Independent Bank Group Inc (IBTX) 2015 Q2 法說會逐字稿

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

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

Thank you and good morning. Welcome to the Independent Bank Group conference call to discuss financial results for the second 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 this call. David Brooks will open with his thoughts regarding our recent acquisition and the second-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 second-quarter earnings conference call.

As you are aware, last week we announced the execution of a definitive agreement to acquire Grand Bank, located in Dallas, with assets of $609 million as of June 30. On a pro forma basis at closing, combined assets for Independent Bank are expected to be north of $5 billion.

Grand has two well-positioned locations, one in Preston Center and the other along the North Dallas Tollway. These locations provide branch coverage in areas with attractive demographics and vibrant economic activity and add to our presence in the Dallas community.

Grand has a very strong balance sheet in terms of asset quality and, on a pro forma basis, will improve our loan-to-deposit ratio to approximately 92%. It also has a very strong deposit base, with over 40% non-interest-bearing demand deposits and a cost of funds of 14 basis points. Importantly, we believe there is a real opportunity to reallocate Grand's uninvested liquidity to increase profitability.

Under the terms of the agreement, the total consideration is valued at $80.1 million, $24.1 million in cash and the remainder in IBG stock. We anticipate that the acquisition will be accretive to earnings immediately and slightly dilutive to our tangible book value at closing, with the dilution earned back in less than three years.

We anticipate closing in the fourth quarter, with the operational conversion in the first quarter of 2016. We have entered into agreements with Grand's leadership and key producers and are excited about them being a part of the Independent Bank family.

Overall, after this acquisition we will be the 11th largest Texas bank and will rank ninth among Texas-based banks for in-state deposits. We issued a press release and presentation on July 23 last week which includes the details of the transaction. Both documents are available on our website, in case you have not seen them.

With respect to the second quarter, organic loan growth was approximately 9% on an annualized basis, with total assets reaching $4.38 billion at quarter-end, compared to $3.65 billion at the end of the second quarter last year. We did experience high payoffs in the quarter and, in addition, our energy portfolio saw some reduction. Most of our second-quarter growth was focused in the commercial real estate and nonenergy C&I portfolios.

Our core earnings were $10.5 million or $0.61 per diluted share. Earnings reflect continued growth in earning assets.

We remain very focused on asset quality and our metrics for the second quarter remain strong. The credit team continues to work to closely supervise underwriting, monitor quality, and maintain effective credit administration.

Regarding our energy portfolio, as mentioned we did see an overall reduction of $12.4 million in its size since the previous quarter through sales, capital infusions, and MCRs. Three of our credits totaling $36.1 million were moved to criticized, but we did not have any addition to the classified category. To date, we have one classified loan totaling $4.2 million and we continue to make specific provisions against it.

Aggregate, criticized, and classified credits in the energy book total $52.3 million, approximately 1.5% 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 material losses in the portfolio at this time.

With that, I would like to ask Michelle to go over our 2015 second-quarter operating results. Michelle.

Thank you, David, and good morning, everyone.

As noted in the earnings release, our second-quarter core net income was $10.5 million or $0.61 per diluted share, compared to $9 million or $0.57 per diluted share for the second quarter of 2014 and to $10.2 million or $0.60 per diluted share for the quarter ended March 31, 2015.

Net interest income was $37.8 million for the second quarter of 2015, compared to $31.4 million for the second quarter of 2014 and $36.1 million for the first quarter of 2015. The increase from the previous year resulted from our organic growth and loans acquired in our two Houston acquisitions. The increase on a sequential basis is due to higher average loan balances and an increase in accretion income compared to the first quarter.

Our net interest margin was 4.10% for the second quarter, compared to 4.26% for the prior-year quarter and compared to 4.07% for the first quarter. The decrease from last year is primarily due to reduced loan yields and the interest paid on our subordinated debt, which was issued in July 2014. The increase from the prior quarter is primarily due to increased accretion income on acquired loans.

Our core net interest margin, which excludes accretion income, was 4.04% for the second quarter, compared to 4.20% in the prior-year quarter and 4.05% in the linked quarter.

Total non-interest income increased $990,000 compared to second-quarter 2014 and increased $143,000 compared to first quarter of 2015. The increase year over year and on a linked-quarter basis is the result of enhanced fee for deposit accounts and greater mortgage fee income.

