Cullen/Frost Bankers Inc (CFR) 2011 Q2 法說會逐字稿

Good morning. My name is Julianne and I will be your conference operator today. At this time I would like to welcome everyone to the Cullen/Frost Bank second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)Thank you. I would now like to turn the conference over to Mr Greg Parker, Executive Vice President and Director of Investor Relations. Mr Parker, please go ahead.

Thank you, Julianne. This morning's conference call will be led by Dick Evans, Chairman and CEO, and Phil Green, Group Executive Vice President and CFO. Before I turn the call over to Dick and Phil, I need to take a moment to address the Safe Harbor provisions. Some of the remarks made today will constitute Forward-looking Statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We intend such statements to be covered by the Safe Harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Please see the last page of the text in this morning's Earnings Release for additional information about the risk factors associated with these Forward-looking Statements. If needed, a copy of the release is available at our Web site or by calling the investor relations department at 210-220-5632. At this time I will turn the call over to Dick.

Thank you, Greg. Good morning and thanks for joining us. It is my pleasure today to review Cullen/Frost second quarter 2011 results. Our Chief Financial Officer, Phil Green, will then offer additional comments. After that we will both be happy to answer your questions. Cullen/Frost's strong performance this quarter reflects our ability to operate well in a slowly recovering economy. Our steady and consistent growth during a transition year of changing regulation is a credit to our employees. They are not distracted with the roller coaster markets or the gyrations within the economy. Our focus remains on providing the best possible service to our customers and the result is another solid quarter.

During the second quarter, net income rose to the second highest level in the Company's history. The best since the third quarter of 2007 which was before the financial crisis began. Our net income for the second quarter was $55.7 million, up 5.3% from the $52.9 million reported in the second quarter of 2010. On a per share basis, earnings were $0.91 per diluted common share, compared to $0.87 per diluted common share one year ago. Return on average assets and equity were 1.23% and 10.45% respectively, compared to 1.26% and 10.67% for the same period in 2010.

We continue to provide outstanding value to our customers affirmed by a solid 7.4% growth in deposits. Since last year's second quarter much of our deposit growth has come from new customers underscoring the strides we are making through our focused and disciplined calling effort. New customer relationships are driving our growth. For the second quarter of 2011, average total deposits were $14.8 billion, up 7.4% or $1 billion over the $13.8 billion reported for the second quarter a year ago. For the second quarter of 2011, net interest income on a taxable equivalent basis increased to $159.5 million, up 2.9% over the $155.1 million a year earlier. This increase primarily resulted from an increase in the average volume of interest earning assets and was partly offset by a decrease in the net interest margin. Strong growth in deposits helped us on the increase in the volume of earning assets. Net interest margin was 3.95% for the second quarter, compared to 4.3% for the first quarter of this year and 4.18% for the second quarter of 2010. Non-interest income was $70.8 million for the second quarter, up almost $900,000 from $69.9 million for the second quarter of 2010.

Trust fees were $19 million, up $1.9 million or 11.4% from the second quarter of 2010. Trust fees included a $1.8 million increase in investment fees. Which generally are assessed based on the market value of trust assets that re managed and held in custody. Other charges, commissions and fees were $8.5 million for the quarter. An increase of 5.6% from the $8 million reported in the second quarter of last year. The largest component of this increase were mutual fund management fees from Frost Investment Advisors. Deposit service charges were down $1.3 million or 5.2% for the quarter due to two new regulation which reduced insufficient funds and overdraft service charges on both consumer and commercial accounts. Non-interest expenses for the second quarter were $136.8 million, up 1.6% for the second -- from the second quarter of 2010. The 5% increase in salaries resulted from normal annual merit raises. We also ramped up our advertising and brand promotion to help spread the word about Frost difference and to grow our customer base. Deposit insurance expense was down $2.8 million from last year and reflects well on a high percentage of funding with our core deposits.

Turning to loan demand during the second quarter, average loans were $8.1 billion, the same as the second quarter last year. And this environment holding our own and maintaining a relatively flat loan position requires a lot of work. Our calling efforts continue to be at high levels. We also need to recognize that our collection and pay off of problem loans totaled $100 million this quarter. Although an ongoing lack of confidence among business owners continues to pressure lending, we have seen slight advances on revolving loans. As well as an increase in new customer requests. These are a sign that business customers are beginning to expand again. That positions us well for stronger growth when confidence returns.

