Prosperity Bancshares, Inc.
Q4 2012 Earnings Call Transcript

Published: 25 Jan 2013

[Operator:]

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note this call is being recorded. It is now my pleasure to turn the call over to Charlotte Rasche. Please go ahead.

[Charlotte M. Rasche:]

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Fourth Quarter 2012 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybanktx.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 Junior, Vice Chairman; and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights for the recent quarter and an update of our recently announced merger and acquisition activity. He will be followed by David Hollaway, who will spend a few minutes reviewing 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, Toya, or you may e-mail 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 Tracy Elkowitz at [phone] and she will fax a copy to you. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the federal securities laws, and as such, may involve known and unknown risk, uncertainties and other factors, which may cause the actual results, performance or achievements of Prosperity Bancshares to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' filings with the Securities and Exchange Commission, including Forms 10-Q 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.

[David Zalman:]

Thank you, Charlotte. I would like to welcome and thank everyone for listening to our year end 2012 conference call. We experienced many successes during 2012. We were rated by Forbes Magazine as the Best Bank in America. Our assets grew 49% from $9,823,000,000 on December 31, 2011, to $14,584,000,000 on December 31, 2012. We announced our first merger outside of Texas into Oklahoma City and surrounding areas. We reported our highest levels of net income and earnings per share with $167.9 million in net income in 2012 compared to $141.7 million in 2011, an 18.4% increase. We posted diluted earnings per share of $3.23 in 2012, compared to $3.01 for 2011, an increase of 7.3%. We saw deposits increase $3,582,000,000, or 44.4%, in 2012. And we saw loans increase $1,414,000,000, or 37.6%, in 2012. In addition to our large increase in deposits and loan growth overall, we realized an organic growth rate on deposits of 10.1% and an organic loan growth rate of 6.2% from December 31, 2011 to December 31, 2012. We are very fortunate to be located in the area of the United States that we are. Our market areas continue to experience low unemployment rates, population growth and increasing sales for homes and other products. Further, our market areas are experiencing growth in many industries, especially the oil and gas, chemical, manufacturing, medical and technology areas. Some of our successes in the fourth quarter and for the full year 2012 include an increase in net earnings to $48.3 million in the fourth quarter of 2012 compared to $36.4 million for the same period in the prior year, an increase of $11.9 million or 32.6%. Our diluted earnings per share were $0.85 for the fourth quarter 2012 compared to $0.77 for the same period in the prior year, a 10.4% increase in earnings per share for the quarter on a linked quarter. Total net income and earnings per share for 2012 are the best we've ever reported. Our Tier 1 leverage ratio of 7.1% at year end 2012 has continued to increase because of our strong earnings. As mentioned earlier, our loans increased 37.5% from $3,766,000,000 at year end 2011 to $5,180,000,000 at year end 2012. Loans increased 2% or 7.9% annualized, or $100.8 million on a linked-quarter basis, compared with loans of $5,075,000,000 at September 30, 2012. Our organic loan growth, excluding acquisitions, was 6.2% year-over-year. Our nonperforming asset ratio of 10 basis points continues to be one of the best in the industry. Our deposits increased 44.4%, or $3,581,000,000, to $11,642,000,000 when compared to their level at December 31, 2011. Our organic deposit growth for 2012, excluding acquisitions, was 10%. Our linked-quarter deposits increased $687.2 million, or 6.3%, 25.1% annualized. However, we do expect some of these fourth quarter deposits to decrease in the second quarter of 2013, as they historically have done. With regard to acquisitions, as you know, we have been very busy. During the last quarter of 2012, we spent a lot of time with the operational integration of the largest bank we ever merged with, American State Bank in West Texas. In October of 2012, we completed the acquisition of Community National Bank, Bellaire, and completed the operational integration of it in December of 2012. We announced on January 1, 2013, that we completed the previously announced acquisition of East Texas Financial Services Inc., in Tyler and its wholly-owned subsidiary, Firstbank. The operational integration is planned for the first quarter of this year. On December 10, 2012, we entered into a definitive agreement to merge with Coppermark Bancshares Inc., a $1.3 billion banking company located in Oklahoma, our first out-of-state banking deal. We expect to complete the merger in the late first quarter or early second quarter of this year, with the operational integration planned for the second quarter of this year. We are very excited about teaming up with Coppermark and their entire team. We believe their values and operations are very similar in nature to ours. Coppermark's current management team will continue to lead our anticipated growth and expansion in Oklahoma. We expect that our industry's current operating environment, with higher regulatory scrutiny and higher operating costs emanating from the new Washington-driven legislative burdens, along with asset quality problems, will result in many banks revisiting their strategic options, including sale to bigger institutions. As we look forward, we recognize the need to grow our balance sheet and, specifically, our loan portfolios to offset the negative pressures on our net interest margin. In 2013, we intend to continue to focus on loan growth, eliminate unnecessary expenses, grow deposits and identify and make accretive acquisitions. Our management teams, along with our associates, are truly engaged and are working to achieve our goals. Again, I would like to thank our whole 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. David?

