Prosperity Bancshares Inc (PB) 2006 Q4 法說會逐字稿

Good day and welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A.

I will now turn the program over to Dan Rollins. Go ahead.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares' fourth-quarter 2006 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'm Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares. Here with me today is David Zalman, Chairman and Chief Executive Officer, H.E. "Tim" Timanus, Jr., Vice Chairman, and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights of the fourth quarter of 2006. He will be followed by David Holloway, who will spend a few minutes reviewing some of our recent financial statistics. Tim Timanus will discuss our lending activity, including asset quality. I will provide some information on our upcoming merger with Texas United Bancshares. 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, Carrie, 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 [Shana] Evans at 281-269-7221 and she will fax a copy to you today.

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 materially differ from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now, let me turn our call over to David.

Thank you, Dan. We would like to welcome and thank everyone that is listening and participating in our fourth-quarter conference call.

Without question, our fourth-quarter and full-year 2006 results were the most successful in our history. Net income for the quarter increased 11.1% to $0.50 per diluted share, compared to $0.45 per diluted share for the same period in the prior year. Net income for the quarter increased 31.6% to 16.6 million, compared to 12.6 million for the same period in the prior year. Our full-year earnings increased 9.6% to $1.94 per diluted share from $1.77 in 2005. The net income for the full year of 2006 increased to $61.7 million from 47.9 million in 2005.

Our team remains committed to building shareholder value. Over the past six years, I'm pleased to report that our diluted earnings per share have increased from $0.74 in the year 2000 to $1.94 in 2006, which represents an increase of 162%. Our total assets have increased 540% from 703 million at year-end 2000 to $4.5 billion at year-end, 2006.

We have grown our loan-to-deposit ratio from 39% in 2000 to 58% at year-end 2006. On the completion of our merger with Texas United later this month, our loan-to-deposit ratio should be closer to 70%.

Our net earnings have increased 662% from $8 million in 2000 to $61 million in 2006.

We continue to control cost, resulting in our efficiency ratio falling from 56.57% in 2000 to 45.29% for 2006. We believe this compares favorably to industry standards.

While we continue to build and increase the size of our loan portfolio, we have maintained our focus on strong asset quality. At year-end 2006, our nonperforming assets totaled only $1.12 million, or 0.03%, or 3 basis points of average earning assets.

2006 was a busy year for us. On April 1, 2006, we completed the acquisition of Southern National Bancshares, which operated six full-service locations and two stand-alone [motor] banks in Harris and Fort Bend counties. This transaction moves Prosperity into the number two deposit market share position in Fort Bend County. This County has experienced 26.6% population growth over the past five years, versus 10.8% for Texas and 6.2% for the U.S. The projected population growth in Fort Bend County for the next five years is projected to be 27.6%.

We feel the Southern National Bank transaction has been very successful, and we couldn't be happier and prouder with the whole team that joined us. Without their help and hard work, this would not have been possible.

As we look ahead, we are excited about planned closing of our merger with Texas United Bancshares next Wednesday, January 31. As you all may remember, Texas United operates four wholly-owned subsidiary banks, which State Bank, primarily located in central and South central Texas, including Austin and Bryan/College Station; GNB Financial, headquartered in Gainesville, Texas and operating in counties north and south of the Dallas-Fort Worth Metroplex; Gateway National Bank, which is headquartered in Dallas, Texas and operating six locations in the fast-growing north Dallas area; and Northwest Bank, located in Roanoke, Texas with five banking centers located in and around the Fort Worth, Texas area.

As of December 31, 2006, Texas United reported total assets of $1.8 billion, loans of 1.2 billion, deposits of 1.4 billion, and shareholders equity of 161 million. After closing and integration of the banks, we should have approximately $6.5 billion in assets and 125 locations throughout Texas, located in the major cities of Houston, Dallas, Fort Worth, Austin, Corpus Christi, Bryan/College Station area, and in many communities located in south and central Texas.

In looking back on 2006, I am filled with pride at the very successful year we recorded, especially considering the shape of the yield curve. Our success and increased earnings in a tough environment can only be credited to the hard work of our associates in reducing our costs to bring our efficiency ratio down to 43% and a rapid and successful integration of Southern National Bank. Going forward into 2007, we expect the same challenges and expect to meet them head on as we did in 2006.

