Good day, everyone, and welcome to today's Prosperity Bank Second Quarter Earnings Call. [Operator Instructions] Please note this call may be recorded [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares Second Quarter 2012 Earnings Conference Call. This call is being broadcast live over the Internet at prosperitybanktx.com and will be available for replay at the same location for the next few weeks. I'm Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares, and here with me today is David Zalman, Chairman and Chief Executive Officer; Tim Timanus, Vice Chairman; and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights of our recent quarter. He will be followed by David Hollaway, who will spend a few minutes reviewing some of our recent financial statistics. Tim Timanus will discuss our lending activities including asset quality. And I will provide an update on our recently announced mergers and acquisitions. Finally, we will open the call for questions. During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Zack or you may e-mail questions to investor.relations@prosperitybanktx.com. I assume you've all received a copy of the earnings announcement we released earlier this morning. If not, please call Tracy Okowitz [ph] at (281) 269-7221, and she would be happy to fax a copy to you now. 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 and Exchange Commission, including Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Now let me turn our call over to David.

Thank you, Dan. Good morning. I would like to welcome and thank everyone for listening to our second quarter 2012 conference call. I'm very pleased to be able to announce our strong performance for the second quarter of 2012, particularly during the current economic environment when our industry is so challenged. We posted net earnings of $37 million for the 3 months ended June 30, 2012, compared to $35.1 million for the same period in 2011, a 5.4% increase. Our fully diluted earnings per share for the second quarter came in at $0.78 compared to $0.75 for the same period last year, a 4% increase. Our asset quality continues to be one of the best in the industry, with our nonperforming assets to earning asset ratio of only 12 basis points compared with 15 basis points for the same period last year. Tim will provide additional detail on asset quality later in this call. Our allowance for loan losses is $50.4 million as of June 30, 2012, with nonperforming assets at only $11.9 million for the same period, representing a healthy coverage ratio. For the first 6 months of 2012, our loans grew 4.9% or 9.8% on annualized basis. Our linked-quarter organic loan growth increased 1.4% or 5.6% annualized. While our total net loan growth was not as robust as we had hoped, we remain optimistic for the full year. Our loan officers actually produced more loans during the second quarter than any other quarter in our history. However, we also experienced elevated loan prepayments. We believe our team is well positioned to grow our loans significantly when loan payoffs stabilize. Additionally, we believe the overall business sentiment deteriorated during the quarter. Our deposits increased $726.9 million from June 30, 2011, an increase of 9.5%. If you exclude approximately $103…

Thank you, David. Just a few more details on the financials. Net interest income for the 3 months ended June, 30, 2012, was $83.7 million compared with $83.6 million for the same period in 2011 and $81.8 million for the first quarter of 2012. Non-interest income increased $126,000 to $13.656 million for the 3 months ended January 3 -- June 30, 2012, compared to $13.53 million for the same period in 2011. Non-interest expense for the 3 months ended June 30, 2012, was $40.8 million compared with $42.5 million for the same period in 2011, a decrease of $1.7 million or 4.1%. The efficiency ratio was 41.9% for the 3 months ended June 30, 2012, compared to 43.6% for the same period last year and 42.2% in the first quarter of 2012. The bond portfolio metrics at 6.30 showed an average life and effective duration of 2.7 years and projected annual cash flows of approximately $1.65 billion. And 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 second quarter of this year totaled $11,873,000, which is 30 basis points of loans and other real estate. This is compared to $14,873,000 or 38 basis points at the end of the first quarter this year. This represents a decrease of 20% from March 31, 2012. The June 30, 2012, nonperforming asset total was made up of $1,624,000 in loans, $13,000 in repossessed assets and $10,236,000 in other real estate. As of today, $6,051,000 or 51% of the June 30, 2012, nonperforming asset total are under contract for sale. But as we always say, there can be no assurance that any of these contracts will close. Net charge-offs for the 3 months ended June 30, 2012, were $1,860,000 compared to net charge-offs during the first quarter of the year of $102,000. $600,000 was added to the allowance for credit losses during the second quarter of this year as compared to $150,000 during the first quarter of this year. The average monthly new loan production for the second quarter was $125 million compared to $106 million for the first quarter this year. This represents an 18% increase. Loans outstanding at June 30, 2012, were $3,950,000,000 compared to $3,875,000,000 at March 31, 2012. The June 30, 2012, loan total is made up of 45% fixed rate loans, 26% floating rate loans and 29% variable rate loans. I'll now turn it over to Dan Rollins.

