Prosperity Bancshares Inc (PB) 2008 Q4 法說會逐字稿

Good day and welcome to today's Prosperity Bank fourth-quarter earnings call. All lines are currently in a listen-only mode and later you will have the opportunity to ask a question during our question-and-answer session.

It is now my pleasure to turn today's program over to Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares fourth-quarter 2008 earnings conference call. This call is also being broadcast live over the Internet at prosperitybanktx.com and will be available for replay at the same location for the next few weeks.

I am 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 for 2008. He will be followed by David Hollaway, who will spend a few minutes reviewing some of our recent financial statistics. Tim Timanus will discuss our lending activities including our asset quality. I will provide an update on our integration plans for the former Franklin Bank locations, and finally, we will open the call for questions.

During the call, interested parties may participate live by following the instructions which will be provided by our call moderator, Katie, or you may email questions to investor relations at prosperitybanktx.com.

I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Whitney Hutchins at 281-269-7220 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 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. David?

Thank you, Dan. We would like to welcome and thank everyone that is listening and participating in our fourth-quarter conference call. It is a pleasure to report another great year for our Company. Our performance during this difficult economic environment continues to be strong. With a challenging US economy and industrywide credit problems, we are pleased to be able to report stable, consistent earnings and strong credit quality.

As we have mentioned before but certainly worth repeating, we do not have any CDOs, SIVs, or other esoteric products that have been causing strain on the liquidity markets. While we do offer some mortgage-related products, we do not operate a mortgage company. We do not have a factoring company or asset-based lending area. We do not participate in indirect lending programs. We do not participate in shared national credits and finally, we are not involved in subprime lending.

In addition, our Board of Directors spent a significant amount of time during the fourth quarter considering the Federal TARP program and ultimately decided not to seek federal capital purchase program funds. We are well capitalized under regulatory guidelines and we should be able to continue building our business and taking advantage of opportunities that arise during these uncertain times.

We expect that our business and its earnings as in the past will provide the necessary capital for continued growth. In the event that a large acquisition opportunity arises where additional capital may be needed, we feel we have the ability to raise capital through traditional sources.

With regard to our 2008 operating results, we showed fourth-quarter earnings per share of $0.49 on a diluted basis. This is $0.03 above the mean analyst estimates. We had annual net earnings for 2008 of $84.5 million or $1.86 per diluted common share. Excluding the non-cash impairment charge we recorded during the third quarter, our net earnings would have been $93.6 million or $2.06 per diluted common share.

On November 7, 2008, Prosperity Bank completed the assumption of approximately $3.6 billion in deposits from the FDIC acting as receiver for Franklin Bank. Approximately $1.6 billion was brokered money and has since exited the bank. We acquired certain assets from the FDIC including approximately $350 million in US treasury and agency securities. In addition, we had the exclusive right to purchase any Franklin Bank loan we wanted at book value. After a thorough review of loans originated and managed in the Franklin Bank community banking offices, we purchased approximately $350 million of high quality performing loans.

My next statement may be viewed as a bit naive by some considering the times, but we are expecting improved earnings in 2009 based on a few factors. One, after a lengthy time period of flat or inverted yield curves, we are finally experiencing a true yield curve. Two, the acquisition of Franklin Bank franchise from the FDIC should be very accretive for us. We were fortunate to purchase over $2 billion in investment securities before rates dropped so dramatically.

As we were purchasing in November, the yield on the 10-year treasury was close to 4%, while today, as you all know, it is much lower, currently around 2.5%. We do however expect our 2009 loan loss provision to be equal to or higher than our 2008 full-year provision based on the economic times we are facing.

With regard to assess quality, our nonperforming assets totaled $14.4 million or 20 basis points on average earning assets at December 31, 2008. This is a decrease from the December 31, 2007 total of $15.4 million or 30 basis points on average earning assets.

Our provision for loan losses was $6 million for the three months ending December 31, 2008. The net charge-offs were $3 million for the same period. The additional provision during the quarter took into consideration additional loans purchased from Franklin along with deteriorating economic conditions as per our loan loss provision calculation.

At December 31, 2008, our securities portfolio totaled $4.1 billion with a total unrealized gain of $81 million. The effective duration on the portfolio is 2.96 years and the average life of the portfolio is 2.93 years.

Talking about the economy a little bit, although the seasonally adjusted nonagricultural employment fell by 25,700 jobs in December, the Texas economy added 153,600 jobs during 2008 compared with job losses of 2.6 million nationwide. Texas seasonally adjusted unemployment rate rose to 6% in December compared to 7.2% for the US. Houston employers created 57,300 new jobs in 2008 an increase of 2.2%. While unemployment claims for Houston and the state of Texas rose during December, we believe that Texas is feeling more of the national recession that until recently it had been immune to. However, we still feel that the Texas economy will outperform the nation in 2009 with a pretty good economy considering all factors.

Without question the full year 2008 results were very successful. Our team remains committed to building shareholder value. Since January 1 of 2000, I am pleased to report that the diluted earnings per share have increased from $0.74 in $2000 to $1.86 in 2008, a total increase of 151% or 12.2% compounded annually. Our total assets have increased 1191% or 37.6% compounded annually from $703 million at year-end 2000 to $9.1 billion at year-end 2008.

The net earnings have increased 956% or 34.3% compounded annually from $8 million in 2000 to $84.5 million in 2008. We continue to control our costs resulting in our efficiency ratio being in the top of our peer group.

Our goal for 2009 is to continue the high performance that we have delivered in previous years, provide quality products, treat our customers to the highest standards, and increase shareholder value. In the past our bank has generally performed well during more challenging economic times compared to our peers and we expect this to be the case in the future. We hope to be able to take advantage of opportunities that arise from the disruption in the loan and deposit markets and to be prepared for the acquisitions -- institutions needing assistance.

Before I close, I would also like to thank and welcome all of the Franklin Bank associates who have worked and are working so hard retaining our great customers as well as helping in the operational integration of our two companies.

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

Thank you, David. Beginning with deposits, deposits were at 12/31/'08 were $7.3 billion, an increase of $2.4 billion or 47.4% from 12/31/'07. On a linked-quarter basis, deposits increased 43.4%. Backing out all the acquired bank transactions, deposits decreased $10 million year-over-year and on a linked-quarter basis, increased 4.8%. I would note that on the linked-quarter number that is similar to previous years. Most of the linked-quarter growth was seasonal and will be gone by the end of the first quarter in 2009.

Net interest income increased year-over-year $27.3 million or 13.6% to $227.7 million. The tax equivalent net interest margin impacted by the Franklin transaction was 3.65% for the fourth quarter 2008 versus 4.15% in the third quarter and the margin was 3.96% for 2008 versus 4.06% for 2007.

Noninterest income decreased 1% year-over-year from $52.9 million in 2007 to $52.4 million in 2008. This was primarily due to net losses on sale of ORE in 2008 and I would point out within the noninterest income category, the deposit on service charges line item is up year over year $4.8 million or 11.8%.

Noninterest expense increased 13.4% to $143.8 million in 2008 compared with $126.8 million in 2007. In addition to the Franklin transaction, the increase was impacted by the impairment of our remaining Fannie Mae and Freddie Mac preferred stock which was a $4 million increase year-over-year.

