Prosperity Bancshares Inc (PB) 2008 Q3 法說會逐字稿

Good day, everyone, come and welcome to today's program. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions) Please note this call may be recorded. I will be standing by if you should need any assistance.

It is now my pleasure to turn the conference over to Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares' third-quarter 2008 earnings conference call. This call is also being broadcast live over the Internet at our website, 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, or you may e-mail questions to investor.relations@ProsperityBankTX.com.

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 law and, as such, may involve known and unknown risk, uncertainties, and other factors which may cause the 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 the Forms 10-Q and 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Now, let me turn our call over to David.

Thank you, Dan. 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 successes 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 nonperforming assets stand at a low 0.26% of average earning assets. Our Tier 1 risk-based capital ratio increased to 13.31%. Our total risk-based capital ratio increased to 14.29%. Our tier one 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 expire, depositors that were only focused on rate move 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 writedown 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 low cost core 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 factoring company or asset-based lending area. We do not participate in indirect lending programs. We do not participate in shared national credits. And finally, we are not involved in subprime lending.

Our management team is very experienced, with many years of service. If 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 model. I am very confident in our model and our continued success.

We have a great group of bankers, and we will continue to 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 creating 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?

Thank you, David. The 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 the third-quarter '08 versus 4.07% for the same period last year and 4.10% for the second quarter of 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 that decreased 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 pretax impairment of our Fannie Mae/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 details on loans and asset quality.

Thank you, Dave. Nonperforming assets at quarter end September 30 '08 totaled $14,536,000, or 0.45% loans and other real estate compared to $11,651,000 or 0.35% at June 30 '08.

The September 30 '08 nonperforming 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 three months ended September 30 '08 were $1,805,000, compared to net charge-offs of $1,164,000 for the three months ended June 30, '08.

$1,700,000 was added to the allowance for credit losses during the quarter ended September 30 '08 compared to $1 million for the second quarter of 2008.

The average monthly new loan production for the quarter ended June 30 '08 was $80 million, compared to $103 million for the second quarter ended June 30 '08.

Loans outstanding at 9/30/08 were $3,249,000,000 compared to $3,313,000,000 at June 30 '08. The September 30 '08 loan total is made up of 41% fixed rate, 30% floating-rate, and 29% resetting at specific intervals.

Dan Rollins, I will now turn it over to you.

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

(Operator Instructions) Jon Arfstrom from RBC Capital Markets.

Thanks. Good morning, guys. Nice job.

Maybe a question for you, Tim, on the average monthly loan production at $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 a little more thoughts on that.

I think it is probably three different things. We are probably being a little more careful. Hopefully we have always been careful, but we are very focused on asset quality, so I think that does play 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 is going on here. The hurricane in September seems to have had a dramatic affect 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. Our assumption is that is primarily related to the fact that certainly in the Houston area, which accounts for 40%, 45% of our business, things came to a halt because of the hurricane.

Yes, Jon, 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.

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 hurricanes. I think that impacted businesses across our market in a lot of ways.

From what you can tell, is October relatively ready to rebound?

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

I think there's still a lot of folks -- we have been talking here, Jon, the -- I don't know what you want to call the news that keeps coming out of Washington and New York. But I think 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.

Okay. 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. You talked a little bit about Texas loan. But do you have any emerging concerns about the Texas economy that we should all be thinking about?

Well, you have been on the conference calls forever and ever, just like me over here. I have always said that you can't be in a room full of people with flu and not get some of it. I have always said the impact in the national economy has to impact the Texas economy. And I think that you are seeing that right now. I think that you are seeing a slowdown.

I guess the good news is that we still have employment growth and we still have population growth and that the prices on homes and stuff like that never got out of whack. Even though we are seeing a slowing down and you're repossessing some of these homes that you have and stuff, probably the good news is that we are still selling them.

But making a long story short is, 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 is pausing and being a whole lot more cautious right now.

But I guess if you had to say -- where do you want to be in life? Texas is probably still the place to be right now.

Okay, and no concerns about the drop in oil or natural gas prices?

Again, I have said this; I know when I have been on the road a year ago I said that oil prices, I think, would probably come back to anywhere between $65 and $85. I know a lot of people when I said that they looked at me kind of funny.

But you know, I think I even told you that. I said that basically all of the people that are drilling, they really don't drill unless they can make it based on $65 a barrel.

So I think we will still do good. What it will cause, though, is where things were kind of like a frenzy sometimes in Houston, maybe more in the commercial real estate market, and everybody was rushing to up prices from say $25 a square foot to on A properties -- now that -- over the last year they were jumping up as high as $37 and $38 a square foot.