Our goal for 2007 is to continue to deliver the high benchmarks that we have set for ourselves in previous years, deliver quality products, treat our customers to the highest standards, and increase shareholder value.

Thanks again for your support of our company. Let me turn over our discussion to David Hollaway, our CFO, to report some of the specific financial results we achieved this past year. David?

Thank you, David.

Starting with the balance sheet, loans increased to 2.178 billion, up 41.1% from a year ago and without the acquisitions, loans grew at a 7.7% year-over-year. Deposits increased to 3.73 billion, up 27.6% from a year ago. Backing out the acquisitions, deposits grew at a 2.7% year-over-year.

Looking at income statement items and financial ratios, net interest income was 138.1 million for 2006, a 24.6% increase over prior year. The year-over-year increase was primarily due to a 24.8% increase in average earning assets.

The net interest margin on a tax equivalent basis for 2006 was 3.80% compared to 3.81% for 2005, and it was 3.79% for the fourth quarter '06, up 2 basis points from the third quarter of '06. Non-interest income for 2006 was $34 million versus 30 million for 2005, a 13.2% increase. On a linked-quarter basis, non-interest income was down 7.6%, and it's an interesting note that I would point out here. This was the exact same trend as last year, where on a linked-quarter basis comparing fourth quarter '05 to third quarter '05, it was down 7.1%.

Non-interest expense for 2006 was $77.7 million versus 68.9 million in 2005, an increase of 12.6%. This was primarily due to the increased operating costs associated with the additional banking centers acquired in the SNB acquisition. On a linked-quarter basis, non-interest expense was down 3.2%, reflecting our continued effort to keep expenses down. This is also reflected in our fourth-quarter efficiency ratio at 43%, down from the third-quarter number of 44.3%.

Return on average assets was 1.44% for 2006 versus 1.42% in '05. Return on average common equity and average tangible common equity was 10.24% and 31.53%, respectively, for 2006 versus 11.56% and 29.88%, respectively, for 2005.

One final comment concerning our bond portfolio--as of 12-31-06, our bond portfolio showed an effective duration of 2.5 years with a weighted average life of 3.2 years and approximately 450 million in annual cash flow over the next 12 months.

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

Thank you, Dave.

Nonperforming assets at year-end December 31, '06, totaled $1.12 million or 0.05% of loans and other real estate, compared to $1.27 million or 0.06% at September 30, '06 and $1.408 million or 0.09% a year ago at December 31, '05. This represents decrease of $150,000 in nonperforming assets from the end of the third quarter '06 and a $288,000 decrease from year end 2005. The December 31, '06 nonperforming asset total was made up of $948,000 in loans, $32,000 in repossessed assets, and $140,000 in other real estate. 60% of these nonperforming assets pertain to loans in the portfolios of the last three banks acquired by Prosperity.

Net charge-offs for the three months ended December 31, '06, were $247,000 compared to net charge-offs of $307,000 for the three months ended September 30, '06. Net charge-offs for the year ended December 31, '06 were $771,000, compared to $410,000 for the year ended December 31, '05.

The average monthly new loan production for the quarter ended December 31, '06, was $72 million, compared to $87 million for the third quarter ended September 30, '06 and compared to $67 million for the quarter ended December 31, '05. Average monthly new loan production for the year ended December 31, '06 was $80 million, compared to $56 million for the year ended December 31, '05, for an increase of 43%. Loans outstanding at December 31, '06 were $2.177 million compared to $1.542 billion at December 31, '05, representing a 41% increase. The December 31, '06 loan total is made up of 41% fixed-rated loans, 36% adjusting as prime moves, and 23% resetting at specific intervals such as quarterly or annually.

I will now turn the presentation over to Dan Rollins.

Thank you, Tim.

I want to spend just a few minutes talking about the status of our proposed merger with Texas United Bancshares. As David mentioned, we are very excited about our future with Texas United Bancshares. Don Strickland, Steve Stapp, Gene Payne, Ray Nichols, Kent McCune and their teams are all fully engaged with us to ensure a smooth transition.

