Prosperity Bancshares Inc (PB) 2009 Q2 法說會逐字稿

Good day. All sites are on the conference line in a listen-only mode. Later you'll have the opportunity to ask questions during the question-and-answer session. And please note this call is being recorded. It is now my pleasure to turn the conference over to Mr. Dan Rollins.

Please go ahead.

Thank you, Tasha. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares Second Quarter 2009 Earnings Conference Call.

This call is 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. And 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 the review of the highlights of the recent quarter. He will be followed by David Hollaway, who will spend a few minutes reviewing some of the financial statistics. Tim Timanus will discuss our lending activities including asset quality. And finally we will open the call for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator Tasha. Or you may e-mail questions to Investor Relations at prosperitybancsharestx.com.

I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call [Leigh Kressman] at 281-269-7216 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 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 its Forms 10-Q and 10K 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 our call over to David.

Thank you, Dan. I'm very pleased to be able to announce the results of another very successful quarter for our bank. Some of our successes this quarter include our second quarter earnings were up 13.1% to $26.5 million compared to $23.4 million for the same period last year, an increase of $3.1 million. Our diluted earnings per share were up 9.1% up to $0.57 for the second quarter of 2009 compared to $0.52 for the same period last year.

Our nonperforming assets remained low at 26 basis points of average earning assets. This is a slight increase from last quarter but remains within our target range. Additionally, the net charge-offs actually declined on a linked quarter basis.

Our tangible common equity ratio increased to 4.84%. Our total risk-based capital increased to 12.28%. Our return on average assets for the quarter increased to 1.2% compared to 1.15% for the prior quarter. Our return on average tangible equity on an annualized basis was 27.98%. And last, our efficiency ratio decreased to 48.98% from 49.47% for the prior quarter.

Our deposits at June 30, 2009, were $7.3 billion, an increase of $2 billion or 37.3% increase from June 30 of 2008. Our deposits were impacted by the deposit assumed in our FDIC-assisted acquisition of Franklin Bank. On a linked quarter basis, we saw our legacy deposits or deposits not acquired as part of a recent acquisition increase $206 million for a whopping 16.2% on an annualized basis.

Talking about loans, only a linked quarter basis excluding loans from the acquisitions, loans reduced to less than 1/2 of 1%. At the same time we continued to reduce our exposure to construction and development loans in the quarter by $30 million.

As I mentioned earlier, our nonperforming assets to total assets increased to 26 basis points from 22 basis points one year ago and nonperforming assets to loans increased to 57 basis points from 36 basis points last quarter, but still within the boundaries we expressed on previous calls.

We provisioned $5.6 million more than our net charge-offs during the first half of 2009. This increased our allowance for credit losses to 1.23% of total loans at June 30, 2009 compared with 1.03% at June 30, 2008.

Talking a little bit about extraordinary expenses this quarter, our FDIC insurance premium for 2008 was approximately $1.4 million. We currently expect our full year 2009 FDIC insurance premium to be between $8 million and $9 million. Additionally, the FDIC imposed an emergency special assessment as of June 30, 2009, totaling $4.2 million or approximately $0.06 cents per diluted share.

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 -- over 10%.

As I have mentioned before, we started seeing signs of a slowing economy in 2008, but did not experience the slowing until the last quarter of 2008. The first quarter of 2009 indicated a slower economy than we had had last year at the same time and this trend continued into the second quarter.

The Texas unemployment rate was 6.9% in May. We continue to expect unemployment in Texas to increase throughout the rest of 2009. We continue to believe that improvements in the world financial markets and overall economic growth should enhance the growth prospects for Texas, particularly late this year and early next year. While the first and second quarter outlook was weaker, longer term prospects remain healthy. Long-term job growth, low business and living costs and a young, fast-growing labor force remain positive. That will help in recovery.

As you all know, Texas enjoys a very large and diverse economy. While we acknowledge a slower economy than we have had in the past, we feel our future is very bright and we feel optimistic going forward. We feel the risk of the economic fear of the 1980s occurring again are remote at best; but with higher unemployment, it would be imprudent not to continue to build our reserve for loan losses and not to expect elevated loan charge-offs.

We believe we are well-positioned for the current environment.

Thanks again for your support of our Company. Let me turn over the discussion to David Hollaway our chief financial officer to discuss some of the specific financial results we achieved. David?

Thank you, David. Just a few quick details.

