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Executives

Graham Painter - Executive Vice President of Corporate Communications

J. Downey Bridgwater - Chairman, President and Chief Executive Officer

Zach L. Wasson - Executive Vice President and Chief Financial Officer

Bob Smith - Executive Vice President and Chief Credit Officer

Analyst

Dave Rochester - FBR Capital Markets

Brett Rabatin - FTN Midwest

Jennifer H. Demba - SunTrust Robinson Humphrey

David J. Bishop - Stifel Nicolaus & Co.

[Ben Harvey] - [Den]

Bob Patten - Morgan Keegan

Sterling Bancshares, Inc. (SBIB) Q1 2010 Earnings Call April 22, 2010 11:00 AM ET

Operator

Ladies and gentlemen, good morning. Thank you for standing by and welcome to the first quarter 2010 Sterling Bancshares Earnings Release. At this time all lines are in a listen-only mode. Later, there will be enough [toning] for your questions and comments. Instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. This time I’d like to turn the conference over to our host, Sterling Bank spokesperson, Mr. Graham Painter. Please go ahead.

Graham Painter

Thank you, operator and good morning everyone. I’m Graham Painter, Executive Vice President of Corporate Communications. This morning Sterling Bancshares released results for the first quarter ending March 31, 2010. To discuss those results with you today are Downey Bridgwater, Chairman, President and Chief Executive Officer; and Zach Wasson, Executive Vice President and Chief Financial Officer; and Bob Smith, Executive Vice President and Chief Credit Officer

I’d like to remind everyone of the Safe Harbor statement included in today’s earnings release. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for certain forward-looking statements including statements made during the course of today’s conference call. These forward-looking statements are based on the company’s current expectations and beliefs concerning future developments and their potential effects on the company.

There could be no assurance that the future developments affecting Sterling will be those anticipated by the company. Factors that could cause actual results to differ from those projected in the forward-looking statements are set forth in today’s earnings release, which had been posted on the Investor Relations page of our website at bancsterling.com. And in the company's quarterly and annual report which have followed the Securities and Exchange Commission and are available on their website at sec.gov.

On today’s call, our speakers may reference certain non-GAAP financial measures, which we believe provide useful information for investors. If necessary, we’ll post reconciliations of these non-GAAP numbers to GAAP results on the Investor Relations page of our website.

For additional detail on these matters and other risks that could affect the company, please refer to the company’s most recent quarterly reports for the first three quarters of 2009 and the 2009 annual report on Form 10-K each of which have been filed with the Securities and Exchange Commission. Sterling assumes no obligation to update the information presented on this call including any of its forward-looking statements.

I would now like to turn the program over to our CEO, Downey Bridgwater.

J. Downey Bridgwater

Thanks Graham. Welcome, everyone. Hopefully by now you've all have a chance to review our first quarter 2010 results which we released this morning before the market opened.

As detailed in this release, our first quarter results were negatively impacted by increased credit cost due to the lingering effects of the economic recession particularly as it relates to commercial real estate values. The $0.07 per share net loss we reported was the direct result of increased provisions related to elevated levels of nonperforming loans and charge-offs we experienced during the quarter.

Approximately $17 million of the net charge-offs recorded was the result of writing down collateral-dependent commercial real estate loans to new values based on appraisals we ordered and received during the first quarter. Additionally, we wrote down loans held for sale by approximately $2.6 million also based on new appraisals, reducing other noninterest income by that same amount.

While we're disappointed in our first quarter results, we're taking the necessary steps to aggressively recognize and work through our credit issues and to continue to improve the risk profile of our balance sheet in order to return the bank to the best position possible to achieve normalized earnings as quickly as possible.

The good news is that we've continued to see some positive data points from an economic standpoint, both nationally and locally, that suggests the economic downturn maybe nearing the bottom and is beginning to show some incremental improvement in certain areas. On a positive note, reflected in our results for the first quarter, is an additional $87 million in capital that we raised in the form of a common stock offering which was completed in early March of this year.

This additional capital strengthens our balance sheet, improves the overall mix in quality of our capital base, and makes Sterling one of the better capitalized banks among our peers. Our rationale for raising this additional capital was to create a strong balance sheet, anticipate increase-required regulatory capital levels for the industry, withstand additional stress with our portfolio including a potential sale of homes, and to be prepared to take advantage of potential growth opportunity, such as new hires and assisted acquisition in Texas as they arise.

