Prosperity Bancshares Inc (PB) 2004 Q3 法說會逐字稿

Welcome to today's conference. At this time, all sites are on the line and in a listen-only mode, and right now I would like to hand the meeting over to your host, Mr. Dan Rollins. Go ahead, please.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares' third-quarter 2004 earnings conference call. This call is being broadcast live over the Internet 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 results for the third quarter of 2004. He will be followed by David Hollaway, who will spend a few minutes reviewing some of our financial statistics and providing additional detail on our results. Tim Timanus will discuss our view on the local economies and our lending activities, including asset quality, and I will provide an update on our recently completed 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, Melissa. Or you may e-mail questions to investor.relations@ProsperityBankTX.com.

I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Tricia Green (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 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 end 10-K. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now, let me turn the call over to David.

Thank you, Dan. We would like to welcome and thank everyone for participating in our third-quarter conference call. As a $2.7 billion Texas-based financial holding company, we believe we have a competitive edge over our out-of-state competitors in gaining customers and new associates that want to be part of a company that is focused on true customer-centered relationships. We continue to focus on growing our bank through the retention of existing customers and attracting new customers. Our growth strategy includes organic growth along with selected acquisitions, which together have produced a five-year compounded annual growth rate of 40 percent in deposits, 35 percent in loans, 46 percent in net income and a 21 percent increase in earnings per share annually for the last five years.

Our company continues to perform, and this quarter was no different. We experienced a 38.3 percent increase in third-quarter 2004 earnings, 8.9 million compared to 6.5 million in the same period last year.

Diluted earnings per share increased 17.6 percent to 40 cents in the third quarter 2004, compared to 34 cents for the same period last year.

For the quarter ended September 30, 2004, return on average common shareholders equity' was 14.4 percent, and return on average tangible common equity was 34.5 percent.

We are very proud of our past performance, and believe that our future is bright. Our team is committed to building upon the historic performance that we have enjoyed. The results we have been able to produce are a testament to the efforts of our entire team. I continue to be pleased with the dedication to customer service our team of real bankers exhibit each day.

We were very honored and proud to be recognized this year by Keefe, Bruyette & Woods, Inc. as one of their 2004 honor roll banks, for consistent earnings-per-share growth over the last 10 years. Our team will strive hard to continue this honor going forward.

On August 1, 2004, we completed the acquisitions of Liberty Bank, which operated six offices in Austin, Texas, and Village Bank & Trust, which also operated in Austin. All seven locations are now operating as full-service banking centers at Prosperity Bank. Austin is a market that we are excited to enter. We believe we have a good team in place that has proven they can grow the bank organically and have an excellent understanding of the local market. Eddie Safady is our Chairman of the Austin area, and Mike Meyer is President of our Lakeway banking center. Both banks have played a large role in the community, and I am sure this will continue with their leadership of the professional bankers we have in Austin.

We are pleased to announce that our bank achieved organic annualized loan growth of approximately 11 percent during the third quarter of 2004. This is on top of our second-quarter organic annualized growth of 10.8 percent. We continue to place emphasis on growing the loan portfolio, and our persistence is paying off. This area will remain a focal point for our team of real bankers. We remain committed to relationship banking with true customer service. With our three-point service commitment of greet the customer with a smile, address the customer by name and try to say yes instead of no, we will continue to create long-term customer relationships and value for our shareholders.

Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. David?

Thank you, David. Again, as David Zalman had mentioned, our diluted earnings per share for the third quarter was 40 cents, an increase of 17.6 percent over the same period last year, and our net income increased 38 percent compared to the third quarter last year.

Looking at some of the other third-quarter metrics, net interest income increased 40 percent year over year to 21 million, and one of the main drivers was an increase in the average earning assets of about 28 percent. Noninterest income increased 41 percent year over year to 6.1 million, and this is generally reflective of just a significant increase in a number of overall accounts, moving up of about 31,000 accounts to about 158,000 accounts.

Operating expenses were up 36 percent year over year, and this is impacted by the four acquisitions that occurred between 9-30-03 and 9-30-04; two of the Dallas banks closed in the fourth quarter last year and the two Austin banks this past quarter.

