Prosperity Bancshares Inc (PB) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to today's program. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session.

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

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares fourth-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 am Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares. 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 our recent quarter and our full-year 2010. He will be followed by David Hollaway who will spend a few minutes reviewing some of our recent financial statistics. Tim Timanus will discuss lending activities including asset quality, and finally we'll 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 Shauna, or you may email questions to investor.relations@prosperitybanktx.com. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call 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 & Exchange Commission including forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

David?

Thank you, Dan. Good morning. I would like to welcome and thank everyone for listening to our year-end 2010 conference call. I am pleased to be able to report some of the successes our team produced last quarter and for all of 2010. Our quarterly earnings increased to $32.8 million in the fourth quarter. That's compared to $30.6 million for the same period in the prior year, an increase of $2.2 million or 7.3%. Our diluted earnings per share were $0.70 for the fourth quarter of 2010 compared to $0.65 for the same period in the prior year, an increase of 7.7%.

Net income for year ended December 31, 2010, was $127.7 million or $2.73 per diluted common share, up 14.2% from 2009 net income of $111.9 million, and up 13.3% from 2009 diluted earnings per common share of $2.41. Our 2010 total net income, our 2010 earnings per share, our fourth-quarter net income, and earnings per share are all new records for Prosperity. Our fundamental performance has never been better.

Our Tier 1 leverage ratio continued to grow throughout 2010 and ended the year at 6.87%. Our organic goal of increasing loans over the next two years is definitely gaining traction as evidenced by fourth-quarter loan growth of $71.2 million or 8.3% on an annualized basis. Our non-performing assets declined to 20 basis points of average earning assets, one of the lowest in the industry and a true sign of strong asset quality.

The allowance for credit loss was at $51.5 million or 1.48% of total loans. We continue to see signs of improving loan quality, we provisioned $13.6 million in 2010 compared to $28.8 million in 2009. If the current economic trends continue, we expect our 2011 provision to be less than 2010. Clearly, we are proud of our asset quality. Our total risk-based capital stands at 14.87% compared to 13.86% as of December 31, 2009, a full 1% increase.

With regard to deposits, we are pleased to report that the trend we have experienced for the past several years continued in the fourth quarter with further increases in non-interest-bearing deposits. Non-interest-bearing deposits were $1.67 billion at quarter-end compared to $1.49 billion for the same period last year, a 12.1% increase. We continue to experience a decrease of higher cost certificates of deposits while our money market and savings accounts continue to increase.

With regard to acquisitions, we continue to actively review and pursue acquisition opportunities, both FDIC-assisted transactions and non-assisted transactions. We continue to visit with bankers across the state both small and large that are considering sell-to or merger-with a larger company.

A year ago I commented that I expected to see activity pick up and was somewhat surprised at the overall slow pace of M&A activity last year. However, toward the end of the year the pace increased significantly. We believe many banks will be forced to look at strategic alliances going forward based upon the additional operating costs, loan problems, and regulatory burdens, along with the income restrictions placed on our industry by the new legislation coming from Washington.

So looking forward, we believe the current environment provides one of the best opportunities we have seen in a number of years. Our bank is in an enviable position from almost every standpoint. We have strong earnings, great asset quality, 175 banking locations throughout one of the fastest growing states in the nation, with one of the best economies, along with great customer-focus associates with many years of banking tenure. We intend to capitalize on the current environment as we continue to solicit new loan customers while 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 such as concentrations in commercial real estate loans or asset quality issues, which divert their attention from developing new opportunities. Our team is actively calling on existing customers and prospects. With this focus, we intend to grow in this challenging period. Again, I would like to thank our whole team for a job well done.

Let me turn over our discussion today to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we have achieved. David.

Thank you, David. Net interest income for the 3 months ended December 31, 2010, was $79.5 million compared with $80.1 million for the same period in 2009, a decrease of $600,000 or 0.7%. Net interest income for the 12 months ended December 31, 2010, was $318.1 million compared to $307.1 million for the year ended December 31, 2009, an increase of $11 million or 3.6%. This increase was primarily due to a 4.8% increase in average earning assets.

