Prosperity Bancshares Inc (PB) 2011 Q3 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. (Operator Instructions) Please note this call may be recorded. I will be standing by if you should need any assistance.

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

(technical difficulty) third-quarter 2011 earnings conference call. This call is being broadcast live over the Internet at ProsperityBankTX.com and will be available for replay at the same location for the next few weeks.

I'm Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares, and here with me today is David Zalman, 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 activities, including asset quality. And finally we will open the call for questions.

During the call, interested parties may participate live by following instructions that will be provided by our call moderator, Amanda; or you may call -- you may e-mail 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 be happy to fax a copy to you now.

Before we begin let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws and as such may involve known and unknown risk, uncertainties, and other factors which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn our call over to Dave.

Thank you, Dan. I would like to welcome everyone and thank you for listening to our third-quarter 2011 conference call. I am pleased to report on some of our successes this quarter.

Our earnings increased to $36.4 million in the third quarter, and that is compared to $32.2 million for the same quarter last year. That is an increase of $4.2 million or 13.1%.

Our diluted earnings per share were $0.77, compared to $0.69 for the same quarter last year. That is an 11.6% increase.

Our nonperforming loans totaled $13.4 million or 16 basis points of average earning assets at September 30, 2011. That is compared to $20.7 million or 26 basis points of average earning assets at September 30, 2010. This represents a 35% reduction in nonperforming loans over the past 12 months.

Additionally, our 30- to 89-day past due loans have decreased significantly over the last year. Overall, our loan quality continues to be very good.

The allowance for credit loss was $52.5 million, or 1.4% of our total loans. When comparing this to the $13.4 million in nonperforming loans, you can see that we are adequately reserved.

Our tangible common equity ratio has improved to 6.89%. That is compared to 5.73% on September 30, 2010. That is an increase of 116 basis points or 20.2% on an annual basis. This increase is attributable to our earnings retention.

Our Company continues to exhibit strong earnings and capital growth, enabling us to build shareholder value through the execution of our business plan. Deposits at September 30, 2011, were $7.8 billion, an increase of $307 million or 4.1% compared with $7.5 billion last year. Our linked-quarter deposits increased $131 million or 6.8% annualized from the $7.7 billion at June 30, 2011. We continue to see strong increases in our non-interest-bearing deposits.

Loans at September 30, 2011, were $3.7 billion, an increase of $323 million or 9.5% when compared with $3.4 billion at September 30, 2010.

While loan activity during August was extremely slow -- due, we believe, in part to the political uncertainty over the debt ceiling -- September was very good for us. Loans increased 7.9% annualized on a linked-quarter basis and we continue to make progress toward our stated goal of increasing loans $1 billion from September 30, 2010, to December 31, 2012.

During the quarter, we were pleased to announce the acquisition of Texas Bankers, Inc., Austin. Gordon Muir and his team at Texas Bankers and its wholly-owned subsidiary, Bank of Texas, will be excellent partners as we continue our Central Texas expansion. The Austin market is one of the fastest growing in America and we are excited about our prospects there.

As we look into the future, we are aware of the challenges presented by all of the new rules and regulations coming out of Washington. However, we believe we are very well positioned to take advantage of the current environment.

In fact, due to our strong performance and our Board's belief in our future performance, we have increased our cash dividend 11.4% to $0.78 per share per year for 2012. Strong earnings, great asset quality, 175 banking locations throughout one of the fastest-growing states in the nation, and one of the best economies, and bankers with years of experience all combine to set the stage for continued successful growth.

We are capitalizing on the current environment by attracting new loan customers and taking care of our existing customers' financial needs. Again, I would like to thank our whole team for a job well done.

Thanks for your support of our Company. Let me turn the discussion over 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 September 30, 2011, was $82.5 million compared with $80.3 million for the same period in 2010, an increase of $2.2 million or 2.8%. Noninterest income increased $927,000 or 6.8% to $14.581 million for the three months ended September 30, 2011, compared with $13.654 million for the same period in 2010.

Noninterest expense increased $1.4 million or 3.4% to $41.2 million for the three months ended September 30, 2011, compared with $42.6 million for the same period in 2010. The efficiency ratio was 42.4% for the three months ended September 30, 2011, compared to 45.4% for the same period last year.

The bond portfolio metrics at 9/30/2011 reflect a weighted average life of 2.6 years; a weighted average coupon of 4.12%; and projected annual cash flows of approximately $1.4 billion. The net interest margin on a tax-equivalent basis was 4.02% for the three months ended September 30, 2011, compared to 3.97% for the same period in 2010 and 4.06% for the three months ended June 30, 2011. For the nine months ended September 30, 2011, the net interest margin on a tax-equivalent basis was 4.03% compared to 4.05% for the same period in 2010.

So looking out over the next 12 months in the current low rate environment, our model shows that we still maintain a stable net interest margin based on the following. The challenge for us is the cash flow coming off of our bond portfolio, which has a current yield of 3.42%. We have to reinvest in securities; that current yield is around 2.10%. However, our ability to grow our loan portfolio as we have shown so far in 2011 will allow us to reinvest the excess cash at a much higher rate and thus provide a positive to the margin.