As we discussed in the first quarter, in this weak economy many of our competitors have lost their pricing and structure disciplines. However, we are maintaining our good relationships. New loan commitments are up 27% this year compared to last year. Remember, that the comparison is to an extremely low base levels a year ago. On a late quarter basis, new commitments were up 36% and June was our best month in three years. Credit quality continued steady and consistent improvement, which mirrors the Texas economy. Absent any significant deterioration in the national economy, we expect further improvement over the next few periods. OAM and classified loans declined for the fourth consecutive quarter. For the second quarter of 2011 these loans declined 7.5%.

Non-performing assets experienced a slight increase during the second quarter of 2011, but are still down more than 25% from their peak in the third quarter of 2009. We expect further reductions or improvements in non-performing assets this year. Net charge-offs were $10.6 million in the second quarter, a decrease from the $11.4 million in the previous quarter. We expect this gradually improving trend to continue. Like previous quarters. The second quarter write downs we're adequately reserved for our prior reporting periods. Delinquencies ended the quarter at $58 million or 0.72% of total loans. That's one of the lowest quarter end dollar totals in many years. Overall, credit quality measures suggest that the conditions of our loan portfolio should continue to improve.

I am pleased that our capital level remains stronger than before the financial crisis began. Tier 1 and total risk based capital ratios for Cullen/Frost were 14.37% and 16.42% respectively at the end of the second quarter. Each ratio is in excess of well capitalized levels. The ratio of tangible common equity to tangible assets was 9.12% at the end of the second quarter, compared to 9.05% at the same quarter last year. Cullen/Frost posted steady results for the quarter as the economy slowly gained some traction. We expanded customer relationships and managed expenses during a challenging revenue environment and changing regulation.

Before I turn the call over to Phil, I will close with a few comments about the economy and why I am optimistic about Cullen/Frost. It is generally accepted that bad public policy decisions from Washington and irresponsible behavior by some of the largest financial firms on Wall Street led to our current economic downturn. So, it is a little ironic that everyone is looking to Washington for the answers. Our focus needs to be on Main Street and our nation's small businesses where most jobs are created and where our economic recovery will occur. A recent US Chamber of Commerce survey of small business owners confirmed some of the same things that we have been hearing from our customers. Economic uncertainty, America's growing debt and deficit problem, and excessive government regulation are the most important concerns facing small-business owners. Uncertainty and over regulation are job killers for businesses of any size.

Enough about Washington, let's talk about a few positive things. We are blessed to be in Texas. Texas entered the recession late and came out of it at a stronger pace than most states. Texas has created more than four out of every ten new jobs in America since June 2009. Projected job growth in Texas this year is 3% to 3.5%, a full 1.5% ahead of the nation. Texas unemployment is a full point lower than the national average. With stronger energy and high-tech sectors, stable housing markets that didn't go through the boom/bust cycles, Texas continues to be one of the country's strongest states. Our manufacturing is strong, particularly in high-tech and petrochemical exports are booming. Energy is very strong, in fact the rig count is almost at 2008 levels. Housing prices are flat and there is less wealth effect.

Despite concerns about the economy and regulation, there is always opportunities for those with a solid business plan who treat customers the right way. At Frost we have aggressively expanded our customer base throughout the recession and continue to reach out to new customers during the recovery. Our capital and liquidity are strong. We remain focused on our value proposition, strong culture and excellent customer service. We received the highest customer satisfaction ranking in Texas in retail banking from JD Power and Associates two years in a row. Greenwich Research recognizes Frost with more excellent awards for small business and middle market banking than any other bank in Texas.

2011 is a transitional year in the industry and at Cullen/Frost. Requiring us to adapt our business model to new rules. But regardless of what legislation or regulation come out of Washington, we will remain true to our value proposition. We will treat customers the right way. And that is how we intend to achieve our goals of consistent and superior financial performance for our shareholders. With that I will turn the call over to our CFO, Phil Green.