The efficiency ratio impacted by the Franklin transaction and does not include the preferred stock impairment charge was 48.6% for the fourth quarter 2008 compared to 45.5% for the same period last year and 45.4% for the third quarter 2008. The year-to-date efficiency ratio for 2008 was 46.5% compared to 46.2% in 2007.

Looking forward for 2009, based on our 12/31/'08 asset liability model, we are projecting our net interest margin to be 5 to 10 basis points higher than the fourth-quarter number. Factoring in the Franklin locations, we are modeling a 10% increase in noninterest income year-over-year.

Projecting a specific target for operating expenses for 2009 is a bit more difficult due to the timing of the Franklin deal, but another way to look at this, we are targeting our efficiency ratio to be back to pre-Franklin transaction levels by year-end.

On the balance sheet side, we are projecting a 5% to 7% loan growth number for 2009 and this is based on the idea that this is the opportunity to get the best of the best customers. And for deposits, we still expect $300 million to $600 million in high rate CDs from the Franklin transaction to leave the bank and because of this, we are assuming deposit growth for 2009 will be flat to slightly down.

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

Thank you, Dave. Nonperforming assets at year-end December 31, 2008 totaled $14.368 million or 0.40% of loans and other real estate compared to $14.536 million or 0.45% at September 30, 2008 and $15.390 million or 0.49% at December 31, 2007. The December 31, 2008 nonperforming asset total was made up of $9.736 million in loans, $182,000 in repossessed assets, and $4.450 million in other real estate. As of today, $1.938 million of the December 31, 2008 nonperforming asset total have been removed.

Net charge-offs for three months ended December 31, 2008 were $3.011 million compared to net charge-offs of $1.805 million for the three months ended September 30, 2008. Net charge-offs for the year ended December 31, 2008 were $7.621 million compared to $5.593 million for the year ended December 31, 2007. $6 million was added to the allowance for credit losses during the quarter ended December 31, 2008 compared to $1.7 million for the third quarter of 2008 and $9.867 million was added during the year 2008 compared to $760,000 for 2007.

The average monthly new loan production for the quarter ended December 31, 2008 was $77 million compared to $80 million for the third quarter ended September 30, 2008. Loans outstanding at December 31, 2008 were $3.567 billion compared to $3.249 billion at September 30, 2008. The December 31, 2008 loan total is made up of 44% fixed rate loans, 28% floating rate loans, and 28% loans that reset at specific times.

I will now turn it over to Dan Rollins.

Thank you, Tim. I'm pleased to report that our team is on schedule to complete our integration of the former Franklin Bank offices before the end of this quarter. We have identified 13 of the former Franklin Bank offices that we can consolidate into nearby locations. The net result for our bank after this integration will be an additional 33 full-service banking centers, bringing our statewide presence to 158 offices.

The Houston area will continue to be our largest market with 51 locations. We will have 36 banking centers in Central Texas including San Antonio, 12 in the Austin area, and seven in the Bryan-College Station market. Our Dallas-Fort Worth footprint includes 24 locations and our East Texas area including Tyler and Longview will have 20 full-service banking centers. Finally, we will operate 27 locations in South Texas including Victoria and Corpus Christi. The Franklin transaction again looks to be very, very attractive for us.

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

(Operator Instructions) John Pancari, JPMorgan.

Good morning. Can you give me just a little bit more color on the linked-quarter expense growth? I mean excluding Franklin, I just want to get an idea of what the core number was there for expenses and then what we should think about in terms of the growth rate going forward?

I think that's what I was mentioning earlier. This is Dave Hollaway. There are so many moving numbers here with this acquisition to really pin this down and that's why I kind of made the comment it is easier to think about it from an efficiency ratio perspective. Because if we are controlling that expense and as we normally do in these acquisitions, we start reducing the expense base that we have.

This transaction is a little more unique because it was a failed transaction. We only had to buy parts of the institution versus a normal type transaction where you take the whole thing and then you start working from that. So kind of a couple things I would say on that is think about it in terms of efficiency ratio. The other way to look at this as you are trying to pinpoint a number and there's no guarantee of a run rate in '09, so when you're looking in our press release you look at the quarterly numbers and you are looking at the expense piece of it. You can kind of see the numbers moving from third quarter to fourth quarter. You can make the assumption that a lot of that extra expense that you see is coming from the Franklin transaction. Dan?

That's right. You know, I think we've talked about this a couple of times, John. You know, the net increase here of 33 offices you can take another stab at it. This is like opening 33 de novos. We didn't acquire the company of Franklin Bank. We acquired bits and pieces of it from the FDIC, so you are really starting with a zero expense base and building expenses as opposed to taking on a whole company and then cutting expenses.

So I think from my perspective I see we are adding 33 new offices and I would look at it as 33 de novos. So go back to the third-quarter numbers when Franklin wasn't there, we were operating 130 offices in that expense base and you can see we are going to lay 33 new offices on top of that.

Plus the other thing to think about is we brought -- this transaction happened in November 7, so it wasn't there for the full quarter.

Yes, you had two thirds of the quarter. It was there for most of two months of the quarter. Does that help you, John?

Yes, it does. That's helpful. Then can you --? Just one thing on the margin. Can you give us some detail on the -- how much of the compression you could attribute to the inflow of the Franklin deposits and then any other factors? The compression was a bit less than I had anticipated and I --

That's a good thing.

I know it is. And I know you expected an increase in '09 over the 4Q level, so I'm just trying to get some understanding, some added understanding of the impacts on the fourth quarter per se.

Yes, I'll jump in on that one first. I mean the reality is if you were able to kind of peel off the Franklin part of the business and the offset of the reinvestment of the deposits for the quarter, the Prosperity stand alone, actually that margin held steady from the third quarter. I mean we were able to maintain on the core business. It didn't go backwards in the fourth quarter. So you could see if that assumption is holding, then you can see that there was tremendous impact from the Franklin part of the acquisition.

And you have to remember that in November we took the full $3.6 billion in deposits and we had that money basically in 20 or 25 basis point Fed Funds for not the full month of November, but it was late in November before that money started really going to work. So you had a much bigger -- the volume was higher in November and the rate or the margin deterioration from that in November was pretty significant.

December was relatively clean. Most of the brokered money was gone by the time we got the December and most of the money had been invested by the time we got to December. I think that's where is Dave is telling you I think in your comments you said you expected to see a 5 to 10 bp increase in margin over this quarter going forward.

But I mean the assumption is absolutely spot on that that huge margin compression is directly attributable to the Franklin transaction.

Okay, then one last question actually on credit. Can you talk a little bit about the jump in the past dues almost doubled? I just want to see what that was largely related to.

You are talking about the over 90-day past due number that went from $3 million, $4 million to $7 million?

Yes.

I think at the same time we were pleased to see that some of the ORE dropped down. I think we are still fighting the same headwinds that we have been fighting, John. I think that in Tim's comments -- Tim you may want to jump in here -- but we saw the NPA numbers basically turn over 50% or 60% from one quarter to the next. So it's the same thing we've been fighting all for the last year now is we're looking at predominantly acquired credits over the last two years and we are just fighting the headwinds of cleaning those things up.

