Prosperity Bancshares Inc (PB) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to today's program, Prosperity Bank's first-quarter earnings call. (Operator Instructions). Please note this call may be recorded. (Operator Instructions). And it is now my pleasure to turn the call over to Mr. Dan Rollins. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. Welcome to Prosperity Bancshares' first-quarter 2010 earnings conference call. This call is being broadcast live over the Internet at ProsperityBankPX.com and will be available for replay at the same location for the next few weeks.

I am Dan Rollins, President and Chief Operating Officer of Prosperity Bancshares, and here with me today is David Zalman, Chairman and Chief Executive Officer; Tim Timanus, Vice Chairman; and David Hollaway, our Chief Financial Officer. David Zalman will lead off with a review of the highlights of the recent quarter. He will be followed by David Hollaway, who will spend a few minutes reviewing some of the financial statistics. Tim Timanus will discuss our lending activity, including asset quality. I will discuss the recently-completed purchase of the three U.S. Bank branches and provide an update on the status of our planned purchase of the 19 First Bank branches in Texas. 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, Shannon, or you may e-mail questions to investor.relations at ProsperityBankPX.com.

I assume you have all received a copy of this morning's earnings announcement. If not, please call [Tracy Schmid] at 281-269-7221, 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 contain 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 Forms 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 call turn our call over to David.

Thank you, Dan. I would like to welcome and thank everyone for listening to our first-quarter 2010 conference call.

I would like to especially welcome our new associates who joined us as a result of our recent acquisition of the three U.S. Bank branches -- Madisonville State Bank in Madisonville; Texas Citizens National Bank in Teague, Texas; and North Houston Bank in Houston, Texas. I would also like to welcome all of our new associates who will be joining us at the end of this month when we complete the acquisition of the 19 Texas retail bank branches of First Bank.

I'm very pleased to report one of our most successful quarters ever. Some of the successes this quarter include our first-quarter earnings were up 21.7%. We earned $31 million in the first quarter, compared to $25.5 million for the same period in the prior year, and increase of $5.5 million, a 21.5% increase.

We reported diluted earnings per share of $0.66 for the first quarter of 2010 compared to $0.55 for the same period in the prior year, a 20% increase. Our nonperforming assets totaled 0.26% or 26 basis points of average earning assets, one of the lowest in the industry and a true sign of strong asset quality.

The allowance for credit loss was $51.9 million, or 1.55% of total loans at March 31, 2010, compared with $39.2 million, or 1.12% at March 31, 2009, an increase of $12.7 million. The allowance is 2.6 times our nonperforming assets.

Our tangible common equity ratio is 5.48%, compared to 4.61% as of March 31, 2009. Our total risk-based capital increased to 14.07%, compared to 11.34% as of March 31, 2009. Our return on average assets for the three months ending March 31, 2010, was 1.4%, and that's compared to 1.15% for the same quarter last year.

Our efficiency ratio was 43.77% for the three months ending March 31, 2010. That's compared to 49.47% for the first quarter of 2009. The decrease was attributable to the operational integration of Franklin Bank and our continued focus on expense control.

I think it is important to note that our non-interest expense decreased $4.3 million, or 9.8%, to $39.7 million for the three months ending March 31, 2010, compared with $44 million for the same period in 2009.

Deposits at March 31, 2010, were $7.6 billion, an increase of $392 million compared to March 31, 2009. The increase was impacted by the deposits assumed from the most recent acquisition of the U.S. Bank branches. Additionally, we believe we are nearing the end of the expected runoff of higher-cost deposits from the FDIC-assisted Franklin Bank acquisition.

Our loans were down from the same quarter of last year. Obviously, we need and want to make loans, but we experienced weak loan demand as stronger companies and individuals who can borrow were still holding off in the first quarter. We anticipate that as the economy continues to improve and employment increases, lending demand will pick up. I find that the loan committees and the customers are much more cautious, but we will continue our focus on increasing loans more throughout the rest of this year.

