Prosperity Bancshares Inc (PB) 2009 Q1 法說會逐字稿

Good day and welcome to the Prosperity Bank first-quarter earnings conference call. At this time all participants in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. Please note that this call may be recorded.

It is now my pleasure to turn the call over to Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares' first-quarter 2009 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, our Chairman and Chief Executive Officer; Tim Timanus, our Vice Chairman; and David Hollaway, our Chief Financial Officer.

David Zalman will lead off with a review of the highlights of the most recent quarter. 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 asset qualities. I will provide an update on the integration of the former Franklin Bank locations we acquired from the FDIC. And finally we will open the call up for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Elizabeth. Or you may e-mail questions to investor.relations@prosperitybanktx.com.

I assume you have all received a copy of this morning's earnings announcement. If not, please call Whitney Hutchins at 281-269-7220 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 risk, 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.

Let me turn the call over to David.

Thanks, Dan. I'm very pleased to be able to announce the results of one of our most successful quarters in the history of our Bank. Some of our successes this quarter include record earnings. Our first-quarter earnings were up 11.1% to $25.5 million, compared to $22.9 million for the same period last year. Our diluted earnings per share was up 5.8% to $0.55 compared to $0.52 for the same period last year, and up 12.2% on a linked-quarter basis from $0.49.

Our nonperforming assets declined again to 16 basis points of average earning assets, among the lowest in our industry and a true indicator of our strong asset quality.

Our tangible common equity increased to 4.61%. Our total risk-based capital increased to 11.34%, and our return on average assets for the quarter was 1.15%. Our return on average tangible equity was 28.52%.

Our efficiency ratio was 49.47% for the quarter. While we realize this ratio is very good when compared to our peers, we should be able to improve on this in future quarters and return to levels before the FDIC-assisted Franklin Bank transaction.

Deposits at March 31, 2009, were $7.2 billion, an increase of $2.2 billion from March 31 of 2008. This increase was impacted by the deposits assumed from Franklin Bank and deposits assumed in the acquisition of 1st Choice Bank.

On a linked-quarter basis, we saw our legacy deposits or deposits at locations that were not part of our recent acquisitions increase $32 million. We find more and more customers are valuing the relationship and the knowledge of their bank and their banker.

When comparing legacy loans as of March 31, 2009, or loans at locations that were not part of our recent acquisitions to year-end legacy loans, we experienced a $14 million increase when you exclude the $23 million reduction in our construction loans.

Additionally, we continue to be able to price our credits at higher spreads. Tim Timanus will provide additional detail concerning loans in a few minutes.

With regard to asset quality, we are pleased we were able to reduce our nonperforming assets and increase our provision expense while showing record income. Our nonperforming assets totaled $12.5 million or 16 basis points of average earning assets at March 31, 2009. That is compared with $17.6 million or 33 basis points of average earning assets at March 31, 2008. The allowance for credit losses was 1.12% of total loans at March 31, 2009, compared with 1.01% for the same period of 2008.

To talk a little bit about the Texas economy, the Texas economy is the second largest in the nation and the 12th largest in the world. Texas is home to 102 of the country's largest 1000 companies and 56 of the Fortune 500, which is more than any other state.

While we began experiencing signs of a slowing economy in 2008, we did not actually see evidence in numbers until the last quarter. As expected, the first quarter of 2009 produced a slower economy than the first quarter of 2008. The area economists are projecting employment to fall 2.8% or 296,000 jobs in 2009. This type of job loss is consistent with a rise in the Texas unemployment rate to about 8%.

At the same time, improvements and world financial markets and overall economic growth should enhance our state's growth prospects, particularly in the second half of 2009. While the first-quarter outlook was weaker, longer-term prospects remain healthy. Job growth, low business and living cost, and a young, fast-growing labor force remain positives that will help in the recovery.

Texas is a very big and diverse economy. While we acknowledge a slower economy than we have experienced in the recent past, we feel our future is very bright and we feel optimistic looking forward.

We believe the fear of Texas returning to the terrible economy we lived through in the 1980s is very remote. Having said that, it would be imprudent not to recognize the risk and continue to increase our loan loss reserves. Additionally, higher loan chargeoffs can be expected with higher unemployment.

We believe we have taken all of this into consideration in our business planning and believe we are well positioned in the current environment. Thanks again for your support of our Company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. David?