I think that is exactly right. There is probably less volatility in our credit markets as compared to elsewhere in the country. But having said that, we have volatility and it's moving around. There are signs albeit not significant signs, but there are signs of deterioration out there, so it's not surprising to us to see that 90-day number move.

OK, thank you.

(Operator Instructions) Jon Arfstrom, RBC Capital Markets.

Thanks. Good morning, guys. Nice job. Question on the loan growth number that you talked about, David. I know you have been -- become a little more optimistic on loan growth but I'm curious what's changed over the last three or four months and really what you are seeing now to give you confidence to say that you can put up that kind of growth?

John, we think that the Franklin transaction is different than say the other transactions with the First Choice and Texas United and Southern National in that when we bought those banks, we were probably outsourcing as much or more loans that they had in their portfolio than we were making. In this particular case, you know, we got to buy just the loans that we really thought were really good loans and so we don't see a tremendous amount of roll off of loans from -- purchased to begin with.

Then number two, I think with the dislocation of the markets the way they are right now, you know we are kind of opposite of what everybody else is doing in the market. We usually always are, but when everybody else was really jumping into the market, increasing their loan volumes by 20% a year, you didn't see us growing that much in the last couple of years. I think we are really finally getting an opportunity to see some credit that normally are coming back to traditional banking that probably were out in the markets, in the commercial markets and the securitization market.

So we are getting some opportunities to see those and we are looking at them because we are getting -- we're not doing them like the securitization market, but we are getting to get personal guarantees. Again, we are getting to get rights. We are getting reasonable down payments and so all of those are coming back into the banking field and that's what's encouraging to me that we should see some -- maybe some loan growth and pick up in these kind of times when other people really aren't in a position to do that.

So you are saying that we can cherry pick the best customers that are out there from the banks that are not treating their customers the way they should be treated?

Well, I just think that everybody knows the economic times are different in whether banks sometimes want to loan. Sometimes they can't loan just because of the situation that they are in. We are in a very good position. We have a lot of liquidity and so we are just in the right place at the right time right now.

And funding for that growth, I am assuming that cash flow off the securities portfolio, maybe some runoff rather than balance sheet growth?

Yes, we have tremendous cash flow. Also the portfolio this year is probably over $1 billion, probably $1.3 billion, $1.4 billion maybe.

Okay, then in terms of the Franklin loans, are you completely through the portfolio and that process is over?

Yes, the process, the purchase and assumption agreement with the FDIC gave us a 30-day exclusive right on those loans that was extended out to a 60-day exclusive right, which terminated on January 5. And we are outside of that window now. We are still talking to some customers over there. We still have the ability to make those customers a loan, but we will not be purchasing any more loans from the FDIC.

John, I would also emphasized that Franklin, they had a lot of different types of loans. They had the loans that were in their what we call their retail banking centers and then they had another group that was a commercial group and several other groups. The only loans that we really looked at were the loans that were made in their retail locations and those are the loans that we actually cherry picked on those.

That's right, David. Franklin operated 45 community bank offices across the state of Texas in Central Texas and predominately Central and East Texas and those 45 offices had originated and were managing somewhere around $650 million in loans that are similar in process to the way we do our lending. So you had customers in the field and you had lenders in the field taking care of that. Out of that $650 million in community bank credits, we looked at those as if we were making new loans to those customers and purchased $350 million give or take of those loans.

Again, loans to individuals and companies and businesses, not -- they are not wholesale. They're not wholesale loans or anything like that.

And the type of loans that we purchase, I think that was a question. Whether you ask it or not, somebody will. It's basically the same types of loans that you see on our current portfolio. So we disclosed in there that the $52 million of that $350 million was in the construction category. That was in the press release. The rest of it is probably proportionately spread across the rest of the categories of loans fairly similar to what we had coming into the quarter.

Okay, then just a quick question on the accounting. You said you purchased these loans at book value, so I'm assuming its book value plus a reserve, or do you end up marking that after you purchased it? How does it work?

Multiples answers there. One, yes, you are right. The [TNA] says purchase on that book value but ultimately they have to be brought over from accounting purposes at market value.

There's no reserve attached to them.

So all of that would be -- any marks would be reflected in the current quarter numbers?

Well, I think the additional reserve that you saw in this last quarter where we actually reserved our provision $6 million for loan losses, we only incurred about $3 million. So there was an additional $3 million in provisions and that -- most of that had to do with primarily the loan-loss reserve calculation, which took into consideration these new loans basically.

Okay, perfect. That's what I was answer. Thanks, guys.

Ken Zerbe, Morgan Stanley.

Thanks. I guess first of all just delving just a little bit more on the Franklin expenses in terms of the branch openings, so given what you said, the $5 million roughly is two-thirds for the quarter, two-thirds of your total expenses, which would imply total sort of Franklin at run rate of around $8 million. Given that you have taken on what was it 44 branches originally and I think you're going to close roughly 10 or 11 of those, is there any incremental or any integration costs or any kind of closing expenses that would probably be viewed as one-time as you close those branches or lay off any people associated with those branches that you did take on?

Not in the fourth quarter.

But in first quarter?

I will jump in. Yes, there's a lot of moving parts here. That's the key here because one of the things to point out is right now this Franklin portion of the business, they're still running on their own data processing system, which is -- which will be increasing these costs significantly. I think that's kind of where you are headed. You know, like if you are looking in this fourth quarter, what are some of these one-time extra costs that are happening now versus as we go out into 2009, they will start disappearing. I think that's absolutely right.

Now trying to pinpoint what that number is, that's going to be a little more difficult. But the thought is correct that the expenses are a lot higher for these two months and into the first quarter. And then by the time we get to the second quarter, we will start streamlining this process. Dan, do you agree with that?

That's exactly right. Your numbers were close. You know, they were 45 - Franklin really operated 46 offices, but one of them was not a branch. So 45 banking centers and we are going to keep 33 of those coming forward.

I think the other part of the question was, though, did we see going forward any I guess maybe big one-time charges that is closing this. And I would answer that, Ken -- this is David Zalman -- that we've taken all of that into consideration. There will be obviously integration costs and closings and that, but we don't expect any of that to be extraordinary or any one big one-time charges or anything like that.

Okay, so maybe elevated the expenses in first quarter and then slowly coming down as you get the systems and (multiple speakers). Okay.

Yes.

That's right. And I think David answered that in the look at the efficiency ratio. You know [we ran] back towards where we were.

Fair enough. The other question I had just on the comment about the impact of where oil is in the overall Texas economy? I think you guys mentioned in your comments that Texas was starting to weaken a little bit. How much is that driven by oil? I understand that the economy did not build itself out around $140 per barrel oil, but I'm sure it had some impact.

I'll take that, Ken. I think oil did -- does have an impact. It was starting to have a bigger impact. I think I mentioned in previous conference calls that what we started seeing really -- first of all, let me say that if you looked at January's oil price last year at this time in January at the beginning of the year, it was $60 a barrel. It wasn't $140 a barrel. So let's start from there. But we did see as the price of oil started reaching these triple digits, we did start seeing commercial real estate rents especially from our perspective as we started renewing probably two or three leases that we had on [eight] properties especially in the Houston market. We saw those.

Our leases that usually would run $25 or a square foot as we were starting to renew some of those leases they were asking anywhere up to $30, $35 and $38 a square foot. So we started seeing prices really escalating. We moved out of those buildings, two of those buildings, so we didn't pay that. But I think that's what the oil started to do.