With regard to acquisitions, as I mentioned earlier we completed the acquisition of the three former U.S. Bank branches late in the first quarter and are scheduled to complete the acquisition of the 19 retail branch locations of First Bank on April 30. First Bank's Texas locations are all in the Houston and Dallas metropolitan areas and represent a strategic enhancement to Prosperity's presence in these markets. We are proud and glad to have all of these new associates joining our team and look forward to serving their customers.

Looking forward, we expect the full-year 2010 net charge-offs to stabilize and hopefully even fall below our 2009 level. We believe our nonperforming assets will continue to fall within the same range we have previously discussed, 25 basis points to 75 basis points of loans.

We expect employment in Texas to grow in the second half of 2010. We will continue to consider the FDIC-assisted transactions and other opportunities, such as our last two announced transactions with U.S. Bank and First Bank. We will continue our focus on organic growth and the opportunities that arise due to the extraordinary turmoil in the credit markets.

And finally, we believe conventional merger and acquisition activity could return later this year as potential sellers realize the price they could've obtained several years ago is not the same today and is unlikely to significantly improve for some time.

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.

Thank you, David. Net interest income for the three months ended March 31, 2010, was $77.8 million, compared with $74.1 million for the same period in 2009, an increase of $3.7 million, or 5%.

The net interest margin on a tax-equivalent basis was 4.20% for the three months ended March 31, 2010, compared to 3.98% for the same period in 2009 and 4.24% for the three months ended December 31, 2009. And then, based on our 331 asset liability model, we do see some pressure on the margin over the next six months, assuming the current rates environment.

Non-interest income decreased $2 million, or 13.6%, to $13 million for the three months ended March 31, 2010, compared with $15 million for the same period in 2009 -- and it also decreased $1.7 million on a linked quarter basis.

What we're seeing in terms of our fee income, especially on a linked quarter basis, is a reduction in insufficient fee income, and the feedback that we're getting from our sales team concerning this issue is that customers are becoming more diligent in maintaining their accounts during these times, and this issue, along with the general education that's going on about overdrafts, is changing the way customers think about their accounts and overdrafts.

On our bond portfolio, the metrics at 3/31/2010 reflect a weighted average life of 3.1 years and effective duration of 2.8 years and projected annual cash flow of approximately $1.2 billion.

With that, let me turn over the presentation to Tim Timanus for some detail on loans and asset qualities. Tim?

Thank you, Dave. Nonperforming assets at the quarter ended March 31, 2010, totaled $19,868,000, or 0.59% of loans and other real estate, compared to $16,356,000, or 0.48% at December 31, 2009. This represents an increase of 21%.

The March 31, 2010, nonperforming asset total was made up of $6,647,000 in loans, $230,000 in repossessed assets, and $12,991,000 in other real estate.

As of today, assets totaling $3,941,000, of the March 31, 2010, nonperforming asset total, are under contract for sale, but of course there can be no assurance that any of these contracts will close.

Net charge-offs for the three months ended March 31, 2010, were $4,381,000, compared to net charge-offs of $3,949,000 for the three months ended December 30, 2009, for an 11% increase. $4,410,000 was added to the allowance for credit losses during the quarter ended March 31, 2010, compared to $8,500,000 for the fourth quarter of 2009.

The average monthly new loan production for the quarter ended March 31, 2010, was $59 million, compared to $85 million for the fourth quarter ended December 30, 2009. Loans outstanding at March 31, 2010, were $3,348,000,000, compared to $3,377,000,000 at December 31, 2009. The March 31, 2009, loan total is made up of 40% fixed-rate loans, 26% floating-rate loans, and 34% that reset at specific times.

I'll now turn it over to Dan Rollins.

Thank you, Tim. As David said, we were pleased to complete the purchase of the three former U.S. Bank locations and are working diligently toward our scheduled closing on April 30 of the purchase of 19 First Bank locations.

The addition of these locations to our Texas franchise is a natural fit. As a part of these transactions, as we mentioned earlier, we purchased approximately $33 million in loans from U.S. Bank and will purchase approximately $100 million in additional loans in the First Bank transaction. Our operational integration teams have done a fantastic job of working with our newest associates to assist our newest customers as we convert them to our service model.

At this time, I think we're prepared to answer questions. Shannon?

