Prosperity Bancshares Inc (PB) 2011 Q1 法說會逐字稿

Good day everyone and welcome to Prosperity Bank's first-quarter earnings conference call. At this time all participants are in a listen only mode. Later there will be an opportunity to ask questions. (Operator Instructions).

Please note that this conference is being recorded. I would now like to turn the conference over to Mr. Dan Rollins.

Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares' first-quarter 2011 conference call. This call is being broadcast live over the Internet at ProsperityBankTX.com, and will be available for replay at the same location for the next few weeks.

I am Dan Rollins, President and Chief Operating Officer, of Prosperity Bancshares. And here with me today is David Zalman, our Chairman and Chief Executive Officer; Tim Timanus, our Vice-Chairman; and David Hollaway, our Chief Financial Officer.

David Zalman will lead off with 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 activity, including asset quality. And finally we will open the call to questions.

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

I assume you have all received a copy of this morning's earnings announcement. If not, please call Tracey Schmitt 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 the 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, 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 first-quarter 2011 conference call. This quarter's successes include our quarterly earnings increased to $33.9 million compared to $31 million for the first quarter in the prior year. That is an increase of $2.9 million or a 9.3% increase.

Our diluted earnings per share was $0.72 for the first quarter of 2011, and that is compared to $0.66 for the same period in the prior year, a 9.1% increase in diluted earnings per share.

Our Tier 1 leverage capital ratio increased to 6.97%. Our tangible equity ratio continued its rapid increase and now stands at 6.03%.

Our total risk-based capital has reached 15.21%. That is compared to 14.07% as of March 31, 2010, and that represents an 8.1% increase.

Our loans increased in the first quarter of 2011 by $87.9 million or 10.1% on an annualized basis. Our challenge to our associates in the fall of 2010 to increased loans by $1 billion before the end of 2012 is gaining traction, as we have experienced good loan growth over the last two quarters.

Our nonperforming assets declined to 0.16% 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 $51.7 million or 1.45% of total loans, while our total nonperforming assets stood at $12.9 million. The allowance is 4.01 times our total nonperforming assets.

We provisioned $1.7 million for credit losses in the first quarter compared to $4.4 million in the same quarter last year. If these trends continue, we expect our loan loss methodology will enable us to lower the provision for credit losses in future quarters when compared to the prior quarters of 2010. Having said all of this, our total nonperforming assets are so low that any unexpected large credit experiencing difficulty could change our forecast.

We continue to see an increase in noninterest-bearing deposits during the last quarter. Our noninterest deposits were at $1.7 billion at quarter end. That is compared to $1.5 billion for the same period last year, an increase of 13.3%. We also continue to experience a decrease in our certificates of deposits, while our money market and savings accounts continue to increase.

As of March 31, 2011, our total deposits stood at $7.8 billion, and that is compared to $7.4 billion on December 31, 2010, a $362 million increase for the quarter, which represents 4.9% growth or 19.4% on an annualized basis.

We continue to actively review and pursue acquisition opportunities, [seizing] both FDIC deals and private transactions. We continue to believe many banks will be forced to look at strategic alliances going forward based upon the additional operating cost, loan problems and regulatory burdens, in addition to the income restrictions placed on our industry by the new legislation coming from Washington.

I would like to compliment all of our associates for their hard work. We challenged our associates in the last quarter of 2010 to organically grow loans and deposits, and from our results over the past few months we are extremely enthusiastic about our prospects for the balance of the year.

We are very pleased with our overall performance, with earnings increasing over 9%, loans increasing over 10%, and deposits increasing over 19% on an annualized basis. Our team is performing very well.

Looking forward 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, 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 associates who are enthusiastic about our prospects.

We intend to capitalize on the current environment by going out and attracting new loan customers, as well as taking care of our existing customers' growth needs. Many of our competitors are limited as to the loans they are able to make due in part to concentrations in commercial real estate loans and asset quality issues.

Again, I would like to thank our whole team once again 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.

Thank you, David. Net interest income for the three months ended March 31, 2011, was $80.4 million compared with $77.8 million for the same period in 2010, an increase of $2.6 million or 3.4%. The increase was primarily due to an 8.3% increase in average earning assets.

The net interest margin on a tax equivalent basis was 4.02% for the three months ended March 31, 2011 compared to 4.20% for the same period in 2010 and 3.99% for the three months ended December 31, 2010.

Noninterest income increased $889,000 or 6.9% to $13.9 million for the three months ended March 31, 2011, compared with $13 million for the same period in 2010, primarily due to an increased and debit and ATM card income.

Noninterest expense increased $2 million or 5% to $41.7 million for the three months ended March 31, 2011, compared with $39.7 million for the same period n 2010, primarily due to an increase in salary and benefits expense.