Total non-interest expense decreased $888,000 compared to second-quarter 2014 and increased $69,000 compared to first-quarter 2015. The decrease from the prior year is primarily the result of the nonrecurring compensation of approximately $4 million paid in connection with the Bank of Houston acquisition, partially offset by increased salaries, occupancy, data processing, communication, and other non-interest expenses due to increased employees in locations added in the two Houston acquisitions in 2014. On a linked-quarter basis, the increase is related to slightly higher operating expenses, given our growth, offset by reduced acquisition expense.

The provision for loan-loss expense was $1.7 million for the quarter, an increase of $280,000 from the second quarter of 2014 and a small decrease of $11,000 from the first quarter. The provision is directly related to our organic loan growth in recognition of the current energy environment, including an additional specific allocation to the classified energy loan that was placed on nonaccrual in the first quarter.

As it relates to loans, for the first quarter organic loans held for investment grew 2.2% from March 31, 2015, or 8.8% on an annualized basis. The composition of the overall loan portfolio remains comparable to previous quarters. C&I represented 20% of the portfolio, which is a slight decrease from last quarter, due to energy paydowns.

Energy E&P outstandings at the end of the second quarter were $226.6 million, comprised of 28 borrowers, representing 6.7% of the entire loan portfolio. Virtually all of our E&P customers have hedges in place through 2015, with the average hedge price for oil above $70 per barrel. We have also increased the number of outstanding hedges for 2016. Oilfield service-related balances continue to represent less than 1% of total loan balances at June 30, 2015, and decreased slightly to $23.3 million.

With respect to overall asset quality, total nonperforming assets represented 0.37% of total assets at June 30, 2015, compared to 0.35% of total assets at June 30, 2014, and 0.43% at March 31, 2015. The increase in the ratio from the prior year is primarily related to the addition of the previously mentioned energy credit. The decrease from the linked quarter is primarily related to the sale of other real estate during the second quarter of 2015.

With respect to funding, total deposits were $3.47 billion at June 30, 2015, compared to $2.85 billion at June 30, 2014, and $3.39 billion at March 31, 2015. We continue to look for ways to grow our core deposit base while keeping costs low. The average cost of interest-bearing deposits decreased to 47 basis points for the quarter, compared to 49 basis points for the second quarter of 2014, and was slightly higher from the first quarter of 2015. Our year-to-date total cost of deposits is 36 basis points.

25.6% of our deposits are non-interest-bearing, up from 24.9% a year ago and 23.8% at March 31. Total borrowings decreased by $25.8 million from March 31, 2015. 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 7.11% at June 30, 2015, compared to 7.10% for the first quarter. Our total risk-weighted capital ratio increased to 12.03% at June 30, 2015, compared to 11.88% as of March 31, 2015. Tangible book value per share continued to increase to $17.18 at June 30, 2015, compared to $16.65 at March 31, 2015.

As we discussed in the first quarter, we were very conservative in our risk weightings of assets for March 31, 2015. After a more detailed review, we were able to adjust some assets and commitments to lower weightings as of June 30, which helped improve our risk-weighted capital ratios.

That concludes my outline of the highlights of our financial statements. I will turn it back over to David.

Thanks, Michelle.

Growth continues across our franchise. The Grand Bank transaction represents continued execution of our targeted acquisition strategy. We will also continue to grow organically. Even though we experienced high payoffs and we had some closings get pushed to the third quarter, our loan pipeline remains sound.

We took time during the quarter to continue to build our lending team by hiring three new lenders, all in Austin. We currently have the highest headcount and strongest depth that we have ever had in that market.

Earnings remain solid and asset quality remains strong, despite the energy market.

In addition to the Grand acquisition, I remain very involved in M&A conversations and we intend to build out our footprint as opportunities arise. We will continue to remain disciplined in our approach to acquisitions with respect to both strategic fit and valuation metrics.

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.

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

(Operator Instructions). Kevin Fitzsimmons, Hovde Group.

I appreciate the detail on credit and the energy book, but, David, one thing if you could just touch on how you are looking going forward? I am sure much of the work in the redetermination process on the borrowing base has been focused on where we stood in most of the first half of the year, which was relatively stable at a little above or below $60 oil. And now, we wake up and we're in mid to high $40s oil.