Thank you, Dick. I want to make a few additional comments about the quarter and our outlook for the year and then I'm going to turn it back over to Dick for questions. As Dick said, we are pleased with our result for the quarter even though the general economy continues to be softer than what we hoped. And in spite of the fact that loan volumes continue to be flat, we continue to make good progress and build on the business. Now I think what Dick said about organic growth helps demonstrate this. I want to expand a little further on the subject.

Our overall average deposits have grown 7.4% versus second quarter of last year, but I'd like to focus on deposit growth not including public funds, correspondent banks or brokered MMA's, so I'm essentially just dealing with our core commercial and consumer deposit base. We are talking about 91% of our overall deposits here. These deposits grew in excess of 10% versus last year and what I'd like to do is look a little bit behind that growth. First of all, 54% of that increase, obviously, over his half of that increase comes from net new customer growth. That's people who previously had no depository relationship with us and to repeat that growth is net of account closures and we are very excited about that. I think another interesting point about this annual increase is that it's heavily weighted to commercial relationships. It represents about 70% of the total growth. I also think that this helps put shoe leather on Dick's point that our commercial calling efforts are building the underlying business even if we haven't yet seen robust loan growth. Looking just at this commercial deposit increase shows that almost two thirds of the growth has come from net new customers.

So, it's encouraging to observe that our commercial deposit growth over the year is not just a result of the same businesses holding more and more balances and the same accounts in response to the economic uncertainty. While we believe that we will see a drop in average account balance as the economy picks up and businesses utilize excess liquidity, if our new customer trends continue we may in fact be able to offset that liquidity utilization and instead of seeing an overall deposit drop, see more of a flattening such as what we saw happen during 2004. And that means we may ultimately be able to use more of our current liquidity for more core earning asset growth and less from needing potential deposit outflows.

Now turning to our net interest margin, we did see a drop of about eight basis points from previous quarter. However, all of this resulted from our strong deposit growth and the buildup of another $0.05 billion in liquidity during the quarter. This actually impacted the quarter by 11 basis points, so we would have shown some margin expansion without it. That margin improvement came from a full quarter of the investments that we made in the first quarter, which we previously reported to you as well as a slight decrease in our deposit cost. I said last quarter that we did not expect further deposit rate declines, but I was wrong. We saw all of the major banks lower slightly over the last couple of months which allowed us to respond with some modest cuts. Finally, looking forward at our expectations for the year we feel the current average of analyst estimates is reasonable. With that I'll turn it back over to Dick for questions.

Thank you Phil. We're now happy to take your questions.

(Operator Instructions) Your first question is from the line of John Pancari with Evercore Partners.

You talked about how the commitments were up nicely in the quarter and that line utilization increased slightly. I just want to get -- in that context can you give us some color around your expectations for loan growth and when we could see some absolute growth in the total number in the coming quarters?

That's a great question, John. I'm optimistic. There' s a lot of things happening. There is no doubt our calling effort remains strong and our customers, as you just said and I said, have began to request some financing. That's led to this new commitments increase in compared to a low point last year. Also 1 month doesn't make a trend, but June was a good strong month of increasing commitment. Let's look at some of the headwinds.

As I said, we've paid -- had $100 million in pay off of problem loans. That's good news. Obviously, we'd prefer to yield those companies back and put them back in the performing portfolio, but you can always do that. Then if you look at the growth, quite frankly, from June of last year to June of this year, the CNI in commercial loans they've grown $121 million. Our commercial real estate loans are down $37 million, consumer down $67 million and we've only got $49 million worth of mortgage loan, 1 to 4 families, and they are down $13 million. About as fast as you ride your bicycle forward which is the staff is doing a great job of making new calls and building commitments, and we've got to remember that most of this growth in CNI loans came this year in the last 6 months.

So, you battle this run off and so it's -- I'm optimistic, as I've said, about the problem loans. It is a slow process, but it's improving every quarter. And we just -- we're doing the right thing to keep calling on customers and expand the base. I can't tell you how fast it's going to go up. If you come back to it, the real essence of it is the small business and mid-size businesses. They are still frozen. I was amazed at one of our staff. I was looking through the information that even where we call on a customer and there is no difference in the proposal, ours asking for the business and the incumbent, they often stay with the incumbent because they are scared to death to make any change that would create risk.