Additionally, at our cost of funds should continue to come down, also helping the margin. One example -- our current CD rates offer are about half of the current portfolio yield of 0.99%. So loan growth and the continued downward trend in our cost of funds should provide us with a net interest margin that should be relatively stable over the next 12 months.

And I can clarify that stable to us means over time movement could be a range of no change up to a 5 to 7 basis points change to the downside, based on the current economic and rate environment. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Dave. Our nonperforming assets at September 30, 2011, totaled $13,363,000, which is 0.36% of loans and other real estate. This is compared to $12,680,000 or 0.35% at the end of the second quarter of this year.

September 30, 2011, nonperforming asset total was made up of $5,125,000 in loans, $22,000 in repossessed assets, and $8,216,000 in other real estate. As of today, $3,048,000 or 23% of the September 30, 2011, nonperforming asset total are under contract for sale. But as we have always said we cannot give assurances that these contracts will close.

Net charge-offs for the three months ended September 30, 2011, were $368,000 compared to net charge-offs of $1,229,000 for the three months ended June 30, 2011. This represents a 70% decrease. The net charge-offs for the third quarter were 0.01% of average loans.

$950,000 was added to the allowance for credit losses during the quarter ended September 30. This is compared to $1,400,000 for the second quarter of 2011.

The average monthly new loan production for the quarter ended September 30, was $98 million, compared to $118 million for the second quarter of this year. Loans outstanding at September 30 were $3.738 billion compared to $3.665 billion at June 30.

Annualized year-to-date loan growth has been 9.7%. September 30 loan total is made up of 43% fixed-rate loans, 25% floating rate, 32% variable rate loans. I will now turn it over to Dan Rollins.

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

At this time we are prepared to answer your questions. Amanda, can you help us with that?

(Operator Instructions) Ken Zerbe, Morgan Stanley.

Great, thanks. Just a question on your funding a little bit. I saw there was a very small tick down in time deposits, both the retail and jumbo. Can you just review your strategy there?

Even though the rates or the cost of time deposits is coming down pretty substantially, are you fine letting those run off? Especially when you have -- if they match up with security cash flows that are coming due, so you're giving up a little in that [I] side but I guess they are kind of lower quality funding sources.

Or is it still worth it to try to keep both of those on? Both the lower securities and the CDs, if that is how it works out?

Ken, this is David Zalman. I think there's two dynamics working here. Again if you are looking at a quarter-to-quarter basis and a quarter-to-year basis we still -- when you compare us to last year, still a lot of our CDs were CDs that were still rolling off from the Franklin Bank acquisition. If you looked at it on a quarter-to-quarter basis -- or we look even on a month-to-month basis -- we think now that most of those certificates of deposits rolled off.

A lot of the customers that they had were really -- it was just a rate-driven security. Even when we bought the bank, I think that we said we -- I think we ended up with about $2 billion in deposits. We thought we would end up about $1.2 billion, $1.3 billion. And I think that is where we are at today.

The second piece of your question is -- does it make sense to keep CDs? The answer to that is yes.

We not really trying to go out and purchase CDs in the market. But we are trying to go after a total relationship. If the customer has their checking accounts with us, their loans with us, we want their time deposits too.

But if it is just a customer that is just coming to us for a rate-driven certificate of deposit, we are really not that interested in that kind of relationship.

I think that dynamic is what is showing up right now. What you are seeing more and more -- less and less money on the certificate of deposit side, and it is going into non-interest-bearing accounts and other accounts.

Also, I would say -- again, we can't measure this as much. But I would say that some of the money that is normally in certificates of deposits probably went into plain non-interest-bearing checking accounts and money market accounts just because the rates are so low right now that I think people, for what they are getting on that type of money, would like to just have the immediate ability to do something with it. So I think there's probably three dynamics working in that area.

Okay. That makes sense. And just I guess one other question, and sorry if you need to repeat yourself on this. But this quarter you saw 4 basis points of NIM compression. But going forward you are saying stable, call it roughly stable; I think you said like zero to 7 basis points down in NIM going forward.

I get the logic. Right? Cash flows from securities going into loans makes sense.

What was different this quarter that is not going to happen next quarter? How do we get 4 basis points but now it's going to be much less than that, say in the next quarter or two?

I will jump in ahead of David on this one, but one of the dynamics that was in play this quarter -- and again I think you can picked up on it from the first question -- is there's some timing that is always involved in these quarters. Part of it because of just the volatility this last quarter, you notice that some of the leverage came off the balance sheet and we were kind of slow to reinvest some of these funds. It is more a timing thing.

Again, going from one quarter to another, I would make that same observation. The prior quarter went up 3 or 4 basis points. It is just within a three-month time frame it is hard to get a good sense of it.

And that is what we are trying to say today, is let's look at it over maybe a longer period of time of 12 months. And these few bps one way or the other, that is just a timing thing.

But the other answer to that question -- again, David is going to jump in. As we are going forward, we're going to start -- not only are we managing the rate side of this, we are managing the volume side of this. As we start growing our assets and deposits again, that is also going to help us here.

Again I can't tell you with some certainty whatever new growth comes on how that impacts the margin. It is probably going to have some pressure on it, is what I would assume.

During the quarter, Ken, we have such a large bond portfolio -- and again, Dave gave a number like we have $1.4 billion rolling off a year. Historically it has been running about $1 billion to $1.2 billion.

