Prosperity Bancshares Inc (PB) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to today's program. (Operator Instructions) Please note, this call is being recorded. I will be standing by if you should need any assistance. And it's now my pleasure to turn the conference over to Ms. Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares's fourth-quarter 2013 earnings conference call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks.

I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares; and here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. Tim Timanus, Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Chris Bagley, our Chief Credit Officer. David Zelman will lead off with a review of the highlights for the recent quarter and an update on our recently-announced merger and acquisition activity. He will be followed by David Hollaway, who will review some of our recent financial statistics. And Tim Timanus will discuss our lending activity, including asset quality. 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, Tony; or you may email questions to investor.relations@prosperitybankusa.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 send a copy to you.

Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares's 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 the call over to David Zalman.

Thank you, Charlotte. I would like to welcome and thank everyone for listening to our year-end 2013 conference call. I am very excited to announce the great results and accomplishments for the fourth quarter and full year 2013.

We were again selected by Forbes magazine as the number-one best Bank in America. All of our associates and directors worked very hard, and this honor recognizes them for that work.

During the fourth quarter, we completed the merger and operational integration of First Victoria National Bank, with assets in excess of $2 billion and a footprint complementary to Prosperity. We are very excited about the combination, and their team members have been great to work with. I know that the associates with First Victoria will help take us to another level and share in our success going forward.

We look forward to our pending merger with F&M Bancorporation and its wholly-owned subsidiary, F&M Bank, located in Tulsa, Oklahoma, which we hope to close at the end of the first quarter or the very first part of the second quarter of this year. The merger with F&M Bank, with assets totaling $2.568 billion as of December 31, 2013, combined with our recent merger of Coppermark Bank in Oklahoma City, will increase our market share substantially in Oklahoma and increase our ability to compete more effectively.

We could not be more pleased with our earnings per share for 2013 increasing 13% to $3.65 compared with 2012 diluted earnings per share of $3.23. Including acquisitions, our loans increased $2.595 billion or 50.1%, and our deposits increased $3.649 billion or 31% when compared with the fourth quarter of 2012. These are excellent results, and this achievement could not be done without all the hard work of our associates and directors. I appreciate all that has been done by everyone to make us the best Bank in America.

A little bit about our economies. Texas and Oklahoma continue to experience a lower unemployment rates than most other areas of the country. In October the unadjusted unemployment rate for Houston-Sugar Land-Baytown MSA was 5.9%. Houston added 79,600 jobs from October 2012 to October 2013.

The Dallas-Fort Worth area saw unemployment at 5.9%. Dallas-Fort Worth also saw payroll job increases of 96,100, which ranked number one nationally among the largest 12 US markets. Houston was number two. By the numbers, Dallas-Fort Worth's 96,100 job growth only trails New York City's 141,800 in new jobs added.

Unemployment in Oklahoma remains low at 4.7% in October. The Oklahoma City market has absorbed the Chesapeake layoff of 800 people, and no more layoffs are anticipated. Forbes ranked Oklahoma number eight as one of the best places for business and careers and number seven on its best cities to invest in housing 2014 list.

Oklahoma is one of the top natural gas producers in the United States, with production typically accounting for almost 1/10 of the total United States production. In the markets we serve, we see a good economy, with new home sales and median sale prices increasing. Office space is strong, as well as apartment construction continues to show tremendous momentum, especially in Houston and Dallas.

We continue to see tremendous chemical plant and refinery expansion along the Gulf Coast as well as growth in manufacturing. All in all, Texas and Oklahoma are very good places to be right now for doing business.

Some of our successes in the fourth quarter and for the full year included an increase in net income to $62.9 million in the fourth quarter of 2013, and that's compared to $48.2 million for the same period in the prior year, an increase of $14.7 million or 30.5%. Our diluted earnings per share were $0.98 for the fourth quarter of 2013 compared to $0.85 for the same period in the prior year, a 15.3% increase.

