Prosperity Bancshares Inc (PB) 2012 Q2 法說會逐字稿

Good morning, ladies & gentlemen, and welcome to today's Prosperity Bank second-quarter earnings call. 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).

Is now my pleasure to the conference over to Mr. Dan Rollins. Please go ahead sir.

Thank you, good morning, ladies and gentlemen. Welcome to Prosperity Bankshares' second-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'm Dan Rollins, President & Chief Operating Officer of Prosperity Bankshares, and here with me today is David Zalman, Chairman and Chief Executive Officer, Tim Timanus, Vice Chairman, and David Hollaway our Chief Financial Officer.

David Zalman will lead off with a review of the highlights of our recent quarter. He we 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 mergers and 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, Zack, or you may e-mail questions to investor.relations@prosperitybanktx.com. I assume you've 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 would be happy to fax a copy to you now.

Before we begin let me make usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities Laws and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Prosperity Bankshares 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 Bankshares' filings with the Securities and Exchange Commission, including forms 10-Q and 10-K, and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now, let me turn our call over to David.

Thank you, Dan. Good morning. I would like to welcome and thank everyone for listening to our second-quarter 2012 conference call. I'm very pleased to be able to announce our strong performance for the second quarter of 2012, particularly during the current economic environment when our industry is so challenged.

We posted net earnings of $37 million for the three months ended June 30, 2012, compared to $35.1 million for the same period in 2011, a 5.4% increase. Our fully diluted earnings per share for the second quarter came in at $0.78, compared to $0.75 for the same period last year, a 4% increase. Our asset quality continues to be one of the best in the industry, with our nonperforming assets to earning asset ratio of only 12 basis points, compared with 15 basis points for the same period last year. Tim will provide additional detail on asset quality later in this call.

Our allowance for loan losses is $50.4 million as of June 30, 2012, with nonperforming assets at only $11.9 million for the same period, representing a healthy coverage ratio. For the first six months of 2012, our loans grew 4.9%, or 9.8% on the annualized basis. Our linked quarter organic loan growth increased 1.4%, or 5.6% annualized. While our total net loan growth was not as robust as we had hoped, we remain optimistic for the full year. Our loan officers actually produced more loans during the second quarter than any other quarter in our history. However, we also experienced elevated loan prepayments. We believe our team is well-positioned to grow our loans significantly when loan payoffs have stabilized. Additionally, we believe the overall business sentiment deteriorated during the quarter.

Our deposits increased $726.9 million from June 30, 2011, an increase of 9.5%. If you exclude approximately $103 million of the acquired deposits over the past year, our organic deposit growth is 8.1%. As expected, our linked quarter deposits decreased $149 million, or 1.8% when compared to March 31, 2012. Our tangible common equity ratio increased to 7.08% from 6.46% a year ago. Our Tier 1 risk-based capital ratio at quarter end was 16.42%.

From the information available today pertaining to the new -- excuse me -- pertaining to the new proposed rules in Basel III, we believe the impact to our Company will be minimal and not material. Like many of our peers, due to the low or zero rate environment, along with a flat yield curve, our net interest margin decreased to 3.55% as of June 30, 2012, compared to 3.64% last quarter. We continue to remain focused on growing shareholder value and have been able to report increased earnings per share by growing our balance sheet.

I would like to welcome Billy and Cathy Allen and the Bank Arlington team. They should help us continue to increase our market share in the Dallas-Fort Worth market. We are also very excited about our future in West Texas and welcome our newest partners, W. R. Collier and his team at American State Bank. That will add 37 banking offices in 18 counties across West Texas to our footprint. We will now have a significant presence in Lubbock, Midland-Odessa and Abilene. And last but not least, we are pleased with our recently announced planned merger with Community National Bank in Bellaire, Texas. We are excited to have Randy Dobbs and John James leading our team in Bellaire. I know you've all heard this before, and you will hear it again, we all of our success to our team of dedicated associates and board members, who work daily to grow our Bank. I want to again say thank you of our hard work, insight and dedication.

We would also like to thank all of our customers for that business and loyalty to the Bank. Thanks again for your support of our Company. Let me turn over our discussion to David Hollaway, our Chief Financial Officer.

Thank you, David. Just a few more details on the financials. Net interest income for the three months ended June 30, 2012 was $83.7 million, compared with $83.6 million for the same period in 2011, and $81.8 million for the first quarter of 2012. Non interest income increased $126,000 to $13.656 million for the three months ended January 3 -- June 30, 2012, compared to $13.53 million for the same period in 2011.