And just if you could describe what the process going forward is. Do we wait -- is it the fall where we have another borrowing base assessment that we go through and what your outlook on risk rating downgrades might be with where oil stands today? Thanks.

Thanks, Kevin. One of the advantages to the higher oil prices during May and June is that a number of our borrowers were able to go out and hedge at higher prices out into 2016, so over half of our portfolio is now hedged out into 2016 at strong prices, in that $60-plus range. So, that helps a lot, in answer to your question.

We have a continual monitoring process going on. We have got 28 borrowers, 30 credits. We are continually in contact with them, monitoring, running stress tests, looking at the effect of the oil prices. I think we said in our release, Kevin, that if oil prices stay down, continue to go down, depending what they do, we could continue to see a migration of credits from pass to criticized to classified.

But at this time, we think our portfolio is in good shape, is marked properly, has been looked at a number of different ways and different angles, and at this point we think we have correctly identified and reserved and everything in the portfolio and we don't see any signs that oil prices getting back down here in the mid to upper $40s is going to change anything dramatically.

But, clearly, the borrowers are in better shape when oil is $60 than they are when it is $45. But we are continuing to execute our plans that we put in place, and a lot of those plans were put in place when oil was in the $40s, so --

The one thing, Kevin -- this is Torry. One thing is, and David has alluded to it, is we are the lead on 25 of the 28 credits that we are in, so we have got that much more constant dialogue. Again, it is so important to be in the top of those 25 of the 28 relationships that we have. So as David pointed out, there is constant monitoring of those.

Got it. That makes sense, makes sense.

Just one quick follow-up, if you could just give a few more comments about the M&A environment, David. You mentioned that you are still involved in conversations and the Grand Bank obviously looks like a good deal, based on all the metrics and the opportunity. But with the lower oil prices, the decline we have seen, what does that do to the M&A environment, because I seem to remember from when we had the initial shockdown in oil prices, a lot of bankers talked about the M&A environment being a bit frozen, where sellers were frozen in their tracks, wanting to see what happened.

And so, did things start to thaw in the first half of the year with oil prices stabilizing? And then, what do you think happens with this decline we have seen now? Thanks.

Thanks, Kevin. The primary thing that froze the M&A discussion was the bank stock prices trading along lockstep with the oil prices, so we have seen quite a recovery -- had seen quite a recovery in oil prices and likewise strong recovery in the Texas bank prices. So, that's been the most helpful thing.

I haven't seen any indication that this recent dip in the oil prices has cooled anything down. Clearly, it revolves primarily around what the bank stock prices do, but we are quite encouraged, continue to be involved in a number of discussions.

I think, as I mentioned earlier and as you just said, Kevin, we really saw the sellers took a pause as well, not only because of the stock prices, but concern about who they wanted to partner with and who -- if anybody really had a lot of energy credit related problems. And I think most of that concern is past time and earnings and examinations and the SNC credit examinations, all those things, have gotten the sellers comfortable that the information is out there now, and if anybody was going to have a major problem, we would be seeing signs of it by now.

And so, I think the sellers are still anxious to find a good partner and I think there's a little bit of price discovery going on right now just to see what is the market here now coming out of the oil price decline and the bank stock decline and subsequent recovery. What are the valuations going to look like?

And we felt good about the Grand deal -- feel very good about the Grand Bank acquisition that we announced, and hopeful that we can find some more fits like that in the months to come.

Okay, great, thanks. Thanks.

Steve Moss, Evercore ISI.

I was wondering, just following up one thing on the energy portfolio, do you have any color as to what -- how much it could decline over the next year or so?

That's a good question. We really went into the year thinking that we would be able to hold our own, Steve.

Obviously, we didn't have -- we were just in the process of discovering where all our borrowers were. We have had a couple of loans pay off. We put -- a number of our borrowers, as we mentioned in past calls, have been placed on monthly commitment reductions or repayment schedules, if you will, and that is adding about $12 million a quarter to the paydown rate in the energy portfolio right now.