The net interest margin on a tax-equivalent basis was 3.99% for the 3 months ended December 31, 2010, compared to 4.24% for the same period in 2009, and 3.97% for the 3 months ended September 30, 2010. For the 12 months ended December 31, 2010, the net interest margin on a tax equivalent basis was 4.04% compared to 4.08% for the same period in 2009.

Non-interest income decreased $806,000 or 5.5% to $13.9 million for the 3 months ended December 31, 2010, compared with $14.7 million for the same period in 2009. Non-interest income for the 12 months ended December 31, 2010, was $53.8 million compared to $60.1 million for the same period in 2009, a decrease of $6.3 million or 10.4%. For both timeframes, the decrease was impacted by increase in losses on sale of other real estate owned and the reduction in service charges on deposit accounts resulting from a decrease in insufficient fee charges.

Non-interest expense for the 3 months ended December 31, 2010, was $41.2 million compared with $40.2 million for the same period in 2009, an increase of $1 million or 2.6%. Non-interest expense for the 12 months ended December 31, 2010, was $166.6 million compared to $169.7 million for the same period in 2009, a decrease of $3.1 million or 1.8%.

The efficiency ratio was 44.1% for the 3 months ended December 31, 2010, compared to 42.4% for the same period last year and down from 45.4% in the third quarter of 2010. The bond portfolio metrics at December 31, 2010, reflect a weighted average life of 3.4 years and effective duration of 3.1 years and projected annual cash flow of approximately $1.1 billion.

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 year-end December 31, 2010, totaled $15.842 million, which is 0.45% of loans and other real estate. This is compared to $20.7 million or 0.60% at September 30, 2010, and $16.356 million or 0.48% at December 31, 2009. This represents a decrease of 23% from September 30, 2010, and a decrease of 3% from December 31, 2009.

The December 31, 2010, non-performing assets total was made up of $4.628 million in loans, $161,000 in repossessed assets, and $11.053 million in other real estate. As of today, $1.248 million of the December 31, 2010, non-performing assets total are under contract for sale. But of course, there can be no assurance that any of these contracts will close.

Net charge-offs for the 3 months ended December 31, 2010, were $2.67 million compared to net charge-offs of $4.373 million for the 3 months ended September 30, 2010. This represents a 39% decrease.

Net charge-offs for the year ended December 31, 2010, were $13.864 million compared to $13.881 million for the year ended December 31, 2009. $2.9 million was added to the allowance for credit losses during the quarter ended December 31, 2010, compared to $3 million for the third quarter of 2010. $13.585 million was added during the year 2010 compared to $28.775 million for 2009.

The average monthly new loan production for the quarter ended December 31, 2010, was $111 million compared to $80 million for the third quarter ended September 30, 2010. Loans outstanding at December 31, 2010, were $3.485 billion compared to $3.414 billion at September 30, 2010. The December 31, 2010, loan total is made up of 40% fixed rate loans, 25% floating rate loans, and 35% variable rate loans.

Dan, I will now turn it over to you.

Thanks, Tim. At this time I think we're prepared to answer your questions. Shauna?

(Operator Instructions)We'll take our first question from Mike Zaremski with Credit Suisse.

I am curious if you think this week's M&A transaction -- your geography would make it tougher for a bank like Prosperity to find willing sellers I guess at a fair price --

This is David Zalman. To answer your question, there is background noise, I guess.

Yes.

Sounds like our moderator is having a conversation. Anyway, Mike, I would say that the price was definitely -- it was good and bad no matter how you look at it. It was on a very high price paid on a multiple of what they call potential earnings, so that's good maybe for somebody like us or somebody else sometimes, so that's probably the good aspect. On the other hand, I don't know that all banks in the state of Texas can be classified in the same situation (inaudible) really good deposit franchise located in the Houston market, and some of the Dallas market so I don't think that there is several banks in Texas that would draw a multiple like that, but I would say the majority of them are not the same type (inaudible).

That makes sense. David, the increased M&A you talked about towards the end of the year, was that in state or out of state?

It is everything. It was the Whitney deal, the BMO deal with Marshall & Ilsley, and we knew about the Sterling deal towards the end of the year so it looks like almost everything. We thought there would be a lot of M&A throughout the year because of the tax consequences and that it didn't happen, and towards the end of year things really picked up.