Thank you, Tim. As you all know and David did mentioned, we closed our acquisition of The Bank Arlington on April 1, and we also completed operational integration during the second quarter. Billy and Cathy Allen, as David said, and their group are on our Dallas/Fort Worth team, and they're actively involved in helping us grow in the Metroplex and doing a good job there. We completed our third merger of the year on July 1 with the completion of our deal with American State Bank. We're actively working towards our operational integration, which should take place later this quarter. Our newest partners in West Texas are focused on taking care of customers and are very actively engaged in the merger process that we're right in the middle of today. We believe the future is very bright for us in West Texas with these experienced bankers joining our team. We hope to close our merger with Community National Bank in Bellaire early next quarter and are excited about our future in the Houston market. And finally, our pending merger with East Texas Financial Services in Tyler may be able to close before the end of the year. These 5 acquisitions are all expected to close during 2012 at approximately $3.7 billion in assets and provide us with additional resources to continue to grow across the State of Texas. As you've heard, we are very proud of our team and the efforts they exhibit each day. Our loan and deposit growth plans are working, and we believe we can continue to build shareholder value going forward. At this time, we're prepared to answer questions. Zach, can you assist us with that?

[Operator Instructions] We'll go first to Ken Zerbe with Morgan Stanley.

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

Ken, David Zalman. It is almost contradictory when you say that because it you say that you've had some of the best production, but you also had -- you got such a large paydown. And I think we've seen this happen now over the last year or quarter-to-quarter. I mean, last year, we were doing great with loan production until the last quarter of last year, and then kind of consumer sentiment and business sentiment kind of deteriorated. And our year-to-date loan growth for last year instead of being double-digit, stayed around 8% or 9%. I can't remember just what. We -- the same thing happened this year. So far, the first quarter, we saw very good loan growth and less paydowns, and we had real good growth. The second quarter, we had good growth but yet consumers rightly or wrongly and business people not even as comfortable maybe when they're seeing stuff about Europe and the election's everyday on the television. They're taking their money. And it also may have to do with the low rates, paying their loans down. And so it's kind of you have 2 components going on here, and it's hard to explain, but it is what it is. And having said that again, we see -- we can see consumer sentiment change from quarter-to-quarter.

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

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

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

Got it. Okay. Just the other question was on the premium amortization. Can you quantify how much that impacted results this quarter? And just remind us what it was last quarter.

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

It did not accelerate further from the first group.

Right. We're still seeing that accelerate rate that we've...

The high rate -- the same rate basically with the first quarter.

Consistent with the first quarter.

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

Yes. I mean, we don't see anything that's telling us that the, I guess, that paydowns and the cash flow is going to decelerate. So yes, I don't think we'll continue to see that.

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

And we'll go next to David Rochester from Deutsche Bank.

I saw that the loan yield was up this quarter. I was just wondering if you could talk about that and if that were sort of a function of the paydown activity you were talking about in terms of prepayment penalty income going up.

I don't know that we have a whole lot of prepayment. Probably we'll do that. It moved up 3 bps, I think, is the number, correct?

Yes.

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

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

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

The 5.60, give or take, that we're posting out there today on that rate, that's a blend of everything that's out there.

Okay. And just switching to the loan pipeline, I guess, given your comments, I would imagine that, that's still very strong but I guess just a function of paydown activity next quarter or so what the growth looks like.