Net interest income for the quarter ended June 30, 2009, increased 39.9% to $75.5 million compared to $54 million for the same period last year. This increase was primarily due to a 40.8% increase in earning assets.

The tax equivalent net interest margin was 4.04% for the three months ended June 30, 2009, compared to 4.10% for the same period in 2008 and up from the first quarter number of 3.98%. Noninterest income increased $2.1 million or 15.8% to $15.1 million for the three months ended June 30, 2009, compared with $13.1 million for the same period in 2008. This was primarily due to the Franklin transaction.

Noninterest expense increased $13.4 million or 43.6% to $44.3 million for the three months ended June 30, 2009, compared with $30.9 million for the same period in 2008. And again this was mainly attributable to the Franklin transaction as well as increased FDIC assessments.

And as mentioned before, the efficiency ratio was 48.98%, slightly down from first quarter of 49.47%. However, if we adjust out the special one-time FDIC assessment, that would have put our ratio back into the mid-40% range which would put us back to our efficiency ratio levels pre-Franklin deal.

The bond portfolio metrics at 6/30/09 reflected a weighted average life of 3.3 years and an effective duration of 3.1 years and the projected annual cash flow is approximately $1 billion. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality.

Thank you, Dave. Nonperforming assets at quarter end June '09 totaled $19,587,000 or 0.57% of loans and other real estate. This is compared to $12,525,000 or 0.36% at March 31, '09. This represents a 56% increase in nonperforming assets.

The June 30, '09 nonperforming asset total consisted of $8,143,000 in loans, $343,000 in repossessed assets and $11,101,000 in other real estate. Approximately $2,900,000 or 15% of the June 30, '09 nonperforming asset total are at this time under contract for sale. But there can be no assurance that any of these contracts will close.

Net charge-offs for the three months ended June 30, '09 were $3,526,000 compared to net charge-offs of $3,857,000 for the three months ended March 31, 2009. This represents a 9% decrease.

$6,900,000 was added to the allowance for credit losses during the quarter ended June 30, '09, compared to $6,125,000 for the quarter ended May 31 -- excuse me March 31, '09. The average monthly new loan production for the quarter ended June 30, '09 was $76 million compared to $64 million for the second quarter ended March 31, '09. Loans outstanding at June 30, '09 were $3.451 billion compared to $3.501 billion at March 31 '09.

The June 30 '09 loan total is made up of 41% fixed rate loans, 27% floating rate loans, and 32% at variable rates that reset at specific times. I will now turn it over to Dan Rollins.

Thanks Tim. While I am sure everybody would like to hear us drone on for several hours I think we'll skip that and we will go straight to questions. Tasha, can you assist us with questions?

(Operator instructions). John Pancari from Fox-Pitt Kelton.

Good morning. Can you talk a little bit about the runoff of Franklin deposits during the quarter? I know the runoff was trending a little bit less than what you had thought as of last quarter. I wanted to see if that is still the case in the second quarter.

Yes, I think that we're down $100 [something] million in the quarter. We continue to see high cost, what we refer to as hot money CDs, you know higher cost CD money, non-relationship money, customers that have just one CD or two CDs with us with no other relationship in the bank. We are not paying up for that money. We don't have a desire to have non-relationship type customers like that and we continue to be on track.

I think if you look at where we are today, we are at $1.7 billion and change and what you heard us say when we made the transaction was we thought we would be at $1.5 billion give or take at year end. I think David actually thought we maybe even substantially lower than that. So I think where we are today --.

Yes, Dan, I would say that I'm kind of really impressed with where we are at -- Dan and I disagreed a little bit, but I thought we could drop as low as $1.2 billion to $1.4 billion. So at $1.7 billion today, I think we are still doing a whole lot better than we thought we would. And having said that, though, we still see maybe a couple hundred million dollars or more in rolloff as some of these 3% and 4% CDs roll off.

That's right. I think we are still ahead of target. You saw it speed up a little bit. What that is, John, is there's buckets of money. Franklin was a high rate payer with several retail promotions rolling throughout the year. So when they would have their big retail promotion and promote 4% money for whatever the term was, as we get to those we are holding some of that money. We are doing as we said a better job than we thought we would be, but there's still some lumps coming through the pipeline here that when we get to a place that there was a big slug of 3.5% money we are going to lose some of that. And quite frankly, I think we want to.

Okay. Good. And then on the expense side, the decline in the comp expense -- if you would just talk about a little bit of that, solely the consolidation of the Franklin branches and what -- if you can talk a little bit about a run rate going forward that you think is likely?