(Operator Instructions). Dave Rochester, FBR Capital Markets.

You'd mentioned earlier that customers are more cautious. Are you seeing any signs of stability now or are you still seeing the economic environment getting a little worse from here?

Are you talking about customers that are watching what they are spending their money on?

Yes.

Are you referring to -- I talked about it as far from the loan side and David Hollaway talked about it from the service charge side. But more specifically, are you looking at the service charge side or the (multiple speakers) loans?

In terms of borrowers from the loan side.

Yes, when we look out in the community, it's kind of -- it's choppy because when you look at the restaurants and you see a lot of cars on the road and a lot of people eating, they are spending money and stuff like that, but then when it comes time to really maybe expand and really maybe take a little bit more risk or do something or borrow some money, both borrowers, commercial and individuals, seem to feel uncertain maybe because of the political pressure or the economic times, and they just have not taken -- they've not taken the leap forward to want to go out and take some of the risk right now. That's what we're seeing.

Thanks for that. One quick one on the margin. I know you mentioned that the runoff of the higher-cost deposit to Franklin is generally done, but it seems like there's still a solid opportunity for you to bring those CD costs down a little bit more. Can you tell us where you are repricing those today and why that won't be able to help support your margin from here?

I'll jump in first. That's absolutely true. There is some room on the CD repricing coming through the system, where today our CD rates are 1%, 0.90%, that kind of range, and if you're looking at the press release you can see the total yield for the quarter was like 1.8 something. Honestly, absolutely there's some room there, and there is also pricing room on our money market accounts if we need to drop those rates.

But you also have to look at the other side of it because, yes, that will help us. We will drop the deposit side, but the big question always comes back to if we're not getting loan traction at the end of the day, what are we reinvesting that money at? Where do we put it? Do we just leave it as liquid as possible overnight in Fed funds and you get, if you're lucky, 0.25, or are we having to go back in, at least buy something on a shorter term which yields on those things? If it's 3% today, that's probably a good deal.

So you've got to wait or two. So I hear where you're coming from and we can manage the liability side, but the bigger question is what are we going to be doing on the asset side. Do you want to add anything to that, David?

I think you're hitting the nail on the head. I think basically there is room to come down on the CD costs and our interest costs. At the same time, money that's maturing that is based so it can't go back in the loans, we're having to go back into the investment portfolio, and right now is probably not the best time in the world to take a long position in bonds.

So, about the most -- the most we can really get and still stay around our -- our focus is about a three-year average life, is about 3%. So, our portfolio is now yielding about 4%, so when Dave talks about a margin squeeze there is somewhere in the middle between what we can lower our CD rates and what we'll reinvest it in, and that's why we still see a little bit of a margin squeeze right now.

Don't forget the impact of the acquisitions that are coming on also, Dave. The U.S. Bank transaction closed four days before quarter end, $375 million in deposits and $33 million in loans. The difference, they're going into a lower-yielding investment security. So, that transaction, and then you can lay on the First Bank transaction here at the end of this month, both of those, while they should improve net interest income in dollars, it's going to be dilutive or damaging to the margin number.

Ken Zerbe, Morgan Stanley.

Maybe just to follow up on that NIM question. So, it looks like there's certainly near-term pressures on the NIM, given, Dan, what you had just mentioned. But when you think longer term, your NIM right now is sort of at a multi-decade high. Going forward, is it reasonable to assume that you guys can stay above or well above that 4% range over the next few years, given the expectation for higher rates?

I think part of that is the loan question, Ken. When you look at it -- from us now, we're at a 44% loan to deposit ratio. As David Zalman has said multiple times, and he is not here with me this morning, we've got to grow loans. We need to get our loans back up. If we can grow loans back to where we were just 1.5 years ago at 65% or 70%, then our margin can do well.

You asked a good question. Barring that you don't build loans and you know, if you look at status, probably look at a zone in a historical basis, and Dave may -- I don't know if we have it in front of us, but we do the regression analysis to determine where we historically have been. And historically, we've been as low as 380 and as high as 420, so I mean in the middle -- historically, we're averaging, what, about 4%, Dave, or more (multiple speakers) if you look over, say, a 10-year period. So that's the number you're looking for.