A quarter-end, our Tier 1 and total risk based capital ratios are now at 14.08% and 16.92%, respectively. I'd like to take a few minutes to walk you through our balance sheet to describe some of the steps we've taken to better position the bank.

Our [including] position remained very strong. In the current economic and interest rate environment that we're experiencing, we believe it's important to remain liquid and position the bank to able to respond appropriately to investment and lending opportunities as the economy continues to recover.

We built a significant cash position and continue to invest incrementally in our securities portfolio. At quarter-end, our securities portfolio was approximately $1.2 billion up from $1.1 billion which equals almost 24% of our total assets in March 31st, 2010. Due to these increases, our interest earning assets were up $127 million or approximately 3% since year-end, while the increased cash position and securities portfolio [it was] a near-term [direct] on a manager's margin allow us to maintain our flexibility prospectively.

During the first quarter, total [purity] in loans increased $131 million or 4% linked-quarter. We have previously given values for total loans to be down approximately 3% to 5% per year. The decrease we expect in first quarter was more than we had anticipated as we were successfully able to exit a few midstream energy credits faster than we had originally planned. Since quarter-end, we have had additional pay downs in midstream energy credits, and have very few remaining in the portfolio.

As of March 31st, our energy portfolio totaled approximately $200 million down from $262 million at year-end. Additionally during the quarter, construction and development loans declined approximately $30 million to $331 million or just over 10% of our total loan portfolio. We have been, obviously, very cautious with new construction lending in this environment and will continue to be so in the near [term].

We continue to produce our concentration of nonowner-occupied commercial real estate. We currently have $1.4 billion in nonowner-occupied commercial real estate and $630 million in owner-occupied commercial real estate. At quarter end, nonowner-occupied commercial real estate is down to approximately 45% of our total loan portfolio.

Based on where we ended the first quarter, we're now protecting loans to be down approximately 5% to 8% the full-year and are optimistic that we might see some additional lending opportunities in the second half of year that may help us offset some of these decrease.

We have recently implemented an aggressive calling program for our bankers to actively pursue commercial industrial loans, owner-occupied commercial real estate consumer loans and residential mortgage loan opportunities. Despite low loan demands, we still manage the book over $209 million in new loan commitments during the first quarter. Anecdotally, we're hearing from some of our customers that business had begun to pick up. However, we have not yet seen evidence of that in increased line usage or loan demand.

Our deposits mix remains very good and continues to improve. At quarter-end, approximately 28% of our total deposits were noninterest-bearing, 50% were interest-bearing provisions and were only 22% consisted of CDs. Average deposits were down slightly for the first quarter of 2010 as compared to the fourth quarter primarily due to the decrease in certificates of deposits.

Average deposits in the first quarter, as compared to the same quarter last year, were up approximately $212 million or 5.5%. During that same period, CDs decreased approximately $230 million with good [merit] coming in the form of noninterest-bearing and interest-bearing demand deposits.

Our overall cost of deposits for the first quarter of 2010 was 76 basis points down from 85 basis points in the fourth quarter. As we continue to benefit from lower pricing of CDs, overall decline in CD balances. Assuming that the level of deposit competition remains consistent, we will expect to see incremental deposits growth as we move during the rest of this year.

Our attractive deposits base continues to be one of core strengths of our company. While these deposits are given last value by investors in its extremely low interest rate environment, we shall understand the long-term value of [quarter] customer deposits and we'll continue to look for ways to maintain and grow our customer relationships. Revenue generation in this environment continues to be challenging. Low loan demand and loan interest rate continue to provide a headwind for net interest income. Net interest income was down approximately $2.7 million for the first quarter of 2010 as compared to the fourth quarter of 2009. Approximately $1 million of that decrease was due to a shorter quarter.

While net interest income increased only $1 million in the first quarter of 2010, it included a $2.6 million charge [were landed to derive] down of certain held for sale in commercial real estate loans that I've mentioned at the beginning of this call. Without that charge, our noninterest income would have totaled approximately $9.1 million which is more in lined with what we would expect to see in the future quarters.

