Prosperity Bancshares Inc (PB) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program. (Operator Instructions) Please note this call may be recorded. I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Ms. Charlotte Rasche. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to the Prosperity Bancshares first-quarter 2014 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 am Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. Here with me today is David Zalman, Chairman and Chief Executive Officer; H.E. -- Tim -- Timanus, Junior, Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Mike Epps, Executive Vice President for Financial Operations and Administration.

David Zalman will lead off with a review of the highlights for the recent quarter and an update on our 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 activities, 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, John; 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 forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now let me turn the call over to David Zalman.

Thank you, Charlotte, and good morning to everyone. I would like to welcome and thank everyone for listening to our first-quarter 2014 earnings conference call. I am honored and excited to share with everyone the great results we had in the first quarter.

We were again named the Best Bank in America by Forbes Magazine. In fact, we were recognized in both 2012 and 2014 as the Best Bank in America.

I am also pleased to announce Prosperity Bancshares' inclusion into the 2013 Keefe, Bruyette & Woods Honor Roll. To qualify for this honor, a company must maintain extraordinarily high quantitative metrics for the last 10 years. 31 banking institutions posted a 10-year record worthy of admission to this year's KBW Honor Roll.

And just yesterday, we learned that Prosperity was rated in the top spot by SNL, among 102 eligible commercial banks with less than $50 billion in assets and at least 60 offices. SNL ranked the companies based on six core financial metrics for the 2013 year.

Some of our successes this quarter include -- our quarterly earnings increased to $67,137,000 in the first quarter, compared to $49,305,000 for the same period in the prior year, an increase of $17,832,000 or 36.2%. Our diluted earnings per share were $1.01 for the first quarter of 2014, compared to $0.86 for the same period in the prior year, a 17.4% increase. Net income for the quarter includes the effects of one-time gains on the sale of assets of $3,310,000 and a one-time merger expense of $731,000.

Loans at March 31, 2014, were $7.752 billion, an increase of $2.489 billion or 47.3%, compared with $5.263 billion at March 31, 2013, primarily due to the addition of Coppermark and First Victoria National Bank. (technical difficulty) quarter loans decreased by $22 million, or 30 basis points from the $7.775 billion at December 31, 2013.

However, excluding loans that were acquired in acquisitions, loans at March 31, 2014, grew 8.2% compared with their level at March 31, 2013, and 1.8%, or 7.2% annualized, on a linked-quarter basis. We are seeing good loan demand in the second quarter and still expect our organic loan growth for 2014 to be in the 7% to 8% range.

Our nonperforming assets at March 31, 2014, were $18,696,000, or 11 basis points of quarterly average earning assets, one of the lowest in the industry and a sign of strong asset quality. Our deposits at March 31, 2014, were $15.460 billion, an increase of $3.747 billion or 32%, compared with $11.713 billion at March 31 of 2013, again primarily due to the addition of Coppermark and First Victoria National Bank. Our linked-quarter deposits increased $168 million or 1.1% from the $15.291 billion at December 31, 2013.

We are finished with the operational integration of First Victoria National Bank and cannot be more pleased. All of the associates with First Victoria have been great and have taken a number of leadership roles in our Company.

We completed the acquisition of F&M Bank this month and expect the operational integration to take place in June. We are very excited about this transaction and look forward to a great future and relationships with all of the associates of F&M.

With the mergers we completed during the last several years, our Bank now offers many more service-related products, which should help our fee income going forward. These products and services include: our trust department, acquired with American State Bank and added to with the First Victoria National Bank, which now has approximately $1.6 billion in assets under management; our home lending center acquired with American State Bank; the Prosperity Bank credit card operation acquired with American State Bank and added to with the Coppermark Bank acquisition; and wealth management and a robust brokerage department acquired with First Victoria National Bank.

We are in the process of rolling out these products and services to the Company's entire footprint across Texas and Oklahoma. We continue to hear from bankers about the added regulatory requirements that are impacting their profitability; and we believe that these factors, combined with management and Board fatigue, will continue to create opportunities for those that have the ability and the will to deal with these headwinds.

I continue to see growth and prosperity for our Company. Texas and Oklahoma continue to have some the best economies in the United States. We continue to see large population gains, low unemployment, strong housing markets, strong construction, commercial, and manufacturing markets, and an influx of companies moving operations to Texas and Oklahoma because of a friendly business climate supported by the state government.