I think that's correct. Our management team is working very closely with our group of lenders. They're all focused on quality loan growth. So I don't foresee any reason to say that our volume of new loans being booked should fall off significantly, absent some kind of catastrophe that we don't have any control over. But the paydowns did bump way up during the quarter. Dan alluded to the fact that a lot of people have just chosen to take their cash and pay debt off with it. They don't have very many attractive alternatives in terms of placing that money for investment. The business people that we talk to, many of them don't see much of anything coming out of Washington that's pro business. So they seem to be very hesitant to talk about any major expansion of what they're doing. An obvious exception of that is the oil industry has been expanding considerably in Texas, which helps the whole economy needless to say.

Tim, repeat your numbers again. Production for the quarter average was 1...

102 -- it was $125 million.

And the pay off rate was?

The pay off rate was $108 million.

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

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

So in our discussions, we try to figure out what is the anomaly that's causing the payoffs to jump up so high, and I wish we had an answer. But when you look at the production -- again, somebody called it gross production, which is probably a good way to look at that. When you look at gross and you get all the disclosures out there -- when we're -- when Tim was quoting these numbers, these are new loan production excluding any renewals. We do not count a renewal of existing credits in the bank in that number. So this is new production coming in the front door. That is the gross number that's coming on. And June was a fantastic month for us. The pipeline is full. We're making loans. The loan guys are all out there. If we could get any kind of economic support to slow down the headwinds of the paydowns, I think we're queued up to see some really good loan growth.

Sounds good. And just one last one here. I remember last quarter you guys were saying you have a bunch securities maturities for 2Q. And we saw that securities balances were down decently. Should we expect to see more runoff in the back half of this year? Or are you thinking maybe you stabilize it from here?

Not sure I followed the question. You got normal cash flows coming in off the bond portfolio, the general outlook [ph] there. In the first quarter, we had -- prebought was the way I would look at it. David, you bought $600 million, $700 million, $800 million in the first quarter.

Yes, again, we prebought a lot. That, again -- and a lot of this was in preparation for the merger with American State Bank. So a lot of it depends -- they have repositioned some of their portfolio, so they had some longer-term bonds that really had real bond maturities of as much as 10 and 11 years. And it really didn't fit necessarily in our portfolio, so we'd asked them to sell them before they closed and they did. So in essence, they bought about -- they sold about $500 million, and they just bought some really short-term Treasury deals that actually mature next month. So right now, our balance sheet looks a little beefed up with additional bonds that were bought. But again, once we merge these 2 banks together, it'll kind of stabilize. We'll be back where we're at.

We'll go next to John Pancari with Evercore Partners.

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

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

Again, it wasn't a big change actually.

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

And then in terms of the loan yield outlook. Obviously, you just comment on what helped it remained stable this quarter. What would be your outlook there? Would you expect it to remain relatively stable as you put on production here? Or do you think we can see some downside as the low rates get priced in?

Want me to make a guess of that?

Yes, what's your crystal ball say? Going down.

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

There's nothing to move it up, so the only real pressure is...

It's all down. It's all down.

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

Right.

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

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

Yes. I mean, I would just interject in there, it's not going to have a material impact on us. If you think about it in a big picture way, we're only 50% loan deposit ratio. So all new risk waitings they have done for certain of assets, et cetera, et cetera and some of the changes come, they're just not going to have a material effect on us as we see it today outside of the one concept where they're going to -- where they will be phasing out the trust preferred securities over x amount of years based on their asset size. So no, the answer is we'll be still very well capitalized. We'll be if we were using the Basel number.

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

And we'll go next to Jennifer Demba with SunTrust.

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

There's probably 2 or 3 questions in there. But in the first one, let's just address the American State Bank deal. The operational integration for American State Bank is you don't want to just dismiss it, but it's relatively smooth. Dan and his team are -- all of them are doing great job in putting it together. They have a great group of people that are very sophisticated. There's not a lot of problems there. So they're really helping on their side. We're helping on our side at the same time. So we don't see it as a real hard deal. So what that means in essence is, is that as we see other deals out there, we have the opportunity to go ahead and do smaller deals. And having said that, yes, right now, we're getting more calls than we've ever gotten before to discuss with different banks and community banks. I think they're feeling a lot of pressure right now. I mean, I think that when they came out with this new -- just for example, the mid-Basel III laws and Dodd-Frank and everything else, I mean, from a regulatory standpoint and even the capital ratios especially for small community banks, it's probably impacting them more than it's impacting banks like ours because most of the time their loan-to-deposit ratio was so high. So you've got that. You got declining net interest margins, and it's going to be really tough for them. So I think that they all -- a number of them are all looking for partners, and so it's creating more opportunity for us than we've probably ever seen before. And so we just really have to take a position, really select the people that we really want to team up with. So we're -- it's really a good time for us right now.

