Prosperity Bancshares Inc (PB) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Prosperity Bank third quarter earnings conference call.

(Operator Instructions). Please note this call is being recorded and I will be standing by should you need any assistance.

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 third quarter 2010 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'm Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares. And here with me today, is David Zalman, Chairman and Chief Executive Officer, Tim Timanus, Vice Chairman, and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights of the 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 quality. And finally, we will open the call for questions.

During the call, interested parties may particpate live by following the instructions that will be provided by our call moderator, Natasha, or you may email questions to investor.relations@prosperitybank.tx.com I assume you all have received a copy of this morning's earnings announcement. If not, please call Tracy Schmidt at 281-269-7221, and she will fax a copy to you.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities laws, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements, can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety, by these cautionary statements. Now, let me turn our call over to David.

Thank you, Dan. I would like to welcome, and thank everyone for listening to our third quarter 2010 conference call. Some of the highlights this quarter include, our quarterly earnings increased to $32.2 million in the third quarter. That's compared to $29.3 million for the same period in the prior year, an increase of $2.9 million. Our diluted earnings per share were $0.69 for the third quarter of 2010, and that's compared to $0.63 for the same period in the prior year, which reflects a 9.6% increase in diluted earnings per share. Our non-performing assets totaled 0.26% of average earning assets, one of the lowest in the industry, and a sign of strong asset quality.

The allowance for credit loss was at $51.4 million or 1.5% of total loans in ORE at quarter end, and as compared to $47.3 million or 1.39% at the same time last year, an increase of $4.1 million over last year. The allowance is now at 2.48 times our total non-performing assets. Our tangible common equity ratio is 5.73%, compared to 5.13% as of September 30, 2009, reflecting an 11.7% increase in capital. Our total risk-based capital increased to 14.47%, compared to 13.01% as of September 30, 2009. Our non-interest bearing deposits continue to increase to $1.6 billion at quarter-end, compared to $1.5 billion for the same period last year, an 8.8% increase. We experienced a slight decrease in time deposits for higher cost certificates of deposits.

Our legacy loans are those loans not acquired through acquisition, increased by $25 million in the third quarter to $3.3 billion. This is a 3% increase on an annualized basis. We continue to see our loan pipeline and production increase quarter-over-quarter for the last three quarters. Tim Timanus will go into more detail with the actual numbers when he speaks. We continue to actively review and pursue acquisition opportunities. Pricing in today's environment continues to be challenging, however, we believe many banks will be forced to look at strategic alliances going forward, based upon the additional operating costs and regulatory burdens, along with the income restrictions placed on our industry by the new legislation coming from Washington.

Our non-performing loans for the first nine months of 2010 have ranged on a quarterly basis from $15 million on the low side, to $28 million on the high side. We expect this trend to continue going forward. We are seeing improvement in asset quality, as our watch list credits have declined for the first quarter, and there do not seem to be as many problems developing -- developing. In the past, as we resolved one problem, there was always another right behind it. We are not signalling that the downturn is over, but we do see some improving trends.

Looking forward, we know we have our challenges with new rules and regulations coming down every day from Washington. However, we believe the current environment provides one of the best opportunities that we have seen in a number of years. Our bank is in an enviable position from almost every standpoint. We have strong earnings, solid asset quality, 175 banking locations throughout one of the fastest growing states in the Nation, with one of the best economies. Our great associates, with many years of experience in banking are eager to help us grow and succeed. We intend to capitalize on the current environment, by developing new customers, and taking care of our existing customers growth needs.

Many of our competitors are limited as to the loans they can make due to several factors, including their concentration in commercial real estate loans, and their asset quality issues. Our team is actively calling on existing customer and prospects. Again, I would like to thank our whole team for a job well done. 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 three months ended September 30, 2010, was $80.3 million, compared with $77.4 million for the same period in 2009, an increase of $2.9 million or 3.7%. The increase was primarily due to a 6.4% increase in average earning assets. The net interest margin on a tax equivalent basis was 3.97% for the three months ended September 30, 2010, compared to 4.08% for the same period in 2009, and 4% for the three months ended June 30, 2010.

Non-interest income decreased $1.6 million or 10.4% to $13.6 million for the three months ended September 30, 2010, compared with $15.2 million in the same period in 2009. The decrease was mainly attributable to a $1.4 million loss on sale of ORE. On a linked quarter basis, our non-interest income increased $358,000 or 2.7%. Non-interest expense for the three months ended September 30, 2010, was $42.6 million, compared with $41.2 million for the same period in 2009, an increase of $1.4 million or 3.4%. On a linked quarter basis, our non-interest expense decreased $456,000 or 1.1%. The efficiency ratio was 45.4% for the three months ended September 30, 2010, compared to 44.5% for the same period last year, and down from 46% in the second quarter of 2010. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave Our non-performing assets at the quarter ended September 30, 2010, totaled $20.7 million or 0.60% of loans and other real estate, compared to $21.856 million or 0.64% at June 30, 2010. This represents a decrease of 5%. The September 30, 2010, non-performing asset total was made up of $9.306 million in loans, $161,000 in repossessed assets, and $11.233 million in other real estate. As of today, assets totaling $5.898 million of the September 30, 2010, non-performing asset total, are under contract for sale. There, of course, can be no assurance that any of these contracts will close.

