Prosperity Bancshares, Inc.
Q2 2008 Earnings Call Transcript

Published: 23 Jul 2008

[Operator:]

Welcome to today’s teleconference. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. Please note this call may be recorded. I would now like to turn the call over to Dan Rollins. Please go ahead, sir.

[Dan Rollins:]

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares’ second quarter 2008 earnings conference call. This call is being broadcast live over the Internet at www.prospertybanktx.com and will be available for replay at the same location for the next few weeks. I’m Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares. Here today with me 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 for the second quarter of 2008. He will be followed by David Hollaway who will spend a few minutes reviewing some of our recent financial statistics. Tim Timanus will discuss our lending activity, including asset quality, and finally we will open the call up for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Jimmy, or you may email questions to [e-mail]. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Whitney Hutchins at 281-269-7220 and she will fax a copy to you. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities Laws and, as such, may involve known and unknown 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’ filings with the Securities & 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. David?

[David Zalman:]

Thank you, Dan. And I would like to welcome everybody joining us today. Before I start the presentation, I’d like to say that there is no bombshells that we’re going to drop on you this morning. There are no monsters to scare you, so scoot back in your chair and enjoy the presentation. Among our successes in this quarter, we saw increased earnings. Second quarter earnings increased 1.93% to $23.4 million from $23 million for the same period last year. Our diluted earnings per share were $0.52 for the second quarter of 2008 and 2007. Our return on average assets for three months ended June 30, 2008 was 1.43%. Our return on average common equity and return on average tangible common equity for the three months ended June 30, 2008 were 7.96% and 26.93% respectively. The efficiency ratio was 46.17%. I am pleased to announce that on June 1, 2008, we completed the acquisition of First Choice Bancorp Inc. and its subsidiary, First Choice Bank with two full-service banking offices in the Houston area. One location is in Pasadena and the other is in the Heights area. We are very excited and honored that First Choice decided to join our team and we welcome all of their customers, directors, shareholders, and associates to Prosperity Bank. Our deposits at June 30, 2008 were $5.3 billion, an increase of $520 million or 10% compared with $4.8 billion at June 30, 2007. The linked quarter deposits increased 7% from $4.9 billion at March 31, 2008. Excluding deposits assumed as part of acquisitions, linked quarter deposits increased 1%. While a few banks are offering rates well above the market, for the most part customers now realize there is usually a reason for this and they generally limit what they will put into those banks, to the FDIC insurance limit. Yet, they even continue to bank with those entities. We continue to believe we will benefit from our strong asset quality and balance sheet, in acquiring new deposits in these more turbulent times. Our net interest margin increased to 4.10% in the second quarter from 4.03% in the first quarter. As we mentioned in our first quarter conference call, as our deposits are repricing, we expected to experience a margin improvement and that’s exactly what happened. David Hollaway will be able to provide additional color on this subject. Loans at June 30, 2008 were $3.31 billion, an increase of $132 million or 4.2% compared with $3.18 billion at June 30, 2007. Linked quarter loans increased 4.8% or $151 million from $3.16 billion at March 31, 2008. Excluding the loans acquired in acquisitions over the past twelve months, linked quarter loans decreased 1%. As I’m sure everyone remembers, Texas United Bancshares, our last large bank acquisition operate a very active mortgage lending department that generated traditional portfolio mortgage loans, held-for-sale mortgage products, one-time-close-construction loans and direct construction loans to builders on a contract and speculative basis. We decided to exit this line of business early in 2007 and are continuing to see these loan balances that were put on in these areas decline. Going forward, we are continuing to monitor construction loans and remain selective as to the strength of the overall borrower. Our builders are reducing the amounts they are borrowing and we are looking to reduce our exposure in this area as well. Having said that, we are seeing lending opportunities on strong credits that in the past were going to non-traditional lenders, simply because we were unwilling to match the aggressive terms and conditions. As these alternative sources dry up, borrowers are returning to more conventional financing such as ours. Our non-performing assets to total assets at quarter, June 30, 2008, were 22 basis points as compared to 33 basis points in the quarter ending March 31, 2008. We are pleased with the progress and are optimistic as we look forward. I believe our asset quality ranks among the best in the industry due to strong underwriting and an experienced loan team. As we reported last quarter, we own Fannie Mae and Freddie Mac preferred stock with a par value of $24 million. During 2007, the net book value of the preferred stock was reduced by approximately $10 million due to an other than temporary impairment charge in accordance with FASB 115 [ph] to $14 million. The market of the Fannie Mae and the Freddie Mac preferred stock was $11.8 million as of June 30, 2008, resulting in an unrealized loss of $2.2 million as of June 30, 2008. We believe and agree with U.S. Treasury Secretary Paulson that these DSCs should continue to exist in our current state. The regulator has decided that they are adequately capitalized and these securities continue to perform according to their contractual terms. We will continue to monitor this situation and take any action if necessary. In wrapping up, I would like to repeat a comment that I made last quarter, and that is we do not have any CDOs, SIVs, or other esoteric products that are continuing to cause strain in the liquidity markets. While we do offer some mortgage-related products, we do not operate a mortgage company. We do not have a factoring company, or an asset-based lending group. We do not participate in indirect lending programs. We do not participate in shared national credit. And finally, we are not involved in subprime lending. Our management team has many years of experience and if economic conditions do change in Texas, I feel very confident in the abilities of our team as and I am confident we will be able to navigate through these trying times. In closing, I would like to say thank you for your support and confidence. I am very confident in our model and our continued success. We have a great group of bankers and we will continue to grow and prosper. We are proud of our past and intend to stay the course. We plan to continue our focus on organic growth and we plan to continue to pursue accretive acquisitions. Although, we want to grow, we will not take our eye off the ball when it comes to asset quality and building shareholder value. We intend to continue building loans, focusing on our customers, rewarding the people that produce results, and also building shareholder value, and honor our service commitment by greeting the costumer with a smile, calling the costumer by name, and finding a way to say yes. Thanks again for your support of our company and let me turn over our discussion to David Hollaway, our Chief Financial Officer, to discuss some of the specific financial results we achieved. Dave.

