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Prosperity Bancshares (NYSE:PB)

Q4 2013 Earnings Call

January 24, 2014 10:30 am ET

Executives

Charlotte M. Rasche - Executive Vice President, General Counsel, Senior Executive Vice President of Prosperity Bank and General Counsel of Prosperity Bank

David Zalman - Chairman, Chief Executive Officer, President, Senior Chairman of the Board for Prosperity Bank, Chief Executive Officer of Prosperity Bank and President of Prosperity Bank

David Hollaway - Chief Financial Officer, Executive Vice President, Principal Accounting Officer, Chief Financial Officer of Prosperity Bank and Senior Vice President of Prosperity Bank

H. E. Timanus - Vice Chairman, Chairman of Prosperity Bank and Chief Operating Officer of Prosperity Bank

Chris A. Bagley - Chief Credit Officer

Analysts

David Rochester - Deutsche Bank AG, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Mikhail Goberman - Portales Partners, LLC

Mike Granger

Matt Olney - Stephens Inc., Research Division

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Operator

Good day, everyone, and welcome to today's program. [Operator Instructions] Please note, this call is being recorded. I'll be standing by if you should need any assistance.

And it's now my pleasure to turn the conference over to Ms. Charlotte Rasche. Please go ahead.

Charlotte M. Rasche

Thank you. Good morning, ladies and gentlemen, and welcome to Prosperity Bancshares Fourth Quarter 2013 Earnings Conference Call. This call is being broadcast live over the Internet at www.prosperitybankusa.com and will be available for replay at the same location for the next few weeks. I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares. And here with me today is David Zalman, Chairman and Chief Executive Officer; H. E. Tim Timanus Jr., Vice Chairman; David Hollaway, Chief Financial Officer; Randy Hester, Chief Lending Officer; and Chris Bagley, our Chief Credit Officer. David Zalman will lead off with a review of the highlights for the recent quarter and an update on our recently announced merger and acquisition activity. He will be followed by David Hollaway, who will review some of our recent financial statistics. And Tim Timanus will discuss our lending 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, Tony. Or you may e-mail questions to investor.relations@prosperitybankusa.com. I assume you have all received a copy of the earnings announcement we released earlier this morning. If not, please call Tracy Elkowitz at (281) 269-7221, and she will send a copy to you.

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

Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares' 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 2013 conference call. I'm very excited to announce the great results and accomplishments for the fourth quarter and full year 2013. We were again selected by Forbes Magazine as the #1 Best Bank in America. All of our Associates and Directors worked very hard and this honor recognizes them for that work.

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

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

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

A little bit about our economies. Texas and Oklahoma continue to experience lower unemployment rates than most others areas of the country. In October, the unadjusted unemployment rate for Houston, Sugarland, Baytown MSA was 5.9%. Houston added 79,600 jobs from October 2012 to 2000 and -- to October 2013. The Dallas/Fort Worth area saw unemployment at 5.9%. Dallas/Fort Worth also saw payroll job increases of 96,100, which ranked #1 nationally among the largest 12 U.S. markets. Houston was #2. By the numbers, Dallas/Fort Worth's 91 -- 96,100 job growth only trails New York City's 141,800 in new jobs added.

Unemployment in Oklahoma remains low at 4.7% in October. The Oklahoma City market has absorbed a Chesapeake layoff of 800 people, and no more layoffs are anticipated. Forbes ranked Oklahoma #8, as one of the best places for business and careers, and #7, on its best cities to invest in housing 2014 list. Oklahoma is one of the top natural gas producers in the United States, with production typically accounting for almost 1/10 of the total United States production.

In the markets we serve, we see a good economy, with new home sales and medium sale prices increasing. Office space is strong, as well as apartment construction continues to show tremendous momentum, especially in Houston and Dallas. We continue to see tremendous chemical plant and refinery expansion along the Gulf Coast, as well as growth in manufacturing. All in all, Texas and Oklahoma are very good places to be right now for doing business.