Non interest expense for the three months ended June 30, 2012 was $40.8 million, compared with $42.5 million for the same period in 2011, a decrease of $1.7 million or 4.1%. The efficiency ratio was 41.9% for the three months ended June 30, 2012, compared to 43.6% for the same period last year, and 42.2% in the first quarter of 2012.

The bond portfolio metrics at 6/30 showed an average life and effective duration of 2.7 years, and projected annual cash flows of approximately $1.65 billion. Now with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

Thank you Mr. Holloway. Our nonperforming assets at the end of the second quarter of this year totaled $11.873 million, which is 30 basis points of loans and other real estate. This is compared to $14.873 million, or 38 basis points at the end of the first quarter of this year. This represents a decrease of 20% from March 31, 2012.

The June 30, 2012 nonperforming assets total was made up of $1.624 million in loans, $13,000 in repossessed assets, and $10.236 million in other real estate. As of today, $6.051 million, or 51% of the June 30, 2012 nonperforming asset total, are under contract for sale. But as we always say, there can be no assurance that any of these contracts will close.

Net charge-offs for the three months ended June 30, 2012, were $1.860 million, compared to net charge-offs during the first quarter of the year of $102,000. $600,000 was added to the allowance for credit losses during the second quarter of this year, as compared to $150,000 during the first quarter of this year.

The average monthly new loan production for the second quarter was $125 million, compared to $106 million for the first quarter this year. This represents an 18% increase. Loans outstanding at June 30, 2012, were $3.950 billion, compared to $3.875 billion at March 31, 2012. The June 30, 2012 loan total is made up of 45% fixed-rate loans, 26% floating rate loans, and 29% variable rate loans. I will now turn it over to Dan Rollins.

Thank you, Tim. As you all know, and David did mention, we closed our acquisition of the Bank Arlington on April 1, and we also completed operational integration during the second quarter. Billy and Cathy Allen, as David said, and their group are on our Dallas-Fort Worth team, and they are actively involved in helping us grow in the Metroplex, and doing a good job there.

We completed our third merger of the year on July 1, with the completion of our deal with American State Bank. We're actively working towards our operational integration, which should take place later this quarter. Our newest partners in West Texas are focused on taking care of customers and are very actively engaged in the merger process that we are right in the middle of today. We believe the future is very bright for us in West Texas with these experienced bankers joining our team. We hope to close our merger with Community National Bank in Bellaire early next quarter, and are excited about our future in the Houston market. And finally, our pending merger with these Texas financial services in Tyler may be able to close before the end of the year.

These five acquisitions, all expected to close during 2012, add approximately $3.7 billion in assets and provide us with additional resources to continue to grow across the state of Texas. As you heard, we are very proud of our team and efforts they exhibit each day. Our loan and deposit growth plans are working, and we believe we can continue to build shareholder value going forward.

At this time we are prepared to answer questions. And Zack, can you assist us with that?

Absolutely.

(Operator Instructions)

Ken Zerbe, Morgan Stanley.

Great, thanks. I think you guys mentioned, at least in passing, that sentiment had deteriorated in the market, but at the same time you experienced some of the best gross loan growth that you've really ever seen. Can you reconcile that, and what does that imply for growth in the second half of the year? Is the sentiment shift that meaningful? Thanks.

Ken, David Zalman. It is almost contradictory when you say that, because if you say that you've had some of the best production, but you also had -- you've got such a large pay down. And I think we've seen this happen now over the last year, quarter-to-quarter. Last year we were doing great with loan production until the last quarter of last year, and consumer sentiment and business sentiment deteriorated. And our year-to-date loan growth for last year [was] something double-digit, stayed around 8% or 9%, I can't remember just what.

The same thing happened this year. So far, the first quarter, we saw very good loan growth and less pay downs, and we had real good growth. The second quarter we had good growth, but yet consumers, rightly or wrongly, and business people, not feeling as comfortable maybe when they're seeing stuff about Europe, and the elections every day on the television. They are taking their money, and it also may have to do with the low rates, paying their loans down. So, you have two components going on here, and it is hard to explain, but it is what it is, and having said that, again, we can see consumer sentiment change from quarter-to-quarter, so -- .

I think I would add in, on the production side, Ken, we've got more producing lenders on the street today than we've ever had. So, we should be producing more loans than we've ever had. Our guys are out there actively calling, they are making inroads, we are bringing new customers on the books. So, I think all of those things are good, but you are talking about economic growth, and there's not been a whole lot of that, outside of a couple different industries. So, we continue to believe that the majority of the business that we are getting is coming from somewhere else.