The efficiency ratio was 44.3% for the three months ended March 31, 2011, compared to 43.8% for the same period last year and 44.1% from the fourth quarter of 2010.

The bond portfolio metrics at 3/31/2011 reflect a weighted average life of approximately 3.3 years, and effective duration of 3.1, and a projected annual cash flow off the bond portfolio of approximately $1.2 billion.

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

Our nonperforming assets at the quarter ended March 31, 2011, totaled $12,888,000 or 0.36% of loans and other real estate compared to $15,842,000 or 0.45% at December 31, 2010. This represents a decrease of 19% from December 31, 2010.

The March 31, 2011 nonperforming asset total was made up of $2,355,000 in loans, $68,000 in repossessed assets, and $10,465,000 in other real estate. As of today $2,134,000 of the March 31, 2011 nonperforming assets total are under contract for sale. But let me remind you there can be no assurance that any of these contracts will actually close.

Net charge-offs for the three months ended March 31, 2011 were $1,524,000 compared to net charge-offs of $2,670,000 for the three months ended December 31, 2010. This represents a 43% decrease. $1,700,000 was added to the allowance for credit losses during the quarter ended March 31, 2011 compared to $2,900,000 for the fourth quarter of 2010.

The average monthly new loan production for the quarter ended March 31, 2011 was $101 million compared to $111 million for the fourth quarter ended December 31, 2010. The $101 million in average monthly new loan production for the first quarter of 2011 compares favorably to $59 million for the first quarter of 2010 and $64 million for the first quarter of 2009.

Loans outstanding at March 31, 2011 were $3,573,000,000 compared to $3,485,000,000 at December 31, 2010, representing a 10% annualized growth. The March 31, 2011 loan total is made up of 41% fixed-rate loans, 26% floating-rate and 33% variable-rate.

I will now turn it over to Dan Rollins.

As you have heard, we are very proud of our team and the effort they exhibit each day. Our loan and deposit growth plans are working, and we believe we can continue to build shareholder value going forward.

At this time I think we are prepared to answer questions. Mark, can you assist us with that?

(Operator Instructions). Ken Zerbe, Morgan Stanley.

I never thought I would say this, but a very good quarter. I mean -- maybe not for you guys, but just in general. I thought this was a very strong quarter for Prosperity.

What I was actually wondering about was in terms of M&A, what are you seeing for the current M&A environment in Texas and your continued appetite? As well as if you can just update us on your thoughts about possibly expanding outside of Texas on the margin. Thanks.

This is David Zalman. We obviously still have an appetite for M&A. We are still seeing a number of deals. We are still discussing a number of deals with people. Although I will be candid and saying that there is still somewhat of a challenge or a disconnect between what we feel is a realistic price in today's market. We are still seeing potential sellers that may want to sell but want a price based on a healthy bank. And the challenge that we are having still is pricing some of these banks and looking at them and pricing them and still taking into consideration what we think potential losses in those banks are. So that has become somewhat of a challenge, and almost at a little bit of a standstill.

So based on a previous transaction in Texas, I can understand where a lot of sellers still feel like that they need to get more. But that is some of the -- that is still some of the challenges that we have.

But having said all of that, it is still my real gut feeling that, especially with all the new rules and regulations and compliance and Durbin amendments and everything else, the challenges that have been dealt us by Washington, I still feel that the banking industry will be in a very big consolidation.

And this is a call -- I would say that in 10 years half of the banks will be consolidated. I just think it is going to be harder and harder for bankers of certain size to really make it.

No, understood. Just a question on security -- on your security portfolio. Are you changing the duration at all in anticipation of higher rates or is it pretty steady?

If you look at our portfolio probably over the last 20 or 25 years that I have been with it, it has always been around a three-year duration. I would say today it is a three-year duration. (multiple speakers) was a [3.31] duration.

Logically sometimes we try to bring down the duration, thinking interest rates will go up, but it seems like we are still around that 3.1 duration.

Okay, thank you very much.

John Pancari, Evercore Partners.

On the funding side can you talk a little bit about on deposits, what you're doing here? It looks like some of the excess deposits was put into the securities portfolio, but also I noticed that your jumbo CD balances grew in the quarter. And if you could just talk about if you're looking to lock in lower rates here, or if you could just give us some color on that front?

Well, again I really didn't pay that much attention, I guess, or I didn't see as much as you did, see the CD jumbos increase. Overall our CDs have been decreasing pretty dramatically over the last year, with interest rates and CDs being down so much. I think we're probably below 30% on all CD accounts that we have in the bank. It seems like we are really losing a lot of certificates of deposit. So we probably aren't focused on that.

Our real growth is coming, as I mentioned earlier, in noninterest-bearing checking accounts and regular trans-NOW account and money market accounts and savings. So we have seen tremendous growth in those areas. And really the money that we haven't put into the loans with the extra deposits we purchased securities. So our cost of funds -- Dave, what is our total cost of funds right now?