We have to use numbers that the model throws at us, and those numbers come from a bunch of different sources where they take Bloomberg and Goldman and a bunch of different primary dealers and they come up with these speeds. I tend to think -- without going into a long spiel --that the speeds they have going right now are a little bit too high.

But having said that, we would always -- because we had so much running off we would purchase in advance sometimes $200 million, $300 million in advance. So as -- when the portfolio ran off we would have bonds to replace them.

What happened is last quarter, again, when you had so much turmoil in Washington and everywhere else, interest rates got so low that we kind of backed out of the deal. We were looking -- today for example, where we can maybe get closer to 2% to 2.1%, we were probably -- you couldn't get 1.6%. So we actually backed out of the market because we thought the rates were too low.

Now, since then rates have come back up, or yields have come back up, and we are back in the market. And that will make a difference also.

Okay. Thank you very much.

Jefferson Harralson, Keefe, Bruyette & Woods. It looks like his line dropped. Brett Rabatin, Sterne, Agee.

Hi, guys. Good morning. Wanted to ask on the margin. I have modeled it out a few different ways, and I definitely can understand how the margin could be flat going forward. But I think it would involve, to some degree, fairly slow balance sheet growth. And given your profitability level -- I mean, you did over a 1.5 ROA this quarter -- it would seem like capital would accumulate unless you are doing acquisitions.

Can you comment around the trade-off of spread revenue growth versus keeping the margin at 4%? Or can you talk a little bit about maybe your growth expectations as well vis-a-vis the margin?

Yes, I mean it's a good question and maybe it is the question, because -- I will kind of rephrase what you are asking. You're basically saying -- well, guys, you have some significant balance sheet growth going forward and those dynamics and the rates that come on and deposits and what you're going to either put it out in securities or lend it out -- is that spread of money going to be 4% or close to 4%? Or does that margin actually come down based on your significant growth?

Or you can come at it the other way and try to mitigate your growth to hold your margin, which then would translate into less absolute dollars going forward. And I think -- again, I am sure David is going to jump in. But I would say we are not going one way or the other.

We're probably going to try to manage this and get into the middle and try to do both, if that -- maybe that sounds a little naive, but that is kind of where we are going to try to take ourselves.

And yes, the other piece of this, you just briefly mentioned it, if we start seeing a lot more M&A transactions then these dynamics -- we would have to revise them. Because you don't know when you -- if you go and do a $2 billion or a $1 billion transaction, you don't know what is coming to the table. That is going to impact the margin itself as well as the absolute dollars.

So I don't know that we can give you a definitive specific number on it, but we can give you our philosophy, how we look at it. And I will let -- David I think wants to say something on it, or Dan.

Yes, I think, Brett, what you are asking is -- you've got to look back. We have done a lot of acquisitions and every acquisition we have done has moved the margin to some extent. Some have been positive moves to the margin; some have been negative moves to the margin and rate.

But in dollars every acquisition we have done has been accretive to EPS, and we would expect to continue to have opportunities to deploy capital through acquisitions. The question is just when.

I think we have been saying now for three quarters, four quarters, five quarters that we expected activity to pick up. And with the way the environment has been it just hasn't happened.

But we continue to believe that there will continue to be consolidation in the banking markets, especially in Texas, where there is still thousands and thousands of banks. I don't know how many there will be in the years to come, but it's going to be significantly less than it is today.

So as those transactions take place, if we are playing that game that could impact our margin. Your question was more driven, I think, as Dave said towards do we -- are we working to protect the rate of the margin? Are we working to protect growth in earnings per share.

We obviously are shareholders. There is a large inside ownership here in our Company. We are all shareholders just like you guys. We want to pay attention and we want to continue to build shareholder value by growing earnings.

Okay. That's good color. Then wanted just to ask around loan generation, can you talk about the rates that you are seeing in terms of what you are doing? I know there is a lot of fixed-rate stuff going on in Texas, and I know you are trying to grow your loan portfolio more rapidly. Can you talk about the rates you are booking today and the dynamic?

You're talking loan rates, on the loan desk?

What's that?

You're talking about loan rates on the loan desk, right?

Yes, just what you are seeing rate-wise, and then if your margin expectations include any kind of atrophy in your loan portfolio yield.

Brett, this is Tim Timanus. On the rates, obviously they are low in terms of historical standards. To mitigate that, we are trying to hold down the time that we are fixing rates.

While we do have some fixed rate loans for 10-, 15-year periods, that is really not necessarily the norm. We try to hold those fixed rates to 3, 5 years and then flip those loans over to a floating or variable rate basis after those fixed-rate terms.

There is, obviously, some competition from other institutions. My personal opinion is we have seen a little spike in the competition lately.

We just have to avoid being caught in the trap of putting too many dollars out at fixed rate and exposing ourselves to a change in our cost of funds on down the road, that we can't respond to on the earning asset side.

We think that the pipeline of loans is still good. As David Zalman mentioned, August was not particularly a good month. While we can't say why that was the case, we can say that there was a lot of bad news out about the gridlock in Washington as it relates to the deficit and the budget, and the downgrade of the companies -- of the country's credit rating. It just seems like there was a bit of economic paralysis that month that we were caught up in.

