Independent Bank Group Inc (IBTX) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Independent Bank's first-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, President and Chief Operating Officer Torry Berntsen. Please go ahead, Sir.

Thank you. Good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the first-quarter 2015. I would like to thank you for joining us this morning. I will go over a few housekeeping items and then hand it over to David Brooks, our Chairman and CEO, to lead the presentation.

We issued our earnings release yesterday evening and a copy is posted on our website, www.ibtx.com. We will be going over much of the release on this call. If you are having trouble accessing it, please call Robb Temple, 214-544-4777, and we will email you a copy.

Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the Act. Please see the text in this morning's release for additional information about the risks associated with these statements.

Please also note that if we give guidance about future results, that guidance will only be a statement of management's beliefs at the time the statement is made. Predictions that we make may not continue to reflect management's belief, and we do not publicly update guidance.

We will discuss a number of financial measures considered to be non-GAAP under the SEC's rules. Reconciliations of these financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in our earnings release.

At the conclusion of our remarks, we will open the telephone lines for questions. At that time, we will provide instructions for submitting your questions.

With those reminders out of the way, I would like to outline the agenda for the call. David Brooks will open with his thoughts regarding the first-quarter results. Michelle Hickox, our Chief Financial Officer, will lead you through the quarter's operating results and some balance sheet highlights. David will then close the presentation, and open the phone lines for questions.

I will now turn it over to David.

Thanks, Torry. Good morning, and welcome to our first-quarter earnings conference call.

We were pleased with our results for the first quarter as we continued to execute our growth strategy. Our organic loan growth for the first quarter was 13% on an annualized basis with total assets reaching $4.26 billion at quarter end, compared to $2.35 billion for the same quarter last year. Most of our first-quarter growth was focused in the commercial real estate and non-energy C&I portfolios.

Our core earnings were $10.2 million or $0.60 per diluted share, which was in line with our expectations. First-quarter earnings reflect the continued growth in earning assets. We remain very focused on asset quality and our metrics for the fourth quarter remain strong. The credit team continues to closely supervise underwriting, monitor asset quality, and maintain effective credit administration.

Specifically regarding our energy portfolio, we added one new relationship in the first quarter which is reflected in the $10 million increase in outstandings. The energy loan that was classified in the fourth quarter of last year moved to nonaccrual and we made a specific provision against it in the first quarter. One additional energy credit was moved to criticize. These two credits together totaled $17 million, approximately 7% of our energy loan book outstandings, or 0.5% of the total loan book.

While there could be additional migration in the energy portfolio over the balance of the year we don't foresee any material losses or problems in the portfolio at this time. We increased our dividend per share by 33% in the first quarter as a result of our earnings growth. The increased dividend reflects our continuing commitment to enhance shareholder value.

And, with that, I would like to ask Michelle to go over the 2015 first-quarter operating results.

Thank you, David, and good morning, everyone. As noted in the earnings release, our first-quarter core net income was $10.2 million or $0.60 per diluted share compared to $5 million or $0.39 per diluted share for the first quarter of 2014, and to $10.9 million or $0.64 per diluted share for the quarter ended December 31, 2014.

Net interest income was $36.1 million for the first-quarter 2015 compared to $22.1 million for the first quarter of 2014 and $38.2 million for the fourth-quarter 2014. The increase from the previous year primarily resulted from loans acquired in our two Houston acquisitions. The decrease on a sequential basis is due to the unusually high amount of loan prepayment fees received during fourth-quarter 2014 compared to normal levels in the first quarter, as well as a fewer number of days in the first quarter for interest accruals.

Our net interest margin was 4.07% for the first quarter compared to 4.17% for the prior quarter -- year quarter, and compared to 4.28% for the fourth-quarter 2014. The decreases from the prior periods are primarily due to reduced loan yield, reduced accretion income, and reduced prepayment fees.

Our core net interest margin, which does not include accretion income, was 4.05% for the first quarter compared to 4.1% in the prior year quarter and 4.17% in the fourth quarter.

Total noninterest income increased $1.6 million compared to first-quarter 2014 and increased $5,000 compared to fourth-quarter 2014. The increase year-over-year is a result of enhanced fees across a number of different areas. On a linked quarter basis, the fourth quarter had gains on the sale of securities and there were no such sales in the first quarter of 2015. This was offset by increases in mortgage fee income, gains on sales of ORE, and fees generated from our wealth management group.