For us individually, Mike, I think you know just the normal calling that we do on our brother and sister bankers out there, the interest level was higher at year end, and we're talking all the folks we talked to all over.

Okay. That makes sense. I will put myself back in the queue. Thank you.

We'll take our next question from John Pancari with Evercore.

Can you talk about the loan growth you put on this quarter, certainly was consistent with your goal to put on the step up production. Can you talk about how much of that was stealing share via pricing or new business relationships?

John, David Zalman again. We don't think it was a matter of pricing at all. I think it's that our bank and our [large] associates made a commitment that we're going to increase the loans and I think that everybody was on the same page, everybody went out and started making loans and we were getting business. Whether or not it was stealing from other people, I don't know. I just know that I talked to a lot of people out in the field and a lot of it I think is just a can-do attitude, so I think everybody is just really pumped up and ready to do it.

I think there is several things working in our favor, John. You've heard me personally on the last several quarters call talk about the shrinkage and the run-off in the construction book. It was a headwind we were flying into. That's gone. We actually saw a little uptick in construction in the last quarter, so when you look at the -- we're no longer having headwind we're flying into. Our team has been producing loans quarter over quarter over quarter for years but we've had pretty strong headwinds as we're getting rid of or divesting some of the credits we may not have wanted. So you had that benefit for us in the quarter as we expected. You had our loan growth initiative that we have been talking now about for some time and remember that's a nine quarter plan, not a two quarter or three quarter or five quarter plan. That's a nine quarter plan. We have finished one of nine quarters.

We expected that and we still expect that to not be a uniform same growth in every quarter. We expect to see seasonality up and town. For the last three years, first quarter loan growth has been the slowest we have seen in all of the last three years from a seasonality standpoint, and fourth quarter was one of those strongest quarters we have seen, so we had that benefit for us in the last quarter also. I think we would tell you we were very pleased and maybe somewhat surprised at how strong loan growth was in the fourth quarter because we think when we built our model out we were expecting the loan growth initiative to be more tail-end loaded when the economy turned around. We're picking up a lot of business from other players and I don't think we're stealing it based on price.

I was surprised as to what Dan said, too. We thought we would ramp up, but we thought we would ramp up a lot slower in the first quarter than we did. Again, we had some tailwinds helping us, too. You had -- I think a change in attitude, and in the business climate over the last quarter, and with the changes in the elections helped tremendously, and I think the stimulus, and everybody felt a lot better. We had a tailwind in back of us.

We were fortunate. We saw loan growth across the state. We saw growth in almost every geography we cover. We saw growth in most loan categories. Again, I think our team is out there knocking on doors and we're seeing the benefits of that.

So given the pickup in loan growth, can you comment on the trajectory of the margin going into the first half of next year?

Yes. If it is a specific margin question, how we would look at it again is just looking at the big picture, not in conjunction with the potential loan growth again. When you look out over the next twelve months, a comment that I would make based on what we see today is it's pretty much a steady margin assuming the loan growth plays out as it needs to.

Okay. Thank you.

Thanks, John. Appreciate your call.

We'll take our next question from Brett Rabatin from Sterne, Agee.

Wanted to ask about going to the M&A question. I was curious about just your thoughts on capital levels and what ratios you guys would be comfortable with and how we should think about the capacity to add assets that you might be thinking about?

Well, Brett, David Zalman. I think all banks would love high capital ratios. If we don't -- if you look at what we're building just through the retention of earnings, we grow pretty significantly on an annual basis, almost a 1.4% a year just because of retention of earnings. Having said that, I think that you have to consider the whole bank in general. You have to look at the asset quality. You have to look at a combination of things. We want higher ratios at the same time we still want to grow and build up the bank, so you will probably still see us do acquisitions and you'll see the capital ratios go down sometimes, and they will be built up in a very short period of time.

If you do a stock transaction, it could be accretive to capital. Really depends on the transaction. It is hard to -- we do not have a target that we would want to discuss with you on where we want to be or should be. We look at each transaction individually and in today's environment there are opportunities to do stock transactions that are accretive to capital.

Okay. Good point. And then the other question I wanted to ask quickly was just one of the other successful legs of your growth stool has always been strong management of expenses, and so I was curious as we head into 2011 if expense leverage was hopefully something we should continue to expect from you guys?