[David Hollaway:]

Thank you, David. Net interest income for the second quarter 2008 increased by 5.1% to $54 million compared with $51.3 million in the same quarter last year. This was primarily due to an increase in average earning assets of 5.1%. Non-interest income for the three months ended 6/30/08 decreased 5.6% to $13.1 million compared with $13.8 million in the same quarter last year. This was primarily due to a decrease in gains on sale of held-for-sale loans and trust and investment income. And in both cases, these decreases reflect our exiting business lines we acquired in the TXU Itrack [ph] transaction exiting both the mortgage banking function and the trust business they had back in 2007. Non-interest expense for the three months ended 6/30/08 increased 2.6% to $30.9 million compared with $30.1 million for the same period last year. This increase was primarily attributable to the four acquisitions we've completed since January of 2007. The tax equivalent net interest margin was 4.10% for the second quarter 2008 versus 4.09% for the same period last year and 4.03% for the first quarter 2008. And again looking at our 6/30/08 asset liability model, we still see margin expansion over the next few quarters and as David mentioned earlier, a lot of this is coming from our ability to be able to reprice our liabilities down. Our bond portfolio metrics at 6/30/08 reflect a weighted average life of 4.2 years and an effective duration of 3.4 years. The projected annual cash flow is approximately $420 million. And one last comment on capital ratios – all of our capital ratios surpassed the regularity well-capitalized thresholds. At 6/30/08, our tier-one leverage ratio was 7.9%, the tier-one risk-based capital ratio was 12.7% and total risk-based capital ratio was 13.7%. Our tangible capital ratio was 6% at 6/ 30/08 compared to 5.5% at 6/30/07. And with that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality.

