Prosperity Bancshares Inc (PB) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Prosperity Bank first-quarter earnings call. All participants are in a listen-only mode. Later you will have an opportunity to ask questions during the question-and-answer session.

(Operator Instructions)

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

Thank you. Good morning, ladies and gentlemen, welcome to Prosperity Bancshares first-quarter 2012 earnings conference call. This call is being broadcast live over the Internet at prosperitybanktx.com, and will be available for replay at the same location for the next few weeks. I am Dan Rollins, President and Chief Operating Officer for 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 most 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 I will provide an update on our recently announced and completed acquisitions. Finally, we will open the call for questions.

During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Toya, or 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 Elkowitz 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 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, 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.

Let me turn our call over to David.

Thank you, Dan, and good morning. I would like to welcome and thank everyone for listening to our first-quarter 2012 conference call. Some of our successes this quarter include record quarterly earnings of $36.5 million in the first quarter. And that's compared to $33.9 million for the same period in the prior year, an increase of $2.6 million or 7.7%.

Our diluted earnings per share was $0.77 for the quarter of 2012 compared to $0.72 for the same period in the prior year, a 6.9% increase. Our Tier 1 leverage capital ratio increased to 7.68% from 6.97% compared to the same period last year. Our tangible equity ratio is 6.65%, up from 6.03% one year ago, despite the bank being much bigger in asset size today. Loans increased in the first quarter of 2012 by $109 million, which represents an 11.6% annualized increase when compared to the year-end 2011. Our nonperforming assets stand at 16 basis points of average earning assets, one of the lowest in the industry. We continue to see signs of stable loan quality. And, our deposits increased $484 million, or 24% on an annualized -- 24% annualized on a linked-quarter basis.

Customers continue to bring in deposits despite the low rates we are offering. We continue to believe some of our deposits could evaporate once consumers have some certainty about the future of the economy. While we continue to experience net interest margin compression, our net interest income increased $2.8 million from the fourth quarter to $81.7 million. Although we have a declining net interest margin, we have been able to increase earnings, primarily due to an increase in earning assets along with our continued loan growth. Looking forward, we hope to offset this declining net interest margin by continuing to increase loans, keep our expenses low, and pursue accretive acquisitions.

On January 1, we completed the acquisition of Bank of Texas in Austin. On April 1, we completed the acquisition of the Bank of Arlington in Arlington, Texas. These acquisitions improve our positions in markets we already serve. We are working diligently to complete our acquisition of East Texas Financial Services, hopefully in the near future. We are very excited about our upcoming merger with American State Financial Corporation in Lubbock. We hope to close this transaction early in the third quarter.

Our teams are working together daily on our integration planning, and we are very pleased with the progress we are making. I want to recognize our customers, our associates, our shareholders, and our directors for their support of our Company. Without any of these groups, we would not the enjoying the success we are experiencing today. We appreciate the dedication and loyalty all of these groups continue to give to our Company. I continue to be pleased with the positive recognition we have received this year. After being named by Forbes as the Best Bank in America for 2012, we were pleased to learn last week that we rank third in Texas for customer satisfaction by J.D. Powers and Associates, up from number 13 last year.

We all work very hard to give our customers a positive experience by living up to our service commitment daily, which is -- greet the customer with a smile; address the customer by name; try and say yes instead of no; and thank the customer for banking with us. We are very excited about our upcoming merger with American Financial Corporation. After the merger, we expect to have approximately $15 billion in assets with 215 locations throughout Texas to serve all of our customers.

Our Company is fortunate to be located in one of the fastest growing states in the nation, with one of the best economies. Again, I would like to thank our home 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, 2012, was $81.8 million, compared with $80.4 million for the same period in 2011, an increase of $1.4 million or 1.8%. The increase was primarily due to growth in average earning assets of $930 million, or 11.3%, from $8.21 billion at March 31, 2011, to $9.14 billion at March 31, 2012.

The growth in the earning assets also impacted the net interest margin. While this was accretive to net interest income, it was diluted to the net interest margin. The net interest margin on a tax-equivalent basis was 3.64% for the three months ended March 31, 2012, compared to 4.02% for the same period in 2011, and 3.82% for the three months ended December 31, 2011. Non-interest income increased $78,000 to $13.945 million for the three months ended March 31, 2012, compared to $13.867 million for the same period in 2011.