So I think what you are going to see -- maybe I am wrong on this. Maybe people will continue to go crazy. But I think we were kind of creating a bubble here. So I am not necessarily saddened to see what has happened is happening. Because I think that we were creating more of a bubble with oil going as high as it is. 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.

Okay, thanks a lot.

Brett Rabatin from FTN Midwest.

Good morning. I wanted to first ask on the loan portfolio, were there any credits that you selectively exited this quarter? Or was the decline just more of a natural -- just payoffs that happened and whatnot?

You know, 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 that we have always -- as Tim said, we have always been very conservative in how we review credits. And we certainly are looking -- we are stressing things a little more. We are 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 exited. 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 have 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 their way through the normal process, that portfolio is going to continue to decline.

The other side of it can again probably be contributed to multiple factors including half of our territory was basically completely shut down for the month of September.

I can add a little bit of color, Brett, though. I do sit in on loan committee. And yes, the answer to your first part of your question is, are we -- we actually have changed our policy. Because we do have lines of credits out to builders, and each builder has its own line that could either be a -- we allocate the spec part of the business or we allocate the contract part of the business where there is a contract on the home.

So these lines where we let people just draw on the lines, we now do it a lot different. Before anybody -- a builder may have a line. And we say a line, it's -- we establish a guidance line in the Bank for anybody. We look at every deal before they go into it. 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 are not allowing that to happen right now.

So we are a little bit responsible -- not a little bit, a lot responsible for what is happening right now.

We are actively managing the portfolio. There is no question.

Yes. Absolutely. We actually look at every deal that comes across.

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

You know, 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 or --.

And yes, those lines, we are working through those lines. I think you are going to see a continued decrease in those lines. Because those are lines that we are just not as focused as they were on it. And as we work through those things and get them out of the portfolio, I think you will see a decrease on those.

But you 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 just to sit back and just let the balance sheet shrink. So I think we want to manage the balance sheet, and we want to make sure that the assets that we are putting on fit.

But we haven't redlined any particular loan type or borrower type. If somebody came and tomorrow that is being mistreated somewhere, that is a good customer with the financial wherewithal, we certainly want to talk to those type customers. I think we have 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 are in today. They are out actively calling on customers in all of our markets, both new customers and existing customers. They are working with those customers to make sure that we can accomplish their needs. Tim, you wanted to add in there?

I think it is safe to say that our focus has gravitated more towards owner-occupied loans in the commercial area. That has always been something that we have liked to do. But I think we are clearly focused on doing more of that now than what you would call spec lending in the commercial area.

If a company -- if a business wants to build a new facility for their use, we are still seeing a fair amount of that. But the spec volume I think in general has softened. I know in what we are approving there is less of it.

Does that answer your question, Brett?

Yes, 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 loans or what have you.

I think it really has been kind of the same thing we have been saying for the last couple of quarters. 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.

First I have to hear, did he say it was light?

Yes, he did.

Oh, well.

Relatively speaking.

It might be light for you.

For the industry, it's light. I know for you guys it might seem a little high, but for the industry.

David is having a heart attack over here.

I consider it dramatic. But having said that, I mean with the way things are right now, I mean I still see that going forward next year at about the same amount anyway. It's the same.

But again, I have to tell you, I don't like that kind of charge-offs, but it is what it is and we will probably still see that through 2009 as well.

You know, it is hard for your crystal ball to be real clear, but we continue to think that we are in front of what is happening. We are, as I said earlier, I think we give good marks to our team. We are actively scrubbing and looking. So I think we are in a manageable position.

Okay, great. Congrats on the core profitability.

Erika Penala from Merrill Lynch.

Good morning. I was just wondering, you talked about M&A opportunity. 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 that eroding your ability to take advantage of your capital position and buy the weaker banks.

But you know, probably at first glance, Erika -- this is David Zalman. At first glance, you know, it appears that -- well, gosh, if they are going to give everybody money, well then yes, there's not going to be any banks that fail and it's going to hurt your opportunities.

But I don't think that is going to be the case at all. If you are applying for this money, it is my understanding that it is a pretty big application process. It is some pretty tough meetings. And you still have to show that you can remain profitable and solvent.

I think there are some banks that probably won't -- again, not to put a scare. But there are some banks that are just not going to make it no matter what; it's not going to be viable.