Return on average assets was 1.37 percent for the quarter, matching the second quarter. Return on average equity was 14.42 percent for the quarter, compared to 14.63 percent in the second quarter.

Loans increased 44 percent year over year. Deposits were up 27 percent, with non-interest-bearing deposits up 41 percent year over year.

The net interest margin was 3.64 percent for the third quarter, compared to 3.55 percent in the second quarter, and this increase is reflective of the Austin acquisitions, which were high loan deposit banks with higher net interest margins, and the recent Fed rate hikes. The efficiency ratio was 48.6 percent for the quarter, compared to 48.8 percent the previous quarter.

Looking at our securities portfolio, the effective duration is 3.2, which is what it was at 6-30-04. The AFS net after-tax unrealized loss in the equity section at 9-30 was 1.9 million, and that is down from the 2.9 million at 6-30.

Concerning the tangible ratio, the two Austin acquisitions are now on the books, and with three more months of earnings, we are still on target to exceed the 4.25 percent at 12-31-04 number we talked about last quarter.

The final point that I would want to make is, based on our asset liability model at 9-30-04, we see our net interest margin increasing over the next 12 months, as the Fed continues to slowly move rates up and we continue to grow our loan portfolio.

With that, I would like to turn over the presentation to Tim Timanus for some detail on asset quality.

Thank you, Dave. Nonperforming assets at quarter end, September 30, 2004, totaled $2,563,000 or 0.25 percent of loans, repossessions and other real estate, compared to $1,609,000 or 0.20 percent at June 30, 2004, and $1,434,000 or 0.20 percent a year ago at 9-30-03. This represents an increase of $954,000 in nonperforming assets from the end of the second quarter 2004 and $1,129,000 from the end of the third quarter a year ago.

The September 30, 2004 nonperforming asset total was comprised of $1,947,000 in loans, $81,000 in repossessed assets and $535,000 in other real estate. 97 percent of these nonperforming assets pertain to loans in the portfolios of banks acquired by Prosperity.

Net charge-offs for the three months ended September 30, 2004 were $295,000 compared to $209,000 for the three months ended June 30, 2004 and $287,000 for the quarter ended September 30, 2003. The average monthly new loan production for the quarter ended September 30, 2004 was $43,170,000 compared to $36,711,000 for the second quarter, ended June 30, 2004, for an 18 percent increase, and compared to $29,330,000 for the quarter ended September 30, 2003, for a 47 percent increase.

We continue to evaluate the addition of new commercial lenders to our staff, and we hope that any such additions, as well as overall marketing and sales efforts, will result in ongoing increases in loan production.

I will now turn over to Dan Rollins, who will give us a status report on the completion of our acquisitions in Austin and some information on our products and services.

Thank you, Tim. I am pleased to report that we completed our acquisitions in Austin on August 1. Our new partners at Liberty Bank and Village Bank & Trust all share our desire to provide a level of banking service that is not often found in today's society.

During the past quarter, we completed the rebranding and the computer conversions necessary to fully integrate all seven locations into our organization. We are very pleased today to have Eddie Safady with us. I would like to introduce Eddie, our Chairman in the Austin area, to comment on our progress in Austin. Eddie?

Thank you, Dan. As Dan has indicated, both banks -- Liberty and Village Bank & Trust -- have successfully completed the data processing conversions, and this now allows our customers the added convenience of using each other's facilities. Signage changes are virtually completed, as is staffing integration. We are now putting together our branding and marketing campaigns and a formal introduction into the Austin area, as we continue to scout for strategic new locations and additions to our lending teams. Austin is doing very well. It is poised for growth and, other than last weekend's loss to OU, most people feel pretty good about Austin right now. Austin is getting international attention, and we benefited from the Texas Economic Development Fund's recent announcement. Home Depot is opening the call center here. Cabela's, the retail giant and tourist attraction, is opening a very large facility here in Austin, and SEMATECH is expanding into the nanoscience and biotech areas.