[Tim Timanus:]

Thank you, David. Non-performing assets at quarter end, June 30, 2008, totaled $11,651,000 or 0.35% of loans and other real estate compared to $17,554,000 or 0.55% at March 31, 2008. The June 30, 2008, non-performing asset total was comprised of $4,857,000 in loans, $139,000 in repossessed assets and $6,655,000 in other real estate. Of the $11,651,000 in non-performing assets at June 30, 2008, we anticipate that approximately $4,600,000 will be removed within the next 30 to 60 days based on existing contracts for sale and collection efforts, although there can be no assurance that these contracts will close or that these collection efforts will be successful. Net charge-offs for the three months ended June 30, 2008 were $1,164,000 compared to net charge-offs of $1,643,000 for the three months ended March 31, 2008, for a 29% decline. $1 million was added to the allowance for credit loses during the quarter ended June 30, 2008 compared to $1,167,000 for the first quarter of 2008. The average monthly new loan production for the quarter ended June 30, 2008 was $103 million compared to $94 million for the first quarter ended March 31, 2008. Loans outstanding at June 30, 2008 were $3,313,000,000 compared to $3,162,000,000 at March 31, 2008. The June 30, 2008 loan total is made up of 41% fixed rate, 31% floating and 28% resetting at specific intervals. I will now turn it over to Dan Rollins.

[Dan Rollins:]

Thank you, Tim. As David said, I am pleased to report that we completed the acquisition and the systems conversion of the two former First Choice Bank locations in Houston that we purchased in June. We believe these locations are a natural fit to our existing presence and we've completed the consolidation of one of our existing locations into one of the First Choice locations. These locations are operating today on our computer system and under our banner and everything seems to be going well with those locations. At this time, I think we're ready to turn it over to questions. Jimmy?

[Operator:]

(Operator instructions) We’ll take our first question from Brent Christ with Fox-Pitt. Please go ahead.

[Brent Christ:]

Good morning, guys.

[Dan Rollins:]

Hi, Brent.

[Brent Christ:]

Could you talk a little bit more about kind of the underlying dynamic in terms of the loan growth this quarter, I guess more so, on an organic basis. It looks the construction balances were still pretty flat, even with the acquisition of the First Choice and just kind of wondering a little bit more in terms of what’s driving that.

[Dan Rollins:]

Good question, Brent. When you look at the organic number, we were down about $30 million organically. When you look at the different categories of loans, the construction loans that First Choice brought to the table was about $20 million, so while construction loans fell about $6 million from period end to period end, $20 million in there was First Choice construction credits. So in reality, organically, we shrunk the construction portfolio about $26 million which represents basically all of the organic shrinkage in the portfolio.

[Brent Christ:]

And where do you kind of see that portfolio trending over the next 12 months or so?

[Dan Rollins:]

The construction portfolio?

[Brent Christ:]

Yes.

[Dan Rollins:]

I think David made a comment in his comments a minute ago that we continue to look at the construction credits and really all credits very carefully, but just the markets that we’re in – the builders that we have are actually throttling [ph] themselves back some. Construction has moderated from the exceptionally fast pace from the past. So, we would expect that construction portfolio to continue to shrink.

[David Zalman:]

Brent, David Zalman. As I mentioned earlier, we would like to see – we would like to shrink our construction portfolio, on the other end I put the caveat in there that every time we try to shrink it, we’re getting more and more opportunity to see real quality credits that we haven't got to see in the past, simply because nontraditional sources from some of these credits have dried up and so, that’s the only caveat I would put in there. We are really getting to see a whole lot more credits than we normally got to see and sometimes they’re pretty good.

[Brent Christ:]

Okay. And then another question on credit quality you mentioned, that there is about $4.6 million of MTAs kind of set to be removed in the next 30 to 60 days, could you just update us in terms of – if included in that number is some of those lumpier foreclosed assets that you had last quarter and to the extent you resolved any of those this quarter?

[Dan Rollins:]

There were four of those big pieces that came on in the fourth quarter of '07 and two of them came off during the quarter and two are still there, and Tim you can address kind of where we are on those two.

[Tim Timanus:]

That’s correct. There are two that are still there. One of which is under contract.