You know, the good side of this is that the prices have come down but on the other hand from a perspective of housing in Texas, the housing market and the prices never went up as considerably as it did in the rest of the nation. So will it impact us? It probably will. You are seeing jobs right now that aren't only from oil. It's from all the other industries at the same time. But at the same time, if you're talking just specifically about the oil industry, I don't think that you are going to see any major layoffs like you did previously. And the reason is last time that the oil companies did that, trying to rehire and get these people that know what they are doing it was almost a virtual impossibility.

So even if you see oil stay where it is at or go down to some degree, I think that the oil companies will be a lot less fast to reduce staff than compared into the past and that's just a personal opinion. But overall, we think there is a slowdown. We see it -- obviously the employment rate is going up.

But having said that, we have taken all of that into consideration in our calculation and because our real estate prices and almost all the other prices didn't get out of hand over here, we still think it's going to be a pretty good economy compared to the rest of the US.

It's also a positive for the consumer, Ken. You know when you look at the cost of gas, over half the vehicles on the roads in Texas are SUVs and trucks that probably aren't the most fuel-efficient miles per gallon. So when you look at what the run-up in cost of gas did and then the run back down, the average household I think I saw an article today, the average household is somewhere between $150 and $250 a month increase in disposable income from the peak of the gas price. So there is a positive on the consumer side with that fall in gas prices.

Understood. All right. Thank you very much.

Charles Ernst, Sandler O'Neill.

Can you just talk a little bit about the balance sheet change? You had a large amount of money go from short-term earning assets on the average balance sheet to basically nothing at quarter end. Just talk about -- it looks like it went into the bond portfolio. What were you buying? What kind of yields?

Okay, I'm not -- you're talking about --?

I'll jump in, but I think David will probably fill in color. Probably what you are seeing is we had a lot of liquidity in the Fed Funds coming right out before the transaction, the Franklin transaction, because we knew it was coming. That's what I think David was saying earlier on. He took that -- a lot of that liquidity and then jumped in and bought securities to offset deposits coming.

Ask your question again, Charles. I don't know if I quite understood.

The average for the fourth quarter in short-term earning assets was $451.5 million and it was at 71 basis points on the balance sheet. But if you look at the year-end balance sheet, the Fed Funds was that $16.5 million.

Yes, the difference is -- we will kind of walk through that -- we took -- through the Franklin transaction, we got $3.-something billion in cash on November 7. All of that money went into a short-term investment until it could be deployed and so that's what's driving that average for the quarter way up. You took in $3.6 billion in total deposits, $1.6 billion of that was brokered money that stayed in short-term investments the whole time those brokered monies were here, which was basically a month.

So you can take one month out of the quarter, three to four weeks. So you had $1.6 billion in there for three or four weeks of the quarter that was in short-term until that money went away and the other $2 billion that came in on November 1 stayed in short-term until it could get fully invested and the settlements on the bonds that David talked about buying. We bought $2 billion in bonds in November and it took time for those to settle out. So that's all the difference you're seeing.

So can you just talk about what you are buying and what kind of yields were on those bonds?

Yes, Charles, basically we bought just really plain vanilla Freddie Mac and Fannie Mae mortgage backed securities that generally had about a 3.5% -- I'm sorry -- a 3.5-year average life that would extend in the event interest rates went up 300 basis points it might extend at least 100 probably from 3.5 years to maybe 4.5 years and most of our yields were in the -- some were between the 4.75, 4.85, 5% range for the most part.

And again, if you look at our total duration when we talked about earlier in my comments, right now basically our whole total portfolio right now has about a 2.93, 2.96 average life and duration right now when you mix everything together.

You can also see the averages, the average for the investment securities for the quarter was $3.2 billion and we finished the quarter at $4 billion. So you can see the difference where those neighbors came from, Charlie.

I would comment that basically we did this deal on November 7 but for the most part, our bank if you want to try to put this together, we didn't make any money off of the investments for that whole -- for the month of November basically. Basically we were purchasing the bonds and most of them -- we did settle on some, but most of them didn't really start settling until we -- the full effect of the purchases were probably starting in December. And you have got to remember too that we had $1 billion probably in these broker deposits that probably took us three weeks to get out of.

We started November 7. And we kept that in a Fed funds rate of -- what -- 25 basis points to 100 basis points, somewhere between 25 and 100 basis points. So we were doing our best just to offset that not costing us anything, really.

If your question is, modeling out going forward, should you use averages or should you use period-end balances, you need to start with the period-end balances.

Okay, so my ultimate question then on this subject is if you just do the math about looking at the average versus the period-end, and you move the $400 million into a yield that you guys were talking about, a 4.75 type yield, then just that shift causes the margin to go up by over 20 basis points. But your guidance is that the margin is only going to be 5 to 10 basis points higher. So is it just conservatism on your part or what else should we be thinking about-? What other dynamic is impacting the margin?

Well, one of the dynamics is -- and I think somebody said this earlier -- is the cash flow off the bond portfolio -- I think somebody said it's $1 billion, $1.2 billion range for this upcoming year. And you have to ask the question, where is that money going? If we don't lend it out, we have to take the conservative approach and say we're going to reinvest in the bond portfolio. Well, today, you would have to ask the question what kind of reinvestment rate would you be getting on that? And I don't think it is 4.85% or 5% in the bond portfolio.

And you have another -- there's a whole bunch of moving parts in there, Charlie. But when you go down to the CD line, it shows an average of the quarter of $2.8 billion. That includes that $1.6 billion in brokered money. We put those brokered monies on for the whole time they were here at 25 basis points, so that held the cost of that money while it was here down. So that is a negative to your number. I think you are a little high on your calculation.

Well, the math is if you just did what you said you guys did on the short-term earning assets, then that adds a lot. But I appreciate the comment about the cash flow rolling off. And just to be clear, the expense guidance that you guys are loosely giving, the efficiency ratio you are talking about is a GAAP efficiency ratio in kind of that mid-45% range.

I would say, again, we said by the end of 2009. So if we are starting at the -- our number, we are showing 48%. Yes, I would say we're going to drive that thing back down into the 46% to mid-45% range. But that would be by year-end, so you have to average that thing out over the year.

Okay. Then my last question is in terms of earning assets, if I look at the period-end balance sheet -- and it sounded like you are going to run off some more to funding, so that means that bonds will probably shrink a little bit, but you are also going to grow loans. So is it fair to assume short of flattish average earning asset balance throughout the year off of the period-end numbers?

Yes, I think that is, because again if deposits -- just use some numbers. I guess if we lose $500 million in CDs, you could fund that with some of the security cash flow. Then if we actually do well on the loan side again the cash flow can do that. So I think that's a good assumption.

Okay, I apologize, one last question. So you guys think that the Franklin deal basically did not earn -- add anything to earnings per share this quarter. Is that true?

For November it didn't. I think we started seeing the income in December.

It might have added just a little bit. I mean it's not going to be significant, if that's what you are saying.

Dan is making a good point. If you count the provision in there, we probably didn't.

On a core business, if you were just trying to run a core and try to back into it, we are not talking anything significant here in the fourth quarter.

Okay, great. Thanks a lot, guys.