Net charge-offs for the three months ended September 30, 2010, were $4.373 million compared to net charge-offs of $2.440 million for the three months ended September 30 -- excuse me, June 30, 2010. $3 million was added to the allowance for credit losses during the quarter ended September 30, 2010, compared to $3.275 million for the second quarter of 2010. The average monthly new loan production for the quarter ended September 30, 2010, was $80 million. This is compared to $71 million for the second quarter ended June 30, 2010, for a 13% increase. Loans outstanding at September 30, 2010, were $3.414 billion compared to $3.425 billion at June 30, 2010. The September 30, 2010, loan total is made up of 41% fixed rate loans, 25% floating rate loans, and 34% variable rate loans. I am going to now turn it over to Dan Rollins.

Thank you, Tim. At this time, we are prepared answer questions. Natasha, can you assist us with that?

Absolutely.

(Operator Instructions).

We'll take our first question from the site of John Pancari with Evercore Partners. Please go ahead.

Good morning.

Hi, John.

Can you talk a little bit about your loan strategy here, if you have any programs underway to spur loan growth, calling programs, et cetera, as the economy begins to stabilize and improve their in Texas?

John, this is David Zalman. And you asked a question, and we're really focused on, in fact, our management team has come up with a goal to increase loans over the next two years by about a $1 billion. Again, we're -- that's a little over -- on a percentage basis, it's a very achievable target for our guys. We -- our management team has gone throughout the state, and really talked to everybody, expressing that we really do have to grow loans. It's very critical, very important. We feel like the goals that we put out are very achievable. They're probably only about $2 million per lender, per increase, per year over at the 26 months that we're having this run. And it's probably not more than $200,000 per branch location, per month increase. So we feel like our goals are very achievable. We feel like this -- we feel like we really have an opportunity to do this right now. We're showing them, that so many other banks right now are not in a position to even make some types of loans, like commercial real estate loans, and they're having other difficulties with their existing loans. So we feel like this is a real opportunity, our team is really behind it. I think everybody's pumped up, and we're really going after it.

So is that more focusing on share gains, and stealing share from competitors, versus deepening your relationships with existing clients?

Yes, I think that we want to do -- multiple answers to your question there, John. What David is saying is exactly right. We've been around, where David and I, personally along with several other of our senior management team, are actively calling with our lenders. We want to do two things. We want to continue to grow, the business that we have from our existing customers. And we want to take business from other folks. And I think that's where we been most successful in the short run. When you look at our numbers for the quarter, our legacy loans for the first time, our legacy loans have grew in the last quarter, for the first time, in sometime. You certainly have followed us for a long time.

You heard Tim talk about production numbers. Just in the last three quarters, production is, and I'm rounding. Tim gave the exact numbers, but production went from $60 million a month in the first quarter, to $70 million a month in the second quarter, to $80 million a month in the third-quarter. And I think that's a direct reflection of the effort that were putting out there. And when you look at what's coming through there, the new business that we're seeing, if you're asking from an organic economic growth in the state, there's not a whole lot of organic economic growth going on. So most of the new business that we are getting, is take-away from somewhere else. But remember, there's a whole lot of non-bank lenders out there that made loans over the last for five years that are gone. And as those loans are maturing, there's opportunity for us to take that business.

This is the first time in a long time that we really been able to focus on her own organic loan growth. John, this is the first time in a long time, that we really been able to focus on our own organic loan growth. As you know, and you have followed us for a long time, we were really -- we were in the acquisition mode. And when you are making a lot of acquisitions, you're buying banks, you are trying to clean up a lot of the loans that are at the existing banks. So we feel like everybody's focused. We have a pretty clean portfolio, and we think that we should be able to go forward.

Okay, and can you just talk a little bit about the financial impact of such a program, in terms of your own assumptions. Just given the increasingly competitive loan pricing environment, and then maybe also what loan to deposit ratio you're targeting?

There are multiple questions in there, and I am looking at Dave Holloway, and he will jump in here. When you look at loan -- at financial impact, you have to balance that into your numbers. But when you look at our margin numbers, you can see our loan yield, quarter-over-quarter, just dropped a few bps. So clearly, putting loans on, from a rate perspective, you can see is a big plus for us. So I would direct you back to the rate charts, on the last couple of press releases we've put out. And I'm flipping through it right now, but I think loan was 6.21% in this past quarter. Is that right? No, 6.15%. Excuse me, 6.15%. It was 6.21% the quarter before, so we lost six bps in loan yield in the last quarter. So, and clearly that's where we would want to be putting business. Dave, are you going to jump in on the second part of that?