David Hollaway again. I think the answer is yes. To be more specific, will it bend down year-over-year when you're looking at the annualized number for 2010 and you project for 2011, I don't know that I would commit to saying it would have bend down further in 2011. But on the other hand I don't think we should see a significant increase year-over-year either. I don't know if that helps.

That's very helpful. Thankful. Thank you.

We'll continue to watch the nickels and pennies.

Thanks, guys.

Jon Arfstrom with RBC Capital Markets.

I remember a time when you guys wouldn't even put voicemail in because it was too expensive.

We have voicemail?

A couple of follow-up questions. The construction and development growth, you touched on it, Dan, but you expect that to level off or do you think that the run-off will resume in 2011?

There is activity in all the market that is we're in, John. I think -- remember, we really don't target a specific number in that category. I would tell you that we're talking to every customer individually and when we find a good customer that has good cash flow, good earnings, deep pockets, the capacity to pay, and we're not worried about what business they're in. I can tell you we're looking at those transactions. We're looking at those issues very, very closely, and we're not out actively soliciting them, but I don't know that we have a number.

I would say where we're at now, Jon, is it seems to have leveled out. The customer that didn't make it, didn't make it and the foreclosures happening and we sold [OREO] and all of that stuff. There may still be something in the portfolio, but for the most part I think we are where we're at. We're not going to see -- we're not going to jump back into the market and get real big with it but at the same time we have customers that have been banking with us for 20 and 25 years and we'll continue to bank in the industry that they're in, so I see it staying level. Tim, you may have some comments on --

We picked up a couple of good customers in that category.

I think the overall level of activity in our marketplace is not strong.

Right.

Having said that, it is not deteriorating rapidly either. Our ability to attract good customers within that marketplace, within that market share I think still remains very good. So while I don't see expansive growth in that area, I don't see a whole lot of massive deterioration either. I have seen a couple of comments by home builders in the business journal. I don't know if they're bashful or not but saying that the banks that they're dealing with have become more competitive, so I think apparently some banks are dealing better with it. I don't know. I think that's right. We know for a fact that some are, not all obviously.

But some that had gotten out seem to have gotten back in also.

When you look at construction as a percent of the total portfolio, John, it is actually down a little bit. When you look at the raw dollars, we were up about $4 million, so it is really insignificant, just the big headline is that it didn't shrink any more.

I am looking in the context of, you're right, it was a drag and has been a drag for a while, but this is a pretty good organic growth quarter for you, and I am just --

That's right.

Just trying to look at the one category that typically has been running off.

That's right. That one has been running out pretty fast. Maybe we plugged the hole.

And then, Dan, just one question for you. You talked a little bit about your M&A calling effort and seems like the pace of FDIC deals have slowed a bit. I am just wondering if your calling efforts changed at all and if you are still thinking about it the same way you were a few quarters ago in terms of your geographic range that you would be willing to look at?

I think we're still -- I am looking at David. I think we're still on the same targets we have been on for the last year. We continue to look for opportunities in our wheelhouse and our wheelhouse depending on the size of the transaction can get further and further away, and the smaller it is, the closer to home we need to be, and we want to make sure that we have relationships with folks that are out there considering their opportunities. There are plenty of players in today's market that are trying to figure out what is in front of them and what they should be doing and our goal is just to continue to be there and talk to them and we want to continue to be somebody they would think about if they decide to make a change.

I think there is a ton of opportunities, John, in Texas. At the same time, we mentioned before if we have an opportunity in a contiguous state or something close to us, we are going to start to look at that, too.

Thanks a lot.

We'll take our next question from Chris Marinac with FIG Partners.

David, just wondering if you can update us on your SBA activity? You mentioned last quarter that was an area of focus and curious on how that is progressing?

SBA loans? Is that what you're asking about, Chris?

Correct, yes.

I think what I recall I remember what we said, we have a person that's really in charge of SBA loans now that's really focused on it and we're an approved lender, and so it seemed like we were more and more was picking up. I guess my overall comments, Chris, would be that we do feel comfortable with our team in the SBA lending, and we are doing more SBA lending? And is it going to become a I guess a question would be is it going to become something that we're going to really build and become a real big focal point in our loan portfolio? No. I think that we're looking at it really just as something to add to our customer mix, and I think that's where we're going with it. It is just I think in the past if you asked me were we really in that SBA market, I would say no. Today, I think it is a product that we really can offer to our customers and be good at it.