[David Hollaway:]

Thank you, David. Net interest income for the 3 months ended December 31, 2012, was $108.3 million compared with $80.1 million for the 3 months ended December 31, 2011, an increase of $28.2 million or 35.2%. On a linked-quarter basis, net interest income increased $1.4 million or 1.3%. For the full year 2012, net interest income was $380.7 million compared with $326.7 million for the same period in 2011, an increase of $54 million or 16.5%. These increases were primarily due to an increase in average earning assets. The net interest margin on a tax equivalent basis was 3.53% for the 3 months ended December 31, 2012, compared to 3.82% for the same period in 2011 and 3.52% for the 3 months ended September 30, 2012. For the full year 2012, the net interest margin on a tax equivalent basis was also 3.53% compared to 3.98% for the same period in 2011. Noninterest income increased $10 million or 71.4% to $24.1 million for the 3 months ended December 31, 2012, compared to $14.1 million for the 3 months ended December 31, 2011. For the full year 2012, noninterest income increased $19.5 million or 34.8% to $75.5 million, compared to $56 million for the same period in 2011. The increase was primarily due to the American State Bank transaction. Noninterest expense for the 3 months ended December 31, 2012, was $57 million compared to $38.4 million for the 3 months ended December 31, 2011, an increase of $18.6 million or 48.4%. For the full year 2012, noninterest expense was $198.5 million compared with $163.7 million for the same period in 2011, an increase of $34.7 million or 21.2%. Again, the numbers were impacted by the American State Bank transaction. The efficiency ratio was 42.9% for the 3 months ended December 31, 2012, compared to 40.8% for the same period last year and 46.1% for the 3 months ended September 30, 2012. The efficiency ratio for the full year 2012 was 43.5% compared to 42.8% for the same period last year. Bond portfolio metrics at year end 12/31 showed a weighted average life of 2.97 years, effective duration of 2.99 and projected annual cash flows of approximately $2 billion. With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset quality. Tim?

[H. E. Timanus:]

Thank you, Dave. The bank's nonperforming assets at year end December 31, 2012, totaled $13,015,000 which is 25 basis points of loans and other real estate. This is compared to $14,051,000 or 28 basis points at the end of the third quarter of 2012 and $12,052,000 or 32 basis points at the end of 2011. This represents a decrease of 7% from the end of the third quarter 2012 and an increase of 8% from the end of 2011. The December 31, 2012, nonperforming asset total was made up of $5,713,000 in loans, $68,000 in repossessed assets and $7,234,000 in other real estate. As of today, $2,400,000 or 18% of the December 31, 2012, nonperforming assets are under contract for sale. But as we always say, there can be no assurance that any of these contracts will close. Net charge-offs for the 3 months ended December 31, 2012, were $1,913,000 compared to net charge-offs of $1,255,000 for the 3 months ended September 30, 2012. Net charge-offs for the year ended December 31, 2012, were $5,130,000 compared to $5,190,000 for the year ended December 31, 2011. So net charge-offs were basically flat from year to year. $3,555,000 was added to the allowance for credit losses during the quarter ended December 31, 2012, compared to $1,800,000 for the third quarter of 2012. $6,100,000 was added during the year 2012 compared to $5,200,000 for 2011. The average monthly new loan production for the fourth quarter of 2012 was $187 million compared to $134 million for the third quarter ended September 30, 2012. This represents a 40% increase. The average monthly new loan production for the year ended December 31, 2012, was $138,000 compared to $104,000 for 2011. This represents a 33% increase. Loans outstanding at December 31, 2012, were $5,180,000,000 compared to $5,079,000,000 at the end of the third quarter 2012 and $3,766,000,000 at the end of 2011. The December 31, 2012, loan total is made up of 46% fixed rate loans, 33% floating rate and 21% variable rate. I will now turn it over to Charlotte Rasche, who will coordinate any questions.

[Charlotte M. Rasche:]

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

[Operator:]

[Operator Instructions] And we'll go first to the side of Ken Zerbe with Morgan Stanley.

[Ken A. Zerbe:]

Two questions, I guess. The first one, just on the premium amortization, I saw it ticked up again this quarter. Obviously, a huge component of your net interest income. How should we be thinking about the dynamics there? I mean, given a steady-state interest rate environment, I mean, should that stay in sort of that mid-ish $20 million range or, I mean, does that naturally slow down over time or just decline over time?

