Texas Capital Bancshares Inc (TCBI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Texas Capital Bancshares second quarter earnings release conference call.

My name is Jonathan, and I am your operator for today.

At this time all participants are in a listen-only mode.

We will be conducting a question and answer session after the prepared remarks, and if you would like to queue up for that in advance you can do that by pressing star one on your key pad.

(Operator Instructions).

As a reminder, this conference call is being recorded for replay purposes.

I would like to hand the call off to Ms.

Myrna Vance, Director of Investor Relations.

You may proceed ma'am.

Thank you very much Jonathan.

And thank you all for joining us today for our second quarter conference call.

Should you have any follow-up questions, please give me a call at 214-932-6646.

Before we get into our discussion today let me read the following statement.

Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainties.

A number of factors many of which are beyond Texas Capital Bancsharescontrol could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

These risks and uncertainties include the risk of adverse impacts from general economic conditions, competition, interest rate sensitivity, and exposure to regulatory and legislative changes.

These and other factors which could cause results to differ materially from those described in the forward-looking statements can be found in our Annual Report on Form 10-K for the year ended December 31, 2010, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let's begin with the discussion.

With me on the call today are George Jones, our CEO, and Peter Bartholow, our CFO.

And after a few prepared remarks, our operator Jonathan will facilitate a Q&A session.

Let me turn it over to George.

Thank you, Myrna.

Good afternoon everyone.

Glad to have you on the call.

Texas Capital posted its best earnings quarter in its 12.5 year history in Q2 2011.

Earnings were $0.44 per share, or $16.7 million.

And our net interest margin expanded 40 basis points to 4.86%.

This expansion was driven by earning asset composition, converting liquidity in the loans at a much better spread.

I believe loan growth now and in the future is the real story here today.

We are now seeing the benefits of hiring 18 months ago.

Not only do we see our existing strong relationship managers producing at a very high level, but our newer hires are becoming productive too.

As a result, we believe that we will see strong loan growth for the balance of the year.

This is one of the benefits of our model.

Growth in loans held for investment was 4% above Q1 averages, and 10% at period end.

Because of this exceptional growth and pipeline, we enter Q3 2011 in a much stronger position to deliver excellent growth for the rest of the year.

In addition to our loans held for investment, our loans held for sale, the mortgage warehouse line of business has outperformed our expectations for the first six months of 2011.

Period end totals were up $300 million from Q1 2011, and average balances increased almost $100 million, a 10% increase.

We expect to see strong production from this group for the balance of the year, improving potential for having average balances for 2011 match those of 2010.

Contributing to the improvement of net interest margin was the 10 basis points reduction in funding costs.

Credit costs were lower by $2 million, and we expect these costs to continue to decline through 2011.

We had significant improvement in the level of non-performing assets with the resolution of several large problem credits.

I will return later to discuss some credit improvement in more specific terms.

Now let me turn it over to Peter.

George, thank you.

As George mentioned we had very strong linked quarter and year-over-year comparisons for both net income and earnings per share.

In terms of core earnings power and net interest margin, they were obviously very strong with net revenue linked quarter up 10% to $79 million from $72 million.

And a year-over-year increase of 20%.

Obviously these numbers were driven by very strong growth in net interest income.

We saw an expansion of the net interest margin by 40 basis points, resulting from excellent growth in loans, which produced a much improved composition of earning assets.

Yields in held for investment and held for sale both remained strong.

We had a significant reduction in funding costs as we had anticipated, and we had a meaningful recovery of lost interest on non-performing assets.

I will discuss that more later.

In terms of credit cost reduction George mentioned, the trend has been very favorable.

Substantial linked quarter and year-over-year reduction was a total of just $8.7 million in cost for Q2.

It is consistent with expectations, and consistent with the very favorable trend we have seen from the peak in Q3 2010 with a $2.1 million reduction from the first quarter.

We had a $2.5 million reduction in ORE valuation charges, down from $3.3 million to just $725,000.

We did have a minor increase in provision from $7.5 million to $8 million, but as George will comment later it really is all related to growth,with less than $1.5 million of that provision related to any problem assets or net charge-offs.

Non-performing assets George mentioned down were 33%.

The non-performing asset ratio reaching 2%, compared to 3% at the end of first quarter, and 4% a year ago.

In expense growth we saw non-interest expense increase mostly related to the collection and professional fees of which is $1.1 million, maybe as much as $1.25 million could come off in future quarters.