Total noninterest expense increased $8.3 million compared to first-quarter 2014 and decreased $545,000 compared to fourth-quarter 2014. The increase year-over-year is the result of our growth and expansion, including our two Houston acquisitions.

On a linked quarter basis, the decrease is related to lower acquisition, compensation, occupancy, and professional fee expenses offset by an increase in other real estate and loan expense as well as other noninterest expenses.

The provision for loan loss expense was $1.7 million for the quarter, an increase of $417,000 from the first-quarter 2014, and a small decrease of $81,000 from the fourth quarter. The provision is directly related to our organic loan growth, the fact that we had net recoveries for the quarter, and recognition of the current energy environment, including a specific allocation to a previously classified energy loan that was placed on nonaccrual status in the first quarter.

As a reminder, we took an additional qualitative adjustment in the fourth quarter of 2014 to prudently reserve for our energy exposure.

As it relates to loans, for the quarter, organic loans held for investment grew 3.2% from December 31, 2014, or 13% on an annualized basis. The composition of the overall loan portfolio is comparable to the fourth quarter. C&I represented 21.1% of the portfolio.

Energy E&P outstandings at the end of the first quarter were $239 million comprised of 29 borrowers representing 7.2% of the entire loan portfolio. As David mentioned, we added one additional borrower during the first quarter. Virtually all of our E&P customers have hedges in place through 2015 with the average hedge price for oil close to $80 per barrel. Oilfield service-related balances continue to represent less than 1% of total loan balances at March 31, 2015.

With respect to overall asset quality, total nonperforming assets represented 0.43% of total assets at March 31, 2015, compared to 0.51% of total assets at March 31, 2014, and 0.36% at December 31, 2014. The decrease in the ratio from the prior year is primarily related to the increased size of the loan portfolio relative to nonperforming assets. The increase from the linked quarter is related to the previously mentioned energy loan that was classified at year-end and was put on nonaccrual during the first quarter.

With respect to funding, total deposits were $3.39 billion at March 31, 2015, compared to $1.89 billion at March 31, 2014, and $3.25 billion at December 31, 2014. Growing our core deposit base continues to be a focus while keeping our costs low.

The average cost of interest-bearing deposits decreased to 0.45% for the quarter compared to 0.51% for the first quarter of 2014 and remained stable from the fourth-quarter 2014. Our year-to-date rate on total deposits dropped to 0.33%.

23.8% of our deposits are non-interest-bearing, up from 18.7% a year ago. Total borrowings decreased by $8.9 million from December 31, 2014. The decrease is primarily related to maturities of FHLB advances.

As it relates to capital, our tangible common equity to tangible assets ratio increased to 7.1% at March 31, 2015, compared to 7.07% for the fourth quarter. Our total risk-weighted capital ratio decreased to 11.51% at March 31, 2015, compared to 12.59% as of December 31, 2014, due to organic growth as well as increased risk weightings for certain assets and unfunded commitments under the new Basel III capital rules.

Tangible book value per share continued to increase to $16.65 at March 31, 2015, compared to $16.15 at December 31, 2014.

That concludes my outline of the highlights for our financial statements.

I will hand it back over to David.

Thanks, Michelle. We feel it was a good quarter overall. Growth continues across our franchise. Our loan pipeline remains strong, even with reduced energy lending, and we expect similar growth for the remainder of the year.

We took time during the quarter to continue to build our lending team by hiring six new lenders across the footprint, which we believe will position us for continued organic growth.

Earnings remain solid and asset quality remains strong, despite the challenges in the energy markets. There continues to be M&A discussions in Texas. I remain involved in conversations and we intend to build out our footprint as opportunities arise.

We will remain disciplined in our approach to acquisitions and will only proceed with an acquisition when it is both strategic and the valuation metrics are appropriate. We believe that our strong financial position, excellent credit quality, and commitment to our proven business model will yield positive results, differentiate us, and enhance shareholder value.

With that, we will open the call to questions. Operator?

(Operator Instructions). Kevin Fitzsimmons, Hovde Group.

Good morning, everyone. It is Hovde Group. Just a quick question. You mentioned, David, about the one loan that went to nonaccrual. And I think you alluded to risk rating downgrades.