[David Hollaway:]

Ken, Dave Hollaway. Couple of points to that. One, yes, as you noted, it went up a little bit, but also keep in mind that the bond portfolio itself was much larger quarter over quarter. So if you kind of level out on a percentage basis, it did not speed up. I mean, it kind of, as you kind of noted, it kind of held steady, so that would be the answer to question one. And two, yes, absolutely, if the pre-payment cash flow speeds slow down, all this refinancing with cash we're getting back, that amortization would obviously begin to slow down, which would help us both from a margin and bottom-line perspective.

[David Zalman:]

Yes. Ken, this is David Zalman. I think that a lot it depends, really, on the interest rates. I mean, today, we are looking at the 10-year, up to 1. 9-something percent, and yield's going up. That naturally will slow down the premium amortization, extending the portfolio a little bit, too, at the same time. And on vice versa, if interest rates go down, it would do the opposite. But having said that, I think a lot of it's really dependent on the interest rates themselves, and so what we're seeing today, it is a possibility that the premium amortization could slow down unless interest rates go back the other way.

[David Hollaway:]

And also a function of the volume of the portfolio.

[David Zalman:]

Right, that's a big, big part of it.

[Ken A. Zerbe:]

All right, that helps. And then, the other question I had, just on the reserve, your total reserves. Looks like right now, the ratio is about 1%. How, should we be thinking about this, just given all the acquisitions you've made? I mean, I don't mean to try to dumb it down to make it into a simple thing that we could just plug into our models, but do the regulators look at it? Is -- okay, here's your core portfolio, here's all the acquisitions, you have those marked, so -- I guess I'm just trying to ask, could we -- could it, should it continue to trend lower or, just given the increase in provision we saw this quarter, the 3.6, are you trying to hold that steady at, say, 1% on a combined basis? How should we think about that?

[H. E. Timanus:]

Ken, I'll give a try at that first. This is Tim Timanus. We have a methodology that we have a comfort level in, and the auditors have comfort in it, and so do the examiners. And it takes into consideration numerous factors, one of which is growth in loans. So as you've said, we've grown loans organically and by acquisition. So that would indicate a possible increase in the reserve. But that's only one of many factors that we look at. I have no reason to believe right now that there's going to be any significant change in the 1% level for the coming year. But that's nothing but a guess on my part. It depends on changes in these factors, and they're numerous. There are 10 to 20 factors that we look at, if that makes sense to you.

[Ken A. Zerbe:]

No, it does. So basically, barring any additional acquisitions, maybe keep a 1% reserve ratio, obviously, with provisions driven by growth, instead having come down. I mean, that's kind of, I guess, where we come out. I just wanted to make sure that was -- we were thinking about it the right way.

[H. E. Timanus:]

Well, we don't -- we obviously don't have any target that we shoot for. It is what it is. But 1% is adequate at this time, based on the methodology that we have confidence in, and when I try to look forward at the various factors that we rely on in arriving at the provision, I just don't see anything on the horizon that's an obvious major change.

[Operator:]

We'll go next to the side of David Rochester with Deutsche Bank.

[David Rochester:]

Just switching back to the margin for a minute. Do you happen to have the purchase accounting that related to the securities amortization in 4Q? I think the figure from 3Q was around $3.5 million or so.

[David Hollaway:]

Yes, I can jump in. This is Dave Hollaway. That number we showed in the last quarter for the acquisitions around $3.5 million, and it's basically the same for this fourth quarter.

[David Rochester:]

Okay, great. And how much loan discount accretion are you expecting in 1Q? Should we see about the same level, $14 million? Should that go down from here?

[David Hollaway:]

Dave, that's the million-dollar question, isn't it? It's not a linear equation, because that accretion comes back to us based on the cash flows of the loans it's attached to. And the reality is that the price would be kind of lumpy as we go forward, not so linear. So when you ask the question, will it be $14 million in the first quarter, that's a good question. I think that the way I would answer this question is, it should trend down. You should -- if you think about it in kind of a logical way, some [indiscernible] loans maybe are being touched early on and we're getting a little bit more accretion upfront, but as we go over time and these loans continue to pay down, that accretion will come down. So I think this is a long answer to say I don't know that we can give you a specific number, but we think it will start trending down as we continue to go forward in time. I mean, does anybody else want to comment on that?

[H. E. Timanus:]

I concur completely.

[David Zalman:]

I agree.

[David Rochester:]

And I guess the only offset to a reduction would be just adding new deals, right? As you close those and you're amortizing more discounts, that could potentially add to it.