And then, we are expecting -- a couple of our other significant relationships are in the process of selling assets, marketing some or all of their assets, in an attempt to deleverage and retire debt. So, we booked one significant credit, energy credit, in the second quarter. We booked one in the first quarter, but for us, anyway, finding new business in the energy sector has been challenging here. Part of it, I think, is just our focus has been on working with our current borrowers and working plans and looking at borrowing rates, redeterminations, and engineering, et cetera, and so we probably haven't spent as much time on marketing as we had in the couple years previous to that.

That said, we also see a lot of caution on the energy companies' part in terms of not wanting to add leverage right now. So, our hope is, and we think it is still -- should be the case, that in the second half of the year that as some of these assets sell and trade hands that we will get an opportunity to finance some of those transactions.

That said, we just didn't see a lot of that opportunity in the first half of the year and consequently were down. So, I don't know that we have done a specific forecast, Steve, at this point, in terms of what we think over the next 12 months. I am sure a lot of it will have to do with what oil prices do and everything. But for us to have a similar drop in our energy portfolio the next two or three quarters wouldn't surprise us at this point.

Okay. And then, the construction loan portfolio also continues to decline. Just wondering if you would give us some updated thoughts there.

We continue to approve a lot of construction loans. Steve, I'm not -- is there a specific -- are you talking about retail or residential or our commercial?

The construction development and land -- I got a little cross-eyed, maybe. Yes, commercial construction and land development was down from December 31.

Got it, and I think a number of our large construction projects, Steve, completed in the first half of the year that we were funding, larger commercial and CRE retail and office projects completed and rolled into permanent financing, so we got paid off on some of those. Some of them converted into permanents on our loan -- on our books.

But we have got a huge pipeline of construction loans that we have approved that are going to be funding up, and so I expect that trend to reverse and you will see increases in the construction portfolio here in the second half of the year.

Steve, sometimes it's just a question on timing on that when fundings actually take place.

Okay, and then I guess looking at the overall total loan portfolio, I know you have thought about loan growth in terms of the mid-teens or so. Is that still your view at this point?

We were surprised a little bit in the second quarter. Frankly, our payoffs, not only energy, but we had a number of our commercial real estate loans that paid off during the second quarter, and purely as a result -- and I think we may have spoken about this phenomenon in the past, but purely the result of we financed a lot of real estate asset acquisitions in 2009 to 2012 when prices were depressed and now that the cap rates are very low and prices very high and some might call it a little bit frothy on the prices of real estate, commercial real estate, a lot of our borrowers have taken their gains and sold those properties.

And then, we just haven't been as aggressive in financing those acquisitions because they just obviously tend to be at aggressive prices and sometimes we can't get enough equity to get comfortable with those particular transactions. So, we have been a little more hesitant to -- we were very happy financing the acquisition of the property that stress priced in 2011, but maybe not as excited about financing 70% of that price when it has doubled or tripled since 2011.

So, that has been a bit of a challenge for us. So going forward, our year-to-date annualized loan growth organically held for investment is about 11%. I think we still see a low to mid-teens growth in the second half of the year. We got a great pipeline looking out and we did get -- some of our credits that we had counted on closing in the second quarter got pushed into the third quarter.

But that said, whether -- if I am looking at it now for the year, just the way we think about it, if we're 11% in the first half of the year and mid-teens in the second half of the year, then that blends together for a total 2015 we are now thinking more of a low teens growth rate for this year, and then it's a little early to think about 2016 yet and how we see that, but I think we're still more of a low to mid-teens, probably low teens, for the entire year of 2015 and then we hope to be a mid-teens grower in 2016 and beyond, but we will see. A lot of that depends on how energy comes around.

Okay, thank you very much.

Brett Rabatin, Piper Jaffray.

Congrats on the Grand deal.

Thanks, Brett. Good morning.

Wanted to, I guess first, just go back to talking about the loan portfolio and I am curious. You obviously had an increase in accretion income in the first quarter. Did the loan payoffs that you experienced in 2Q, did that benefit the margin? Did you have some prepayment fees that boosted the loan yields? And just any kind of color around where you guys are originating loans today and if the margin can continue to hold up here at pretty nice levels.

Let me answer the last question first. I think we still feel good and Michelle can address it in more detail, if you want, but we still feel good about our margin. It ticked up a little bit for the quarter, as you mentioned, because of some accretion income, and some of that was a result of some payoffs or payments on loans that we had acquired.