But it bounced back in September. And as of this point in time, the pipeline for loans still looks good. The Texas economy is reasonably good. So we are optimistic that we are going to be able to maintain loan growth and move monies from the securities portfolio to the loan portfolio going forward.

But just to clarify, Tim, you're not suggesting -- or maybe one of the Davids -- you are not suggesting that your flat margin assumption assumes any meaningful atrophy in the loan portfolio yield going forward?

Well, yes, let's go back to that.

(multiple speakers) because if you look at our numbers our yield is 5.85%.

That's right.

Dan, I know you want to say it, but we are not suggesting --

No; we are not suggesting that we are going to maintain a 5.85% yield on the loan portfolio, if that is what you are asking. We are booking loans today ranging from -- if it is a floating rate loan, it is in the 3%s. If it is a fixed-rate loan it could be in 5%s or 6%s.

But we are certainly not going to maintain a 5.85%. We didn't have a 5.85% margin yield on the loans last quarter.

So I think our modeling does show a declining rate on the loans. The issue, Brett is moving dollars out of the bond portfolio into the loan portfolio. So if your choice is investing dollars that are rolling off the loan portfolio or the bond portfolio into the bond portfolio -- and David said you can get 2%, 2.10% -- or into a loan that you can get 4%, 5%, 5.5% on, then you are going to push towards the loan side and that will protect our margin.

I think a couple of things, Dan. I think the loan yields we're making now are coming down too. But also our CDs that are on the books right now are at 0.99 basis points; and our renewal rates are anywhere from 25 to 40 basis points. So you have got to work it on both ends at the same time.

Let me give you some color on pricing -- and maybe too much color, but it is a real-life situation that we went through yesterday in Loan Committee.

That is we have a new customer that wants a $3 million line of credit to do some things with. Very, very strong customer and it could be a good customer, and we -- the Loan Committee came back at 3%. And the customer came back and got with some other bigger banks that said -- well, we will give it to you at prime minus a quarter.

So for two or three days, we went through a dilemma. Do we really want just to price things just to get deals in?

So after a lot of discussion, a lot of thought on it, we said -- you know, we want the opportunity to bring this customer in. And we probably will -- we will probably do this one time. We will go prime minus a quarter for this $3 million. But in the event they don't bring a corresponding amount of deposits to the Bank and we can make other loans to make up the difference, it would be the last time we would do it for it.

So we are definitely facing some of these challenges to get the new business, as you are saying.

But we want the whole relationship.

But we want the relationship and we want to make money out of it. We're not -- I guess the point I am trying to make, we are not going to go ahead and just put the loans on no matter what pricing we get and drive our margins down just to say we have grown.

Okay. Thank you all. Thanks for all the color.

Jon Arfstrom, RBC Capital Markets.

Thanks. Good morning, guys. Any -- can you give us some color on the one-to-four family growth, and the profile of what is going into that portfolio, and how large you might let it get?

Okay. I am going to flip pages here. One-to-four family right now is 26% of the total loan book. And his question is -- how high is it going to be?

You got to look back, Jon, I think at a couple things. I am taking your question to be that maybe you think there is not quality there. And I think our belief has been for a long time we had one-to-four families well over 45% of the Bank five or six years ago. So as we have grown the one-to-four family business has been good for us.

What is in there is predominately relatively short paper. Tim said a minute ago, we will do a 15-year product and we will do a 10-year fixed product. But the paper in there, rate-wise, we also do a lot of one-year ARMs and three-year ARMs and five-year ARMs in there.

Jon, this is David. I think there's two dynamics. We in the past -- again, we are not afraid of making loans. Again, we are still trying to average -- even if we are doing a home loan and we are doing a 10-year fully amortized loan or a 15-year fully amortized loan -- we are still trying to hit around a 3.6 year average life.

So we will continue to making that. What we really look at is our policy says that we should never have over -- I'm going to look back at it -- it is 20% or 25% of our assets that mature or reprice over five years. So that is more of a number that we are looking at for the whole Bank, which includes our securities, our loans, and everything.

So that is really what we pay attention to. As we start hitting a number --

In the ALCO process --

In the ALCO process, where our repricing -- we have over 20% or 25% over five years, that is when we would have to stop.

Today in the one-to-four family market we have got a couple of products that are still pretty good out there. We do a lot of business with owner-operators. They like us having all of their debt.

We can finance their jumbo home loan or their weekend home. We put it on our balance sheet. They know who they are dealing with. Our customers like that a lot.

I think it is important to emphasize once again that these are truly relationship loans. We are not just making home loans to book an earning asset.

Really good point.

We're getting the deposits from these people.

That's right.

And if we don't, then we are not meeting our goal. But we have been successful in doing that. So these are truly relationship loans.

We don't have any mortgage people out there buying loans for us. These are loans being made in our 175 offices.

I think we got to this point, Jon, because if you look back in the '80s, banks were just failing every -- I forgot, was it Thursday or Friday? They called and shut them down on Friday. And nobody was willing to make any types of loans.

That is really when we started saying, okay, well what kind of loans can we make in the '80s that you make today that won't go bad tomorrow?

That's when we started making the one-to-four and achieving and getting the relationships and the deposits. It has really built a good core banking franchise for us. So we like the product.