Well, Texas -- again, and we'll get off of this, but Texas is still a very good economy, and we have a lot of population growth. These numbers may not be exact, but we were in a management meeting the other day and they were showing me where over 300 people a day are moving into Houston, over 300 people a day are moving into the Dallas-Fort Worth area. 40,000 people a year are moving into the Austin area. You can go on and on. We have a lot of people going in, we're growing and we're doing new business, but again, your existing business and customers are going to have to feel confident about what they are doing instead of just taking their money and paying off debt.

We identified, during the quarter, I don't remember what the exact number was, well over $10 million in loans that were paid off -- that were paid off out of cash where the borrower said -- I used to have cash in the bank and I liked having my cash in the bank so I could use it and expand, and I had debt, and I've decided I really don't need to carry that cash. I've paid the debt off because I really don't see a whole lot of expansion opportunities in front of me. I'm just going to pay the debt off, and if I need it I'll get it back.

Got it, okay. The other question I had was on the premium amortization. Can you quantify how much that impacted results this quarter, and just remind us what it was last quarter?

This is Dave Hollaway. I don't have the exact number, but it didn't change from quarter-to-quarter, whatever the number was that we quoted a couple quarters ago. We are still seeing accelerated amortization. Of course, the number is going to be a little higher, because our bond portfolio is greater in terms of dollars.

It did not accelerate further from the first quarter.

Right, we are still seeing that accelerated rate that we've -- .

It is a high rate, but the same rate, basically, as the first quarter.

Consistent with the first quarter.

Okay, and then, looking forward, I would imagine that, unless something changes, you may see a similar amount again next quarter?

Yes, we don't see anything that's telling us that the pay downs or the cash flow is going to decelerate, so yes, I think we will continue to see that.

I would think, though, that's hard to make a call on that. I think that's just so dependent on what the 10-year Treasury does. Today, the 10-year Treasury, as we are talking right now, is up about 5.32%. If it continues to go up, you'll see less pay downs. If it goes down, you'll see more pay downs. I think that's really tied more to the dynamics of what the Fed does, and what your Treasury does to see what future rates are, basically.

All right, I appreciate it, thank you.

David Rochester, Deutsche Bank.

Hello, guys, how are you doing? I saw that the loan yield was up this quarter. I was just wondering if you could talk about that, and if that were a function of the pay down activity you were talking about in terms of prepayment penalty income going up?

I don't know that we have a whole lot of prepayment penalty -- we do know that it moved up 3 BPS, I think is the number, correct?

Yes.

Yes, I think it is just normal stuff going on out there. We don't think there's anything too exciting in there that would move the number up or down very far. We are producing a lot of business; we've got the wide range of types of loans and rates of loans coming on the balance sheet, and I think we are comfortable with that's where we are. There's nothing extracurricular out there that we are aware of.

Got you. And if you just talk about where rates on new loans are on CRE and single-family and maybe on C&I as well, that would be great.

How about low? (laughter) All kidding aside, they obviously are at historical lows. The single-family, the spread seems to be as low as 3.5% to 4.5% I guess. And on the commercial side, it is not a whole lot stronger than that. We are able to get 5% and 5%-plus, in some cases, on the commercial side, but all lenders are hungry for loans, so there's a lot of competition. All borrowers are reasonably intelligent, and they don't want to pay more than they have to. They all want extended fixed-rate loans right now, for the obvious reason that they think it is a good deal for them. So, it is a difficult environment in that regard, but I don't see that it is getting ready to change anytime soon.

Yes, the 5.60%, give or take, that we are posting out there today, that rate, that's a blend of everything that's out there.

Okay. And switching to the loan pipeline, given your comments, I would imagine that's still very strong, but is just a function of pay down activity next quarter as to what the growth looks like?

I think that's correct. Our management team is working very closely with our group of lenders; they are all focused on quality loan growth. So, I don't foresee any reason to say that our volume of new loans being booked should fall off significantly, absent some kind of a catastrophe that we don't have any control over. The pay downs did bump way up during the quarter. Dan alluded to the fact that a lot of people have just chosen to take their cash and pay debt off with it.

If they don't have very many attractive alternatives in terms of placing that money for investment, the business people that we talked to, many of them don't see much of anything coming out of Washington that's pro-business. So they seem to be very hesitant to talk about any major expansion of what they are doing. An obviously exception to that is the oil industry; it's been expanding considerably in Texas, which helps the whole economy, needless to say.