We have had over 500 million in venture capital that has been invested in the Austin area here, most of it in the mezzanine levels this past year. And the unemployment number has gone down to 4.8 percent. This is from a high in June of last year of 6.5 percent. By and large, we feel pretty good about what is happening in Austin, and we think with the integration of the banks into the Prosperity system that we are positioned to go after a new tranche of business, and look forward to the opportunities here.

Thanks, Eddie. We are all looking forward to a great future in Austin. Glad to have you on our team.

Less than two years ago, our bank was predominantly a South Texas bank, with 42 banking centers and over 56 percent of our deposit base within the Houston CMSA. Today, we have 58 full-service banking centers across Texas, with significant operations in and around Dallas and Austin.

On the organic loan growth situation, as you have heard, we reported another quarter of annualized loan growth over 10 percent. We saw good loan growth in our commercial real estate portfolio, our commercial industrial portfolio and our construction portfolio for the quarter.

At September 30, 2004, commercial and industrial loans represented 14.5 percent of our loan portfolio. Commercial real estate loans represented 33.2 percent, 1 to 4 family loans represented 26.6 percent, and construction loans now represent 9.6 percent of our total portfolio. Our pipeline remains strong, and our team remains focused on producing results.

On the consumer product front, I am pleased to report continued strong growth in our fee-based products, along with our Internet banking product. Outstanding debit cards are growing at a 24 percent pace from the beginning of the year. Our debit card income doubled last year. Our popular Royal Checking product continues to grow, and is generating significant fee income. During the third quarter, we ran several Internet banking promotions to drive customers to our site. I am pleased to report that the results have been phenomenal, and the number of users continues to increase.

In closing, our team is on task and producing results, both on the l side and on the fee income side.

At this time, I think we are ready to take some questions. Melissa?

(OPERATOR INSTRUCTIONS). Jennifer Demba, SunTrust Robinson.

I was wondering if you divested any loans from the Austin banks' portfolio, and if you made any new commercial lending hires during the third quarter.

Easy questions. No and no; we did not divest ourselves any loans out of the Austin portfolios, Jennifer, and we have not hired any additional lenders in the quarter. Now, we did pick up, obviously, several lenders as a part of the Austin acquisitions, but no new hires into the bank.

And do you guys have the net interest margin by month for the third quarter?

Yes. It was trending up; it started at about 3.56 in the first month, and the last two -- about 3.67 the last two months of the quarter.

Chris Marinac, FIG Partners.

Can you talk about the impact of a flattening yield curve -- both from a margin perspective, in terms of lending money, and then also maybe how you are managing the securities portfolio, and elaborate, if you can, there?

Looking at a flattening yield curve, we have run some models with the flattening yield curve, and basically, the results still come out and say that with interest rates increasing like they are, we should still be positively GAAP (ph) and should make more money. It won't -- again, I don't have specifics to give you, but it shouldn't make a dramatic difference on earnings one way or another.

There's just a lot of variables that go into that (multiple speakers).

That's right. There are so many variables that can go into a flattening yield curve, and it's going to be all based on the assumptions that you put into your model, and there are just so many assumptions that can be put into it.

Chris, I'm not sure I followed your question on the loan side. What was the loan part of it?

I guess also sort of are you pricing loans any differently today, and this is also, I guess, a competitive question as well.

From a competitive environment, I think we continue to believe that the Houston market in particular is highly competitive on rates, on the loan and deposit side. And I think we are trying to be competitive in the market, as we have grown commercial loans. You have got to get in the game and play, but I think we continue to be focused on not giving the bank away. If we can't be rewarded for the risk that we're taking, we have been willing to walk away from credits.

Would that same be true in Dallas, from the standpoint of pricing?

I think our view today would be -- and, David, you can jump in here -- but I think our view today would be that pricing competition is hot across the state. Houston probably is experiencing a little more competitive pricing pressures than Dallas or Austin are today.

We have not seen -- although it is competitive everywhere, as Dan mentioned, it is not nearly as competitive in the Dallas market or Austin market as we find it to be in the Houston market. And a short answer to your question is yes. To increase the loans, we are having to be a little bit more competitive and a little bit more giving than we have in the past, to show the loan growth.

Bain Slack, KBW.