[Brent Christ:]

All right.

[Tim Timanus:]

We hope that contract foreclose. The other is set for foreclosure in early August, so we’re still trying to deal with that one.

[Brent Christ:]

Got you. So, within that $4.6 million, probably $2 million or so is related to one of those fore credits [ph] that –

[Tim Timanus:]

That is correct.

[Brent Christ:]

Okay. Thanks a lot guys.

[Dan Rollins:]

Thank you, Brent.

[Operator:]

We’ll take our next question from Erika Penala with Merrill Lynch. Please go ahead.

[Erika Penala -- Merrill Lynch:]

Good morning.

[Dan Rollins:]

Good morning, Erika.

[Erika Penala -- Merrill Lynch:]

Can I just get a little bit more color on what you’re hearing from the – your developer clients? I know you mentioned that they are sort of dialing down in terms of further build out. What are they saying in terms of sales activity?

[David Zalman:]

Erika, this is David Zalman, I’ll address that. I guess sometimes you have to determine which one you’re talking to, but overall, I think most people, most of them agree that there is a slowdown, and if you looked at quarterly conference calls last time and the time before that, almost everybody said that the slowdown was just strictly in the, what we call, starter homes or lower end homes. But I think that everybody will agree that there has been a slowdown. On the other hand, the slowdown that they're telling me really just takes us back to a time of a couple of years back when we – which was really in my opinion a normalized build rate. And so, I think that’s where we’re at today. The Texas economy is, we think, is really helping us. It is still growing. The Texas Workforce Commission pointed out that we grew 47,700 jobs in June and we’ve added 245,000 jobs in the past 12 months. So, our annual job growth rate on an annual basis is 2.4%, which is really still bringing people into the Texas economy and they’re looking for houses. In fact, if you look at the overall prices of homes, what they are showing is, in all of the markets that we're in, all of the prices actually saw a little bit of an increase with the exception of Fort Bend County and the Dallas Metroplex. But overall, if you had to average the prices of homes, how they did seasonally adjusted, we are still seeing a 1% increase in homes. So having said that, I think basically, I made a long story out of this, but I think what we are really seeing now is that it's not really what it was a year or so ago, but we're back more in normalized rate, and if the Texas economy continues to stay where it is, and grows and continue bringing people in, I think we're in pretty good shape.

[Dan Rollins:]

That answer your question?

[Erika Penala -- Merrill Lynch:]

Yes. And just a follow-up, so the developers that are holding these -- and thank you so much for the added construction disclosure by the way. The folks are sort of – with the raw land or partially developed loans, they still have reserved enough cash even if they are not finishing the project, they have serviced the dead and just hang to the land without having to dispose of it. That’s the right way to think about it?

[Dan Rollins:]

No. I wouldn't go down that road. Developers are still developing products and builders are taking lots down. The way I understood, your question was it sounded like developers have stopped construction in the middle of a project and we're not experiencing that here. I mean we are experiencing some slowdown in the takedown of lots. So, if the developers took down 50 lots last year or the year before when it was red hot, this year they're taking down half of that.

[David Zalman:]

I think Erika is probably referring to some of the capital lending that was out there, with a lot of the mortgage companies, and yes, there was some of that where people were buying lots and speculating that they would sell to somebody else and flipping it in. And you're still seeing some of that and you're still – we're still trying, I think the market is trying to clean and cleanse themselves of that.

[Dan Rollins:]

(inaudible) portfolio there.

[David Zalman:]

Well, I'm not saying there was still some stuff from our past Texas (inaudible) stuff there with other mortgage company. We still see periodic loans like that. So I mean I see where Erika is coming from.

[David Hollaway:]

I think it is important to emphasize that we see the quality developers that have good product still with reasonable demand, albeit maybe not as stronger demand as it was within the last couple of years. It's still reasonable and they're still selling product. Now, the lesser quality developers that have poor product, they may be having more problems but we don't see that we have very many those that we are doing business with.