But can you give us a sense, a little deeper sense, on what you saw this quarter in risk rating downgrades and what you expect going forward? I know you said you still don't expect losses to emerge from those. But just give us a sense on what kind of downgrades you might be expecting and what that may mean for provisioning going forward in the next two to three quarters.

Sure, yes. To be clear, around our release, Kevin, we had the one loan had already been downgraded internally to a substandard category in the fourth quarter, and then we placed that loan with the -- migrated it to nonaccrual this quarter. And there was one additional internal downgrade to criticize of an additional energy credit.

So we have two total; one classified, one criticized loan at the end of the quarter. What we see, Kevin, is we continue to work with our borrowers. They are adjusting to what the prices are. We are putting plans in place, have put plans in place. Some of those plans include them selling off some non-core assets, in some cases getting some mezz equity or mezz financing in behind us, and some other things like that.

So the borrowers are doing a great job of executing those plans that we have agreed to. Everybody is on the same page.

And so, the only risk I think of -- or the risk for us of potential further internal downgrades would be if there is a material change in the environment again to the negative, and that impeded some of our borrowers' ability to execute those plans. So that is really the risk for us here through the balance of the year.

I think we have got a good handle on our portfolio. We have got agreements and plans in place now. Our borrowers are executing those plans. And if something happened unexpected that caused them not to be able to execute a plan and, in some cases, if we were wanting to reduce our exposure a little bit and they were unable to do that, then we would have to continue to watch those internal ratings.

But again, those are around the margin. We don't expect a lot of migration and we certainly don't expect any material losses. I think from a provisioning standpoint, Kevin, again I don't see it driving our loan-loss reserve to be materially different than it has been the last couple of quarters.

But that always remains a possibility, again, depending on the volatility of energy prices. If energy prices settle in here in the 50s, low mid 50s, where they have been for a while, for a few weeks now, then things, I think, look pretty good for all the Texas banks. And if they drop back in the low 40s or into the 30s then I think there is more headwind for everyone.

So we will see how it plays out. We feel very good about where we are today.

Okay, great. (multiple speakers)

Kevin, it is Torry. One thing we've continued to add additional hedges to our portfolio which has been a real positive, as well. Especially through the rest of this year and into 2016.

Okay, great. Great. Thank you.

One quick follow-up. David, you would mentioned that you guys continue to have M&A discussions and you continue to look out. But what do you think is so the likelihood that anything happens in the near future looking out two to three quarters, and I say that just because it seemed like a few months ago the talk on M&A was that the likely or potential sellers -- it's kind of a deer in the headlights kind of effect where they need this new reality of oil prices to sink in and to see how it plays out. And then, on the private bank side, they just haven't -- they just don't get the daily stock ticker of reminding them what they are worth. So the pricing takes a little longer to sink in for them.

So, just what you feel on that.

Yes, that is a good question, Kevin, and a bit of a hard one to answer. My thought is, I do think -- to answer your initial question, I do think that you are going to see transactions announced here in the next two or three quarters in Texas. And some more material, we have seen a few small, very smaller deals happen in the last quarter, too. But I think you will see some larger deals get announced.

We think the new price reality is taking hold in some of our discussions, obviously what happens with the publicly traded stocks will also have an impact in terms of our evaluations. So, over the next two or three quarters.

And so my sense is that those things come together and that we are going to see some activity the next two or three quarters. Obviously, there are scenarios as with the oil prices, that we can't foresee at this point that could preclude that from happening. But my sense is more positive toward that.

Okay. Thank you very much.

Brad Milsaps, Sandler O'Neill.

David, just wanted to see if you could talk may be a little bit more about the margin and loan pricing. Obviously this quarter was affected, as expected, by lower prepayment fees and less discount accretion income. But just curious where you are seeing loan pricing and what that means for your NIM for the remainder of the year?

Good question, Brad. I'm going to let Michelle take that.

Yes, Brad. I think our outlook is still the same as what we had said at the end of Q4. We expected this drop in our NIM. It was probably a couple of basis points lower than what I expected. But I still think we are going to see a couple of basis points each quarter through the end of the year.

Our average loan yields, looking at that compared to what has been coming on over this past quarter has gotten actually fairly close to the same number. So, I don't expect to see the same compression, especially what we had in this Q1.