Tim, repeat your numbers again, production for the quarter average was one -- .

It was $125 million.

And the payoff rate was?

The payoff rate was $108 million.

And that's the highest we've ever seen in the quarter on payoffs.

By far the highest we've ever seen, by leaps and bounds the highest.

In our discussions, we try to figure out what is the anomaly that's causing the payoffs to jump up so high, and I wish we had an answer, but when you look at the production -- somebody called it gross production, which is probably a good way to look at that. When you look at gross -- and, I mean, get all the disclosures out there -- when Tim's quoting these numbers, these are new loan production excluding any renewals. We do not count a renewal of existing credits in the Bank in that number, so this is new production coming in the front door.

That's the gross number that's coming on, and June was a fantastic month for us. The pipeline is full, we are making loans, the loan guys are all out there. If we could get any kind of economic support to slow down the headwinds of the pay downs, I think we are queued up to see some really good loan growth.

Sounds good. And just one last one here. I remember last quarter you guys were saying you had a bunch of securities maturities for Q2, and we saw that securities balances were down decently. Should we expect to see more runoff in the back half of this year, or are you thinking maybe you stabilize it from here?

I'm not sure I followed the question. You've got normal cash flows coming in off the bond portfolio that's always there. In the first quarter we had, pre-bought is the way I would look at it, David, you bought $600 million, $700 million, $800 million in the first quarter.

Yes, again, we pre-bought a lot, but again a lot of this was in preparation for the merger with American State Bank. So, a lot of it depends -- they have repositioned some of their portfolio, so -- they had some longer-term bonds that really hadn't -- real final maturities of as much as 10 and 11 years, and it really didn't fit necessarily in our portfolio.

So, we had asked them to sell them before they closed, and they did. So, in essence they bought about -- they sold about $500 million, and they just bought some real short-term treasury bills that actually mature next month. So, right now our balance sheet looks a little beefed up with additional bonds that were bought, but again, once we merge these two banks together, it will stabilize and we'll be back where we are at.

Got you. Great, thanks for that extra detail, appreciate it.

John Pancari, Evercore Partners.

Good morning, guys. Can you talk a little bit about the -- actually, back to the securities portfolio with the prepayment speeds. Do you have how much the prepayment speeds on the NBS book accelerated, how they changed in the quarter? And then also, do you have the balance of unamortized premium as of June 30?

The amortization did not speed up in the first quarter, between first quarter and second quarter. That's what Dave said a few minutes ago. The amortization speed between the first quarter and the second quarter was consistent. The unamortized premium, I don't think we've put any of those numbers out there.

Again, it wasn't a big change, actually.

That's right, the bond portfolio actually fell some.

Okay, thanks for clarifying. And then, in terms of the loan yields outlook. Obviously, you just commented on what helped it remain stable this quarter; what would be your outlook there? Would you expect it to remain relatively stable as you're putting on new production here, or do you think we could see some downside as the low rates get priced in?

Do you want me to make a guess at that? (laughter)

Yes, what's your crystal ball say?

It's --

It's going down.

It's obviously a guess. There clearly is downward pressure. My sense of it is that downward pressure is not so much immediate. Just looking at the last couple of weeks of what we've done, the rates we are getting right now seem to be stable with the quarter. But the longer this low rate environment carries, and the more aggressive our competitors become, then obviously there's continued downward pressure. So, to put it in the context of the third quarter this year, I wouldn't foresee a huge difference, but there's no guarantee I'm right about that. Probably -- maybe not even a huge difference to the end of this year, but beyond that it is very hard to say.

And there's nothing to move it up, so the only real pressure is --.

It is all down, it's all down.

I agree with you, though. I mean, I don't see it immediately affecting us in the next couple of quarters, but after that, if it stays persistent for long, it obviously goes the other way.

Right.

Okay. And then lastly, do you happen to have the quantification of the impact of the new Basel III NPR on your regulatory capital ratios?

Dave can probably answer it if he wants. We've done the calculation. Basically I would say that based on what we've done, it's truly preliminary, so it is not factual because we don't know. You have to look back at your loans, and there's a certain risk weighting for every type of loan. And some of the banks we've bought didn't necessarily have the weightings. But all in all, on a preliminary basis, we are already in a well-capitalized position.

