Prosperity Bancshares, Inc.
Q3 2008 Earnings Call Transcript

Published: 17 Oct 2008

[Operator:]

Good day, everyone, and welcome to today’s program. (Operator Instructions) It is now my pleasure to turn the conference over to Mr. Dan Rollins.

[James D. Rollins:]

Welcome to Prosperity Bancshares’ third quarter 2008 earnings conference call. This call is also being broadcast live over the internet at our website, www.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. Here with me today is David Zalman, Chairman and Chief Executive Officer, H. E. Tim Timanus, Jr., Vice Chairman, and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights for the third quarter of 2008. He will be followed by David Hollaway who will spend a few minutes reviewing some of the recent financial statistics. Tim Timanus will discuss our lending activities including asset qualities, and 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, Dawn, or you may email questions to [e-mail]. I assume you have all received a copy of this morning’s earnings announcement. If not, please call Whitney Hutchins at 281-269-7220 and she will fax a copy to you. Before we begin, let me make the usual disclaimers. Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of the Federal Securities laws, and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Prosperity Bancshares to be materially different from future results, performance, or achievements, expressed or implied by such forward-looking statements. Additional information concerning factors that could cause actual results to be materially different than those in the forward-looking statements can be found in Prosperity Bancshares’ filings with the Securities 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.

[David Zalman:]