How about the size of the loans you are making? You talked about the $3 million loan before. Just curious if -- as you start to (multiple speakers)

Dan and I disagree sometimes because normally the way we have it set up is that basically what comes to Loan Committee is about $2.5 million. So I sit on Loan Committee and I have seen over the years as we have gotten bigger, loans are trending -- or relationships are trending to get bigger. Dan will probably give you some input in a minute. But when he breaks it down by all relationships, he's probably going to say it is going to be a very low amount.

But yes, the loans are getting bigger in the commercial. I think that just happens with size, really. But, Dan, you may want to jump in.

I think you hit it head on. When you look at what is coming through the pipeline today, we are booking larger loans today on average than we were two years ago. But we still have a lot of little relationships.

But when you look over the total numbers, that average number has moved up pretty good over the last year. Our average loan today is about $114,000, which is 14% or 15% higher than it was a year ago. So that is telling you that we are booking larger loans.

We have still got 30,000-plus loans on the books today, so it takes a lot of bigger loans to move that number. But David is right; we are seeing a whole lot of loans in $1 million up range that we didn't book as many of a year ago.

But in having said that, though, I don't want to give a misconception that we have a bunch of $100 million relationships. I would say that probably -- I don't know that we have any relationships over $30 million.

Two.

Two over $30 million? And probably -- they are not over $40 million?

That's right.

None over $40 million.

And I would say the amount relationships we have up to $20 million or $30 million, you could still use a couple of hands to count both of them.

Or one.

Or one hand.

Yes. Does that help you, Jon?

That helps. Thanks a lot.

Scott Valentin, FBR Capital Markets.

Good morning, gentlemen. Thanks for taking my question. Just with regard to the MBS book, Washington is trying to fix the economy and there has been talk of maybe doing a refi program. Just wondering if there is any premium or maybe dollar amount of premium associated with the mortgage book.

Dave or I can jump in the [deal]. Right now almost all the loans that you are buying right now -- if you're going into the market most of the loans are being originated at a 3% coupon or more.

So whatever you are buying, it's going to be a premium probably up to -- probably 1.03%. We are not in the market buying the 1.8%s, 1.9%s, 1.10%. And if you look at our previous mortgage-backed securities I think our whole premium is only -- Dave, what is our premium right now?

Total amortization on our books?

Right.

Out of a total of $4-billion-plus portfolio we have got somewhere in the ballpark of $50 million roughly in amortization total.

Do you know what price, the average price, would that be on all (multiple speakers)

Well, obviously, that is $50 million of the $4 billion; it's very small.

Very small, yes.

Okay. That's helpful.

I think your prior point is well taken. That where you are at today and what we are buying, you're at a 1.03% basically.

Yes, but the prior stuff was at par or less. It's just in today's market you can't buy it at par; it is just not there.

I want to re-emphasize that we are [not] -- a lot of banks, are out there. I wouldn't say a lot of banks, but what from what they are telling me a number of people are out there buying 1.08%, 1.10%, thinking that they're buying the higher coupons, thinking that they are not going to speed as fast. And really they are speeding that fast and your yield is maybe negative really.

You know, Dave talked for a minute. He can repeat his number, but our average coupon is --

It's 4.12%.

Yes, so what is in our portfolio today, Scott, is not the high-coupon stuff that is pouring off of everybody else.

Okay, that's very helpful. Thank you. Then just a follow-up question. You guys did a --

I've got that number for you. I just found it. You want to see our book price today; our book price is par 0.44. So we are not even a 1.01%. We are a par 0.44. That is very small.

Okay. Yes, I agree. Thank you. On the M&A front, I know you guys have been active in the past. Just wondering. People talk about the regulatory environment and tough economic environment.

But it seems like with the Fed commentary about leaving rates low until 2013 or wherever they end up being, has that added pressure on small banks to sell? Are you seeing people just throw in the towel now that it seems like the yield curve is going to flatten and just present even more challenges to their business model?

Well, do you trust the government and what they say? I'm sorry; I shouldn't have said that. But having said that, there is absolutely no question.

I mean we are seeing -- the bank we purchased in Austin, for example, a very good bank. Very well managed. Around $100 million in size.

Let's just face it; if you're in a major metropolitan area and you are not a certain size, with the regulatory burden that everybody has and the interest rates that are so low, they can't really -- they are going to have to do something. Most banks will have to do something.

This wasn't making money on an operating day-to-day basis. And this was a good bank. But so if you have a bank maybe more in a rural market or something you might be able to be a lesser -- lower bank in total asset size.

But going forward you are definitely going to see a consolidation. People, they don't want to hear it. They know it. I don't know that they are all admitting to it yet.

Yes, I just think the timing is -- everybody is still in somewhat of a denial. But the zero rate environment is absolutely causing pressure out there.

David said it. I don't know where the size line is, but the smaller you are the less options you have and the less opportunities you have.

One of the things we like for us today, the chair we are sitting in today, we have got lots of opportunities in front of us. Several of the competitors of ours on the acquisition trail have gone away over the last few years. They have taken out themselves or they are in the penalty box. So the number of potential buyers on the acquisition trail is down.

We think that we have got a process in integrating acquisitions that is as good or better than any of our peers. We think we have got a process to buy and integrate banks. So we really feel like we are sitting in a very good position.

And our capital position continues to grow. So from an M&A environment, we think we are sitting in the right chair to be there. The question is just when -- and when do the sellers get there? And we want to continue to be opportunistic.