It is probably in the last quarter you're talking 60 bips, 65 bips (multiple speakers).

So we're probably at about 60 bips. And the money that we don't invest in the loans we are investing in securities that we are trying to average about 3%, 3.1%, 3.2% average to come up with about a three-year duration.

Let me take a stab at the deposit side for you, John. We really not running any deposit promotions. We are not out there attracting deposits. You are correct, jumbos were up basically $30 million for the quarter. If you're looking at jumbos as a percentage of total deposits, however, they actually went down. We dropped from 14.5% of jumbos in December to 14.2% in March. So as a percentage of total deposits they went down.

Now the deposit mix that we are taking care of is the customers that walk in to see us every day. So when customers are coming in and they are looking for a relationship and they are looking for a bank, we are not turning customers down. We are very focused on protecting our cost, and so you see a very, very low cost of funds.

And quite frankly I think we were pretty pleased with the deposit growth we saw. Maybe even surprised that it was as good as it was.

I guess there may be some question as to how far are you going to let certificates of deposits fall, but again, with our growth in our other areas I think we are still on the right track. I think if interest rates ever start going back up, you may see that product increase more. But most of the major banks, we are all priced about the same. You'll see a lot of mom-and-pop shops that really are paying a lot more than we are, and I think probably that is where a lot of the certificates are going to.

David is looking at certificates as a whole. And just kind of making his point, CDs in the quarter were 28% of total funding -- total deposits. A year ago CDs were 35% of total deposits. So you have seen our CD move from 35% of total deposits to 28%. I don't know that we are excited or unhappy that we picked up $30 million in jumbos in the quarter.

We really make our money not off of certificates. We make -- our spread and margins are much better on the transaction accounts, and that is what we are focusing on.

No, that makes sense. I'm just -- I'm looking at if you were making efforts to lock in the lower rates.

Then in terms of the loan portfolio, a good portion of the loan growth you saw the quarter was out of the resi mortgage portfolio. Can you talk about what your plans are for that book and how much you're looking to grow that book here over the next year or so?

This is Tim Timanus. I don't have a hard answer for you on that, other than to say we are looking at it. Historically single-family residential loans have been very good to us. Our default percentage has been virtually zero. They tend to have a fairly quick turnaround, an average life of five, six, seven years at the most.

But we do have quite a bit of it, so we are looking at it and trying to make a determination. A lot of it is tied to ongoing customer relationships. We get deposits that come with those loans. So all that needs to be looked at, but I don't know that we have a hard answer for that right now.

I think there is -- go ahead, David.

I would say historically if you look back five and ten years our ratio of 1 to 4 family residential loans were a lot greater than they were today. And for the most part it is a product that seems to be a good product with not a whole lot of risk. Again, we are not keeping the 30 year mortgages. We are making some variable rate mortgages, some 10 year fixed and 15.

On the 10 year fixed-rate mortgages they have an average life of about 3.6 years. The 15 year mortgage has an average life of about [4. something] years that increases after five or six years with a 300 basis point increase.

So overall I think we are managing our risk pretty good. And historically it has been a good product and one that has made us money. And, as Tim mentioned, really brings us a lot of deposit relationships with good, core customers.

There has been a lot of disruption of the mortgage markets, and so when you're talking to our team that is out the disruption that is out there, especially on the jumbo home loan side, and Texas is a market where the jumbo loan is still the low number, the [417] number, not -- we don't have any communities that have the higher jumbo limits.

So those market -- those particular loans have been very good for us. We get a loan LTV. You have got a relationship with the customer. They like doing business with somebody they can talk to. That is a good product for us.

Somebody had the question, going forward all banks may be into this more if Congress and the Administration eventually try to do away with a Fannie Mae or Freddie Mac, you may see that more banks -- this may become a dominant product for most like it is in other countries.

I think to the point David made earlier, it has got to come back again. We are not doing 30 year paper. This is a one year ARM, a five year ARM or a 10 or 15 fully amortized product. So that's a little bit different than the regular mortgage market.

Okay, thanks for taking my questions.

Mike Zaremski, Credit Suisse.

Back on the loan growth, so weren't you typically seasonally weak? I know the weather wasn't great in Texas either this past quarter. So do you agree with that? Do you expect the run rate to accelerate potentially for residential and for overall loans?

When you look at our quarter a couple of things are interesting. Tim gave you the loan growth numbers on the average for the quarter. January and February were very slow. March knocked the doors off. We absolutely just knocked out a whole lot of business in the month of March. In March the weather was pretty good down here. We did have some freezing weather for the Super Bowl in February. We had some freezes that knocked us out for a week or so in late January, early February.