Jennifer Demba, SunTrust Robinson.

Thank you. Good morning. My question is about the construction portfolio, which I guess is about $666 million now. Can you give us a sense of what kind of loss content you see in that portfolio this year and what your current NPA level is out of that portfolio?

Jennifer, this is Tim. I don't think that we foresee really any change in the loss in that portfolio. Obviously there's no given in that regard. But based on the credits that we have and our assessment of those credits, we just don't see a large swing there.

Do you have a nonperforming assets in that portfolio right now?

We do. I don't have a breakdown of exactly how much that is.

We don't break the NPA number down by type like that. I think we have had nonperformings in the construction portfolio for the whole year.

That's correct. It's safe to say, Jennifer, that I don't think it's significantly a higher percentage now than it has been, if that answers your question.

Okay, thank you.

Erika Penala, Banc of America.

Thanks, I just wanted to clarify a number that was mentioned during the prepared remarks. How much in rentals do you expect for the runoff from the Franklin (technical difficulty) portfolio?

Franklin deposits?

Yes.

How much runoff do you have from the runoff?

Yes, how much further runoff do you expect?

Again, as we said coming in, you know, we're talking about their higher priced CDs and so we are in the range anywhere from $300 million to $600 million. What does it show on the 12/31 -- about $2 billion?

$2 billion, yes. When you look at what Franklin was, Erica, their community banks that they had acquired going back to 2002 forward, I think that we looked at that transaction as roughly $1.5 billion in true core lower-cost sticky core funding. And then over the last year or so they had paid some higher rates on some retail deposits and ballooned that balance sheet up to the current $2 billion number.

So our expectation is that those customers that are rate shoppers and rate-sensitive that ballooned up $500 million give or take in new deposits over the last year or so -- we are probably not going to be competing for that rate shopper high rate deposits going forward and as that matures, a part of that we will probably move out. That's where Dave comes back to that $300 million to $600 million number.

Having said that, Dan, is that monitoring what we are monitoring right now, though, we don't seem to be seeing as much of the runoff as we thought there would be, too. So it's probably too early to tell, but that's just a little bit of color, too.

Could you give us a sense in terms of that -- those deposits you are targeting that could potentially run off what roughly the cost of deposits are right now?

Well, I don't know that we have a number to tell you the average cost of those deposits because let me walk through the process here again. They are not on our computer system. We can't slice and dice numbers the way we would normally be able to do if we had converted them onto our computer system. So we are running kind of with our arms tied behind our back. But I can tell you the weekend that Franklin failed, they were running full-page ads the Saturday and Sunday after they failed on Friday at 4.25% for CDs. So the market at the time was 3 or less.

So the answer is they had a higher base to start from than what we certainly had at all.

Going back to some of the comments that were made, I think -- I was wondering if I understood it correctly. You mentioned that when oil prices were going up, commercial real estate rents were rising in kind. Were you talking about your own needs or were you talking about color from your commercial real estate borrowers?

No. This is David Salmon. When I was referring -- I was referring to as our leases had started maturing and we started looking at new leasing prices, the prices we were being quoted was affecting us. So --

For our own needs.

For our needs basically. But I'm sure that was starting to impact everybody else as well.

Yes, but that applies to the whole market.

And do you expect in your term commercial real estate portfolio in '09 for some asset classes as some of the leases come up, do you expect some of the rents to start coming down, renegotiated lower?

You know we -- Tim can answer this -- but our portfolio probably doesn't consist of any major buildings that these $50 million, $100 million, $150 million buildings. That is not our portfolio. So I don't think that we ever got to that point really. Tim, you may want to add to that.

That's exactly correct. We have virtually no large office buildings or complexes in our portfolio. So from an office perspective, we are not directly impacted by that in an extremely significant way and really the same thing is true on the retail side. We have very few big box retail sites that we have financed. There are some obviously, but there are not that many. And we are all cognizant of the difficulty that many of these large retailers are experiencing right now.

So we don't see an immediate direct impact from that either. Obviously there's fallout from any negative economic activity that occurs. So indirectly we could be affected by all of this at some point in time, but we don't see it staring us in the face right now.

Remember, Erika, our portfolio is very granular. The average credit size in that commercial real estate box or the commercial real estate bucket of loans is still in the $400,000 range. So lots and lots of relatively small credits. Tim is right, we have some bigger credits in there, but we also have some smaller credits in there.

And my last question, could you remind us what your direct lending exposure is to the energy sector?

We really don't break out a sector exposure like that. When you're talking about energy credits per se, we've discussed amongst ourself with our chief credit officer and our chief lending officer and the four of us in this room. And we don't break it out that way, but I can tell you from an exploration and production standpoint, we don't have an exploration and production department. We probably do have a few credits that are secured by producing wells, an insignificant amount. And we probably have some credits that are secured to oilfield service type companies for equipment or trucks or tanks or whatever. Again, a very, very small part of our portfolio.

That's correct, it's not a significant portion of our lending.

Thank you.

Chris Marinac, FIG Partners.

Thanks, guys. I just want to understand about the goodwill change in the quarter and to what extent you may be able to revisit that as you have further runoff on the deposits from Franklin.

Chris, I don't think there will be any goodwill impairment. When we bid on -- if this is what you're getting at -- when we made the bid we really didn't anticipate. Our bid was based on what we thought we would end up with in deposits, not what's running off right now.

I guess I want to make sure I understand your question. We went from 811 in goodwill to 876. That's what you are seeing, Chris?

Right, exactly.

Okay, and that is basically the premium on the Franklin transaction.

But again, we never bid based on the deposits being -- those deposits that where there. We made our bid based on what we thought we would end up with.

Right. Okay, but the premium dollars in dollars is what ultimately gets booked into goodwill and that will be fixed as (multiple speakers)?

That's right.

Got you, great. Thanks, guys. I appreciate it.

Andy Stapp, B. Riley & Co.

Good morning. Nice quarter. Could you tell me how your 30 to 89 delinquencies fared quarter-to-quarter?

I think the answer is they were actually a little bit better in the fourth quarter. Tim, I don't know if you brought any of those numbers with you? 30 to 89 past due?

No, I don't have it broken down, but there was no significant deterioration.

I think we actually finished the fourth quarter better than we did at the third quarter. But again, not a material number change.

Yes, I think, Andy, for your purposes just assume it was flat.

Okay, and would you happen to have what your net interest margin was in the month of December?

Yes, we do, and that's where we are coming -- when I talked about earlier when we are talking about look at our margin expanding, that's kind of the range that our December margin was in. We already had seen improvement from as I think it was said earlier, November was just -- we couldn't move fast enough to get all that money reinvested, but once December rolled around, we did see some expansion in that margin, so that is where we are coming from talking when you are talking about that.

Okay, and do you expect any deposit run off from the Franklin branch closures or they are just being rolled into nearby offices?

They are all being rolled into the nearby offices. Obviously we are expecting to see some runoff in the hot money or the high-cost CD money. But the offices that are being consolidated, I mean eight of those offices are literally a block or less apart. So they are very close, so we are not abandoning a big block of deposits by closing an office, if that's the question.

And aren't most of them CD --?

Yes, they are mostly CD (multiple speakers)

Hot money funded anyway which is part of our number.

That's right.