Okay. That's great. And, Michelle, just to maybe follow up with that one housekeeping item. Did the tax rate -- you mentioned here that some of the professional fees weren't in previous quarters, maybe tax-deductible. Is this more of a new run rate? Or should we see it snap back to 34?

No I think this is a good rate for us. Q1, we didn't have any nondeductible expenses in the first quarter. And it has kind of bounced around because we did in 2014. But I think this is a good rate for us.

Okay. And then, David, maybe kind of bigger picture question. You have kind of been hanging around this kind of 1 to 1.05 sort of core ROA for a couple of quarters. At this level of NIM going forward, can you talk a little bit about where you see the levers and sort of pushing the profitability even higher over the next few quarters really to just come from you guys holding the line on expenses, and some of these new lenders you brought on continuing to fill out the infrastructure, or what are other pressure points you see that could improve that run rate?

Brad, I think the near term is exactly what you said, and that is we think we are at a very good expense run rate right now. We have realized cost saves out of our most recent acquisitions. So we feel good about that. Other than adding some lenders, which we had projected and had in our budget, we think expenses should remain pretty flat. And so, then it is just a matter of growing the balance sheet, which we feel good about; not only the new lenders we've hired, our pipelines are good.

And then we have also got a number of construction projects that more than normal, I would say, the last six months that we have put on to our books that haven't funded yet. So, when we look at our unfunded loan commitments, we think we are going to get some nice tailwind there in the second, third, fourth quarters out here, which again I think will -- first quarter has typically been one of our seasonally weak quarters. And we grew at a 13% annual rate.

We still feel good about the midteens that we talked about previously for the year. So, I think that's the short-term answer. And of course, any M&A activity that we can generate here this year would also push the levers. But we still feel good, Brad, that our efficiency ratio comes down this year, ROA, core ROA, kicks up and headed toward 1.10 and 1.20 eventually in the next couple of years is where we think we can get to.

I think the big point, Brad, is sort of we're on track where we thought we would be on the expense side and feel good about that going forward.

That's great. Thank you, guys.

Michael Young, SunTrust Robinson Humphrey.

I was just wondering if you could give us a little bit of color on the geography of the loan growth, if more of that was coming from Houston or Dallas or just the location? Particularly within CRE.

Yes, remarkably balanced, probably a little more C&I based in Houston. But their activity in the first quarter was right line with the rest of our markets. Our strongest market by a little bit might have been the Austin market. We've -- the last two quarters as energy has cooled a little bit, that has kind of made Austin stand out to the positive, if you will, the last couple of quarters. But balanced across the board, the CRE more in Austin and Dallas. And I'd say some of the non-energy C&I more focused in Houston. But in terms of percentage growth, pretty balanced across the portfolio.

And then just as a follow-up, can you provide a little more location around where the lenders were hired, maybe just as you look out through the rest of the year, where you have the most opportunity to hire new lenders?

Sure. Three of the six lenders were in the Austin area. And so we feel like we are as well positioned in Austin as we have ever been for continuing organic growth. Two were in the Dallas area, and one was in Houston. And so focus five were in either Austin or Dallas.

But, going forward -- and those lenders, by the way, were hired -- three from other Texas regional publicly traded banks; and three were hired from large, privately held banks across our footprint. Going forward, I think again we expect a pretty good balance there in terms of hiring if we look out.

We haven't put a priority on any market over another. We just look for people who fit our culture and our strategy, and when we find them in whatever market they are in we try to hire them. And so I would say we are just as likely to hire in any of the three markets going forward.

And one last one, if I can sneak it in. Just on the accretion income, obviously a drop this quarter. But do you think -- will it rebound a little bit through the rest of the year? Or is this kind of a good run rate, do you think, going forward?

We typically only get about 2 or 3 basis points related to accretion income. And I don't really expect that to change. The only time it gets significantly more is if we have something that pays off unexpectedly, or a loan that we had a non-accretable discount for. So that was what you saw in the fourth quarter.

But generally, just on an ongoing basis, it is at 2 to 3 basis points different in our yield.

So it will be a little bit lumpy, Michael, as these acquired loans that have the non-accretable discount on them, sometimes we'll refinance, or sometimes they sell the property but that secures the loan. And it may be a loan that we had a mark on, and at that point we have to bring that back through the accretion income.