But, yes, I think we do as a general rule tell you that if you look back for the last four or five years first quarter was the low quarter of the year for loan production. So I think we feel pretty good about it where we are. I think March really turned out well. Our production team is doing a good job.

The loans that we are picking up, I don't think any of us feel like we are seeing a whole lot of organic business growth in the market. What we are seeing is marketshare move from other weaker players. As David was saying, there is a lot of opportunities talking to some of our lenders.

I talked to some the other day. Three or four years ago the competition was so hot probably everywhere, but in Texas you picked up the phone book, you called 10 banks, and within five minutes, just like the record drivers, you had 10 bankers in your office begging you to please take the money.

Today you pick up the phone book, you call 10 banks, eight banks don't return your call. So the market has clearly moved in our favor. Sometimes your own bank doesn't return your call. So that is making it a lot easier for us to take care of business. And our team is very focused on making that happen.

Okay, and --.

You know, we are talking the other day about some statistics on our production in this March compared to last March, and it was pretty dramatic, wasn't it?

Right, as Dan mentioned, historically for us the first quarter of the year reflects lower loan production than the other three quarters. For example, going back to 2009 the average monthly production for the first quarter was $64 million. For the whole year of 2009 it was $75 million. Then you bring that forward to 2010 the average production for the first quarter was $59 million, but the average for the whole year was $80 million. And we had $101 million this quarter of this year.

So it is holding true that maybe the first quarter is the lower production, but the graph is going up. I mean, the trend is upward.

And March was the quarter that got us to $101 million, we wouldn't have been there January or February.

That is correct. That is correct.

So clearly we came through the downcycle as we expected in January and February, and March performed very well for us.

Okay, that's interesting. Then one other question. In the prepared remarks I think David alluded to, and correct me if I am wrong, potential reserve releases if there were no large NPAs that popped up. So are we expecting the run rate of provisions to actually fall from this quarter going forward?

This quarter -- I want to be -- what I was trying to say really you compare what we provisioned this quarter compared to last year, it was pretty dramatically -- it was a big change. I guess what I was trying to say in there is that going through looking at the next three quarters they should be similar to this or lower, if the trend holds up.

I think looking at our methodology is the key here. I think if credit trends continue to look good, I don't know that -- you're asking us specific would we see a release of reserves where we are going to bring money back into income. I don't know that we are seeing that in our methodology, but we certainly an experience where net charge-offs were in excess of the provision.

Well, the methodology has so many factors in it. Even though things look very good when you look at them from a -- when you look at the loan default rate, when you look at the nonperforming ratios. When you look at everything the trends are really good.

At the same time we have to keep in mind -- again, this is all based on the methodology -- it also takes into consideration your loan growth. So with us wanting to continue loan growth you've got to keep that in mind too.

Okay, thank you very much, guys.

Bob Patten, Morgan Keegan.

Guys, every one of my questions has been asked. Just one question, Dan, I guess, if you go to across your markets, where are you guys expecting the best growth over the next 12 months? Is it the Houston market? Is it the San Antonio Central market? Obviously, you have density in Houston.

When you look at where we produce growth in the last quarter we actually had growth in every area. We managed the state with six management teams, six different geographic areas, and we saw loan growth in all six of those areas.

The Central Texas market, which would include the San Antonio/Austin corridor, had the best growth in dollars, followed very closely behind Houston. If you're looking at where the opportunities are, clearly Houston and Dallas is the population basis. We have a big presence in Houston. I think we continue to believe that we can continue to pick up business in the Houston market.

The Dallas/Fort Worth market holds great opportunities for us. I don't know that we have a target for the rest of the year, I think we expect all of our areas to grow. We are starting with such a low base in the East Texas market we saw good loan growth in East Texas in the first quarter.

So I think we are seeing it -- and the same applies on deposits. In the fourth quarter we did not see deposit growth and loan growth in all six of our operating areas. In the first quarter we saw both deposit growth and loan growth in all six areas of the state.

I would say that in visiting the different locations throughout the state of Texas almost everyone that I am visiting is experiencing a lot of loan growth and a lot of enthusiasm. So I would have to say overall it is a broad Texas deal where we're at.

That is right. So if you look at our balance sheet, we are 40% plus weighted to Houston. We would see 40% plus of the growth coming out of the Houston market.

is there any specific marketing efforts directed towards maybe the disruption with the Sterling acquisition and some recent personnel changes over at the Amegy Bank?

I think what we are doing is just continuing to do what we do. We're certainly making calls on customers. We are certainly taking advantage of the opportunities that are out there. We want to just make sure that people know that we are there. We have spent some money on some media advertising making sure that people know that we've got money to loan.

And as I said a minute ago, quite frankly, when your banker isn't returning your call, it makes it very easy for our guys, because our guys are out making calls every day.