Total noninterest expense decreased $537,000 for the first quarter of 2010 as compared with the fourth quarter of 200 and decreased $645,000 compared to the same period in 2009. However, FDIC insurance premiums increased $691,000 linked-quarter and professional fees were elevated in the first quarter by about $600,000, as well.

Other noninterest expense declined approximately $1.8 million in the first quarter of 2010 compared to the fourth quarter of 2009 due primarily to reduction in ORE cost. We'll continue our efforts to reduce costs at every opportunity. In the first quarter, we closed one branch in the Dallas market and consolidated our treasury management services operations into our core operations group.

Going forward, we'll continue to evaluate every opportunity for cost savings and continue to increase productivity within our existing infrastructure.

I will now turn the call over to Bob Smith our Chief Credit Officer to discuss asset quality. Bob?

Bob Smith

Thanks Downey. Nonperforming loans totaled $136 million at the end of the first quarter for a net increase of approximately $33 million. Overall, the gross nonperforming loan inflows were approximately $64 million. A large portion of the increase in nonperforming loans was due to our decision to move approximately $27 million in restructured accruing loans to nonperforming status at quarter end due to further deterioration of the borrower or noncompliance with the modified terms.

As we have stated before that if troubled debt restructured loans is more than 30 days past due, it is our practice to place that loan on nonaccrual status unless there are extenuating circumstances. As of March 31, 2010, accruing restructured loans total $10.7 million as compared to $69.9 million as of December 31st, 2009.

The $10.7 million in accruing restructured loans at March 31, 2010, consisted entirely of loans that were modified during first quarter of 2010. Of the total $69.9 million of accruing restructured loans reported at year-end, approximately $40 million are performing as agreed under the modified terms and are, therefore, no longer required to be reported as restructured loans.

One of the challenges we have faced in this environment is a sizeable amount of commercial real estate loans on our balance sheet. As with most recessions, commercial real estate values have been depressed due to the decrease in economic activity resulting in higher vacancies and lower rents, and this recession has been no different.

The most stressed that we have seen today on a relative basis has been in our out-of-state commercial real estate portfolio. As of March 31, 2010, our out-of-state commercial real estate portfolio totaled $355 million including loans held for sale. Approximately $45 million or 12.7% are classified as nonperforming up from $33 million in the fourth quarter of 2009.

The sector within commercial real estate which has experienced the most stress has been hospitality. As of March 31, 2010, our hospitality portfolio totaled $335 million, including loans held for sale with approximately $220 million of hotels securing these loans being located in Texas and $83 million located outside of Texas. For clarification purposes, the $83 million of out-of-state hotel loans are included in the $335 million of out-of-state commercial real estate loans that are previously discussed.

Our hospitality portfolio consists of mid-priced hotels and motels the majority of which are flagged properties in major NSAs. There are no resort type or luxury properties included within this portfolio. The hotels in our portfolio are primarily geared toward the business or extended-stay traveler. There had been no new loans added to this portfolio during 2009 or 2010. We saw deterioration in this portfolio in during 2009 and continuing into this year as $26.6 million of loans at March 31st were nonperforming up from $22.2 million at December 31st, 2009.

Over the last 15 months, the industry has experienced significant declines in occupancy of rates, average daily room rates and revenue per available room. As a result of this deterioration, we charged-off approximately $9 million against the allowance for credit losses associated with this loan portfolio during 2010. We're in the process of finishing up a thorough review of this entire portfolio.

Acquisition and land development loans make up approximately $26.7 million of our existing nonperforming loans at quarter-end up from $18.1 million in the fourth quarter of 2009. For the most part, lot sales are still taking place on several of these projects, just not at the pace that would justify keeping them on performing status.

For the quarter, net charge-offs totaled $21 million. Other $21 million in net charge-offs, approximately $9 million, were related to hospitality loans; $5 million were related to other types of commercial real estate; $2.6 million related to acquisition and land development loans; $2 million in commercial and industrial; and $1.8 million in charge-offs were related to residential mortgage and multifamily loans.