But we still feel good. I think our guidance was and core NIM went from 4.05% to 4.04% first quarter to second quarter and I think we have guided to about a 1 basis-point decline per quarter for the next few quarters until or unless rates go up.

And we do think it will be a positive from an asset liability standpoint. Grand is asset sensitive. Grand Bank is asset sensitive, so when we blend them in and their 40%-plus DDA balances into our balance sheet, that will help and make us a little bit more asset sensitive, although we still remain pretty neutral and they are a significant bank, but on a $5 billion balance sheet, they will be 10% or so of our -- 10% to 12% of our balance sheet, so it won't be a dramatic shift, but it will push us a little bit more toward the asset-sensitive side.

Loan rates tend to look stabilized to us. Floating rates are coming on at similar rates that they have been, three- to five-year fixed-rate CRE loans in the 4% to 4.5% range, so pretty similar. We are not seeing a lot of downward pressure on rates. We are seeing more pressure, Brett, on the structure, just people wanting to stretch out there their -- not amortization -- stretch out their fixed-rate period now that they are concerned about rates going up. People, like I mentioned a moment ago, buying real estate at pretty significantly increased prices than where they were a couple years ago and wanting to put a lot of leverage on those transactions, so we are being cautious around that. So it's more -- it's been more of a structural issue than it has been a pricing issue. Torry?

Right, on the -- just the cost of deposits, the Grand acquisition really helps as well, as David pointed out, just on the deposits. But their cost of deposits is 14 basis points, so when you blend that in with us, that's a real benefit to us because we're in the mid-30s, so you put their 14, so that brings our cost down, which is a real asset.

All right, okay. And then -- I appreciate that color, and then the other thing I was just hoping for some clarity on was just the expenses moved up a little more, maybe, than I was expecting in 2Q. Is this a good run rate going forward or can you talk maybe about the growth of the expense levels in 2Q and what drove that?

Yes, I think it's a good run rate. There were a few things that caused expenses to go up in Q2. We have added six lenders this year, so salary expenses have increased there just because of that, which we have talked about in the past. As we add groups of lenders, that is going to make our expenses and our efficiency ratio a little lumpy.

We also -- if you notice, mortgage is having a really good year, so that causes increases in their commission and bonus expenses because, as we talked about before, the revenue we get for mortgage really to the bottom line is not that significant, simply because of the comp agreements that we have with those guys. But I think going forward this should be a good quarter to use as a run rate.

Okay, great. Thanks. Appreciate the color.

Brad Milsaps, Sandler O'Neill.

David, you guys have covered most everything, but just wanted to verify a couple numbers. Did you mention that the classified number on your energy launch was $52.3 million? Is that correct?

No, the only classified loan we have is the $4.2 million loan that we have moved to nonaccrual and have been making provisions for.

We have moved a few of our credits from, quote, pass over into OAEM or mentioned credits or watch credits, depending on how different terminology people use. But we call those criticized, but they are not classified substandard, and so the official category is OAEM loans from a regulatory standpoint, and so they are -- they straddle the fence, I guess, between passed and a classified credit.

And so, we have seen a migration from the passed credits over into that category, just watching them a little more closely. Some of them are in the process of selling assets or refinancing, which I mentioned earlier, so credits that are in that category are credits we are working to help them either improve or pay down or pay off.

Okay, got it. So that is the criticized bucket, okay, perfect.

Yes, the $52.3 million includes criticized and classified, so it includes the one classified, so criticized would be about $48 million, classified at $4.2 million.

And I think that number was around $17 million last quarter, and I guess obviously the increase just reflects you guys continuing to go through the book and what happened with energy prices, et cetera?

Exactly right. So in some cases, Brad, we put a plan in place and they were executing a plan to maybe raise capital, and if they didn't get the capital raise done in the time that we agreed for them to get it done, then that could have caused them to move over into, hey, we better watch this a little more closely.

And in a lot of cases, those borrowers, as I mentioned, have plans to raise equity, sell assets, do whatever. So until they get those plans executed, we may put them in that category and keep a close eye on them.

Great, and then just one housekeeping thing as it relates to Grand. I appreciate all the disclosure there in the slide deck. Do you guys, when you -- your accretion assumptions, did you build those off of the consensus expectations that are out there for you guys or was it more of a internal type forecast?