Total net income and earnings per share for 2013 are the best we've ever reported. Our Tier 1 leverage ratio was 7.44% at year-end 2013, continues to build rapidly because of our strong earnings.

As mentioned earlier, our loans increased 50.1%, from $5.180 billion for year-end 2012 to $7.775 billion at year-end 2013. Our organic loan growth excluding acquisitions was 5.8% year over year and 6.3% annualized on a linked-quarter basis.

Our nonperforming asset ratio of 15 basis points continues to be one of the best in the industry despite the uptick in the fourth quarter, primarily from banks acquired in 2013. Our deposits increased 31.3% or $3.649 billion to $15.291 billion when compared to the same period last year.

Our organic deposit growth excluding acquisitions for 2013 was 2.6%. Linked-quarter organic deposits increased $642 million or 5.8%, or 23% annualized.

We expect that our industry's current operating environment, with higher regulatory scrutiny and higher operating costs emanating from Washington-driven legislative burdens, will result in many banks revisiting their strategic options, including sale to larger institutions. As we look forward in 2014, we plan to continue to focus on loan growth, deposit growth, elimination of unnecessary expenses, and the identification and completion of accretive acquisitions. Our management team, along with our associates, are truly engaged and are working to achieve our goals.

With that, again, I would like to thank our home team for a job well done. 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 December 31, 2013, was $145.5 million compared to $108.3 million for the three months ended December 31, 2012, an increase of $37.2 million or 34.3%. On a linked-quarter basis, net interest income increased $18.9 million or 15%.

For the year ended December 31, 2013, net income was $498.8 million compared with $380.7 million for the year ended December 31, 2012, an increase of $118.1 million or 31%. All these increases were primarily due to an increase in average earning assets.

The net interest margin on a tax-equivalent basis was 3.82% for the three months ended December 31, 2013, compared to 3.53% for the same period in 2012 and 3.59% for the three months ended September 30, 2013. Excluding purchase accounting adjustments, the net interest margin on a tax-equivalent basis increased on a linked-quarter basis, from 3.19% to 3.35% for the three months ended December 31, 2013.

Noninterest income increased $1.1 million or 4.4% to $25.2 million for the three months ended December 31, 2013, compared to $24.1 million for the same period in 2012. For the year ended December 31, 2013, noninterest income increased $19.9 million or 26.3% to $95.4 million compared to $75.5 million for the year ended December 31, 2012.

Noninterest expense for the three months ended December 31, 2013, was $68.6 million compared to $57 million for the same period in 2012, an increase of $11.6 million or 20.4%. For the year ended December 31, 2013, noninterest expense was $247.2 million compared with $198 million for the full year 2012, an increase of $48.7 million or 24.6%. The efficiency ratio was 40.2% for the three months ended December 31, 2013, compared to 42.9% for the same period last year and 41.6% for the three months ended September 30, 2013. Our bond portfolio metrics at December 31 showed a weighted average life of 4.4 years, effective duration of 3.98, and projected annual cash flows of approximately $1.4 billion.

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

Thank you, Dave. Our nonperforming assets at year-end December 31, 2013, totaled $22.504 million, which is 29 basis points of loans and other real estate. This is compared to $12.687 million or 20 basis points at the end of the third quarter of 2013. $9.426 million out of the [22,000, 504,000] (sic - see above, $22.504 million) are assets of the three financial institutions that joined us in 2013. This is 42% of the nonperforming assets at the end of the year 2013.

The December 31, 2013 nonperforming asset total was made up of $15.178 million in loans, $27,000 in repossessed assets, and $7.299 million in other real estate. As of today, $7.311 million or 32% of the nonperforming assets at the end of the year 2013 have been liquidated or are under contract for sale, but there can be no assurance that those under contract for sale will close.