I will let Dave try the run rate piece but let me talk about what is out there. Head count was down 50 people from 12/31 to March 31 and what we talked about on the last quarter call was that the large majority of those 50 people were predominantly in the number for the quarter. There was a big drop-off at the very end of last quarter.

So a piece of this quarter's expense say is the headcount reduction from last quarter. And in addition we had another 50% headcount in this quarter that was probably more evenly spread across the quarter.

So that is what is driving your comp expense down is just reduction in headcount. And it is expense saves coming through the acquisition in the first quarter. Remember we didn't convert the Franklin group over to our computer system and bring them into our operating environment until March 1.

That means that, prior to March 1 or the full first two months, we ran two separate deposit operations. We ran two separate loan operations. We ran two separate computer systems. We ran two separate networks for our systems.

All of that expense was basically doubled in the first quarter and even though we turned it off on March 1, it then took basically the month of March to kind of line everything down and clean everything up. So we really ran both banks for the first quarter.

For the second quarter, I think you are seeing the expense saves across-the-board. I won't put words in Dave's mouth, but I think that, from an expense save standpoint, we are substantially there on the transaction.

Right and I would just add when you are looking forward so, again, this is all absent these extra FDIC extra assessments, but when you are looking at a normal bank run rate and we have our efficiency ratio back into the mid 40s, I think that is kind of where we want it to be. And to start driving it lower, you have to start being cognizant are you cutting -- are you really cutting fat at that point or are you cutting into muscle?

I mean there are expenses that we need to incur to make sure the bank can service its customers. So the long -- the short answer to that is, I don't foresee us dropping our expenses significantly in the next two quarters.

Great. And then one last question actually and I know it's off of a low base and going to a low base, but I have got to ask it. The increase in the commercial real estate 90-day past dues if you could talk a little bit about the types of (multiple speakers) --.

I lost money, John. I said that was going to be question number one and you made it question number three.

You have a question -- part three, question one.

Okay. Yes. Let's dive in there a little bit. Several things -- Tim kind of touched on it.

NPAs as a whole, in our press release, the way we account for them went from $12.5 million to $19.5 million. That is up $7 million. However 30 day past -- 30 to 89 days past due credits during the quarter dropped more than that.

So if you look at total 30 day past due plus, NPAs plus over 30 days, the number is actually down a little bit from last quarter in a consolidated number. So we have more problems over 90 days and in ORE, but less problems in the 30 to 89 day bucket than we had before.

So it is hard to see a trend in some of that. Specifically, you are asking on commercial real estate, so let's try to dive into there a little deeper.

There were five credits in that bucket last quarter, there are nine credits in that bucket this quarter. Three of those credits represent $5 plus million of that that were not there last time. So there's your increase.

And of those three credits, one is roughly $1 million at quarter end and it is currently current. It is not nonperforming and it is out of that bucket today.

Another one is about $1.5 million. That is a hotel, a hospitality industry piece. We have been working with those customers for some time. That piece of property is under contract to sell for $3.3 million and the borrowers basically filed bankruptcy a while back that will slow the process down. But they owe us $1.5 million and the hotel is under contract for over $3 million.

The final piece is a medical-related development type piece that we foreclosed on and it is in our ORE. It's in the ORE at $2 plus million, $2.5 plus million. We took a loss on that so when you look at the commercial real estate loss or at the charge-off table that is in the press release, the $1 million loss in commercial real estate, the lion's share of that loss is off of this piece of property.

It is on our ORE, at again over $2.5 million. We had a contract working for a little over $3 million on that property that fell through. We've still got multiple people looking in the $3 plus million range. So again we expect no loss there.

I think really the question you are asking is does this -- is this the first signs of a trend. And I think when you have a portfolio that is as granular as ours that has as many small credits as we have, we had three bigger ticket items kicked up this time that kind of move your numbers. You're right -- from $1 million to $6,000,000 percentage wise is huge, but it's really three credits.

And so I don't think we -- I don't think we really feel concerned that this is the beginning of a trend.

I would add too, John, that it's not like these three credits were identified previously either. We've watched these credits over the last couple of years and working them so they finally, finally have come through attrition really.

So we are well aware of them and I would add that I've seen throughout the quarter, nonperforming loans go from $10 million to over $20 million. So, overall, I think we are still within the guidance that we gave.