I think what you're saying, I would touch a little but differently, but I think the message's we're looking for a cultural fit and people fit. And we found that in West Texas, the people are excellent. The fit to the way we do business is excellent. I've continued to travel out there. We've had teams coming and going back and forth. But the same thing applies on the smaller banks that we've looked at. We're looking for the cultural fit where there's people that can join our team, play in our community bank model. We saw that in Community National Bank in Bellaire, when David talked about Randy Dobbs and John James. They've got a great group of people. And I think there are many other opportunities in front of us. We get to be a little more selective to make sure it's the right fit, I think, is what you are saying, David.

That's exactly right, Dan.

And we'll go next to Matt Olney with Stephens.

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

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

That was first quarter.

Yes. Again, we probably today have $800 million, $900 million in purchased -- in money that's purchased because we prebought securities. Now having said that, as the securities from American State Bank, again, we asked them to sell some of their securities, which was about $500 million. In turn they did, to get all the shorter maturity, because we like a shorter duration. We try to average around a 3-year duration in our portfolio. So in essence, they sold theirs and they bought some short-term Treasury securities around $500 million, I think, maybe mature next month or so. So when that comes in, that reduced our borrowings and still leave us with $300 million -- $300 million or $400 million and a little bit of leverage. It's kind of just pre -- it's -- we're trying to buy ahead. These interest rates and the volatility on the 10-year has been so erratic. Yesterday, it gets as low as 1.4, 1.39. This morning, it's up to 1.5. It's up over 5%. So we wait for certain times in the market, and when certain times in the market we feel that a rate is consistent that we can live with, we're going to go in and buy big time, probably $400 million or $500 million at a time. And we just prebuy and won't do that again. We're protected for the next few months because of the positions we've taken. And so we don't see interest rates -- again, we're not trying to call interest rates, but we don't see interest rates over the next year, 2 years or the foreseeable future with the way it is right now ever going up dramatically. So we're really just looking at different times that we can really jump into the market when the market something happens basically.

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

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

This is Dave Hollaway. Yes, I mean, absolutely, it should tick up over the next few quarters. And think of it this way. We closed on a ASB on July 1, but the actual integration, meaning when they go on to our computer system, yes, doesn't happen until, I think, it's mid-September. So you can't gain a lot of efficiencies when you're having, in essence, running 2 sets of books. So yes, that would mean the efficiency ratio should tick up. But over the next 12 months, just as we announced -- back when we announced the deal, we will bring -- I can't give you how much it could tick up when there's too many moving parts, but the point would be it'll tick up, and then we'll gradually bring it back down to the levels that we're at today.

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

From our integration planning, Matt, Dave alluded to that. We are carrying extra expenses until we get to merger or conversion or operational integration, whatever name you want to put out there, that would be late this quarter. And even then, you carry some extra expenses for the next month or so. So really, the third quarter numbers, you're going to see some elevated expenses. In the fourth quarter, some of those expenses start dropping off, and some of them may not drop off all for the whole quarter. So the fourth quarter is still a relatively higher quarter. My guess would be that we should see the lion share or I should say majority, well over half of our costs, though, should be in by the time we get to January 1. So that when you see first quarter numbers, you should see some real benefit, and by the time we get the second quarter’s numbers out, we should be 90% there.

And we'll go next to Gary Tenner with D.A. Davidson.

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

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

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

Yes. I don't think that we're having that many dollars walk out the bank because we're not willing to meet rate on existing loan customers. I don't think that's the issue. So I think you're correct about that. So it's just the real mixture of all the above that took place during the quarter. And that's probably not going to change for this quarter that we're in now.

