceleration in wage inflation in either Houston or Dallas, and sort of where you may be seeing the most of that, if any at all?

We will probably all take a stab at that. David do you want to go first?

Yes, I can probably answer that, or at least start off with that. A lot of our associates -- first of all, let me say this -- there are a lot of bankers out there. And I think there are a lot of banks that probably consider hiring people, and they change from job to job. But I think that there are only really -- there are a handful of what we consider really good bankers out there. And I think you have to make a decision on the type of bankers that you're going to recruit. A lot of the companies that are coming in, for example, are hiring somebody at the 50 to $70,000 level. And our experience at that level, a lot of times, is that -- for us, if you're paying somebody 50 to $70,000, by the time you add the unemployment tax and the 401(k)s and all that, you're really paying that person probably $100,000 a year. If that person can only produce $10 million for you, that's probably not even breaking even for the bank. How we base that is that, I usually say we buy investments or we can go into the loans. Usually, our investments are bond investments and have about a three year duration. And if you go into a loan -- hopefully, you're going to have a floating loan, and hopefully, if you lock, then you're going to have about 100 basis points more. So on 10 million, that would generate the bank 100,000. So, instead of us going out and trying to hire -- I'm not going to say subpar. We try to find the people that are really good producers, and we probably don't have as many. But the ones that we have are extremely good.

Now having said that, how do you retain them -- the second part of your question is. As I mentioned, and you're probably familiar with our story, years ago when we were growing from a $40 million bank, we really did not have the income to retain the guys that we needed to help build our company. And so we gave them what we call "stock." In the old days, we gave stock options that really would run for ten years. And so there are still several years left on some of those stock options that people -- you know, they are going to have to stay with us because they're really valuable at this point in time. But even having said that, annual basis, we look at everybody. And the people that really perform, we really reward those people handsomely; as good, or better than, the rest market. So, that is my answer.

David is exactly right, Scott. You know, the majority of the producers out there have some level of options in their hands. Certainly the one that have been here longer have more. And everyone is in our performance-based bonus program that can pay off.

Right. And are you seeing any wage inflation?

Tim wants to jump in there with you. You know, wage inflation is a good question. I think we have seen a little bit of that, but I don't know that it has affected us greatly. I think it comes down to what David was saying -- when you've got a key producer and you need to make sure that that person is comfortable and happy, we are going to be in front of that in making sure that they are comfortable and happy before they get sucked away somewhere else.

I see. Okay.

Tim wanted to add in there a little bit.

Scott, this is Tim Timanus. While we certainly can't guarantee that we would never lose one of our top producers, the fact is, historically, we have not ever lost one. I think that the environment that we provide to our people is one that is very attractive to them. It's not just a matter of what their salary is, what their bonus might be at the end of the year, or what their option profile might be. It's the overall environment of making decisions and how things work and how people fit together. And I think our people enjoy that, and I think they like it. And I personally would be very surprised if we all of a sudden found out we were going to lose any number of key people.

Got you.

I think that is an excellent point.

Second question, you have a big advertising push. And we see it in Dallas. And I think you're fairly early in this media push. Do you have any evidence yet of what type of return you are getting from that push in terms of either number of new accounts, or what have you?

Not in the Dallas market. You know, we started that advertising up there in mid-January. We have been on the ground advertising in a real way in the Houston market now since February year ago. I think that is one of those things that it is hard to put value on and real dollars on. We have got -- what we're trying to do today is just increase the awareness of our brand in the markets that we are in. You do hear many comments from our lenders that it has helped open the doors. Can we say that we've attracted 10 accounts or thousand accounts? I don't know that we can tell you that. I can tell you that both in Dallas and here in Houston, the calling officers that are out calling and knocking on doors, where you used to go in somewhere and say "I'm from Prosperity Bank," and they said, "who? where?" Certainly now, our tagline that real bankers -- one of our guys was telling us the other day that he was out and was visiting with a customer, and he walking around this building and somebody came up and wanted to know, "what are you doing here?" And whipped out his card out and said "I am here from Prosperity Bank talking to so-and-so next-door," and the guy said "oh, you are one of those real bankers," and proceeded to talk to him for a while. It certainly has opened some doors for us.