Net charge-offs for the three months ended December 31, 2013, were $496,000 compared to net charge-offs of $288,000 for the three months ended September 30, 2013. Net charge-offs for the year ended December 31, 2013, were $2.522 million compared to $5.130 million for the year ended December 31, 2012. $7.865 million was added to the allowance for credit losses during the quarter ended December 31, 2013, compared to $4.025 million for the third quarter of 2013. And $17.240 million was added during the year 2013 compared to $6.100 million for 2012.

The average monthly new loan production for the fourth quarter ended December 31, 2013, was $197 million compared to $210 million for the third quarter ended September 30, 2013. This represents a 6% decrease.

The average monthly new loan production for the year ended December 31, 2013, was $184 million compared to $138 million for 2012, which represents a 33% increase. Loans outstanding at December 31, 2013, were $7.775 billion compared to $6.183 billion at the end of the third quarter 2013 and $5.180 billion at December 31, 2012. The December 31, 2013, loan total is made up of 43% fixed-rate loans, 32% floating-rate, and 25% variable-rate loans.

I will now turn it over to Charlotte Rasche, who will coordinate your questions.

Thank you, Tim. At this time, we are prepared to answer questions. Tony, can you assist us with questions?

Absolutely. (Operator Instructions) Dave Rochester, Deutsche Bank.

Hello. Good morning, guys, nice quarter. I wanted to ask about the yield on loans first, if I could. It looks like if you back out that loan accretion, the loan yield only declined about 4 bps, which was about half of what we saw in 3Q. So was just wondering if the book yield is now getting close to that total loan production rate? And if you happen to have a sense for where loans are pricing today that you're adding to the book, that would be great.

Your question is where is the loan pricing today versus what we're showing in the quarter at 4.97%?

Yes.

I'd waive it to you guys.

I think that's in line. I mean, I think that's -- what we're putting on today is probably in line.

It's reaching that inflection point, the way we look at it.

Yes, I think so. (inaudible).

I think that's absolutely right. I think what's being booked today's absolutely in line with that number.

Perfect. And I know in the last call you mentioned maybe taking a little bit of a break from deal activity near term; I was just wondering how the inbound call volume has trended over the past quarter, and if you're still getting a lot of interest to partner up? And if you think, given the timing of that F&M integration, which I think is supposed to be mid-year, that you might be back at it so to speak in the back half of the year?

So as you recall, Dave, we basically told -- mentioned to everybody at the end of last year -- I don't know if it was September or August. We plan to take a full year to do the operational integration of the First Victoria National Bank, and also, the F&M Bank, which, you are correct; we're planning on closing the deal with F&M Bank in the last -- towards the last end of the last quarter -- I'm sorry. For the last end of the first quarter or the very first part of the second quarter. Having said that, we'll do the operational integration around mid-year.

I would say that our operational integration with First Victoria National Bank has been better than I -- it's been really good. I don't know that we really -- again, knock on wood, but they've been a real pleasure to work with. And they really seem to have gotten a lot faster. A lot of transactions that you do, integrations that you do, people have sometimes -- especially the lending side has a tougher time getting involved, and getting the new forms and group policies and all that.

But this transaction with First Victoria has gone exceptionally well. So that, I think, speeds up a few things. Again, we still have the F&M Bank to do. That's probably going to be in mid-year. But if F&M Bank goes as good as the First Victoria, I think toward the end of the year that we probably could be looking at something again, possibly.

And in terms of the inbound call volume, that's still fairly strong, I would imagine?

Yes.

And could you just update us on any particular focus, or if there any higher-priority markets you have in mind that we should be thinking about?

I think that -- our first primary market is Texas. There's still so much available in Texas. So given the opportunity in Texas, we would always like to be there. But again, we've always said that we are not opposed to looking at banks that are contiguous to us. Again, we're in Oklahoma, which opens up new opportunities for us.

Louisiana -- we're just a few miles from Louisiana. So states that are relatively close to us are still always opportunities for us.

And within Texas, are there any specific areas of focus?

I think not. Overall, Texas -- we're all over Texas right now. And so I think everything in Texas will be primarily a billing for us.

Great. All right, thanks, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Nice quarter. Two questions for you, David.