I am pleased to report that we're well down the road toward the integration of all four of the Texas United banks. Upon the consummation of the merger, currently planned for January 31, pending our final regulatory approvals, our plan is forced for action. We should complete the first of four computer conversions early in February. Before the end of the second quarter of this year, we will complete the process of integrating all of the TXUI locations into Prosperity Bank. I am confident that we will be able to achieve our goal and minimize any customer inconvenience with the strong leaders from TXUI that are joining our team.

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

Great. (OPERATOR INSTRUCTIONS). Barry McCarver, Stephens, Inc.

Good morning, guys. Looking over Texas United, they've got a really strong margin and I would assume, going into this, the closing of the merger, that's going to have a pretty significant benefit to you guys' margins. Is that a fair assumption and can you give us any color on that?

I would say--Barry, this is David Zalman--they truly have a lot higher margins than we do. But I would say, historically, you know, the margin tends to come down more to where we are at. I mean, we should get some pickup off of it but it would not be the pickup completely to where they are at right now.

Yes, I would chime in and would certainly agree with that. Again, when you are historically looking at where they were running, I don't know, you can just take that number, add it to ours and pro forma that. I think it would be a little less, just because we've changed the balance sheet around a little bit from their perspective.

Right.

Okay. Then looking at the quarter's growth, particularly in the loan portfolio, would you give us a little detail on some of the loans that came out of the SNB acquisition during the quarter and kind of what your internal growth thoughts were for the fourth quarter? It wasn't, it certainly wasn't quite what I was hoping for.

You know, I think you do what you can do in the market that we're in. I think the loan market is very competitive. We've been talking about that for a long time. Loan pricing has been very competitive.

On the Southern National side, Barry, unfortunately, we had three or four rather large credits pay off out of the Southern National portfolio mid to late December. All of those were normal transactions where a piece of property sold or the ownership of the business sold and we didn't lose any business per se to somebody stealing business from us, but just the normal comings and goings of year-end big transactions. I wish we hadn't had the big payoffs that we did from Southern National but we did, and that team has focused on replacing that business and continuing to grow.

I think our loan team is out there competing very effectively every day. I don't think we are unhappy with where we are. I think the question is what's happening out there and what's happening from a pricing standpoint and a credit quality standpoint. We're going to continue to play the way we like to play the game.

Yes, I will just add to that, Barry, I was familiar with two or three larger credits that were very large--I say very large credits that the projects had been finished and the investors have an opportunity to sell make a lot of money, and they did. I would also add that, in September, we also have agricultural loans that really fund up completely in midyear. Hopefully, by that third or fourth quarter, hopefully those loans do pay off. So you had some of that going on, which is standard. If you look back, it's always been (multiple speakers).

It's about 10 million?

Yes, or more, so those are a couple of things.

Then I would go to say that we still are committed overall to build a loan portfolio. I mean, if you look at our numbers, growing it from five or six years ago from 39% to almost 60% today and pro forma is 70% with TXUI, we are committed to build a portfolio which just we're going to do it. If you look at our history, we do do what we say. We're going to continue to do that but again, we're going to do it at a pace that is not going to jeopardize the asset quality as well.

That's actually very helpful; thank you for that. I'm just wondering, to add onto that, is there a monthly sort of run rate in loan production, production obviously not net, but production that you have in mind for your team that might give us an idea of what we might be seeing in future quarters, not putting any time limits to it?

Barry, this is Tim Timanus. We always try to budget for 10% loan growth, and some years, that happens; some years, it may not happen. We always try to make that budget subject to maintaining our asset quality. There's a fine line between increasing the loans and stabilizing shareholder value in terms of holding your asset quality in place.

I can tell you that December was a slow month in terms of loan growth. We don't have a specific answer to that slowness. It's the holiday season, and sometimes December is a month that's off. It doesn't happen every year that way, but some years, it does. But our production did drop significantly in December. That's why the production, when you compare the fourth quarter to the third quarter, is off; it's primarily the month of December. So it may be just everybody went skiing for the holidays. We don't know.

The last question, I promise--the margin is up a little bit. Obviously, that's a great thing. I'm wondering if there--maybe some of those paydowns that we spoke up before is part of the reason it was up, or anything specific?