We saw a change in the FDIC assessment approach that has been clearly beneficial, with a 21% decrease linked quarter.

Held for investment growth, as George mentioned, was 4% linked quarter, 10% year-over-year.

The very substantial increase experienced in June pushed the total to almost $5.2 billion,5.6%greater than the Q2 average, and 16% above Q2 2010.

We have much increased confidence in our previously stated outlook for year-over-year double-digit held for investment growth.

To put it in perspective, with no growth from quarter end balances, the growth on in the average balance for 2011 compared to 2010 would be 11%.

As anticipated held for sale balances grew 10% from Q1 of this year, with much higher balances at the end of the quarter.

As George mentioned we expect good growth in Q3 compared to Q2 average, but I don't think we will see the average for the quarter reach the quarter end June 30 level.

We have done a lot to address the excess liquidity that we built in the anticipation of loan growth.

We had very good DDA growth that continued 3% linked quarter, and 42% year-over-year.

We saw a flat comparison in total deposits as planned with the initiatives to reduce excess liquidity.

But we are still up 10% year-over-year.

The program to reduce excess liquidity and rates was very successful with a 15 basis point decrease in the cost of interest-bearing deposits, and all interest-bearing funds.

Slide six is the quarterly income statement.

Obviously very good trends in year-over-year growth and net revenue, strong growth in held for investment and held for sale obviously were major factors in Q2.

A sharp increase in NIM was obviously very important.

I think credit costs are still above what we consider normalized.

They are down sharply and confirming the expected improvement we see for the rest of 2011.

Obviously very good quarterly progression of net income and EPS.

We had the highest quarterly ROA at 1.08% in TCB history.

ROE is also much improved.

Slide seven, the average balances yields and rates increase of 40 basis points was driven princely by the change in earning asset composition.

As planned the growth in loans displaced liquidity assets with a major impact on both NIM and the net interest income.

Simply stated we had $229 million reduction in liquidity assets, shifting to $244 million increase in total loans.

As a result, the yield on earning assets for the total portfolio increased by 30 basis points.

Because of the growth in total loans at June 30 compared to the Q2 average, the impact on NIM and net interest income will be more pronounced in coming quarters.

We have seen a substantial reduction in liquidity assets which were producing nominal yields, although the cost differential between deposits and borrowed funds has been sharply reduced.

The excess liquidity level represented to us by the balance of held for sale still supported by deposits instead of borrowed funds remains high in support of our growth plans, at $700 million at the end of June.

Loan yields performed very well in held for investment and held for sale.

We did have a 10 basis recapture of interest on non-performing assets in the 14 basis point increase in LHI yields.

Funding costs are down again sharply.

Linked quarter reduction as I mentioned, 15 basis points in interest bearing deposits and interest bearing funds.

Improvement in cost of funds and NIM also obviously related to the growth in DDA, which we expect to continue.

We will see very minor benefit in Q3 from Q2 events, maturities and repricings that did not effect the full quarter, and maturities of CDs this quarter.

Average balances we have spoken about held for sale very strong, held for investment very good, and much improved at quarter end.

Interest bearing and total deposit balances were consistent with initiatives described producing a slight reduction in total from Q1, but increased again as I mentioned 10% from Q2of 2010.

Again, quarter end balances, 5.6% greater than the Q2 average.

Held for sale very much ahead of plan sharply higher than the Q2 average at the end of the quarter.

With LHI and LHS positions, we expect total growth in loans for Q3 to exceed Q2 average by as much as $400 million or more before the impact of any additional growth.

Obviously on slides 10 and 11, the CAGRs of income and balance sheet components are very strong, and I really don't need to comment on those.

George.

Thanks, Peter.

Turn to slide 12, this reflects loans by collateral at 6/30.

You have seen this before.

Our loans held for sale increased from 15% to 18% of loans, and our market risk real estate declined from 25% to 22% of total loans.

We will get into some of the credit metrics here in just a second.

Slide 13 you will see some of our improved credit trends, with total credit cost declining as Peter mentioned $2.1 million to $8.7 million for Q2 2011.

Our net charge-offs of $10.5 million represented 86 basis points, compared to 113 basis points for 2010 obviously reflecting a better trend.

The provision plus ORE valuation charge was $8,725,000, compared to $10,800,000 in Q1 2011.

Only about $2 million of this $8.7 million went to support problem assets, with the balance of $6.7 million used to support growth.

We have seen significant improvement in non-performing asset levels for the fourth consecutive quarter.