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

Total net income and earnings per share for 2013 are the best we've ever reported. Our Tier 1 leverage ratio of 7.44% at year end 2013 continues to build rapidly because of our strong earnings. As mentioned earlier, our loans increased 50.1% from $5.180 billion for year end 2012 to $7.775 billion at year end 2013.

Our organic loan growth, excluding acquisitions, was 5.8% year-over-year and 6.3% annualized on a linked quarter basis. Our nonperforming asset ratio of 15 basis points continues to be one of the best in the industry despite the uptick in the fourth quarter, primarily from banks acquired in 2013.

Our deposits increased 31.3%, or $3.649 billion to $15.291 billion when compared to the same period last year. Our organic deposit growth, excluding acquisitions for 2013 was 2.6%. Linked quarter organic deposits increased $642 million or 5.8% or 23% annualized.

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

With that, again, I would like to thank our 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 Hollaway

Thank you, David. Net interest income for the 3 months ended December 31, 2013, was $145.5 million, compared to $108.3 million for the 3 months ended December 31, 2012, an increase of $37.2 million or 34.3%. On a linked quarter basis, net interest income increased $18.9 million or 15%. And for the year ended December 31, 2013, net interest income was $498.8 million, compared with $380.7 million for the year ended December 31, 2012, an increase of $118.1 million or 31%. All these increases were primarily due to an increase in average earning assets.

The net interest margin on tax equivalent basis was 3.82% for the 3 months ended December 31, 2013, compared to 3.53% for the same period in 2012 and 3.59% for the 3 months ended September 30, 2013. Excluding purchase accounting adjustments, the net interest margin on a tax equivalent basis increased on a linked quarter basis from 3.19% to 3.35% for the 3 months ended December 31, 2013.

Noninterest income increased $1.1 million or 4.4% to $25.2 million for the 3 months ended December 31, 2013, compared to $24.1 million for the same period in 2012. For the year ended December 31, 2013, noninterest income increased $19.9 million or 26.3% to $95.4 million, compared to $75.5 million for the year ended December 31, 2012. Noninterest expense for the 3 months ended December 31, 2013, was $68.6 million, compared to $57 million for the same period in 2012, an increase of $11.6 million or 20.4%. And for the year ended December 31, 2013, noninterest expense was $247.2 million, compared with $198 million for the full year 2012, an increase of $48.7 million or 24.6%. The efficiency ratio was 40.2% for the 3 months ended December 31, 2013, compared to 42.9% for the same period last year, and 41.6% for the 3 months ended September 30, 2013.

The -- our bond portfolio metrics at 12/31 showed a weighted average life of 4.4 years, effective duration of 3.98, and projected annual cash flows of approximately $1.4 billion.

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

H. E. Timanus

Thank you, Dave. Our nonperforming assets at year end December 31, 2013, totaled $22.504 million, which is 29 basis points of loans and other real estate. This is compared to $12.687 million or 20 basis points at the end of the third quarter of 2013. $9.426 million out of the $22.504 million are assets of the 3 financial institutions that joined us in 2013. This is 42% of the nonperforming assets at the end of the year 2013. The December 31, 2013, nonperforming asset total was made up of $15.178 million in loans, $27,000 in repossessed assets and $7.299 million in other real estate.

As of today, $7.311 million or 32% of the nonperforming assets at the end of the year 2013 have been liquidated or are under contract for sale. But there can be no assurance that those under contract for sale will close.

Net charge-offs for the 3 months ended December 31, 2013, were $496,000, compared to net charge-offs of $288,000 for the 3 months ended September 30, 2013. Net charge-offs for the year ended December 31, 2013, were $2.522 million, compared to $5.130 million for the year ended December 31, 2012.

$7.865 million was added to the allowance for credit losses during the quarter ended December 31, 2013, compared to $4.025 million for the third quarter of 2013. And $17.240 million was added during the year 2013, compared to $6.100 million for 2012.

The average monthly new loan production for the fourth quarter ended December 31, 2013, was $197 million, compared to $210 million for the third quarter ended September 30, 2013. This represents a 6% decrease. The average monthly new loan production for the year ended December 31, 2013, was $184 million, compared to $138 million for 2012, which represents a 33% increase.