It is just not a tool in our tool kit that probably we didn't have the way we wanted it to be in the past. I don't know that there is a real focus.

We're not going out and hiring a bunch of SBA lenders or going into other regions and doing that.

Maybe we misled you last quarter. I don't remember that.

There is no specific goal when it comes to SBA loans. We look at each one its own merits, and we do feel like we have expertise in-house that has the ability to evaluate those loans and come up with a reasonable decision, but we're not out there trying to generate those loans just to meet a goal. We look at each one on its own merits one at a time.

And the change is up until a year or so ago we really didn't have any in-house expertise.

We didn't have as much as we have now.

Now we do.

That's correct.

Certainly gives our calling officers another something to talk about but I don't know that there is any big focus on that area.

That is great. Thanks for the clarification there. I guess a separate follow-up in general M&A, David, how much are the loan marks that any given portfolio have out there that drives your interest or non-interest in a given deal?

Well, the loan marks are important. I think what we look at in the deal is you have to consider the loan marks and consider the capital that the Company has, too, at the same time. You saw the most recent deal, and there was a pretty big loan mark. Comerica took it at the same time, and Sterling had quite a bit of capital at the same time, so I think you have to look at both of them at the same time.

Whitney's [loan] mark was smaller on a percent basis. I think the loan marks part of the equation if you are asking -- I think what I am hearing you ask, Chris, is how does the size of the loan mark impact our attraction to a target, is that what you're really asking?

Yes, correct.

I think when we're looking at targets today, and in today's purchase accounting environment, I don't think we want to create problems. Don't take this wrong. We don't want to build problems on our balance sheet. With today's purchase accounting rules I don't know that, that is an overriding factor that would drive us to or away from a target based upon their loan situation.

Just what we look at in a loan market, we look -- if we're looking at a deal like that, we're really looking at the loan mark. We're taking a mark that if we took those loans and non-performing assets and sold them into the market, and then took the loan mark, what capital does the bank still have and how solid is it after we actually clean the portfolio up? It is not to say that we would change our [straps] but for the most part I don't know if we want to get into a bank and take on a bunch of worked out loans so most of our deals would be a deal we go in and if we bought something like that, maybe sell that.

That help you, Chris?

It does. Thanks very much, guys. Appreciate it.

We'll take our next question from Scott Valentine with FBR Capital Markets. Please go ahead.

This is John Martinez. Most of my questions have been answered. Just a quick question circling back to net interest margin. Were there any trends in the fourth quarter that helped you out that you see playing out as far as the cost of funds side?

You're asking on our funding costs?

Yes.

Maybe it is a two-part answer. No. There was nothing unusual in the fourth quarter driving it one way or the other. It is the same dynamics that were in place for the prior quarters were there for the fourth quarter. And should be there.

We'll be going forward and somebody brought up a good point earlier on. The positive bias to that margin going forward is the better we do on the loan growth side obviously helps that margin going forward. It will be a huge positive bias. No, there was nothing unusual in the fourth quarter.

I would say though that when you say those the margin probably is helped with us creating bringing an increasing non-interest deposits in our money market and savings accounts compared to the CDs that have fallen off so the mix of money really [affects] the dynamic really. The same trend we have been on for the last four or five quarters. The question is what changed this quarter?

Did something change? Did something change?

I think, David, it is maybe a better way to frame what I was trying to ask is, was there anything that changed and also was there any -- second part of that would be is there any room for additional improvement and roll off in the CD portfolio?

When you look at the CD portfolio, you've still got $2.3 billion in CDs that are over 1%, and our high rate today is 60 bips.

Yes. I think that if you are looking at a dynamic, really the mix of money really we have seen decreasing certificates of deposit and increasing our other deposits and it is made a little bit of a dynamic there, going forward I think the CDs that we were probably in a 20% something range now what we have in CDs in our mix. I think historically we have been around 27% to 29%, something like that. I think going forward we'll probably maintain more of a steady CD mix. Now, I think a lot of the CD mix that we got through the acquisitions First Bank and US Bank and Franklin Bank all of those were more most of those companies were more towards the CD side and --

More rate sensitive.