Thank you, David. Net interest income for the quarter ended March 31, 2009, increased 42.5% to $74.1 million compared to $52 million for the same period last year. The increase was primarily due to a 45.2% increase in earning assets.

The tax-equivalent net interest margin was 3.98% for the three months ended March 31, 2009, compared to 4.03% for the same period in 2008 and up from the fourth-quarter number of 3.65%.

The linked-quarter margin expanded at a much greater pace due to multiple factors, including the ability to lower deposit pricing at a faster pace than projected. I would note that the yield on the savings and money market accounts decreased from 1.74% in the fourth-quarter '08 to 1.36% first-quarter 2009.

Noninterest income increased $2.3 million or 18.4% to $15 million for the three months ended March 31, 2009, compared with $12.7 million for the same period in 2008. This was primarily due to the Franklin transaction.

The Franklin transaction also was the primary driver in the change in noninterest expense, which increased to $44 million for the three months ended March 31, 2009, a 51.2% increase compared to the first quarter of 2008.

Finally, the bond portfolio metrics at 3/31/09 reflect a weighted average life of 2.9 years and an effective duration of 2.8 years; and the projected annual cash flow is approximately $1.2 billion. With that, let me turn over the presentation for to Tim Timanus for some detail on loans and asset quality.

Thank you, Dave. Nonperforming assets at quarter ended March 31, '09, totaled $12,525,000 or 0.36% of loans and other real estate, compared to $14,368,000 or 0.40% at 12/31/08. This represents a 13% decline.

The March 31, '09, nonperforming asset total was made up of $2,964,000 in loans; $427,000 in repossessed assets; and $9,134,000 in other real estate. Approximately $4,100,000 or one-third of the March 31, '09, nonperforming asset total are at this time under contract for sale. Of course there can be no assurance that any of these contracts will actually close.

Net charge-offs for the three months ended March 31, '09, were $3,857,000, compared to net charge-offs of $3,011,000 for the quarter ended December 31, '08, for a 28% increase. $6,125,000 was added to the allowance for credit losses during the quarter ended March 31, '09, compared to $6 million for the fourth quarter of 2008.

The average monthly new loan production for the quarter ended March 31, '09, was $64 million, compared to $77 million for the fourth quarter ended December 31, '08. Loans outstanding at March 31, '09, were $3,501,000,000, compared to $3,567,000,000 at 12/31/08.

The March 31, '09, loan total is made up of 42% fixed rate loans; 27% loans that float; and 31% variable loans resetting at specific intervals. I will now turn it over to Dan Rollins.

Thanks, Tim. Let me just add a couple of statistical numbers on the loan side and then we can talk about Franklin. One of the things we've talked about many times is the granularity in our overall loan portfolio, and we have talked about that in a couple of ways.

We did disclose today a little more information on the nonperforming assets, and I think you'll see that the average size of the nonperforming assets at March 31 was $120,000. 104 credits representing a $120,000 average. That is down a little bit from the $146,000 average at year-end.

But let me remind everybody the overall portfolio, the full $3.5 billion, the average loan size is still sitting right on top of $100,000. When you look at the individual parts of that portfolio, our commercial real estate portfolio -- the largest piece of our loan book -- the average loan size in that portfolio is $385,000. The second-largest average loan size piece is in the construction piece that Tim talked a little bit; and the average loan size there is $254,000.

We believe that granularity in the portfolio is a big plus for us and will continue to help us manage through the process that we're in.

I am pleased to report that our team completed the integration of the former Franklin Bank offices on March 1. They have our signs up, they are on our systems, and they're operating well today. Our newest associates are doing a great job of taking care of customers. In fact we are beginning the process of winning back some business that they had lost over the most recent past.

Today we have 158 full-service locations across Texas. The Houston area is our largest market with 51 offices representing a little less than half of our total loans and our total deposits.

We have 36 banking centers in the Central Texas market including Austin, Bryan/College Station, and San Antonio. Our Dallas-Fort Worth footprint includes 24 locations, and we're operating 20 locations in the East Texas markets including Tyler and Longview. Finally we operate 27 locations in the South Texas market, including Victoria and Corpus Christi.

Overall, our Texas footprint covers about 75% of the total population of the state of Texas.

At this time I would like to take some questions. Elizabeth, will you help us with that?

(Operator Instructions) Jon Arfstrom, RBC Capital Markets.