Well, loan deposit ratio, I mean --

Oh --

Do you want to answer that one also?

I haven't even calculated what the loan or the deposit ratio would be. Our goal, really has been -- our loan to deposit ratio has really decreased especially, because of the last acquisitions we've done. As you know, we bought the Franklin Bank which is about $2 billion in deposits. Of course those deposits, we expected them to shrink down to about $1.2 billion or $1.3 billion, and they have. The higher certificate of deposits that we really weren't matching the rate steps that they could get in other places. So that dropped. And then as you know we bought the US Banks, and the First Bank.

So we had a ton of money come in from deposits, not loans.And if you look five years back or so, we were in a similar situation. And we were able to bring our loan deposit ratio back up to 65% over a period of years. That usually, I think, is any where between three to five years, for the most part. And I think that's still our goal today.

From a financial impact, the simple answer is, clearly, if we could take deposits that we are currently paying our cost of funding the bank balance sheet less than 1%, and put them into loans that, north of 5% and pushing 6%, that's going have a huge positive impact on our financial numbers. Dave is nodding his head, do you want to jump in?

Yes, I was just going to reiterate that in terms of impact to margin going forward, it definitely will be a huge positive, as we start -- keep gaining net loan traction, and that portfolio starts growing.

Okay, great. Thanks for answering my questions.

Thanks, John.

Our next question comes from the John Armstrong with RBC Capital Markets. Please go ahead.

Hi, Good morning.

Morning, John.

Following up on that, just can you talk a little bit about the pricing discipline on some of the new production that you have? It's obviously a goal to keep the loan yield high, but how is that going, and how competitive is it?

That's another reason, John. This is David Zalman, again. That's one of the reasons we feel this is really an opportune time for us to get into the market, because we -- you never want to say that it's not competitive. But I would say that most banks out there today are very reasonable, and everybody's on the same page. There's not that many people that are undercutting each other. And you're able to get a fair return for putting the money out, for taking the risk.

That's one of the main reasons were really trying to push the loans right now. In the past, as you know a couple years ago we backed out of loans completely, because we felt like basically what we were earning on the loan side, compared to what we could put on the security side, and after taking into consideration, losses, and officers egos, salaries, and everything. It was pretty obvious that we could do about the same in security. That's not the same today. And so we think this is a really good market. And I would say for the most part, we do have floors on most of our loans. And I would say a bottom floor, where it's probably dropped -- probably a year ago our floors were at 5.5. I think today we're still trying to hold somewhere between 4.5 and 5.5 for the most part.

John, I think that David said it when he was talking a minute ago, that opportunities that are in front of us today are coming our way. That's what I think the message is, when you look out there at what's happening. The market is coming to us, and so were able to get good pricing. We're able to do things the way we want to do them, and we're able to grow. So that's the opportunity that are in front of us.

Okay. You also had some commercial construction growth, can you talk a little about profile of what's driving that?

Well, we had CRE grew, I am flipping pages to make sure that we're on the right page. Construction actually fell.

Okay.

Construction loans fell from $514,000 to $498,000 in the quarter, on a linked quarter basis. But CRE grew from a $1.350 billion to $1.357 billion, so up $7 million. CRE - there's opportunity for us out there. Tim is wanting to jump in on here.

I think the bottom line is that, the bulk of what's happening in that area, is in the owner occupied area. We're not doing very many spec projects, primarily most of what we're doing is for our owner-occupied real estate properties.

Remember, out of that $1.350 billion, in commercial real estate, about half of that at the beginning of the quarter, and I haven't seen the end of the quarter numbers, was owner-occupied. And we are again, that is one of the active calling programs that we're under, is we're actively calling on the owner-occupied businesses, and looking to take that business away.

Yes, I was just looking at one of the sub tables, where commercial construction was up a bit.

Oh, commercial construction, okay. That's going to be owner occupied. Okay, you're right. You're down at the bottom of the page?

Yes.

Yes, you are exactly, right, exactly, right. That's going to be an owner-occupied category.

Okay. Okay. And then, Zalman, maybe one last question for you, any message in the dividend increase?

Yes. We didn't play it up big enough in our press release. Thank you for asking. We did. As our bank continues to earn more money -- in -- our directors have wanted to increase it. And historically, and I guess this won't always be going forward, but historically we've always tried to give back to the shareholders about 25% of what the earnings were, of the bank were. And that's how we are coming up with this number, and the increases that we see each year. We did, let's get full disclosure out there, we did move the normal pay date. Our normal pay date on dividends has been the first working day of a quarter. And because of the uncertainties today on the tax implications, we moved the pay date for our dividend up one business day, which moves us into this year, instead of next year. That's a one-time only change.