First of all, over the last several quarters, you have talked about wanting to focus more on growing some of your fee income items.

Right.

And given all the deals that you've done, it's hard for us to kind of tell how that progress is going. I was wondering if you could kind of give us an update there on how you're feeling about things and what you think the future opportunity is there? And I have a separate question.

Yes, well I think that we are focused on fee income, especially after the Durbin Amendment, where so much of our fees got cut on the debit cards. But as mentioned in the past, when we didn't have trust services, now with the bank in -- American State Bank in Lubbock -- they have over $1.300 billion trust portfolio.

First Victoria now has over $600 million. So that's going to be more significant income going forward from trust. In the past we didn't focus on the secondary market on home mortgages, and again, that's really seemed to -- this last month hasn't been good for anybody.

But again, that -- coming on to us, with American State Bank in Lubbock, and then Coppermark Bank, and F&M Bank, and a number of banks that are joining us, that adds more fee income. We have the ISO, which is the ATM sponsorship, which is growing about -- over $1 million a year into the mix. We're focused on credit cards, to sell more credit cards to our customers. Not necessarily going out to the rest of the world, but just our own customers should really help us.

So we're really focused on fee income. I think that -- I'm sorry, brokerage -- First Victoria was probably, for their size of a bank, was probably the highest in their peer group with regard to brokerage income. So I think that's truly going to help. And again, Russell Marshall, who leads the brokerage, is also leading our wealth management.

So I think that we have really -- in the last year or two have gone from really being just a plain middle bank to really having a lot of products that we can offer. I think we are really focusing on cash management as well. We've had cash management teams that now have been consolidated.

Jackie Fiegel in Oklahoma City -- she's actually coordinated our whole cash management teams to coordinate Houston, Dallas, Oklahoma, and West Texas. So we're really focused on those areas.

So we are focused on -- we're also -- Mike Epps, who was at -- the President of American State Bank in Lubbock is also joining us on the Executive Committee here in Houston. And they actually did a better job than we did sometimes on fee income. And so he's going to really be focusing on taking a look on the fee incomes that we have right now, too, to try to help us move that forward. Long answer, but there's a lot going on there.

Thank you. And I'm curious: if you look at -- and this may be a difficult question to answer, but if you look at your cost base today versus when you are under $10 billion in assets, can you give us a guesstimate of how much you had to add just in compliant, legal, etc., just to jump to that higher level?

I would just -- again, I don't know that I have the exact numbers, but I would tell you that if you're a $10 billion -- if you're a $9 billion bank going to $11 billion, and that's all you're going to go, you probably wouldn't want to do it.

There has been such a change in focus, especially from a regulatory standpoint, that once you got over a certain size, that -- look. In my years in banking, the primary focus used to always be silence and safety. And that doesn't mean that it's not for some; but in our case, with the size that we're at, the regulatory focus has just really changed. And they're really focused on BSA compliance, TRA, internal audit.

I would tell you we -- quant analysis, stress analysis, and VPAS -- I would tell you that we probably have at least 50 people more just focused on this at the size that we are at. When you take that 50 people and the costs affiliated with that, plus all the different stress testing and programs required to do all that's required, plus with the loss of the Durbin Amendment, it's just probably $15 million or $20 million a year for us.

Thank you, David.

Jefferson Harralson, KBW.

Thanks. I wanted to ask you about the 23% annualized organic loan growth you mentioned. Is that on an average basis or an end of period basis?

23% -- I don't know that we had that. The loan growth? Our composite growth or loan growth?

Probably about loan growth -- let me step back. Of the loan growth this quarter, what was your organic linked-quarter?

Our organic loan growth year over year was 5.6%, I think; I'm talking off the top of my head. And probably a linked-quarter basis was 6.3%. But having said that, I would also follow up on to that -- we've now thrown American State Bank into what we call -- after a year we put their numbers in with our numbers.