I just wanted to know, in the third quarter I think you all typically have some paydowns on the ag portfolio. I was just wondering if you could quantify that, and maybe back that out and see what the growth would have been without that.

Well, the facts are we didn't have the paydowns (ph) in the ag portfolio this quarter, Bain. I'm digging for numbers. The answer to your question is I think the ag loans in dollars were basically flat, but I can't put my hands on that sheet right now. I'm talking off the top of my head, Bain; I don't have the sheet. Give me just a second to keep looking.

Were there paydowns in other areas, or does that seem to be behind you all now?

Paydowns in other areas? No, I don't know that --

Compared to last year, when we had a lot of payoffs on loans.

Yes, I found -- ag loans were 29 million at June, and they are 30 million at September. As a percent of the portfolio, that is obviously shrinking. But in real dollars, that is not what happened. Last year at this time, from June to September, the ag portfolio shrunk about $4.5 million. So we did not see that happen in the third quarter.

But you will see that in the fourth quarter.

My guess would be that we will see that fall off. And then, looking at last year, ag loans fell another $6.5 million from the third quarter to the fourth quarter, for a total drop of 10 million from June to December. We have not seen that yet, but I think we would anticipate, or we would certainly hope that the ag customers are going to be able to pay their loans back this year, because that is a part of that business.

That probably has to do, also, Bain, with the heavier rains that they had in this region this year. Again, when it rains like that, it takes longer to get the crops out. And that is probably the reason that you have not seen, for the most part, these loans being reduced.

Also, the government payment stream is a little different now.

That's right.

It takes longer for them to get their government payments than it used to.

That's true.

So everything has moved back one or two quarter, from that standpoint. And Bain, I don't know whether it was part of your question or not, but in terms of overall paydowns, we are not seeing the refinancing from lower interest rates now that we were a year ago. So I would describe our paydowns within the portfolio now as normalized. And we really don't see anything unusual from that standpoint.

The second thing I want to just touch on -- if you all could give some color on noninterest expenses, I guess excluding the Liberty and Village deals. It looks like the core expense growth, I guess, was actually down quite considerably. Can you give us some color there?

Core -- something specific? You're saying when you back out the -- are you looking at what periods of -- what period are you looking at?

We are looking at linked quarter.

From 6-30 to 9-30, that they are significantly down? That is going to be representative of just the continual cleaning up of the acquisitions in the fourth quarter. We don't normally -- again, we closed those two Dallas banks in the fourth quarter. You don't normally see all the cost saves the following two or three months; it comes through a couple quarters.

And then, obviously, these two deals should result in some more cost saves going forward?

Right. Again, I don't think you would see them all in like the next -- the fourth quarter.

No; I think Bain is right in his assumptions that -- you know, the fourth quarter, you're not going to see a lot of cost saves, or you shouldn't see all of them. They should begin to hit in the first quarter, and we should see some real benefit in the second quarter of next year.

Diane Montague, Neuburger Berman.

How would you summarize your financial flexibility, with respect to further acquisitions?

Financial flexibility, further acquisitions? You know, that's a great question, because we get that question a lot on how can we pay for and how can we finance acquisitions. Let me just talk about the most recent acquisitions that we have done, and how we have financed those. The Liberty Bank transaction was 75 percent stock, 25 percent cash. The Village transaction was 100 percent cash, and that's the only 100 percent cash transaction we have done now in the last four quarters. Going back into the fourth quarter of '03, the First State transaction and the Main Bank transaction in Dallas -- they were both mixed consideration; there was some stock and some cash in varying amounts on both of them, into both of those.

So from a go-forward basis, I don't think we are feeling pressure. Obviously, if we needed to do a cash transaction today of any size, that we would not be able to do that without raising some equity in the market. But we feel like that we have got the ability to raise equity if we needed to, or that we have got the ability to continue to use our currency for acquisitions.

But I would say, Dan -- let me just comment, Diane -- really, our position today really isn't any different than it was back when we started building the bank as a $40 million bank in 1988 (multiple speakers) that we've only been public since 1998. But, really, if you look at our ratios, our tangible capital ratios, they were really no different then than they are today, and (multiple speakers) to grow, have strong growth. And I would say going forward, we will still have strong growth in that area.