Okay. Thanks very much.

Andy Stapp, B. Riley & Co.

Good morning. You mentioned your loan production was up significantly in September. Do you know what the production was in that month?

We don't have a monthly number that we put out, Andy. But I can tell you not only was production a change, also just the total growth. When you look at the portfolio as a whole, the outstanding dollars at month end -- we went from the outstanding dollars at the end of June to the outstanding dollars at the end of September, we were up $70-some-odd-million or we had been up $90-some-odd-million or almost $100 million in the prior quarter.

We have grown loans outstanding at month end every month of the year, except August. In August we were basically flat; we went backwards a couple million dollars. So that August month everybody kind of just stopped. As Tim said, a little paralysis in the system.

Do you expect loan growth will continue to be driven primarily by residential mortgages? Or are you seeing any you can uptick in C&I pipeline?

I think we are booking loans in all types. I don't know how to gauge it. David was talking a minute ago, the way we see loans and the way our approval process works, David and Tim and the senior credit guys see the larger credits, which are typically C&I credits and commercial real estate credits.

The one-to-four family credits are smaller, and they are coming through a concurrence process, so they don't see as much of that. I think we are trying to grow on all fronts.

Yes, I would say, Andy -- this is David Zalman. If our growth is any indication of our Loan Committee yesterday, I would say that we are going to have really good strong growth. Again, that Loan Committee because the loan size is $2.5 million before you get there, we really don't see home loans per se. But we had really a strong meeting yesterday with a lot of demand that were in a lot of different areas.

It was heavily weighted to C&I and commercial real estate.

Right. That's right.

If you look at how our loan portfolio breaks down in terms of percentages of categories I don't see anything on the horizon that is going to dramatically change those percentages anytime soon. We are seeing a little bit of everything come in.

Right.

We are seeing opportunities in all categories. Clearly we would like to grow more in C&I and CRE, and our guys are focused on that.

Okay. How much in interest-bearing liabilities do you have maturing over the next few quarters?

Are you talking about CDs?

Yes.

The CD book today is -- we are paying 99 basis points on in the quarter. Is that what you are talking about?

I was wondering how much is maturing.

Yes, I mean on the CD book, the bulk of our CDs are short, and that dynamic hasn't really changed. I would say roughly -- this will be pretty darn close. It was roughly about 50%, 51% rolls over on a six-month period, six months or less.

We have really very few beyond a year. We (multiple speakers) have some, but not a significant number.

I mean when you get over -- if you go out past a year, it is negligible.

Right.

The average for the quarter was $2.1 billion in CDs with a cost of 99 basis points; and we are currently paying a high rate of 60 bps maybe.

On what?

CD -- any CD. What's your highest CD rate?

Well, if you go out for five years, you may get something. But really I think we are paying 25 basis points on a six-month CD and we are paying -- I'm off the top of my head -- maybe 40 basis points on a one-year (multiple speakers).

Bottom line is rates are going to come down.

It's very short (multiple speakers).

That --

And truthfully we are still higher than really some of the big national guys, although we are probably lower than some of the mom-and-pop shops. So we are kind of in between.

We will still get some pickup in deposit cost lowering.

Okay. Can you talk about what you are doing to mitigate the impact of Durbin once you hit $10 billion in assets? And can you refresh my memory what your exposure is there?

Let's talk through that a couple -- remember, that is a December 31 snapshot. So at December 31 if we are over $10 billion -- and where we are today it doesn't look like we will be there -- then we would be subject to the Durbin rules. And those would take effect next July.

So if we are not over $10 billion at year end -- and again, we don't expect to be over $10 billion at year end -- then we would not be subject to those Durbin rules until the following year if we were over $10 billion the next year. And then it would take effect in July of that year.

So if we are not over $10 billion at the end of '11, the earliest the Durbin rules would impact us would be in July of 2013. What is at risk for us, Dave, I think we have said we have got $4 million or $5 million.

$4 million to $5 million (multiple speakers)

-- in pretax revenue on the table when we become impacted by Durbin.

Okay, all right. Thank you.

Michael Rose, Raymond James.

Good morning, guys. Just had a question on market share opportunities. With the big banks maybe getting a little bit more stable here, is it getting harder to move market share or lenders or things like that? Are you guys actually looking to hire lenders? Any commentary there would be helpful. Thanks.

You know, I think really that has been happening over the last couple of years. I think your larger banks have seen a lot more stability and you are not seeing a whole lot run off from there.

I think you are seeing probably more people moving around from acquisitions than probably anything else. You have pretty big acquisitions with Sterling and Comerica --

Or problem banks.

Or problem banks. So I think you are seeing more people. But we are still -- again, we are not the kind of guys that really go out and hire 15 bankers at one time. I know there are some people that do that.

We are really more of a onesies and twosies. We continue every month -- I would say monthly -- picking up one or two people every month that are really quality people. But again we are doing it one person at a time.

I have been intimately involved in that process, Mike, and David is exactly right. We have hired a new senior lender just in the last month that joined us in Dallas. We have got another lender coming on here in Houston. Some of these are coming out of the bigger banks that want to play in a more community bank environment like we provide to them. We have hired some folks in the Central Texas market that are coming out of some more community banks that the banks might be not in as healthy shape as they want to be, and the lenders aren't happy.