Of total net charge-offs in the first quarter, approximately 1/3 or $6.7 million were related to properties secured by collateral outside of Texas. The majority of these charge-offs with the result of our efforts in the quarter to reappraise a significant part of our classified commercial real estate loan portfolio to make sure that we have reserved for them properly. Or in the case of collateral dependent loans, they're written down to their most current value.

Unfortunately, we saw significant value deterioration in some of our substandard and nonperforming loans. For the most part, the values on the collateral of performing commercial real estate loans that we have renewed are holding their value, as well. Foreclosed real estate was up approximately $590,000 in the first quarter as compared to the fourth quarter of 2009, for a total of $17.3 million at quarter-end.

In the first quarter, we sold properties with the total book value of $4.5 million. We have an additional [plead] property currently at the end of contract with a book value of $2.4 million. We continue to experience good demand for foreclosed properties. We expect credit headwinds related to commercial real estate to persist for the next few quarters in the form of additional nonperforming loans and charge-offs, but we anticipate that we'll begin to see improvements in our credit costs in the latter part in 2010.

As such, we have continued to build our allowance for credit losses. The loan loss provision totaled $22.9 million, more than covering the $21 million in net charge-offs recognized in the first quarter. At March 31st, the allowance totaled $79.5 million or 2.55% of period-end loans up from $77.6 million or 2.39% of loans at year-end and that's significantly from $57.8 million or 1.55% of loans at March 31st of 2009.

I will now turn the call over to Zach Wasson, our Chief Financial Officer, to provide some additional insight into our financial results.

Zach Wasson

Thanks Bob. We appreciate everyone taking the time to join us on the call this morning. Since Downey did a good job walking you through the financials, let me take a few minutes to discuss our mid-interest margin, our overall approach to managing our balance sheet, and our capital.

As mentioned, we reported a net loss of $6.2 million or $0.07 per diluted common shares for the first quarter of 2010. The loss was a direct result for recording a provision for credit losses in the amount of $22.9 million for the quarter. Additionally, noninterest income for the quarter was reduced by approximately $2.6 million due to write-downs on some certain loans held for sale.

As a reminder, we did complete a common stock issuance in the first quarter that increased the number of shares outstanding to [cite me] under 102 million at period-end up 20 million shares from the fourth quarter of 2009. The net interest margin for the first quarter of 2010 was 4.02% down 9 basis points from the fourth quarter of 2009 and down 30 basis points from the first quarter of 2009.

The biggest negative impacts on the margin in the first quarter of 2010 as compared to the fourth quarter of 2009 were the fourth quarter securities transactions were we settled some higher yieldings but riskier securities as well as the impact of the increase in nonperforming assets in the form of interest reversal and interest [for] down. These factors had about a 16 basis point negative impact on the net interest margins for the quarter. [Half of the net] interest margin about seven basis points in the first quarter was a decrease in regular CD yields as compared to the fourth quarter of 2009.

Our average cost of deposits were 76 basis points for the first quarter of 2010 down 9 basis points [mid-] quarter and down 39 basis points from the year of that quarter. Now not much of an impact on the first quarter is compared to the fourth quarter. The total impact of excess cash we have on the balance sheet continues to be a significant headwind for the net interest margin overall. We estimate that the excess cash has a negative impact on the net interest margin of approximately 14 basis points. Likewise, the nonperforming assets on the balance sheet also provide the significant drag in the margin. We estimate the impact of the interest fall down on nonperforming assets is approximately 17 basis points. Due to the extreme level of interest rates, I would expect an [interest] margin to be under slight pressure over the near time.

Assuming those significant changes in the interest rate environment and that we are able to maintain our pricing strategies we'd [like] it to learn in the deposits. We'll continue to have some pressure on the net interest margin created by our excess [liquidity disposition] especially if our deposit growth continues to out strip loan growth. We would be hesitant to run our [pre-need] deposits unless were core deposits after customer relationship. At the end of the first quarter of 2010, our securities portfolio totaled approximately $1.2 billion dollars which equates to 24% of total assets up from $1.1 billion or 22% in the fourth quarter of 2009.

During the first quarter we continued to add to our securities portfolio and an effort to put some of the excess liquidity to work. We purchased mostly related security open says of mortgage related securities and In terms of interest rates, the short end interest curve specifically the as most influence on our net interest margin at 25 basis points disaffectedly at the bottom. Our balance sheet continues to be asset sensitive positioned to benefit from environment. Assuming the static balance sheet we estimate that the 300 basis points in one up with increase at interest in net interest by approximately 12%.