We've just -- we're in an environment where the study that I referred to in regard to the US chamber, what you've got is you've got the people that are economic uncertainties is about 55% of what they're worried about the future. There's a lack of sales. Were not at sales volumes where we were. The uncertainty about what Washington will do next. The requirements of healthcare and there's too much regulation. Those are the 5 points that small businesses talk about and they talk about that over the next year 64% will keep the same number of employees. That's not what's going to grow this economy and that's the headwinds were facing. I know that's a long answer. We are doing the right things to call on customers and build commitments and in time that bottom number will grow. But it's tough right now.

Okay. That's very helpful. Just a follow-up along that same line. It looks like your link quarter commercial and industrial loans were up about 2.4%, so it's kind of back into it using your year over year trends. That's up notably from your recent trend. I believe they were down last quarter and then increased about a 1% to 2% link order rate in the third and fourth quarter of 2010. So, we are definitely seeing some acceleration there if I'm reading that correctly and I'm just wondering if that alone could help drive some total loan growth in the back half of this year?

This emotional volatility that we see if you watch the news and I recommend our staff only look at the food channel because you can really get messed up, but I get real excited when I see these link quarter increases and yes it is a positive. There's no question about it. But I can't guarantee, dependent on the timing of things, you still have got to look at the averages also. But I am optimistic. I don't want to oversell it. But when you've got people starting to use their lines and new requests coming in, I used the word slight, but there is some light at the end of the tunnel and I don't think it's a flashlight.

Great, thank you guys.

Your next question is from the line of Ken Zerbe with Morgan Stanley.

Thanks. When you argue the new commercial customers coming, do you notice or is it even possible to tell if those guys are coming over from I guess your other Texas peers or are you gaining or winning business from some of the larger banks?

It's the big banks. That's primarily who we go after. They can't give good customer service, I don't think, if they wanted to. We have outstanding customer service. I pointed out some of the research and they've got a dominant part of the market and so that's where you get the business.

Understood. Then I want to ask the first question a little bit differently. You obviously have very positive comments about Texas and its ability to increase the number of jobs in new businesses, but if you look at your total loan growth, obviously, it's flat Q on Q, we've actually seen many of the other banks around other parts of the country posting a modest increases in their loan balances despite being in a, let's call it, a disadvantage geography. Is there anything more to read into the comments about why you're not growing loans versus why some other banks might be despite your very good geography that you are in?

I don't think I agree. It's a great economy, it is doing well. You go back to the things I talked about. The middle market businesses are frozen. They want to move. We get great -- look at the research, very positive. They're just scared of the stuff coming out of Washington and then secondly we are aggressive about solving our problems. We're not going to sit around and not address that. And that's good news.

Okay, thanks.

Just to reinforce something that Dick alluded to earlier. Our CNI growth on a link quarter basis was up $119 million, it's an annualized almost 13% and you're looking at a 7% annualized drop in commercial real estate and a 6% annualized drop for the quarter on a link quarter basis on a consumer real estate. Then you've got some drops in the some small other areas, but I think that we're making progress and growing our commercial business. I think what we cornered out with regard to the commercial relationships on the deposit side say a lot about that. We really can't speak to what other banks are doing, never have been. We just do what we do and we think that we're making progress and we see things on the whole turn around, we think we'll show some good momentum.

I might just add one other thing. We do some studies about real estate outlook because nobody wants to talk about real estate. But it's interesting in Texas to get your comparison. Vacancy levels have improved in all of our cities we operate and rent rates are up in all of the cities. So, it's happening. One of the things that multi-family is very strong and it's doing well, which I think we would expect with this housing across the country. People are -- I remember when I started working at the bank, I couldn't afford a house so I rented an apartment. I didn't feel like a second-class citizen. It was the right thing to do. I have shared those comments with the fed. It's getting better.

All right, great thank you.

Your next question is from the line of Brady Gailey with KBW.

Had a question about the margin, if you look over the last year it seems to be bouncing around the 4% level and down a little bit in the second quarter. If we see a low rate environment extended for the next couple of years, I was wondering what potential downside -- what the downside would be to the margin? Do you think that it would be under 20 basis points or over or what risks do we have to the margin from an extended low rate environment?