Okay. Thank you very much.

John Pancari, Evercore ISI.

It's Steve Moss, actually, for John here today. I just wanted to ask and touching back on energy, the energy loan portfolio here, how much of production is hedged for 2015 and 2016 now?

Virtually every customer has some amount of hedges on. The last time I spoke with our credit guys it was north of 50% of -- I'm sorry -- 65%, Torry says, of the 2015 is hedge. And then I think around one-third of the 2016 is hedged.

Okay. How do you guys think the energy loan portfolio balances will evolve over the course of the year? Are you looking for more or less stable or some growth or decline?

I think our guess is that in the near term it could decline a little bit. That was offset the first quarter because we picked up a new relationship. But as we look out at those plans I was talking about earlier, that we put in place with each of our energy borrowers, some of those plans do include them selling non-core assets or getting a paydown through mezz or equity. And so that would be a little bit of headwind on that front.

And then, I think more toward third and fourth quarters, we hopefully will be able to add some business as some of these assets change hands, and as we are able to go out and people kind of pick their heads up again and go forward with the strategy of how they are going to grow their borrowing base. So near term, I would say next quarter or two, probably a headwind, and then maybe we will tailwind toward the end of the year.

Okay. And I guess also one more question with regard to the lenders you hired this quarter. Are they C&I lenders, or commercial real estate lenders?

They look to be evenly balanced between the two, about half C&I focused and half real estate, maybe with a slight edge toward real estate.

Thank you very much.

Brady Gailey, KBW.

So the one NPL and the one classified loan in the energy book that totaled $17 million, can you give us a sense -- are these production-based? Or they servicing? Are these independent originated loans or were these acquired?

And I'm not sure if you all give it, but can you update us where the reserve stands for the entire energy portfolio?

Let me take a step first, to let Michelle take step, the last one, on the preserve. Both of those credits are credits we originated. The one that has gone nonperforming, we are the only lender. It is a small credit, a little over $4 million, about $4.5 million of outstanding. That's the one that has gone nonaccrual. And we have put a larger specific reserve against it during the quarter. It is E&P credit and secured and some hedges in place, et cetera.

And then the larger one is a shared credit. I think we have got one -- I don't remember if we have one or two participants on that credit. But it is a credit we originated, our customer, and just executing a strategy. And we are not, again, E&P credit, but not -- we are not concerned about loss there, just working through some challenges they have had.

And it's not classified as this internally. We downgraded it to a criticized level.

And I can't give you an exact number on the amount in the general reserve related to energy. Generally we put in 1% of our loan growth related to all of our loans. If you remember in the fourth quarter, we added about an additional $300,000 just for energy. And we've also adjusted our qualitative factors for energy in Q1, as well. So it is going to be somewhat north of that 1% of the portfolio. And then the one loan that we put on nonaccrual does have a specific reserve of about $720,000. So --.

Actually, Brady, the other thing is, even -- we gave you this number last quarter. But we've actually increased it a little but our allowance plus our fair market value adjustments, the total loans is just shy of 1% now. So it is a bigger number than it was before.

Okay. Okay. All right. And then my second question is on capital. [TC] is still a little north of 7%. And other risk-weighted assets were up a little bit this quarter just with the Basel III stuff. Can you update us? 7% is a level that is probably below the average community bank out there.

Are you all still comfortable with your capital base here as you continue to grow organically?

I am, Brady, comfortable where we are right now. And our pro forma shows that without any M&A activity that will continue to build a little bit during the year from our organic earnings. So we feel good where we are today, obviously subject to any M&A activity that we might have.

And then, Michelle might comment about the Basel III adjustments that we made during the quarter.

As it relates to our risk-weighted assets, those were a little higher than we expected. But we are being very conservative on our risk weightings under the new rules. And I expect that some of those, especially the unfunded commitments, may migrate to a lower risk rating the remainder of the year. So just -- we were being really conservative in the way we graded those in the first quarter.

Okay. Great. Thanks for the color.

Matt (technical difficulty) [Olney, Stephens].

Circling back on the energy credit discussion, you may have disclosed this. But I'm curious what percent of the energy loans went through its normal redetermination process during the first quarter?