Morning, guys. Nice job. A couple questions for you.

Dave Hollaway, in terms of the margin, is everything baked in there? Does that fully reflect the repositioning of the Franklin deposits and Zalman [has] the securities portfolio offsetting, so we have the potential to see something more stable going forward?

I think that is absolutely right. That fourth quarter everything was still in flux and it was hard to get a good read on it. But absolutely true on the asset side, everything has been fully invested specific to Franklin.

So now on a go-forward basis it is just a matter of what we always do with these acquisitions. It's to try to get their mix of money to start reflecting more our mix of money. What I mean by that, our CD percentage as a total of deposits generally is lower than these transactions that we take over. So we will start seeing some of that going forward. So you might get some efficiencies on the CDs continuing to reprice down; and that is a bank-level statement.

But the other side is we have to focus in on what is going on on the asset side, because again we have a big percentage of our money in the bond portfolio. And as that cash flow comes off, what are we going to be reinvesting it in?

Is it going to be loans? Will it be chasing off CDs that high-cost CDs and it pays that off? Or do we try to stay short? Because we have to be cognizant longer term of extension risk. We don't want to do something in the short term on the security portfolio side that causes us pain going forward.

So what that means bottom line is we may have to stay shorter if the money goes back into the security portfolio, meaning less yield there. So I think it's a long way around to say absolutely right; I think the margin will probably be a lot stabler at least over the next six months.

Okay, that's helpful. In terms of the commercial real estate balances, they were stable sequentially and it was stronger than the other categories. I'm just wondering if you could talk a little bit about impressions of the Texas commercial real estate market in terms of what you are affording and what you might be attracted to in that category?

I think we probably can all jump in on that a little bit, Jon, I think. Commercial real estate obviously is where folks are focusing today, and that is what I was trying to say a few minutes ago. You first have to start with our bread and butter. And obviously $1.3 billion or $1.4 billion or whatever is in that category is the biggest part of our loans.

But the granularity in there -- with an average size, again, of $385,000 -- says we are making loans today in the $1 million, $2 million, $3 million, $4 million, $5 million range. We are seeing those on a regular basis. They run the gamut from A to Z, 1 to 99.

If you can dream it up, it is probably in there in some of the markets that we are in, ranging from the doctor's office building, the veterinary clinic, the small manufacturing plant, the new law office. Just if you can dream up a small project in the $5 million or $10 million down, that is probably things that we are seeing today.

I think we are really focusing on more of the owner occupied, the folks that have the wherewithal to play in the game. We're not focused on a whole lot of investor or speculative properties at all. But our commercial real estate book is very diverse and is again spread across the state from the bigger Houston and Dallas markets to many others.

Jon, this is David Zalman. I would say that going back as far as two years ago where a lot of people were really taking in any and every commercial real estate they could for getting the points and we really got out of the market. I mean we really -- of course I would say we really never did participate in that type of market to begin with.

But we were really never really keen on bringing people in that really weren't core customers of the Bank, meaning dry relationships, people that were just moving loans and going based on price.

We always look at every type of loan, whether it's a commercial real estate loan or a commercial loan, to be, say, a full relationship where the customer banks with us. They have their checking account with us.

So just sitting in on loan committees and looking at what -- and watching nonperformings, I don't see the amount of risk maybe in our portfolio that maybe some of the other people do in the commercial real estate side. Because the kind of loans that we make, we make loans to individuals who bank with us; they needed it for their offices, or -- we really didn't do speculative deals and just hoped that they would fill out.

Having said that, you know we bought some banks that did take more risk. And the good part about that is we over the last couple of years have been outsourcing those type of loans and really getting them out of the Bank when the market was still good. So I really don't seen the amount of risk in the commercial real estate area in our Bank that some people might think that there is.

I think there's a couple of factors that I would want to kind of tag on to. David is exactly right. The pluses in that commercial real estate book for us is -- remember, our Bank is more of an amortizing type credit originator. So when you look at that commercial real estate book, those are amortizing credits. They have been on the books for a while. We are getting principal payments or principal reductions on a monthly basis on the majority of that.

The LTV that is in that book, we started at 80 and moved down from there. So I think when you look at the overall commercial real estate book today and the amortizing nature of that book, you've got credits that have been on the books for three to five to 10 years or more. Those loans are paid down significantly.