No, I think it's kind of--to reiterate what we said on prior conference calls, you know, again, we have to manage our balance sheet and over a three-month period, when it moves 1 or 2 basis points, I don't know that we get too excited about it. Over the twelve months is what really we're trying to look for. Just as we said when we started the year, we thought we would get it to a certain range and improve over the year. As you can see, it was pretty stable against the inverted yield curve. So, I don't know. It's hard to predict on a three-month basis. I know that's not a direct answer to your question, but it's kind of how we are viewing it.

Fair enough. Thanks a lot, guys.

Brett Rabatin, FTN Midwest.

Good morning, gentlemen. Two questions for you--first off, on the fee income side, I wanted to get some clarity. I'm curious to know if the decrease linked-quarter in fee income is your typical Q4 seasonal decrease and we might see some increase during the first quarter of '07 is question one.

Then secondly, the deposit costs--obviously you had growth in the core deposits but also did a great job managing your overall deposit cost this quarter. I know, last quarter, you mentioned increasing your rate somewhat to more compete on the deposit front. So I was curious about kind of what you saw during the fourth quarter in terms of your price and relative in the market, and not to give too much way to your competition, but what you're doing currently going forward.

Okay, Dave Holloway here, let me address the first question, fee income. You know, when you think about it, a year ago when we were sitting here, it's the same issue on the fee income. We saw it dramatically drop-off. The question was what's going on? When we went back and looked at it, there was no specific thing. The Bank hadn't changed anything. You look out what's going on on a customer base and nothing unusual there. It was odd because prior years up to that, we had normally seen seasonally fee income go up, but last year went down and we really couldn't discern why. Again, it looks like it's trend, because it's replicated itself this year. I don't know that I have that great of a crystal ball looking forward. But if you look back in '06, you did see it drop off in the fourth quarter; then you saw it pick up again as each quarter wore on through '06. Quite frankly, if you exclude SNB saying well, you've added $1 billion bank and what that brings with it, even if you exclude them, our fee income went up. So yes, the short answer should be, our expectation should be, that we should see our fee income continue to rise for '07, but we will see as we look at it.

The cost of funds question, I will start with that, somebody else may want to jump in. My comment to that is we've stayed disciplined as far as deposit pricing, not trying to match the highest rate out there by the de novo bank or whomever has got the teaser rate. I mean, we are not trying to match those CD rates, so that I think is what has helped us in staying disciplined. I think where the concern has to be is how to stay competitive on your lower-cost money. I think, in today's rate environment, people are starting to really want to work their money, so not necessarily looking at the CD rates. Something we will be looking at in '07 is the impact on these lower-cost funds.

I don't know, David, do you want to chime in?

This is David Zalman, Brett. I'm probably the one that commented last time about deposit costs going up. Overall, I guess it was maybe taken a little bit out of context. What I was really saying is that interest rates seem to be climbing and so interest rates would go up on things like CDs and money markets and things like that, and ours went up at the same time. But I would also say that we have not been--we're not the highest-paying bank in the market. I think we are at or above the peer group in our competition, but at the same time, we are not out there paying 5.5% for CDs or 6% and 5% on money market accounts, so we are not competing in that market.

At the same time, there's a lot of de novos that are doing stuff like that answer. The competition is really out there. But again, we've really tried to pay a fair rate and monitor and keep our margins in check. I think we've done a pretty good job of doing that, really, maybe at the expense, to some degree, of some deposit growth, but at this point in time, to maintain the margin and have some deposit growth like we did, I think we've done a good job with that.

Okay. Then maybe just one last follow-up--on the asset side, you're fed funds sold averages in the period were higher than they were last quarter, and so I know that those balances are actually yielding more than your securities portfolio. But is that any way in relation to (indiscernible) the deal closing here in the first quarter and you guys using some liquidity or can you give us any thoughts on your liquidity levels during the fourth quarter?

Yes, the liquidity levels are running really high right now. Again, there's probably not a lot of difference between a short-term fed funds rate of 5.25 and something that you can invest in at maybe 5.5. But more so than anything else right now, we are staying a little bit liquid because the Texas United does have some forward money and were probably going to use some of that funds to offset their borrowed money.

Yes, I kind of thought that was the case. Okay, great. Thanks, guys.

Brent Christ, Fox-Pitt.