In closing, I would like to welcome all the new associates and customers that have joined us over the last year. We will continue to work hard for your support. Our goal is to continue to have satisfied and happy associates to take care of our customers with new and innovative products at fair prices that benefit our customers and help make their life easier.

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. David?

Thank you, David. Net interest income for the three months ended March 31, 2014, was $143.7 million compared with $108.1 million for the three months ended March 31, 2013, an increase of $35.6 million or 32.9%. The increase was primarily due to a 25.1% increase an average interest-earning assets.

The net interest margin on a tax-equivalent basis was 3.62% for the three months ended March 31, 2014, compared to 3.42% for the same period in 2013, and 3.82% for the three months ended December 31, 2013. Excluding purchase accounting adjustments, the net interest margin on a tax-equivalent basis decreased slightly on a linked-quarter basis, from 3.35% to 3.33% for the three months ended March 31, 2014.

Noninterest income increased $5.2 million or 22%, to $28.6 million for the three months ended March 31, 2014, compared to $23.4 million for the three months ended March 31, 2013. Noninterest income this quarter included $3.3 million in gain on sale of assets; and excluding these gains, noninterest income was up $1.9 million or 8%.

Noninterest expense for the three months ended March 31, 2014, was $71 million, compared to $55.8 million for the three months ended March 31, 2013, an increase of $15.2 million or 27.4%. This increase was primarily due to additional noninterest expenses associated with the acquisitions of Coppermark and First Victoria National Bank. Additionally, the current quarter included one-time pretax merger expenses of $731,000, which were related to these acquisitions.

The efficiency ratio was 42% for the three months ended March 31, 2014, compared to 42.4% for the same period last year, and 40.2% for the three months ended December 31, 2013. The bond portfolio metrics at 3/31 showed a weighted average life of 4.3 years, an effective duration of 3.9, 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. Our nonperforming assets at the end of the first-quarter 2014 totaled $18,696,000, which is 24 basis points of loans and other real estate, compared to $22,504,000, or 29 basis points at the end of the fourth-quarter 2013. This represents a decrease of 17% on a linked-quarter basis from December 31, 2013.

The March 31, 2014, nonperforming assets total consists of $11,233,000 in loans, $91,000 in repossessed assets, and $7,372,000 in other real estate. As of today, $5,560,000 of the March 31, 2014, nonperforming assets total are under contract for sale; but there can be no assurance that any of these contracts will close. This represents 30% of the nonperforming assets at March 31, 2014, that are under contract for sale.

Net charge-offs for the three months ended March 31, 2014, were $786,000, compared to net charge-offs of $496,000 for the three months ended December 31, 2013. $600,000 was added to the allowance for credit losses during the quarter ended March 31, 2014, compared to $7,865,000 for the fourth quarter of 2013.

The average monthly new loan production for the quarter ended March 31, 2014, was $223 million, compared to $197 million for the quarter ended December 31, 2013. This average monthly new loan production for the first quarter of 2014 was a 13% increase on a linked-quarter basis.

Loans outstanding at March 31, 2014, were $7.752 billion compared to $7.775 billion at December 31, 2013. The March 31, 2014, loan total is made up of 43% fixed-rate loans, 32% floating-rate loans, and 25% variable-rate loans.

Charlotte, I will now turn it over to you to coordinate questions.

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

(Operator Instructions) Dave Rochester, Deutsche Bank.

Hey, good morning, guys. Now with the F&M deal closed, can you just update us on what we should expect for realized cost saves and accretion at this point, that we will see flow through 2Q?

This is Dave Holloway, I'll take the first shot at that. Again to be -- I don't know how specific I can be, but let me answer it this way.

On the cost-saves perspective, historically what we have done on these last transactions -- and we, as you've noted in the numbers in our presentations, we project cost saves to be anywhere between 20% and 30%. So I will leave that to you to put a specific number on that. Probably a little heavier in the first quarter as we go out, but that is something to think about.

On the accretion side again, I would point you back to some of these recent acquisitions in terms of what would that fair value purchase accounting number be. And again I think in F&M's case, they are roughly at 3/31 $1.7 billion in loans.

And again, this is historically; we have not seen the final numbers on this, so this is just projections. But you could probably assess -- again, this is something you would want to look at -- somewhere between 2% and 3% discount.