Well it wouldn't be good. It's the nature of the business, but I couldn't say it would be 20 basis points or whatever because it depends on a lot of assumptions. I guess I'd just say you have to see what your underlying assumption on the loan growth on that. Loan growth is going to be a pretty big determiner of what margin does. Particularly when you've got the kind of liquidity that we have.

If you have a rate environment that's flat for 2 years, I think in your example, it probably means that there's going to be some challenges in the economy for that period of time. If you assume that loan growth is not robust and we have some run off of some other securities, there will be some pressure on the margin. And you can do the math and determine how bad you want that to be or how modest you want that to be. But you're right, flat rates for 2 years would not be a good thing for the market.

Okay, and Dick, I was wondering if you could update us on your thoughts about acquisitions. Your company continues to build capital at a faster pace than the balance sheet is growing. I know there's a lot of people talking about a consolidation wave coming in Texas with the amount of smaller banks within your state. I wonder if you could just update us on your interest in acquiring other banks and what you see over the next couple of years in the state of Texas.

Well we hadn't really changed. We're aggressive lookers and conservative buyers. I don't have to tell you there is a lot different dynamics with all this changes in regulation about what are banks worth. So, you have to take all of that into consideration. But certainly we will continue to be aggressive lookers.

Okay thanks guys.

Your next question is from the line of Steven Alexopoulos with JPMorgan.

I know we're going to get the details in the Q, but Phil could you give us what the average loan and security yields went to in the quarter?

Yes, I think I've got that here. Hang on just one second. The second quarter, our average loan yield went from 5.01% to 5.02%, so there really wasn't much change. On the security side, we went from 4.73% to 4.79%.

Okay.

One thing you did see, as I mentioned, we did see a pick up in liquidity of about $0.5 billion.

What was it that drove the increase in security yields in the quarter?

We had some security purchased last quarter. That would have affected it some. It was only 6 basis points, but as I mentioned, we would've had an increase in the margin had it not been for the liquidity increase and that would've been driven primarily by the security purchases that we had last quarter. A full annualization of those.

Any updated thoughts on the impact from Reg Q to the margin and are you now paying interest on commercial DDA?

As we have always said, we don't think it's a big factor early on because rates are at 0%. We have -- I think we're still shaking out in terms of what the lay of the land's going to be competitively. I'm aware of one bank that sort of a larger regional bank that I think has a 1.1% offering. There is that kind of silly response that we predicted there would be in some corners. But by and large there's just been pretty modest reaction to it. And we haven't really seen any impact on us at this point.

Maybe just one final question. Last quarter you guys talked about competitors going back to old habits on underwriting and having short memories. This quarter you're showing pretty good CNI loan growth. Has the competitive environment improved from last quarter?

No, it's gotten worse. They are still covenant light at all levels and lower pricing and it's a silly season that we find ourselves in, in this world particularly in such a weak economy that they would doing that kind of stuff.

Great, thanks.

Your next question is from the line of Brett Rabatin with Sterne, Agee.

I wanted to ask on the initiative you have with marketing, how much we should expect in terms of financial impact on expenses and then just the roll out of that initiative. I know you've been doing that earlier in the year as well, but maybe you could give a little more color around that implementation that you have planned.

As we had mentioned before, it wasn't a big impact on the first quarter, it did begin to ramp-up in the second. Second quarter link quarter basis other expenses increased by $1.6 million relative to advertising and promotion. Compared to a year ago, we were up $2.1 million. You begin to see some impact on that.

Okay and just wanted to ask from a credit quality perspective, your credit quality is very good, the non-performers are up a little bit link quarter, are you seeing downward migration of, or improvement I should say, in the problem loans and can we expect a provisioning in the reserve levels to continue to abate?

We are, as I mentioned, we are continuing to see positive trends in all areas. Non-performers did move up a little bit which is kind of an unusual performing non-performing loan. That will continue to pay the interest and regulators allow that in this particular case. I think we will continue to see positive trends. As you know, and we've always said, the reserve is really related to classifications and they continue to improve.