Good morning, guys. A quick question on the deposit side. I guess if you look at the end-of-period balances, they were up pretty significantly and it seemed like all the growth was centered in the lower-cost categories. But was there anything lumpy driving those balances sequentially?

You know, again, if you look at trends in our bank, it seems like our trend in our bank is our deposits start building up probably in October/November/December. They generally try to get the highest. Then we see some of those deposits starting to fall out through the first quarter, some of them not completely. They even get down toward midyear; maybe that's because we have a lot of banks where a lot of businesses are using their money and they pay their taxes in the midyear. Then again in the third quarter, it starts building up and that's historically been our trend, really.

Yes, I would agree. In the fourth quarter, you see some of the deposits spike up, as David said, and then some of it will dissipate over the next couple of months.

Okay, so nothing outside of the seasonality driving it really?

No.

Okay. Then in terms of the loan volumes and the Southern portfolio, how much were those three to four large pay-offs that you commented on, as a percentage of, say, the total decline in this quarter in that portfolio?

The Southern National piece?

Yes.

Shoot, two of those were probably (multiple speakers).

--were over 10 million, yes.

That was a huge hunk of that. I don't know a percent number for you, but it was big.

Yes, I mean two or three of the loans were probably over $10 million apiece.

Okay, all right. Then a couple of quick ones on this Texas United. Where do you guys--how do you think about the pro forma of loan loss reserve and where you see that shaking out?

Do you want me to take a run at it--pointing fingers at me. (LAUGHTER)

Nobody has the answer to that? I don't know.

Brent, I think where we are today is they are doing their analysis on where they are; we're certainly running our allowance for loan loss methodology through both of theirs. I don't have answer for you as to where it's going to fall out, but I can tell you both teams are actively working towards that.

Yes, I think basically we're doing a calculation where we prepare our allowance for loan loss calculation. Now, we're taking into consideration, we're taking their loans and we are [teaming] up where we think we really need to be in the loan loss valuation.

Okay, and then the same question on the margin, your comment earlier about (multiple speakers).

That was all I will say, Brent. I would just say, overall, we're trying to get a handle on it. Again, I can't commit but I think it's probably going to be around the 1% mark where we are at, probably.

Okay. In terms of the noninterest margin you mentioned earlier, it's not probably accurate to just slap the two sides together and come up with pro forma, that we should discount that a little bit. What's really driving the discount and how (multiple speakers)?

Well, you know, when they announced their stuff at the end of the last quarter, Brent, I think they said they were moving some loans into the available-for-sale category. So some of the stuff they have that they've been divesting leading up to closing is going to negatively impact that margin some.

I got you.

They also have a factoring company and an asset base lending that we are not as big into that we probably won't be into that, so that you can take some of that margin away for some of the higher-risk lending.

Okay, thanks a lot, guys.

Bob Patten, Morgan Keegan.

Nice quarter. A quick question --Dan, I guess, can you comment on are there any metrics that you guys use in terms of specific customer retention, employee retention revenue growth cross-sells for deals that you guys have done with the line of business and that you'd be willing to share with us on a going-forward basis?

I'm not sure I understood your call. You know, we certainly track product per customer in the Bank today, and we look at that with the institutions that we are acquiring. But Bob, the difference in the software products that different banks are running mean that what they may show today may not map over on our software to end up with the same product-per-customer number. So coming into it without it being on our system, we can't tell you where they are. Our goal all along has been to be pushing four Bank products per customer; four Bank products per customer is what we want to push out there. But we can't tell you what their numbers are and every bank counts that differently. You know, we talk to some of our big brothers and sisters and they count a brokerage account in that process; they may count some other what we would consider to be non-Bank products in their account, and they say they want to have [eight products] per customer. We are a plain-Jane vanilla bank and we've got loans and deposits, so when we are counting products, we are counting pure Bank products in our counts. But we don't have a number that says, you know, if they are not at X, this is what we need to do or if they are above something, we do something else.

Would you agree, Dan, that we do try to look at them from like a fee income generation (multiple speakers)--

Oh, absolutely!

(multiple speakers)-- of the products, kind of start getting--normally what we see in these acquisitions is they've not done a good job of cross-selling their products, and then when they adopt our structure, we start getting them into these sales goals and product gains, but we don't really look at it so much outside of the four products per customer. We want to see how it falls to the bottom line. Year-over-year, what are they doing from a fee income perspective? Is that true?