Thank you, Dan. I would like to welcome everyone to our third quarter 2008 conference call. I am delighted to report a stressful but successful quarter. Among our success this quarter, our third quarter earnings per share were $0.53 on a diluted basis before the impairment charge on Freddie Mac and Fannie Mae perpetual preferred securities. Our third quarter net interest margin on a tax equivalent basis increased to 4.15%. Our non-performing assets stand at a low 0.26% of average earning assets. Our Tier I risk-based capital ratio increased to 13.31%. Our total risk-based capital ratio increased to 14.29%. Our Tier I leverage capital ratio is 7.75%, and our tangible equity to tangible asset ratio increased to 6.28%. Our efficiency ratio improved to 45.3% from last quarter’s 46.2%. Loans increased 3.9% for the quarter compared to the same quarter last year. Loans on a linked quarter basis decreased 2%. We attribute the decrease in loans to our continued emphasis on credit quality and our desire to reduce our exposure to construction lending. Deposits increased 6.7% for the quarter compared to the same quarter last year. On a linked quarter basis deposits decreased 3.6%. We attribute the decrease in deposits partially to the normal third quarter seasonality of our deposits as well as our consistent focus on reducing our interest bearing deposit expense. As we have discussed many times over the past few years, some of the banks we have acquired were paying much higher rates than we were offering. As contracted rates expired, depositors that were only focused on rate moved their deposits to other banks. Our ability to maintain core deposit relationships has helped us achieve a better net interest margin which directly improves our bottom line. Net income for the quarter was $15.4 million or $0.33 per diluted common share, a decrease in net income of $8.4 million compared with the $23.8 million or $0.54 per diluted common share for the same period in the prior year. The decrease was primarily due to the $9.1 million after tax impairment write down on our Fannie Mae and Freddie Mac perpetual preferred securities. Over the past few months we have witnessed dramatic changes in our industry as well as our overall economy, times most of us thought could not be possible. Nevertheless, our team continues to perform. Our bank’s asset quality is superior when compared to our peer groups. Our loan cost for deposit base allows us to be flexible with our deposit pricing and also allows us to be very selective with the assets we put on our books. Our business model has not changed. We continue to be plain vanilla. We take in deposits, we make loans, and we watch our expenses. We continue to be disciplined in the type of assets and liabilities we put on the balance sheet as well as the acquisitions that we make. We continue to be fortunate in that the Texas economy still remains relatively strong despite the lower confidence people are feeling about the overall economy. Home prices in Texas never increased as much as they did in other parts of the country, so we are not experiencing the home price declines others are having. In fact, home prices have been holding their own. Unemployment has been low although it has increased from 4.3% in August of 2007 to 5.1% as of August 2008. We are still experiencing positive job growth with 6,700 new jobs for the month of August. Texas employers have added 252,000 jobs over the past 12 months for an annual job growth rate of 2.4%. Rebuilding in the aftermath of Hurricane Ike should also help job creation in the Houston area in the near future. In wrapping up, I would like to remind everyone again that we do not have any CDOs, SIVs, credit default swaps, or other esoteric products that are causing strain on the liquidity markets. While we do offer some mortgage-related products, we do not operate a mortgage company. We do not have a factoring company or asset-based lending area. We do not participate in indirect lending programs. We do not participate in shared national credit, and finally we are not involved in sub-prime lending. Our management team is very experienced, with many years of service. As economic times change for Texas, I feel very confident that the knowledge our team possesses will allow us to navigate through any difficulties. In closing, I would like to say thank you for your support and confidence. We have not changed our mode. I am very confident in our model and our continued success. We have a great group of bankers and we will continue and grow and prosper. We are proud of our past and intend to stay the course. We plan to continue our focus on organic growth and we plan to continue to pursue accretive acquisitions. Although we want to grow, we will not take our eye off the ball when it comes to asset quality and building shareholder value. We intend to continue building loans, focusing on our customers, rewarding the people that produce results, and building shareholder value and honor our service commitment by greeting our customers with a smile, calling the customer by name, and finding a way to say yes. Thanks again for your support of our company. 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 third quarter 2008 increased 12.5% to $57.8 million compared with $51.4 million in the same quarter last year. The increase was primarily due to a 10.1% increase in average earning assets and the rate paid on interest bearing liabilities decreasing at a faster pace than the yield earned on interest earning assets. As mentioned before, the tax equivalent net interest margin was 4.15% for third quarter ’08 versus 4.07% for the same period last year and 4.10% for the second quarter 2008. For the three months ended 9-30-08, non-interest income decreased 7.4% to $13.1 million compared with $14.2 million in the same quarter last year. The decrease was impacted by a decrease in net gain and loss from sale of ORE and other assets and due to a decline in interest rates, a decrease in both bank owned life insurance income and dividends paid out on FHLB stock. These items were offset by a 5.2% increase in service charges on deposit accounts, reflecting an increase in the number of deposit accounts from recent acquisitions as well as an increase in debit card income. For the three months ended 9-30-08, non-interest expense increased 53.7% to $46.2 million compared with $30.1 million for the same period last year. The increase was primarily due to the pre-tax impairment of our Fannie Mae and Freddie Mac preferred stock. Excluding the impairment, non-interest expense increased 7% due to operating costs associated with the banking centers acquired in 2008 and an increase in salary and benefit expense due to annual merit increases and incentive programs. Our bond portfolio metrics at 9-30-08 reflect a weighted average life of 3.9 years and effective duration of 3.4 years. The projected annual cash flow as of 9-30 looking forward is approximately $460 million. With that, let me turn the presentation over to Tim Timanus for some detail on loans and asset quality.

[H.E. Timanus:]

Thank you, Dave. Non-performing assets at quarter end, September 30, 2008, totaled $14,536,000 or 0.45% of loans and other real estate compared to $11,651,000 or 0.35% at June 30, 2008. The September 30, 2008 non-performing asset total was made up of $6,848,000 in loans, $158,000 in repossessed assets, and $7,538,000 in other real estate. Net charge offs for the 3 months ended September 30, 2008 were $1,805,000 compared to net chargeoffs of $1,164,000 for the 3 months ended June 30, 2008. $1,700,000 was added to the allowance for credit losses during the quarter ended September 30, 2008 compared to $1 million for the second quarter of 2008. The average monthly new loan production for the quarter ended June 30, 2008 was $80 million compared to $103 million for the second quarter ended June 30, 2008. Loans outstanding at 9-30-08 were $3,249,000,000 compared to $3,313,000,000 at June 30, 2008. The September 30, 2008 loan total is made up of 41% fixed rate, 30% floating rate, and 29% [restating] at specific intervals. Dan Rollins, I’ll now turn it over to you.

[James D. Rollins:]

Thank you very much, Tim. Dawn, at this time I think we’re ready to take questions.