It was completely built off the consensus of all the eight analysts who cover us and have numbers out there.

Perfect. Thank you very much.

Matt Olney, Stephens.

On the efficiency ratio, I believe the previous commentary you were targeting a low 50s number in the back half of the year, and since then, you guys have announced the Grand deal and reported 2Q results. So, any incremental commentary on the efficiency ratio in the back half of the year and end of 2016?

No, I think the efficiency ratio will continue to come down, Matt. As Michelle mentioned, we did hire six lenders in the first half, three in the second quarter, and that, in addition to the mortgage increase in volume and revenues and expenses related with mortgage, have pushed that expense run rate up a bit, but we think that's a pretty good run rate for the balance of the year and, obviously, we expect revenues to continue to improve.

So, the efficiency ratio will naturally come down. We will get a big boost in that -- or a big drop in the efficiency ratio, but a big boost in our quest to get our efficiency ratio down, I guess was the right way to say it, with the Grand acquisition.

And one of the things we have said, Matt, is to drive our efficiency ratio down into the low 50s or upper 40s is going to take us just continuing to leverage our infrastructure, meaning growing, and this acquisition puts us -- will put us through $5 billion, $5 billion to $5.2 billion by the end of the year, and then our organic growth and other possible transactions we think over the next 12 to 18 months will get us in that $6 billion to $7 billion range and at that level is where we really get our maximum efficiency down in that 50% range.

Okay, that's helpful. And then as far as the M&A commentary, Grand obviously gives you more metro Dallas scale. What's the strategic priority now in terms of geography for future M&A? Is it still additional metro Dallas or is it elsewhere?

I will say what I always say, Matt, to that question, which is we're going to go where the best opportunities are. That said, I think given where we are in, Dallas, Fort Worth, Austin, San Antonio would be all markets that we are very interested in expanding our presence and our footprint.

Houston is still a great opportunity. We're still, I would say -- to be completely transparent, we are still putting our franchises together down there. We made two significant acquisitions there in 2014, and we just want to make sure we get that right before we add to that franchise. And so we are more focused, I would say, on central and northern Texas right now in our M&A discussions, but we continue to have banks we really admire in the Houston market as well, and so I think opportunities could be anywhere, but from a priority standpoint north and central Texas would be a higher priority for us right now.

All right, that's helpful. Thank you much.

John Moran, Macquarie Capital.

I have got a couple of ticky-tack questions on energy. I think you guys mentioned that 50% is hedged into -- or 50%-plus hedged into 2016. What is that at for 2015?

73% right now is hedged in for the second half of 2015.

Okay, and second half of 2015, you mentioned, was north of $70 a barrel. The 2016 hedges that came in, that got layered in, where is that at in terms of pricing?

In that range where the pricing was in May/June, right in the range of the low $60s. I think the average was about $62 a barrel.

Got it, got it. So everybody just ran for it as the commodity recovered, okay.

Well, they either ran for it or we led them to the table.

Got you.

Remember, John, when a lot of those hedges were in place, the prices were lower on an overall basis when you put the 2016 in than when you initially put the 2015s in.

Okay, got it. That's helpful. And then, if you could give us an update on how many out of the 28 credits or so are in MCR today? I think as of the first quarter call, it was close to half?

Yes, now with a few more borrowing-base determinations and completions and everything, we are close to two-thirds of our credits are now on monthly reductions.

Okay. And where are the advanced rates on the book overall today?

Our policy remains 65% and the majority of our credits are within that band. The ones that are not would be the ones that are in that criticized area as we are working with them to get those advanced rates down, but they're not materially different from where we have been, but they are almost -- most are in compliance. The ones that aren't are in the 65% to 75% range, so we still feel fine about it, especially when you put the hedges in place.

Okay, all right. And then, the last ticky-tack one on the energy book for me, how many -- and I know this is a little bit different than other banks where the vast majority of the book is SNC, but how many of these count as Shared National Credits? And are the 2Q SNC exams incorporated in this set of results for you guys?

We have four of our 28 relationships are considered SNCs, two that we agent, two that we participate in with other Texas banks, and they are or have been subject to the SNC review and none are criticized or classified at this time.

Perfect. And then, I have actually got two others not energy related. The hires in Austin, it sounds like all three were in Austin, is that C&I folks or CRE folks?