I'm trying to get a sense, I suppose, of whether you would be diluting current shareholders, in order to continue the level of growth that you have been doing.

Well, that's a question that I know at the last conference call we had.

That was my question. Just touching base.

I'll reiterate again, we have talked to our directors, and for the most part there's a lot of money available right now. Probably every investment banking firm has offered to raise $50 or $150 million in new capital for us. And really, we just don't see the point in doing it right now, unless we really have a deal. And if we have a deal, then for sure. And they want cash and don't want our stock, well, then, we will go out into the market.

With inside ownership over 25 percent, I don't think there is a big desire on our part to dilute current owners just for the sake of having more capital. When you look at the run rate -- I think David said it a few minutes ago. When you look at our run rate, when we are returning well north of 30 percent on tangible capital, that tangible capital number is going to grow fairly significantly. And off of you all's current estimates for next year, there's big income coming in that will allow us, if we wanted to spend some cash, to do that.

Can I ask another question, or do you prefer I get back online?

No; that's fine. Go ahead.

Are you setting any targets for your organic loan growth for fourth quarter in 2005?

We have said all along that we wanted to stay in the 10 percent range all the way through. Obviously, we would like to do better than that, but we think that's an achievable goal.

And do the targets include a breakdown among the types of loans, by any chance?

No; I don't know that we have taken it as deep as trying to figure out where we went to get the loans from. I think we are more interested in making sure that we are getting quality credits than for (ph) what particular type of credit it may be.

Campbell Chaney, Sanders Morris Harris.

I think I heard you mention that you were getting some traction in your C&I portfolio. Can you give us some more color on possibly what types of credits you are seeing in the C&I portfolio, and what types of industries that is coming from?

I don't know that we can give a whole lot of detail to that. I guess my off-the-cuff answer to that would be we continue to bank with the customers that would be considered to be small businesses. We are not doing any large regional players, and we are not doing large revolving lines of credit -- large being multi-million dollar revolving lines of credit for inventory or receivables. Most of what we are seeing has been the smaller commercial businesses that need support for their business. I don't know that we can identify any one industry. I'm looking to Tim here for some help.

No; I think it is fairly well diversified in that regard. As you say, most of the credits fall into the smaller or medium-size business category. We do, as I believe everybody is aware, a lot of real estate lending on various commercial projects, ranging from retail centers --

She's asking C&I.

-- to all types of projects in that regard.

I think that a lot of it -- I think you're seeing the C&I change as we go into different markets. Being in the Houston market, and then being in the Dallas market, they are similar, but they are still different. And even going into the Austin market throws a different complexion on the type of loans that we do. Again, Austin is probably growing; it's probably growing real healthy in the -- again, the two different banks we have are (indiscernible). The Lakeway location is probably more in one to four (ph) family residential development loans, where the Liberty Bank that joined us is probably more in C&I downtown, in that area, in commercial real estate. So a lot of it is depending on the area that we are in. And as we grow, that will change our complexion.

Are you seeing more C&I growth, then, maybe in the Austin or Dallas markets relative to Houston? Would that be fair?

Let me kind of come at that answer a different way. I don't know. I think the answer to your direct question is no, I don't think that's fair. Keep in mind, in this quarter there were two acquisitions that can move the needle on what you are seeing there. So, when you look at the portfolio, I don't have the numbers to pull out, by product type, what was acquired and what wasn't. We know that we had 195 million in total loans acquired in Austin, but I don't know what categories those were in. We do know that they were in construction, we do know they were in C&I, and we do know that they were in commercial real estate. But I can't tell you how much of that growth in C&I was acquisition related, I guess, is what I'm saying.

So to make a blanket statement that we are seeing more C&I growth in Austin or Dallas over Houston, I don't think we can tell you that.

Fair enough. And then, switching gears a little bit on the deposit side, the competition in Houston -- we saw some numbers coming out of Hibernia yesterday that showed that they are really jacking up the deposit rates on transaction accounts and money market accounts. Do you see some of that competition and maybe those rate hikes coming to an end, or do we continue to see kind of price wars going forward?