[Operator:]

(Operator Instructions) Your first question comes from Jon Arfstrom from RBC Capital Markets.

[Jon Arfstrom:]

Maybe a question for you, Tim, on the average monthly loan production of $80 million being a bit slower. What would you attribute it to? Is it caution on your part? Is it just seasonality in the summer? Give us some thoughts on that.

[H.E. Timanus:]

I think it’s probably three different things. We are probably being a little more careful, hopefully we’ve always been careful, but we’re very focused on asset quality so I think that does play a part in that number. While the Texas economy seems to still be doing much better than most other places, I think there has been some softening in what’s going on here and the hurricane in September seems to have had a dramatic effect on activity really for the majority of that month. For example, our production in July was approximately $98 million. In August it was approximately $86 million, and it dropped all the way down to about $54 million in September, so there was a dramatic drop from July and August to September and our assumption is that’s primarily related to the fact that certainly in the Houston area, which accounts for 40% or 45% of our business, things came to a halt because of the Hurricane.

[David Hollaway:]

John, I think that we didn’t talk about the Hurricane at all, but with a little less than half of our business in the Houston metropolitan area, while most of you all were focused on what was happening on Wall Street, some of us were down here living without electricity. Tim, you didn’t have electricity at your house for over two weeks, I didn’t have electricity for two weeks and a few days. A big part of Houston was down here camping out for a couple of weeks after the hurricane and I think that impacted businesses across our market in a lot of ways.

[Jon Arfstrom:]

From what you can tell, is October likely to rebound?

[James D. Rollins:]

It’s probably too early to say. It should be better than September, I can say that.

[David Zalman:]

I think there’s still a lot of focus, we’ve been talking here, I don’t know what you want to call the news that keeps coming out of Washington and New York, but I think you know all of the talk has got a lot of folks sitting on the sidelines so I think just the overall today, our belief is that people are being more cautious and a little more slow to react, waiting to kind of see the outcome of some of the things that are going on.

[Jon Arfstrom:]

Dave Zalman, maybe a question for you. I think most of us have relied on your bank and the Texas economy as being stronger than others and you talked a little bit about Texas loans, but do you have any emerging concerns about the Texas economy that we should all be thinking about?

[David Zalman:]

You’ve been on the conference calls forever and ever just like me and I’ve kind of always said that you can’t be in a room full of people with glue and not get some of it, and I’ve always said the impact in the national economy has to impact the Texas economy and I think that you’re seeing it right now. I think that you are seeing a slow down. I guess the good news is that we still have employment growth and we still have population growth. The prices on homes and stuff like that never got out of whack and even though we’re seeing a slowing down and you’re repossessing some of these homes that you have and stuff, probably the good news is that we’re still selling them. Making a long story short, do we see changes? Yes. I think a lot of even the national economy has really rolled over, even people that have the ability to do things. I think everybody’s pausing and being a whole lot more cautious right now, but I guess if you have to say “Where do you want to be in life?” Texas is probably still the place to be right now.

[Jon Arfstrom:]

And no concerns about the drop in oil or natural gas prices?

[David Zalman:]

Again, I’ve said that I know when I’ve been on the road a year ago I said that oil prices I think would probably come back to anywhere between $65 and $85 and I know a lot of people, when I said that, they looked at me kind of funny, but I think I even told you that. I said that basically the people that are drilling, they really don’t drill unless they can make it based on $65 a barrel so I think we’ll still do good. What it will cause though is where things were kind of like a frenzy sometimes and Houston maybe more in the commercial real estate market and everybody was rushing to up prices from say $25 a square foot to... Now over the last year they were jumping up as high as$37 and $38 a square foot. I think what you’re going to see, maybe I’m wrong on this, maybe people continue to go crazy, but I think we were kind of creating a bubble here. I’m not necessarily saddened to see what’s happened is happening because I think that we were creating more of a bubble with oil going as high as it is and I think it needed to moderate and I think that prices were getting a little out of hand so... Nobody likes to see things go backwards but I don’t think this is all bad, really.