We continually to evaluate, to trade off between increase and current income and reducing our benefit from possible increasing interest rate, even the current rate environment in the expectation rates could remain in low for a extended period of time. Additional increases in the security portfolio will probably be appropriate. The modified duration of our securities portfolio as of March 31, 2010 was approximately 3.8 with the tax equivalent 7% as compared to 3.6 years in 4.1% at year-end. Our quarter end tend to capital ratio was a strong 8.96%. All about regulatory capital levels are well about in the minimums to be considered well-capitalized.

As of March 31, 2010, Tier 1 leverage ratio was 10.64%, Tier 1 risk based capital split at 14.08% and our total risk based capital was 16.92%.

With that, I would like to turn the call back to Mr. J. Downey before we open the call for questions. Downey?

J. Downey Bridgwater

Thanks, Zach. Despite the challenging environment our strategies at Sterling's not changed. We'll continue to focus on providing competitive banking product and services all constituencies within the small and medium size business segment, more specifically, companies with annual revenues of a $100 million or less in taxes. This includes business sellers, employees, their family members and people who work and live around their locations. We pride ourselves on building long-term relationships for our customers knowing their business and how they can achieve their goal. With that I like to open the call for questions. Operator?

Question-and-Answer-Session

Operator

Thank you. Ladies and gentlemen on the phone line, should you wish to ask a question. Please press star and then one on your touch-tone phone. You'll hear a tune indicating that [you] can place in cue, and move yourself into it anytime by pressing the pound key. Once again if you have a question please press star and one at this line.

And our first question today comes from a line of Dave Rochester representing FBR Capital Markets. Please go ahead.

Dave Rochester

Hi. Good morning, guys. Thanks for taking my question.

Graham Painter

Yes.

Dave Rochester

So, with the capital raise and in place and if you have signs of economic stability there, are recovery near term have you guys given more consideration to engaging in more meaningful sales of probable loans at all over the next year.

J. Downey Bridgwater

Interestingly, this is Downey, Dave. Interestingly though, when we raise the capital, with subsequent to the capital raise we've been deceived by (inaudible) [loan]. So, I can assure you we certainly on our evaluating opportunities and taking a look at the [realty depricing] and what those potential sales look like. So, yes, we are certainly looking at them and we'll do what's certainly [approved], generate the highest price for those loans that we possibilities can. But, we are not going to do is discount them significant, to double to get them on off the balance sheet.

Dave Rochester

Okay great. And you mention you are on the process of finishing a loan review of the hospitality portfolio, I believe. Does that mean that you're re-doing all the appraisals on that whole portfolio? And if so, can you give us a [sense] for where you are in the process. Are you half-way there or most on the way there at this point?

Zach Wasson

We are updating, making certain that we have updated information regarding the occupancy levels and the real [par] and average (inaudible) rates. And were looking to get updated valuations if we have any indication that we have properties that are negatively or barely cash flowing. So, I guess the answer to your question, if this juncture, is yes we are aggressively getting updated values. We've actually receive some values showing that on some of the updated hospitality properties that have come back very positive in instances where we have thin cash flow. We are getting updated information and we should have are review finished, I would say within the next 30 days.

Dave Rochester

Okay, great. Thanks, guys.

Graham, Downey, Zach, Bob

Thank you.

Operator

Next we go to (inaudible). Please go ahead.

Bret Rabatin

Fine. It's Bret.

Unidentified Company Executive

Let's go 80. (inaudible).

Bret Rabatin

Wanting to first ask on the securities portfolio, you mentioned, Zach, that you thought you obviously deploying some funds in the securities with the pay-offs and loans. Will they modify the duration of 3.8 a year? So, that's will that short enough any or is that going to be exactly the same? Do you have a plan on working (inaudible) in the near term?