Okay and then just one last question. On the interchange topic, I think your total revenues last quarter from a bank card interchange fees were approximately $7 million. Can you give us some thoughts on how you see that impacting you guys as Durbin is implemented in October?

I think our expectations will take about a $4 million a quarter hit because of the Durbin impact.

Would you anticipate changing anything in terms of pricing or policies as a way to offset the decline?

Not related to that. That is what it is. We are dealing with all of the changes that have occurred from regulations by -- run our business tight, continue to promote our value proposition that Dick's talking about and we are changing our products. It's really taking advantage of movement in the market around us of others to create products that are more to the liking of customers, frankly. Lower barriers to entry, lower barriers to doing business with us so that we will be able to expand our customers more and more in this environment.

It's really, and we said this before, in the loan to deposit ratio over time it's going to improve our profitability more towards where it was before. I frankly don't think there's enough money to be made to make up for all of the things that have happened to the industry just by continuing to load fees on the customers. What we know and believe is that by increasing that loan to deposit ratio back to where it was a couple of years ago, say from the really low levels we are today and utilizing these tremendous amounts of liquidity, and we believe, I should say at some point as the capital kicks in, we will see some more rationalization on pricing. We think that's really where the operating leverage is for our Company and so we're not really trying to cut our nose off to spite our face with our customers, by letting them bear the brunt of a regulatory change that has happened in Washington.

Okay that's great color. Thank you.

Your next question is from the line of Emlen Harmon with Jefferies.

You started to touch on fees a little that in your last response there. I was hoping to maybe get a little bit more color on that. We've heard from some others that the larger banks on the commercial side are starting to take up fees, for example commitment fees, other fees that they're charging their commercial customers. Could you give us a sense of what your outlook is there in terms of fee growth and how you plan to position yourself competitively?

Quite frankly, we have looked at fees on commercial and have improved that over this last year. Really to just get to a point of being competitive, not a reaction, but just as we looked at the market, quite frankly, there's room to, as you mentioned one example is the commitment fee and so we are moving more towards the market in that regard. You just look at a lot of things in the commercial things. Being sure that were given excellence at a fair price and that's exactly what we are doing which involves right and fees and balances and the total relationship.

Okay, got it. As a follow-up, could you talk about just capital deployment priorities at this point? You did talk about M&A a little bit. But I would be curious -- it sounds like you're being conservative there, but just curious to hear your thoughts on where the dividend goes from here and whether you're thinking about buy backs at all.

First of all, I would say with regard to dividend, we said before that our level of payout's is pretty much in line with where we think it ought to be. Which is roughly half, about 50%. I wouldn't expect t anything dramatic with regard to the dividend.

With regard to buy backs, I think the thing that we've said also over time is we've been careful with the amount of capital that we are maintaining as they roll out these capital rules. Basel III, we've gotten some more insight on where that's going. One aspect of it, I think that for all banks, is really a serious issue is their a decision to the include the OCI impact from unrealized securities gains and losses in capital and if they really do follow through with that. I think that what it means is even more capital for the industry, particularly community banks, but also the larger banks. Or a smaller investment portfolio.

As we -- but there's a long way to go, I think, before we finally decide what happens with those rules, so we are going to be watching those very closely to see what the impact will be. That's something that we need to be mindful of as we consider any buy backs in the near-term. I think what our expectations are is we are going to continue to husband capital and watch these developments and once they finally shakeout, it will give more clarity in terms of what our response can and should be on the capital.

Okay. Thanks for taking the questions.

(Operator Instructions) Your next question is from the line of Scott Valentin with FBR Capital Markets.

Good morning, and thanks for taking my question. With regards to securities portfolio, you mentioned that the yield had gone up a little bit. Was there any significant change in duration or any of the characteristics of the portfolio?

No, there really wasn't. The duration portfolio was 3.95 years today and that assumes a Bloomberg duration for our municipal's which have calls in is and so you adjust that based upon expectations there. No, no real change on the duration.

And then you mentioned before, someone asked a question before about low rate environment and the pressure that would put on margin. One of the things you can control is expenses and just you run an efficient bank. Just wondering if there's opportunities anywhere to maybe cut expenses?