More rate sensitive and as we become more broader into our realm I think we're seeing more of a stabilizing factor in there right now.

I would reiterate is it is the same as it has been. The same dynamics are in place. I think where the rates are at today, where the CD book is today if we're not lending the money out we're putting it back into the bond portfolio, all of those rates if you look it today, it would suggest to you we're in, it's a good term, let's just use, "stabilize". I think that will be -- it won't move. It will creep pretty steady, it won't move one way or the other too much but unless we have some good loan growth, there should be positive bias to it.

Same boring story, John, no changes.

We like that. Thanks a lot, guys.

We'll now go to the site of Matt Olney with Stephens.

David, I think you mentioned in your prepared remarks you expect loan loss provision to be down in 2011 versus 2010. How are you thinking about the loan loss provision reserve ratio in relation to the loan growth initiative that you discussed before?

You've got probably three or four different dynamics going on at the same time, but I will probably let Tim jump in here at the same time, and answer that. Tim, do you want to answer that? We talked about it earlier.

Sure. Matt, our methodology that supports our reserve looks at numerous factors, one of which obviously is loan growth, and if our loans do grow, that would by itself be an indication and a bias towards increased reserve, but there is so many other factors that you can't really come to that conclusion. We look at how our loss history is going. We look at our concentration of credits. We look at economic conditions and numerous other things, how our past dues are trending, et cetera, et cetera, so loan growth in and of itself doesn't necessarily mean that we feel like our provision is going to have to be increased, if that makes sense to you.

So another way, I am not sure we believe we need to stay at 1.5%.

Yes, the methodology takes into consideration qualitative and quantitative deals and right now we're at almost 1.5% provision. We have $51 million in our provision and we have $15 million in non-performing, so I think as part of the methodology takes into consideration the economy as the economy continues to do good. In the past historically before this, I'm going to call it this crash between 2007 and now, we historically had run about 1% and if based on the methodology in the provision for loan losses, they were about 1.5%, so I think it can happen. I think the provision going forward, I would still stick with that. I think that if trends stay like they are, the credit trends, I think that we will see a provisioning, not as much as we did last year, and I think that we can still be able to grow the loan portfolio and maintain a good provision based on the methodology, again, the reserve. There is just a lot of factors that go into that. From what I see right now I think we can achieve all of that.

So it sounds like you wouldn't be adverse to seeing the reserve ratio tick down over the next few quarters?

Well, again, a lot of it is the methodology but based on the methodology we're seeing now and taking into consideration the qualitative and quantitative events we're seeing in this methodology we think it is entirely possible.

I think you've got to dial in your credit costs and your expected credit losses and your credit quality and that is an entirely a possibility.

I think it is important to emphasize that reserve as it is right now, based on our methodology, is a reserve that we should have.

Right.

The methodology supports where we are in that regard.

Okay. That's helpful. Another question I guess for David again on the securities book, we have seen bond yields improve from a few months ago. What's your current outlook on bond yields and what's your strategy today with the securities book? Are you just buying -- are you just replacing maturing cash flows or buying more than what's cash flowing right now?

Again, sometimes it is better to be lucky than smart. Towards the end of the year we saw the bond yields really kick up. We like that ten-year [mortgage-backed] security product, has about a 3.6 year average life and at the end of the year we saw yields kick up or our yield to us we could get almost 3%, and we mixed that with some of the 15 year mortgage back, and not much, but that we were getting almost 3.5 on that. So we're trying to keep our portfolio a little over three years average life, three years duration, but we really leveraged up and bought about $300 or $400 million from the Federal Home Loan Bank and bought all that so right now we're really in a good position. We're still in a purchase position with the yields. The yields have come down since then. We still think or I still think that interest yields are still going to go back up. Not dramatically but I think you will still see yields go back up on securities, maybe another 25 basis points to 35 basis points probably.

Okay. That's great. Thanks, guys.

The next question comes from Michael Rose with Raymond James. Please go ahead.

Most of my questions have been answered. I wanted to get more context around your loan pipeline and how that's grown and how that's translated into actual loan growth this quarter which I think was better than most people expected and if close rates are up, if utilization rates on C&I are up and what you are seeing geographically? Thanks.