I think it's probably important to point out that while we still anticipate run off of some of that higher priced money, I think that the sensitivity to the risk of where people have their money is heightened at this point in time. So as David mentioned earlier, we actually haven't seen quite as much of it run off yet as we thought although it's early in the game, but it may be that some of these people are looking at our bank and realizing that we are probably not getting ready to go out of business. Therefore their money is safe, so the rate may become somewhat of a secondary issue to some of them.

Yes, you know, we are still so early in the game we are less than 90 days in. The rebranding process is just on the very early stages, so it will be by the end of this quarter everything will be rebranded. Everything will be computer conversion changeover and we will all be on one platform by the end of this quarter and we will have a much clearer picture of kind of what's happening at that point.

Dan, you may want to -- one of the other guys asked a while ago and we probably didn't go into it about closing some of these offices and stuff like that. You might want to mention that we are only having to take the offices. You might want to go into that just a little bit.

That's right. Somebody was asking on the expense side. You know, under the purchasing assumption agreement with the FDIC, the way that works is we only are -- we only purchase or assume the leases on the locations that we want to keep. So the offices that we are not taking we don't really have to do anything to close those office or vacate those offices. You know, the nice part of this transaction is that becomes the FDIC's problem and if we don't want to keep it, we move out and it becomes theirs to either dispose or release or whatever they have to do. So that's a positive from the expense run side.

And these will all be closed in the first quarter?

Yes.

Okay, thanks.

Maclovio Pina, MorningStar Equities.

Good morning, guys. Looking at your tangible common equity ratio, it fell from about 6.28 to 4.18 between September and December. A large part of that was driven by the intangibles there from Franklin. But -- and you did mention that in the case you were interested in acquiring something, you would raise some equity by the traditional means. But without any acquisition, how comfortable are you with this ratio so low?

Obviously -- this is David Zalman. If you go back in time and in history, starting at the end of last year was probably the highest capital ratio that we ever had. I would first point out that our tier one ratio is 5.66%. Now that does take into consideration $100 million of preferred stock that is your 4.18, 4.18% or whatever (inaudible) capital ratio didn't have.

But if we didn't have -- if we were running at a 75% or 100% loan to deposit ratio like a lot of the other banks, first of all, it's not sustainable. And if you didn't have the credit quality or asset quality that we have that we have now or had over the last 20 years, that is not sustainable. But again, when you are running the asset quality that we are, it is lower. On the other hand, our earnings, just our natural earnings that I think the analysts have us at about $2.13 to [mean] this next year. If you just take that number and add back by year-end what we will have in just a straight tangible capital ratio after dividend, it's going to be well over 5%. So we have very, very strong earnings that helps compensate for the lower ratio.

So we really look at it as a risk model and that's what David is talking about. You know, if you paint with a broad brush and you are looking for the low tangible numbers, my guess is we will be in that group. But I think you have got to look at it in the context of the full balance sheet and with a 50% loan to deposit ratio, $4 billion of the assets predominantly in agency mortgage backeds and 20 bps of nonperforming on average earning assets, you know, I think we feel very comfortable.

If you can feel comfortable in today's times. I don't know that it would be realistic to say that a bank like ours would have the same capital ratio as one that had a different profile than ours. I mean if you made -- I know a lot of people right now are almost in a cynical position and saying that everybody should have 8% or 9% capital. It's nice. It would be nice to have, but again, I don't think you can paint everybody with the same brush.

Thanks for your color.

David Bishop, Stifel Nicolaus.

A question in regards to the outlook for loan growth next year, just curious where you think -- what sort of segments are you seeing yourselves get compensated from a risk adjusted basis or do you think that is going to be more sort of market share transfer from some of the other super regionals that might be struggling from liquidity or capital?

I really hear two questions in there, David. You're talking about where the loans coming from? Is it new credits being generated in the economy or is it stealing credits from other players? And two, what types of credits do we think we are getting properly rewarded for on the risk? I guess you are really asking is do we want to add more CRE or more construction loans?

I think David answered a part of that earlier when he was saying that the market today is allowing more traditional credits the way they were years ago where the borrowers that had the financial wherewithal are now -- they are signing personally again where for a while the personal guarantees went away. The equity requirements and credits for all practical purposes went away over the last few years and now there's a requirement that they have real cash equity back in the transaction. So I think the risk side I think is good.

To answer your question, yes, I think the loans come from two places. The super regionals that were making loans that have these 100% loan to deposit ratios, whether they want to or not they have to cut back. The Street is making them and everybody else at least until they get their loan losses into a more stable environment and their loans into a more -- until we get into a more stable economy.

The other part is what Dan is saying, the loans are coming -- probably we are getting new opportunities where people in the past were going after the securitization market. Those same people are coming back in and are willing to do what we said earlier, sign personal guarantees, put real money down and we are getting an interest rate. But also I would like to say that we are not doing that for everybody.

This is a time when you can really pick and choose and we are going with people and companies that have been around not one year ago, not five years ago, but people who have been around in business and we have known them for the last 20 and 30 years. We are looking for that type of opportunity where people -- we couldn't get those credits in the past because they weren't willing to pay the rate. They weren't willing to the terms and conditions like we want. Those are the kind of companies that we are going after right now.

Tim, do you have any comments?

I think that's all exactly correct. We hope that we are looking at all loans closely regardless of the segment and that certainly holds true for all real estate loans. But it's a reasonable guess that not every homebuilder is going to go out of business for example. And if we can pick up somebody that has been in that industry for a long time that we've known and watched and been unable to do business with because they've gotten lower rates and less down payment requirement historically, we are trying to embrace those kinds of credits. And they come from all segments of the economy.

So the growth if it comes will be from all sectors, probably less real estate than others. But it will come from all sectors.

Does that help you, Dave?

Yes, and then maybe one housekeeping item. The dollar amount of the FDIC deposit insurance premiums this quarter -- I know that's kind of a bug there going forward, but --

Yes, that thing is significantly increasing. I mean per monthly this past quarter it was like $250,000 which was significantly higher than prior quarters. And then we are into the new year, that number is on an annualized basis you are somewhere in the $7 million range.

So third quarter it was running at about $100,000 a month and in fourth quarter it was $250,000 a month and you are expecting it to be $500,000 plus a month going forward?

Yes, on an annualized basis $7 million.

Thanks.

A pretty significant jump.

Bob Patton, Morgan Keegan.

Hey, guys. That FDIC question was the last one I could come up with. But I will ask you one -- and this is going on too long, so I will let you guys go. Just the thought process, when you guys did the third quarter, oil had come down from $145 to like $93 at the end of third quarter. Then it closed in the fourth quarter at $33. What kind of shock testing do you go through when you look at your portfolio? I understand that you are not big in energy directly, but the whole ancillary issue with a lot of different businesses.

Are you talking about shock testing for oil and gas production loans?

Not only that, but job loss. When you saw oil go down that quick, obviously you guys had to be looking at what the net effects were to your overall market in terms of loans across various spectrums.

First of, Bob, you have to say that oil went up pretty quick. I mean, if you looked at last January, oil started at $60 a barrel.

Absolutely.