I would say it like this too, historically our bank is not really -- when there has been big changes like this we have not tried to go to other banks and raid their staff. Obviously, we do get people that do interview with us that want to come and some are from these other banks. And we interview them, but we don't make a big effort to go and try to raid their staff.

We try to put out a good product. We try to put out additional advertising and let the communities know that we are there, and that is the way we attract the business.

I think if you're looking at the staffing levels, we have hired -- I don't know how many lenders this quarter -- five or six probably. And when you look at where we are hiring from, and not just this quarter, but if you go back two or three quarters, we have hired some from Whitney, we have hired some from Compass, we have hired some from Sterling. We have hired some from lots of little community banks. So you wouldn't recognize a lot of them.

We are typically looking for the lender that can fit into our model, which is a generalist that wants to play in the game that we like to play. So as David says, we are not out trying to raid a big team and bring a big group of people over here to change our process. That is not us. We are looking for the one-off guy that can fit in the model.

I appreciate it, guys, good job.

Jennifer Demba, SunTrust Robinson Humphrey.

I have two questions. Number one, for David Hollaway, I am just wondering, David, how much of your operating expenses were more seasonal in nature, since usually the first quarter has some unusual items for the industry?

I guess the way I could respond to this, I don't know if the term seasonal gets us there, but if we were projecting forward, I think it is probably good to say that I don't think that absolute numbers should increase us that much as they go forward.

In other words, I guess what we are trying to observe is will it have -- are there extra charges in there that will fall off as the year wears on? I think just because of all the things that are going on, just holding it steady for the rest of the year would be a pretty good accomplishment.

Then, again, what I would point out is if the bank continues to hit the targets and goals that have been set out, and it is represented by the numbers you see in the first quarter, it might end up a little bit, but that is certainly going to be predicated on the balance sheet targets and goals that we hit.

Okay. And secondly, it was touched on earlier about two-thirds of your loan growth over the last six months has been 1 to 4 family. So, David Zalman, would you anticipate more commercial and CRE growth in future quarters or do you think this kind of mix will prevail for a while?

I would say our hope is that it would be -- that our commercial would increase more. Having said that, I can't predict the future on that. We have a real brisk loan team out there and they are really excited. And I can just say from prior experience, generally when people start making loans and these lenders start making loans it tends to grow in other areas. So our hope is that, yes, these other areas will grow. I think that 1 to 4 will still always be a pretty big part of our mix.

Okay, thank you.

(Operator Instructions). Jon Arfstrom, RBC.

A question for Dave Hollaway. Any thoughts on the margin outlook? I know you guys touched a little bit on funding costs, but it just looks like loan yields have come down a little bit, but earning asset yields were up a bit, so there is some mix trends. I am just curious what your thoughts are there.

It is absolutely the story on our margin. We even actually talked about this on the last quarter conference call. We said then we thought we were at a place where the margin over the next few quarters should hold steady, and that the big variable in this would be what is going on with our loan portfolio.

So, in other words, all those assumptions hold true as we sit here today. We look out over the next few quarters, we think our margin will hold steady. But there is some positive bias that can happen here. If that loan growth continues to stick, as we have seen in the last few quarters, it could actually trend up a little bit.

It all depends on the amount of loan growth that we put on the books, because you're getting better yield off the loans versus reinvesting it back into the bond portfolio.

Maybe, Dan, a question for you. You talked about loan growth and you said -- or Tim, I guess -- you said it was primarily marketshare moves and not organic. But it sounds like you're also saying the organic environment is getting better. Is that a fair way to look at it?

We probably have a disagreement in the room on that one. We talked this morning on that specific question. I think some of us are feeling like that maybe there is improvements going on in the market, that the economy is getting better. And there is others in the room that probably think that while it is not getting any worse, it is not really getting any better.

I would say -- again, Dan and I disagree sometimes as you know. But I think [partly] more of an organic growth than a marketshare -- getting from somebody else, at least when I am sitting in loan committees and I'm talking to the lenders out there. But, again, there is disagreement on where we're at.

Then just one other thing that is maybe more subtle. I don't think I have ever seen you grow loans in acquired branches. You typically go in the other direction, where you are shrinking loans in acquired branches.

We are in the fourth quarter of the acquisition on both of those transactions. And remember, they started with virtually no loans. So while I think you're right historically, it takes a little while to let the loans settle out when you inquire an entire institution, including all of their loans.

But both of the acquisitions that we are currently reporting, we cherry-picked loans that we wanted at the start, so the expectation would be that the runoff that was there was just normal paydowns and refinances in that portfolio, nothing that we really wanted to runoff, as opposed to being able to start growing. And they started from a low base.

So I think you're right, but I also think they started from such a low base. I think we are very proud of what is happening in the U.S. Bank acquisition and the First Bank acquisition. Those guys are all -- they've hit the ground running. You've got to give folks six months or nine months to get on the team and figure out how to turn the lights on and get their computer running. And they have jumped in and they are playing with the team very well.