Okay, I'm sure your shareholders appreciate that.

Thanks, John.

Thanks.

Our next question comes from Jennifer Demba with Robinson Humphrey. Please go ahead.

Thanks, good morning. You had some margin pressure in this quarter. Can you talk about what your outlook going forward for the margin, and what other strategies besides loan growth, will enter into combating any margin pressure you may have?

There is two parts to that question. One again, when you're looking forward on the margin, as David and Dan had said earlier. What's critical to that margin is starting to continue to show that loan growth. Because if you think about it, we have all this liquidity, and as cash flow is coming off the security portfolio, if we had to reinvest that at current rates, obviously, puts pressure on the margin. So what it comes down to as were going forward, we need to start seeing this loan growth. And so the question becomes, what's the percentage of velocity of the increase in the loan portfolio, and the yields that come from that will definitely help our margin. On the deposit side, going on the other side of the perspective, what we're doing here, and what we've always done is rebalancing the mix of money on the deposit side.

In other words, as we've inherited from these transactions that we've had, and they generally have high CD books, with high CD interest rates, we're generally trying to -- we can't -- obviously from a liquidity perspective, we can't roll over CDs at above market rates. But what we are doing, and what you see our numbers, is CD percentage of total deposits is starting to come back to about 32%, which is where we've been historically. And what that means is, we're constantly going back to our customer base, for the customers -- for the newer customers that come with us, and gaining their checking accounts, they're core relationships, not just the CD relationship only. What that means in the big picture is, when your gaining, technically lower cost money in place of high cost CDs. And that also will help the margin move forward.

And I think also, Dave, I would like to add that after taking on some of these other locations that we've had. There's a large number of locations, and they have smaller deposits than maybe some of our other locations, existing locations. I think that we -- operationally integrating these, I think that over time our efficiency ratio or our net overhead is a little bit higher than we would like it to be. We're hoping to cut that net overhead down some what. That's one thing. And then also, going forward, hopefully, and again, there is no promises of something like this, but a going forward -- if the loan portfolio, or the loan outlook continues to improve, you may not have to be putting into the provision, the way we have been putting into the provision the last two years. Today, we're one of the very few banks that our loan provision for loan losses stands at 2.48 times, what we have in total non-performing loans. So I think a combination of expense control, the provision outlook on the loan side of the loan, the loan increase the loan growth we're talking about. And also from the deposit side, getting our deposits ratio like we've had them in the past, all of those things combined should help us get to where we want to be, and where we need to be.

So, David, do you think it's possible the total operating expenses flattish for a while?

I don't think that. I think we need to cut them a little bit.

Okay.

I think that's our goal, is to try to cut the operating expenses.

Okay. Thank you.

Our next question comes from the site of Chris Marinac with FIG Partners.

Thanks, good morning, David and Dan.

Hi, Chris. How are you?

Can you tell us what you're doing with SBA loans. Have you done much in that business, is that an area at all of interest going forward?

We have done some in the past, Chris. This is Tim Timanus. I would say we're probably more focused on it now than ever. And it goes back to the comment about owner-occupied real estate opportunities.

And the government changes on SBA.

Well, that's true. It's a better picture out there right now. But the 504 loans, are attractive. many times and we are looking at those, and we have done them. Those tend to be owner-occupied deals, which we like we think there is less risk in that a profile. We have a lady that's been with us now a few years, that came to us from one of our acquisitions And she's an expert in that area. And she's done a wonderful job for us, and so we are focused on it and we are continuing to try to find those opportunities.

I would add Tim, Chris, it's David again. In the past, I don't know that we as a management committee felt as comfortable doing SBA loans, because I don't think we really have a department set up for that. I think that we finally, Tim and I and all the lending staff, we really have a lot of confidence in our SBA team that we have right now. And because of that I think you will see more SBA loans going forward in the future.

And moving up to a 90% guarantee on the bigger credit also, and the move up on the size limit.

Correct. It's just a better picture all around.

Right. That's helpful. And then, David, just a big picture question about consolidation, do you have any signs today that regulators promoting small banks to head towards larger companies in consolidation, or is that still premature to expect?

Again, I don't want to be specific, but definitely banks that -- and what I'm seeing or hearing about in the market, banks that are having some problems right now, some difficulties, they really are pushing those banks to try to find investors, private equity investors, and other people to come into those banks. And I do know of a couple of them, again and they are very small. They were on the verge of maybe not making it. And the regulators have really helped the people that have come in, to get these things done. So I think what you are going to see -- I don't know that the FDIC is going to have as many losses as they thought they were. Because there seems to be a lot of people stepping in, and even for the smaller banks to try to help bail them out. I don't know if is going to be quite as bad as they anticipated originally.

Thank you for the color.