[David Zalman:]

I'd say it will add to it. I mean, we -- again, we announced the deal in Tyler, so you'll have a mark there, a 91 mark and an 03 mark. And then Coppermark will be -- they have over $800 million in loans, so you'll have a mark, a 91 mark and an 03 mark on Coppermark as well. So that will add to it.

[David Rochester:]

Good. And on the expense side, can you just talk about the trend heading into 1Q? I know you've got some new expense from the deal closing, but could we see further cost saves from ASBC keep that number flat versus 4Q?

[David Hollaway:]

Yes. Again, I come at it a different way. First, absolutely, you'll see some lumpiness. Not so much from the Tyler deal, but we get further into the year, and Coppermark being a larger deal, we'll see some lumpiness there. But yes, I mean, to get to the heart of the question, the expense, the total net -- the total noninterest expense you see in that fourth quarter, that's probably a good run rate, absent the noise that comes from acquisitions. Somewhere that number, flattish, a little up, a little down, that would be a good range.

[Operator:]

We'll move next to the side of John Pancari with Evercore Partners.

[Rahul Patil:]

This is Rahul Patil on behalf of John. Could you just discuss the recent trends in loan demand? Were there any big changes in 4Q following the tax law changes, and what do you expect? Where does the pipeline stand at the end of the year?

[David Zalman:]

I'm sorry, but I didn't catch your name and we couldn't hear you very well, either. Could you try to...

[H. E. Timanus:]

I heard him. I heard what he asked, I think. I think my answer is that we did not see, in the fourth quarter, in my opinion, anything that was specific -- from a loan demand perspective that was specific to the changes in the tax law. I suspect that, that's going to change and that people are going to alter their behavior based on the tax law going forward. While we don't have a hard and fast answer for why loan demand went up so significantly during the quarter, we are obviously thankful that it did. And we don't see anything on the horizon that necessarily creates a big change from that, going forward. The Texas economy is still very good, certainly compared to many other parts of the nation. And absent some unforeseen upheaval in the oil and gas industry, we don't see a change in that. So while there's a lot of, always, uncertainty about what's going to happen with loan demand, I just don't see anything that's out there that changes it significantly at this point in time.

[Rahul Patil:]

Okay. All right. That's helpful. And then, on the -- are you still seeing still-elevated paydown activity? I know last quarter you mentioned that the average paydowns you were seeing were around $135 million. What was it in 4Q?

[H. E. Timanus:]

Well, I don't have a hard number on that, but the answer is we are still experiencing an elevated paydown. We're still able to add to the loan portfolio on an organic basis. But the answer is yes, paydowns continue to be elevated. If the recent uptick in the 10 year means anything and we start to see rates increase, and I'm not sure that we will, but if we do, then that paydown activity will lessen. So I think that's something we've lived with now for -- every year it's increased a bit for the last 2 or 3 years. So I -- that's something we've lived with and will continue to live with.

[Operator:]

We'll go next to the side of Jon Arfstrom with RBC Capital Markets.

[Jon G. Arfstrom:]

Just a follow-up on the loan growth story. Is there anything, Tim, that's unique about it? Is it larger deals, smaller deals, geographies, or anything? Any other color you can add?

[David Zalman:]

I'll jump in, and Tim probably can. I don't think -- I think it's probably the size of our bank, where we're at. I think that we're seeing more deals. I think we're becoming more known throughout the state of Texas. If anything, I would say there has been a lot more activity in the Permian Basin area. The Midland/Odessa area is on fire with the oil and gas industry, and so we're probably seeing increased demand from West Texas to the Permian Basin area. Of course, Austin is a very good growth area and Houston is a very good growth area. So, I mean, we're -- overall in Texas, and I think Tim mentioned this, I mean, we are seeing unemployment rates lower, much lower in some cases, than the rest of United States. We're seeing population growth, people coming in, and we're seeing job growth. Again, these aren't exact numbers, but we have probably in the Houston area 70,000, 80,000 new jobs created; probably in Dallas, Fort Worth this next year, 70,000 to 80,000 new jobs. These aren't exact numbers. 20,000 in Austin. The unemployment rate in Midland is around a little over 5%. So I think there's just a lot of activity and so there's just a lot happening right now.

[Jon G. Arfstrom:]

Maybe it's all those radio commercials driving it?

[David Zalman:]

Maybe so.

[Jon G. Arfstrom:]

Another question on American State, just maybe following up on your comments, but where do you expect that loan portfolio to bottom and what's the good way for us to gauge what's really happening there? Because you do have, obviously, some of the paydowns or runoffs, and that's probably helping some of your purchase accounting accretion. But I guess, what I'm trying to get to is how do we gauge what's really happening in those markets?