That's absolutely true. Every acquisition is a little different. If you look back, Southern National's fee income was very low; the Texas United, their sales team is very similar to ours. Their sales metrics, their product push, their incentive comp is very similar to us. So those two transactions come from very different positions when we look at that product mix.

Okay. Then, just a general question, Dan or Dave. The M&A environment, you would think, with the inverted yield curve being where it is as long as it has been or where it's forecast to be, that deal pricing or the chatter would create more attractive deal pricing. Now the small banks are probably being impacted more than the larger banks. What are you guys seeing out there, in terms of compared to like '04 and '05, chatter and pricing and the CEO comments from those banks?

Well, this is David. You know, there's a lot of activity out there right now. We are getting an opportunity to look at it. You know, if you're posing the question has the price expectations come down for some of these smaller banks, the answer to that on the first glance is no. I mean, when you throw them a price, some of it is just almost bizarre what they are asking for. But overall, generally if the bank really is--wants to get out and to sell, they're going to come down to prices that are reasonable, whoever the buyer is. Every buyer has a different calculation, but they're going to meet the buyers, what the buyer expects to make out of it.

So overall, there's a lot of activity right now, probably more smaller banks than larger banks that I've seen in a while. I think there's more smaller banks looking to sell right now. Again, the first expectations from the banks that are still not coming down on their expectations. On the other hand, as they get closer to really wanting to sell, they do come down and moderate.

But you're saying that the expectations from the sellers (indiscernible) is still out there next to that new planet that is out there (indiscernible) Pluto or something (LAUGHTER)?

I will give you an example. There was $100 million bank that was for sale with a few offices that I think they had about $8 million in capital and wanted $33 million for the bank and had a total of about, in core deposits, probably about 60 or 70 million, so about a 50% premium. So (LAUGHTER) but again, you walk away from deals like that, you know, and there's other deals out there that are more realistically priced.

Okay. Yes, it's got to be hard for you guys. Do you wait for pricing to come down if we stay here a year from now? The earnings are certainly going to come down so the prices at some point have got to start to moderate, but we haven't seen it yet.

Yes, there's deals out there. I think there are deals that are outrageous, and there's deals that are realistic. It's not a question of if we can find deals again. I mean, we have a lot of opportunities and people are coming to us. Our real challenge or question is how much can we take on at a time. Our first goal right now is to really take Texas United and integrate it to the best of our ability, and move as rapidly and expeditiously as we can, but we are still having some other opportunities out there as well.

Okay, thanks, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. All of my questions to been asked except for the operational conversion for Texas United--Dan, I'm sorry I didn't hear all of what you said. You said the first conversion would occur in February and then the rest when?

Before the end of the second quarter is what I said. But they will stretch out over a pretty even space here in the first quarter. We will do a couple, two or three in the first quarter and the last one will happen mid to late second quarter.

Is that accelerated versus what you had originally planned?

No, this is the plan that we have been talking about all along, you know, that we would be through with everything before the end of the second quarter, which is before the end of June. You know, remember you've got some differences involved here. We've got four banks but we're looking at this kind of as a four-in-one transaction. State Bank is larger than the other three combined, so that piece is a bigger piece of the puzzle. The other three are relatively small and so I think we can do those in a more rapid succession than we can the bigger ones.

That's good detail. Thank you. Nice quarter.

Bain Slack, KBW.

Good morning. Nice quarter. Most of my questions were answered. I guess I just have a little bit of a follow-up on the, sort of the pro forma net interest margin with Texas United. It sounds like you're saying, when we look at it pro forma, it should really come down a little bit because of the loans held for sale, and it sounds like maybe you all are getting out of the factoring and any other high yielding assets. But I wanted to I guess--I also heard, in an answer, that you're going to use some of the liquidity to pay down the borrowings at TXUI. I just want to make sure. Was that incorporated when you're sort of guiding the pro forma number down a little bit?

Yes, I mean I'll make a quick comment. The answer is yes. I mean we're looking at all the moving pieces. I just don't think--David is going to jump in here but I just don't think it would be that accurate to take whatever their number is and whatever our number is and you weight it and there's your new numbers. It's not going to quite be like that, but I know you want to jump in.