Loans outstanding at December 31, 2013, were $7.775 billion, compared to $6.183 billion at the end of the third quarter 2013, and $5.180 billion at December 31, 2012. The December 31, 2013 loan total is made up of 43% fixed rate loans, 32% floating rate and 25% variable rate loans.

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

Charlotte M. Rasche

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Dave Rochester with Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

I wanted to ask about the yield on loans first, if I could. It looks like if you back out that loan accretion, the loan yield only declined about 4 bps, which was about 1/2 of what we saw in 3Q. So I was just wondering if the book yield is now getting close to that total loan production rate? And if you happen to have a sense for where loans are pricing today that you're adding to the book, that will be great.

David Hollaway

Your question is where is the loan pricing today versus where we're selling in the quarter of 4.97%?

David Rochester - Deutsche Bank AG, Research Division

Yes.

David Hollaway

David, what have you got?

David Zalman

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

David Hollaway

It's like reaching that inflection point of where you look at it.

David Zalman

Yes, I think so.

H. E. Timanus

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

David Rochester - Deutsche Bank AG, Research Division

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

David Zalman

Well. As you recall, Dave, we basically told -- mentioned to everybody last -- at the end of last year, I don't know if it was September, August and that of -- we plan to take a full year to do the operational integration on First Victoria National Bank and also the F&M Bank, which you are correct, we're planning on the closing the deal with F&M Bank in the last -- toward the last end of the last quarter of this -- I'm sorry, toward the last end of the first quarter, or the very first part of the second quarter. Having said that, we'll do the operational integration around mid-year. I will say that our operational integration with First Victoria National Bank has been better than I -- it's been really good. I don't know that we really, again, knock on wood -- but they have been a real pleasure to work with. And they really seem to have gotten a lot faster, a lot of transactions that you do, integrations that you do. People have sometimes, especially the lending side has a tougher time getting involved and getting the new forms and new policies and all that. But this transaction with First Victoria has gone exceptionally well. So that, I think, speeds up a little things -- a few things. Again, we drive the F&M Bank to do -- that's probably going to be at mid-year, but if F&M Bank goes as good as the First Victoria, I think, toward the end of the year, that we probably could be looking at something again, possibly.

David Rochester - Deutsche Bank AG, Research Division

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

David Zalman

Yes.

David Rochester - Deutsche Bank AG, Research Division

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

David Zalman

I think that if -- our first primary market is Texas. There's still so much available in Texas. So given the opportunity in Texas, we would always like to be there. But again, we've always said that we're not opposed to looking at space that are contiguous to us. Again, we're in Oklahoma, which opens up new opportunities for us. Louisiana, we're just a few miles from Louisiana. So states that are really -- relatively close to us are still always opportunities for us.

David Rochester - Deutsche Bank AG, Research Division

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

David Zalman

I think not. I mean, overall, Texas -- we're all over Texas right now. And so, I think everything in Texas would be primarily a filling for us.

Operator

Next we'll move to Jennifer Demba with SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Two questions for you, David. First of all, over the last several quarters, you've talked about wanting to focus more on growing some of your fee income items.

David Zalman

Right.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

David Zalman

Yes. Well, I think that we are focused on fee income, especially after the Durbin Amendment where so much of our fee income got cut on the debit cards. But as mentioned in the past, when we didn't have Trust services, now with the bank in America, say, bank in Lubbock, they have over $1.300 billion trust portfolio. At First Victoria, now has over $600 million. So that's going to be more significant. It can move forward from trust. In the past we didn't focus on the secondary market on home mortgages and, again, that's really seen -- this last month, [indiscernible] mean for anybody, but again, that with -- which is coming on to us with, say, Bank in Lubbock and then Coppermark Bank and F&M Bank and a number of banks that are joining us. That adds more fee income. We have the ISO, which is the ATN sponsorship, which has grown about over $1 million a year into the mix. We are focused on credit cards to sell more credit cards to our customers, not necessarily going out to the rest of the world, but just our own customers should really help us out. So we're really focused on fee income. I think that -- I'm sorry, brokerage, First Victoria was probably their size of the bank. That was probably the highest in there apparently, with regard to brokerage income. So that's really going to help, and again, Russell Marshall, who leads the brokerages, is also leading our wealth management. So I think that we have really, in the last year or 2, have gone -- come from really being just a plain vanilla bank to really having a lot of products that we can offer. I think we are only focusing on cash management as well. We have cash management teams that now or have been consolidated. Jacque Fiegel, in Oklahoma City, she's actually coordinated our whole cash management teams to coordinate Houston, Dallas, Oklahoma and West Texas. So we're really focused on those areas. So we are focused on -- and also, Mike Epps, who was at -- the President of American State Bank in Lubbock, is also joining us on the executive committee here in Houston. And they actually did a better job than we did sometimes on fee income. And so he's going to really be focusing on taking a look on the fee incomes that we have right now too, to try and help us to move that forward. Long answer, but there's a lot going on there.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