[Operator:]

Your next question comes from Brett Rabatin of FTN Midwest.

[Brett Rabatin:]

I wanted to first ask you, on the loan portfolio, where there any credits that you selectively exited this quarter or was the decline just more of a natural just payoffs that happened and what not?

[H.E. Timanus:]

I don’t know that we can identify a decline to one or two credits that we wanted in or out of but I think our credit team, Chris Bagley and Randy Hester, our Chief Credit Officer and our Chief Lending Officer are very focused on credit quality. They are spending long hours every day working with our team. We are looking at our credits in a way... As Tim says, we’ve always been very conservative in how we review credits and we certainly are looking, we’re stressing things a little more, we’re continuing to look under the sheets a little more. I don’t know that we could say that it was one or two credits that we selectively exit. I think that you’ve got, as Tim said, multiple factors out there that are impacting that, certainly the decline in the construction portfolio, we expect to continue to see that construction portfolio decline because as you’ve heard us and everybody else say, the construction business in Texas has cooled off. There is less construction going on. So if those loans just work the way through the normal process, that portfolio is going to continue to decline. The other side of it can again be probably contributed to multiple factors including half of our territory was basically completely shut down for the month of September.

[David Hollaway:]

I can add a little bit of color, Brett. I do sit on the loan committee and yes, the answer to the first part of our question, are we... We actually have changed our policy because we do have lines of credit out to builders and each builder has its own line that could either be we allocate the spec part of the business or we allocate the contract part of the business where there’s a contract on the home and so, these lines where we let people just draw on the lines, we now do it a lot differently. A builder may have a line and though we say a line, we establish a guidance line in the bank for anybody. We look at every deal before they go into it and if a builder has two specs or three specs that haven’t been selling for a long time and wants to do some more specs, we’re not allowing that to happen right now. So we are a lot responsible for what’s happening right now.

[James D. Rollins:]

We’re actively managing the portfolio. There’s no question.

[David Hollaway:]

We actually look at every deal that comes across.

[Brett Rabatin:]

Are you guys still making commercial construction loans and if we just sort of look at the natural progression downward of the construction book over the next few quarters, is it fair to assume that we’ll see the total loan portfolio down another 5% or so on the next year? Can you give us some thoughts on what you see happening?

[James D. Rollins:]

I would say that our bank has never really been big into commercial construction. I think the commercial construction portfolio came primarily from one of our acquisitions, Southern National Bank, and yes, those lines we are working through those lines and I think you’re going to see a continued decrease in those lines because those are lines that we’re not as focused as they were on and as we work through those things and get them out of the portfolio, I think you will see a decrease on those.

[David Zalman:]

But you’re also, I think, we continue to push our team, when you talk about balance sheet growth as a whole. I don’t think our expectation is to just sit down and let the balance sheet shrink. We want to manage the balance sheet and we want to make sure that the assets that we’re putting on fit. We haven’t redlined any particular loan type or borrower type. If somebody came in tomorrow that’s being mistreated somewhere that’s a good customer with financial wherewithal, we certainly want to talk to those type customers and I think we’ve had some good success in moving customers from banks that are focused on internal problems to banks like us that are very focused on our customers. Our team of bankers, I think I give them great marks in the market that we’re in today. They’re out actively calling on customers in all of our markets, both new customers and existing customers, and they’re working with those customers to make sure that we can accomplish their needs.

[H.E. Timanus:]

I think it’s safe to say that our focus has gravitated more towards owner occupied loans in the commercial area. That’s always been something that we’ve like to do but I think we’re clearly focused on doing more of that now than what you would call speculating in a commercial area. If a company, if a business wants to build a new facility for their use, we’re still seeing a fair amount of that. But the spec volume I think in general has softened and I know in what we’re approving there’s less of it.

[James D. Rollins:]

Does that answer your question, Brett?

[Brett Rabatin:]

Yes and there’s one last thing. The chargeoffs were pretty light still. I was just curious if there was anything in particular that happened in chargeoffs this quarter, comprised of anything in particular, a couple of items or what have you.