I will comment on that too. It is hard to really know, at least from a quantitative standpoint, how well you're doing compared to the amount of money that you are spending. But just a real quick story, if Dan will allow me -- A customer was going to one of the larger banks, or S&Ls, here in Houston the other day and they were opening up an account. And they went and talked to the teller or the new accounts person, and they said "we want to open up our business account here, but will you be able to give us a decision, or will you be able to give us an answer?" And it's so funny because the teller or the new accounts person told them, "you know really, at this location we can't. If you are really looking for a real banker, you need to go down the street to Prosperity Bank and they really have somebody that can give you a decision." To me, that tells me the advertising is really working, and that it is really paying off. But I thought it was flattering that somebody at another institution would tell their own customer to go to our bank. And that customer came back and told us when they opened up their account. So that was very positive, I thought.

Excellent. I will move on and let you get the next question.

Diane Montague (ph), Newburger Bormann.

Good morning, gentlemen, and congratulations on continuing to do a great job. It strikes me that your company might be at a bit of an inflection point. You have grown the company wonderfully through acquisitions; you've managed terrifically during a really tough declining interest rate environment and a lousy economy; and you're sitting on a wonderfully-appealing loan-to-deposit ratio. Can you tell me how leverageable you believe you would want that to be? Do have a target loan-to-deposit ratio that you would be looking at it an environment where interest rates are coming back up?

Great question, Diane. The simple answer to your question is yes, we certainly have a target number on our loan-to-deposit ratio, and we're pushing very hard and we're very focused on our loan production at this time. When you look at it on what is realistic, what is the target and what is a realistic expectation -- those are two different questions. If we were to grow our loan portfolio 10 percent this year, that is a 70 million increase, or almost an 80 million increase in our portfolio. We would like to see us get to the 50 percent, 60 percent and realistically maintain somewhere in the 65 loan-to-deposit ratio. Certainly, you can run those numbers. Dave's probably got some numbers here for us. If you do that, what the pickup is on the yield on the loan portfolio versus the investment portfolio, there's certainly cost structure that comes into adding those loans that would be a part of that. But yes, the goal would be to leverage that portfolio up and to continue to grow loans.

Great. Another part of that question is, in terms of your acquisition strategy -- I heard you say, number one, that your focus here is on internal growth, which is very positive. The second part, shortly after that, said that you would like to continue to look for acquisitions. Can you give me some color on where you are in your ability to finance any future acquisitions? And whether you would consider diluting current shareholders if you needed to?

Two parts to that. I'm going to let David jump in there on the dilution question. But what David said was, we've always had a two-sided coin here, where we have been focused on internal growth. We've never not been focused on internal growth.

Right, right, I did not mean to imply that.

And we have been opportunistic on the acquisition front. So, you know, while the last two years have been fairly robust in that category -- we did nine (ph) acquisitions -- there are still a lot. There are many, many potential acquisition targets out there for us that we talk to on a regular basis, that we cultivate relationships with. That we're looking -- when you look at the style and the success that we've had, it's the partnership that comes into that. We are not an acquirer that is going to come in and clean house and ship you and your manual on how to do things. We are looking for partners that want to provide quality service and maintain that customer relationship that is there.

I understand that and I fully expect you to keep doing that. My question was really on the financial side of things. How close are you to --

The last few acquisitions that we have done have been more with a stock component.

Yes, I have seen that. That is part of what is fueling my question.

If I can jump into the deal, I will. I am going to answer the second part of your question first. (indiscernible) that aspect of it. When we went and did our IPO in 1998, we committed -- and we are still committing to this -- that we're not going to do dilutive transactions.

That is what I was hoping to hear.

The shareholders, and even insiders own a pretty good chunk of the stock. Just to grown to say we're going to beat the other guys, doesn't impress me that much. So, from that aspect, we are not going to do -- now, I did put one caveat, I think, when we did the IPO. If we could get into a market that would enhance our stock value for shareholders (multiple speakers) a growing market, and there would be some benefit for shareholders, we would consider something like that. But the bottom-line is, we are not in favor of dilution. We own too much of the stock -- (multiple speakers).