So I think you will still see some of those deals happening. I think that you are also going to see that where -- you are going to see other banks that are in the business that are just saying -- golly, we need the help of somebody that maybe has some other -- that has some stronger capital, that has some other products so we can compete with our customers.

So I think it is still going to be out there. I do.

I agree. I think there is definitely going to be opportunities for us, Erika. If you are asking some personal feelings, I think all of us in the room are probably a little more towards the side of -- gosh, we 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.

Have pricing expectations steadily gotten more realistic? Or is it volatile and tied to whatever the government response has been?

I don't know. I've talked to several bankers in the last couple weeks. I don't know that expectations are tied to the government's actions at all.

Pricing expectations from sellers are whatever the seller thinks they can get, and they are always going to be high. Maybe you are asking a question that we are answering in a different format.

If you are asking from a public bank perspective what expectations may be, we typically only bought or merged up with two public banks; and we have done, pushing 30 transactions. We are typically talking to smaller private institutions that they have an expectation of 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 are not ready to walk away for nothing.

Erika, you probably have two types of banks. You probably have a bank that is playing defense, that are having a lot of problems. They are either going to have to find some capital or team up with somebody. And they are not going to have much negotiating power.

Then you're going to have other banks that are very offensive. They are good. And if they don't get the price they want, they are not going to do a deal.

But I will tell you this in my career, the deals that we thought or I thought we got at the cheapest price were not the cheapest. And the deals that -- sometimes you think that you paid enough for or maybe a little too much for, I think those kind 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.

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

You know, it is hard for us to say this quarter, because our third quarter usually we always have a decrease in deposits. I don't know if it is just the makeup of our customers, the seasonality of it or not. We usually regroup in the fourth quarter and regain that and go back.

You know, 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. I think that those customers probably -- you probably saw those customers flee to probably Wells Fargo and JPMorgan and some of those guys.

So I think there is a flight to quality. In Texas, it's a little hard to tell by deposits, so it will be interesting to see the rest of the banks. Because as we mentioned earlier, with the loan side, we also -- the deposit side, I mean, 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.

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

I think if you are looking out to 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 that will continue to be?

It has fallen off a little bit with these other players in the market, where they are 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 is a lot going on these days.

Even, Dave, even with the prime dropping, we'd still be able to maintain our margin.

Thanks, Erika. We appreciate your help.

Thank you.

Bain Slack from KBW.

Good morning. I wanted to get -- since we have started talking about the TARP program, obviously looking at the capital ratios. We know you all 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 your thoughts on that and how that may apply to Prosperity.

This is David. You know, as I mentioned earlier, our total risk-based capital right now is 14.29%. Our Tier 1 risk-based capital is 13.31%. Our leverage ratio was 7.75%. So looking at it right now, we have probably more capital than our Bank has ever had.

On the other side, the way I am talking to other people about it -- and again everybody is looking at it two ways. If you are a defensive bank and you need the capital, there is no question. You are going to take it. You're going to pay the 5% and give the warrants and you are going to take it.

If you are an offensive bank, in 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 I really looked and there's a lot of things that go along with the money. That is, can you pay dividends without their permission? Can you --? There's salary deals, there's a number of things that go along with this too. What's that?

Tax implications.

Tax implications. So, I called a couple of investment firms in Wall Street who I know everybody trusts right now. And we did more than one. But I asked. 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 a car and go from building to building in Manhattan, how long would it really take?

They said that basically we would have it in a couple of days. So I think there is money available for banks that are in a good position.

On the offensive side.

On the offensive side.

In a deal environment.

In a deal environment. So I think that that's -- and again this is something our directors are probably going to want to talk about on Tuesday. We have a Board meeting. But that is kind of where we are at right now.

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

Great. I know, I tend to agree. Thank you, though, for giving me the thoughts there.

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

Thank you, guys.

Ed Timmons from Sterne, Agee.

Good morning, guys. Just a couple quick questions. Most of my questions have already been asked. But on the 90 days past due jump there, was there any --? Was it a couple big credits there or was there any trends in specific portfolios? What kind of detail is behind that?

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

Again, I think while it can bounce around, we are doing credits today from a couple hundred thousand to 5 or 6 or 7 or 10 or $15 million. So, you know, certainly one credit can move your numbers around, Ed. I think that is what you are seeing.

Right. I mean credit is still holding up fairly well; but are you seeing any weakening trends in specific portfolios?

I wouldn't say so. The weakness we see is a hodgepodge. It comes from here, it comes from there.

And it comes from all over the state.

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.