[James D. Rollins:]

I think it really has been kind of the same thing we’ve been seeing for the last couple of quarters and I think as cloudy as our crystal ball may be, it appears to us that it’s going to continue to be kind of the same going forward.

[David Zalman:]

Did he say it’s light?

[Brett Rabatin:]

For the industry it’s light. For you guys it might seem a little high but for the industry it’s light.

[James D. Rollins:]

David’s having a heart attack.

[David Zalman:]

He’s being a little dramatic. But having said that, with the way things are right now, I still see that going forward next year at about the same amount anyway. I have to tell you, I don’t like that kind of chargeoffs but it is what it is and we probably still see that in 2009 as well.

[James D. Rollins:]

It’s hard for a crystal ball to be real clear but we continue to think that we’re in front of what’s happening, we’re as I said earlier, we give good marks to our team. We’re actively scrubbing and looking, so I think we’re in a manageable position.

[Operator:]

Your next question comes from Erika Penala from Merrill Lynch.

[Erika Penala:]

I was just wondering, you k now you talked about M&A opportunity, and it seems like if the weaker banks were allowed to participate in the [tarp] capital purchase program that it will create a lot of walking wounded. I was just wondering what you sense in the marketplace in terms of not eroding your ability to take advantage of your capital position and buy the weaker banks.

[David Zalman:]

Probably at first glance, Erika, it appears that “Well gosh, if they’re going to give everybody money, then there’s not going to be any banks that fail and it’s going to hurt your opportunities” but I don’t think that’s going to be the case at all. If you’re applying for this money, it’s my understanding that it’s a pretty big application process. It’s some pretty tough meetings and you still have to show that you can remain profitable and solvent. I think there’s some banks that probably won’t... Not to make you scared but there’s some banks that just aren’t going to make it no matter what. It’s not going to be viable. So I think you’ll still see some of those deals happening. I think that you’re also going to see that where other banks that are in the business just saying, “Golly, we need the help of somebody that maybe has some stronger capital that has some other products so we can compete for our customers.” I think it’s still going to be out there, I do.

[James D. Rollins:]

I think there’s definitely going to be opportunities for us, Erika. If you’re asking us for some personal feelings, I think all of us in the room are probably a little more towards the side of, “Gosh, we’ve played by the rules for the last 30 years and we should be able to take advantage of some opportunities that are out there for us and maybe this program is going to take away some of those opportunities” so that can certainly be agitating, but there’s opportunities out there for us today.

[Erika Penala:]

Has pricing expectation steadily gotten more realistic or is it volatile and tied to whatever the government response has been?

[James D. Rollins:]

I don’t know. I’ve talked to several bankers in the last couple of weeks. I don’t know that expectations are tied to the government’s actions at all. For pricing expectations from sellers are whatever the seller thinks they can get and they’re always going to be high, and maybe you’re asking a question that we’re answering in a different format. If you’re asking from a public bank perspective what expectations may be, we typically, we only bought or merged up with two public banks and we’ve done pushing 30 transactions. We’re typically talking to smaller private institutions but they have an expectation for what they think the bank is worth and maybe they are learning that the worth of banks has declined over the last few months or the last year, but their expectations are not... they’re not willing to walk away for nothing.

[H.E. Timanus:]

Another thing, you probably have two types of banks. You probably have a bank that’s playing defense, they’re having a lot of problems and they’re either going to have to find some capital or team up with somebody and they’re not going to have much negotiation power, and then you’re going to have other banks that are very offensive and they’re good and if they don’t get the price they want, they’re not going to do a deal. But I will tell you this in my career. The deals that I thought we got at the cheapest price weren’t the cheapest and the deals that sometimes you think that you paid enough for, maybe a little too much for, I think those kinds of deals turn out a lot better, so finding a good bank and paying a realistic price for it in my opinion is better than just trying to get a deal all the time too.

[Erika Penala:]

On the deposit side, a lot of the large banks in your footprint have been talking about the flight to quality. Is that not happening in Texas, the flight to big so to speak?