So the overall LTV in that commercial real estate book is relatively low. I think you can see that when you look at the net charge-off information that we provided this morning, that shows that over the last 15 months we are in a net recovery position in the commercial estate book.

So again we all understand the focus that is on the commercial real estate today. I think what David was saying and what I'm saying is I don't think that is where we are the most concerned today.

And again, we will get off of this subject, but it seems to be a topic of interest for everybody. Our Bank really never jumped into making real estate loans, short-term real estate loans that ultimately were supposed to fill up and then be sold on the secondary market. We never participated in that type of lending.

I don't think that we ever made a loan or originated a loan from our Bank that we didn't intend to keep if they [could] move.

There is no high-rise office buildings, there is no huge credits in there, there is certainly no shared national credits in there. These are our customers that we take care of. And again you can see that on the average loan size.

All right. That's helpful. Thank you.

Long answer, Jon. Thanks.

Brett Rabatin, Sterne, Agee.

Hey, guys. Good morning. I wanted to ask -- obviously the credit metrics were really strong. I wanted to ask on the construction side, was there any geographic centrification to what you saw on the construction stuff? Was it more in Austin? Or was there anything in particular that stood out? Just were any of the chargeoffs related to some stuff from past acquisitions? I know you've got $50 million or so from Franklin in the construction book.

The answer to the first part of the question is that the problems were really spread geographically among all of our markets. There was really no concentration in any particular area.

There weren't any Franklin credits to speak of in there. There were credits from other acquisitions, TXUI, Southern, 1st Choice, et cetera. But I don't believe there were any from Franklin at all.

Yes, zero. The Franklin loans we bought -- remember, we cherry-picked the best of the best Franklin loans. There is not a problem in that book of business.

And we're not really not seeing any of our markets deteriorating more than another one, so to speak. Everything seems to be relatively flat across the board from that standpoint.

So you see them all kind of being the same?

So far, that's correct.

Okay. Then I wanted to go back to the question [talking] about the margin and just the balance sheet. I'm curious. Is it fair to assume that you guys might shrink the balance sheet a little bit this year, assuming just kind of the reinvestment rate risk and the securities portfolio and loan growth not growing that fast?

You have asked lots of questions. I will let Dave jump in. But on the balance sheet side let me talk from the retail perspective on the front lines.

Let me remind everybody, when we acquired the Franklin deposits through the FDIC-assisted action, there were $2 billion in community bank deposits in that book of business. We said last November -- coming up on six months ago -- that we really expected that number to shrink because some of that money was what we would consider to be hot money or rate shopper CD money. While we can discuss internally whether it's going to drop $400 million over the next year or $600 million or $700 million over the next year, we certainly expect that hot money to fall.

And you see that in the numbers. I think the total Franklin deposits were down $120 million give or take from quarter end in December. I think our expectation is that we will continue to see that hot money move away.

But the caveat in there, quite frankly, is I think we are maintaining more of it than we thought we would, because the rate pressures and the rate competitors are not out there as much.

And as David said in his comments, I think our customers or many customers have become more focused on bank asset, bank quality of who they are doing business with. In today's rate environment, maybe that has gone away a little bit, but we certainly expect the high-cost CD money to do one of two things -- either to go away and shrink the balance sheet, or it's going to reprice at our rates.

And when you look at -- Dave will talk about specific numbers. But you can see our rate that we were paying is significantly down and will continue to fall.

The growth on the loan side question, we certainly want to continue to cherry-pick the best of the best credits that are out there. Our team is focused. Tim gave you some loan production numbers. While production was off in the first quarter, I think it's important to recognize that in the first quarter we integrated what was 46; that we kept 33 banking centers out of. We had our team very focused on bringing that across.

As has always been our process we work very aggressively and very quickly to integrate new folks. And that is somewhat disruptive to the existing Bank and the core franchise and the production that is out there. Because we've got lenders literally in other offices for weeks on end to bring those guys across the new team.

So all that being said, I'm hopeful and optimistic that we can continue to find good credits in the market and we can continue to take business away from our competitors that are in the penalty (technical difficulty) for whatever reason. I think when you look at what is out there today we certainly have the ability to win some business away.

Let me remind you also, though, we face a headwind quarter-over-quarter. You saw our construction loans shrink $23 million from December 1 to March 31. Our expectation is we are sailing straight into that headwind again and we should see $20-plus-million shrinkage in that construction book this quarter and next quarter moving forward.