I might add to that. What you said is absolutely correct. But it is interesting that right now one of our top producing lenders and banking centers in Houston in is one of the new ones.

That's right.

So that one certainly has moved forward. And, Dan, there may be a difference just firstly on the same thing, and maybe semantics where you're saying we may be taking marketshare from other people. When you say that I feel like these are loans that were at other banks. And I didn't mean -- I don't think that we are actually taking loans from other banks. We may be getting new loans that might have gone to other banks that we are now getting. Maybe that is the difference. I don't know.

Then just one more for Hollaway again. Zalman, you said in your comments that some of -- in the M&A comments there is a regulatory burden, cost issue on some of the smaller banks. I guess to Dave Hollaway, is there anything that concerns you over the next year or so that we should be aware of in terms (multiple speakers)?

Any additional costs. I think what you're asking is do we see any additional cost that is not currently in the numbers for the regulatory burdens that are coming down the pipeline?

Yes, anything we should be concerned about.

I would flip it around. From a cost perspective, obviously, additional compliance is there for us, but I think we are set up to handle it. I think a better question or the better look is the new regulations coming down in terms of impacting fee income. Because if you look at our numbers, you see that that trended down a little bit in this first quarter.

And, again, we don't have a crystal ball, that I got to guess with all of the new regulatory things, including Durbin, etc., that will impact us at some point. The question is we don't know specifically when and how much. So that is probably my main concern.

Fair enough, thank you.

Brett Rabatin, Sterne Agee.

I wanted to just ask a question on -- you have talked some about the marketshare movement. Can you give us a sense of the competitive landscape, maybe from -- compared to a quarter or two ago just on the lending side to where you see the competition increasing? Is it -- the C&I obviously is tough. Are you seeing that get even more competitive? And maybe the other markets too, is the CRE market still pretty slack and there is room to make a lot of loans in that part of the world?

This is Tim Timanus. My personal sense of it is that the competition has actually waned a bit. It certainly hasn't disappeared. It is there, but it is not aggressively vary based on what I am seeing. Now whether that holds or not remains to be seen. I suspect it won't hold. I suspect the competition well increase and continue to be an issue for us. But for this last quarter, as an example, I don't think it was extremely significant.

I think that when we talk about competition for us it is again important for us to talk about the customer base that we are after. We continue to hear stories in the market about the guys that are chasing the $30 million and $40 million revolving credit C&I loans. We are really not playing in that market.

We continue to hear that there's people chasing that stuff very aggressively on pricing. I don't know that is something we have been chasing or playing in. So I am not sure we are a good gauge of what is really happening on the C&I side.

My personal sense is -- this is David Zalman -- is that there may be a little bit more competitiveness than there was six months or a year ago. But still I'm with Tim. In comparison to where we were this has still been a very good market for us.

I said it earlier, you call 10 banks and eight of them probably aren't going to return your call. So that puts us in a very good spot.

Right.

Then just to follow up on the commercial real estate, is that a loan segment where there is just really not much competition, because banks are trying to decrease their exposure to that asset class?

I think we all would agree with that.

I think if you wanted commercial real estate portfolio and you were competitive on the rate, you could fill your boat up pretty easily.

Okay, thanks for the color.

Jefferson Harralson, KBW.

Can you talk about the cash flow that is coming off of the securities portfolio and have how in general you are positioned for rates? I see in the K that you're slightly liability sensitive, but you're also very core funded. So I guess how you think about your earnings stream as rates go up?

I think David wants to jump in, but on the first point, the cash flow coming off the bond portfolio is still holding steady. The projected over 12 months is about $1.2 billion. Again as we have commented before, the average life or the average expected duration of those things are roughly 3 years still.

So the portfolio is turning over. That in essence -- we need to back up and kind summarize why we are at where we are. Again, being core funded, and it takes time to prudently lend this money out, [essentially] we are just using the bond portfolio as a temporary holding pen.

So we do keep the duration very short and structured it, as we have over the last 20 years to reduce this cash flow, so when rates to come up, and nobody knows when -- if and when they do, but at some point I think they do. We do keep it shorter. That cuts our -- we could make more money, obviously, if we would go out longer, but that wouldn't be the prudent thing to do.

But with the $1.2 billion cash coming off the portfolio, if we continue to grow our loans as we have seen in the last couple of quarters, that will soak up a lot of this liquidity.

So having said all that, when you throw it all back into the mix that comes back to our previous comment that at least over the next three quarters, again absent any violent rate changes, that margin should hold pretty steady. Again, with the caveat that we really significantly grow our loan portfolio, that is going to have a positive effect, because the loans that are being put on the books are much higher yield than -- this is where David wants to jump in -- but for buying a 10 year product, whatever it is, those yields today are, what, 2.70%?