Non-performing assets decreased $37.5 million, or 26% from Q1 2011, and showed a reduction of $75 million, 42%, from the peak levels in Q2 2010.

Our non-performing asset ratio of 2.03 today as Peter mentioned is down from 3.01% in Q1, and 4% in Q2 2010.

We expect to see that decline continue.

Non-accrual loans of $78 million are down $39 million from Q1 2011, and $60 million from Q2 2010.

I think we have mentioned before our largest non-performing loan of $20 million was paid in Q2 with very little loss.

Our non-performing loan ratio is now less than one-half of Q2 2010 at 1.24% of total loans, and 1.51% of loans held for investment.

We have contracts or letters of intent to purchase on most of our larger ORE assets.

We expect to see significant reductions in existing ORE over the next two quarters.

We do expect credit costs and non-performing assets to reduce further in 2011.

We will move to slide 14.

This reflects our net charge-offs to average loans.

Most of these charges were allocated in previous quarters, so we experienced very little impact on current earnings.

Our reserves to loans has come down slightly with our non-performing asset ratio and coverage ratios remaining strong, giving us the ability to deal with non-performing assets aggressively.

Now let me take a minute and close by restating what I think are four important points about Texas Capital.

One, our Company has exceptionally strong core earnings power, that will continue, and does continue into 2011.

We believe that we can maintain a stable net interest margin, even with strong competition and higher funds costs in the future.

Two, we continue to maintain a very strong capital position.

Three, credit cost improvements are expected to continue throughout 2011.

Finally, four, we do believe we are well positioned to take advantage of market opportunities as the economic conditions certainly in our state improve.

Well, thank you very much.

That is the end of our prepared remarks.

We will now turn it back to our operator for our Q&A session.

(Operator Instructions).

Your first question is coming from the line of John Pancari with Evercore Partners.

You may proceed.

Good afternoon.

Hi, John.

Can you talk a little bit about the drivers of loan growth this quarter, how much of that came from the C&I portfolio more specifically, and if you could talk about how much energy and just give us some of the details behind the drivers behind the growth?

Sure, thanks.

The big growth in total loans was mortgage warehouse, but you really need to exclude that, because there is some volatility, as you approach the end of the month you grow dramatically, and then it falls off somewhat.

Let's talk about loans held for investment, which really relate by the overall core portfolio.

By the way mortgage warehouse did increase significantly, over $300 million at the end of the quarter.

Anyway, in loans held for investments we saw the big drivers being energy, premium finance, our traditional C&I business, and real estate.

Real estate was our smallest component of growth.

That was a little bit less than 15% of the growth.

Traditional C&I about 34% of the growth.

Premium finance, we will talk about that in a second, grew 36%, and energy grew 15%.

Premium finance grew a little bit more than normal because there was an acquisition of a loan portfolio they made prior to the end of the quarter, but they still, in addition to purchasing that portfolio, grew significantly organically.

Those are the real components, John, of the growth.

Okay, and did you say that the premium finance loans grew 36%, or they were 36% of the growth?

They were 36% of the growth.

Okay, and how big was that portfolio that they acquired?

Less than $100 million.

Okay.

Close to $100 million.

And can you tell me how much your shared National Credit portfolio totaled at the end of the quarter, and how much it grew by on a linked quarter basis?

I don't have those exact specifics.

It is $500 million or so plus in total outstandings,probably about 60 credits.

Growth in the quarter, John, we will have to get back to you.

I can't give you that number.

Okay, lastly just on the margin you indicated that you expect a relatively stable margin, and in saying that I know you mentioned some notable price competitions.

Could you just talk about your expectation for how loan pricing is looking right now in your markets, and what that could mean for your loan yields?It was pretty impressive that your loan yields were up 14 bips or so, despite what we are hearing as some pretty heightened competitive pressure on loan pricing in your markets?

I think you are right, and we have seen, in fact, it is not new.

We have seen competitive pricing now for the last four months, five months, something like that, and we have still been able to maintain our margins, even having experienced some of that.

It is quite aggressive.

It is more difficult to get a floor on the credit today.

It is more difficult increase the spread to index as we are competing for business, and the structure in many cases is under pressure somewhat, because we see a lot of outliers coming in and trying to grab business in our marketplace, and willing to take a little less structure than before.

But bottom line, how is that going to attack us from a margin standpoint going forward?

We feel like we have done a pretty good job in the past, maintaining our spreads and our margin.

Again, come under pressure, but the changes we will make won't all come at one time any way.

It will come over a period of time.