Okay. Then lastly, you guys have touched on it a little bit here with the hurricane, though. 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 increased loan demand?

Then finally, do you see any hit to credit, maybe in the next couple quarters, as these businesses are basically out of business for a couple weeks or a month?

You know, one of the first things we did was, once we got up and running, and so when you talk about the hurricane, we went into our contingency and business resumption planning mode early the week before the hurricane came in.

We certainly were impacted by the hurricane. You know, we had basically the entire -- 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 got 30-something offices down there.

So really, while the hurricane hit Houston, you've got to remember that from a business perspective, that South Texas market from Corpus Christi up basically also lost a week. They went into hurricane preparation mode. 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 five or six 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.

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, certainly impacted us all.

One of the things we did right after that was Chris and Randy immediately began working on what our exposure is to the storm. So we look at Census tract 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 produce those information, push it out to our lenders, and ask them to report back in on what is there.

So as we have come through that process, we certainly have some credit exposure to damaged property. Being a real estate lender, most of that is insured; and our expectation is that it's not going to be a significant number and that we won't see a whole lot of that today, from our first look through those numbers.

From an ongoing perspective, the City of Houston, Tim, I don't remember the exact number, but I think they said that we are expecting some $8.5 billion or $9 billion in insurance proceeds coming into the Houston-Galveston market.

I think that's right.

So just on those pure numbers rolling in, obviously they are also saying -- I mean, come the other way. They are also saying there is $11 billion or $12 billion in damage, so the difference being the uninsured physical damage that is 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.

Okay, thanks, guys.

Did I talk too long on that answer?

No, that was good information. Appreciate it.

Christopher Marinac from FIG Partners.

Thanks. Good morning, guys. Dan, I was just curious on what you are seeing, whether it is from competitors or just other observations in the market on loan sales. Whether it be nonperforming or performing loans, or what pricing has been in Houston, Dallas, etc.

You are asking if we are seeing other banks selling credits?

Correct. Or just the credits that are being sold on the street and sort of what their ranges are. Just trying to compare with other markets.

Chris, this is 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 -- you know, some you didn't get $0.50 or $0.60; some you got $0.90-something. But we probably averaged over 80% on loan sales.

I would tell you today I have talked to some of the people that buy the loans, and it is nothing like that anymore.

The bid-ask spread has gotten a lot wider.

So 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 is a lot lower than that today.

Yes. You know the people that we know, I have no factual information that says anything is traded. But you know, I had lunch with some folks the other day that are in that business; and they said that the bid-ask spread is very wide today.

I would say you are 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.

Great. That's helpful, guys. Thank you.

Jennifer Demba from SunTrust.

Thank you. Good morning. Thanks for the details on the construction portfolio. How much of your nonperforming assets come from that portfolio?

From the construction portfolio total? I don't have a hard number on that, Jennifer. But I would say it is around half.

Okay.

That is not going to be too far off.

Okay, and your other half, would that be concentrated in any one portfolio or kind of spread out?

Once again, it's a hodgepodge of a lot of different things.

Ranges from a $1,000 motorcycle repo to a home to a commercial business to a karate training -- if you can dream it up, it is in there.

It is all over the spectrum, Jennifer.

Okay. Thank you very much. Good quarter.

(Operator Instructions) Daniel Cardenas from Howe Barnes.

Morning, guys. Can you remind me what percentage if any of your loan portfolio is tied to LIBOR?

You want me to answer that?

Go ahead.

Dan, it is kind of a pet peeve for me. Because we have had customers forever that they wanted to price their portfolio on LIBOR and I said, you know, first I don't know -- they don't know that it is an acronym or what it stands for.

But more so than that, the short answer is we've never used 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.

Yes, I would have to say it is less than one hand.

Yes.

Very few, Dan.

Then can you give me any comments on your 30- to 89-day bucket? How is that looking?

Past dues?

Past dues, yes.

Yes, I think it is looking the same as it was last quarter and the quarter before. I think Randy Hester is the primary architect in that area and he is -- we are actively working that.

The beauty of our loan portfolio compared to many others, 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 is kind of how you can manage that 30, 60, 90 process.

As opposed to a true revolving credit or C&I credit where everything is 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've got a problem here. That is not how our portfolio works.

So the answer to your question is I think it is no different today than it was last month or the month before. 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.

Great, thanks. Good quarter, guys.

It appears we have no further questions.

All right. Dawn, thank you for your help. Ladies and gentlemen, we certainly appreciate your participation on our call. We look forward to seeing you all again in the future. Thank you very much.

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.