It went to $140. So it went up real quick. Do we do testing? The answer to that is yes, all of our commercial real estate is tested and it's tested on several factors. Tim, you may want to jump in and again, Chris Bagley, who is our chief credit officer, does this for us. And they look at it basically on a collateral basis, on a valuation basis and if valuations drop and where we are at -- and again, I don't have the exact numbers but I was really impressed by what our average valuation to value was.

Tim, I don't know if you remember that. It could drop pretty dramatically and we are still covered. Was it 60% rate? I don't want to give you a number that's not accurate.

I'm not sure it was that good. But you are talking real estate. He's talking C&I.

Well, I'm talking everything.

So yes, I think the answer to your question is we review all of the portfolios but to put a number out there for you, I don't think that we can do that today. But I think the part of the portfolio that's directly tied to energy we believe is very, very small, very, very small. And then we are all tied to it. When you get down here, we all drive cars that use the gas and Texas does have a big part of the state tied to oil and gas production, more gas certainly than oil. I think we missed that part of the puzzle here.

But Bob is making a good point too and I think something that may give you a little bit of a comfort level that we do that I don't know that all banks were doing, where a lot of banks would make loans based on a certain asset or the asset itself and the cash flow from that asset, we have always done what's called a global cash flow. So we take a borrower's total indebtedness, what they have, and their total income where they bring in everywhere and we stress that when we are making a loan to determine if there is certain changes, if there's certain deals that go bad, can that customers still continue to pay? Where I think (inaudible) in the past a lot of banks haven't done that and we have done that since we've been in business really.

I think it's important to point out that A, as we have said, we don't have a significant direct exposure to the energy industry. But B, what exposure we do have by and large is to credits that have been out there in the market place for quite some time. A lot of these companies went through the depression in the oilfield in the '80s and the price of oil and gas actually right now is very attractive on a relative basis to where it was back then. And those people learned a lesson and the lesson they learned was that debt is not a good thing.

And as a general rule, they are not extremely leveraged. So that helps them during these periods when the price of their commodity dips. So there is no guarantee that the energy sector is going to stay healthy, but my point is that a lot of these companies in terms of the structure of their balance sheet are much better off this time around than they were last time around. There's just not as much leverage out there.

I would also go a step further in saying that the banks, they didn't put everybody in business the way they did in the prior boom. And again, that boom, if you want to call it a boom only lasted for a very short period of time, so you didn't see a bunch of new people jump in. But banks in general didn't --

Because they were busy putting people in the homebuilding sector.

I guess somewhere (multiple speakers) somewhere in the homebuilding business. But in the '80s, you know, everybody that might have been a workover rig started owning a vacuum truck service or (inaudible) oil and production and that didn't happen. In fact to the contrary, we've had a couple of our customers, believe it or not, that are in the oil and gas service industry call us and they have reserves built up wanting to buy somebody like we do that may be having a hard time.

So it's much different. I think your oil industry this time is much stronger than your -- if you saw the weakness, I think it's more, as Dan pointed out, kind of in a jokingly way, but I think everybody was putting everybody in the homebuilding business. They weren't putting them in the oil and gas business.

Yes, and then one other quick question. We talked about capital. Are you guys really highly confident would you say, modestly confident that you guys could raise common in this current environment?

I can only -- the reason I want to be cautious on this, I don't want to be sued one day because you say automatically that you can just automatically raise it, but we have had a number of different investment firms that have contacted us and have told us that we have the ability if we needed to to raise $200 million or $300 million in a very quick fashion.

From a position of strength.

From a position of strength and if we maintain the position of strength that we are in today and our asset quality stays where it is and our income stays where it is and we should be able to raise money. They've reassured us that we can raise money where we are at and then also if we ever find a bigger acquisition that there will be money available for us, large acquisitions. Well again, if we stay in the position that we are in. Things change on a daily basis it seems like today.

Our model continues to be very simple, Bob. Keep it simple. Take care of the simple things. We have not invested in esoteric products. We want to keep simple, plain vanilla type loans on the balance sheet where we can watch the credit quality. Our investment portfolio is that way. So asset quality continues to be a core strength. And then I think on the expense side, I think in today's market, we've got to watch the expenses that we are -- we've got to watch the dollars that we are spending and Dave Holloway does a great job of that for us and I think that is part of what makes us be successful.

Thanks, guys. I appreciate it.

[Ari El-Skocheh], [Omega].

You know, this is probably a good follow-up to that last question, but I wanted to discuss more if you could review -- what are your criteria for doing deals? And if you could just review both what your criteria would be for buying a bank as well as what your criteria or what are the metrics you use when thinking about doing an assumption transaction like an FDIC type transaction?

This is David Zalman. The criteria that we use is everybody in this room probably has the majority of your net worth tied up in our bank stock. So unlike somebody else, we have egos. We won't admit that we don't have egos, but to say that we want to do a deal just to be $2 billion, $3 billion, $4 billion bigger has never made me very enthusiastic. The criteria for doing deals and from what our perspective is is are they accretive? Can they make us extra money?

We've always been -- we've always looked at earnings per share from the time we started this -- you saw some of the numbers where we started off in 2000 where we were making $0.76 a share and today we made what was it -- $1.86 a share. We are always focused as shareholders on continuing earnings and earnings per share growth for us and building capital and getting a cash machine. So in the past, we didn't have the FDIC deals. The FDIC deals, there's no question they are very, very nice because they exempt you and take all the litigation away from you. You can buy things right now reasonably.

But having said that, you know this is how we got our start back in the '80s. This is what we did was bought FDIC deals. Now having said that, once the market turns, sometimes those deals get more expensive than a regular conventional deal. So I wouldn't rule out a regular conventional deal that is not an FDIC deal. If it made a lot of sense that maybe it can enhance our capital position. But it's always got to increase earnings per share. We have never done a deal yet that's not been accretive to the bottom line.

In what time period?

One year.

You sort of alluded to this, but my next question, if you could just reflect on your experience so far with Franklin, have you learned things in that transaction that make you more or less willing to do future transactions? Then similarly have you -- in your ongoing discussions with the FDIC, do you think that they feel, too, that it was a good transaction for them and that they will be willing to come to you when other ones perhaps are available?

We are still early in the process with the FDIC on this transaction, but the simple, easy answer is that from our standpoint -- I can't speak to whether it was a good transaction for the FDIC or not. I think they hoped that banks would never fail. But from an acquisition standpoint, I think David hit the nail on the head. When we've looked at banks in the past that wanted to partner up with us, if they had asset quality issues, that can create us problem because we don't want to bring that across. We want to divest the asset quality problems prior to closing. That's a harder thing to do in today's market but the litigation piece just is huge.

So the fact that you come into this transaction clean and you took the deposits, you got to cherry pick the very few loans that we did, the assets that came with it were government securities, treasuries and agencies, and then we can hand pick or cherry pick the best locations that we want to occupy, theirs or ours if there is overlap. All of those things make this a very, very attractive situation for us. I don't know if there is a whole lot of those opportunities out there. There just aren't that many that would be a good fit like this for folks.

But certainly if there were other opportunities out there, I think our relationship with the regulators is excellent.

Let me just say we are on the list and we see things weekly as we are right now.

One other question is in terms of your capital levels, I would imagine that the level that both you and your regulator would allow is sort of a comfort standpoint of your minimum levels is probably higher than it would have been a couple of years ago when looking at transactions. Do you have a sense or do you have a benchmark in your head for what those levels would be so that you would -- if you did a larger transaction or a transaction that was more expensive that it would cause you to want to do a simultaneous capital raise?