We also met with our senior management yesterday just to get a good feel from what they saw out in the fields. And for the most part, where we've had this trend up a little bit they still feel cautiously optimistic.

Great. Thank you.

Jon Arfstrom from RBC Capital Markets.

Tim, could you repeat that number that you said? I missed it, but it was the -- just related to this last topic. How much is under contract in the current NPA total?

$2,900,000.

Okay, David Zalman talked a little bit about the core deposits up $200 million and in going through the release it looks like it is money market driven.

Right.

Did you do anything special there? Or do you expect that type of growth to continue?

You know you -- it's hard to believe that that could continue at that pace, but first let me answer the first part of your question. We didn't do anything different. In fact if anything we have lowered rates. So --

We haven't run any special promotions if that is the question.

So I think it must be money that is finally coming in. You know, it's competitors that probably might've been in money market funds somewhere else and is finally coming back to the bank or maybe out at the market.

Again I would say I don't want to be so optimistic to say that you can grow at that kind of pace, $200 million a quarter, because I do think when the economy turns around some of the money that is sitting on the sidelines is obviously going to go back out. But it is nice right now.

Then I know you spend a lot of your time on the securities portfolio and I think that everybody maybe assumes that longer-term rates are going to go up, maybe not prime, but treasury yields will go up. I'm just wondering if you've changed your approach at all in terms of how you manage the portfolio? Have you become more defensive or done anything different in the way you're thinking about that?

Absolutely. I mean, we do it. Probably one of the questions later on is going to be a lot of people are going to put a pencil to the CDs and they're going to see, gosh, they've got $2 billion in CDs at this cost and as they roll down to the cost we are after going to say then that interest margin should really increase dramatically for the bank.

But the truth of the matter is we are not able to extend as long as we wanted to on the CD port -- I mean on the securities portfolio. So some of that gain that we are going to see on the reprice of the CD is going to go to a lower yield in the securities. And it is just simply because we are trying to stay shorter on the securities market than we have in the past because we really do feel -- it may be wrong, may be right, I don't know.

We really feel that as you buy today interest rates will go up and depending on what period, and how long it'd take to go up you could have a loss in them. So we are being a lot more defensive. We are trying to shorten what we buy pretty good right now. We have been buying up until recently a lot of 10-year mortgage-backed security product with about a 3.5, 3.7 year average life.

Some of the stuff we're looking at today is really some structured stuff, still agency, Fannie Mae, Freddie Mac stuff that's where they are going together maybe a CMO or where they are having some 6.5% coupons that you are going to get some rapid payback. And the average life today is probably only 1.7 years, 100 basis points of 2.7 years and so.

But again the yield is a lot -- the yield is a lot less. It's like about 3.2, but we feel like we really have to stay shorter right now, based on what we think might happen later.

Okay. Makes sense. All right. Thank you.

Joe Stieven from Stieven Capital.

Good morning, guys. First of all, good quarter.

David, my question was pretty much on the deposit in the CD side because if you look at what your rates did in the June quarter versus the March quarter -- I mean rates came down pretty sharply. You sort of answered the question already. My point was, how much more in the next six months do you guys have that will be repricing? And what is your guesstimate as far as how far you'll be able to move those breaks down on that book?

Yes I mean, again, you know when you are looking at our numbers -- this is Dave Hollaway -- when you are looking at our numbers, you know 60, roughly 60% of our CDs mature within six months. So you are absolutely spot-on.

You can see on our marks when you look at our net interest margin page on the press release, you can see the average cost of those CDs is about 260-- somewhere in there, 270 and current market rates and what we are paying is more in the 1.5 range. So you can see there should be opportunity there. This is not pure hot money and I think that David had alluded to this.

One of the questions is, in the past, these -- especially in this Franklin book of business, there's rate shoppers. There was always a lot of players out there. You can certainly find somebody paying well above market rate. A lot of those seem to have fallen off, off the face of the earth and so they are not chasing that money right now. So if they stick with us they are having to reprice at these much lower rates and so there is huge potential for us.

Of course I think again, David, this just hits the nail on the head. How much of a pickup will there be? It depends on what we're doing. If we don't lend that money out, we've got to -- what are we doing with it?

Are we putting it in a security bond portfolio or do we try to stay liquid? Because we do have to be cognizant that rates could be turning up and they will turn up fast. We don't want to get stuck that way either. And you see part of that thinking when you are looking at our balance sheet. Note that our cash position and our Fed fund overnight position is much higher today than it was because that is a dilemma. We are trying to be very careful here right now.