Yes, I would just interject in there, it is not going to have a material impact on us. And if you think about it in the picture way, we're only 50% loan deposit ratio, so all the new risk weightings we've done for a certain of assets, et cetera, et cetera, and some of the changes, it is just not going to have much material effect on us as we see it today.

Outside of the one concept where they are going to -- where they will be phasing out the trust preferred securities over X amount of years based on your assets -- .

10.

-- based on your assets size. No, the answer is -- we will be still very well-capitalized when we -- if we are using the Basel numbers.

It's too preliminary for us to actually put a number out, John, so we can't give you a number, but we've run modeling lots of different ways and it is not a material motive.

Okay. All right, thanks, guys.

Jennifer Demba, SunTrust.

Hi, good morning. Question is for David Zalman, just wondering, with the headwinds continuing to pile up for the community banks, are you getting relatively more incoming phone calls right now? And second, what's your biggest concern in terms of the integration of American State, and are you inclined to fold in some smaller deals if they were to come about over the next few months during that integration?

There's probably two or three questions in there, but in the first one, let's address the American State Bank deal. The operational integration for American State Bank is -- you don't want to just dismiss it, but it is relatively smooth. Dan and his team, all of them are doing a great job in putting it together. They have a great group of people that are very sophisticated. There's not a lot of problems there, so they are really helping on their side; we are helping on our side at the same time. So, we don't see it as a real hard deal. So, what that means in essence is that as we see other deals out there, we have the opportunity to go ahead and do smaller deals.

And having said that, yes, right now we are getting more calls than we've ever gotten before to discuss with different banks. Since they're community banks, I think they are feeling a lot of pressure right now. I think that when they came out with these new, just for example, the new Basel III laws and in Dodd-Frank and in everything else. From a regulatory standpoint, and even the capital ratios, especially for small community banks, it is probably impacting them more than it's impacting banks like ours because most of the time their loan-to-deposit ratio is so high.

So, you've got that, you've got declining net interest margins, and it is going to be really tough for them. So I think that they all -- a number of them are all looking for partners. And so, it is creating more opportunity for us than we've probably ever seen before. And so, we just really have to take a position, really select the people that we really want to team up with. So it is really a good time for us right now.

I think what you are saying, I would coach a little bit differently, but same message. We are looking for a cultural fit and people fit. And we found that in West Texas, the people are excellent. The fit to the way we do business is excellent. I've continued to travel out there, we've had teams coming and going back and forth.

But the same thing applies on the smaller banks that we've looked at. We are looking for the cultural fit where there's people that can join our team, play in our community bank model. We saw that in Community National Bank in Bellaire with -- David talked about Randy Dobbs and John James. They've got a great group of people. And I think there are many other opportunities in front of us. We get to be a little more selective to make sure it is the right fit, I think is what you are saying, David?

That's exactly right, Dan.

Thank you.

Matt Olney, Stephens.

Hi, good morning, guys. Going back to the investment securities book. Dan or David, I think one of you said the Bank bought about $600 million or $700 million in the first quarter. Was that right? And the second quarter, can you give us an idea of how much was purchased versus how much was rolled off, just rough amounts?

Again, this is extremely rough. I don't know exactly what quarter it was; I can tell you where we are at today. We bought a lot of securities when the interest rates were up, the yields were up. When I say up, that's when we were getting closer to 1.75% and 2% yields. And so we've -- today -- .

That was first quarter.

Yes. Again, we probably today have $800 million, $900 million in purchased -- in money that's purchased because we pre-bought securities. Now, having said that, as a securities from American State Bank, we asked them to sell some of their securities, which was about $500 million in turn. They did to get a little shorter maturity, because we like a shorter duration; we try to average around a three-year duration in our portfolio. So, in essence, they sell theirs and they bought some short-term treasury securities, around $500 million, that I think maybe mature next month or so.

So, when that comes in, that will reduce our borrowings, and still leaves us with $300 million, $300 million or $400 million, and a little bit of leverage. We're trying to buy ahead; these interest rates and the volatility on the 10-year has been so erratic. Yesterday it gets as low as 1.4%, 1.39%. This morning it is up to 1.5%; it is up over 5%. So, we wait for certain times in the market, and when certain times in the market we feel that a rate is consistent, that we can live with, we're going to go in and buy big time, probably $400 million or $500 million at a time that we just pre-buy. And we'll do that again.

We're protected for the next few months because of the positions we've taken. And so, we don't see interest rates -- again, we're not trying to call interest rates, but we don't see interest rates over the next year or two years, or the foreseeable future with the way it is right now, ever going up dramatically. So, we are really just looking at different times that we can really jump into the market when the market -- something happens basically.