[David Zalman:]

I'll start off with it, John. This is David. I think that we have seen some paydowns over there. Again, whenever you merge with a bank, there are certain loans that you like or don't like and make debt or not debt, so that's always something. But I'd say for the most part that West Texas should be bottoming out, should stabilize. In fact, I think we should see growth. When you see the loan growth, I think a lot of growth will come from the Midland/Odessa-Permian Basin area, basically. I mean, I'd say, if loan committee is any kind of indication, then yesterday, I think that we saw more from their area than we did some of the other areas.

[Operator:]

We'll move next to the side of Scott Valentin with FBR.

[Scott Valentin:]

Just with regard to M&A. In terms of -- you guys have been a pretty fast pace of M&A. Are there any infrastructural limitations you have in terms of -- was it -- is it IT? Is it infrastructure? Is it people?

[David Zalman:]

Well, I think that -- I'm glad you asked that question, because nobody else asked, but everybody does know that we're -- from our beginnings, we've always done a lot of M&A. But I think everybody has to realize that we've grown 40 -- over 40-something percent in 1 year from around 9-point-something billion to 14.5 billion, not even including the Coppermark deal and some others. So I think that we spent a lot of time at the end of last year with the operational integration of West Texas which is over $3 billion. A very big deal. Although we did the operational integration, when you're doing something that large, you still want to make sure it's done right. We're still fine-tuning that, probably moreso with the lending officers getting them used to the closings and the clerical part that we'd have to close loans. We just got through doing the operational integration in December of the bank here in town which wasn't that big, it's not $100-something million, $160 million in size. So we did the operational integration, then we're getting ready to do the operational integration for the Tyler this quarter. And we're getting ready to do the operational integration in the second quarter for Coppermark. So, all of that is I think that it -- no matter what anybody says, growing that size does put stress on your infrastructure. But having said that, I think for the most part, everybody's feeling good. But again, we're very cognizant of the fact, I know people want us to grow at rapid speeds. But again, we also recognize and realize that probably our operational integration of what we have already is our first and foremost, and we're centered on that. That doesn't mean that we won't look at new deals, but that we do take into consideration and make sure that what we have, we're getting it right before we move on to the next. I hope that helps. Or not?

[Scott Valentin:]

No, it does. It does. And just as a follow-up question kind of the same -- down the same path. But you mentioned the regulatory pressures, tough operating environment. So it seems like more and more banks are realizing it's going to be not so fun to be a bank of a small size. But you mentioned the pace of deals and the integration challenges. Does that push your average deal size up then? Are you still interested in the $300 million, $400 million, $500 million bank, or now does it have to be -- call it $1 billion or $3 billion?

[David Zalman:]

I always like bigger deals. I always have. Having said that, it probably -- what it limits for us, maybe not the $500 million in size, that's still a pretty decent-sized bank for us, especially if it's in a market that we're currently in. Probably it is probably diminishing some of the real smaller banks that are $100 million to $200 million in size. I mean, that's really making it harder on them and harder for us to jump in. Having said that, if it -- again, if it's next door and it's something that we can consolidate, we would certainly consider that. But what -- your general thesis is right. As the regulatory burden is getting bigger and bigger, it does make more sense for us to do larger deals sometimes.

[Operator:]

We'll go next to the side of Patrick O'Brien [ph] with Fox Asset.

[Unknown Analyst:]

Guys, question. What were organic revenues year to year? Quarter to quarter and year to year?

[David Hollaway:]

Organic revenues, you mean outside of the ASB transaction?

[Unknown Analyst:]

Yes. Yes, so I'm obviously asking a question related to organic loan growth and diminishing NIM.

[David Hollaway:]

Yes. I don't know that we can give you -- we don't have that specific numbers to what ASB is generating for a specific net income number. But I think you could probably back into it if you just look at -- we do break out the loans and deposits.

[David Zalman:]

I mean, that's a hard question. I mean, for us, it's not hard. I mean, I think the answer is obvious. With interest rates going down and down organically, even though you have loan growth, the revenues are going to go down. Now, having said that, and Dave may have a better feel for this, you may have -- that may be different for service charges, and we've taken on other new income with regard to trust income with American State Bank in West Texas. We've taken on -- have a mortgage company, service charges were a little bit better than ours. So from the fee income standpoint, you probably are experiencing revenue growth. I'd say from the loan side, there's a lot of pressure, just simply because of -- even if you grow there could be because of the net interest margin.

[David Hollaway:]

But I mean the point could be made that they do bring a lot to the bottom line. I mean, it was 30% of our size. So...

[David Zalman:]

Right.

[David Hollaway:]

Again, a lot of it gets intertwined. So to try and identify a specific net income number for them is a little difficult.