Got you. Okay. That's helpful. Then I know that you guys weren't that excited about the SNC portfolio you were buying there. Have you sold any of that at this point, or are you expecting to sometime this quarter?

This is David Zalman, Dave. Again, all the decisions so far up until this month have been made by F&M Bank, I think. For the most part, again, I don't have the exact numbers, but they did -- some portion of the Shared National Credits and participations have been reduced over the last three months.

And again going forward, you are right, we probably won't be as active in that part of the business as they were. But having to give an exact number would be hard at this time. I am sure there will be some portion that we will continue with, I am sure.

Got you. Then I know they were coming in with a lot of cash on the balance sheet. I am just wondering if you guys had redeployed any of that and what you are buying at this point.

I may not be clear on this, but I didn't think that they did have a lot of cash, maybe $300 million or so in securities. So it wasn't -- in our perspective, that is not a whole lot of money compared to our total position.

And again, I think that we have been going back with, again, a mixture of the 10-year and the 15-year mortgage-backed securities, about 50/50 buying. The 10-year with an average life of around four years, and the 15-year product that has an average life of five, with not much life extension in either one of them.

Those are the two products that we have been buying, usually about 50/50.

And then what where the rates on those, roughly? Or what are you seeing today?

I think most of the rates right now we are looking on the 10-year product being about 1.8%. I think the 15-year is probably around 2.5%.

Perfect. Then just one last one. Do you guys think you've realized the full amount of expense saves at this point from First Victoria. Or do you still see opportunities to reduce expenses there?

Yes, again, I'll respond to that. I think we are pretty much there on the First Victoria aspect of it.

Okay, great. All right. Thanks, guys.

John Pancari, Evercore.

Yes, hi. This is Rahul Patil on behalf of John. Just a question on the loan growth. I know you mentioned that the new loan production was actually up 13% in the quarter, but the end-of-period loans declined slightly.

I am just trying to get a sense of - how much runoff are you still seeing in loans from First Victoria or Coppermark?

This is Tim Timanus; I will try to answer that one for you. During the first quarter of the year, we had approximately $121 million pay off out of the portfolios of our three most recent acquisitions. Most of that was from First Vic, but there was a fair amount from Coppermark also.

Those paydowns represented a number of things, from borrowers selling the assets that secured the loans, to refinancings at extremely low rates that we were not comfortable matching. And then there were some assets in the mix that really didn't that our model; and we had agreed with the management of Coppermark and First Victoria to remove those assets if and when we could, in an appropriate manner.

So a lot of that paydown, again, came from those two banks. What we see in the future is probably moderation of that.

There will be, obviously, some additional payoffs within their portfolios. But I suspect -- and it is only a guess -- that that is probably going to decrease over the next couple of quarters.

That's helpful. Then just want to clarify on your loan growth guidance that you gave, the 7% to 8% in 2014. Is that organic loan growth basically excluding the deals that were closed in 2013?

Yes, that is.

All right. That's it for me. Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you. Good morning. Curious as to what your outlook on the net interest margin is over the next three or four quarters.

Yes, this is Dave Hollaway; I'll take first shot at that. It probably hasn't changed much from what we said last quarter.

Now, we said last quarter, if everyone recalls, we thought the margin would stabilize. And just talking about core margin here. We saw it move a couple basis points.

But we don't think that dynamic has changed, and there is a couple of variables here to think about. One, F&M is coming on. They have higher a loan-to-deposit ratio and their yield is a little higher than ours, so that will have somewhat of a positive effect on the margin, a little bit.

But still when we step back, we still think the margin will be stable. Could be a few basis points over the next few quarters: could be a few basis points down, a few basis points up.

The big variable on this is the net loan growth. Obviously, the more net loan growth we get on the books, the more positive it will be for the margin.

What about on the reported margin?

I didn't hear that.

What about on the reported net interest margin? Would you expect that kind of compression again?

Yes, kind of look at it a different way, because the reported margin includes the fair value discount accretion in there, so that -- so converted into numbers, you saw this past quarter roughly $13 million in accretion. That is probably -- we don't have F&M in there, so it could change a little bit.

But we think that -- we said last quarter we thought it would run $9 million to $12 million. But having a run rate of about $13 million, that is not unreasonable.