There's a whole lot of activity going on here to prepare our balance sheet and American States' balance sheet for the merger that took place on July 1, Matt. So, what you're seeing in today's announcement is really just us. I think the direct answer is, David is right, we bought bonds in the first quarter that were yielding close to 2%. I don't think you bought anything that shows up on our balance sheet in the second quarter, but come third quarter you've got to merge the two balance sheets together, and so that's the positioning that's been going on.

Sure, understood. And then secondly, with the addition of American State in the third quarter, I'm assuming that results can be a little bit noisy initially. Is it fair to assume that your efficiency ratio could pick up a few quarters? And if yes, can you give us an idea of how long that will take, you think, to tick down to more normalized levels, recently around or below 42%?

This is Dave Hollaway. Yes, I mean, absolutely it should tick up over the next few quarters. And think of it this way -- we closed on ASB on July 1, but the actual integration, meaning when they go onto our computer system, that doesn't happen until, I think it's mid-September. So, you can't gain a lot of efficiencies when you're, in essence, running two sets of books. So yes, that would mean the efficiency ratio should tick up.

But over the next 12 months, just as we announced -- back when we announced the deal, we will bring -- I can't give you how much it could tick up when there's too many moving parts. But the point would be -- it will tick up, and then we will gradually bring it back down to the levels that we are at today.

But I think Matt's -- he's really bringing something out that I think is good. The third-quarter numbers will be noisy because you've got that, and you've got these closing costs and some expenses and stuff like that. And I don't know that we have the exact number on that, but it will be a noisy quarter for the third quarter.

From our integration planning, Matt, I know Dave alluded to that, we are carrying extra expenses until we get to merger or conversion or operational integration, whatever name you want to put out there. That would be late this quarter, and even then you carry some extra expenses for the next month or so. Really the third-quarter numbers, you're going to see some elevated expenses.

In the fourth quarter, some of those expenses start dropping off, and some of them may not drop off for the whole quarter. So, the fourth quarter is still a relatively higher quarter. My guess would be that we should see the lion's share, or I should say majority, well over 50% of our cost save should be in by the time we get to January 1. So that when you see first-quarter numbers, you should see some real benefit. And by the time we get second-quarter numbers out, we should be 90% there.

Great, very helpful. Thank you.

Gary Tenner, DA Davidson.

Thanks, good morning. Just a couple questions. The drivers of the loan payoffs, you alluded to this a little bit in your previous comments, but can you quantify, perhaps, how much was cash payoffs versus maybe being refied elsewhere, as there's a lot of competition on rate, and maybe some folks are going down that path?

Gary, we don't have a hard number right now on that. I think that the cash payoff portion of it, and this is just off the top of my head, would not be any more than 10% or 20% of it, I don't think.

I think that's right. But, how much of it is -- are we losing per rate? Because I think we're pretty competitive out there, so I don't know what -- I don't know that we are losing a whole lot of refi business out. I think what we are seeing is just things that may be selling, or just --.

Yes. I don't think that we are having that many dollars walk out of the Bank because we are not willing to meet rate on an existing loan customer.

Right.

I don't think that's the issue. So I think you are correct about that. It is just a real mixture of all of the above that took place during the quarter, and that's probably not going to change for this quarter that we are in now.

Okay, great. And just to make sure I understand, and I apologize if I missed it, I had to hop off for a second, but the $500 million that American State's repositioned on their balance sheet securities portfolio, that I think had a very short, short maturity you mentioned. Will those be allowed to run off after the merger on your end, or will they be reinvested in line with your investment style?

It actually was -- it was around $500 million, and again, that's what we pre-bought for them, so theirs will roll off. And again, ours had already bought. Basically, it just reduces the leverage to the federal home loan bank on our books.

All right, that make sense. And then, just the $6 million of MPAs that are under contract to sell. Any additional [OREO] write-downs as part of that, or are they going to be sold generally where they are carried right now?

The $6 million in ORE that's under contract, how much additional loss, is that what you're asking?

Yes, how much initial valuation adjustment or loss on that?

It would not be material. There may be a minor amount, but it is not anything --

Some of it gain, some a little loss, I think it is basically a wash.

Yes, I mean, it's just not a material number.

Okay. Great, thanks very much.

[Joe Stephen, Stephen Capital].