So for us to grow loans, everything else being equal, we've got to fill up the $20 million construction bucket first and then grow. I think that is a possibility, but I don't know that you are going to see huge growth numbers.

Dave, the question was on net interest margin. Can you address that?

I would just -- you mentioned one thing that I think is a dynamic we saw probably over the last 60 days and it is worth repeating. One of the things that we are seeing is customers are seeking out stronger banks, good management teams. We are getting core deposits coming in because good customers are seeking that.

So yes, the direct answer is these higher priced CDs, we certainly don't like to keep them. They either roll out of the Bank or they're going to reprice down to what we [div].

So depending on what happens, the answer is yes. If they are higher priced CDs they will probably roll out of the Bank and some of that cash flow we will pay it off. If they reprice at low -- at the right correct level, then we will keep those deposits and we will have to reinvest some of that cash flow back into the bond portfolio, if we are not increasing our loan business. I mean that is absolutely correct.

Overall, though, I would say that what we are seeing especially in the Franklin deposits with regard to their CDs, it is turning out much, much better than we ever, ever anticipated.

I think what you're saying is of the $100 million that we lost from the Franklin deposits, the majority of all of it, over 90%, had to be with the CDs. So where we thought that we could possibly lose $400 million or $500 million of those deposits, I don't think that is going to happen now.

That's also -- just a perspective. That is because there's a lot less players out there. These crazy players that were paying way above market.

And having said that, a lot of that stuff is repricing over the next couple of months, too, where these things are 3%, 4%. So we will get to -- there is no question we will lose more, it is just I think that we are going to probably end up retaining a whole lot more than we ever anticipated.

Okay. That's a lot of great color. Thank you so much.

Hey, Brett. Thanks. We're glad to have you back on us.

Andy Stapp, B. Riley & Co.

Good morning and nice quarter. Your deposit service charges were down almost $1 million despite a full quarter of Franklin Bank. Can you just provide some insights there?

You are talking about service charges on deposit accounts?

Yes, if I looked at it correctly.

Right, and the short answer is and what you tend to see, it's a seasonal thing. I realize these acquisitions when you do them at year-end tend to really change the dynamic. But within that service charge on deposit accounts, a big chunk of that is the NSF fees, and it always goes up.

What I would always do is go back and look at the third quarter. Because what you see happen is the third quarter and fourth quarter jumps way up because of the seasonal aspect of it all; and then it always comes back down in the first quarter.

That is exactly what happened in '08 to '09. Again I understand some of that is muddled up with the Franklin. It should have brought more feast to the table. But that dynamic was in place for not only our book of business but the Franklin book of business we bought.

So I don't know there is anything else systemic under there other than that seasonality thing. There is nothing else that I am aware of that changes that number.

Okay, yes -- it just seemed to be a little bit more than seasonality.

It is down 832,000 is the down number on that line and --

Right.

I think the Franklin piece, they were less focused on that side of the deposit book than we have, and so that is one of the things we work on is on the retail, core deposit, free money side for them.

Let's jump in and tell me if I am wrong on this, guys, but basically when we took Franklin too, they had a different overdraft policy than we did. As something went into the overdraft there, they would actually collect a service charge and it would turn the overdraft into a loan.

I think when we first took that over it created a lot more service charge income. Whereas when you are in the overdraft with us, we either charge it off if you can't pay the overdraft charge, but we don't turn it into a loan. I think that had some bearing on it also.

Maybe a little bit. Yes, I agree with Dave. I think it is almost all seasonal.

Okay. And do you have what your 30-to-89-day delinquencies were at quarter end?

When you look at it, I don't have the number on that. We talked about that yesterday a little bit. I don't think it is materially different than it was at year-end. I think at year-end it was roughly $40 million in the 30-to-89 category; and I think when you talk to our guys I think we are focused on that.

Okay. Is there much room for your cost of funds to continue to trend downward through the repricing of your legacy liabilities?

There is no question that our costs will go down. They should go down.

On the other hand, we have to always keep in mind what David Hollaway mentioned earlier. We still have a big bond portfolio and so as our deposits come down in price -- and they should -- we still have to -- we don't get to put the money back in the loans. We have to go back in the reinvestment of bonds.

You're reinvesting at a lower rate than what we did. We just really hit a home run when we bought the Franklin deal in that we purchased about $2 billion worth of bonds. Again, we generally bought product that had an average life of three years, and we yielded probably about 4.8% on it.