Good. One last question, if I could. You mentioned that you're seeing the national economic numbers improving. Can you comment specifically on Houston and Dallas? What you're seeing in terms of improvement? And are they different between those two markets?

Tim can probably answer this better than I can. I'm just going to start off and I will let Tim jump in it. On the (technical difficulty), I always look at the worst things that could happen, and I've never been willing to jump on the bandwagon to say that the economy is really going forward and going strong and doing good. I would have to tell you, I am converting right now. I am about to jump on the bandwagon. To see the enthusiasm that I see out there right now and the new jobs, and just the overall economy, I am probably going to be one of the guys to jump and turn on and say, "okay, I think the economy really is doing good now."

You are talking Houston and Dallas.

Throughout Texas; I'm looking at Texas right now.

Is it as strong and the national numbers?

I think it is stronger. I think more factual to back that up -- Tim, do have some of those facts?

I've got a little information. The job forecast for Houston over the next three years -- so that would be 2004, 2005 and 2006 -- is about 110,000 jobs being created. So, about 35, 36,000 jobs annually. And I think that Dallas has predictions that certainly parallel that, maybe actually exceed it just a little bit. I don't think there is a significant difference between the projections and those two economies, Dallas and Houston.

Let me just mention this too, because sometimes I get a little put out with economist. Because, you know, when we were in school, we also said if you have a 6 percent unemployment number, the economy was doing really good. Over the last year or so, our employment numbers have been below that. And what actually, I think, even makes that such a more important number is the productivity. Our productivity numbers are so much stronger now today with the new technologies than they have ever been. So I think it's been pretty good the whole time. But I do think it's getting better.

Good. Well thank you very much.

Toville Olivia (ph), Synovia (ph) Capital.

Good morning, great quarter, guys. I have a quick question -- you addressed most of the questions that I had -- and that is the duration of the securities portfolio? Can you give us an idea, a little more granularity on the securities portfolio please?

Yes, as of March 31st, 2004, our duration -- I guess I'm looking at it right now on our IRR report, our interest rate risk report -- is still about the same as it has always been. Right now we're at 3.18 right now, 3.18 years -- our effective duration. And that's kind of where we are staying; we are trying to stay around 3 to 3 1/2.

And in terms of gains and losses on the securities portfolio?

The gains, as of March, on the overall portfolio were $22 million, a little over $22 million.

That's on HTM (ph) also.

But I would point out that, even though the total portfolio has a gain of 22 million, the majority of our portfolio is classified as held-to-maturity. So that doesn't flow down into the equity section.

And we have not taken any gains in the quarter, --

Yes. Okay.

Let me also say too, though, that we do think interest rates are going to go up. And as interest rates go up, their duration probably will be extended a little bit, hopefully not over the 3 1/2 year extension. But, at the same time, our reports are showing that if interest rates go up 200 basis points in a 12-month time horizon, we still make more money. And if interest rates go up 300 basis points over a 24-month time horizon, we are still making more money. Our real risk in this bank is really -- and I know this is hard, because when you look at the stock market yesterday and probably even today, the market has really been selling off banking and interest rates are just going to kill everybody.

Our real issue is if interest rates went down. If interest rates went down, our earnings would be a lot more impacted negatively than if interest rates go up. In fact, if interest rates go up, we still do a lot better in the 12-month and 24-month time horizon as long as they just don't go up 400 basis points, or 300 basis points all at one time.

What do you think the gain would be today, you know with the mood that we have?

You know, I don't now, but it would definitely have impacted the gain that we have right now. It would be -- I don't know if it would be half of that, but it would be substantial, probably. Because just over the last five-year treasury, for example, it was trading at 2.65 percent, probably into March. And this morning, it's probably trading around 3.45.

The gain in the AFS (ph) portfolio at quarter-end was a little less than 2 million.

Okay. Great. Thank you, guys.

Joe Stieven, Stifel Nicolaus.