Good morning, guys. Actually, all my fundamental questions have been answered, but it gets back to the M&A environments. My only question is -- you guys have been very successful recently getting deals, and it goes off of Jenny's question. Are sellers just starting to feel more of a need to do something? Or is it just that your story and message is resonating? Or is it just a little bit of -- it is hard to put your finger on why things come in groups sometimes? That's really it.

I think it is -- it's probably not -- it's probably a little bit of both.

All of the above.

I think it is probably more pressure, though, on the changing times. I think it is just becoming harder and harder for the smaller community banks to really get traction and make a decent return on capital. Which, again, it is the regulatory burden. I know it wasn't the intent of Congress when they passed a lot of the legislation. But based on the legislation that they passed, and the regulatory burden, and what everybody has to do, and again, these new Basel III numbers I think -- and again, the net interest margin declining. I think all of those factors are really pushing people in to really make some decisions.

It is a changing environment, it is like, when I grew up, there was a full service gas station on every corner, and you didn't think that would ever change, and it changed. It changed more to self-service. You'll usually had a Mom & Pop grocery store, and probably very few if any Mom & Pop grocery store. You're just starting to see a consolidation in industry that people thought was going to take place a number of years ago that's really just starting to really come up now.

I agree. I think all of the above has been answered, but I do think there's some fatigue out there on the Boards of small community banks.

And when you guys are out just sort of dating, is your potential dating list even getting fuller? As your story is not only resonating, but the success for you guys of having. Is your dating book even getting better?

Yes, I would say this is like college. (laughter) In college, sometimes we would --.

It's a target-rich environment.

In college, we would hit for -- we were just real hot for maybe two or three weeks, if we did, and then it went cold. Right now the clubs are full.

Okay, great quarter, guys, thank you.

Jefferson Harralson, KBW.

I'm still laughing at that one. All right, on the America State Bank coming over, it seems like with the rates going down, possibly you would have more unrealized gains in the securities portfolios of what your marking, and maybe mark down to a -- since they're being marked up, it might be lower income coming off of them. Does the rate change since you announced American State make the deal less dilutive from a tangible book standpoint, and also less accretive from the earnings standpoint?

I'm not going to give you the exact answer on this thing because I don't know that we have the exact numbers, but yes. They've had a big bond portfolio. They sold the big bond -- a good portion of the bond portfolio, and again, had a pretty good gain on it. So in essence, that lowers the goodwill that you pay for the company.

And again, fortunately, we bought securities that mitigated the lower yield in advance. They had some -- a lot of, I would just say, fixed-term treasuries and stuff like that, that really -- things that didn't fit where we bought -- we went back into our product and mortgage backed securities, and got somewhere between 1.75% and 2% yield rate. So we mitigated, although it is still a little bit less than maybe what they were getting.

At the same time, with the mark to market, as you know, you mark to market the loans, and you also -- I'm sorry, you mark to market the securities and you mark to market the loans, and so somewhere in between there, I can't tell you that it is going to be a neutral effect, but there's some there -- you've got to take both of those into consideration. On one hand, the earnings are lower from the bond side, and yet you may get the accretion from the loan side based on the mark that's out there. So, the answer is somewhere in the middle of that.

The mark-to-market accounting is making it all very transparent, so everyone can fully understand everything that's going on.

Do you think that the mark-to-market margin is going to come over at a lower margin than yours or a higher?

I don't know that I --

Yes, I didn't either. Say that again?

We're going to mark to market their balance sheet, and we're going to basically bring their margin over, and it seems like there's a possibility it could come over at a lower margin because we're going to mark all these securities to market. Do you think, when it gets added onto your balance sheet, do you think that the combined margin for your Company goes up or down?

Specific to ASB themselves. If we're just looking at the securities themselves, we agree that the yield is coming down on the remaining part of the security portfolio. But if that was the only thing moving, that probably would be a true conclusion, but again, remember, the rest of their balance sheet is also being marked to market, the loans, the deposits, the whole thing. And so, I don't know that you could come to that conclusion to say their margin is going to be less because of all the mark-to-market accounting that will go on it. So, I don't know if I would draw that same conclusion; it will move, but I don't know if it can be that significant.

Again, we can't give you a direct answer because we're not through -- we've hired outside people in addition to us to give us valuations on the loan portfolio right now. And so, based on the valuations of the loan portfolio, the mark to mark there -- you know it is a real moving view on it. We can't give you -- our hope would be that it would be neutral, but we cannot tell you that right here.