Non-interest expense for the three months ended March 31, 2012, was $40.5 million compared with $41.7 million for the same period in 2011, a decrease of $1.2 million or 3%. The efficiency ratio was 42.2% for the three months ended March 31, 2012, compared to 44.3% for the same period last year, and up from 40.8% in the fourth quarter of 2011. Our bond portfolio metrics at 331 showed an average life and effective duration of 2.9 years, and projected annual cash flows of approximately $1.6 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you, Mr. Hollaway. The Company's non-performing assets at quarter end March 31, 2012, total $14.873 million, which is 0.38% of loans and other real estate. This is compared to $12.052 million, or 0.32%, at December 31, 2011. This change represents an increase of 23% in non-performing assets from December 31, 2011.

The March 31, 2012, non-performing asset total was made up of $7.142 million in loans, $13,000 in repossessed assets, and $7.718 million in other real estate. As of today, $1.641 million of the March 31, 2012, non-performing assets are under contract for sale. But, there can be no assurance that any of these contracts will actually close. Net charge-offs for the three months ended March 31, 2012, were $102,000, compared to net charge-offs of $2.069 million for the three months ended December 31, 2011. This represents a decrease of 95%. $150,000 was added to the allowance for credit losses during the quarter ended March 31, 2012, as compared to $1.150 million for the fourth quarter of 2011.

The average monthly new loan production for the quarter ended March 31, 2012, was $106 million, compared to $100 million for the fourth quarter ended December 31, 2011. Loans outstanding at March 31, 2012, were $3.875 billion compared to $3.766 billion at December 31, 2011. The March 31, 2012, loan total is made up of 43% fixed-rate loans, 27% floating-rate loans, and 30% variable-rate loans. Dan, I will now turn it over to you.

Thanks, Tim. As you all know, we completed the acquisition of Texas Bankers, Inc. on January 1, and we completed the operational integration during the first quarter. Gordon Muir and his group, have joined our central Texas team and they are actively involved in helping Prosperity Bank grow in the Austin area today. We completed our acquisition of the Bank of Arlington on the first of April, and will be working this weekend to convert their computer systems into ours. Next Monday morning, Bill Allen and his team in Arlington will be working at the newest Prosperity Bank branded location, which further supports our efforts in the Dallas-Fort Worth Metroplex. Finally, we hope to close the acquisition of East Texas Financial Services in Tyler within the next few weeks. Derrell Chapman and the bankers at Firstbank significantly improve our visibility in East Texas.

These three acquisitions together add approximately $300 million in assets, and provide us with additional resources to continue to grow in those markets. As David mentioned, we are also excited to be working towards the previously announced merger with American State Financial Corporation. I have been in West Texas several times over the past several months and have been able to meet many of the American State officers and associates. I am very excited about this merger. The West Texas market is vibrant in a strong economy, and American State Bank is very active in the communities they serve. When the transaction is completed, hopefully early in the third quarter, we will be able to provide our customers -- existing Prosperity Bank customers with some additional fee-based products such as Wealth Management. W.R. Collier, Mike Epps, and Tony Whitehead will continue to manage their locations in West Texas.

Gary Galbraith in Abilene and Mike Marshall in Midland-Odessa will continue to manage the locations in their regions, and they will all become a part of our senior management team upon the completion of this merger. We believe the future is very bright for us in West Texas with these experienced bankers joining our team. 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. The recent recognition by Forbes and by J.D. Powers provide solid evidence that our team is performing very well. At this time, we are prepared to answer your questions.

Toya, can you assist us with questions?

(Operator Instructions)

John Pancari, please go ahead, your line is open.

This is Raul on behalf of John today. I have a question regarding loans. Your loans were up 3% this quarter, even excluding the loans acquired it was up 2%. Where are you seeing the loan demand pick up, and can you give us a sense of the pipeline and the utilization going into Q2?

Are you asking geographically where, or are you asking what type of loans?

What type of loans, yes.