Thanks, Chris.

Our next question comes from the site of Michael Rose with Raymond James. Please go ahead.

Hi, good morning.

Good morning, Michael. How are you today?

Doing well Two questions, first, it looks like the losses on the ORE sales were offset by reserve release this quarter. What are your expectations for losses going forward, and would you maybe expect to match that over the next few quarters?

Michael, this is David. And Tim may want to jump in over here. Last year when you look and compare our numbers, our losses on a ORE sales, we actually had a gain at the same time last year, where this year we have a loss. And so obviously, and I think we're about $2 million something of losses, so obviously we put them on the books at too much money, or we can't get the appraisers to appraise them right, because it's the two-fold type of deal. You have to go a lot on the foreclosure basis, and what the appraisal says. But having said that, again, I want to be very cautious in this, because I want to qualify it, because with such a low non-performing loan portfolio like we have, I can be extremely confident, and you get one loan that's $5 million or $10 million, it can really change our numbers dramatically, just because we have such low numbers to begin with.

But going forward, what we see, I will reiterate again. A lot of loans that we have been working on for the last two or three years, especially this last quarter, we finally think that we've written them down quite a bit. We think we got sales on them. There still may be a few out there, not maybe a few, there's still a number of loans out there, but again, that we're working on. But the number of loans and problems, do seem to be declining. And I think going forward, we may be able to see some improvement in what we're putting in the provision. But having said that, it we're really intending to grow loans like we want, we need to be careful there too, so that we don't take money out of the provision, if that's what we are looking for.

I think I would want to talk the big picture. You try to tie the charge-offs or the provision expense back to the chart -- the loss on ORE. I don't know if those really tie together. When you look at our modeling, which is quite extensive, Tim, some of the comments that Tim made, you need to dial that in. When you look at the ORE, we're at $11 million, give or take out an ORE. And I think, Tim, you said we're -- almost $6 million of that is under contract today. No guarantee that it sells, but that's the bigger percent of ORE under contract that we've seen in some time. But as David said earlier, our watch list has improved this quarter, which is first time we've seen that in a while.

Our 30 to 89 past dues are as low as they've been in several years. So all of those trends are good. So just in a big picture industry-wide perspective, the way I would want to paint that picture, Michael, would be, if there's an industry is improving, and the economics are picking up, then you would see more charge-offs, than provision expense of the tail end of the economic cycle. Because we recognized those losses in earlier quarters, and hopefully we're coming to the tail end of that economic cycle. I think it's too early for us to say that's exactly what's happening, but when you look at all the numbers, the watch list is improving, 30 to 89 days is improving, ORE under contract is improving, so feel pretty good about all those things.

And a lot of the numbers, I mean a big portion of the numbers, our ORE expenses are up pretty dramatically, because a lot of the property that we're taking back usually there in bad shape. So they're just expensing right through the income statement, rather than taking it as a loss that you're seeing.

Another reason to get rid of it quick.

That's right. That help you, Michael?

That's very helpful. And secondarily, I noticed that your deposit out of the two branch acquisitions are about 10% of your deposit base. So nearer term, how much opportunity do you have to reprice down those deposits? And basis point impact of how that might offset the margin on the whole?

I think when you look at the yield page on the press release again, total interest-bearing liabilities is 99 bps. Clearly, it's in the $2.5 billion CDs is where we have repricing opportunity. The total CD book is costing us 144. Breaking it down to the newer acquisitions versus older is hard to do. But when you're looking at $2.5 billion in total CDs at 144, and were paying 60 basis points on the year maybe. David, you jump in here on the rate.

(Inaudible -- multiple speakers)

There's quite a bit of movement here, and that CD book turns pretty quickly. So I think you'll continue to see that $2.5 billion CD price continue to reprice down.

But you also have to add the CD book will reprice and help us. But again, going back to what we said earlier, those locations, we're constantly calling those customers, the core relationships.

To build free money.

And you'll see also in our numbers too, this time, where we were probably one of the first ones in our peer groups to really cut rates. So I think we cut rates, a lot of the others were lagging behind. And so we -- it was planned. And we let a lot of that certificate or higher cost money get out of the bank, where you saw some reductions in that. I don't think that you're going to see that as much prevalent going forward. But again, we were one of the first ones doing the -- lowering the pricing. Most of all of our peers now have come to where we are at pricing.

That help you, Michael?

Thanks a lot, I appreciate the time.

Thank you.

Our next question comes from the site of Andy Stapp with Riley. Please go ahead.

Good morning.

Hi, Andy.

Could you talk about the timing of the $1 million in -- or the loans you expect to grow over the next couple years. Is it -- how much of it do you expect to see in the first year versus second year?