But to the point is, yes, we don't get loan traction and nothing else is going on. That's all static. Rates turn up. That's our biggest headwind. We have to build a loan portfolio eventually because over -- again rates -- we don't change overnight. Again, our ship is slower. What the rates impact us tend to be 12 to 18 months, but again if we're in a 30% loan deposit ratio based on our balance sheet today, that would have impact on our margin and it would drop to the 4% level.

Yes, and the things that will help us in a margin squeeze are probably two things. One, hopefully the economy is getting better, knock on wood, and the provision that we put in the provision for loan loss will be substantially reduced. That would be number one -- the first thing.

Then number two, generally, in an economy that is improving, we should be able to bring our loan to deposit ratio back up to about -- I'm thinking 65% within a two- to three-year period. So those two things combined, and our ability to reduce the interest rates that we're paying, which -- those three things can help us a great deal going forward.

And in our assumptions, we're assuming -- we're being a little bit more aggressive on our assumptions that when rates turn up, we're being a little bit more aggressive on raising those deposit rates, but in reality, our customer base is not as rate-sensitive, so we may be able to lag that up a little bit more.

Probably the thing that helps us the most -- we're a lot different than some of the banks, we probably only have about a 30%, 32%, 33% CDs in our banks. The rest of our bank is really just made up of core non-interest-bearing checking accounts, NOW accounts, some savings accounts, and money markets. So we have some flexibility when it comes to that, when the rates come.

Okay, great. The other question I had just on the NSF/OD fees, your comments about people being more diligent. Does that imply that you probably won't expect that to sort of have it seasonally -- your seasonal rebound in second quarter, that should stay low? And also, if you can comment on the potential changes later this year, in terms of what you think the ultimate hit might be.

Yes, I mean, multiple issues in there. Absolutely right. There is a seasonal aspect when you're looking at fourth quarter to first quarter. Again, when you can go back in history, there is always a drop-off after you get out of the holiday season.

But having said that, obviously there's been a -- from our perspective, it looks like there's been a change in customer behavior here in the short term. It's a good question. Over the longer haul, when the economy recovers and people start feeling better about what's going on, job security, that kind of thing, I'm guessing human behavior kind of reverts back to the norm. So, yes, I mean I think that will probably trend back up, plus we're adding X amount of accounts from all these transactions, so that will help us going forward.

The second point, though, also needs to be addressed. The government does have these new rules coming down the pipeline on the overdraft program that's effective August 15, and we've just begun that process to communicate with our customers and discuss it with them to see because everybody has to opt back in, so we're at the beginning of the program.

We've begun the opt-in program.

Yes, we've done that program, so how is that going to impact us after this is all done is a hard question to say. It just depends how successful that program is. Dan, do you have any thoughts on that?

I think probably [nate] probably is not as familiar with it as we are. Basically, the overdrafts -- if you're writing an overdraft from a check, it's really not impacting you, but if we have an overdraft program and if somebody uses their debit card, for example, or ATM card, we can go ahead and pay it. We can also collect a fee for that.

So, basically, we determine -- these people, if they want to continue that, they have to opt in, and so we've developed a couple of strategies. One, they can contact us by the Internet. Also a lot of our banking centers are working on them, but we're focusing on those customers first that use it the most and we think that we'll be pretty successful getting that completed by August.

August 15.

August 15.

We'll probably be on before then, but just to add some specificity to that, again we've done our analysis. The good question is what percentage of your NSF income today is being generated by this program that we're talking about? You know, that's ginned from the debit card ATM side. And again, we've done that analysis and if we were to sit back and do absolutely zero, on an annualized basis you're talking about $7 million.

Pretax.

Pretax on an annualized basis. So if we just sat back and said we don't want to worry about this, that would be our exposure. Now, I don't think it'll be that high once we go through the program of getting people to opt in through our Internet program and all the other things available --

I promise you when somebody goes to use their debit card and they don't get paid like they (multiple speakers), they will be calling. It may not happen immediately, but most of those people all come back on, in my opinion.