Again, Tim can jump in there, this is David. From what we can tell, I think that we are having -- it's broad, it's all over, I don't think that it's any one particular -- it's not just CRE, it's not just loans for, I think it's in proportion to what we have. Tim, do you have a feeling on it?

I agree with that. Our percentage, in terms of categories of loans, is not really changing. So the loan pipeline is falling into those historical percentages. For example, our commercial real estate lending typically runs 35% to 40% of our portfolio, and that's probably the percentages deals that we are seeing. Residential typically runs 25% to 30%, and that is probably typical of what we're seeing. So, the loans are coming in to the historical buckets in the normal fashions. I don't think there is anything.

The largest growth we reported in the first quarter was in the C&I category. But I think all of us are seeing good growth, both across the state in all of the markets we serve, and in all of the loan categories.

Okay. Then, in terms of, I know last quarter you mentioned that the paydown activity had -- was at an elevated level. Do you see any moderation in the paydowns? Would you still require a moderation in paydowns to get to your $1 billion loan growth target by year-end 2013?

We are seeing some decrease in the paydowns on the loans. For example, all of 2011, the monthly average was $81 million. It is now at about $78 million. And as we said earlier, the loans booked are about at $106 million. So, that difference is expanding a bit, so if that holds true, that should be good news for loans staying on the books through the end of the year.

I would come at it from another side. When you look at our loan growth goal, we are doing everything we can do to get there. We are producing more loans today in dollars of loans, more loans in number of loans than we have ever produced in the history of our Company. We continue to add to lenders to our team, we continue to add support on the backside to support those lenders to reach that goal.

We said at the very beginning we needed a couple of things to happen. Loan paydowns would be a good one to slow down some, but we also need some economic tail winds, and while the economy in Texas is doing very well and there is job growth, and there is earnings growth, and there's employment, income growth. There is still a lot of people that are sitting on the sidelines economic-wise, and waiting to see what happens from the big picture with taxes in Washington. So, I think we need some more economic tail winds to get there to our goal.

Thank you.

Ken Zerbe, please go ahead your line is open.

Obviously you have been on a tear with acquisitions. When you think about what you have coming down the pipe and what you are trying to integrate, can you address your appetite for additional acquisitions from here? At what point does it just get -- your hands get too full to think about new deals in the near-term?

Ken, this is David. I will start off. We have announced a number of acquisitions that truly -- Bank of Texas, what with $60 million or $70 million in size, and Bank of Arlington is really small, $30 million or $40 million. We haven't completed the East Texas deal, Ken. All of these banks are very small in size, if you add them all together it's $300 million. Those kinds of deals are not hard for us at all.

I always kid, I said we have a staff of people that we went a long time, and they are like piranhas, if we don't start eating somebody they will eat themselves. We were in need of some of those deals. Having said that, the American Bank in Lubbock, it's a very clean bank. They are so much like us, that it is a bigger deal, it's $3 billion in size, and there's definitely an operational integration, and we don't want to make light of that. But the people that we have on the other side that we are merging with are very competent and very good. Maybe almost as good as anybody that we have ever been with before. So they are very helpful. Having said that, because of the way they are, and there is not a big cleanup, we think that if there is more opportunities where we can do them.

I think the timing is the issue there, Ken. All of these things take time to cook. You put things in the oven and let them cook, and there's work involved. Their is multiple hurdles along the way that take a lot of time and effort. We just filed the S-4, was effective for us yesterday. That is a huge project that took a lot of time off of our team and the American State team. That project is behind us, that's the shareholder meeting date for early in June for their side. We are well past the regulatory conversations.

In fact, we expect that we will have regulatory approval here hopefully within the next couple of weeks. Much of that now is out of out of the way, and we are really left with what David just said, which is the operational integration piece. Our teams have been actively working with each other. We have had people in West Texas, as I said, I have been there I can't remember how many times now, three, four, five, six times in the last couple of months. We have had lots of our folks up there also. We have had some of their folks down here. That process is well underway. If there was some huge transaction, well clearly it would need to wait until this one was finished to get integrated. But I think David is right, I think when you look at the way we line these things up, we've got the capacity to continue to talk to people.

Okay, all right, that helps. A small question on premium amortization, how much did that impact numbers this quarter?