[Operator:]

We'll go next to the side of Gary Tenner with D.A. Davidson.

[Gary P. Tenner:]

Just had a question regarding the loan discount accretion this quarter of $14 million and change. I think it was $11 million and change in the third quarter, and you suggested have expectation somewhere in the $6 million to $8 million range for the fourth quarter. So I'm curious, are you seeing more of those acquired loans being refi-ed away from Prosperity as you've gone through the first couple of quarters following that acquisition just to a greater degree than you had expected?

[David Hollaway:]

Two-part question. The first part, again, I just want to say it can be lumpy. It could have gone up and down in the fourth quarter, so just for that part of it. But then to the specific question, where it was inferred that these loans are being touched, and I think your specific question, so you're seeing them re-fied out of the bank, or is there something else going on, and I don't know if somebody else would want to jump in on the loan side instead of...

[David Zalman:]

When I think it is 2-part, Dave, and Tim may want to jump in, too. But probably -- as you said, the loans are being touched as they migrate from the portfolio of American State Bank to the portfolio of ours. If we touch them, that makes a transaction and again, that's going to increase. It doesn't necessarily mean that we've lost the loan or it's gone somewhere else. It's just whenever you do touch it, whether you renew it or something else, again, that changes the...

[David Hollaway:]

Within certain parameters.

[David Zalman:]

Within certain parameters. Right.

[Gary P. Tenner:]

Okay. So there's some element of those loans that stayed within the system but just maybe were rewritten or re-fied in terms of...

[David Zalman:]

Absolutely.

[David Hollaway:]

I think that's the case. That's the majority of it.

[Gary P. Tenner:]

All right. That's helpful. And then just a question on the service charge line item. It was higher in the third quarter, came back down in the fourth quarter. Any kind of waivers or anything, any change in how you're kind of managing that line item post-deal?

[David Hollaway:]

Yes. I think the one specific thing that I could comment -- provide color on, I think there's one line item that says service charges, deposit account, or something like that, and you see it change from quarter to -- from third quarter to fourth quarter. And it's interesting, because we can get down in the weeds a little bit on this, but on all these transactions that we do, when we do the data processing conversion, if you were to step back and think about it, one day the customers are on one system and it's calculating their monthly service charges based on average balances, whatever it is. And then the next day, it's on a new system, and it's calculating again. So what happens here is when you -- when we do these data processing conversions mid-month and in this case, not only mid-month, end of quarter, and it's a sizeable transaction, what happens is kind of how we do it is we look at this and we see where customers are being affected by a bank's data processing conversion. They didn't convert the bank. The banks are -- they're selling and buying. And what happens is they're getting double-dipped. They get 2 -- in a lot of cases, they may get a second charge on their account. And so just as a customer service thing, we've done this for 20 years, we'll go back in and we'll see the impact of some of this and we go back and reverse those charges that first time out, and that's exactly what happened here. The reason that we can see it is it's at the end of the quarter, it's a sizable transaction, and that number, if you were looking at that specific line item, I would draw you guys's attention to it, that was about $180,000 of duplicate, what we would call double charges to the customer. And as a service, we always go back and reverse those. Because we came over the quarter, there's about $180,000 extra charge in the third quarter that came back out in the fourth quarter. So if you're looking at that one specific line item, what I can tell you specifically, that should -- that run rate on that line item should be about $3 million.

[Operator:]

We'll go next to the side of Jennifer Demba with SunTrust Robinson and Humphrey.

[Jennifer H. Demba:]

I apologize if this has been -- may have been asked or covered already. I had to jump on the call late. There's a lot of overlapping calls. David, could you just talk about how you reallocated Dan Rollins's duties since he departed in December?

[David Zalman:]

Well, Dan -- let me say first that everybody here at the bank likes and respected Dan, and we miss him, again. But again, a big part of what Dan did, he did -- a big portion of it is he dealt with the investment bankers and the analysts and stuff like that. So David Hollaway and I are taking probably a lot of the calls from you guys and dealing with the analysts. Charlotte has really jumped in a lot really on some of the acquisitions. We have Tim Timanus and Chris Bagley, and he's our Chief Credit Officer, and also Randy Hester. So we've had a lot of people jumped in and really help, even -- we've even seen, on the Coppermark deal, for example, one of Dan's big deals that he helped us with was when we did a transaction, he would be kind of the warm and fuzzy guy between us and the people we're merging with. And Mike Epps at West Texas, who did a great job with their own bank and putting our 2 banks together, has really helped us a lot on the Coppermark deal. So I can go on and on, but we've had a -- we have a very deep bench and a lot of people here that are really -- that jumped in, really.

[Operator:]

We'll go next to the side of Bryce Rowe with Robert W. Baird.