[Dan Rollins:]

Let me come at it in a different way. I think you are asking about, do people have cash to hold, and I think when you talk about the quality of the borrower that we are banking today and the way we have underwritten loans in the history of our company, I think we actually are looking at the borrower, we are looking at what their overall total consolidated cash flow of all of their entities are, and that is our expectation, that our borrower would be able to cash flow and support their projects if things slow down.

[Erika Penala -- Merrill Lynch:]

Okay. And just one more question to follow-up on what, David mentioned the lending opportunity that you have going forward. You mentioned that there's opportunity on the construction side, but is there also opportunity on the term commercial mortgage side, specifically refinancing loans that were once done by the conduit lenders.

[David Zalman:]

I don't know about the refinancing. I just would say primarily new projects, we are definitely getting to look at new projects. And yes, it is probably more in that area than it is even on the construction side. I think that's probably the area that we are seeing the most of.

[Dan Rollins:]

I agree. I think, maybe – you misunderstood [ph] what he was saying, we are seeing a lot of construction opportunities. The opportunities that we are seeing are predominantly more new activity coming in.

[David Zalman:]

Yes.

[Erika Penala -- Merrill Lynch:]

Okay.

[Dan Rollins:]

And your question about refinance activity, I don't know that we are seeing a lot of refinance going on. For people who want to refinance a project, typically you want to see rates move down substantially and we really haven't seen that rate movement. So there's not a big incentive to refinance a lot of projects today.

[David Zalman:]

Yes, I would say, if you are seeing refinancing, it's probably for another reason.

[Erika Penala -- Merrill Lynch:]

Right. The conduit doesn't exist anymore and so they have to go to traditional lending sources. Okay. Thank you for your time.

[Operator:]

We'll take our next question from Brett Rabatin with FTN Midwest. Please go ahead.

[Brett Rabatin:]

Hi good morning, guys.

[David Zalman:]

Good morning.

[Dan Rollins:]

How are you?

[Brett Rabatin:]

Good. I guess I haven't seen too many (inaudible) trust preferred, that was interesting. So, obviously, in Texas things are good enough where you don't have to have additional capital, which is great. I wanted to ask on the Fannie/Freddie stuff, in the yet unrealized loss there, I mean how do you think that plays out? Are you guys looking at the OTTI type thing, or what’s going to happen with that assuming nothing changes with valuation?

[David Zalman:]

As far as what do you think our feelings are about what will happen with Fannie Mae and Freddie Mac?

[Brett Rabatin:]

Well, just --

[Dan Rollins:]

You made an assumption that nothing happens with valuation, that's a pretty big assumption to start with.

[Brett Rabatin:]

No, I mean, there's obviously no way to know what's going to go on with those securities, I mean, it's -- they could be up or down a bunch. I mean there’s no way to know. Well, let's just say they’re static, what do you guys end up doing, do we just go ahead and adjust or we just hold it until --?

[David Holloway:]

Hey, I mean, this is David Holloway. I'll jump in before Zalman does, but yes, I mean that's the $1 million question. We've seen so much volatility in the pricing in all the headlines over the last couple of weeks. It a hard call sitting here today to say, well, we're going to go right or left because with some of the things that happened especially with Paulson [ph] coming in and saying they want to maintain these entities as is, you take that for what it's worth, you can go one way. But the bottom line is, we live under accounting rules and one of this is other than temporary impairment concept. And with the pricing down -- I guess today, it's dropped off dramatically from 630, there will become a time where we have to address that specifically from an accounting perspective. Is it into the third quarter, is it end of the year, well, I can’t tell you at this point but absolutely depending on the facts over the next couple of months, we may have to write those things down. But, as of today, I don't know if we could make that call one way or the other.

[David Zalman:]

Dave, I would think that we're going to get a lot of -- a lot more clarity. I think Bush announced this morning that he's going to (inaudible) and give in and sign that Congressional bill that includes Freddie Mac and Fannie Mae and I think this morning again you saw their common stocks increase dramatically which they have over the last three or four days, and I think even yesterday evening, we've seen some real upticks in this preferred stock. So, I think within the next three months, we'll have some real clarity on this field.