Bond portfolio premium amortization?

Yes. We had talked about that last quarter. It came up a little bit because of a larger bond portfolio. So, it went up, but that speed, if you come out from a speed perspective, it was pretty much the same as it was less quarter.

If I remember right, last quarter reduced the premium amortization, reduced NIM by about 10 basis points. You are saying that actually reduced NIM by more than 10 basis points this quarter?

You've got to get it to apples to apples. I haven't put it on paper. But, what I would tell you is that dollar amount that you have converted back into dollars and then put back on our first quarter, I don't know if it's quite 10 basis points. I don't want to commit to that, but you are on the right line of thinking.

We do think it's similar to last quarter. Even though the numbers were higher, the bottom portfolio was bigger, so the impact is similar to last quarter.

Similar, but I can't give you an exact number. It wouldn't --

That helps. Thank you very much.

Dave Rochester, please go ahead, your line is open.

Nice growth this quarter. Back on the loan discussion, can you comment on how the pipeline looks this quarter versus last quarter? Are you looking at a stronger pipe going into 2Q?

Dave, this is David Zalman again, and I will let Tim jump in. I think we are pretty excited from what we see. We see a pretty good pipeline. I don't have the exact numbers for you. But we -- things look good. We sit at loan committee, I sit at loan committee every Thursday, and it's really picking back up. So, we are excited. We're excited from what we see.

I think that is right. We are obviously just short of one month into this new quarter. So it's too early to say for sure, but based on what we've seen to date in April, the pipeline is good. And if yesterday's loan committee meeting is any evidence, it's good. We had an all day meeting, basically, and looked at many loans. I don't see any deterioration right now, in the pipeline, at all.

If you look backwards, Dave, January is always a slow month. You come through December, and believe it or not a lot of people don't seem to work a whole lot during December and in the loan business, it's a 30 to 45 day lead time to get things done. So, January was relatively slow, February picked up, and March was fantastic. If we can hold the performance that we were running in March into the second quarter, then we feel pretty good about what's in the pipeline.

Sounds good. On the deposits side it looked like growth was very good there. I saw the cost is up a little bit for the interest-bearing demand, and I was wondering if that were related to new product or promotions? And then what's your outlook for growth going into --?

I think it's more dollars moving within existing products. And it's a seasonal number, and there are some dollars that come in and out. I think it's important when you talk about the deposits side though, Dave, let's remind everybody some of the deposit growth we experienced in the first quarter may have really been accredited to the fourth quarter.

Remember, we were working very hard last quarter, or at the end of the fourth quarter, and we talked about it on our first-quarter call. It was very important for us to stay under $10 billion in assets at the end of the year, to stay out of the Durbin Trap. And, we did. So, we experienced some deposit growth in the first quarter that we probably had tried to mute in the fourth quarter.

Overall, Dan, you'd have to say that our first quarter deposits generally increase because people are putting money away for their federal income taxes and their property taxes that they have to pay. We generally see a big increase, historically, in the first quarter, and in the second-quarter you may even see a decrease.

April is the worst month of the year for deposits. I don't know where that money goes in April, maybe somewhere in Washington?

We don't have the exact number, but we think maybe a $160 million to $200 million may have went to -- from our customers paying taxes in April.

Got you, okay. One last one, can you talk about the securities growth this quarter, which is pretty strong? What you were buying and yields on that, and then what we should expect for balances going forward?

If you look at our balance sheet, you can see that our securities increased about $1 billion, and that came from two places. The first place, you saw a huge increased or inflow of deposits that we took in, around $400 million and something. So a portion of that did not go into loans actually went into securities.

Also then we also, because of the Fed and the way their outlook is, they are pretty much committing, who knows, right or wrong, but they're pretty much committing that we won't see a whole lot of change in the next couple of years in interest rates. What we have been doing is when we have such a big roll off of deposits every year -- how much, Dave, a billion what?

Do you mean cash flows?

$1.6 billion.

$1.6 billion, so what we've started doing is if you saw -- when you see the 10 year get really weird on a day, we saw the 10 year get up to around two last month or so, and a couple of months ago. We are starting to buy when the market is there, and even though we might have --

Right up to 220.