[Bryce W. Rowe:]

My questions were actually asked and answered, but thanks for the opportunity.

[Operator:]

We'll go next to the side of David Bishop with Stifel, Nicolaus.

[David J. Bishop:]

Like Jenny, I apologize if this question was asked before. So bear with me. David, question for you. I've talked to some of our management teams and they've sort of been stunned at the deterioration in structure and terms and underwriting there this early into the recovery, so to speak, of the commercial real estate cycle. Are you seeing any instances of that or glimmers of that, especially given how heated the Texas market is?

[David Zalman:]

You were stunned at what? The deterioration in what?

[David J. Bishop:]

And just in terms and structure on the underwriting side.

[David Zalman:]

It's not stunning to me. I've seen it before. I mean, it's a -- it looks like when everything becomes extremely competitive, people just pull their pants down sometimes. I mean, it's just one of those things. I don't think it's abnormal, it's just -- it's -- at this part of the cycle, when everybody's being extremely competitive, you're seeing some banks that are just going out and again, terms and conditions and rates, all of that, they're doing that work. It does put pressure on the other banks that are trying to hold those positions. But at the same time, I would say that you have to be cognizant of it but, again, we're not [indiscernible] jumping. We're not changing the way we do things. Do you see it any different?

[David Hollaway:]

I don't. It is extremely competitive, but I would say, my personal opinion is, I've seen it much worse many times before. So this is not a new game. I mean, it cycles in, it cycles out.

[David Zalman:]

I don't think it's as bad as it's ever been.

[David Hollaway:]

It's not anywhere as bad as it has been and probably will get to be in the future at some point in time. Do we believe that there's some lending institutions that are making mistakes? The answer is yes. We believe that. Is it across the board and rampant? I don't see it quite that way yet.

[David Zalman:]

I would just say just making a general overall comment, from what you've seen in loan committee, I see that the banks have been around, that are publicly traded, that do have to respond to shareholders in the street, I think for the most part, they're trying to do things in the right manner. I think if we're seeing pressure sometimes, it's really a little bit more from mom-and-pop shop banks that are so desperate for the loans, they're almost willing to go down to any type of rate to get up. Again, those are probably smaller loans, $1 million and less, I would say.

[David Hollaway:]

I agree with that, yes.

[Operator:]

We'll move next to the side of Christopher Marinac with FIG Partners.

[Christopher W. Marinac:]

David, you were mentioning a couple of callers ago about the deal size and how small deals may not fit. If you look at Oklahoma, do have to depart from that just because a lot of remaining banks there are smaller? Is there a scenario where you do nothing other than Coppermark to keep in this market?

[David Zalman:]

No. Chris, we would never have gone into Oklahoma if we thought that we were just going to do the Coppermark deal. We do intend to grow there. There are several banks in Oklahoma that are $1 billion-plus that are opportunities, perhaps. But there's also -- again, if there's stuff -- Coppermark really is primarily located in Oklahoma City. It's got 4, 5 locations there. And then we've got in -- they've got a location in Edmond and 1 in Norman. So whenever we can improve our position, we probably would, and we'd probably go down to a smaller size if it were filling in, in a nick, in a situation like that.

[Christopher W. Marinac:]

Okay. Very good. And do you expect pricing to be any different than it has been in terms of the deals you've looked that, even the ones you haven't done? Is that changing at all this year?

[David Zalman:]

I would say pricing is all over the board, depending on who you're dealing with. There's some people that are completely unrealistic. And then the deal that we enter into, the people are reasonable, and those are the kind of deals that we are entering into. There still -- I guess in every type of market, you'll find this, but there's some that are just -- they're living somewhere in the past, and it's unreasonable what their expectations are. And so -- but then on the other hand, I would tell you there's a lot of banks that are reasonable, and it's probably a good time to grow a bank and put a deal together like this.

[Christopher W. Marinac:]

Great. And then last question, just more mechanical. As you look at new loans that are going on the books, how different is the new loan yield compared to what the average loan yield is on the -- this last quarter?

[David Zalman:]

Tim, can you....

[H. E. Timanus:]

Well, of course if you look at the total yield, there's some accretion in there. So if you back that out, I would say that the average yield is stressed a little bit right now, but not significantly. It's not materially different, if that answers your question.

[David Zalman:]

And I would say, I would go a step further and say even the loans that we have on the books, if they were higher than what the market is, they've already repriced or ask us to reprice them to begin with.

[Operator:]

We'll go next to the side of Michael Rose with Raymond James.

[Michael Rose:]

Actually, Chris just actually asked 2 of my questions. So, thanks.

[Operator:]

We'll go next to Jefferson Harralson with KBW.