[David Holloway:]

And so that’s why, again, just to reiterate, that's why I want to be very clear. We had $24 million on our books at year end. We did do another in temporary impairment of about $10 million. We took it down on our books to $14 million. At 630, the unrealized loss related of about $14 million was $2 million, about $1.4 million after tax and equity. So, if you're kind of doing the exposure to capital and if you took the worst case scenario and said that the common shareholders and preferred shareholders get wiped out, then our exposure is roughly about $12 million as we sit here today.

[Brett Rabatin:]

All right. Okay. Thanks for the color on that. And then I was also curious on the construction fees, I don’t know if you guys had available geography-wise where you have the single family construction in land and all in, it sounds like those portfolios are still relatively fine. But I was just curious geography-wise if you had a breakdown of where they might be?

[Dan Rollins:]

It's all over the state. When you look at what our team is doing, when you look at the total portfolio, a little less than half of it is in the Houston metropolitan area because that's our biggest base. And so I think you can extrapolate out from there and assume that half of the construction piece is in there. We've got construction in the Dallas-Fort Worth Metroplex, we've got construction in the Austin market, and we certainly have it down in the South Texas market also. So, I think we're spread out.

[Brett Rabatin:]

Okay. And then just lastly on the margin front, I’m curious if there might be any change? I mean obviously the securities portfolio is a little bigger at quarter end. Any thoughts on balance sheet management, aside from the loan growth that you might have, are you guys going to look to maybe slow balance sheet growth going forward or should we expect you to leverage with the present yield curve or what’s your thoughts on that front?

[David Holloway:]

A couple of things. One, again, Dave Holloway, I'll jump in before Zalman, but one of the things that we are seeing that's interesting is, with all the chaos in the markets these days and again we are not paying up on rates, we're not -- we've never paid the top rates, we're not doing that today, but what's interesting is with all the chaos we're seeing, we're getting a lot of opportunities from the deposit side. These people are looking for safety, if you will, looking for -- they’re doing their homework, they’re researching it on the FDIC side or wherever, and are looking for places to park their money. So we're seeing a lot of opportunities with people bringing in deposits and this is not where we're having to pay top rates. They're just parking in the bank. And so when this is happening, we can't just leave it sit in Fed funds. We need to go ahead and try to invest it short term and then hopefully over the long haul, we'll lend it out and that's kind of have been our mantra all along. So that’s what you’re seeing when you look at our balance sheet. And I don't know, David, you might want to mention, you’ve also tried to jump in a little bit on --

[David Zalman:]

Yes. First of all, in the overall segment, we're not going to leverage the balance sheet. The only thing we have done is that we have such amount of liquidity that turns every month from -- or every year from loans and our securities that we are able to buy up. Sometimes you may see this leverage up to $100 million in Fed funds just for the coming month from the roll-off. If we don't have it to go on the loans, we have securities rolling off. You may see us leverage up a little bit because we have a pretty good spread there, I mean that's about it really.

[Brett Rabatin:]

Okay. Great. Thanks for all the color. Good quarter guys.

[Dan Rollins:]

Thanks.

[Operator:]

We will take our next question from Ed Timmons with Sterne Agee. Please go ahead.

[Ed Timmons:]

Hi guys. Good quarter.

[David Zalman:]

Good morning.

[Dan Rollins:]

Hi, Ed. How are you?

[Ed Timmons:]

Pretty good. Just to follow up on the last question here, can you just remind us how much in CDs you have re-pricing this quarter and rates still around 250 or so?

[David Zalman:]

A couple of things. One, you can look in the terms of the rate on the CDs and pick that up if you're looking at our press release on the net interest margin on the back page, but the right question is, we still -- most of our CDs were short, so we’ll be working -- about 50% of them will be rolling over in the next six -- one to six months again. So, the rates that you see in the forth quarter which, Dan, you’re looking at --

[Dan Rollins:]

397 was the second quarter.