It is not going to go up. There's no upward pressure. Same as the loan question earlier, the rate environment is just so low, they are flying into the same headwind that we are. When you look forward, they've been fighting the same battle; we're both basically 50% loan to deposit, we're both fighting margin compression. So, we've got the same battle going forward.

Theirs gets accelerated because of the mark, has that -- am I thinking about that right?

But everything marks, so there's positive marks and negative marks, is what Dave is saying.

Basically you are marking just the securities, you may not be taking into consideration the mark to the loans.

I got you.

And the deposits.

The mark to the loans and the deposits shouldn't mitigate the marking of securities, we're hoping, to some degree.

I fall into your camp, that it's a little more negative than David and David do, but we don't have all the numbers to answer that question.

Okay. Thank you, guys.

Jon Arfstrom, RBC Capital Markets.

Good morning, guys. Just a question on American State. Just curious how the loan production is going in American State, and are they seeing some of the similar pay down activity that you are seeing?

They haven't. We've had a bunch of people up there talking. The real facts are -- they're producing good loans. But we've also got them in a little bit of a neutral zone while we try and roll out merger related activities. So they've been in classes, they've been talking about policy changes, they've been talking about operational changes.

But they are certainly taking care of their customers. And the way I would coach that is, when we go through an M&A transaction of any size, whether it's ASB or any others, the first thing we do is we play defense. So, they are playing defense in West Texas; we're playing offense here in the rest of the state of Texas. We are not pushing them hard to grow loans; we don't want to lose business, and they are not calling on customers. But their number one goal right now is to get our two banks merged together, to get us all on the same platform, to get us all on the same playbook. And so that means they are playing a lot more defense today than they will be going forward.

I would say, John, that they actually had better loan production. They had actually better than us, as far as production numbers and increases up until the merger. I think right now is what Dan is saying, when you are doing a merger, they are trying to learn our loan policies and they are numb right now. So, we've got to get through that part, and get them back to where they feel comfortable in how to submit their loans, and how the system works. So, that just is going to take a few months, probably.

I think that's very normal. We see that with everything. (multiple speakers) They want to know what we like, and what we don't like, and what we think, and it just takes a lot of work through all that process.

Well, and even the loan policies, I think, are different, too. Even though you don't think they're much different, just the slightest thing to a producer makes them feel -- it's an uncomfortable feeling, they've got to learn to -- everybody's got to get a feel, so it just takes a little while.

That's right. But it is a very -- it's very normal, and their group is very professional. They understand the business, and we personally don't think it is going to take long for them to hit stride at all.

And we like what we see up there; we like the lenders we see. They've got good people on the ground doing a good job.

Okay. Then Dave Zalman, just maybe a bigger picture question for you. A quarter ago, the 10-year was 2.10% or 2.20%, and obviously we're much lower today, but do you worry at all about lower rates? You said earlier your view is that rates will stay lower for longer, but is there anything you're doing and thinking about in terms of protecting the Bank from higher rates if that should be the case?

Were they 2%? I don't remember that. I would say, John, that I didn't think that rates would get as low as they've gotten, quite frankly. Today it is a little bit encouraging, I never thought I'd say I'd like to see higher interest rates, but it is a little bit encouraging today, as we are looking and talking right here, the 10-year is now at 1.514%, it's up 6% in one day.

So, that's encouraging, but again, the good thing is, again I will reiterate, we did take advantage of the situation when rates got to the point which you are talking about, and we just really loaded the boat up on the deal. So, we are covered for a few months, but we really need interest rates to move up. We need interest rates to move up another 20 basis points or so, or 25 basis points, and again we will probably be buying. If the rates do hit in that area.

And again, I just think, with the financial situation that our country is in right now, it cannot really afford to pay. When you got $14 trillion in debt, and the government's bleeding as bad as it is right now, if you just had -- say they had to raise interest rates 3 basis points on $14 trillion, you can do the math. Any increase they were going to get from us one-percenter guys, that $600 billion, that'd be gone just for interest. So, unless the country really turns around, and really sees a lot of growth, I just don't see a lot of change. I don't see interest rates going up dramatically, at least in the next two to three years for sure.

Okay. All right, thanks, guys.

And we have no further questions in queue. I'd like to turn the conference back over to our presenters for any closing remarks.

Thank you, Zack. Thank you, ladies and gentlemen. We appreciate you taking the time to participate in our call today. We appreciate the support that we get for our Company, and we will continue to work on building shareholder value. Thank you very much.

And this does conclude today's teleconference. You may now disconnect, and have a wonderful day.