A combination. I believe two of them were real estate and one was C&I lender, and all have been in the Austin market. All have followings there in the Austin market, so we really like that addition.

Austin was our most productive region, loan growth-wise, in the first half of the year, so we want to put people where the activity is. And so, we have been focused on hiring people in Austin for the last year and really brought that to a conclusion, if you will, in the second quarter by adding those three.

That's helpful, and that actually leads well into my last question, which is in terms of pipeline and growth by geography, it sounds like, so, obviously, you just said Austin has been the most productive. Can you give us some color on the other markets? And I think a lot of investors out there are concerned about Houston slowing, so maybe any color that you can give with respect to that market would be helpful.

I will say our Bank of Houston -- Houston broadly was positive in the first half of the year. They were, I guess, the recipients of a number of the paydowns I spoke about earlier, some very nice real estate deals that they had on their books when we acquired the bank in 2014. Some of those paid off here in 2015, first half of 2015.

They have done a great job of generating new business, so our pipeline in Houston looks really good. We have just been battling that headwind of the paydowns there.

In addition to that, in our Houston Community acquisition there were a couple lines of business that we chose not to continue in, and so we have either seized those lines of business or sold off those lines of business, so that also resulted in some decline in their overall total book in Houston.

So, we are seeing good activity down there, but in terms of just the net growth, net of payoffs, Austin was the strongest market, followed by Dallas, and then Houston would be third in that.

One of the things we're really encouraged about is not only our pipeline, John, that I mentioned earlier from our existing banks, but we really have a lot of synergy with the Grand Bank. Our current Dallas presence has done a good job with locating and generating a lot of business in C&I, as well as real estate, but Grand has almost another whole group of customer base that have been somewhat limited by their smaller borrowing base and we really see a lot of opportunity there. And, in fact, I know our officers are already working with their leadership on a couple of opportunities even since the announcement last Thursday.

So, there is going to be a lot of opportunity there and that's one of the reasons we are encouraged, and it won't necessarily have to wait until after the close of the acquisition toward the end of the year. So while we think it will be very helpful in 2016, we actually think there will be some nice opportunities here in the second half of 2015.

Terrific. I appreciate all the color. Thanks.

Michael Young, SunTrust.

I just wanted to check on one thing. I thought you had hired six lenders in the first quarter, and then you were mentioning three this quarter, but you were saying six for the full year. I was just trying to make sure I understood that.

Yes, you are correct. I think Michelle may have misspoke. Yes, we hired six in the first quarter and three follow on in the second quarter, so a total of nine year to date. I apologize.

Okay, and six total in the Austin market thus far?

Correct, that's right.

And can you just give an update on maybe how much of the growth this quarter came from Austin?

Gosh, I don't know that I have a dollar amount. Year to date, let me look here. Year to date, it is $56 million of net growth and about $40 million in Dallas, so between just our Austin proper and our downtown Dallas location, about $100 million of the growth.

Okay, that's great. And just one last one, on the energy portfolio, I just want to make sure I understand. The hedge percentages that you're talking about, that's number of customers hedged or is that percentage of production?

Yes, it is percentage of production. So that's the number of barrels that we have financed that are hedged.

Okay, that's great. Thanks.

(Operator Instructions). Brett Rabatin, Piper Jaffray.

My follow-up has been answered. Thank you.

Adam France, 1492 Capital.

Thanks for squeezing me in. Just a quick clarification point. You talked about low teens loan growth for this year. Was that including Grand or excluding Grand?

Well, of course, we won't have Grand until -- we are targeting a November 30 close on Grand, so, yes, I am talking just purely organic growth that we are projecting to be -- we were 11% in the first half of the year, project still to be low mid-teens, 14%, 15% kind of a number in the second half, which will blend to a 13%-ish kind of number for the year, so we consider that to be low teens for the year, just purely organically.

When I mentioned the Grand opportunities, that would be organic to the extent that we can generate some joint opportunities here between now and the end of the year, and that would be plus and on top of that, if we can do that.

Very good. Thank you.

Thank you. I am not showing any further questions at this time.

Okay, if there are no further questions in that, we will conclude our second-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 does conclude today's program. You may all disconnect. Everyone, have a great day.