Yes, Joe. I would say that even -- as we mentioned earlier it could probably turn out either way. If we increase our loans, there's no question we could dramatically increase from that interest margin. And so a lot of it depends on that. If we don't increase the loans and we just say where we're at today and reinvest in the shorter securities two year average life, on the two year average life, the yield comes down.

But having said that the net interest margin, I think, looks pretty stable really. I wouldn't count on it going up a great deal. It could, but I wouldn't count on it.

It will trend up, but -- it just depends.

Yes. But not astronomical.

Thank you. Great quarter again.

Brett Rabatin from Sterne, Agee.

Good morning. Wanted to ask on the other real estate owned, what was -- were there any expenses related to dispositions this quarter? And then just wanted to get some color on kind of what you're saying with -- as you try and get rid of those loans you have on other real estate, kind of what the market trends were and if you were able to -- let's say you have a borrower who is willing to buy the properties, do you guys end up doing the funding for those or how that works?

Yes. Let's break that up into multiple pieces. You (multiple speakers) --

Yes, sorry.

Yes. The first question is were there expenses involved with this and the answer is absolutely yes. It's not broken out at this point because the numbers haven't been big up to this point, but for this past quarter those ORE expenses related with all this. And this is off the top of my head, but it will be close. It's somewhere to the tune of $400,000, $500,000 for the quarter. Previous quarter was probably I want to say $300,000, somewhere in that -- $350,000. Somewhere in that.

So it is running in about that range. So hopefully that helps you out on that part of the question.

On the trend piece, Tim can jump in here. Really that depends on, it is kind of like -- I talked about our portfolio a minute ago. We have a very granular portfolio. THE larger ticket items as we have said now for multiple quarters, larger ticket items, you have a smaller pool of buyers. It takes a little more time to move those things through.

The smaller residential credits, we are able to move very quickly. So that piece of the puzzle is working well.

Are we funding the sale of ORE? That would be an exception to our normal policy. We are not going to say we haven't done it, but that would be a big exception for us.

I think we have because we have against one of the properties we have, we have made one loan against it.

But that is an exception.

There have been one or two instances where we have financed the acquisition of the ORE but --

With cash equity in the transaction.

Have gotten real solid down payments. And there.

Terms and conditions that match our other loans.

Exactly there haven't been any out of market terms or conditions and in terms of the trend, Dan is correct. I would say that it has slowed a bit across-the-board.

You don't have to go back too far. And we were very fortunate that we could move most assets out really within 30, at the most, 60 days. And that has been extended a little bit especially the larger pieces as Dan says.

Investors have fishhooks in their pockets. They can't get their money out.

: That's right. But a lot of the average priced residential properties we still turn very quickly, but we haven't seen buyers disappear. They are out there. There is activity on all the pieces. It just seems like the length of time to solve the issues has increased a little bit.

And I don't have the hard numbers on the average time, but it probably wouldn't be unreasonable to say that it is gone from 45 to 60 days to maybe 90 days on some of these properties.

Okay, that's great color. And as a follow-up, I wanted to ask, you have a fairly small piece of land development but I -- it seems like that's one of the pieces that a lot of lenders in Texas are saying, look, there is just no liquidity so they are not able to sell lots and so it is hard for some of those borrowers to have any kind of cash flow.

I'm just curious what the trends are in that individual loan segment at this point?

I would say in the land development area, again, we don't want to be cavalier about this because nobody is that great, but the kind of loans that we've made in loan development, land development are usually to well-seasoned customers that we've had since the '80s. Some that have more money on deposit than what they have in loans to us.

And I would say that we are not afraid of land development. That we know where we're at. In fact we made an offer to a customer recently a week ago, a $30 million loan, that has probably financed one of the hottest subdivisions in the nation right now in Texas, here in Houston and it's secured by possibly $150 million of collateral and there is a lot of loss and at selling.

So we are not necessarily afraid of that and I don't think that we have a great deal of fear in that area for the loans that we have. Tim, you may want to jump in on that.

I think that is right. There is clearly softness in some areas in that regard and when I say some areas, I'm talking about areas within Texas. Obviously there is in places other than Texas.

But the softness that we are seeing is nothing compared to what --

Absolutely. Nothing compared to what (multiple speakers)

What we're hearing (multiple speakers) --

What is taking place elsewhere. That's right. I guess the best way to describe it is it's spotty. Some lots seem to be selling fine. Some developments seem to be moving along well. Others are sluggish and not doing so well.