I think it really just comes down to renewed focus on trying to increase the loan book properly. We have had numerous meetings with all of our loan people throughout the state. We have emphasized the need for the growth in quality loans, and I underscore quality. I don't think that our approval process has gotten any weaker. I think we're looking at loans the same way we always have. We typically have a disciplined process in everything that we do, and that's certainly the case when it comes to loan approvals. We're encouraging our people to get out of their chairs, get out of the marketplace, meet with existing customers and potential customers and bring business in and I think that renewed focus and that level of encouragement that we give them is showing that it is paying dividends.

Okay. As a follow-up to that, can you quantify maybe on a percentage basis what portion of this quarter's growth maybe came from existing customers versus new customers?

I don't know that we have that number for you, Michael that would tell you what's new and what's existing. I think I would tell you that our belief is that the lion's share of this growth is not new organic economic growth if that's what you are trying to drive at. We're able to take business from other players. We have seen new customers come to us from lenders that can't take care of their needs. We have seen our customers doing some expansion a little bit, but we don't believe that there is a whole lot of economic expansion driving our loan growth if that's what you're asking.

Yes it is. Thanks, guys.

Our next question comes from Tom Alonso with Macquarie.

Just expense on the OREO expense this quarter, any color you can provide there and is that a sign of your ability to move this stuff quicker and do you think that continues going forward?

Tom, this is David. Anybody else can jump in if they want. We have some bigger items on the ORE list, apartment complexes and stuff, and we finally made a decision that we just want to get out of these things and so a lot of times when you repossess or for close on something like that, there is a lot of fixing up you have to do and I think that to get these things in shape we did a lot of fixing up and on the foreclosures we had on that end and some houses and that's what drove the ORE expense along.

It was down basically flat from third quarter. I think part of that is while ORE was down the expenses were elevated as a part of that because of what David was talking about. If we continue to shrink ORE and divest of the bigger more expensive pieces --

We have bigger pieces and they cost a lot of money to maintain.

We expect to see that number come down over time.

Fair enough. I appreciate that color. Thanks, guys.

Derek Hewett with KBW.

Quick question regarding the loan growth that you expect over the next eight quarters. In terms of the balance sheet size, should we expect that the securities portfolio would shrink by like amount?

I am sorry, I didn't catch, who are you with?

KBW.

Who is this?

Derek Hewett.

I am sorry. What's your question again, Derrick?

In terms of the loan growth you guys are expecting for over the next eight quarters, should we expect a corresponding decline in the securities portfolio balance?

I would say that you would have a decline if your deposits don't increase because that's where the money -- that's where it would come from. You would actually pull it out of securities or not purchase securities and put it back in the loans.

Our expectation would be to see increasing deposit base to offset some of that growth and whatever growth we don't cover with increasing deposits and then you would reduce your dependence on the securities book.

And also saying it a different way to get that same point, we have acknowledged that 47% loan deposit ratio we would like to get that up a little higher than that.

That's right. I think over the next we said over the next four or five years we would like to be back at 65% loan to deposit ratio.

It is probably important to emphasize that we don't see a need to buy deposits to support this growth. We think we've got the cash flow from roll off and bond portfolio existing deposit customers in place, et cetera, where we don't think we need to go out and in essence buy CDs or whatever to support the growth.

Well, that's true. When you look at just the core bank, the core bank grew in deposits last quarter. When you look quarter over quarter, the deposit shrinkage that we experienced was in higher cost, money, primarily at the locations that we had acquired in 2010, the core bank is growing deposits and I think our expectation is we will continue to grow deposits in 2010. So you can get to this as David Hollaway just said at 61 a% loan to deposit growth rate you can get there multiple ways. You can just shrink the securities deposits even and raise loans or you can grow loans and grow deposits at a faster clip and hold securities level and still get to your 65% loan to deposit ratio.

Historically I think what we're trying for, we're still shooting for organic deposit growth, but we're also shooting for organic loan growth that should be in excess of what our deposit growth will be.

That's a better way to say it.

That's really what we're looking at.

Great. Thank you very much.