Campbell, I would say your observation is absolutely correct. They are a new player in the market, and I think what they are doing is really not any different than maybe when we go into a new market or maybe some other bank comes into a new market. And that's just one of the strategies they try to do to build a name, is to really pump up the rates.

And I would say the rates overall are not pumped up on the overall products that they offer, but they are more directed to a promotional type of product that they are offering. So I don't think it's that uncommon. Secondly, I think the amount of deposits that we have -- we are not in a position where we have to chase those rates, and we have not chased them. So we don't see it as an issue at this point in time.

You were also asking whether we believe that the rate competition is going to be here longer or is going away. And I guess, while, yes, you have identified one of the players that has become pretty aggressive on rates, I think our belief would be that a year ago there was somebody else that was pretty aggressive, and a year from now there will probably be somebody else that's pretty aggressive. So I think the competition is here to stay.

But a point I would make is that our customer base really is not a customer base that moves -- it's not really hot money, and as long as you are somewhat competitive, as long as you are not a big change or different from the other guy, our customer base is not one that is going to move for the person bringing up the promotional product. Historically, that has been the case.

That's a great point. And Dave also commented -- Dave, what was your number? You said noninterest deposits were up 41 percent for the quarter or year over year? Again, as we have become more commercial-based and less interest-bearing, even this quarter, the percentage of our deposit base that it is in -- interest-bearing, checking, money market and non-interest-bearing accounts moved up to where that is currently 67 percent of our total deposits. So interest cost is important to us, but I don't think you are going to see us chasing hot money.

Charlie Ernst, Sandler O'Neill.

A couple of questions for you. One, could you say what the margins were, kind of guess at what the blended rates were for the two banks you brought on this quarter? If I remember correctly, they were a fair amount higher than your current margin, or is that wrong?

They were higher, not significantly. But I think one of them -- the blended rate was like 3.70, 71, 72, somewhere in there. And the other one was like 3.60, 3.61, 3.62, somewhere in that range.

Okay. So they would not have had much of an impact on the improvement in the margin rate you all saw this quarter?

It would have, a little bit. I don't know how significant; but, again, that was higher than our margin. The 3.70, obviously, was higher than our margin.

And then, secondly, could you talk about what your deposit repricing assumptions are for the interest-bearing demand, and also the savings and money market and then the CDs?

Repricing in --?

Just in terms of the model, the sensitivity to various rate hike assumptions.

You are saying, what kind of assumptions are we driving in a 25-basis point up --

Exactly. Or 100, or however you do it.

We kind of look at it -- and David will probably correct me if I'm wrong here. But you know, like in our model we project up 100, up 200, up 300. And then this is off the top of my head; I don't have it in front of me. But when you look at NOW accounts, as an example, we do a beta rate factor and say if rates go up 100, we are probably not moving them -- and you can correct me if I'm wrong, but I think we have like 20 basis points move, maybe?

It's different. I have got a -- that's something we do have, and I wish I had it with me. But basically, on the CD rates that we have -- and again, I'm going from the top of my head, so you know, this may not be exactly accurate. But on CDs, as interest rates move 100 basis points, we are moving those 80 or 90 basis points. Our money market accounts, or what we call our high-yield money market accounts, is the same. We are raising those rates probably 80 basis points for every 100 basis points in increase in the prime rate or Fed funds rate.

As David mentioned earlier, with regard to the NOW checking accounts and the savings accounts, those things are not going to move nearly as fast as -- if there's 100 basis points increase, it's almost a tiered model, where maybe the first 100 basis points would go up 20 basis points or 25, the second 100 basis points rise might go up 30 or 40. But it's a tiered model, and I just don't have those in front of me. But I'll be more than happy to share those with you later and get those to you.

And just looking at the rate moves this quarter, it seems to me that you were able to lag a little bit more than maybe what your model was suggesting, in terms of the CDs and the money markets, because they don't seem to have moved a whole lot in the quarter. Is that a fair statement?

That's a fair statement. You are looking at the quarter-over-quarter interest move, and you can see the CD rates are up 10 bips, and money market is up 9. Is that what you're looking at?

Yes, exactly.

I think that's a fair statement.