Zach Wasson

It's probably going to remain about the same. We’re looking at a strategy of doing some real short type investment securities, some between of three to five year. And it's completely a blend of those but I would've expected to remain relatively stable. Now this portfolio is generating consistent steady cash flow off of it, (inaudible) remain relatively low for an extended period of time. It just gets too expensive to hold all of these funds, just in a 0 to 25 bases point deal. As far as the (inaudible) signed the balance sheet, we have paid all them wholesale borrowing [jobs] that we could pay. So, now we're looking at core deposits. We recognize that this part of this cycle, core deposits aren't that attractive as for financial measure. But over the cycle, core deposits are proved to be very valuable.

Brett Rabatin

Okay. That's helpful, and then secondly, just wanted to ask on the TDR. These are obviously you have a two-bucket there. You have some movement in non (inaudible) and then you have some back to [acquiring]? Are you guys still willing to do TDRs? Or can you give us an update on sort of how you view that implementations of that policy?

J. Downey Bridgwater

The level of TDR's that we will undertake drops significantly. There certainly will be a case from time to time that will consider it, but there really had better be a very good reason because otherwise, we probably should just put the credit on not performing and that's the approach we're taking with everybody. We've sent our bankers to training, we have a questionnaire to have to answer, when the process of automating that process. So, I think it's going to be unlikely that will have a significant [impact] on TDR's because we'd rather just go ahead and deal with the problem aggressively and put in on our (inaudible).

Brett Rabatin

Okay. Thanks for the call guys.

J. Downey Bridgwater

Thank you.

Operator

Next question comes from the line of Jennifer Demba with Sun Trust. Please go ahead.

Jennifer Demba

Thank you. Good morning, I was wondering if you could talk to us about what kind of severities you're seeing in [involving] non taxes [CRE] portfolio as well as your entire hospitality portfolio. As well as what kind of (inaudible) [you've lost] you're expecting on these two portfolios over the cycle.

J. Downey Bridgwater

It depends on the type of property, Jennifer. If, you know, it [involves your] earlier comment. And you know, if you got a decent occupancy and the (inaudible) are not too bad, they're not too far off, then [values that we've order] are [no appraisals are coming] pretty close to what they had been when we made the loan. They've held in pretty well. But if you have a significant drop in occupancy and any other metric around the hotel and it's being fed by guarantors or you know, its (inaudible) last leg, then you'll going to see the values drop anywhere from [we see from] 30% to 70%. It just depends on the location of the property and the, you know, what's going on with the occupancy, so.

Zach Wasson

Know the key indicator that we were looking for there is loss of [plague] if they lose a franchise, a lot of the franchisors is being pretty ruthless through this cycle. And using it as a cleanup period so we are looking very closely if that information is well and that's you know, declining a revenues and loss of [plagues] or a real key leading indicator there.

Jennifer Demba

So, can you give us an idea what kind of range of accumulative loss you might be expecting?

J. Downey Bridgwater

It's going to be a loan by loan basis, Jennifer. (Inaudible) you know, give you a guess of what we're thinking, a mark to the portfolio would be. You know, we're doing that analysis right now and as [Pop said] (inaudible) in about 30 days to let you know what we expect the [came in of loss] could be and the hospitality part of our portfolio.

Jennifer Demba

Okay, that feeds into my next question. Do you think that (inaudible) are going to stay at the level that they were on the first quarter over the next two or three quarters?

J. Downey Bridgwater

Well, we certainly expect (inaudible) in relative provision to remain elevated, but we expect those levels to begin to taper off incrementally throughout the rest of the year. You know certainly, second quarter we expected to be elevated. We may or may not be as high as the first quarter; in fact we hope it would be a little bit less but we expect better improvement in those related cost, really on the second half of 2010.

Jennifer Demba

Okay, thanks.

Operator

Our next question comes from David Bishop with Stifel Nicolaus. [For added] additional questions, please press star 1.

David Bishop

Hey, good morning, gentlemen. I was just wondering you spoke about the added market, the added [Texas] portfolio. What do you think in terms of the legacy [Texas credit loaning] in terms of (inaudible)?

J. Downey Bridgwater

Well, the [Texas] portfolio, and we'll start really with [past dues] is very small. It's about [30 basis points].

Zach Wasson

Yeah, if you take out there's about the top ten loans in the [Texas] portfolio. If you remove those top ten loans, the remaining portfolios show that there's 30 basis points to [pass this].