We have been working generally, Matt, with our borrowers that we had mentioned or last quarter's call for 6+ months now. I think about half or so of our E&P credits actually had a literal borrowing base redetermination in the first quarter. Some had happened before. Some, we reengineered some data from the third or fourth quarters last year, and they won't be due for their formal redetermination until the third or fourth quarter of this year.

But we were able to go in and reengineer the same information, if you will, with the new prices and things. And so, that is part of what we have done in working out plans with customers.

If they had a borrowing base determination, say, at the end of the third quarter last year, rather than waiting until the end of the third quarter of this year, we have agreed with them to go in and, in some cases, have a third-party engineer, not the one who did the original determination, but a third-party engineer to go in, re-look at those engineering numbers, and lay on the current pricing model and just see how that affected their borrowing base. And then, we come up with a plan based on that information.

So it is kind of what I would say formal redetermination is probably about half. But a lot more than that in terms of what I would call the softer borrowing base redetermination where we kind of say, well, if we redetermined today, where would we be? And how do we want to behave on that information?

And so again that has all been part of our -- working with our borrowers.

I think, Matt, that that is the beauty of our portfolio. If you have 31 credits where we are only a participant in three of them where we've got the ability, again, as David has pointed out in the past, to go in there and take a much more in-depth look than you would if we were part of a bigger type facility in a smaller amount.

Yes. That is a good point. Thank you, Torry. And on the oilfield services loans, I know this is a small part of what you do. But oilfield service loans -- did those also get a complete review in the first quarter?

Yes. We took -- we had looked at them in the fourth quarter last year, just took a quick early look to see if there were any impending problems coming our way. And we felt good about them in the first quarter. We went in and actually did a -- in detail, in the first quarter, had our senior credit guys down in Houston meeting with those specific borrowers.

And so, we went through every credit kind of top to bottom, again in the first quarter, no internal downgrades there. And we feel really good about it. The bulk of that $28 million that we were at at the end of the first quarter, Matt, is concentrated in three or four names down there. And obviously we have put a lot of our attention on those three or four credits -- getting to know, getting an update with those borrowers that they are all long-standing companies, third- and fourth-generation, all privately held; low amounts of leverage. And they are paying that leverage down, or have paid it down. And so we feel as good as we can right now about those credits.

Okay. And then, switching gears, over towards deposits. I think one of the key priorities this year was going to be growing core deposits. Any updates on this initiative in this quarter, anything you can share with us?

Well, I think, of course, for deposits, we are up a little over 4% during the quarter. And our loan to deposit was down to 97.5%. So we keep doing a better job of garnering those deposits from our borrowers. It is part of our Executive Loan Committee decision when we look at each transaction now. And we are seeing more deposits come in. We are also seeing some more on the public funds side which has always been a big market for us. And that is a very granular portfolio, as well. And we really get to a number of those smaller areas where our footprint exists, we have some really strong relationship there.

So overall deposits keep growing. And it is a major push within the institution.

Okay. Thank you.

(Operator Instructions). John Moran, Macquarie Capital.

Just quickly following back up on the energy stuff. So 50% of the redeterminations are done. Do you have a sense of where the advanced rates stand on the updated borrowing base? And then a sense of what percentage went up or increased in terms of borrowing base versus went down?

That's a great question. In the cases of it going down would have been, with a lower price environment, John, the cases where it has gone down would have been where they had a lot of new wells they drilled during the fourth quarter of last year, they got added into their redetermination, that drove a few of them down. I would say the majority, though, increased, John, slightly. But generally within our policy and within our boundaries.

And so that has been, I think, a positive as we have been through these to see that people didn't go from 55% to 90%, if you will. They were going from 55% to 62% and things like that. So still within policy.

In the handful of cases where they went above our guidelines and our policies, those where we have plans in place, and they are selling off. And, in a number of cases, if they went -- even if they weren't above the guideline, if they are not drilling wells at this point, which most are not, then we have put them on MCRs, monthly commitment reductions. So we are getting paydowns monthly now so we are capturing cash flow.

And so, sometimes the plan is just, hey, they went from 57% to 67% so they are 2% outside our guideline. We have got monthly payments in place that will have them back down below 65% within 60 days. And so that is the plan.