All agency paper.

All agency, Fannie Mae, Freddie Mac paper. So you know, we really did real good, and you can see that in our 10-Q, the gain that we have in the portfolio, which is over $120 million.

So we are benefiting from that. But at the same time, as this stuff does reprice we have to reinvest it at lower rates, too. So it's probably -- you know, I would say we are probably going to do a little bit better, but not a lot better on the margin.

Right, which projects more of a stable margin (multiple speakers) short term.

Thanks, Andy.

Okay, thank you.

Erika Penala, Banc of America Securities Merrill Lynch.

Good morning. You mentioned that term theory is not a top of your concern list. But if you were watching one loan segment most closely, what would that be?

I'm sorry, I didn't catch the first part of the question.

The question is we said, David, that the commercial real estate book, because of its amortizing nature and lower loan-to-value is not the top of our worry list. She is asking us what we worry about.

Well, you worry about everything. Let me say that to begin with. But if you had to pick your first and foremost -- and this is just mine, and Tim may feel differently. He is as much in the loan committee side as I am.

As I think the construction portfolio, the one to four family residential construction and land development, that seems to be where the slowness is. I think it's more reflective of a national trend where a lot of people felt that Texas wouldn't see that trend. I mean, it's not as bad here as it is everywhere else, but that is still the trend over here right now that I see.

That's right. There are some positives out there. I think for the last three months or four months -- I need to get Randy in here; Hester runs that side of the collection piece for us. But I think we have foreclosed on properties every month for the last few months and we have brought those properties in. Some of them are turning pretty fast.

Let me remind you, when you look at the quarter-over-quarter NPA numbers there's 104 on there this quarter. Less than half of those were there last quarter. So we are turning that NPA group pretty quickly.

But Randy was telling me just yesterday that this month, the April foreclosure day we showed up at the courthouse and there were buyers for that property at the courthouse and we never even got it. We went to foreclose it and somebody else bought it before we could foreclose on it at the foreclosure sale.

So there are certainly buyers out there on that one to four family stuff, and we think we're in pretty good shape.

And the good news is, again just relaying what Randy relayed to us too, when we do get homes back and they are completed, we are not taking that big of a loss on them. We are selling them maybe 10% or 15%. So the real loss does come though if you have a development or a home that has not been completed and you can take -- you can end up with a 30% loss on that.

Completed properties are worth a lot more than uncompleted properties.

But the good news is that we are rotating them. We are flipping them and we are selling them; and that is the good news.

There is a market out there.

Thanks, Erika.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. Question, follow-up question on the construction book. You've got $300 million or so in lots, raw land, land development. Can you tell us what you've been experiencing when you foreclosed on those loans?

It's a pretty small piece of it but we've had some. I don't know that we've done any land development.

We have not foreclosed on any significant land development. What lots and pieces of land we have foreclosed on, Jennifer, we really haven't seen a buyer response to those that is much different than what we just described. We have been able to sell them -- I don't know whether easily is the right description; but we've been able to sell those and move them along.

So up to this point in time, that raw land piece of it doesn't really jump out as being a significant issue apart from the overall real estate picture.

What kind of severity are you seeing when you have sold? I understand it hasn't happened very often. But --?

I don't know, Jennifer, that we really -- I'm going to jump on to what Tim said. You know, we really haven't seen big losses. We have come close to maybe even foreclosing on some, and somehow they get a MUD development check and we get pulled out of the deal, and we get out of it. I just don't think that we've seen --

I don't think we can help you.

Well, we just haven't seen it, I don't think.

We are not experienced, thankfully.

We really haven't. I guess if we had to throw a number out there and it's not a -- once again it's not based on a lot of volume in terms of our experience. But between 10%, 20%, 30%, Jennifer. I don't think it is any worse than that.

Okay. I assume these types of loans are not showing up more on your watch list?

No, I don't think there's been any real surprises coming along the pipeline. We continue to manage the portfolio the way we always have. I think that we are continuing to watch all those.

We are small enough in a few days' time we can look at every credit out there if we needed to. So I don't think we are seeing any glaring headlights coming at us out of the windshield.

Okay. Thank you very much.

Tom Alonso, Fox-Pitt Kelton.

Just a quick one on expenses. I know March 1 you close the Franklin. Is this quarter's run rate, I would assume, is probably a little bit elevated; or is that a good base to work off of?