No, I think -- clearly the economic times can do that. We're not modeling that in any big way, earlier or later. What David said, 27 months from now til 12/31/2012. And were pushing our team hard to grow loans. I don't know that we're modeling in a faster on the front side, or a faster on the late side. The economy is going to drive some of that. We just want to be out knocking on doors, and opening door, and bringing in business and we can't.

I think probably as the economy improves, it may be a little bit harder right now, to achieve the success we want on the front end. On the other hand, we're already seeing a lot of momentum. And I think a lot of this is psychological. If we can get our people out there and really get out and do some business, that the world's not coming to an end. I think we can move pretty fast. Again, you have to take into consideration the economy, where we're at today too.

Okay. And your loans associated with the First Bank branches were down quite a bit. Was that just chasing off weaker credits?

Remember, let me go back to -- let's roll the film back a couple of quarters. We bought the First Banks, as apart of that we took a $100 million in loans. And when we did that, we told all of you that we took those loans at par. And to do that we took some shared national credits. For the first time in our history, we had some shared national credits on our books. And we said we really didn't want those -- or that wasn't our cup of tea. But to make the deal happen as it did. And one of those -- two of those shared national credits are now gone. One of them in the last quarter. And that was roughly a $20 million credit that went away. So that clearly is the lion share of what that is.

And we really only have one shared --

We only have one left.

Do you remember what the balance is, it's smaller?

(Multiple speakers).

That's correct. The one that paid off was about 20, like Dan said. And that was our intent the whole time, is to get out of the shared national credit.

So that's what was moving that number.

And you have $5 million left, is that correct?

(Multiple speakers). Shared national credits?

Yes. (Multiple speakers). Just trying to get a handle, is there anything else, any more -- that you want to flush out there?

Well, we probably do. I would say eventually we will get rid of that too.

Okay.

That's correct.

Okay, and --

Andy, just talking about acquisitions, we continue to break out the acquired portfolios for a year, so you'll see that for next couple quarters. You will be able to identify what's happening on that side. But the rest of the balance sheet, or the rest of the book, the legacy loans that David was talking about, that's what we were really tracking for growth.

Yes. Okay. And could you talk about what was driving the increase in CRE charge-offs, and also what you're seeing on the CER front, in terms of valuation and investor appetite?

Well, again, our non-performing numbers are so small, one item is going to jack that number around. So what you're seeing on the charge-offs in the CRE, is literally one piece of property. And the type of property that it is and what it was, and we can go into a lot of detail. But I don't know that going to paint a picture of the (inaudible)Texas economy, that's going to go anywhere for you.

I don't mind telling, it's just one property. It's was a loan that we inherited through one of the banks that we got from -- through one of our acquisitions. And it was an apartment complex, and it was a C rate apartment complex. And $2 million of that was related directly to that apartment complex. But again, we could of held out, and we could have waited and maybe not have taken a loss. But I think, Andy, you and I have talked in the past, we take the losses. Our first loss was our best loss. We settle at what the market is.

We milked it for as long as we could.

And that thing has probably been on the books, gosh, for three years or so.

It's been on longer than that. Okay, the other question you asked, was appetite in the community. I think you can see that clearly off the number under contract, that Tim gave you. If we have got $11 million in ORE, and $6 million of that is under contract, that's the most we've seen. There are people out there today, ready to do something, or at least getting a little more impatient. Over the last couple quarters, I think people had money in their pockets, but weren't really willing to do anything. And it appears as we're rolling up towards the end of the year, some of that money is burning a hole in some people's pockets, and they are wanting to take some action. But they want to steal the property. Everybody wants a deal.

Yes, right. I guess you can't blame them. You mentioned 30 to 89 delinquencies were at there lowest level in several years. You happen to have that dollar amount?

I don't.

Okay. All right. Thank you.

Thanks.

Our next question comes from the site of Scott Valentin with FBR Capital. Please go ahead.

Good morning, and thanks for taking my questions. Just with regard to the acquired branch deposits, just I'm assuming you expected some runoff there as you repriced some deposits. But has that been pretty much according to expectations?

The repricing of deposits?

I guess the runoff, of those acquired bridges could.

Absolutely, David, I'm sorry, do you want to jump in?

Thanks. When we bought that bank and Franklin Bank, there again, as David mentioned earlier -- David Holloway, we usually run a ratio of about 32% of our money is a certificate of deposit. If you look at these other banks that we were buying, they have a lot higher ratio of certificate of deposit to normal deposits. And we really focus -- we really focus on checking accounts for businesses, for individuals, money market accounts, and some transaction accounts. And we're still seeing those grow, which we're happy about. But again -- but long -- the answer to your question is it was totally expected.

Short answer.

(Multiple speakers). Totally expected.

Okay, and just to follow up on the securities portfolio, pretty meaningful decline linked quarter. And just wondering if any change maybe in strategy, shortening duration or length in duration there?