But David is exactly right. We are looking for a relationship lender. You heard Tim talk about it on the one-to-four family side. You heard David talk about it when he was talking about rates a little earlier.

We want the lenders that have relationships with their customer, and that lender can do anything and everything that that customer wants. Remember, we are still not siloed up. We don't have a CRE department and a C&I department and a one-to-four family department and a construction department. We have a lender, and that lender can take care of whatever he needs to help you take care of.

He may need to get some assistance from other folks in our Company. But that lender is going to be your primary relationship, and he is going to take care of everything you need.

That appeals to a lot of lenders out there today. That is why I think, David, in this quarter I think we added four or five lenders in the quarter spread out across the state.

We also had a couple retirements. When you look back over the last quarter we had two people this quarter that had both been with our Bank or a predecessor through an acquisition for 30-plus years that just through the natural life occurrences decided it was time to retire. So we have lost a few folks on the retirement side, but we are still hiring good lenders to join our team.

Well, just as a follow-up to that, has there been any change in the complexion of the loan officers that you are hiring? I.e., do they have bigger books of business? Are they doing bigger loans? Or as it similar to what you have done historically?

No, we are not looking to change stripes. I think one of the things we have been very consistent at -- the level of insider ownership that we carry here, we have been very consistent in our model.

We like community bankers. We certainly want to go after the bigger customers, and we like those bigger customers. But we are not actively soliciting somebody that only makes loans of $30 million or more, or somebody that only does a certain type of loan. We are looking for the relationships.

And the size of the book that a lender can bring to the table typically is dependent upon their tenure in the business and their experience level. So if we are hiring somebody that is younger and hasn't been in banking more than 10 years, our expectation is that they are not going to have a $100 million book to move over with them.

If we are hiring somebody that is more experienced and more tenured in the banking industry, then the expectation would be that they would bring a larger book with them. And quite frankly, they demand a larger salary to come with that.

One of the bright spots that I see, Dan, and we don't talk about it a lot. A few years ago we didn't, but we started an analyst program where we are bringing in a number of young people. I see all the young people we are training. I don't know [how many] in the program. There's nine right now.

Again, they are coming out into the field in Dallas and Houston and Austin, all parts of Texas, Corpus, and they are really helping the lenders that are really mature lenders that have been around for a long time, that their books have been built up so much.

So these more mature lenders are really sharing their knowledge with a lot of the younger lenders. And they have a lot of pee and vinegar, and I think they are willing to get out there.

And I look at that as a bright spot. We have a lot of younger people from the colleges that are really trying to get into our program. It's just the number of people we can accept at any one time.

Yes, Chris Bagley runs that for us and is our Chief Credit Officer, and we have had some great successes. We have got three or four or five lenders that have come out of that program that are doing a great job for us across the space.

They are really doing good. I mean they are really coming out like a ball of fire.

Thanks for the color, guys.

Christopher Marinac, FIG Partners.

Thanks, guys. David and Dan, you had addressed M&A a few questions ago. I just want to follow up on -- is the external environment improving at all such that the accounting marks and the credit marks you may have to take, particularly on a medium or larger deal, does that make it any easier for you to consider those today? Or is that still a challenge?

Okay, let me rephrase that question to make sure we are understanding what you are asking, Chris. Thanks for calling.

What you are saying is -- has the economic environment, as we're looking at an acquisition and we're looking at what the potential loan mark would be to mark the loans to market, how much in mark would we have to put on the portfolio? Is that mark going down or getting lower because the economy is improving? Is that what you are asking?

Correct. Or just the passage of time that allows the marks to change.

Yes, a little bit maybe, but I don't know that we are seeing that as a reason to do more or do less, or the reason that there is no activity happening. The marks are going to be what the marks are.

And every acquisition target that we have looked at, talked to, or wanted to talk to -- and we kept a long list of those -- the loan mark is going to be different in each one of them because their asset qualities are all going to be a little different.

Well, and I think that's true. And again the banks that we are talking to, we keep up with even though we don't have a deal. But we keep up and watch them.

And from what I am seeing -- because I am seeing these banks are taking bull by the horns themselves; we are seeing them package loans and selling loans off and doing a number of other things to reduce their nonperforming exposure.

But having said that, most of the banks that are in that condition still have a whole lot. They're still a couple, two, three years away. So I think there is still a need for those people to do something.

But again they are really starting to sell the product, selling the nonperforming themselves, and trying to get out of some of this stuff.

Which may be helping accomplish what you are asking. Are they trying to do the right things to help improve their asset quality, which would ultimately lead to it being an easier acquisition or less loan mark for us? Yes; I think that is probably taking place.

Okay, great. Then I guess just, David, just as a follow-up to that question is -- are there any or even just in general markets you may considering doing an organic entry in? Whether that be nearby Texas or even in a neighboring state in the next year or two.

My first answer is no. The thing that would change that would be that if there was a market that there was really a group of guys -- neuter gender, I mean it can be ladies or guys -- but that had a real strong presence in a market, and they felt there was a need, they could get a bunch of business in that. That the need wasn't being met in that area or community, then we would.

But just to organically go into an area and start off from scratch, not have a general overall feeling for the community or the town that we are in, I would say no.