And then the fair value from F&M is not in that number, so you will have to factor that in. But I think that is a good run rate. So that is a long way of saying that top-end number should be pretty stable also, if we are running at that $13 million.

Okay. Could you guys comment on your pipeline in terms of acquisition opportunities?

And, David, if you could talk about what you think -- when you think you might be comfortable announcing another transaction? And do the DFAS results have any impact there?

I guess there's three questions there, and Tim will probably help us on the loans. So you know, my gut feeling in looking at the loans, January was an extremely good month for us; February and March we definitely saw some downturn in February and March.

As far as the total numbers coming down, I think Tim is going to give you numbers that show our production has probably been higher than ever; but the total overall came down. Looking in this first -- looking at the first part of April right here, the numbers look extremely good. And I think we are up year-to-date $40 million or $50 million right now already for the first month.

So that looked extremely good and that is what gave us the confidence to say that the 7% or 8% organic loan growth is -- we feel comfortable with that. I will let Tim -- you want to jump in before I answer the other one?

I agree with everything you just said. I think the backdrop to all of this is that the economies in Texas and Oklahoma are very good. In fact, I read an article in the Houston paper, front page, this morning that said that the state of Texas by itself is now the largest producer of oil and gas, second to Saudi Arabia only. So Texas has moved literally into an international framework in that regard. And while that can obviously change over time, there doesn't appear to be anything on the horizon to change it right away.

If you look at 2013, for example, our average monthly new loan production for the full year of 2013 was $184 million per month. That peaked out in the third quarter at $210 million; the fourth quarter was a good quarter also at $197 million.

But once again, this first quarter of 2014, we hit $223 million. So we feel very good about where we are right now. And if you just look at the history of that production over the last year, certainly over the last three quarters, it gives reason for optimism.

So I think we have a very good chance of being at 8% on an organic basis at the end of this year.

With regard to the M&A, as we mentioned earlier, our two primary goals this year were really the close on the First Victoria National Bank deal and do the operational integration. And again, we couldn't be more pleased on that.

The team from First Victoria has added a lot to our group, and again they have taken management roles, and I just can't say enough. I couldn't be more pleased.

I think that there probably are a lot of banks have gone negative on the loan side for an extended year to year and a half. I think in their case, they may even turn around and start going positive sooner than some of the other banks, so that is real positive.

Again, we just closed on the F&M Bank deal this month, and we are looking for the operational integration of that in June. And again just because you are doing the operational integration in June doesn't mean that you have all your back-room stuff put together and all that. That usually takes probably 30 to 60 days there.

So I think if that goes good and everything, our operations, we just really want to make sure that our operations in our back rooms and our IT and everything is up to snuff. We will be looking toward the end of the year again to do something.

But again, we are still completing the F&M deal. We want to make sure that goes good and again that -- from the back room and the operational infrastructure, that it is all in place, too.

And, David, when are you expecting to get some feedback from your stress test results with the regulators.

Yes, this is Dave Hollaway. That is fortuitous here, because they are actually in as we speak doing their review. So we hope to get some feedback here in the next few weeks, actually.

Okay, thank you.

Jefferson Harralson, Keefe, Bruyette & Woods.

Hi, thanks. I was going to ask about the size of the balance sheet we should expect next quarter. Looks like you guys may have bought some securities this quarter. Was that pre-buying in advance of the F&M purchase?

I guess last quarter they had about $2.6 billion in assets. Should we bring over $2.6 billion, or should it be closer to $2.3 billion, or $2.2 billion, or $2.0 billion or something?

Yes, I think that is right, because there is always some intercompany action going on here. But yes, $2.6 billion is probably too high. And I don't have the exact number, but I would be more in the -- and somebody can jump in here -- but I would be more in the range of $2.3 billion, $2.4 billion, initially.

Yes, again, I know our balance sheet grew this quarter. But always remember our Bank and just historically our deposits always increase in the last quarter of the year, and they tend to increase the first quarter of the year. The second quarter and third quarter our deposits get lower there.

So two quarters we do real good and then two quarters we go down. So I think that what has happened this quarter historically is not -- I think that is the reason the balance sheet has gone up. But Dave, do you disagree with that?

No, I agree, but I think Q3/Q4 is where you want to be in, coming out of the box on F&M.

Great. And the runoff of F&M, it is a relatively large portfolio. Should we expect a higher run off at F&M versus what you have had at other banks that you have bought recently?