Okay. Great. Just to make sure I understand, and apologize if I missed. I popped out for a second, but the $500 million that America State's repositioned on their balance sheet securities portfolio that I think had a very, short, short maturity you mentioned. Will those be allowed to just run off after the merger on your end? Or would they be reinvested in line with your investment stock?

It actually was -- it was around $500 million, and again that's what we prebought for them. So there is no roll-off and again, ours is -- ours that are already bought, basically it just reduces the leverage to the Federal Home Loan Bank on our books basically.

Okay. All right. That makes sense. And then just the $6 million of NPAs that are under contract to sell, any additional order write-downs for that? Or are they going to be sold generally where they're carried right now?

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

Yes. How much additional evaluation adjustment or loss on that?

It would not be material. There may be a minor amount, but it's not anything that's significant.

Some had a gain. Some had a loss. I think it's basically a loss.

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

And we'll go next to Joe Stieven with Stieven Capital.

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

I think it's probably not getting -- just probably a little bit above that...

All of the above.

And I think it's probably more pressure though on the changing times. I think it's just becoming harder and harder for the smaller community banks to really get traction and make a decent return on capital, which just again, it's just the regulatory burden. I know it wasn't the intent of Congressmen when they passed a lot of the legislation, but based on the legislation that they passed and the regulatory burden and what everybody has to do and again, these new Basel III numbers, I think -- and again the net interest margin declining, I think all of those factors are really pushing people in to really make some decisions. It's kind of a changing environment. I mean, it's kind like when I grew up, there was a full-service gas station on every corner, and you didn't think that would ever change. It change more to self-service or you usually had a mom-and-pop grocery store and probably very few, if any, mom-and-pop grocery store. And you're starting to see a consolidation in the industry that people thought was going to take place a number of years ago that's really just starting to really come up now.

Yes, I agree. I think all of the above is the answer. But I do think there's some fatigue out there on the boards of small community banks.

And when you guys are out, just sort of -- I don't want to -- sort of dating -- I mean, is your potential dating list you've been getting fuller just as your story is not only resonating, but I mean just a success for you guys just having. Is your dating book even getting better?

Yes. I would say, this is like college. I mean, in college, sometimes we could...

So it's hardly a rich environment.

In college, we would we would hit for -- we we're just real hot for maybe 2 or 3 weeks. So we did and then they loco [ph] . Right now, the clubs are full.

And we'll go next to Jefferson Harralson with KBW.

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

I'm not going to give you the exact answer on this thing because I don't know that we have the exact numbers. But yes, they've had a big bond portfolio. They sold a big bond. They sold a good portion of the bond portfolio and again, had a pretty good gain on it. So in essence, that lowers the goodwill that you pay for the company. And again, fortunately, we bought security that mitigated the lower yield in advance. They had some -- a lot of, I would just say, fixed term treasuries and stuff like that, that really we're confident [ph] . And the thing that didn't fit where we bought -- we went back into our product and mortgage-backed securities and got somewhere between 1.75% and 2% yield rate. So we mitigated, although it's still a little bit less than maybe what they were getting. At the same time, with the mark to market, as you know, you mark to market the loans and you also -- I'm sorry, mark to market the securities, and you mark to market the loans. And so somewhere in between there, I can't tell you that it's going to be a neutral effect, but there's some -- you got to take both of those into consideration. On one hand, the earnings are lower from the bond side, and yet, you may get the accretion from the loan side based on the mark that's out there. So the answer is somewhere in the middle of that.

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

Do you think that the mark-to-market margin is going to come all right at lower margin in years or higher?

I don't know that I'm [indiscernible] ...

Me neither. Say that again.

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

Yes, I mean, kind of specific to ASB themselves, if we just -- we have the securities themselves and you -- we agree that the yield's coming down in the remaining part of the security portfolio. If that was the only thing moving, that probably would be a true conclusion. But again, remember the rest of their balance sheet is also being mark to market, the loans, the deposits, the whole thing. And so -- I don't know you could come to that conclusion. Just say the margin's going to be less because of all the mark-to-market accounting that'll go on it. So I don't know. I would draw that same conclusion. It'll move but I don't know it can be perhaps significant.