David Zalman

I would just -- again, I don't know that I have the exact numbers, but I would tell you that if you're a $10 billion -- if you're a $9 billion bank going to $11 billion, and that's all you're going to go, you probably wouldn't want to do it. There's been such a change in focus, especially from a regulatory standpoint, that once you got over a certain size, that -- in my years in banking, the primary focus used to always be size and safety. That doesn't mean that it's not for some. But in our case, with the size that we're at, the regulatory focus is just really changed and they are really focused on BSA, compliance, CRA, internal audit. I would tell you we -- quant analysis, stress analysis and [indiscernible], I mean, I would tell you that we probably have at least 50 people more just focused on this at the size that we're at. So when you take that 50 people and the cost affiliated with that, plus all the different stress testing and programs you're required to do all that's required, plus with the loss of the Durbin Amendment, it's probably $15 million to $20 million a year for us.

Operator

Next we'll move to Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

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

David Zalman

23%? I don't know that we have that. The loan growth?

David Hollaway

Our deposit growth? Or...

David Zalman

You're talking about deposit growth or loan growth?

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Talking about loan growth. Let me step back on the -- what -- of the loan growth this quarter, what was your organic linked quarter?

David Zalman

Our organic loan growth was, year-over-year, was 5.6%, I think, I'm talking off the top of my head, and probably a linked quarter basis was 6.3%. Having said that, I would also [indiscernible], we've now thrown American State Bank into, what we call, after 1 year, we put their numbers in with our numbers. And of course, they haven't done as well on the loan side. If you excluded the American State Bank transaction, we -- our loan growth this year would have been probably in excess -- our organic loan growth would have been in excess of 9%. And also on the deposit side, instead of a 2.6% year-over-year, we probably had 4%.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

You're quoting period-end numbers too?

David Zalman

What's that?

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

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

David Zalman

Yes, that's correct. I guess my point is, I mean, we -- American State Bank does have to come into the numbers and they are, and I think going forward, it took them a little bit longer than some of the other banks that have joined us, but I think that they're really on board and they'll be focusing on and helping us to grow our loans. Going forward, I still think that when you look at us, and you looked at us over the last 20, 25 years, our organic loan growth, it still runs between 8% and 9% annually, and deposit growth usually runs about 4% annually, organic deposit growth.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

All right. And let me ask you about the accretable yield. The increase went from $51.9 million to $159.6 million, that's a lot more money to come through accretable yield over time, then you had a big quarter, this quarter. Looks like you went back to it -- maybe went through all your deals and increased your -- decreased the amount of expected losses there. Can you talk about, I guess what transpired to get that number, to make that number jump up so much?

David Hollaway

Let me jump in on that one. When you're looking kind of laser it down to the quarter, you saw that in this quarter to the income side, there was about 19 point -- call it $20 million. The point that we want to make out of that, of that $20 million, $6 million of that comes from the, I guess, what we call the SOP 03 side, the credit impaired side, where we've always talked over the last few quarters that from the 91 side, the accretion side, should be generally pretty stable. But when we have these 03 credits that we resolve, it's going to create lumpiness in the quarter, and that's what you're seeing out of that $20 million. $6 million of that was related to, I don't know, David, was it 1 loan or 2 loans that we were able to resolve.