And it all probably really comes down to quality. The ones that were quality to begin with are still quality, and the ones that weren't in that category are the ones that are struggling the most. And we don't have very many that fall into that category.

So as David says, we are cautious about it. And we're trying to move forward with our eyes open, but we don't see any immense problems in that area on the immediate horizon.

Yes, it doesn't need that we don't have any, but I would say the ones that are in the major metropolitan areas, the subdivisions that we may be in are still very good and have a lot of turnover and we are seeing a lot of transactions.

If there is a concern, it may be from some of the banks that we might have purchased previously that might have had a $1 million or a $2 million development loan primarily to a smaller developer primarily. It doesn't mean that we don't have any because we do. I don't know just how many, it's not that much. But I still think we feel pretty comfortable with where we are at.

We have some in there, but again I think we all feel like we are managing that process fairly tightly.

Thank you.

Jennifer Demba from SunTrust Robinson Humphrey.

Good morning. Acquisitions and opportunities there. David, could you talk about what you are seeing?

Well. There's no question there are opportunities out there today. There is opportunity where banks from out-of-state banks that have some operations are trying to see if they can get some money for what they have to try to shore up. Maybe their capital positions are some of the problems they have in other states so you got that. There is other opportunities that we are looking at.

I think there's going to be -- I think they're going to be a lot of opportunities. Maybe not all in Texas, but there will be some in Texas and I think that we are ready for that. This is really a time that we've been waiting for. It is a time that you go back to the '80s when we started, that we really made more money for shareholders than we ever did just on the day-to-day plain-vanilla banking.

So we are finished with the Franklin transaction. The operational integration turned out very well. We surprised ourselves how well it turned out and how smooth it went. Thanks to everybody.

I mean, again, don't want to be cavalier about it because it took a lot of work by everybody, but we really feel and we talked about it as senior management, we really feel that we have the ability and the opportunity to really do some -- maybe some good transactions going forward. And we are ready for it.

There's good opportunities out there. And I think the hard part for us is to make sure that we don't take -- we have got to pick the right one of the opportunities since there's going to be several of them. So I think we are kind of just watching and paying attention and we want to be prepared when the time comes.

And I would comment that we are not going to twist off on an opportunity. We primarily would like to look at an FDIC deal more than anything else and we are going to try to cover ourselves completely on the downside which for many, from any loan exposure really.

So are you still inclined to wait for potential opportunity before perhaps raising capital to make yourself ready for those opportunities?

You know, I know people don't want to hear this, but that is still the case. We still want to make sure -- we still want to make sure that we have a deal before we raise any additional equity, even if we have to. We have a lot of good earnings and a lot of the deals that are out there right now especially on assisted transactions, there may even be support and help from the FDIC really.

Thank you very much. Good work.

Bain Slack from KBW.

Good morning. Good quarter. Two quick questions. One, I think there is a lot to ask about the (inaudible) margin. I guess just focus on the asset side of that.

I guess, David Hollaway, you said there was about $1 billion in cash flow running off annually. I'm assuming that's pretty evenly spread across the quarters or is that --?

Yes, that's a good assumption.

And then on the loans, I guess where we stand right now, it didn't look like much repricing in the quarter. Do we feel pretty good assuming rates kind of stay where they are and that they are going to stay in this range? I mean there are no resets, maybe resets coming I would assume or do you have floors then? What kind of color can you give me there?

You are asking a couple of questions. We are building floors into many of the loans that are out there. We do have floors in some loans. The loan yield for the quarter was [638]. I think that we continue to have opportunities to deploy capital.

I think that when you look at the risk returned we're getting on the money, I think we are able to get a better spread than we were getting in the past. Now obviously primes, I don't even know what it is. Three something, it's way low. We are not making any loans that low.

No I think our floors that we have on anything right now are usually 5.5 is our floor.

And we have put floors in virtually almost 100% of the variable rate loans.

And if we are locking into something for three years or five years our rate is going to be anywhere -- depending on what type of product it is, it could be anywhere from 6.5 to 7.5.

Yes. Tim gave the numbers on variable rate, floating rate and fixed rate and the fixed-rate number actually went up 1% or something. But again the loan portfolio remember is also turning to the tune of $1 billion a year and cash flow coming off of the bond portfolio.

We have been able to deploy most of that back in -- excuse me, loan portfolio. I said the wrong words.