And, of course, they haven't done as well on the loan side. If you excluded the American State Bank transaction, our loan growth this year would have been probably in excess -- our organic lawn growth would have been in excess of 9%. And also, on the deposit side, that's another 2.6%. Year over year, we probably had 4%.

But they're quoting period-end numbers, too, right?

What's that?

You're quoting balances as of the period end versus average.

Yes, that's correct. That's correct. And I guess my point is American State Bank does have to come in to the numbers, and they are.

And I think going forward, it took them a little bit longer than some of the other banks that have joined us, but I think that they're really on board and will be focusing on and helping us grow our loans. So going forward, I still think that when you look at us, and you have looked at us over the last 20, 25 years, our organic loan growth -- it still runs in between 8% and 9% annually. And deposit growth usually runs about 4% annually -- organic deposit growth.

All right. Let me ask you about the accretable yield. The inquiries went from $51.9 million to $159.6 million. So that's a lot more money to come through accretable yield over time. Then you had the big quarter this quarter.

It looks like you went back through, and maybe went through all your deals, and increased the -- or decreased the amount of expected losses there. Can you talk about what transpired to get that number -- to make that number jump up so much?

Let me jump in on that one. When you're looking -- kind of laser it down to the quarter, you saw that in this quarter, to the income side, there was about $19 million -- call it $20 million. But the point that we'd want to make out of that, out of that $20 million, $6 million of that comes from the -- I guess what we call the SOP03 side, the credit-impaired side. Where we've always talked over the last few quarters that from the 91 side, the accretion side, it should be generally pretty stable. But when you have these 03 credits that we resolve, it's going to create lumpiness in the quarter.

And that's what you're seeing out of that $20 million. $6 million of that was related to -- I don't know, David, was it one loan or two loans that we were able to resolve?

We had two loans.

Yes, two loans.

So that put it up to -- that put an extra $6 million in there this quarter. So, really, you could think of it a different way, and back up from $20 million, and take $6 million out. So that other run rate is about $14 million, which is still little bit higher than what you've normally seen.

But then again, First Vic is now into the mix, and maybe this will help everybody on a go-forward basis. And again, I'm only talking from -- I'm using layman's terms here. But the 91 side, you know, if we are looking over the next 12 months, we think that that accretion from loans should be in a range. Can't be a specific number, but we would tell you $9 million to $12 million per quarter. And again, if we resolve any more of these SOP03 loans -- if we do better than what we thought, that would provide some lumpiness to the positive on that accretion.

Yes, I think the accretion, Dave, we did have it recovered on some loans that really we charged off or reduced another $6 million. At the same time, the provision for loan loss this time really increased over $6 million, too.

Again, that's based on a calculation. But I think we were able to do that because of the number of loans that we -- one of the factors in that is the number of loans that you have on the books. So it's kind of a little wash a little bit, I think, when you look at the total net effect this time.

Okay. Thank you, guys.

If you look at the total, the 3-10-30 marks are about a third of the total marks that are out there right now, and those are harder to predict. And then we're going to have F&M coming in with marks very soon. So that whole mixture is going to change somewhat.

That help you any, Jefferson?

That does. Thanks a lot, guys.

Scott Valentin, FBR Capital Markets.

Good morning and thank you for taking my question. With regard to the securities portfolio, I noticed a pretty big jump if you look at the yield on securities without portfolio -- without purchase accounting adjustment. Just curious if we've kind of seen the bottom in terms of securities portfolio yield? And now with -- if we continue to see a rise in the belly of the curve interest rates, say 2- to 5-year type interest rates, market rates moving up, can we expect to see securities portfolio yields to continue higher?

I'll jump in first. There's probably a two-part answer there. I'll pick up the first part of it. And I think David probably wants to comment on the second part. But one observation is: remember, on our portfolio, as rates had moved up, the amortization on that overall portfolio slows down. So when you look in the quarter in our press release, we show roughly $12 million of amortization.

So if you're looking back on previous quarters, you can see that's significantly dropped, which helps -- from an accounting perspective, helps that yield. So that's always a positive.