[H.E. Timanus:]

It’s hard for us to say this quarter because our third quarter usually we always have a decrease in deposits and I don’t know if it’s just the makeup of our customers, the seasonality of it or not. We usually regroup in the fourth quarter and regain and go back. I think that there is some flight to quality. I think it would be unreasonable to say that there wasn’t some flight to quality, especially with some of the banks in the news every day. I think you saw especially they talked about the larger banks, everybody knows about WaMu, Wachovia, and I think that those customers, you probably saw those customers probably bleed to probably Wells Fargo and JP Morgan and some of those guys, so I think there is a flight to quality, and in Texas it’s a little hard to tell by deposits [inaudible] the rest of the banks because as we mentioned earlier with the loan side, we also on the deposit side, if people were without electricity for two weeks, and I think you had a lot of people pulling money out of banks just to make sure they had enough money to go from day to day, so it will be interesting to see what the other banks do.

[Erika Penala:]

One last question. Given the Fed easing this month, how should we think about the margin trends in the fourth quarter?

[James D. Rollins:]

I think if you’re looking out at the fourth quarter and obviously there’s a lot of moving parts I would say we should be able to hold steady over the near term. The dropping rates specifically will help us a little bit but you really have to think in kind of a deposit pricing perspective, how competitive will that continue to be, it’s falling off a little bit, but with these other players in the market where they’re starting to exit the market, but it all comes down to the deposit pricing in my opinion. Based on what we see, we think the margin will hold steady over the next quarter but again there’s a lot going on these days.

[David Zalman:]

Even with the prime dropping, we would still be able to maintain our margin.

[H.E. Timanus:]

Thanks Erika, we appreciate your help.

[Operator:]

Your next question comes from Bain Slack from KBW.

[Bain Slack:]

I wanted to get some... since we started talking about the [tarp] program, obviously looking at the capital ratios, I know you don’t need it, but we heard from some stronger banks, looking at this as a potential maybe to, given the cheapest of the funding and/or trying to ask the question would you be at a competitive disadvantage by not participating, if you can give me kind of your thoughts on that and how that may apply to Prosperity?

[David Hollaway:]

As I mentioned earlier, our total risk based capital right now is 14.29%. Our Tier I risk-based capital is 13.31%. Our leverage ratio is 7.75%, so looking at it right now, we have probably more capital than our bank has ever had. On the other side of the weight, I’m talking to two other people about it, and again, everybody’s looking at it two ways. If you’re a defensive bank and you need the capital, there’s no question, you’re going to take it, you’re going to pay the 5% and give awards and you’re going to take it. If you’re an offensive bank, and the way that we are, and we have plenty of capital right now, I think that if you have a deal working and you think you could use that money to make a deal happen, you would probably consider it. If you don’t have a deal working immediately, I don’t know that a bank like ours would be interested in taking it because when... I really looked and there’s a lot of things that go along with the money and that is can you pay dividends without their permission, there’s salary deals, there’s a number of things that go along with it, tax implications, so I called a couple of investment firms on Wall Street who I know everybody trusts right now, and we didn’t more than one, but I asked that. I said, “You know guys, if we really wanted to raise capital and if we needed $100 million or $200 million and we needed it pretty quick, and we didn’t really want to get in the car and go from building to building in Manhattan, how long would it really take?” They said basically we’d have it in a couple of days. I think there’s money available for banks that are in a good position on the offensive side in a down environment, so I think, and again, this is something our directors are probably going to want to talk about on Tuesday, we have a Board meeting, but that’s kind of where we’re at right now.

[James D. Rollins:]

I think the big difference for us is just the difference between playing offense and playing defense. If you’re playing defense, you don’t really have a lot of choices. If you’re playing offense, you’ve got a whole lot more choices today.

[Bain Slack:]

I tend to agree. Thank you for giving me those thoughts there.

[James D. Rollins:]

We like playing offense. David, Tim, and I all went to school from the number one Texas Longhorns.

[Operator:]

Your next question comes from Ed Timmons from Sterne Agee.

[Edward Timmons:]

Just a couple quick questions. Most of my questions have already been asked, but on the 90 days past due, it jumped there. Was it a couple big credits there or was there any trends in specific portfolios? What kind of details is behind that?