We don't have the exact number yet. But again, having $300 million to $400 million in Shared National Credits and participations to begin with, you would expect it to be more than some of the other banks.

Okay. Thanks, guys. Thank you.

Ken Zerbe, Morgan Stanley.

Thank you. Just on the provision expense, was there anything unusual in, I guess, the provision or the underlying credit trends that drove basically the almost close to zero provision this quarter? I guess I was just thinking, with the organic growth I would expect it to trend back higher, knowing that you have obviously very low charge-offs.

Am I thinking about that wrong? Or any comments on provision? Thanks.

Well, you are probably thinking like a banker would think, I would say, or the way I would think. As your loan portfolio would grow you would normally want to add to it.

Unfortunately, we have this strong methodology formula that prohibits you to tell you what you can do. In fact, based on the formulas, we are lucky we didn't have to take loans out of it based on the metrics that we had and put money back into it. You are just looking at it too logically.

I tend to do that, I guess.

Ken, I think we do have confidence in the methodology. As David says, those of us that have been in the industry for a long time feel like we could probably work this on the back of a napkin, so to speak.

But having said that, we have to comply with accounting rules and regulatory rules, and we all understand that. And we do feel like we have a good methodology. We feel like it is accurate. It has proven to be over time.

And I think the asset quality speaks for itself. It is very, very good. The NPAs declined from the end of last year.

So we believe that the provisioning is adequate, and we have no reason to suspect that the methodology will not prove itself to be accurate going forward.

All right, perfect. Thank you very much.

Brad Milsaps, Sandler O'Neill.

Hey, good morning. You guys addressed most of my questions, but just a follow-up on Ken's question; and the answer may be the same. But was there something that drove the larger provision in the fourth quarter?

It seemed -- credit kind of the same, obviously got a little bit better linked-quarter. But you are almost $8 million in the fourth.

And then I guess secondly, I guess you reserve at 87 basis points. Probably best to look at that as a percentage of -- or excluding the acquired loans. Is that how you guys think about it, as well as the coverage ratio?

Well, I think yes is the answer. There are numerous factors that go into the model, one of which does take into consideration loan growth.

So when we acquire an institution with a substantial loan portfolio, that loan growth is by itself one of the factors that is taken into consideration. But once again, there are multiple factors, many factors.

So, there were things that transpired during that quarter, not the least of which was First Victoria joining us, that having worked through the model indicated that that provision was adequate. Those circumstances changed somewhat with the quarter that we just finished. So it is really a quarter-by-quarter calculation, and you have to look at the dynamics during each quarter on its own.

I think I would point out, too, that a lot of the growth in the loans came from First Victoria National Bank, Coppermark, and acquisitions in the past. And again as you know, we are making a number for the accretion of the loans that pay monthly.

But then you're also making this other number of loans that you think can go back. So you have a provision in those three categories.

Dave, what was the total provision for all three? Am I reading it right?

As of what date?

Well, at the end of this --

End of the quarter it's about $42 million (multiple speakers)

That's right. That's right.

$42 million. So I think if you really want to get a true estimate or I think of what your real provision is, you've got $42 million plus the other $60 million or so that we have in provision. I think that really does give you a lot better perspective on what is in provision than just the number that is really just laying out there and blatant, really.

Okay, great. Thank you.

Jon Arfstrom, RBC Capital Markets.

Hey, thanks. Good morning. Thought you had forgotten about me way back in the queue. Just, Tim, a question for you.

You talked a little bit about energy and Texas. Give us an idea of how the energy activity in lending has gone in West Texas for you since the acquisition.

Well, the answer is it has gone extremely well. That is a function of having good, knowledgeable people that joined us that understand that type of lending and how to work through it.

And that also includes Oklahoma, because we got some very capable people that joined us through Coppermark in that regard. And we are going to receive some on the F&M side also.

The market is just good. Just as an example, I guess, David Zalman and I flew out to Midland-Odessa not too long ago, and it is an amazing part of the world. You fly over that Permian Basin, and it is just one oil and gas well after another as far as the eye can see.

Of course we all know that commodities can be variable in their price; they can fluctuate. But we feel very good about where we are right now.

We have tried to be very careful with all the credits. We have tried to build decent margin into our collateral positions. And we always look at the tax load of the dollar.