Whatever it was, we started buying and taking advantage of the situation because we have so much of our portfolio that cash flows every year, we're buying -- we're being more opportunistic, and that is what increases the bonds also. (multiple speakers)

We were in that same position, Dave, last year in the 2nd and 3rd quarter, basically you are pre-funding your cash flow off the bond portfolio two or three months out. Yet, at the end of the year, again, to stay under the $1 billion -- $10 billion in assets, we eliminated all of that, what I would call pre-purchases of future cash flow. And so we were in a very tight, or reduced, balance sheet size at the end of the year.

And then in the first quarter, we basically put all that back on. So we're now, basically three months out on the cash flow coming in off the bond portfolio.

It's not something you want to do in a rising rate environment. But when rates are pretty stable, we think, and they're pretty stable, it's a real advantage to us to be opportunistic and buy when the rates -- there's flips and flops in the market sometimes.

You specifically asked, David, what you purchased. And I think almost everything we purchased was purchased when the 10 year was like 220 in the quarter.

That's right.

And what was it that you were buying?

Primarily the same -- we don't change. We are plain vanilla, we are buying probably 10 and 15 year mortgage backed securities, basically. Fannie May and Freddie Mac. The average lives on the 10 years that we buy usually run around 4 years, and the 15 year usually has about a 5.6 year average life. Our duration, our portfolio has increased from last time, as Dave mentioned, we are up to about -- we are getting more normalized. It got so low, today, we are probably around 2.9%. Historically, we've run 3% or better in our duration. We are kind of -- the model hasn't changed, really.

Thanks, guys. Looking forward, as the balance of these charities buckle will vary a little bit, just depending on the opportunities out there for you, but you are not looking to grow that materially, and sustain that growth going forward?

No, our focus, we're not trying to put a carry trade or something, like a lot of banks are doing, that's not her intention at all. Our intention is to really build the loan portfolio and to be opportunistic in this type of rate environment, and buying ahead three -- two, three or four months, sometimes.

If your question is are we trying to lever up the balance sheet, the answer is no. I think we are in the same position today we were in the second quarter and third quarters last year, which is basically having a little bit of purchase in front of the cash flow coming off the bond portfolio. For looking forward, the size of the securities portfolio is going to be dependent upon the deposit inflows into the bank, and whether or not we can deploy that money into the loan portfolio or not. Whatever the difference in those numbers are is going to end up with the securities portfolio. We don't target or manage to a balance or a level of securities.

Perfect. Thanks guys. I appreciate it.

Jennifer Demba, please go ahead.

Good morning everyone, this is David Grayson in for Jennifer. Thanks for taking my questions. First, I wanted to start on the competitive environment. I know earlier this week, Frost showed some loan growth for the first time in a while. I wanted to see if you could provide some commentary on the competitive environment for loans in Texas at this point.

I will start off, David, this is David Zalman. We are seeing our competition being more competitive. The banks, for a while there, you could almost dictate what you wanted the terms and conditions that you wanted. Again, when we are in loan committee things are becoming very competitive. I wouldn't say we are at an irrational stage, where things are out of control, but we are -- but it is becoming more competitive. Tim, do you want to say something?

I think that is 100% correct. I think the competitive environment is heating up. But, it's not extreme by any means. I think the banks that we see out there, in terms of competition are, quite often, offering some rates that we feel are certainly on the low side. Overall interest rates, obviously, are a factor there, and most banks want loans just like we do. But a lot of these banks have had credit problems, more so than we have. So, they seem to be focused on the better credits, not the middle level type credits. It is more competitive, but it is certainly not frenzied, and it's something that we focus on weekly, if not daily.

It's also most competitive the larger the loan size.

That is correct.

So, remember, Dave, when you look at our balance sheet, while we are doing larger loans than we've ever done in the history of our bank, we are still playing in a smaller size, or smaller bite-size, for many of our regional peers. And if they are looking at $20 million and $30 million and $40 million credits on a regular basis, the competition there is a lot higher than it is in our average ticket size.