2.70%. A 15 is about 3.50%. I would say is that our bank -- we never really tried to call rates. We have tried to buy product in all markets and have a very short duration. In fact, an investment banker that was looking at our bond portfolio, we would probably get the worst ratings that they would give anybody, because of the first thing they would say -- your portfolio is too short and you need to expand and you go have got to be [here and there].

So we have really not paid a lot of attention to that. We kept about a three-year duration on the deal. If you compare us to say a bank that has just got an 85% or 95% loan to deposit ratio, as interest rates go up you're going to see their earnings increase a lot faster. And you will see ours -- we are like the Queen Mary trying to turn around in a parking lot, it is not going to happen to us. It takes us about -- it takes us about 18 months before we catch up with the trend.

When rates are going up, we probably lag a little bit. When rates are going down, we are ahead of the other guys. So it is just the way we have managed the portfolio over the years, and it seems to have worked very good for us.

Right, thanks. One last one. How do you guys -- what is your tolerance, or how do you think about book value dilution when you're looking at deals?

Most of the deals I would have to tell you that we have looked at haven't been dilutive; they have been booked accretive to us. I don't know. I am not having the experience yet to see a dilutive deal yet.

You know, if you do a cash transaction. (multiple speakers).

Okay.

We look at all the metrics that are out there, and I think we continue to be very focused. David is very disciplined in wanting to see dollars drop to the bottom line. And so we're not going to give away the bank from a dilution standpoint, but that is something we are watching.

All right. Thanks, guys.

Matt Olney, Stephens Inc.

Most of my questions have been addressed, but I want to circle back on the securities portfolio. It looks like the yield there have destabilized and even modestly increased in the first quarter. Do you think this has stabilized the next few quarters or could this, in fact, rip down again a few quarters from now?

A couple of things. David, he is asking about -- we can barely hear you -- he is asking about the yield on the bond portfolio went from 3.50% to 3.52% in the quarter. You had a couple of less days in the quarter. I think you have seen some slowdown in the pre-pay penalties. So the question is, do you expect that 3.52% to hold or would you expect it to continue to fall?

I will go first. The yield falling over the last year, we are hitting an inflection point. What you just heard David say, if we are having to fill back in on the ten year again -- let's repeat this. If something like -- again, rates -- let me just stop first and say rates bounce all over the place in a quarter's time. So one of the things when the rates turn up that is always an opportunity where we jump in. But having said all that, the 10 years roughly again 2.70% --.

2.60%, 2.70%, depending where (multiple speakers).

15 years. (multiple speakers).

I is probably around 3.50%, 3.60% yield.

So if we are having to go back on the bond portfolio and you average that out, let's say, and we are at 3.50% today -- I don't know there is going to be much movement on that yield if all the metrics hold up.

The thing that is helping us, Dave, is you know, it seems like the paydowns has slowed down to some degree, which is really helping our income, because we are not having to amortize the premium as fast. It looks like (multiple speakers).

(multiple speakers) our yield up a couple of points.

Over the last couple months. I think that helps. Having said that there may be some -- again, you have to make some assumptions, and if you are making an assumption that everything is static, as it is today, you can obviously take to two numbers Dave gave you, divide it by 2 and come up with something that compares to the 3.4%, 3.5% right now. There may be some downward movement. We think that any downward movement is offset by still that we have $2 billion in CDs -- that our total CDs that are over 1%, which our rates are more like 60 or 40. So I think we are coming up with a philosophy and idea that things should be pretty stable in a static market.

Great, thanks for the color.

Christopher Marinac, FIG Partners.

I will try to ask something different here before we conclude. In the 10-K there was a great table about risk ratings and risk grades that you often disclose.

My question is more of a curiosity, even though the numbers are tiny, as you make an acquisition, and let's say you bring X hundred million -- billion dollars of loans to the portfolio, are those marked such that the new loans after closing are all pretty much in the past category, the 1 and 2 risk rates, or will some of that even after a credit mark start to slip into special mention or classified assets?

That is a great question and we have had multiple visits with our regulatory bodies on that question. What he is asking, Dave, a couple -- make sure I understand your question. He is saying in the K we now disclose loan rates. We have that table that is in there that discloses our loan rates.

And his question is just what -- Chris Bagley and I were in the FDIC offices not long ago talking about was when we do an acquisition and you mark them to market, there is some on the GAAP side that say if you mark them to market appropriately they are performing assets. And the regulatory side is saying, if it is not performing to the terms in which the loan was originally written, it is not a performing asset.

So there is some good questions on that. And I think my guess is you're going to see multiple banks answer that question in multiple ways as you look out over the future.