H. E. Timanus

2 loans.

David Zalman

Yes. 2 loans.

David Hollaway

So that's put it up to an extra $6 million in there this quarter. So really, you could think of it a different way and track it from $20 million, take $6 million out, and so the other run rate is $14 million, which is still a little bit higher than what you've normally seen. But then again, First Victoria is now into the mix, and maybe this will help everybody on a go-forward basis. And again, I'm only talking from -- I'm not using kind of layman's terms here, but the 91 side, if we're looking over the next 12 months, we think that, that accretion from loans should be in a range. It can't be a specific number, but we will tell you $9 million to $12 million per quarter. And again, if we resolve anymore of these SOP 03 loans, that will -- if we do better than what we thought, that would provide some lumpiness to the positive on that accretion.

David Zalman

Yes. I think the accretion, Dave, we did have -- we recovered on some loans that really we charged off or reduced to about $6 million. At the same time, the provision for loan losses this time really increased over $6 million too. Again, that's based on a calculation. I think we're able to do that because of the number of loans that we limited. One of the factors in that is the number of loans that you have on the books. So it's kind of a wash a little bit, I think, when you look at the total net effect at this time.

H. E. Timanus

If you look at the total, the 3 10 30 marks are about 1/3 of the total marks that are out there right now. And those are harder to predict and then we're going to have F&M coming in with marks very soon. So that whole mixture is going to change somewhat.

Operator

Next we'll move to Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

With regard to the securities portfolio, I noticed a pretty big jump if you look at the yield in securities without portfolio -- without purchase accounting adjustment. I was curious if we've kind of seen the bottom in terms of securities portfolio yield and now if we continue to see a rise in the belly of the curve, interest rates, say 2 to 5 year type interest rates, market rates moving up, [indiscernible] like to see securities portfolio yields continue higher?

David Hollaway

I'll jump in first, it's probably a 2-part answer there, I'll pick up the first part of it, and I think David probably wants to comment on the second part. But one observation is, remember on our portfolio, as rates have moved up, the amortization on that overall portfolio slows down. So when you look in the quarter, in the press release, we show roughly $12 million of amortization. And so if you're looking back on previous quarters, you can see that's significantly dropped, which helps us, from an accounting perspective, helps that yield. So that's always a positive. Looking forward, to drive that number down more in future quarters, I'm not so sure that's there based on where we're at rates today. We'd have to see rates probably move up to slow that down more than the $12 million per quarter that you see. But that's looking into a crystal ball. So that would be part of it, that's helping the margin. The second piece I think is, is also important to answer, but I'm going to let David -- he'd want to jump in because the question, I'll rephrase it a little bit, as we think maybe rates are starting to migrate up a little bit, we've kind of taken a position, I don't want to steal your thunder, but now maybe we're trying -- we're giving up some yield today to try to be cognizant of extension risk. Is that right, David? Did I say that right?

David Zalman

Yes. I think that's accurate. It's -- [indiscernible] I think, let me just say -- expand a little on it, I think the amortization expense on the bond portfolio probably is, with the slowdown, that's probably where it's going to be. I mean, I don't see a whole lot of improvement there. If you looked on our yield on the bond portfolio, you would say, well, there's probably some room, the base that you're buying, the profits that you're buying to increase that yield. But as Dave mentioned, we're taking a little bit of a different stance. We're trying to mix our purchases now with a shorter-term mortgage backed securities [indiscernible]. And again, so I wouldn't count on an extremely larger yield on the portfolio then -- right now because we're trying to reduce it. We have a policy within our bank that says that, basically, we don't want to have -- we do not want to have over 25% of our assets in a bucket that we price as over 5 years. And so, with interest rates going up, we're trying to maybe some 10-year and 15-year mortgage backed security, to make a mix of that and that's why we're just trying to reduce the duration, basically, so it might be some, but not a lot, not based on current yields right now.

Scott Valentin - FBR Capital Markets & Co., Research Division

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

David Zalman

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

David Hollaway

I think it's just a hair, maybe more or less, but it wasn't significant.

H. E. Timanus

That's true.