Remember, Ken, the way we're structured, each of our offices is a profit center, and our team is very focused on this today and I think we're on the beginnings of doing a good job of opting those customers in, or at least communicating with the customers and giving them a chance to opt in.

Okay, great. And do you guys happen to have, like, the percentage of opt-in acceptance rates so far or --

No, we're at the very beginning of that stage. It's too early for that.

Jennifer Demba, SunTrust Robinson Humphrey.

Can you talk about the acquisition pipeline, what you're seeing from both an FDIC transaction, branch acquisition, and regular way M&A standpoint? You did say you thought things might pick up at year end from the regular way standpoint.

Jenny, this is David. Again, we're still looking at the FDIC deals and again, last year we looked at over 100 of them, probably. We looked -- we probably look at three or four or five every week right now.

But, again, we're still not seeing the type of bank that we would particularly care for. Most of the banks that we are looking at that are, for the most part, are banks that really have real high CD ratios and banks that were started over the last few years. But we're going to continue to look. I mean, we're not ruling out that possibility.

What we're seeing, though, and what we think is happening, we are starting to get some inquiries from banks that would be an unassisted deal. We are getting some opportunities -- again, nothing contractual or current, but we're getting two or three opportunities to talk with different companies that might be just considering to maybe exiting. They've been there for a long time. They waited through this. A lot of them wanted a lot higher price a number of years ago.

There is certainly a lot more talk than there was (multiple speakers) in the quarters.

A lot more talk, and again, I think there's a lot more talk going on right now and I think that you will see some deals, especially if the -- probably in the second half of this year, some deals that are probably non-assisted FDIC deals will probably start getting done at more reasonable prices.

Yes, when you look at the FDIC transactions, let me just add in to what David is saying, when you look at the FDIC transactions that are out there, it appears to us that the pricing on those has gotten red-hot.

There's a lot of dollars chasing that, and the FDIC has changed the structure. You're probably aware when there was a two-tier, 95/5 and then an 80/20 split on the loans. Now they've gone to an 80/20 all the way up and down the line, and we're hearing that some of the more recent transactions are basically trading at par with the loss share on top of that. So that's a pretty rich environment. It certainly adds risk, and so from our standpoint we're going to be very careful that we pay attention to what we're looking at.

The numbers we're seeing, basically what some of the bids are coming in at on the FDIC deals, we can actually go and buy an assisted bank. (Multiple speakers). An unassisted bank, and not have to deal with the FDIC, based on some of the bids.

Now that may change as more and more banks come on. But we're looking at all the banks that have done the FDIC deals, and it's still hard for us to see that there's a lot of profitability in what they've done, based on the bids.

We are certainly focused on that, Jenny.

Bob Patten, Morgan Keegan & Co., Inc..

All my questions have been asked, thank you.

Christopher Marinac, FIG Partners.

I just want to, I guess, echo on Jenny's question about the M&A. David or Dan, as you look at the inherent value of the deposits on things you may be bidding on, how different is it today compared to what it might be in a couple of years, if we are truly in a higher interest rate environment?

Well, I think today, the inherent value of the deposits aren't as great as they were a few years ago. And that's simply because in the past you could take the deposits, and even if you didn't go in the loans, then you could make a pretty good spread just buying a relatively riskless security or an agency or something like that. There's not as much room in there today, but we do think that --

(That annual) rate environment helps.

Yes, that helps, but going forward we still think that there's going to be a lot of value in the core deposit relationships. And so, some of the deals that we're looking, going forward, it's going to be hard for us just to buy a deposit-based transaction going forward right now, simply because you don't want to take just a bunch of deposits and put them into your -- to a bond portfolio when you think that rates may be going up. So I think that's the number of things that have changed, from my perspective, anyway.

So Dan -- sorry, so David, would that mean that you would perhaps look at other banks that perhaps had some problems to it but you knew had to fix them from an operational as well as a credit perspective?

Based on what we see right now, that presents a better opportunity to us than maybe just going out and buying some deposits or going directly to the FDIC. If you have to ask me what I think we're focused on, we're probably looking more at something like that than one of the other transactions.