Okay, great. One follow-up if I might. I know that this is a topic that has been discussed in past calls, but I thought I'd touch on it here today. With the leverage ratio at about 7.7%, if earning asset growth keeps moving at the pace, or somewhat similar pace, to where it is now, what are your thoughts on addressing that leverage ratio? Are you comfortable where it's at, or do you see a need to supplement, maybe, Tier 2 capital to boost up -- I'm sorry, Tier 2 capital -- Tier 1 capital to boost that a little bit?

This is David Zalman. The answer to that is no. Our earnings are -- I don't want to say great or phenomenal, but we have very strong earnings. If you compare our capital ratios, the leverage and the annual capital ratio from this year where we're at today, comparing it to last year at the same time, we grew the bank almost $1 billion in size, and still increased capital ratios very strongly. Again, I think the growth that we had -- I don't know that we will see the kind of growth, I don't thinks we'll see with see the kind of growth we have in this first quarter all year long. That would be --

It would be nice, but --

It'd be pretty unusual. (Multiple Speakers) -- I think balance sheet -- I don't see that. But just having that, our earnings forecast this year is $3 and something a share, so it's $140 million something. Even if you take out our dividends, you can see that we retained a whole lot of capital. So we don't see that as being an issue.

We also have to look, David, at the quality of the balance sheet. So when you look at our balance sheet, give or take 50/50 government securities and loans and our asset quality at 16 bits of non performers on average assets, I don't think were feeling any capital constraints of any kind.

Dave, have you run any numbers to see at year end where we would be based on our growth on our leverage ratios? We are well and above 7%.

Right, only that's gone.

We don't see that being an issue.

Their is no capital constraints here.

Great thanks for taking my questions, good quarter, guys.

Scott Valentin, please go ahead, your line is open.

Thank you and good morning, everyone. Just a follow-up on the earning asset growths. For the quarter, earning assets averaged about $9.1 billion, and my rough math says the end of the quarter about $9.5 billion. You are off to -- Q2 should benefit from stronger earning asset growth, again. But the margin, there will be some spillover, March compression, from securities growth in the first-quarter into the second-quarter?

That is a fair statement. When you look at where that's coming in, Scott, remember, we started the year depressed and then we grew deposits pretty quickly in January. When David was actually buying some of those bonds, was actually late January and into February when the rates spiked up to the 220 range there on the 10 year for a while. So I think you are right, I think you're saying that the average for the quarter was lower in the first quarter than it will be in the second quarter, which has the potential to be depressing on them. it's accretive to NII.

Your observation is good, the earning assets are, at period end, a little higher than what our average is. It's not as dramatic as with year over year, so, yes, it should -- if all things being equal, again, we don't have a pristine crystal ball here. But all things being equal, the same dynamics that play, we will see some positive to net interest income, and the margin itself, it will contract a little bit more. Again, based on -- if you are looking at a 30 day deal, I don't know that -- are we going to have tractions with 20 basis points a quarter? We can't make that prediction. But it will affect it somewhat.

The bottom line is there's definitely a net interest margin contraction. That's how earning assets rise.

Fair enough. Just looking forward, as you guys end the year with the American State deal pushing over $10 billion in assets -- when does Durbin kick in? I appreciate the disclosure of the ATM and debit card fees.

That's a 12/31 look, so we pass the 12/31 look, 12/31/11. We will not pass the 12/31/12 look. So we would then be required to comply with all of the Durbin rules on 07/01/13.

07/01/13. And you are expecting about a 40% or 50% haircut to this debit card and ATM fees? Is that fair under Durbin?

Yes, we've been looking at it on a dollar basis, again, we are starting to see really good growth in this area. When we look at this over the past few months, as we've said on previous conference calls, in dollars it's at about $5 million annualized pretax impact to us.

Okay. Thanks for the clarification.

Having said that, though -- we still have options on our end to raise fees in certain areas, too, that may --

We can mitigate that in other areas.

It can mitigate that to some degree, too.

Not with Durbin fees, but with other fees.

Right. That's Right.

Okay. Big picture questions come up on other conference calls, but obviously, Houston market very heavily energy dependant, natural gas prices are pretty low. Are you seeing any impact either in the portfolio or a macro perspective in the Houston market from low natural gas prices?