[David Zalman:]

So, that would give you a kind of a sense --

[Dan Rollins:]

But he was asking what the current rate is.

[David Zalman:]

Right. That will give you a kind of a sense. In our market based CDs, we are 3% down. So, you can see there is going be a little bit more opportunity, and that's also interesting with the yield curve normalizing. And again, you can pick this up when you're looking at those net interest margin pages on our press release. One of the things you pick up and you can see what's helping our margin, at least one aspect of it is, take a look at the yield on our securities versus the yield on the CDs. If you look at this current quarter versus a year ago quarter, you can see that the spread between those two has picked up dramatically and that's just because we're no longer in that inverted yield curve, which was causing a huge squeeze in our margin last year.

[Ed Timmons:]

And then on the loan side, can you just talk a little bit about pricing and spread and how they've reacted this quarter? It seems like your loan yields are holding up better than a lot of your peers. Is that just better pricing because of the increased opportunities, or are you guys walking away from credit that may be not priced as well?

[David Zalman:]

No, Ed, I mean, pricing has always been very important to us and we walked away even if you look where other banks are really growing their portfolio and ours was not growing organically as much, pricing and having margin is very important to us and that's just one of the things that we're going to stick with.

[Dan Rollins:]

We're getting paid for the risk we're putting on the balance sheet.

[David Zalman:]

That's right.

[Ed Timmons:]

Okay.

[Dan Rollins:]

I guess, the answer is we're actively managing that and watching that, and we're not putting low risk and low priced product on.

[David Zalman:]

The reality of it is your growth may not be as large as some of our competitors, but the probability will be better.

[Dan Rollins:]

That help you?

[Ed Timmons:]

That does. Thanks guys.

[Dan Rollins:]

Thanks Ed.

[Operator:]

We will take our next question from David Bishop with Stifel Nicolaus. Please go ahead.

[Dan Rollins:]

Hi Dave.

[David Bishop:]

How are you guys doing?

[Dan Rollins:]

Good.

[David Bishop:]

Most of my questions have been answered but maybe you can talk about obviously you closed on first choice here, what are you hearing in the market in terms of bank M&A there? Are you seeing more sellers here, what's the velocity maybe? Obviously Texas is outperforming the rest of the country, but I’m sort of distressed deposit or asset sale come down the pipe, will the velocity be there?

[Dan Rollins:]

I think all the investment bankers have gone summer vacation. It's pretty quiet.

[David Zalman:]

Dave, this is David Zalman, we are seeing more opportunities today than we have in a long time and I would say, if you're asking what we're doing, is we're analyzing all of them. I think if you're going to see there -- as everybody knows there's probably going to be some issues and you might see some banks that may need some assistance and that's an opportunity. You may see other banks that are -- larger banks that are in the market that may want to get out of the market. I think you're -- I think even – if you think of Wachovia and some of those, they said that they're looking at assets. I think everybody is -- I think everything is on the table right now and I think there's going be a lot of opportunities and basically what we're doing right now is just we're holding path looking for the right opportunity. We have a number of opportunities but we’re looking for the right opportunity.

[Dan Rollins:]

That help you?

[David Bishop:]

Yes, thank you.

[Dan Rollins:]

Thank you, Dave. Appreciate it.

[Operator:]

(Operator instructions) We will take our next question from Jennifer Demba with SunTrust Bank. Please go ahead.

[Dan Rollins:]

Hi Jenny.

[Jennifer Demba:]

Hi, how are you?

[Dan Rollins:]

Good.

[Jennifer Demba:]

Actually, my question was asked by the last caller. Thank you. Good quarter.

[Operator:]

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

[Dan Rollins:]

Great. Ladies and gentlemen, thank you so much for participating in our conference call this morning. We appreciate the support that we received from you all. We look forward to visiting with you again soon. Thanks you all for participating.

[Operator:]

And this thus conclude today's teleconference. You may disconnect your lines at any time. Thank you and have a great day.