And, again, as I mentioned earlier, in response to another question, the risk of other or future internal downgrades or classifications is really just would be based upon if any of our borrowers stumped their toe in executing their plan.

Okay. That's helpful. And then, do you have the number of credits that are on the MCR program at this point?

I don't know exactly -- let's see here, John. I am looking at a list. It looks, I would say about half of our E&P credits now are on MCRs. And the other half that is not, they are well in compliance with our borrowing base formulas and policies. So we don't feel like we need them at this point.

Got you. Maybe one more follow up on that. And this is possibly a stupid one, so forgive me. The two that are somewhat problematic -- the one on NPL, and the other one that migrated this quarter -- it's safe to assume that those are both on MCR, right?

That is -- let me look here. Hang on, the -- I know the one that is nonaccrual substandard is, let me see where the other one is here. Oh, there it is. Yes. They both are. That is correct.

Okay. Okay, perfect. And then just one housekeeping item. You guys just referenced a pretty good deposit quarter. And I know treasury management is a big portion, and obviously strategically important to get more deposits in the door.

Do you have an update on -- I know that last quarter you guys were still I think modestly liability-sensitive. Any sense of where that stands today? I imagine pretty much unchanged. And what the thinking is in terms of repositioning things as the year progresses.

Our model shows us to be still fairly balanced but just slightly asset-sensitive right now.

So we have ticked them a hair toward the asset-sensitive side, John, in this quarter. But again very close to neutral, and that's really where we intend to keep it for the balance of the year. And certainly if we err, we'll err toward being more asset-sensitive.

And as we've said in the past, too, we think that because of our strong historical organic growth and ability to grow organically, that keeps us -- even if we show to be balanced in our dynamic model, if we are growing the bank 15% plus a year -- then you are somewhat asset-sensitive just because you are adding all those new assets at current pricing, whatever that is when we add them each quarter.

So, i.e., if rates were to tick up in the third and fourth quarter of this year, the growth that we added in the third and fourth quarter of this year will come in at those new rates. So that makes you a little bit asset-sensitive that isn't necessarily picked up in the models, since the model is based upon a point in time where your balance sheet is.

John, the other thing we are able to even take deposits down this quarter, slightly. So we're working hard on that. And at the lowest point where we have really been --.

Deposit cost.

Yes.

The other thing I will say, one other thing I thought about a moment ago, John, regarding from a high level, I see us changing the culture on the deposit gathering. We have done that as we talked about last year, last two or three quarters, by building up our treasury management team and really hiring what I believe is the higher level, higher quality team now heading up our treasury management. They have really worked hard and gotten the confidence of our senior lending teams and our most active lending teams at their. And that is, in a lot of cases, the best chance we have to grab those deposits is when we bring in a new lending relationship. And if the lender doesn't trust his customer or her customer to the treasury -- doesn't feel great about a handoff, then sometimes there is a resistance there.

And I would say if there is one thing from just a high level, it hasn't reflected necessarily, although we had a very good quarter, I think what you will see in the quarters to come now is, we are changing the culture slowly but surely to where we are really going after deposits in a big way when we are bringing in these new relationships.

And then we are now going back to our portfolio with our treasury management folks and with our calling officers, and finding prospects and people that we have been doing business with for a while where we didn't capture all the deposits we could have gotten. And so, I think it is a long-term process, but we are beginning to see some first fruits of that. And I really expect that to accelerate in the next four to eight quarters.

And part of it, just to add to what David said, John, part of that is also augmenting it with products for our customers. We are about to launch a new online commercial system which will be state of the art. And that will continue to benefit us from a treasury management standpoint, as well.

Terrific. I really appreciate it, guys. Thanks.

Michael Young, SunTrust Robinson and Humphrey.

Just a quick one, probably for Michelle, on the increase in asset sensitivity in the quarter. Were there any changes at all to the model that drove that increase? Or was it just purely on all the work you have been doing on the funding side?

Yes. We haven't made any changes to our model in the past year. So it would be totally balance sheet-driven.

Okay. Thanks.

Thank you. I am not showing any further questions in queue.

I would like to turn the call back over to management for any further remarks.

Great. Well, if there are no further questions, that will conclude our first-quarter 2015 earnings call. We appreciate your attendance, and thank you for your interest in Independent Bank Group. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.