David Zalman

Yes.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. One follow-up question. In terms of mix, you guys have been securities heavy over time. And just wondering as you do the acquisitions and get -- some banks have had some pretty strong loan production and some new high-growth markets. Do see the mix changing where loan-to-deposit ratio moves higher over time.

David Zalman

I think you've probably already seen that with the acquisition of First Victoria National Bank, already seen our loan-to-deposit ratio change. They had a lot larger ratio of loans-to-deposits than we did. And I think with F&M, same thing, no question, a lot higher. So I think the 2 combined changes the ratio in and by itself now. As again, we mentioned that as we buy these banks, sometimes we lose 15% to 20% of their loans so there's a period of 1 year to 1.5 years that goes by where we lose some of those deals before they start growing. So when you look at us, we're growing maybe 8% a year. It kind of offsets the loss they have in the banks that we acquire. So I think longer term, when you're looking past a year and everything was stagnant and didn't buy another bank, I think that's exactly true.

David Hollaway

Plus in the fourth quarter, well, there was a little cloudiness to that because the deposits sloshed in. Deposits that came in are a lot higher than normal for one quarter. [Indiscernible]

David Zalman

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

Operator

And our next question will come from Terence McEvoy with Oppenheimer & Co.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

You've been in West Texas a year, 1.5 years with the American State deal. You talked a little bit earlier about that franchise has been a little bit slower to grow organically. Can you just maybe comment about that market and why you feel like that business can turn the corner and grow a little bit better in '13 -- 2014?

David Zalman

Yes. I do. I think that, again, the Midland/Odessa area was never an issue. I think that they have so much going on over there, that's been helping a lot of the growth in West Texas. Probably more of the Lubbock area and some of the surrounding communities in that area were slower. They had a number of loans that were paid off and the lenders did have a harder time, I think, getting used to booking loans. And so, I think that's passed since Mike Epps is moving from West Texas to our executive committee here in Houston. Tony Whitehead is now the Chairman out in West Texas, and we also appointed 2 new presidents, Mike Marshall in Midland/Odessa is taking over that area, and also Gary Galbraith in Abilene. And again, Abilene was a little slower too, but I think just putting the new blood in there and then wanting to -- their conversations with me, they're really wanting to build now and move forward, so that's why I think that we have a bit of opportunity to change that dynamic over there.

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

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

David Zalman

Well. I think you're probably referring to BB&T. And they bought a number of the city branches. BB&T and Kelly King in this group are very competitive. I think that they're really good bankers. The nice part about Texas is, it's so big, it's so dynamic. I think there's room for all of us, quite frankly. I think they do a good job. They have been extremely competitive and they're trying to grow the deal. But again, I really think there's enough businesses. As long as you don't have somebody that's doing stuff that's just off the wall and crazy, competition is always good, really.

Operator

Next we'll move to Mikhail Goberman with Portales Partners.

Mikhail Goberman - Portales Partners, LLC

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

David Hollaway

I'll take a shot of that first. I mean, just overall picture, you saw that our margin over the last few quarters and maybe I should say core margin, it seems that as we had stated in the past calls that there would be some positive trends to it and that's what you saw in over the last 3 quarters. You see the core going from 3.09%, 3.19%, 3.35%. And we should point out in this fourth quarter, obviously that 3.35% is being impacted by the First Victoria transaction, which again, they have a much better book in terms of loan-to-deposit ratio, so that just brought a positive bias to our margin. The same concept should work, as we get closer to F&M, they're very similar. They should -- their margins should help our overall margin somewhat. But just taking them out of the mix, as David mentioned earlier, on -- somebody had brought up the securities portfolio, where we're probably at an inflection point. The loans, maybe we're close to an inflection point on that. So what that's telling us, for what we can tell over the next few quarters, pretty much a stable margin from where we're at today.

David Zalman

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

Operator

Next we'll move to Mike Granger with Tegean Capital.

Mike Granger

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

David Hollaway

So let me rephrase the question. What you're asking is the overall portfolio? What's the total unrealized gain or loss on that portfolio as of 12/31?