Hi, guys. First well, good quarter again. Most of my questions have been answered, but I will follow it up with two. You guys have talked for a while about having the loan-to-deposit ratio creep up over time to target ratio 50, 60 percent. David, excluding acquisitions -- and this is not to be critical, because you guys have done very well, even without a high loan-to-deposit ratio. But, excluding acquisitions, when do you get to just the lower end of that range? That's question number one.

And then question number two is -- you guys obviously have been very good about giving guidance, and you're talking higher end of the range. Is the higher end of that range guidance just sort of predicated on, let's say, the previous low interest rate environment? Or are you modeling in any increases? Because it sounds like if there were some increases, you would have actually upped your guidance. Those are my two questions. Thanks, guys.

You make it hard on us, Joe. The loan-to-deposit ratio, I mentioned this before, if we got out of the M&A business and just focused strictly on growing the loan portfolio, I think it would take us probably three years to get up to the 60 to 65 (ph) percent loan-to-deposit ratio. What I mean by that, that's focusing entirely on internal growth, hiring all the right guys, or putting our guys, instead of doing five or 10 due diligences a year and cleaning up the old portfolio. I still stick with the fact that it would take us probably two to three years to get up to the 65 percent.

The higher guidance earnings is really predicated on if interest rates stay where they're at right now or even go up 100 and 200 basis points. We're still probably going to be on the higher end. The deal that I would have to retract, that we would have to retract, would be if we saw a downturn in interest rates. We would have to probably maybe pull back, but not much.

Does that answer your question, Joe?

That's good enough. That sounds like we are in good shape. Okay. Thanks, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. I was wondering if you could give us some color behind the fact that expenses were kind of essentially flat from the fourth quarter level? Is there anything going on there that's perhaps non-recurring? Or --

Jennifer that's, again, a reflection of -- in the last year and half we've had some any acquisitions. This really does take time because you're integrating them into the overall structure of the bank. I think, just because of all the activity we've had, everybody's (indiscernible) that would cut expenses within 30 or 60 days. That does happen, but what you're seeing in this first quarter is just the continued refocus on these acquisitions in terms of their overall cost structure and bringing it into line with ours.

That's what I figured, I just wanted to make sure. Second question is, with kind of a renewed focus on growing the commercial loan portfolio, does that mean, David, that you're now willing to take on a little more risk? Or are you just expecting that growth to come really from more of an increase in demand?

Well, I would say that we probably have taken on more risk, a lot more risk than where we were when we started five years ago. You know, we're still not -- I am still a firm believer that you don't have to take a lot of risks to make good loans. I don't buy off on that. I think it is getting out there and getting the business, quite frankly. And getting your guys to really beat the other guys.

Inherently, there's more risk in a C&I portfolio than there is in a one-to-four family portfolio. I think that's a given. The question is, are we willing to open the doors and take anything that comes in? I think our credit quality criteria, Jennifer, has always been -- we want the cream of the crop.

There's some things that are willing to take more risks, that their margins are higher. You know, in some cases 100 basis points more than ours is. It's just really not our style, and personally, I do think I could personally get comfortable with taking on higher risk credits. But we do want to grow the loan portfolio.

Thanks. I appreciate it.

Jeff Allen (ph), Fullercrest (ph) Asset Management.

Good morning, guys. Dan, could you just please repeat that C&I loan growth number that you said before? And also, do you guys have any numbers on same-store deposit growth? I noticed non-interest-bearing deposits were down 5 percent sequentially -- there might be some seasonality there. Could you just comment on that?

I will jump in. Just on the same-store growth, we do track that. What we are calling same-store growth is when you factor out the '03 acquisitions, if you will. But the overall deposit growth of those same-store sales, if you look at the first quarter on an annualized basis, it is still running in the 10 percent range for those locations.

So, same-store deposit growth has been good. The seasonality on the interest-bearing/non-interesting bearing piece of the puzzle has something to do -- I think a piece of that is the institutions that we bank, the public entities that we bank, taxes rolled in at the beginning of the year, and that is going to move that interest-bearing deposit number a little bit as a piece of that.

On the loan side, Jeff, kind of what we were talking about earlier. When you look at the C&I loan portfolio from or K, we reported basically $94 million in C&I out of the $770 million portfolio. Today, that C&I piece is about 102 million out of the 770 million portfolio. On annualized basis, that's growing at about a 33 percent cliff.