It's a good question, because I talk to a lot of people, all the time, I talk to the subcontractors in the oil business, and from what they're telling me is that there doesn't seem to be that big of a slowdown. We've had more growth in Texas, probably, than all the other states combined in employment. And basically what we are seeing is people are just switching to -- from drilling from --there are two things happening. People are switching from drilling for natural gas and going back into oil. But, they are even telling me too, they're not going to quit drilling for natural gas because their leases would expire, so you are seeing a combination of things. We are still seeing a very vibrant economy. Not only in Houston, you are looking at the Eagle Ford shelf in South Texas, and the Midland-Odessa area is just really booming too.

Houston is where a lot of the international oil companies are, so what they are doing is, they are on an international scale, and they're more in the marketing. But overall in the state, we are really seeing a lot of activity, and a lot of production's still very active. I would say the people in the service industry make more money in the oil business last year than they have long time, or ever, yes.

You are right, Scott. The gas prices are low, but most of those folks are shifting that effort from the gas to the liquids. When you look at job growth, the latest job growth numbers out for Texas August 2010 to August 2011, which is pretty stale at this point. But natural resources extraction is the fastest-growing sector out there for job growth across the state of Texas.

Professional and business services is number two, and healthcare services is number three. And remember, Texas showed pretty healthy job growth where many other states were not showing job growth last year. While the economy, we think, is humming along here pretty good, we continue to believe there's investors and business people out there that are still sitting on their hands, waiting to see some evidence of stability in the economy.

I think it's a good economy. We are increasing employment. At the same time, we are not seeing the bubble bust at the same time. Sometimes when things get going very strong, you see commercial real estate, everyone's building buildings and strip malls, and housing going crazy. I think what we are seeing today is really a good growth. We are seeing an economic growth in a lot of different fields; oil and gas, the medical industry. You've got Caterpillar that built a plant in Victoria, you've got Apple that's bringing in 3000 jobs in Austin. We have a well-rounded, I could keep going on and on, but we have a real well-rounded economy and it's not only in one industry, and it's not running hot. It's running a good growth.

The oil industry is running hot. I was in it Midland a couple weeks ago where West Texas crude is, let me tell you, Midland is hot. There is a lot of activity in Midland.

It's hot. I think it's hot everywhere, but again I grew up in the 80s and I remember what hot really was. Everyone was wearing Ostrich boots and wearing gold chains and Rolexes.

They're not throwing their money --

We're not, we're not -- (multiple speakers).

They're putting their money in the bank.

I think most of the time -- I think the people -- the customers out there -- the contractors and subcontracts, they realize that they can't go out and make long-term decisions 5 and 10 years from now, that when they are borrowing, and most all of them realize that you don't want more than 2 or 3 years at a time.

I appreciate the color, thanks very much.

(Operator Instructions)

Bryce Rowe, please go ahead.

Good morning. Thanks. David, I wanted to get a better feel for how you are reinvesting cash flows from the securities portfolio today. Obviously, the 10 year has spiked back down. I'm wondering if you will continue to reinvest here, or allow those cash flows to pay down the wholesale borrowings you have taken down.

No. You are right. Right now we won't -- we won't be buying in this position right here. What we are buying right now, what we are looking at, is, they're smaller deals. Maybe sometimes $10 million, $20 million, or $30 million. We see a lot of municipals wanting to finance, and we're in locking a number of pre- negotiated deals with municipals. Those under $20 million or $30 million, and we can sometimes get a better rate, so we will work on that.

But as far as buying the 10 year, right now, or the 15 year right here, we have plenty of -- we are purchasing right now. We can run -- the portfolio can run down for two months, and we're still not going to be affected. We really like the position we are in, being opportunistic, and that's just the position that we're going to continue to do. We see -- we see today, everybody in the world is down, and I think the 10 year this morning was at 1.95%. A week from now, that bank could at 2.00%, or 2.10%, 2.20%. That is why we're buying in advance and just be opportunistic.

That's exactly right. The position we're in and what David described earlier, Bryce, by pre-buying for future cash flow coming off, David, specifically, has been very opportunistic in where he is buying. When the market has spiked, we have taken advantage of that, and you bought a lot within a pretty short period of time. Then, we won't buy again until either we have to, or the market moves in the right direction.