Our next question comes from David Bishop with Stifel Nicolaus. I was wondering as you speak to your loan officers and clearly you guys are moving more on the offensive here, what are you hearing from the lines there and just in terms of pricing competition? Are you seeing any degradation or hearing any degradation in terms of terms and conditions and pricing out there?

I will answer first and, Tim, you can jump in. From what I have seen during the loan committees, for a while there we had seem like when you were making loans, you had all the pricing. You were in the upper hand. I think we are seeing more pricing pressure. Having said that, I think it is a good, clean competitive pricing pressure. There is still enough for everybody to make money. We don't see things that are just very unrealistic or some very unrealistic quotes, so I think my general gut feeling is there is more pricing pressure but again, it is a competitive pricing pressure but there is still plenty of margin for all of us. Tim?

I think that's exactly right. I think we're seeing a few more banks come back into the lending world. I emphasize a few. It is certainly not all by any means. And there is some pricing pressure and competition and having said that, we don't see near as much what I will refer to as maverick lenders out there doing completely crazy things in terms of pricing, so while there is competition and there is obviously always been competition in our business, it is not in the bizarre realm. It is the level of competition that we can meet and deal with.

Competition is good. We have always had competition. I think what you are hearing both of these guys saying is when we stopped lending or pulled back from the loan desk is when the market was irrational or crazy competition and crazy pricing.

Exuberant.

Exuberant, however you want to describe that. We said we're not playing in that game, and I think that's just the same strength in our business model all the way through. We're pretty disciplined in how we price M&A activity and how we price deposits and how we price loans and competition is always been there and we can compete with that competition healthily. I think we were going to continue to be disciplined in the way we look at things.

Thank you, gentlemen.

We'll take our next question from Andy Stapp with B. Riley & Company.

Could you talk about the impact the Durbin Amendment once you hit the $10 billion mark in assets?

Yes. Again, just for clarity sake, those rules kick in for institution that is are $10 billion or greater in asset size, and so I think the way the rules are written today, they look at you every December 31 to determine if that kicks in so obviously for us December 31 this past year we weren't at the $10 billion marker. So in the big picture way the specific interchange roles won't exact impact us in 2010. I say that on a theoretical basis because again we have to wait until all the final rules come in. In the theoretical world that doesn't impact us. If we go over the $10 billion mark, it certainly would impact us in 2011. I am not sure we can provide any specificity in terms of how that impacts us because we're still probably year, year-and-a-half out, to take a look at that.

Okay. Thank you.

(Operator Instructions)We'll take our next question from Jennifer Demba with SunTrust.

Net charge-offs have been basically flat on a dollar basis in '09 and '10. You indicated you thought the provision could come down. I am assuming you think you can make some material improvement on net charge-offs in '11?

We think that -- well, we think --

What does your crystal ball show, David?

I think yes, the answer to the question is yes. I think you will see net charge-offs drop as provisions drop, both probably on a balanced scale from what I can tell. Again, that's, you can always qualify that and say that we have such a small amount performing assets to our portfolio and if you had one large loan come up that we're not familiar with, or something that can change it, from what we see now the economy continues like it is. We see the charge-offs declining proportionately to the drop in provision.

If you look at it on a quarterly basis, Jenny, I think the fourth quarter provision was lower so you have seen it coming down a little bit over time.

Yes.

The fourth quarter provision was the lowest we've had in several years.

Yes. I know this topic has been beaten to death, and it has probably been asked another way but I'm going to try again. On the margin, assuming that you continue to grow loans pretty steadily each quarter for the next several quarters, is it reasonable to assume that the margins should be fairly well supported going forward in 2011?

Yes, I think it is reasonable, but again I like to use the terms "it is a positive bias" because everything being equal, absolutely. If we're growing loans at a tremendous pace, it has absolute positive to the margin. Again, you don't want to paint this exuberant picture of the margin because other things are going on. What's happening on the deposit side? If we don't do that loan growth, what happens to the margin? We're just trying to provide some color to this whole thing here.

Thank you.

Does that make any sense?

It does. It does. Nice quarter.

There appears to be no further questions at this time.

All right. Folks, listen, we really appreciate you participating in our call this morning. We appreciate your support of our Company, and we will continue to do what we do and continue to build shareholder value. Thank you very much.

This concludes your teleconference. Thank you for your participation. You may now disconnect.