Our duration right now is probably about as short as you can go -- I think David, help me out -- 2.6 years? I think our effective duration is 2.6 years. We really feel -- gosh, I hate to say this, but we really feel buying right now -- you have to be extremely careful. As you know, our portfolio has close to $200 million gain in it. But again, when this market turns around, we feel that we will one day -- you can have a big loss, at the same time. So we're trying to be extremely careful and not extend the portfolio. I know a lot of securities people have come into the bank, and their advice is just to opposite, take the gain on the portfolio, and reinvest your money in the longer term. And again, that's not our intention at all.

The intention is to increase the loan portfolio.

Right. (Multiple speakers).

Okay. So we would expect the securities portfolio to continue going down, as you grow the loan portfolio?

We would hope.

That's our hope.

Okay, all right. Thanks very much.

Thanks, Scott.

Your next question comes from the site of Bain Slack with KBW.

Good morning.

Hi, Bain.

I'm not sure if I missed it, but the -- you were talking about the security portfolio runoff. Did you give an annual dollar amount number?

Cash flow?

Yes.

It's about a $1.2 billion, $1.3 billion.

Okay, and I guess when thinking about the --this goal putting on a $1 billion of loans, what's the expectation of runoff there? Are we to think that the portfolio is going to go from the $3.4 billion by the end of 2012 to $4.4 billion? Or as David said, are we looking at it more from the legacy portfolio? I am trying to think gross versus net here.

I think you can take $3.4 billion to $4.4 billion. We're looking for total growth.

Okay. Okay, great. And I guess a last question, I know M&A, you are always looking. I think in the past, you have commented on the potential sellers are still having a little bit of a price that you have deemed a little bit too high. Has the new rules coming out of Washington, and the obstacles coming out of the government, changed the sentiment at all in your opinion of potential sellers, to maybe come down a little bit? Or, and I guess the other side of that is, do you find yourself when you are in conversations, as being among a midst of buyers? Or are you the only ones out there?

I don't know -- I'll take your last question first. I don't know that we are the only ones out there. I do know that we're still calling on a number of people. I don't know if there is a lot of people calling right now. There seems to be more activity picking up. Going back to the question about, when we visit with these people. You can definitely, or at least my feeling is when I visit with them, I can see the stress and the tiredness on their face (inaudible -- multiple speakers) on their face. At the same time, again it depends on if you're talking to a bank that had some troubles and some issues as compared to a bank that doesn't have some troubles and issues. I guess you'd have to characterize both ones.. When you talk to the first banks, that are not having problems they're still pretty adamant about their pricing, or at least they have been. I think they may be getting a little bit more (Multiple speakers).

(Inaudible)

Well, I don't know if (inaudible) but there still -- there still needs a little bit more time, to still a bit -- the expectations are still unreasonable.

Right.

When you talk to another bank that may be having problems with non-performing assets and so forth and so on. I don't know that the question there is a matter of pricing, as much as it is, is it really something they should do. Should they really consolidate, or should they wait longer going forward and that's what they had to ask. Most of the have asked himself the question. The situation that we are in right now, they have high non-performing loan ratios. And so if they really want to clean it up, they are looking at working for the next three to four to five years, really not increasing income or capital, and just working it, or merging with somebody like us, that may have the ability to take the loans and sell them, or march to market. And so those are -- that's what all the discussions are about right now.

Okay, great. I appreciate that. Good quarter.

Thanks, Bain.

(Operator Instructions).

Your next question comes from site of Matt Olney with Stephens, Incorporated. Please go ahead.

Hi, good morning.

Morning, Matt.

Most of my questions have already been addressed, but going back to the margin issue. I think I understand why you want to grow the loan book for several reasons. One of which, is to help offset some of the margin pressure. But if we don't see any loan growth like were looking for, what margin compression could we be talking about in 2011 do you think?

Are you making an assumption that there is zero loan growth? Or what's the initial assumption, is the question?

I think he's asking if there is not loan growth, and a static market like we are at right now, what do you think our margin would be?

It's a hard question to project, but what I would say is, again, think about it this way. If there's no loan growth, what's going on with that cash flow from the portfolio? So you have to ask that question, what are you reinvesting, at what rate, because, again, I know you want a specific answer, but you have to put all these assumptions in. So that would be the first question is, where does that cash flow going, in terms of reinvestment? And number two, as Dan pointed out earlier, but what offset some of that, if you even assume you are reinvesting at current rates, let's say? You have to then dial in, look at, again look on the press release, the net interest margin, look at the CD yield, which is, was it down?

144.

144, and we are paying about -- 50 bps would you say?

On average, yes.

50 bps, so you have your CD book repricing down , which is going to offset that. So I think if you go back and plug that into your model, you are going to see, yes, that it won't be as good if we had loan growth, but then again, I don't know if it's the end of the world either. You will just have to plug it

So is it safe to say, that if we didn't see the loan growth next year, and we remained in the current environment, and securities portfolio, that the opportunities there were limited, that we could see the balance sheets shrink in 2011?