Looking forward, to drive that number down more in future quarters, I'm not so sure that's there based on where we're at in rates today. And you'd have to see rates probably move up to slow that down more than the $12 million per quarter that you see. But that's looking into a crystal ball. So that would be part of it that's helping the margin.

The second piece, I think, is also important to answer. But I'm going to let David jump in, because the question -- I'll rephrase it a little bit. As we think maybe rates are starting to migrate up a little bit, we've kind of taken a position -- I don't want to steal your thunder, but now maybe we're giving up some yield today to try to be cognizant of extension risk. Is that right, David? Did I say that right?

Yes, I think that's accurate. In plain terms, I think -- let me just expand on what Dave said. I think the amortization expense on the bond portfolio probably is -- with the slowdown, that's probably where it's going to be. I don't see a lot of improvement there.

If you looked at our yield on the bond portfolio, you would say, well, you know, there's probably some room, based if you're buying the product -- if you haven't been buying to increase that yield. But as Dave mentioned, we're taking a little bit of a different stance. We're trying to mix our purchases now with the shorter-term mortgage-backed securities.

And again -- so I wouldn't count on an extremely larger yield on the portfolios under where we're at right now, because we're trying to reduce it. We have a policy within our Bank that says that, basically, we do not want to have over 25% of our assets in a bucket that re-prices over five years.

And so with interest rates going up, we're trying to maybe buy some 10-year and 15-year mortgage-backed security to make a mix of that. And that's why -- we're just trying to reduce the duration, basically. So might be some, but not a whole lot. Not based on current yields right now.

Okay. And just -- you mentioned duration and the target there. Do you happen to have what the duration of the portfolio is now versus last quarter, given the rise in rates?

Our duration right now, our effective duration as of December 31, 2013, was 3.98. I don't know what it was last year -- I mean, last quarter.

I'm thinking just a hair -- maybe a hair less, but it wasn't significant. That's true.

Okay. And just one final question. In terms of mix, you guys have been securities-heavy over time. And just wondering, as you do the acquisitions and get some banks that have some pretty strong loan production in some new high-growth markets, do you see the mix changing, where loan deposit ratio moves higher over time?

I think you're probably already seeing that. With the acquisition of First Victoria National Bank, you've already seen our loan-to-deposit ratio change. They had a lot larger ratio of loans to deposits than we did.

And I think with F&M, the same thing, no question. A lot higher. So I think the two combined changes the ratio in and by itself now.

As, again, we mentioned, as we buy these banks sometimes, we lose 15% to 20% of their loans. So there's a period of a year to a year and a half that goes by where we lose some of those deals before they start growing.

So when you look at us, we're growing maybe 8% a year. It kind of offsets the loss they have in the banks that we acquire. So I think longer-term, when you're looking past the year, and everything was static, and we didn't by another bank, I think that's exactly true.

Plus, in the fourth quarter, it was a little cloudiness to that. Because the deposit squash team -- the deposits that came in were a lot higher than normal for one quarter.

But I think you could easily make a statement, based on the banks that we are buying and us focusing on building the loans, where we have been focusing on banks -- when we look at banks, on banks more that have loans than necessarily just deposits, as we did in the past, too. So I think that's a true statement.

Okay, thank you very much.

Terry McEvoy, Oppenheimer and Company.

Thank you, good morning. You've been in West Texas a year, year and a half, with the American State deal. You talked a little bit earlier about that franchise has been a little bit slower to grow organically. Could you just maybe comment about that market and why you feel like that business can turn the corner and grow a little bit better in 2014?

Yes, I do. I think that -- again, the Midland-Odessa area was never an issue. I think that they have so much going on over there that they're -- that that's been helping a lot of the growth in West Texas.

Probably more of the Lubbock area and some of the surrounding communities in that area were slower. They had a number of loans that were paid off, and the lenders did have a harder time, I think, getting used to booking loans.