[H.E. Timanus:]

There was one credit of about $2 million that accounts for I guess about two-thirds of that increase. That’s a kind of mixed use commercial real estate development, so it is secured.

[James D. Rollins:]

While it can bounce around, we’re doing credits today from a couple hundred thousand to 5 or 6 or 7 or 10 or 15 million so certainly one credit can move your numbers around, Ed. I think that’s what you’re seeing.

[Edward Timmons:]

And credit’s still holding up fairly well but are you seeing any weakening trends in specific portfolios?

[H.E. Timanus:]

I wouldn’t say so. The weakness we see is a hodge podge. It comes from here, it comes from there and it comes from all over the state. So I don’t really see that the weakness is concentrated geographically or necessarily in the type of loan.

[Edward Timmons:]

Then lastly, you guys have touched on it a little bit here with the hurricane. Can you maybe talk a little bit more about the impact both on the deposit side from government grants and insurance proceeds but then also maybe a little longer term with the rebuilding, what kind of increases or demand, and finally do you see any hit to credit maybe in the next couple quarters as these businesses were basically out of business for a couple weeks or a month.

[James D. Rollins:]

You know one of the first things we did, once we got up and running, so when you talk about the hurricane, we went in to our contingency and business resumption planning mode early the week before the hurricane came in and we certainly were impacted by the hurricane. We had all of our Houston area offices which is 40 something and we had all of our South Texas offices closed on Thursday afternoon and Friday before the hurricane came in because there was such a wide path of where the hurricane could come. As it became obvious that it was moving to the northern part of the state, Houston and Galveston, the South Texas area was able to kind of reopen. We’ve got 30 something offices down there, so really while the hurricane hit Houston, you have to remember that from a business perspective, the South Texas market from Corpus Christi up basically also lost a week. They went into hurricane preparation modes and we were boarding up locations, we were making sure that we were prepared for the hit wherever it came in. Once the storm came into Houston or into Galveston or a little east of Galveston, we have an office in Galveston. That office today is still running on diesel generator power. We took a diesel generator into Galveston with a temporary building. That office had about 8 feet of water in it. We had a temporary building down there and a diesel generator and our own plumbing supplies and everything else and we were open in about 5 or 6 days after the storm down there. All of our other offices were able to open much quicker. On the Monday after the storm we started the day with about 10 offices in Houston open and we finished the day with 50% of our Houston offices open which would be 24 offices, and by the end of the week, we were completely 100%, all of our offices were running again. However, at one point we had 13 of those offices running on emergency generator power or diesel generator power that we were able to deploy throughout, so just on our side, I know what we went through and I can only imagine that our customers were all kind of in the same shape, so the impact of the storm from a cash planning perspective, from a disaster planning perspective, it certainly impacted us all. One of the things we did right after that was Chris and Andy immediately began working on what our exposure is to the storm and so we look at census track data, we look at zip code data, and we send that out to our lenders. Remember we don’t have an 800 number in the bank. We don’t have a call center that takes care of business. We take care of business at the point of sale, so we produced that information, pushed it out to our lenders, and asked them to report back in on what’s there, so as we’ve come through that process, we’ve certainly had some credit exposure to damaged property. Being a real estate lender, most of that is insured and our expectation is that’s not going to be a significant number and that we won’t see a whole lot of that today from when we first looked through those numbers. From an ongoing perspective, the City of Houston, I don’t know exactly, but I think they said that we’re expecting some $8.5 billion or $9 billion in insurance proceeds coming into the Houston/Galveston market and so just on those pure numbers rolling in, obviously they’re also saying there’s $11 billion or $12 billion in damage, so the difference being the uninsured physical damage that’s out there, but that certainly will be a net positive to the construction jobs or the rebuild jobs that are out there for the next few quarters. Did I talk too long on that answer?

[Edward Timmons:]

No, that was good information. I appreciate it.

[Operator:]

Your next question comes from Christopher Marinac from Fig Partners.