Yes. You know, we have to look at the state of Texas. Gosh, there is still so much opportunity in front for us here. We have got -- we could double our size in Houston. We could triple our size in the Dallas-Fort Worth market.

What do we have in San Antonio? One office and a few offices kind of outside of San Antonio? San Antonio is the eighth or ninth largest city in the nation.

There is so much opportunity for us here in our existing footprint. For us to be looking outside of that footprint for a de novo opportunity, it would have to be really compelling.

Right, great. That's helpful color, guys. Thank you so much.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. David, as you can see, investors are very focused on margin so I just want to clarify one thing.

The guidance you guys gave is for the 2012 year? And I am wondering what your confidence level is in that guidance and what the risks are.

What our confidence level is and what was the second?

What the risks are, what are the (multiple speakers) that we don't meet your guidance?

Well, let me come at a different way. Obviously there's lots of moving parts to it this. One's crystal ball when you look in the future, it can only be as good as one can be. But let me say it this way.

The variables that we look at, number one, loan growth plays a big part in this. We have got to have the loan growth, number one. And the more loan growth we have the better it will be for us. If the loan growth for some reason becomes anemic, that would be the risk; and we would have to look at it.

And then -- what are the rates that you are booking those loans at? Again, if the economy -- I can't predict what the economy does. But if everything falls off a cliff and the rates that we can get on loans drops off, that would be a risk.

There are some political (multiple speakers) there.

If it improves and we can get better rates, that is better for us. So those are the kind of things we have to think about, those moving parts.

And then as has been brought up earlier in the call, we have to build growth in here. You were talking about the margin itself, but the Bank historically has grown asset-wise or on the deposit side, however you want to look at it, 4% to 6%. So as we have that kind of growth on top of what we are talking about, how does that impact what we are looking at?

I would just use some numbers. In today's low rate environment, if we are bringing on deposits at an average rate of -- again, pick whatever you want -- but let's say it's 20 basis points, 25 basis points; and we can lend the money out at -- let's just pick a number -- 4.5%, that spread on that money is 4.25%.

Well, if that happens, that's good. But that is just one scenario of many. I think that's -- this is the one thing that we just have to clarify. This is our best case guess scenario. Not guess, we are using the model to look at this. But there's a wide ranging of variables that can impact us one way or the other.

I would want to talk about, though, Dave, the modeling that you are doing now is basically the same modeling you have been doing for the last two years. And you have been giving margin guidance now that we would be relatively flat for most of the year. We were at 4.02% in the first quarter and we are at 4.02% today. We bumped up to 4.06% in the second quarter.

I think the guidance from the modeling that we have been using has proven to be spot-on in the past.

It has. But again you can't predict the exact growth if it is 5%, 10%. That is where the --

I think the very biggest variable is, Jennifer, that is -- if we continue to do the loans on the growth rate that we are doing we are going to be fine. If something happens globally, here in the US, where things just -- politically where things just come to a shutdown, well then yes; I think that is going to hurt our net interest margin.

That would be the risk.

That to me, that is the risk. Next quarter if you saw we didn't grow loans, that would be -- your antennas need to go up, I think.

Today our outlook on loans is very bright.

I'm saying -- even if we continue to do what we are doing next year, what we are doing right now, we will be fine. Again, it is just a political -- if something politically happens or you go into some major recession in Texas or something that we are not counting on, then that would change things.

And we are looking over the 12 months. One quarter moving up 3 or down 3, it is just not a good -- too short of a time frame.

Does that help you, Jennifer?

It does. Thank you very much.

Scott Valentin, FBR Capital Markets.

Thanks for taking my follow-up. Just a real quick question on credit. On page 3 of the press release, you break out the categories for non-performing assets. I think three of the four categories showed an increase. Granted, your credit is still excellent, so it is not an issue of the overall level of credit.

Just wondering, is that just normal seasonal noise? Or is there anything actually taking place in the Texas economy that maybe we have seen the bottom in terms of credit and it can only deteriorate from here?

Really, Scott, I mean -- you know, when you look at the size of our portfolio, $3.7 billion, and you've got $12 million or $13 million -- again I don't want to make light of anything, because there is a small increase. But again you are looking at it from one quarter.

I think maybe a better perspective would be to look at it where you were this time last year. Last year you were at $20 million -- I don't have the numbers in front of me -- and today you're at $13 million. So if you want to look at it one way we have had a 35% improvement year-over-year in asset quality.

So I think seeing $1 million -- you'd see a $5 million because of different changes in our numbers. That is something that I don't -- again our asset quality looks good. But again our numbers are so low that $1 million or $5 million one way or another is just part of doing business for us.

I am not trying to be coy about it or something like that. It is just the way it is. Tim?

And I would also point out that any shifts in magnitude within these length categories I think is somewhat meaningless. It is not indicative of anything. It is just normal activity.

Yes, I was going to comment. We've got 103 credits on the page; that means that the average in there is $130,000. The commercial real estate piece dropped almost 50%, and that is where we have been expecting the problems. So I don't think there is any picture here at all that we are going to hold anything to.

Okay, fair enough. Thanks very much.

And it appears that we have no further questions at this time.

All right. Well, thank you very much, ladies and gentlemen. We certainly appreciate you participating in our call. We look forward to talking with you as we are out on the road over the next few months. Thank you again.

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