Okay. All right. And then could you -- I guess that does not include the commercial mortgages?

No, the commercial mortgage piece of that book is basically even from where we were. One of the biggest pieces of our portfolio is commercial mortgages. It is in the $260 million range. And it's a little over a third of the total portfolio.

Okay. And that was about flat sequentially?

That's right.

Okay. The other thing I wanted to ask is, in your loan portfolio now -- I guess I'm really talking about the commercial part -- what's the proportion of those loans that are fixed-rate as opposed to floating?

The majority of them have a floating-rate element to them. Many of the commercial real estate loans have a fixed portion on the front end. We typically do not balloon up a note or do a bullet note that is going to be a fixed rate for 1, 2, 3, 4 years, and then have to renew it. We would prefer to put that loan on a 10-year, 12-year, 15-year repayment plan. If the customer is looking to lock in a rate on the front side, we will do that for 2, 3, 4 or 5 years. Then the loan becomes adjustable after that. I think what you're asking is, is how many dollars of loans in the portfolio are not going to move in an uprate environment -- is that?

Sure, I guess that is the jest of it, yes.

The answer to that question is -- we have loans on the books today with floors in them a little over $130 million, where the floor is at prime plus one, basically. So a move of a rate -- a 100 percent move -- a 1 percent move in rates would cause that loan rate probably not to move, initially. So, you've got about 130 million in that number.

And that's all getting factored into when we're looking at our IRR reports, and looking at the net interest margins. You know, one of the other reports we look at is, we probably have roughly 40 percent of our earning assets that have the ability to re-price within a year's time. And that includes the loan; parts of the loan portfolio as well as the security portfolio.

Okay.

I appreciate your help, Jeff.

Thanks.

Karl Dorff (ph), Dorff Asset Management.

Good morning, guys. I was just wondering if we can get a little bit more color on the investment portfolio. Like, what's in it? What are the primary aspects of what makes it up? And has there been any shift in that portfolio mix over the last year? I heard that you basically kept the duration relatively where it is over the last year. How about the mix?

Well, the mix really is what it is at the time. You know, it's kind of -- there are different products that we go into at different times, depending on what the yields and what the average rates are and the durations and all that kind of stuff. Last year, I would say that a good chunk of our portfolio, with the majority of the refinancings that we had, we were getting paydown pretty dramatically. And so, we bought a lot of product last year. And so, if you would ask me what the majority of the product that we bought to replace the stuff that was paying off, we went into the 10-year mortgage-backed security, fully amortized mortgage-backed security that has an average life of about 3.6 years. And that seemed to be the product that could keep us in the duration that we wanted to be in. And we also stressed that product to say, okay, if interest rates went up not even 300 basis points, if the speed slowed down to 4 percent CPR, what is the extension from that 3.6 years, what will it be? And that would put us at only a 1-year extension. So that has been the majority of the product that we really have been buying.

In some cases -- not right now, but maybe even a month ago -- everybody, because -- I guess we were there and everybody started jumping into that product, they wanted the best yield they could get with the shortest duration. So that product got extremely expensive. And we probably got out of that market in some of the CMOs they were developing, taking some 15-year actual maturities, they would try to restructure a CMO that had -- that looked a lot like the 10-year fully amortized mortgage-backed securities. And we were doing some that. A lot of it depends on where you are at that time, really, and what you can get the best value at.

Where are you, mostly today?

As far as --

The primary, the majority of the investment portfolio.

The big picture mix has always been mortgage-backs. We have not varied off of the mortgage-backed. When you're looking at mortgage-backs, non mortgage-backed, I think the mix is basically the same today as it was a year ago.

Right.

Different types of mortgage-backs that David is talking about, but it's still basically mortgage-backs.

That's true.

Okay. Thank you.

Thank you. It appears that we have no further questions at this time.

Thank you very much, Janna. We really appreciate everyone's support. We look forward to talking with you all again as we are out on the road. Thank you very much.

That does conclude today's teleconference. We appreciate your participation. You may disconnect at any time.