[Christopher Marinac:]

Dan, I was just curious on what you’re seeing, whether it’s competitors or other observations in the market on loan sales, whether it be non-performing or performing, what the pricing is in Houston, Dallas, etc.

[James D. Rollins:]

You’re asking if we’re seeing other banks selling credits?

[Christopher Marinac:]

Correct, or just credits are being sold on the street, sort of what the ranges are, just trying to compare with other markets.

[David Zalman:]

You know, when we were buying some of the banks that we were buying, we would make packages, and we probably averaged I would say, sometimes you didn’t get $0.50 or $0.60 but we probably averaged over 80% on loan sales. I would tell you today I’ve talked to some of the people that buy the loans and it’s nothing like that anymore.

[H.E. Timanus:]

The spread has gotten a lot wider.

[David Zalman:]

I wish I could tell you what I thought a package of loans would go for, but I can tell you where it was, and it was in the 80s, and I would think it’s a lot lower than that today.

[James D. Rollins:]

The people that we know have no factual information that says anything is traded but I had lunch with some folks the other day that are in that business and they said that the bid out spread is very wide today.

[David Zalman:]

I would say that you’re probably at a point today where in the past you might have sold the product because you just want it off your books and today because the prices are so cheap, you may want to keep it and work it out yourself and make more money out of it.

[Operator:]

Your next question comes from Jennifer Demba with Suntrust Robinson Humphrey.

[Jennifer Demba:]

Thanks for the details on the construction portfolio. How much of your non-performing assets come from that portfolio/

[H.E. Timanus:]

From the construction portfolio total, I don’t have a hard number on that. I’d say it’s around half. That’s not going to be too far off.

[Jennifer Demba:]

And the other half, would that be concentrated in any one portfolio or kind of spread out?

[James D. Rollins:]

Once again it’s a hodge podge of a lot of different things. It ranges from $1000 motorcycle repo to a home to a commercial business to a karate training studio. If you can dream it up, it’s in there.

[David Zalman:]

It’s all over the spectrum.

[Operator:]

Your next question comes from Daniel Cardenas from Howe Barnes.

[Daniel Cardenas:]

Can you remind me, what percentage if any of your loan portfolio is attached to LIBOR?

[H.E. Timanus:]

Dan, it’s kind of a pet peeve for me because we’ve had customers forever that they wanted to price their portfolio on LIBOR and I said, first I don’t know if they know it’s an acronym or what it stands for, but more so than that, we’ve never priced... The short answer is we never use LIBOR simply because we based our rates off of what our cost of deposits are and our cost of deposits were never tied to LIBOR, so we might have a few LIBOR loans in there simply because of loans that we acquired from other banks, but for the most part, we don’t have LIBOR lending.

[James D. Rollins:]

I’d have to say it’s less than one hand. Very few, Dan.

[Daniel Cardenas:]

Then can you give me any comments on your 30 to 90 day buckets, how’s that looking?

[James D. Rollins:]

Past due?

[Daniel Cardenas:]

Yes, past due.

[James D. Rollins:]

I think it’s looking the same as it was last quarter and the quarter before. Randy Hester is the primary architect in that area and he is... We’re actively working that. The beauty of our loan portfolio compared to many others. I want to kind of back up and fly a little higher, when you look at our loan portfolio, our loan portfolio is hugely amortizing, so when you look at the $3.2 billion portfolio, 75%, 85% of that is on an amortizing basis, so what that does for us is it allows us to know where the issues are early in the game and that’s kind of how you can manage that 30-60-90 process. As opposed to a true revolving credit or C&I credit where you know everything’s rocking along fine for the year and all of a sudden you get to the end of the year and you realize, “Oh heck we got a problem here.” That’s not how our portfolio works. So the answer to your question is I think it’s no different today than it was last month or the month before, and again our cloudied up crystal ball kind of indicates that it looks like it’s going to stay the way it is for the next foreseeable future.

[Operator:]

It appears we have no further questions.

[James D. Rollins:]

Ladies and gentlemen, we certainly appreciate your participation on our call and we look forward to seeing you again in the future. Thank you very much.