You know, I'm not going to give you a direct answer because back in the '80s depending on how bad things got, almost every deal was a different deal. And your negotiations with the FDIC and your primary regulator is on a one-on-one deal and sometimes just like we look at loan customers, they look at us and they look at other banks at the same time and they value the management. They look at -- judge the management. They judge what your past record has been. They judge your asset quality. And all those things come into consideration when they are looking at what a capital ratio is.

In the '80s, they let us go extremely low one time and gave us some dispensation to catch up over a 12-month period. So I really can't tell you what their core number is going to be. I think it's really -- their job is to get the best deal at the best time and they've got to make that decision to see who's the best group for it and who can make it happen and they don't want it back again.

The regulators here both on the safety and soundness side that we deal with, but in particular we've been dealing with them on the resolution and recovery department that they have that is doing the failed transactions, they've been -- have nothing but nice things to say. They are good folks. They're working hard. I think they are overworked a little bit, but they are good folks and they are trying hard to do the right thing for the FDIC.

Do you get the sense that the TARP funds for the banks that perhaps were more likely to look for outside solutions, has the TARP lifeline changed the dynamics of what sellers want to do and how they look at their options?

I may be wrong at this but the people that really took the TARP money in my opinion and it's probably not 100%, they took the TARP money because they had specific needs for it. And that's one, to boost capital or they had 100% loan to deposit ratio and they needed to make more loans. I think anybody that really was in a good position you wouldn't have taken TARP just to take it because somebody said it's cheap if you really looked at all the variances and things about it.

I think the bottom line, I think the people that took it or the banks that took it for a specific reason. And I don't think that's necessarily for acquisitions.

Very good. Thank you, guys.

(Operator Instructions) Jordan Hymowitz, Philadelphia Financial.

Thanks for taking my call. Do you break out your reserve related to just construction loans?

No, sir. We really don't break the reserve out based upon deposit -- based upon loan types.

Okay, let me ask the question a different way. You guys credit has been excellent by a mile. But a year ago, it was also excellent and you had the reserve at this level. My question is will you take the opportunity to increase the reserve now that you can -- now that there's no more regulators breathing down your neck to keep the reserves low? Or do you want to just keep it at this level until you actually see some deterioration?

So you are talking about the fact that it has been 104, 105 now for four or five consecutive quarters?

Yes, a year ago everybody was at that level. So even if you wanted to double it to be prudent you couldn't do it, but now that everybody else is substantially higher, do you think you might take forgetting what the actual losses are, do you think you might take the opportunity to boost it up just to be conservative?

Jordan, this is Tim Timanus. We have a very clear methodology that we employ in looking at the reserve and monitoring reserve and it's a methodology that regulators have deemed acceptable, our auditors have deemed acceptable and more importantly, it's one that we think actually works. And right now per that methodology and how we evaluate it, we think our reserve is fine. We have a formal recalculation of it quarterly. We actually look at it monthly. If at any point in time the factors change and circumstances change and we feel like we need to add to it, we are going to add to it.

So it's not a matter of being predisposed one way or the other about it. We are going to be flexible. We are going to adjust to circumstances and we will add to it if we need to.

I think that's a good point, Tim. You know, when times were really good, everybody was adjusting their deal and going down. As times got bad, everybody's going this other way. I think just doing it based on what your methodology says and being consistent is more important than this trying to change numbers for earnings a lot of times.

But the magnitude concerns the frequency and severity of losses. If you look at just the Houston Fed [site], they have deteriorated pretty rapidly in the past three or four months. So whatever assumption you have has got to be worse now than it was a year ago.

I think that's true. I think that's why you saw in our last quarter you saw that we made a $6 million provision and we only had $3 million in charge offs. And one of the primary forces driving that decision is you have a ton of -- not a ton -- but a number of different factors that influences what that calculation should be and one of them is economic factors and that was probably one of the things that really boosted that reserve for this last quarter.

That's exactly correct. That's one of the pieces that we look at continuously and we will continue to do so and obviously it's not the only piece, but we intend to react to it on an as needed basis.

Thank you.

Daniel Cardenas, Howe Barnes.

Thanks for all the color on the quarter. Just one acquisition-related question. As you look at deals going forward, are they going to -- are you going to try to stay within your Texas footprint or is it time to expand into other states?

Texas is pretty big.

Dan, this is David. For the most part, we are really trying -- Texas is a big state and there's a lot of number of banks out there. Again, buying or acquiring a bank on a regular conventional basis right now or at least last year wasn't as good of a deal as buying and FDIC bank. There's no question. But going forward, I think that you are still going to see probably more banks this year starting to look to partner up and again for the most part, we are looking and trying to stay in Texas.

On the other hand, you know, I would tell you that we are always looking at a great opportunity, but again it's not in the cards. I want to make sure of this because I said this once before in the home markets that we're going out of today, I don't want to say that. I'm just saying we will always look at all opportunities, but our main focus is primarily in Texas right now.

Does that help you?

It does, thank you.

(Operator Instructions) Jennifer Demba, SunTrust Robinson.

We have gone on so long I think I have forgotten my question. But fee income, you said I think was going to grow about 9% or 10% this year. Just wondering what you see as the drivers there?

Year-over-year and that's coming straight from all the acquisitions, all of the extra accounts we have added not only from Franklin but 1st Choice, etc.

Yes, the 1st Choice piece came in, you know in the midyear and then the Franklin piece came in at the end of the year so just number of accounts drives the fee income.

Thank you.

(Operator Instructions) David Bishop, Stifel Nicolaus.

Thanks, gentlemen. I think I'm in Jennifer's camp there too, I'm not sure what I was going to ask. Maybe it was about what's for dinner tonight? But maybe just one follow-up question on the charge-offs in the quarter, maybe some help there, what was driving the uptick this quarter?

On the charge-offs?

Charge-offs, yes, the 32 basis point of average loans.

I will answer that if I can and, Tim, you may want to jump in. But we had some stuff that was on the nonperforming list for probably over one quarter, maybe two quarters, Tim. And it was stuff like maybe more in the commercial real estate part of it, I think. We just made the decision that we were going to sell it and get it off of the books and I think that's added to the additional charge-offs.

Well, that was a piece of the ORE loss. We took the loss on the ORE and then on the charge-off side, there was a (inaudible) full of loans that we took a write-down on to just exit out and get out. We had some that was residential and some was commercial real estate, the two biggest pieces.

Yes, most of it was real estate related and quite a bit of it was continuing cleanup of some of that Southern National portfolio.

But the main part is, too, that we made a decision that we are not going to hold property once we foreclose on it in ORE, too.

We are not in the real estate business.

And other loans, too, not only just real estate. We are going to set it what it is worth and get out of it. We've only been successful doing that and we have made that decision to do it. If something stays in there for a period longer than we think it should, we are going to sell it to whatever the market asks.

Thanks.

It appears as though we have no further questions at this time.

Great. Thank you all very much for participating. I think that we've gone a little long today but we certainly appreciate your support. We will continue in 2009 to try and build shareholder values, watch credit quality, and watch our expenses. Thanks again for your help and your support. Thank you.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.