No, it is elevated because we did do the data processing conversion on March 1, and so there is a lot of expense that surrounds that. You are carrying all these extra people and they are probably all in through the end of the quarter. So it is elevated and there should be some -- not should be, we expect to see some improvement on it as we go throughout the year.

Let me jump in on the people side of that for you, Tom. When you look at the headcount quarter-over-quarter, you see down 50. My gut tells me that that 50 dropped off late in March. So I think we carried those people almost all the way through the quarter.

Okay, okay. Then I just want to make sure I heard your comments earlier on the Texas economy. You're expecting a bit of a bounceback in the second half of this year. Is that better growth in the second half of this year?

You know, I think if the rest of the national economy does come back, I think that we should see a better second half, yes.

Okay, would that translate into loan growth for you guys as well? Or is that just you're still going to play it close to the vest this year?

No, I'm hoping that we should see some loan growth.

Okay, great. Thanks.

Thank you, Tom. Appreciate your help.

Dave Bishop, Stifel Nicolaus.

Hey, good morning, gentlemen. In terms of the impact of the decline in energy prices there, when you sort of survey your clientele, your small business customers there, and look at the landscape from a commercial perspective, anecdotally any sort of trickle-down effect you are seeing there in terms of pressure on rental rates, vacancies, and the like among the greater Houston area?

You know, the price is down, but again at $50 a barrel that is still a pretty good price. If you are seeing any place where it's slower, you have seen the service industries that are related to the oil companies. I mean if you look at the rig count, yes, it's down. And if you see some of the service industries or people that take mud to the rigs or tall saltwater or workover rigs, you will see that they have reduced staff a little bit.

But at the same time, almost everybody that is in the game right now in Texas in that part of the business has lived through the '80s. So they are not going to over -- they are not going to go -- they're not going to hire too many, they are not going to let too many go. Because as times come back they will need those people at the same time.

So there is somewhat of a little bit of an impact. But I think the overall gas prices being down at the pump far exceed any downturn or layoffs that we see in the oil industry. It is -- the stimulus is phenomenal.

Now with regard to real estate, there is no question about that. As the oil is getting to $130, $140 a barrel, we actually moved out of two or three of our buildings because the rates that they were going up on the commercial real estate to us we couldn't find. They were going from rates where we were paying $22 to $26 a square foot for A space, they were going up as much as $38 plus plus plus.

So that seems to have changed now. We were working on one lease that we didn't think we were going to be able to compromise. We thought we may have to move out. We did I think or pretty close to a compromise on that. So we are seeing people become more realistic from the commercial side also.

But I think that if you would have saw the $140 stay up there, Texas really would have had a bubble and it would have been a real estate bubble based on the oil industry. Because there are so many people that were expanding, getting new office space, and bringing people in. It would have been a tough situation.

So I think when you're talking $50, $60, $70, that is more where we need to be and it's a good place.

Does that help you, Dave?

Terry McEvoy, Oppenheimer.

Thanks. Good morning. I was wondering, could you just talk about your outlook for M&A multiples in Texas going forward? In light of just the discussion all morning about the Texas economy and whether you think that is going to result in lower acquisition multiples again in the future.

The biggest investment banking firm right now working the bank this is I think is called the FDIC, and they are setting the price.

Yes, Terry, when you look at our situation -- and again I can't speak for everybody else -- where we were very acquisitive in buying good banks, I think all of us right now are saying -- do you want to buy a bank and take on the challenges of those existing banks that are out there, if they have them?

So overall the price is not where it was last year. Probably won't be for some time. If you are looking at us, we are probably more interested in looking at opportunities from banks that are having a more difficult time even from the FDIC. We think that's where the opportunities for us lie really going forward.

We think that we can make a whole lot more by participating in that type of market than acquiring other banks, basically.

Unfortunately, I think if a bank is, quote, healthy and they want to sell today, unfortunately I think just the environment that we are in is going to severely restrict any multiples compared to what they could have been in the past.

So certainly there may be some good banks out there that may be great opportunities and partners for us. But I think the multiples and the prices are significantly reduced from where they had been.

I guess that doesn't mean that we're out of the market either. If there is a bank that we can really enhance our position in, in a major market --

Or a strategic market.

Or a strategic market that we are in, we are definitely going to be interested in that. And of course that type of bank would draw more than some $100 million bank in a rural market or something like that.