My (inaudible) if you ask how we would characterize it or categorize it, I think even if it is mark to market and it is a substandard loan, it is a substantive loan.

Then the question becomes if you had $1 billion substandard loan that you mark to market and you marked it $0.50 on the dollar, you'd only be showing $0.50 of the principal balance on the --.

It would still be considered substandard in my opinion.

That's right. That's right.

I agree with that completely. It is what it is.

It is what it is.

Regardless of what you carry it at.

That's right. But as Dan said, I am sure you will get a lot of different opinions on that (multiple speakers).

The boys at FASB have a different opinion.

Well, I think you're right. The difference FASB would say probably that it is maybe not. On the other end, the people that roll their sleeves up and the regulators, I think, would have a view like us probably.

Got you. David, have you been surprised by the credit marks you have seen on various deals last the three to six months?

No, not really. Some of the deals that we participated in that we -- with our credit marks that we came up with, and then some of the outside people that got the deal, and I can think of two deals -- the bigger deals that we were in, the credit marks were very close.

Great, guys. Thank you very much.

Bryce Rowe, Robert W. Baird.

(multiple speakers) longest call. I just have a couple of quick questions here. Can you guys -- you guys obviously have this loan growth goal of $1 billion by 2012. What do you expect the balance sheet to do over that time period? Do you expect deposit growth to match that loan growth or should it be a little less than (multiple speakers)?

I think when we started we said we expected to see 5% to 6% deposit growth, and then that would equate to a 12% or 13% loan growth over that time period. But that is not what we have experienced in the last two quarters.

So I think when you look back over our history, and Dave is jumping in here -- Hollaway -- when you look back over our history we typically have modeled a loan growth slower -- or excuse me, a loan growth a little faster than deposit growth is what we have been modeling for some time.

Historically that is true. But who has that crystal ball. Let's back up and just say what is our vision and focus here, to grow our bank, get core customers on the deposit side, and get -- and book good loans. However that ultimately falls out, so be it.

I think, and this is David Zalman, if you look historically -- and these numbers may not be accurate, Dave may jump in -- but if you look us over the last 10 years, and exclude the last few years where it has been such a crazy market, historically -- and it has always been hard to see because we have done so much M&A -- but if you pulled out the M&A, historically on an organic basis we grew the portfolio -- the loan portfolio at 8% or 9% and our deposits at about 4%. So historically there has always been a difference.

Now I think when you are really putting a push on for loans that we should grow the loads a lot faster than the deposits. Having said that, we have had such large deposit growth -- but, again, you've got to remember too, our deposit growth, I will say March the first quarter for us is always a good deposit growth.

Usually we see -- we don't see the deposit growth for the second quarter or in the third quarter. The worst quarter for us is the second quarter. Third quarter not -- it is okay, but it takes the fourth quarter before we show deposit growth again. Just historically, I don't know why, that is just what our bank does.

That is a good comment. Comparing deposit growth to loan growth, loan growth first quarter has historically been the slow quarter. Deposit growth first quarter has historically been the best quarter of the year. And that is year after year after year. Third quarter has been the worse quarter of the year for deposits.

On paper, again, I think what the real question is, what we are asking is, if we grow our loans out-stripping our deposit growth that would mean that our security portfolio as a percentage of assets would go down. But I guess we are not seeing that because our deposit growth has been so good the last (multiple speakers) quarter.

Another way to look at that would be, I think, David continues to drive us towards a higher loan to deposit ratio. This quarter we went backwards on that number because deposit growth was so strong.

Don't you think this may be more of an abnormal time (multiple speakers).

I do. I do.

I don't know you could count -- I think it is realistic to assume that a bank our size could have a 19% annualized loan -- I mean a growth rate.

Excluding the acquisition, excluding the acquired locations, it was 23% or 24%.

Yes. But again that is highly unusual, and I wouldn't use those numbers going forward.

Okay, that's helpful. Then the other question on deposit -- average deposit cost, there was an uptick in that NOW interest-bearing component of the deposit mix. Should we expect that to stabilize here or will that continue to move higher?

Again, was that because we had more deposits? (multiple speakers).

It is all payment to the NOW. So, no, there is no plan that says we have to grow certain types of deposits one way or another. Other than on the CD side where we have let those higher costs deposits runoff and it is taking us from 35% down to 28%. But, again, no, there is no -- they could tick up again; they might tick down a little bit. It is what it is.

Some of that is off of tiered pricing, so you had more dollars in higher tiers that can drive what you're seeing there.

Alright, that's helpful. Thanks.

Gentlemen, we have no more questions in queue at this time.

Thank you very much. We certainly appreciate everybody's participation. As I said, we are proud of our team and what we are doing every day. And we look forward to continuing to grow shareholder value in the future. Thank you for participating.

This concludes today's conference. We thank you for your participation and hope you have a nice day.