The loan portfolio has got $1 billion plus a year in cash flow coming off that we are deploying back into the loan portfolio. And the goal is to continue to grow that.

Okay and I guess when I look at your construction portfolio and, clearly it is coming down overall, but it seems like within the segments, obviously the residence real estate seems to be coming down a little faster. And there actually seems to be some growth on the commercial side. I guess could you just give color as to what kind of opportunity you're seeing there? I assume part of that is what you were saying earlier, Dan, about the better risk reward and is this marketshare take away or new demand? What is going on in that?

I don't know that I have got a new demand at all.

I would say we are seeing more opportunities today than we ever have on credit, commercial credits, and all around credits that might've been at some of the larger banks are now coming to us and we are getting an opportunity to look at them, price them, commercial credits even on the commercial real estate side. There might have been in the past where you had some bigger projects and people would actually come in and we couldn't compete because of the rate, because of the guarantees.

They would do a take it and securitize it and sell it off. So we are getting a whole lot more opportunities than we have ever had and it is really back to traditional banking. We are really -- again I don't know how long this will last. I hope it lasts a couple of years, but we are getting terms and conditions that are what they should be in banking and where we've had a lot we are trying to -- I wouldn't say run off some of these other loans and construction and that, as some of that stuff is going and we are foreclosing on some of these other pieces of property. It is hard to see, but I really feel good about the loan, our loan piece out there.

I think that we have -- we are getting more opportunities than we ever had.

You were asking specifically on the construction pieces of it and I think we may be swimming against the stream. I don't know. I hear folks talk about competitors that have basically just said they are not doing any more of X type loans or they are not doing any more of Y type loans. We been very resistant to say just put an x on a certain type of credit. We are looking at every credit as an opportunity just like we talked about acquisitions.

We want to look at the borrower, we want to look at the customer, we want to look at the relationship, we want to look at the opportunity and so we've not said no to a construction credit. You heard David talk talk about a big one. Are we out actively soliciting them? No, but there are some very good long-term developers and old folks that have -- old folks -- customers that have deep pockets in the markets that we serve that are not being treated properly by their banks. And we are taking advantage of moving that business over, even in the construction category.

Yes I think a lot of banks, not because they want to, but they are just in that situation where they have had to say okay, no more commercial real estate or no more of this. And no matter how good the customer is, they are trying to outsource those people. It's because it helps them and gives them liquidity.

Most banks are loaned up 100% loan to deposit and we're not. So this is just a great opportunity right now.

And that does help give me the color I was looking for. I guess and I guess we are also seeing that in the long production numbers that that may give us a sign of what's going on with the production numbers that Tim had given.

Right.

I'm assuming so. Alright, great. Thanks guys.

Terry McEvoy from Oppenheimer.

Good morning. Everything on my list has been discussed except for one small question, and I believe in the first quarter there was a good slug of loan servicing income that was paid by the FDIC. And I believe that contract ended this quarter. Was that the case and was there a significant amount at all of revenue or loan servicing fees paid in Q2 that would not be there in Q3?

That contract ended in Q1. So all that revenue, there's been -- there is virtually no revenue for that in Q2 is the answer.

Perfect. That's it. Thank you.

(Operator Instructions). Andy Stapp from B Riley & Co.

Nice quarter. You touched on the fact that 30 to 89 day delinquencies went down. Do you have the actual number of 30 to 89 delinquencies?

I don't have an actual number because they are still putting that together in the call report, but it is off over $7 million from the March number.

Okay, and regarding your increase in 90 day plus delinquencies, just if you could provide some color why they fell into the 90 day bucket as opposed to the non accrual bucket?

Yes, the accounting rules for that are -- that's what I was talking about what I gave the color on the three pieces of CRT. If it's over 90 days and still accruing, then we believe there is not loss in the credit. So when you heard me talk about that, the hotel credit that's out there that's $1.5 million it is clearly over 90 days. That property is under contract for over $3 million, so our risk of loss is not there.

So we don't take that to non accrual. If we believe there is risk of loss in the credit then it moves into the non accrual category.

Great. That's all I had. All my other questions have been asked.

[Karl Dorff from Dorff Asset Management].

Good morning. Very good job in a difficult environment. Mine is more of a comment than a question and it's relating to the securities portfolio. My belief is that that Fannie Mae and Freddie Mac are bankrupt and have been for a long time without the government behind them. There is guarantees on that paper through the end of this year. And I know I don't know what is going to happen subsequent to that, but you guys have a lot of investments. And I know you have a lot in Fannie and Freddie and I would hope that you would take this comment into consideration in what you are doing with your investment portfolio.