So there is nothing on the horizons that is disturbing about it right now. In fact, to the contrary, I think we are reasonably bullish about it.

Yes, and I would say, Jon, as Tim ked him said, he and I flew out there; and when you looked out the airplane window there is a well there every 20 acres. I mean, unless you saw it and you were out there, you just couldn't believe it.

The businesses are good. They are doing fantastic.

One of our questions in going out there is to say: okay, what is going to make this different than in the 1980s? And I thought -- they said it was, and I thought the explanations they gave were realistic, but we couldn't be more pleased with our operation than we have with our people out in West Texas.

Okay. David, I know you are pretty risk-averse guy. But do you have limits in place and do you monitor that exposure and concentration?

We do. I don't have the exact numbers with us. Merle, you're here with me today, and I don't know if you have the exact numbers that we have in the oil and gas industry. But --

I can give you a little color today.

Thank you.

Merle Karnes6 If you just look at our total Permian Basin loans -- not all of which are loans on production or even to service companies, but just the loans within those banking centers, it is about 3.5% of our total loan portfolio. So if you add other areas to the Permian Basin, it is not over 5%, I don't believe. I don't have a hard number, but I don't believe it is over 5% of our total loan portfolio. And that is a number that we are comfortable with today.

Okay. Maybe for you, David Zalman, or Tim, just that there has been a little discussion on the SNC portfolio of F&M. As you become a larger Bank, just what kind of comfort or appetite do you have for some of the larger loan opportunities that are out there in Texas?

As referred to Shared National Credits or just overall loans?

I would say overall larger loans in general. You could touch on Shared National Credits as well, but I am more interested in just larger -- comfort for you with larger loans.

Well, it is probably not by design, but I do sit at Loan Committee and now we don't see loans in there unless they are over $3.5 million. I would have to say that loans, because of our size, are just naturally getting larger.

We are seeing larger and larger credits. Again I don't know that we are making [NHU's] credits, but overall you'd have to say because of our size that loans are getting bigger, and we have to adapt to that.

With regard to the Shared National Credits, it will take us some time, if we ever get used to Shared National Credit as much. It won't mean that we won't do them; but again, it would have to be major companies with good, good transparent numbers that we can really rely on and something like that. It won't be to all the mom-and-pop-shop types of Shared National Credits.

I would add that, I guess on a historical basis, we have done a few. We all know it has not been many, but we have done a few.

And the ones that we have done have virtually, I believe 100% of them, been to credits that we had in the Bank anyway. They may have been a Shared National Credit, but we had a relationship in several of these cases with the owner or owners of the business. So it wasn't totally arm's-length, in other words.

I think a lot of it, though, Jon, too, is the pricing issue. If the pricing ever got realistic in some cases where it is worth the risk, we may be in more favor of them.

But again when you are pricing some of these things at LIBOR plus 1.5, we can almost buy security and be about the same there and not have the risk. So if those things change or improve, we may be more open to that also.

Yes, okay. Then just a quick one for Dave Hollaway. Excluding the F&M piece, the service charges, and NSF, do you expect the typical Q2 seasonal bounce in those categories? Or is there anything unusual this quarter?

No, I think we should -- we love seasonality so we should see it snap back; and also just make sure that we adjust for those one-time gains in the first quarter. That obviously -- we can't count on that to be in the next couple quarters.

Okay. All right. Thanks for the help.

Mikhail Goberman, Portales Partners.

Good morning, gentlemen. Most of my questions have been answered, but I am sorry if this is kind of beating a dead horse, but back to the reserve issue for a moment. I see that your allowance is 1.18% on total loans excluding acquired loans.

Is there, I guess, a floor that you can potentially get that ratio down to, sort of a normalized area that you won't go lower than?

I don't know that I -- do you guys understand the question?

Well, I think I understand. I certainly understand in theory your question and why you ask it; but I think the technical answer is no. I mean, the calculation is what it is. And there is really no way to impose what the accounting profession would consider an artificial floor.

So I don't think that approaching it that way is actually feasible under today's accounting rules.

Asked from a regulatory standpoint, there is no pressure from regulators or anything like that to keep a certain normalized allowance ratio?

Well, that varies over time; and I guess it varies with the regulators that you are talking to at that point in time. But right now, I would say that is not the case.

But once again, if you talk to regulators that have been in business a long time, just like some of us have, we all have mental floors and we all have a floor in our mind that we maybe don't think we should be below.