Mike Granger

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

David Hollaway

That's right.

Mike Granger

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

David Hollaway

Yes. I mean, the direct answer if you look at our overall portfolio as of 12/31, we had an unrealized loss of roughly $70 million.

Mike Granger

$70 million? Okay.

David Hollaway

That's the total portfolio.

Mike Granger

Yes. That includes both pieces, obviously?

David Hollaway

Right.

Operator

Next we'll move to Matt Olney with Stephens.

Matt Olney - Stephens Inc., Research Division

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

David Zalman

I'm going to let you talk with Chris Bagley, unless Chris is [indiscernible]. He's actually focused and knows more on that than everybody, so he probably has more color than I can give you.

Chris A. Bagley

Well, the process of valuing the F&M market's in process as we speak. And so, we can't actually value it until the transaction date, so we'll run a trial balance at that time, and we'll turn that information over to our third-party, and we slice and dice that in a lot of different ways. And the loan portfolio mix will impact, probably have it valued. But I really can't give you any guidance on what it would look like because it's a changing market daily. But we do have a more of a commercial loan portfolio than First Victoria. Average loan size is larger, and yields are a little bit different in terms of -- the rates are probably lower on average, but they tend to float. All those things are factored into it. All that said, I don't know that you'll see a whole lot of difference in the FAS 91 or 3 10 20 marks, but that is driven off the portfolio and interest rates. It's the 03 side that's uncertain and we're still working through those numbers.

Matt Olney - Stephens Inc., Research Division

Okay. That's helpful. And David, how should we be thinking about the size, that bond portfolio, the next few quarters, compared to where we were at 12/31?

David Zalman

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

Matt Olney - Stephens Inc., Research Division

And what about your own purchases? I mean outside the acquisitions, what are you looking for in terms of the bond size?

David Zalman

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

Operator

Next we'll move to Jon Arfstrom with RBC Capital Markets.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Just the big deposit surge, the core deposit surge, in Q4. Do you expect any of that to run off early in '14?

David Zalman

Yes, John. This is David. I -- usually, we have a big surge in deposits at quarter end and then usually, the second quarter, maybe not necessarily the first quarter, but the second and third quarter, things go down and pick up again. This last year, if you remember last year, we had a tremendous amount of surge at the end, it was $600-something million, I think. And so -- but having said that, in the past, we didn't have as much run off in the second and third quarters as we did this year. So I don't know what caused that, I think I know what caused that. I think people buying are just -- when they're buying something -- I'll give you an example, the rates are so low, they had a good loan in Oklahoma. A good customer was buying his own business and a new complex and office and all that. And a pretty good sized company and normally, they have an appraisal, for example, and it was made out to them and, of course, we need an appraisal that was made out to us. Under new Dodd-Frank, this is one of the problems with some of the regulatory deals. And they said, "Well, you know, instead of doing that, we'll just pay with our own money." So I think you're seeing more and more people just using their own deposits and buying land and probably there's lots of stocks and stuff like that this last year.

Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division

Okay, okay. And then Dave Holloway, other than these expenses on First Victoria, other than the $2 million that you carved out, what was the approximate contribution from First Victoria on expenses and also fees?

David Hollaway

Yes. I mean, a good way to look at the impact of First Victoria, is just actually look at the linked quarter increases both in fee income and expenses. So pretty much the majority of it -- the majority of that is going to be the -- to the First Victoria transaction, and I would just tell you, remember they were only on our books for 2 months, so if you adjust accordingly, that will give you a good indicator.

Operator

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

Gary P. Tenner - D.A. Davidson & Co., Research Division

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

Chris A. Bagley

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

Gary P. Tenner - D.A. Davidson & Co., Research Division

So as more loans in the purchase portfolio get refi-ed or rewritten in some form or fashion...

Chris A. Bagley

Pursuant to the accounting rules and that guidance, they all end up flowing into our existing methodology.

Operator

Next we'll move to a follow-up question from Matt Olney with Stephens.

Matt Olney - Stephens Inc., Research Division

All my questions have been answered.

Operator

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

Charlotte M. Rasche

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

Operator

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

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