I would say that there is always something you can do just by managing tightly and I think our people have a good view for that. A wide ranging expense reduction program, I think, is not in the offering for us because I think that we've got our expenses matching what it is we do. Our operating levels, the service levels that we provide and I think our people have done a good job of controlling them. A lot of times those kind of programs are temporary anyway. Just being honest, it's not really the focus of us right now. What we're focused on is trying to grow the business in a low rate environment, high rate environment, or flat rate environment.

Just add to that, he's said it well. Certainly the way we look at expenses is from a strategic power, it's always a commitment of ours to reduce unnecessary expenses. But as he said, we are going to stay with our model of continue to give outstanding service. I don't think you'll find this Company wastes money in any way. We -- you who have known us know that Phil and I personally look at any new expense over $10,000. That's not to play a government game, but mainly it is to make sure that the business managers are seeing that it's rational to spend that money. We approve. So, I think we've got good expense control and it's really a compliment to our staff and the culture in which we have.

Okay, thank you. One final question, you mentioned the Texas economy doing far better than the US overall. Are there any MSA's that stand out in Texas, maybe San Antonio versus Houston where you are seeing better opportunities?

They are all strong. If you just look at job growth numbers for the last 3 months, Austin is strong as horseradish and that's a lot about the technology. The average for Texas in 3 months is 2.46% and they all hover around there except for Austin is almost 4%. But they are all good markets.

Okay, thank you very much.

Your next question is from the line of Michael Rose with Raymond James.

I just had a question as it relates to your loan loss reserve and how we should think about provisioning, at least over the next couple of quarters. Obviously, with loan growth picking up a little bit and credit seeming to kind of bounce along the bottom maybe improve here, should we think about you continuing to under provision relative to charge-offs, at least for the next quarter or 2?

I think you've just got a look at what I said earlier that the trends are positive. I said I think they will continue to be positive. Again, it's most sensitive to classifications and so that's what's really going to drive it and things look good. Contractors are still struggling and we think we've identified all of that, but about the time you think you know everything you don't. So, it changes all the time. I think the main thing I'd tell you is the trends are positive.

Okay, that's helpful. That's all I had, thanks.

Your next question is from Brett Rabatin with Sterne, Agee.

Hi, just had a quick follow-up. Phil, I think in your prepared comments you mentioned comfort with the current consensus. I forget how you exactly say it. Average, which [$346 million] which would essentially imply a pace of $0.83 in the second half of the year compared to $0.91 this quarter. Can you comment on specific variables or that's obviously a decline from the first half of the year?

I'll just say what I said. Rather than comment on quarterly trends. But one thing you've got to remember is you've got Durbin's kicking in. For example, and these regulatory things. I guess that's the only specific comment I'd make on it.

Okay. Fair enough. Thank you.

Your next question is from the line of Bob Patten with Morgan Keegan.

All my questions have been asked, but Dick I guess my take away here is you're feeling a little better than you felt in the last couple of earnings calls just about the growth starting to look a little better than it has.

That's correct. I'm scared to say it, but I've been using words like slightly and I gave you all the numbers and they are positive. When you talk about those commitment levels and somebody talked about it earlier and that was the first question I asked. You look at these commitments are so good, then you wonder well why aren't your loans up? Of course, as I pointed out, the base was so low last year, but it is positive. You just can't get around it.

If you could just take 30 seconds and just remind us about how many calls your lending officers make on a monthly quarterly basis. What the sales culture is doing right now to take advantage of this opportunity?

I don't have the exact number, but I can tell you that when we went into the recession we went up 65% and we are holding at the highest level. In fact, where we are, you just can't make any more calls. We are maximizing out what a human can do. They are doing it extremely well. The other thing that we are doing, we are doing a lot more team selling which I think is extremely valuable. We have seen. The customer response are positive to it. So, what are doing you're going to the customer and not being a product peddler, but what you're doing is you are listening to the customer and their needs and then we're bringing them solutions.

Okay, thank you very much.

There no further questions at this time. I will now turn the floor back over to Dick Evans for any closing remarks.

We appreciate your interest in our Company and this concludes our second quarter 2011 conference call.

Thank you all for participating in today's conference call. You may now disconnect.