Yes, Chris, if you look at our history, I know you've followed us a long time, we certainly have done well when we've been able to find partners to merge with us, where from an operational standpoint we're able to build more efficiency into their operation. So that continues to be something we would look for.

As David said, the rate environment makes it very difficult for us today to take deposits only, but we've just done two core deposit transactions that are in our footprint and inside of our wheelhouse that, while it's going to be damaging short term to margin in a percent number, long term we believe the core value of the deposits that we are acquiring is still good. We're just looking for the earnings power.

Well, in the two deals that we did, it's like you said, Dan, they're right in our backyard and they're really core deposits, and so we should generate some additional money off of service charges and fee income, too, that normally you wouldn't because they definitely have a good core deposit base, so.

The weakness in those transactions is until we can deploy those deposits into some higher-yielding assets, either rates move from the bond side or we can get into loans that we want to get into, we're not going to make as much money as we would have in the past.

That's right.

(Operator Instructions). [Lucy Webster], Stifel Nicolaus.

I was just wondering if you could talk about your expectations on the effect of your operating expenses from the acquisition of the 19 First Bank branches, and if maybe you're considering consolidating any of those, and additionally, kind of another question, how their cost of deposits compare to your legacy deposits.

Let me ask that again because I didn't understand -- the first part of that was talking about the acquisitions and what the cost structure -- operating cost structure --

Yes, and just how you think acquiring those branches and their operations will have an effect on your operating expenses.

Okay, yes, let me kind of walk through that. These were both branch transactions, so let's -- there were multiple parts of that question. Some of them are easy, but the U.S. Bank transaction, those were three new locations to us and all three of those are continuing to operate today. So there's no consolidation there.

On the First Bank side, First Bank operates 19 offices in Houston and Dallas metropolitan areas, and when we close the transaction and consolidate them in, we will operate 15 of those 19 locations. The other four -- in three of the four cases are literally either directly across the street -- in one case, we actually share a parking lot. So, we certainly don't need to maintain two offices in the same parking lot. (multiple speakers) We will consolidate four of those 19 offices in and that will leave us with 15 locations to add from the First Bank transaction. So, the net up of the two transactions is 18 new locations.

And the way I would look at that, Lucy, from an expense run would be to take our current expense base over the number of locations that we've been operating, 158, and say that these offices, by and large, would be an average to that. Because it's an expense pick-up -- you're not buying the whole bank where you can quote cut costs, but there is that back-office support coming with them. These are regular retail branches that are there.

And she asked about the cost of deposits. (Multiple speakers) what I can tell, the cost of deposits are increasing from what ours is, I think.

That's right. I think you will see that the cost in both of these transactions is going to be very close to what we have today.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

A couple of questions. Just following up on M&A, you guys had mentioned a couple quarters ago that you'd consider an assisted deal that was maybe in a market extension or maybe in a different state. Does the same thinking apply to regular way M&A? Has your business changed enough and you've become large enough where you might consider that?

Yes, Jon, this is David. We did talk about that and we would still consider that. There's no question. If there is an M&A transaction that's close to us, in an adjoining state, I think Dan said draw a line from California down to Florida, and it was something in that area and if it made a lot of sense. We're probably more focused if it's an adjoining state, something like Oklahoma, New Mexico, Louisiana. In fact, right now, we probably have -- one of our branching locations is probably not 10 miles away from the Louisiana coast and probably not 10 miles away from the Oklahoma (multiple speakers)

Yes, and we'll probably buy.

(Multiple speakers) So I mean, we are almost touching these other states right now, and so, as Dan mentioned before, Texas is such a large state that sometimes it looks like it would be hard for us. But if you drove from [danny use] from Houston (multiple speakers)

Houston to El Paso is 12 hours. In the same drive time, we can be Houston to Orlando. Across six states.

So I think it is something that we can handle. Again, when we are looking at, though, is the bids have been so competitive in these assisted transactions and that's what we really have to consider. We're not going to be willing to take on an assisted transaction and really work extremely difficult and not make returns that we are usually used to making.