David Bishop

And if you include this?

J. Downey Bridgwater

I'm sorry? (inaudible). It's 1.1 on the Texas portfolio, exclusive of (inaudible).

David Bishop

Are most of those issues related to (inaudible) energy or they sort of also..?

J. Downey Bridgwater

We have really no credit issues in the energy. In fact, the (inaudible) that [pay] down. We actually expected those who pay down over the course of the year, they were mostly midstream and [view] the credits. Two of them were [passed] watch and one of them was substandard, so, we're [glad] we got them out of the [books]. We're surprised [they paid off] as soon as they [did]. So, our energy credits, there are no criticized [cash] by loans or even, any [past this] anything our (inaudible) portfolio. It's very good.

David Bishop

Okay, thank you.

Operator

Our next question is from [Ben Harvey's] line with [Den]. Go ahead.

J. Downey Bridgwater

I'm sorry; I couldn't hear whose calling.

Ben Harvey

It's [Ben Harvey]with [Den].

J. Downey Bridgwater

Oh, hi, Ben. How are you doing?

Ben Harvey

Good. Good morning, thanks for taking my question. I've got two in relation to credit, the first one, in potential problem loan decrease, what percent of that decrease went into nonperforming as a post [meeting] result?

J. Downey Bridgwater

Wait, I don’t, we don’t have enough time. I don’t have that all. [Inaudible] I will call you back with that [again].

Ben Harvey

But generally speaking, would you say that the decrease was driven more by movement into a non performers [as opposed] to resolutions?

J. Downey Bridgwater

Yes

Ben Harvey

Okay.

J. Downey Bridgwater

That’s your resolution but most of (inaudible) performance. That's correct.

Ben Harvey

Okay. And the last would be on the movement of the TDRs into none performing loans of $27million. How much of the charge of this order were suppose to pay with that loan?

J. Downey Bridgwater

Charge it all. Charge it down on the TDRs. I don’t know. [Inaudible] I just call you back with it.

Ben Harvey

Okay.

J. Downey Bridgwater

That’s not the use of 27 million wended of performance. But as far its charge down [inaudible] $27 million. I just don’t know that number. We’ll be back to call you.

Ben Harvey

Okay. Thank you very much.

J. Downey Bridgwater

Thank you.

Operator

We have a question from Bob Patten representing Morgan Keegan. Please go ahead.

Bob Patten

Hey guys. I hated to be the dead horse on the outer state portfolio. But, I guess if we look at strategy going forward, you know two or three years. Can you talk about what was the peak exposure for Sterling in terms of out of market growth? Where we see that in terms of percentage? Where we see that in the future? And I guess, you know going back in the high (Vernie’s) days. We knew why High (Vernie) went out to Louisiana that has no growth that you guys have growth in Texas. I'm just trying to understand what the composition you have in your balance sheet in terms of loans will be two, three years from now.

J. Downey Bridgwater

Two to three years from now we hope working all in Texas, only in Texas. And we will abolish any out of state lending that is not relationship based. In other words, if we have Texas company, Texas borrower and they want to have a vacation home and ask the Colorado we might considered something like that. But as far as generating new commercial credits with collateral outside of the State of Texas that’s not relationship based, are intended to have zero. So we are in the process of orally liquidating, reducing our exposure to any out of state collateral. Again, that’s not relationship base or [increment] basis. And as I mentioned on the (Collin’s) question earlier hopefully we’ll be able to sell some of those loans and reduce our exposure more quickly so we can get to that zero exposure faster sooner rather than later.

Bob Patten

At better and better [percentage is the best].

J. Downey Bridgwater

For the question that the peak was like $548 million is what we had at the peak. And about a third of those loans were to be sold help for sales. So were move on the, held in the [maturity] when the capital markets shut down.

Bob Patten

Thanks, Downey.

J. Downey Bridgwater

Goodbye.

Operator

Gentlemen, there are no other questions at this time.

J. Downey Bridgwater

Okay well we certainly appreciated by joining us today and we look forward to talking to you next [quarter]. Goodbye.

Operator

Ladies and Gentlemen, that does include for our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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Source: Sterling Bancshares, Inc. Q1 2010 Earnings Call Transcript
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