And so I think that's past since Mike Epps is moving from West Texas to our Executive Committee here in Houston. Tony Whitehead is now the Chairman out in West Texas. And we also pointed to the Presidents. Mike Marshall in Midland-Odessa is taking over that area; and also, Gary Galbreath in Abilene.

And again, Abilene was little slower, too; but I think just putting the new blood in there, and them wanting to -- their conversations with me, they are really going to build now and move forward. So that's why I think that we have a good opportunity to change that dynamic over there.

And just as a follow-up, you guys have been competing with out-of-state banks that have been coming in to Texas for years and have been growing market share. You've got a North Carolina bank that's making some noise in Texas. Does a new competitor change the environment at all in a market? And does a bank your size need to respond? And if so, how do you respond to a new competitor?

So I think you're probably referring to BB&T. And they bought a number of the city branches. BB&T and Kelly King and his group are very competitive. I think that they are really good bankers.

The nice part about Texas is it's so big and so dynamic, I think there's room for all of us, quite frankly. I mean, I think they do a good job. They have been extremely competitive when they're trying to grow the deal; but again, I really think there's enough businesses. As long as you don't have somebody that's doing stuff that's just off the wall and crazy, the competition is always good, really.

Thank you, David.

Mikhail Goberman, Portales Partners.

Good morning. Thank you, gentlemen. I was wondering if you could maybe give some color on how we can think about the net interest margin going forward, once the F&M acquisition hits your earnings and balance sheet? Thank you.

I will take a shot at that first. Just overall picture: you saw that our margin over the last few quarters -- maybe I should say core margin -- you've seen that as we had stated in past calls, that there would be some positive trends to it. And that's what you saw over the last three quarters. You see the core going from 3.09%, 3.19%, 3.35%.

And we should point out, in this fourth quarter, obviously, that 3.35% is being impacted by the First Victoria transaction, which again -- you know, they had a much better book in terms of loan deposit ratio. So that just brought a positive bias to our margin.

The same concept should work as we get closer in F&M. They are very similar. Their margins should help our overall margin somewhat.

But just taking them out of the mix, as David mentioned earlier -- somebody had brought up a securities portfolio where we're probably at an inflection point of loans. Maybe we're close to an inflection point on that. So what that's telling us, from what we can tell, over the next few quarters -- pretty much a stable margin from where we're at today.

I agree with that, David. I would say that First Victoria had probably a little bit better pricing power then probably F&M Bank does. F&M Bank usually -- typically price their loans differently than First Victoria. So they're maybe not as great as First Victoria. On the other hand, just the dynamics of them having the higher loan-to-deposit ratio should help.

Okay, thank you. That's really helpful.

Mike Granger, Tegean Capital.

Just wondered if you could give the number for the difference between market value in held to maturity securities and the book value?

So let's rephrase the question. What you're asking is the overall portfolio -- what's the total unrealized gain or loss on that portfolio as of December 31?

Yes, I think you have -- most of your securities are in held to maturity, right? You have a small available-for-sale. I think that available-for-sale number was actually disclosed in the press release?

That's right.

I'm just looking for the other piece, the held to maturity piece.

Yes, I mean, a direct answer: if you look at our overall portfolio as of December 31, we had an unrealized loss of roughly $70 million.

$70 million? Okay. All right, thank you.

So that's a total portfolio.

Yes. That includes both pieces, obviously.

Right.

Yes, thank you.

Matt Olney, Stephens.

Good morning, guys. In the press release, you mentioned the First Victoria loan mark is about $60 million, which I think is about 3.5% of the loan balance that you brought over from First Victoria. I'm trying to estimate what would the fair value mark be for the F&M Bank. Can you talk about how the loan portfolios differ from First Victoria compared to F&M, and what this can mean for a fair value loan mark?

I'm going to let you talk with Chris Bagley. I'm going to let Chris answer that. He's actually -- is focused and does more of that than anybody. So probably has more color than I can give you.