I hear you. I think that is something that we all think about all the time. On the other hand I still believe if Fannie and Freddie ever go under, or they let it go under then you and I won't even have to be talking today. We will all be (multiple speakers).

If they don't honor the guarantee.

Yes. We will all be eating beans under the bridge probably because -- that's probably every bank in the United States would go under, I would think.

Well, if -- they don't have to let them go under. There could be changes that were made that would certainly change the ratings on the obligations. Yes, I don't know. I really don't know how this is going to come out. Your comment is true and that's the way everybody is looking at it.

But it's -- in my opinion anyway it's an awfully big bet that the government is going to continue to stand by a very difficult situation rather than try to make them go private and perhaps result in some changes that people are not cognizant of or looking at at this point in time.

Well I hear you and again I am not underestimating anything that you say and it's always been something in the back of our mind at the same time so I really appreciate your saying it. I thought about it myself really.

Thanks. I just wanted to weigh in on that.

(Operator Instructions). Dave Bishop. Stifel Nicolaus.

Good afternoon, gentlemen. Question for you. I don't know if you touched on this since I might have missed it, but the increase in some of the short-term, that's unsold in the other temporary investment. Is that sort of reflective of trying to fund some of the anticipated runoff from the Franklin deposit that you guys are baking in over the coming quarters?

Probably the other side of that is probably no place to put the money to get any yields. The question is how come your Fed funds are up $150 million. (multiple speakers).

It goes back to in our earlier comment what are we, what is our strategy, what are we going forward and what are we thinking rates are going to be and we've been dragging our feet on a lot of things. We have kept anywhere from $100 million, $200 million liquid at any given time and, again, we are trying to find shorter securities a year to two year average life out there.

So that is some of the issues.

And you can look at it the other way. Obviously if those CDs were to run off quicker we wouldn't even have that dilemma, right. (multiple speakers).

In the back of our minds we really thought we would have a bigger runoff than we had. We thought the liquidity coming in would just go to to run off and we just haven't had the run off actually.

Another follow-up in terms of the branch closures there, where are you in that process and what's the count at this standpoint?

What do you mean by branch closures?

The Franklin branches.

No --that -- . We consolidated everything right off the bat. Franklin had 46 locations in November a year ago and many of them were consolidated early in the first quarter and the final three or four of them were done on March 1. So the remaining 33 locations that we are -- the 33 pickup from the Franklin transaction has been in place since March 1. We have not had any change in that this quarter in

Okay. And then finally in terms of the state economy there just in terms of the energy sector, any sort of change? Any sort of noticeable change there you've seen over the past couple of months or so?

I'll jump in on that. Obviously it's not -- oil is not at $140 a barrel, but even at the $60 and $70 a barrel the oil companies can make a whole lot of money, but have they reduced their workover rigs and some of their drilling rigs? The answer to that is yes.

But they are all still very healthy and again probably the good part is that we don't see them laying off a bunch of people like they've done in prior years, simply because they found out last time -- that happened in the '80s, I guess -- that trying to recruit people when it does gear back up is almost a virtual impossibility. They didn't have enough people in the industry.

So I think they are still making a lot of money. They may not be as busy. They may not be drilling as much, but it is still okay.

Also I think a lot of that, I guess what we could call is sluggishness in what they are doing, I don't think is so much driven by the economic marketplace as it is the political marketplace. The political things that are going on.

I think they're all suspicious to say the least of the cap and trade issues and they don't know really where that is going to end up and what it means for them economically. So I think the political face of it has really frozen a lot of them in place.

There are a lot of cross winds blowing. You know what I was going to add into that, Dave, I think the energy business is very similar right now to the CRE business in that you know there's -- the prices out there are actually pretty good, but you've got a lot of people just literally sitting on their hands. They are not willing to do anything. Whether it is commercial real estate-based; whether it is business-based; whether it's energy-based -- everybody is kind of sitting on the sidelines waiting to see when is the right time to take action. When is the right time to put money in.

I think until something changes that people decide they want to get in the game, I think we are going to see just kind of slow.

All right. Thank you.

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

Sounds great. Ladies and gentlemen, thank you so much for participating in our call today. As usual we appreciate the support that we get from the investment community and we look forward to seeing you all again over the next few months. Thank you very much.

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