I don't know -- (Multiple speakers). I know we thought shrinkage this time. It was a planned shrink, because of the acquisitions that we make. I think you may see a little bit more shrinkage. But I don't think you are going to see a whole lot more shrinkage, going forward in the balance sheet. Could you see some net interest margin compression next year, if everything is static like you said, I'd say, yes. I think -- I don't think it's going to be dramatic. And again, I think some of the things that should offset that, should be our expense reductions, hopefully our provision for loan losses, and our loans. So, we have I think -- it's going to take a combination of all three of those things working.

Okay, thanks for the color.

Thanks, Matt.

Our next question comes from the site of Tom Alonso with Macquarie.

Good morning.

Hi, Tom.

As you might imagine, most of my questions have been answered at this point in time. Just for a quick, on the service charges on deposit accounts, I was -- the up linked quarter, I was expecting a little bit of pressure there. Can you give us a little bit of color on what's going on there?

Yes, and I think, if you go back and look over the last few quarters again, putting it all back into context, there is a lot up headline news, and discussion, and new rules concerning the fee incomes, specifically, insufficient income charges. But I think our customers base, if you go back and look at the numbers, they -- and I guess some of it was education, and we talked about it. They probably reacted to this news last year. And as we have this Reg E deadline coming to this point, where we pretty much touched all of our customers, I think all of that, that was going to affect us happened last year. And so when you see on a linked quarter basis, per the income been back up again, I think that's just following a natural historical trend at this point. We're just growing our customer base, and it's the regular fee income that comes with it. And it'll be interesting to see in the fourth quarter, because historically, our fourth quarter fee income, has always had an upward bend to it, just because of a holiday.

Yes, fourth-quarter has always been the highest of the year.

Okay, fair enough. And then just real quick on the CDs, does the entire CD book that you have now, does that -- do you have a sense of when it reprices, in terms of the timing? Will it all reprice over the next 12 to 18 months?

Yes, on our CD book, and it's historically always been this way, and maybe it's because of the interest rate environment we are in today.

But generally about, most of, the big chunk of book of CD business is on a six month or less maturity schedule, in otherwards maybe 55% of it will roll over, in the next six months, up into the next six months.

Okay, okay great. And just one, just last one. And you have paid down a pretty decent chunk of borrowing, it looks like this quarter. If you keep getting the cash flows, and it takes a little while to ramp up the loan growth, is that something you can take to zero?

Yes, it's possible. What we want to add some color onto that, is that's just more of a reflection on a day-to-day basis, where we're at. In other words, if you see some borrowings on our book, that's probably more reflective of what's going on, in terms of the monies coming in on a daily basis. There's no specific strategy or hedge there.

And then early on, David, you'd either got an opportunity to buy some securities, and you went into a purchase position for a short time.

Most of that, Tom, really depends on a lot on if we are buying or not buying. A lot of times we can make, for example, we were able to buy two months ago, $50 million or a $100 million in securities, that would probably be delivered in November, two months later. So, before that, we probably got an extra 60 basis points yield. So whenever we can find deals like that, we may go in and borrow for future purchase dates. Because we know we have so much money rolling off our securities portfolio, it's just a management technique, basically. We're not out there buying money, for one year, or five years, or 10 years. Everything you're seeing is a daily basis.

And you have no leverage strategy.

No.

So we are not trying to use that as leverage.

Not at all. That is just daily management. And again, if you look at the numbers, it went from an average of 150 to 50. So that's a very small number.

Yes, fair enough. That's good color. Thanks very much.

Thanks, Tom.

And your last question comes from the site of David Bishop with Stifel Nicolaus. Please go ahead.

Hi, good morning, gentlemen.

Hi, David.

Most of my questions have been answered as well. But looking through some of the tables here, I noticed the FTE headcount was down, somewhat on a linked quarter basis. Is that coming from some of the newly acquired institutions, is that a planned attrition program there, in light of the restraint in operating expenses, is that something that we should expect to continue?

All of the above. When we do acquisitions, we come in and we try and bring them into our plan. And sometimes we can improve our efficiencies and locations. Sometimes we inherit some issues. All of the things that you are talking about come into that, along with just the ongoing efficiencies that we try to build into our organization. We've done several things on the backside of the house, in the last couple quarters that have improved efficiencies on the head count on the operating side. We've improved our imaging capabilities at the locations. We have improved the way we move paper around through the system, that saved us some FTE counts. I think you will continue to see us drive that FTE count down.

Great, thanks.

There are no further questions at this time.

Okay. Listen, ladies and gentlemen, thank you all very much for participating. We look forward to talking with you, as we are out on the road in the next quarter. Thank you very much.

This concludes today's conference. You may now disconnect, and have a wonderful day.