I don't think we're interested in putting on a whole lot of credit problems.

No.

We are not in the workout business.

Well, we are when we get paid for it.

Okay. There you go.

That's exactly the color I was looking for. Thank you.

Steve Covington, Stieven Capital.

It's actually Joe Stieven. Actually, every single one of my questions has been answered. But just good quarter, guys. Thank you.

Thanks.

Thanks.

Erika Penala, Banc of America Securities.

Just one more quick one.

You can only add one, Erika.

I didn't mean to cut you off a minute ago. Sorry about that.

It's okay. By the way, that was a great line, Dan, about the FDIC. I was out of my chair, but anyway, I know you talked about the granularity of the term CRE portfolio. Can you just tell about your top concentration by collateral type, ex-owner-occupied?

You know, when you look at the overall portfolio again and you talk about we really don't have any big concentrations, but when you look at the whole portfolio and you look at credits above -- pick a number -- above $10 million, we've got a whopping less than 10 credits above $10 million. Less than 30 credits above $5 million.

Our loan limit is $160-something-million. So we just don't -- I don't have a number and I can't give you an industry because it is so granular I don't know that we can answer that.

I don't think we can. We can look, but I just don't think you can.

It wouldn't have any meaning, it is so diversified. I can tell you it is really spread out.

I think the one for income producings, -- the one property type that concerns a lot of folks is retail. Is that also -- the definition of that is too broad?

Well, the answer is yes, because here is the problem. When you're looking at retails and we saw the big REIT that filed bankruptcy yesterday, the big mall, we don't have any big shared national credits. We don't have any big box.

When you look at the value of those things, whether it's the centers that had the cap -- what is the retailer that just filed bankruptcy too and shut down? An electronics deal -- Circuit City. The Circuit City boxes, I certainly see those boxes sitting empty. We've got one right next to Tim's office over there.

Those transactions are above the level that you're seeing on our portfolio. Do we have some retail centers? Sure we do. The question is how do we account for those? I can name three where we've got a retail shopping center and the largest tenant in there is our customer, and they bought the center for themselves and then they rent out other space on it.

I would think though, Dan, if you wanted to highlight something, probably we were probably ahead of the curve. This Southern National Bank had probably more retail centers than any other bank we ever acquired and we were worked feverishly trying to get those things out of the Bank, or else getting them on a performing basis. And I think we did a pretty good job. We were probably ahead of the curve.

We're not seeing the weakness in that area right now. I think if you saw the weakness -- somebody asked a question a while ago -- more of the weakness I think is in the construction part of it.

Great. Thank you so much.

Yes, when you look at -- we are trying to dig for numbers for you. When you look at the retail that is out there, the way we class it, we show a little less than $150 million in total in that category.

Great. Thank you again.

(Operator Instructions) Daniel Cardenas, Howe Barnes.

Morning, guys. Most of my questions have been asked. Just a quick question on your tangible common equity ratio. Moved in the right direction this quarter. How long do you think it's going to take to get to the pre-Franklin levels?

What was the pre-Franklin level? Let me flip back and turn the chart.

I think I could answer it. It's going to -- everything going along the way it is now, it will be over 5% by year-end. So if we were at 6% pre-Franklin, it would probably go into the (multiple speakers).

(inaudible) now, Dave, though, shouldn't we be closer to 5.5% at year-end?

Depends on balance sheet side.

Yes, you just can't --

Remember, we shrunk some this quarter. If we continue to experience the shrinkage, we could be at 5.5% plus at year-end. If we don't shrink -- the answer is we've got great earnings power, Dan, and I think we are certainly headed in the right direction.

Remember the 6.28 that we were at, at 9/30 year ago, was the highest level I think in our Company's history. So when we look back I think it's the 5.5% number, the 5% number, we don't have a target for that, but we certainly think we can be into that range relatively quickly.

But I think it's easy to calculate. I mean if you just look what the analysts' expectations are and take our dividends, it's going to get you there pretty quick by year-end. Again, assuming everything else is stagnant and stable.

Great. Thank you.

Gentlemen, it appears that that was our last question. Do you have any closing comments?

Yes, I just want to thank everybody again. We really appreciated all the good questions and all the comments. We look forward to visiting with folks as we are out visiting with investors.

Thank you for your support of our Bank. We will talk to you soon.

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