No, I don't; I think you said it fine.

There's a lot of moving parts. Bain, there's a lot of moving parts over there. Having four banks and operating four separate computer systems, you know, our expectation is, is when we close this transaction, we will be able to provide or they will be able to provide some color to you on kind of where they are and what they've done. That will help you be able to plug some of your numbers together.

Maybe we could say it a different way. It will help our margin. I mean we're not--.

Absolutely!

I'm not saying that it's not going to have (technical difficulty) impact on our margin.

But we are saying that you can't just slam the two together.

Okay, well, I just wanted to make sure that also included the borrowing pay down as well.

Yes.

I guess just a more general question and I will let you go, I mean deposit growth looked really good. I know you talked a little bit about it but I think, in previous quarters at Prosperity and then others in Texas, we heard about obviously a lot of hot competition, especially in the middle of '06 from the out-of-state players. Does that seem to have cooled down somewhat or what's your read on that?

No, I think it's more feverish today than ever before. I think it's extremely competitive, and I haven't seen that ease at all, quite frankly.

I think it's competitive on both sides of the balance sheet. I think we are fighting a pretty intense battle pricing-wise on the deposit side with multiple players, and we're fighting the same battle on the loans side, on a pricing basis and on a structure basis.

Okay. I guess we say that in the loans but I guess, given that competition and given the deposit growth and without much repricing up per linked-quarter, I would say it looks pretty good for you all.

Thanks.

Congratulations.

Brett Villaume, FIG Partners.

Congratulations, fellows, and all of my questions have been answered.

Campbell Chaney, Sanders Morris Harris.

Good morning, guys. David, could you give us some color now that you're going to be a $6 billion bank pro forma with TXUI? Are your size expectations now larger for acquisitions, maybe for new footprints and expanding outside of your current territory, or were you still looking at smaller institutions outside your territory as well as inside? Then I have a follow-up.

Well, I would say, Campbell, that basically we are always going to be opportunistic. You know, some people have even asked, analysts and even other people, can you really--does it really do you any good to buy a 200 million or $300 million institution because it doesn't move the needle? But I will tell you that we're going to be opportunistic. If we see things that are in the markets that we are in currently, Houston, Dallas, Fort Worth, and we can really enhance our position in those markets, we're going to look at the smaller deals. At the same time, just being $6.5 billion or so, you know, you have a better opportunity to acquire some larger banks. I mean, the answer to the question in short would be that we're probably going to be looking at both, really.

Yes, but if you were going to expand outside of your current territory, would you be looking at larger deals or smaller, or does it matter?

It just depends on what you say our current territory is. Our current territory right now I consider as the state of Texas. You know, if you said that we were going to go out-of-state, and we have no plans to the out-of-state right now, yes, you would probably have to look at a larger deal out-of-state; you would almost want it to operate on its own basis.

It would have to be pretty compelling.

It would have to be compelling to do. But we're not really looking out-of-state right now. There's so much in Texas, we have our hands full here, really.

Okay, fair enough. Then looking at some of the deposit materials, on a pro forma basis, including Texas United, can you give us some color on the rollover of your time deposits? Is it going to change much and how much do you have, say, maturing and rolling over in the next three months and six months on a pro forma basis?

You know, I don't know that I have an answer for the TXUI piece of the puzzle at this point, but you know, if you were just looking at the Prosperity side, you know, typically when you look at our numbers, you can see that our CD maturities are relatively on the short side, three to six months, maybe eight months or so. So I don't know if that helps you in any way.

I would add, let me this, Dave, you know every bank is different but I would tell you that Texas United banks are very similar in their makeup and their profile. If you look at their demand deposits and the portion that they have in money markets and what they have in time deposits, our ratios are so very, very close. I would tell you that their pricing is very similar to our pricing. In fact, I think they've been pricing off of our pricing for probably the last few months, whereas that was probably different with Southern National Bank. Southern National Bank had a very larger CD portfolio that really was based on pricing, and a lot of people that came to southern national was on pricing. So I don't think that you're going to see much of a difference really with Texas United and us. I don't think that you're going to see overall that there is any difference at all, really.

I think that's right.

Okay, that helps. Thanks a lot.

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