And would you say that the relationship -- maybe the last rate movement, the relationship was closer to the 80 to 90 kind of percent delta? Or would you say you are still experiencing better results than what your model is probably assuming?

I would answer it a different way. I don't know that you can look at each rate move, but I think you can say that we are not going to be the leader in moving rates up. So we are probably lagging on the timeline behind what's happening.

One of the things that probably helped us is that probably two quarters ago, I mentioned that our rates probably were a tad higher than maybe they should have been, and so as interest rates have gone up, we might not have had to go up as significantly as some of the other guys.

But the point is well taken. Yes; we have actually trended a little better than what the model showed, yes.

And then, Dan, do you have what the percent of variable-rate loans is in the portfolio?

You know, sorry, I don't have that for the 9-30. The number from June was 58 percent or something, and I don't have that from September.

And is that include hybrid ARMs, the 58 percent?

Yes, it does.

Joe Stieven, Stifel Nicolaus.

This is actually John Rodis. A couple of questions. I guess my first one kind of relates to a previous question about new commercial lenders, and you said you didn't have any new hires. And I was just wondering if that was intentional, or can you maybe talk about the market? I'm sure the market for hiring new commercial lenders is pretty hot, so can you maybe just talk about that a little bit?

Let me kind of back up and talk history for a little bit. While we have been actively looking for people for a long time, we are looking for people that fit into the model, and can play in the market the way we like to play the game, and we think we're kind of unique. So we have only hired four new lenders in the last several years. And coincidentally, they all four came in the last quarter. I think I was talking to the guys and we were all talking; we said, we have interviewed a lot of people, we've talked to a lot of people over the last year or two. And for one reason or another, they didn't come with us or we didn't like what we saw. And then all of a sudden, all at one time, the sky and the moon lined up correctly, and we got four lenders.

So I don't think that says anything negatively, that we didn't find another lender during the quarter. I think we are continuing to look for lenders both here in Houston and in Austin. You heard Eddie talking about some of his goals in Austin, and we are also actively looking for folks in the Dallas market. What is the competition for lenders? I think you are right; I think there are a lot of people that really are looking for established, career lenders that can move a book of business with them. I think that's a true statement.

And then I guess my second question, just kind of related back to your internal loan growth during the quarter -- was most of that in the Houston area, or was it concentrated in Dallas? Or can you talk about that a little bit?

Yes. Again, I don't have a breakdown. I do have -- I'm going to flip for numbers. I've got where we are. I don't know that I have the last-quarter numbers, Dave. I think we're seeing good loan growth from an organic standpoint. We've got to pull Austin out, because Austin wasn't here at the beginning of the quarter, but I think that we're seeing loan growth in Houston and in Dallas and in South Texas. We continue to see good loan growth outside of the metro areas.

Thanks, guys. Nice quarter.

And it appears no one else has queued for a question, but I would like to give everyone another opportunity. (OPERATOR INSTRUCTIONS). Barry McCarver, Stephens, Inc.

Good morning, guys, and great quarter. I think most of my questions were covered. Actually, I just wanted to ask about the average size of the loan in the commercial loan portfolio, and if that is coming up any at all.

The answer to your question is yes, it's moving up, but I don't know that it's moving the needle. The average commercial loan is still under $100,000.

But what are you making today?

Well, the loans we're putting on the books -- the sweet spot in our loans, when a loan gets into the batter's box, the sweet spot is really $500,000 to $3 million. And we are seeing a lot of that flow through the process. But as far as moving the needle up, we have so many loans, we have almost 20,000 loan accounts out there today. So it's going to take a while for that number to move on an average size.

I think it is safe to say, in terms of Houston and Dallas, that the average size of what we are looking at is going up a little bit. But once again, if you look at the overall and look at the South Texas locations and blend it all together, it's not moving the needle a whole lot, as you say.

Thank you very much, and there appear to be no more questions. So I would like hand it back over to management.

Thank you very much, everyone. We really appreciate everyone's participation in support of our company. We look forward to talking to everyone again soon. Thank you.

Thank you for joining us today, ladies and gentlemen. This concludes today's conference, you may now disconnect.