[Jefferson Harralson:]

With the $11.5 million of -- we got loan accretion happening last quarter and the $14.5 million this quarter, how much does that leave for loan accretion to come through over time?

[David Hollaway:]

Yes. I mean, again, that's -- we've got that in the press release, but again, if you look on the press release, there's about $55 million of what we've called as -- we use the old terminology, FAS 91 accretion related to these deals. So you take that number and you can kind of back into it.

[David Zalman:]

And that doesn't include the 03 marks, does it?

[David Hollaway:]

It does not. The 03 do not generally make that huge accretion that you can see on the FAS.

[David Zalman:]

Unless you collect more than you anticipated.

[David Hollaway:]

That's right. So the answer to your question is if you go back and look, it's $55 million and you can go from there.

[Michael Rose:]

Okay. And the -- on the securities amortization, that should be about $3.5 million negative going forward, roughly?

[David Hollaway:]

Again, trying to predict going forward -- that amortization on that part of the business is going to be a reflection of the cash flows coming back to us. But I guess what we can tell you is $3.5 million last quarter, roughly $3.5 million this quarter. So I mean, your call is as good as ours as to what number you'd want to use going forward.

[David Zalman:]

I think you'd have to consider what the rates are doing. If the tenure continues to increase, I think you will see it slow down. I really do.

[David Hollaway:]

You should.

[David Zalman:]

Like how long it takes, I don't know.

[Operator:]

We'll go next to the side of John Moran with Macquarie capital.

[John V. Moran:]

So 2 quick ones. First, deposit flows have been real strong. Wondering if you guys saw any benefit from, or if you perceive any benefit, from TAG expiration? And then the flip side of that is did anything flow out kind of early in the year?

[David Zalman:]

I'd start. I was concerned the first time when I read the article in the Wall Street Journal where they said, I forgot, how many billion left the first month with the TAG disappearing. But we didn't find that to be the case over here at our company. I mean, we looked at it, but we did not see an outflow of deposits. If anything, we had an inflow of deposits.

[H. E. Timanus:]

Yes, I mean, specific to that, the TAG program, I mean, we've had a few customers. But it's not been, as of today, we have not yet really got to see any kind of material movement on that. And what David said was right. We've actually seen inflow of some deposits rather than an outflow. But I would think there'll be some of that as we move forward.

[John V. Moran:]

That's helpful. And the second one that I had for you is just for the year. If we look over '12, you guys averaged over $10 billion in assets. Any kind of impact on, and forgive me if you guys already disclosed this before and I just maybe missed it, but maybe you could just remind us if there's anything that we ought to be thinking about either on the fee side or maybe some additional OpEx to kind of deal with any additional sort of regulatory burden? If there's anything like that, that would be helpful.

[David Hollaway:]

Yes. I think, kind of -- yes, we have talked about this before, but -- this is Dave Holloway. A couple of points in there to address. But again, just the reminder on the fee income side again, we will be under the Durbin Amendment or law, whatever that's called, that's effective July 1. And as we've said in the past, on an annualized basis, that's about $9 million of lost fee income for us. Of course, this will be a half year on that. So before tax, call it somewhere in the $4.5 million range impact to us. And this is also probably another -- a good to point out, again, and repeat, with the ASB transaction, brought a lot of these other fee income potential possibilities for us, and one of them being credit cards, which we're not significantly in as of today. But if we can take the credit card program that they have and introduce that to our customer base, we believe that, that will be one of the most significant ways to offset some of this lost income from Durbin. You had a second point, David might want to jump in on this. But the regulatory -- all the new regulatory rules and the cost that, that's adding to us, you might want to...

[David Zalman:]

I've got to be nice. There's too many listening on the other line. There's no question as you get to this size, the regulatory burden is -- we have probably have regulators here full-time. We have FDIC, State, Federal Reserve, now, Consumer Federal Protection Bureau, our [indiscernible] have their own offices. I can go on and on if you want. So we've had to really increase staff in there. Right now, one of the big pushes for -- from the regulatory side is BSA, Bank Secrecy Act, and asset money laundering, and that in itself, I mean, we've really beefed up this last year to probably add 12 people in that one little department. So I think it will continue. I don't think it's going to get any better. It's just -- that's just one of the mantras that's coming down from Washington, actually. And I think at the size that we're at, they probably watch us -- I noticed, when we went over $10 billion in size, they seemed to pay a lot more attention to us.

[Operator:]

I'm showing no further questions in queue at this time.

[Charlotte M. Rasche:]

Okay. Thank you. Thanks, everyone, for joining us.

[Operator:]

This concludes this conference. You may disconnect at this time, and enjoy the rest of your day.