But that is not how you can operate anymore. You have to document and define where you are through an accepted methodology. And once again, that methodology does not allow for that kind of a floor, so to speak.

I got you. That's helpful. If I could, just one more, circling back to the $3.3 million or so of one-time non-core: the gain on sale and the fee income. As you guys fold F&M into your mix and start thinking about further acquisitions, is there a potential for more volatility in the line item as you figure out what businesses you may want to chop off and that sort of thing?

This is Dave Hollaway; I will take that one. It is hard to say because this all comes down to the target that we ultimately get and what they have.

The past few deals it has just been fortuitous, I guess, in some regards. And using First Vic as an example, where I think we said -- and I won't get this number right -- but I think we had like 14 locations that were duplicate, when they were right next to each other. In a lot of cases, in this particular instance, a lot of cases we liked the First Victoria location better than our own; and that's what you would see in terms of seeing sales of assets.

We might be getting rid of our location in those cases. So that certainly could happen going forward. But until we saw the actual transaction, hard to say.

Okay. Thank you very much, gentlemen.

Matt Olney, Stephens.

Hey, good morning, guys. I want to go back to the discussion on purchase accounting. Of the $13.5 million of the loan accretion in the first quarter, do you have a breakout of how much of that is credit-impaired versus non-credit-impaired?

Absolutely. Actually you can see that in our press release if you looked on page -- for everybody else -- if you're looking at page 12 at the bottom, you can actually figure it out. And the answer is about $10 million was with what we call the 91; and about $3 million with the credit-impaired in this past quarter. But you can see that on page 12 at the bottom.

Okay. Then, David, I believe your commentary a few minutes ago was that $13 million of accretion the next few quarters is not unreasonable. Did I hear that correctly? And does that outlook include F&M?

Two-part answer. Yes, that is exactly what we are commenting on. We said -- and this gets into the esoteric levels, but again let's build our way back there.

We contemplate $9 million to $12 million from the 91; but you are always going to have some of that from the [oh-three]. So that is how we say that $13 million on a look-forward is probably okay.

And then along with that, you're going to have to build something in F&M on top of that $13 million.

Got it. All right. Thanks, guys.

(Operator Instructions) Gary Tenner, D.A. Davidson.

Thanks. Good morning. Just had a quick question on the brokerage business. It looks like you have had really rapid success in building that out across the franchise with the addition last year. Can you talk about whether that has exceeded your expectations and what your view is going forward?

Your question, Gary, is the brokerage meeting our expectations? Again, First Victoria brought a lot to the table; they actually did more brokerage than what we did. We were a lot bigger Bank but they did more brokerage than we did.

With First Victoria, Russell Marshall actually, he became Chairman of that brokerage area. And again we moved from a company called LPL to Cetera, and so we are in that process right now.

But I think I would say it is probably too early to tell where we are at on the deal. My gut feeling is that the momentum looks good; and I think going forward it will surpass a lot of our thoughts on what it would be, from what I can tell right now.

Again, this is Dave Hollaway. I would just add to that, just simply because I have been back and forth with them over here, I would agree with that. I think of all the lines of business that we have and the different things going on, they have definitely moved to the front of the pack in terms of getting their feet on the ground moving forward.

So I know they want me to give them some kudos here, so I am sure they are listening. But --

They definitely had their trials and tribulations, but (multiple speakers)

They have a major challenge because their biggest challenge was to introduce this Bank-wide across 250 locations. But so far so good. They have jumped ahead of the curve a little bit.

I would say that we were excited for them in what they are doing.

Yes, it certainly seems as though it has probably exceeded the pace that you would have expected. Has it been really focused in expanding it through Texas initially, and then Oklahoma follows? Or is it really across the whole franchise right now, in terms of (multiple speakers) products?

(multiple speakers) can answer this; we are not across all the franchises, not right now. But I think for them -- now this is a huge, huge company for them to -- I say huge company -- it is a big deal to get through the whole franchise. And I think that is just going to take them what, six months or a year to probably get through that, Mike? Do you have a [set lease] (multiple speakers)?

I think it will take a year.

A year or two get it really fully rolled out to everybody really.

Okay. Thanks for the color.

It appears we have no further questions at this time.

Thank you, John. We appreciate everyone 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.

This does conclude today's program and you may disconnect at any time.