Yes. I mean, again, we can't give you direct answers because we're not through. We've hired outside people in addition to us to give us valuations on the loan portfolio right now. And so based on the valuations of the loan portfolio or the mark to mark there, you got to -- it's a real moving deal, and we can't give you -- our hope would be that it would be measurable [ph]. We can't tell you that to be right here.

Not going to go up. But there's no upward pressure. same would go up, [ph] a question earlier. I mean, the rate environment is just so low. They're flying into the same headwind that we are. When you look forward, they've been fighting the same battle. We're both basically 50% loan to deposit. We're both fighting margin compression, so we've got the same battle going forward.

But theirs get accelerated because of the mark. Has that shut them? Am I thinking about that right?

But everything marked. So there's positive marks and negative marks is what Dave is saying.

Yes. Basically, you're marking just the securities, you're not taking -- you may not be taking into consideration to mark to the loans.

And the deposits.

Yes. The mark to the loans and the deposits should mitigate the mark to the securities we're hoping to some degree.

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

And we'll go last to Jon Arfstrom with RBC Capital Markets.

Just a question on American State, just curious how loan production is going in American State. And are they seeing some of those similar paydown activity that you're seeing?

They have. We've had a bunch of people up there talking. The real facts are they're producing good loans, but we've also got them kind of in a little bit of a neutral zone while we're try and roll out merger-related activities. So they've been in classes. They've been talking about policy changes. They've been talking about operational changes. But they are certainly taking care of their customers, and the way I would coach that is when we go through an M&A transaction of any size, whether it's ASB or any others, the first thing we do is we play defense. So they're playing defense in West Texas. We're playing offense here in the rest of the State of Texas. We're not pushing them hard to grow loans. We don't want to lose business, and they're not calling on customers, but their #1 goal right now is to get our 2 banks merged together, to get us all on the same platform, to get us all on the same playbook. And so that means they're playing a lot more defense today than they will be going forward.

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

Yes, I think that's very normal. I mean, we see that with every where we're going to. They're -- they want to know what we like and what we don't like and what we think, and it just takes a while to work through all that process.

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

That's right. But it's a very...

Normal.

It's very normal, and their group is very professional. They understand the business. And we -- I personally don't think it's going to take long for them to get stride at all.

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

Okay, okay. Then, Dave Zalman, just a maybe a bigger picture question for you. A quarter ago the 10-year was $210 million or $220 million, and Obviously, we're much lower today. But do you worry at all about lower rates? I mean, you've said earlier your view is that rates will stay lower for longer, but is there anything you're doing or thinking about in terms of protecting the bank from higher rates if that should be the case?

Were they 2%? I don't remember that. The 2%, but...

In the first quarter. Remember that far back?

I don't. I would say, Jon, that I didn't think that rates would get as low as they've gotten quite frankly. Today, it's a little bit encouraging. I never thought I'd say I'd like to see higher interest rates, but it's a little bit encouraging today. As we're looking and talking right here, the 10-year's now at 1.514. It's up 6% in one day. So that's encouraging. But again, we're -- the good thing is -- again I'll reiterate -- we did take advantage of the situation when rates got to the point, which you're talking about, and we just really loaded the boat up on the deal. So we're covered for a few months, but we really need interest rates to move up. We need interest rates to move up another 20 basis points or so or 25 basis points. And again, we'll probably bond with -- if rates do hit in that area. And again, we -- I just think with the financial situation that our country's in right now, it can't really afford to pay. I mean, when you got, what, $14 trillion in debt and the government's bleeding as bad as it is right now, if you can just add -- say they had to raise interest rates 3 basis points on $14 trillion, you can do the math. Any increase they were ever get from us 1 percenter guys, it -- that $600 million, that'd be gone just for interest. So I -- unless the country really turns around and really sees a lot of growth, I just don't see a lot of change, and I don't see interest rates going up dramatically at least in the next year to 2 years for sure.

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

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

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