Okay. That's good detail. Can you guys talk about the nature of the wholesale borrowings you are putting on? Are those fairly short-term?

It's all overnight. It's all federal home loan bank overnight borrow, 100%.

What's the rate on that, Dave?

It's 15 bits.

Or something like that.

15 bits, alright, thanks guys, appreciate it.

Jon Arfstrom, please go ahead.

Good morning. I like the gold chains and --

Ostrich boots? We knew you would.

I like to get some color, Jon.

Zalman, did you ever have any of those?

He pleads the fifth.

Everybody's young at a point and time in their lives.

He pleads the fifth.

The answer is yes.

Question for you on West Texas and the loan-to-deposit ratio of American State. I'm just curious, do you feel like that geography can generate enough loan growth to keep pace with the rest of the franchise, or is -- you built a different approach?

If you look at it, John, basically, Lubbock and Abilene, you're not going to see a ton of loan growth in those two communities. Where you are seeing the loan growth will be the Midland-Odessa area, and we realize that's an area -- and they realize, too, I've talked with WR, their Chairman. They realize we do have to be careful in lending in that area. You will see growth, but there won't be growth like in other parts of the state, in two of those. Your main growth will come in the Midland-Odessa area.

The big economic drivers in Texas are Houston and Dallas, and, to some extent, Austin and San Antonio. But Houston and Dallas has got to be where you're going to get the majority of loan growth over the long-term. But, just -- lay all the cards on the table, they had better organic loan growth in the first quarter, they being American State, than we did. They grew loans organically in the first quarter a little over 10%.

I would say, Jon, too, they're in Lubbock, but because of their size, they had customers in the metropolitan areas at the same time, so I think that helped them.

Well, they come over and touch Dallas.

That's right.

That's helpful. The other thing, just in terms of -- I know you are spending more time in loan committee then you probably have in years, but what changes in terms of credit authorization and how you authorize loans, in terms of that West Texas market? Is it the same?

We will pull that into our current program, what we've got today we pyramid up. The area managers have their authority levels, and they will fall into that. And above that we run through a concurrence group that runs up to $2.5 million. They are operating in a similar format today, and above $2.5 million in our world comes into the credit committee. We see that they'll just fold into the existing program we've got, and we'll continue to expand. That's a fully expandable, or accordion, we can grow that process fairly easily.

Dan, I think it's important to emphasize that our perception is that these are confident, qualified decision makers.

Oh yes, the people are very good.

Right. And what we anticipate is that they will be teamed up with our people. For example, I will be teamed with one of them, Randy Hester will be teamed with one of them, and we'll go down the road with essentially the same structure we have right now.

Tim -- I don't know if you're really catching, Jon, what Tim is saying, what Tim is really saying that they'll be on our concurrence committee too. (Multiple Speakers). They will be seeing, maybe, loans in the Houston-Dallas metro area, as compared to maybe where they're at in Lubbock, and our guys may look at the Lubbock. So everybody gets a taste and a feel for the Company, and everybody understands where we are headed.

Remember we rotate our conference offices was around the state so we have some fresh eyes on a regular basis in other parts of the state. And we'll do the same thing with these guys. But they will certainly be bringing talent to the table to help us.

Thanks.

(Operator Instructions)

Matt Olney, please go ahead, your line is open.

I just want to circle back on some of those purchases of securities during the quarter. I think you gave some details as far as the size and duration. But can you give us any more details as far as the average yields and the timing during the quarter that you purchase those?

I can't give you the exacts, they're not in front of me, but again we bought when the yield were probably getting around 2.00% to 2.20% basically --

The 10 year was basically 2.20% when you bought on. When you bought it early February, late January.

It was all north of 2.00% a little bit.

Yes, it was all north of 2.00%, almost everything we bought, we probably bought $400 million or $500 million, and it was north of 2.00%.

Okay, your timing was as good as ever, David, thanks.

Showing no further questions in queue at this time.

Alright, well, everyone, we really appreciate you participating with our call this morning. We appreciate the interest in our company, we look forward to visiting with you as we are on the road over the next few months. Thank you very much.

This concludes today's call. You may disconnect at this time.