Well, the process of valuing the F&M mark is in process as we speak, and so we can't actually value it until the transaction date. So we'll run a trial balance at that time, and we'll turn that information over to our third party. And we slice and dice that in a lot of different ways.

And the loan portfolio mix will impact, probably, how they value it. But I really can't give you any guidance on what that would look like because it's a changing market daily. But they did have more of a commercial loan portfolio than First Vic did. Average loan size is larger; the yields are little bit different in terms of -- the rates are probably lower on average, but they tend to float.

All those things will factor into it. All that said, I don't know that we'll see a whole lot of difference in the FAS 91 or 3-10-20 marks; that is driven off the portfolio and interest rates. It's the 03 side that's uncertain. And we are still working through those numbers.

Okay, that's helpful. Thanks, Chris. And, David, how should we be thinking about the size of that bond portfolio the next few quarters compared to where we were at December 31?

Well, at First Victoria, again, didn't have a lot of bonds; and F&M doesn't have a lot of securities. So I don't think you're going to see big moves in the bond portfolio.

And what about your own purchases? Outside of the acquisitions, what you looking for in terms of the bond size?

Basically, we're -- again, our portfolio has an average life of -- I guess we're getting about $1.5 billion. It rolls off every year, so we have to reinvest that less any increase in loans that we have. So that's kind of what we reinvest, basically.

Thank you.

Jon Arfstrom, RBC Capital Markets.

Okay, thanks. Good morning. Just the big deposit surge -- the core deposit surge in Q4: do you expect any of that to run off early in 2014?

Yes, John, this is David. Usually we have a big surge in deposits at quarter end, and usually the second quarter -- maybe not necessarily the first quarter, but the second and third quarter things go down and pick up again.

This last year -- if you remember last year, we had a tremendous amount of surge at the end. It was $600 million-something, I think. But having said that, in the past we didn't have as much runoff in the second and third quarters as we did this year.

So I don't know what caused that. I think I know what caused that. I think people buying them are just -- when they're buying something -- I'll give you an example. The rates are so low. They got a good loan in Oklahoma. A good customer was buying his own business, and a new complex and office, and all that, and pretty good-sized company. And normally they had an appraisal, for example, and it was made out to them. And, of course, we needed an appraisal. It was made out to us under the new Dodd Frank. This is one of the problems with some of the regulatory deals.

And they said, well, you know, instead of doing that, we'll just pay with our own money. So I think you're seeing more and more people just using their own deposits in buying land, and probably just bought some stocks and stuff like that this last year.

Okay. Okay. And then Dave Hollaway, other than -- this is expenses on First Victoria. Other than the $2 million that you carved out, what was the approximate contribution from First Victoria on expenses and also fees?

Yes, a good way to look at the impact of First Vic is just to actually look at the linked-quarter increases, both in fee income and expenses. So pretty much the majority of it -- around the majority of that is going to be due to the First Vic transaction. And I would just tell you, remember, they were only on our books for two months. So if you will adjust accordingly, that will give you a good indicator.

Okay, perfect, thanks.

Gary Tenner, DA Davidson.

Just had a question on the credit quality side. Obviously your numbers have remained very good, but I was curious about the 5 basis point increase to the loan loss allowance ex the acquired loans from 1.20% to 1.25%. Was that specific to the modest increase in NPAs, or is there anything else underlying that increase?

I'll take a shot at that. It's Chris Bagley. The bulk of that is really migration from the purchased portfolio to what we call the legacy side. And the way the purchased amount accounting rules work -- a lot of the loans that hit a certain maturity or are touched in a certain way will actually leave the purchased money accounting world and come into the methodology world, if you will, and that's what's driving most of it.

So as more loans in the purchased portfolio get refied or rewritten in some form or fashion --.

Pursuant to the accounting world and that guidance, they'll end up flowing into our existing methodology.

Okay. Thank you.

(Operator Instructions) Matt Olney, Stephens.

All my questions have been answered, thank you.

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

Thank you, Tony. 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.

Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.