But I don't think our feelings have changed, Jon, and I think two quarters ago, whenever we talked about -- one quarter ago, I think we told you then, our wish list is -- our top 10 expansion list, one through nine, are in our backyard in Texas and number 10 would be an opportunistic play somewhere else. And I think that's still the case today.

But the opportunistic is what I think you are hearing David and I both talk about, but the opportunities or the financial reward opportunities on the FDIC-assisted transactions appear to us anyway to have been declining over the last couple of quarters.

Dan, have you ever made that drive to El Paso?

I have. I have.

A couple more questions. Maybe David Zalman. I think sometimes you have a little different opinion on disposition of OREO than maybe your credit guys do, but it's not a big balance -- obviously it's $13 million, but what kind of an appetite do you have in terms of lowering that and how aggressive do you want to be?

We have no appetite for it at all. And so, again there's two models and two different opinions, but we've been very successful at marketing other -- I don't know if there's anything over a year old in our ROE. That may be one little piece, and we're going -- I'm not going to say dump it, but we're going to put it in auction and let's get rid of it.

Our policy, our philosophy has been sell it for what it brings. In some cases, what we've put it in, into an OREO, we've actually had to charge off a little in some cases. We actually bought more into income. So I think we're pretty good at placing what the true value of it is and what it will sell for in, you know, in hopefully a three- to six-month period.

I think what you're seeing now that's a little bit different is that probably a year ago and 1.5 years ago, we were having so much of the residential or the home loans that would come in, and those things would come in and out -- we would sell those things in 30 days a lot of times, 30 to 60 days. So what we're seeing now is more commercial real estate, and so, that's what we are working through right now is commercial real estate and the commercial real estate OREO is -- it's more challenging.

Takes a little more time. (multiple speakers)

Takes a little more time.

Jon, I would tell you there is no disconnect here. The team is focused on moving this stuff off fast and I think Tim has the numbers on what percent of -- it's not just OREO, but on the NPA list what percent was there -- is new this quarter or was still on from last quarter.

It's about 50-50. From this quarter to last quarter. So historically, it goes from 40% to 80%.

Yes, we are moving pretty fast. So, if 50% of the stuff is new, that means that 50% is off. And I think that's a fast turn, Jon.

And then, just maybe one more question for you, David Zalman. We all talk about higher rates and we worry about it and wring our hands over it, and I guess I've probably watched you guys manage through three or four different rising-rate cycles. But how -- is it different this time, given the size of your bank and your low loan to deposit ratio, and how, I guess, worried or concerned are you this time around?

Believe it or not, we were talking about this before we started the conference call today. And right now, we -- our ship is a lot different than a lot of other ships we see. We have all this money that's coming in and we were talking between ourselves and I said, you know, we're buying stuff that has a little over a three-year average life and we're getting around 3% and I said if we were just willing to go out and extend ourselves to -- maybe buying some longer stuff. But we've stuck to our guns and said we've been buying stuff that has about a three-year average life, even in extension, a 300 basis-points upward extension.

The life extension is a little bit less than one year from where it is in the base case. So, our ship -- and I say this is like the Queen Mary where if we were truly a commercial bank that had a lot of commercial loans, as interest rates rose, our profitability would go up considerably in an immediate fashion. We're not. It's like trying to turn the Queen Mary around in our parking lot. It takes us 18 months. So when (multiple speakers)

But it used to take us 18 months.

And it still does today. So I guess the answer to your question is the model hasn't changed, the numbers are just bigger. But we still feel very confident and comfortable that we're not earning as much as we could but we are not taking the risk, but if things do turn around we're not going to get hurt like everybody else. But again, it's not going to be immediate [for zar]. It takes us about 18 months to turn the ship around.

(Operator Instructions). It appears that we have no further questions at this time, so I would like to turn the program back over to our presenters for any closing remarks.

Thank you very much, Jen. Thanks very much, people. Everybody on the line, we appreciate all of your efforts, we appreciate all your support, we appreciate you taking the time to participate with us today, and we look forward to talking with you again soon. Thank you very much.

This will conclude today's teleconference. You may now disconnect your lines and please enjoy the rest of your day.