We have still been able to hold floors in many of our credits.

We provide more than just money at a certain rate.

I mean we are value-added to relationships, and many of our customers are willing to stay with our pricing, or pay a little bit more because we add a little more of that relationship.

Bottom line, it will effect us somewhat.

I think it will effect us less than most, and we haven't seen it yet show up.

John, as I mentioned, 10 of the 14 basis points came from interest recapture.

So the change in yield is more modeston the core portfolio.

Right.

And the purchase George mentioned in premium finance occurred very near the end of the quarter.

So it did not effect the averages or the yields, that portfolio is, as is the core portfolio in premium finance, which grew very well, are at higher yields.

Right, okay.

Just lastly, and then I will hop off.

So you still expect a stable NIM, despite the fact that part of it this quarter was held by the recapture on the NPAs, but also that you are seeing stronger competitive loan pricing, and then you expect some higher funding costs that you mentioned in your prepared comments, George, but still prepared to assume a stable margin going forward?

I think so because again we have got a pretty strong book of premium finance loans today that carry a much higher yield.

Our mortgage warehouse group is contributing pretty dramatically.

I think you are not going to see dramatic changes in the margin.

Well, and you start off the quarter with $400 million more in loans that are producing a margin like what we reported for the quarter.

Thank you.

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

You may proceed, sir.

Pancari must have dialed in at 3.00 today to get in that quick.

Hi, Bob.

Hi.

I have one question as a follow-up on John's questions.

How big is the premium finance portfolio, and that is in the held for investment portfolio?

That is in the held for investment portfolio.

Bob, it is extremely competitive in this business, and that is why we are a little bit reticent to dig too deep into the specifics of the portfolio.

It is becoming significant as a part of our overall loan portfolio, and it is beginning to be quite a contributor to income.

But it is a multiple of hundreds of millions of dollars.

Less than 10%.

Less than 10% at quarter end.

Okay, and then when you look at the funding side, if we sort of look forward a year or two, and if we get the kind of loan growth acceleration, say the second half is a little better, you guys have outgrown the group by 2 to 1 it looks like.

Do you ever anticipate the need to have to go out and get capital to fund this above average growth?

Bob, we want to see that is sustainable obviously first.

We are seeing the possibility of using debt.

The rates are still not attractive, and we badly want to leverage our equity a little bit more than we already have.

We are still running 8.5% to 9% tangible common on an average basis, and need to bring that down.

Yes, and where do you think the biggest negative concern is for the margins sustainable?

You gave all the reasons why it should hold up over the next couple of quarters.

What is your biggest concern Peter?

It is going to be pricing that we can't control obviously, in the held for sale category.

Listen, we started the effort to reduce deposit costs in anticipation of what we expected to be the repricing issue, and what it turns out is we have been more aggressive on the repricing of the deposits than we have seen in the loan portfolio.

We saw a 15 basis point decrease in the cost of funds in Q2.

We are going to see several basis points in Q3 just from the maturities I mentioned.

Just a great book of business going into the quarter will mitigate that pressure.

Could it fall a little bit?

Absolutely.

Could it go up a little bit?

Maybe so.

Okay, and then the last question, just on pipelines, any commentary?

Is it accelerating from where we were at the end of the last quarter?

I think it could be described as stable, good, it is kind of hard to put together another quarter like we just had.

It is pretty strong.

But I do feel like the momentum, Bob, is there, and I do feel like our people are engaged, they are producing.

We are getting some of our hires, as you remember we talked about that we made 18 months, 24 months, they are becoming productive.

Our good strong RMs are producing.

I feel very comfortable in telling you that growth is exceeding our expectations at this point, and we believe it will exceed our expectations for the balance of the year.

Thanks, guys, appreciate it.

You bet.

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

You may proceed.

Hi guys, good afternoon.

How are you, Brett?

I am great, thanks.

I wanted to get some clarity if I could a little bit on the asset quality side.

You mentioned, George, I think in the prepared comments that the non-performers could continue to decline substantially.

Could you provide a little more color around the magnitude, or if you have several projects on the real estate side that might work out?Could you give us some more color there?

I will try, but it is really hard to lay this out in a way that you can put it on a piece of paper, and say exactly what it will be in the future.

I mentioned that we have on most of our larger pieces of ORE, now a large piece of ORE is $2 million or $3 million to us.

Most of those have a contract on them, or have a letter of intent stipulating intent to purchase.

We feel very good about that.

We have sold some ORE in Q2.

I think in Q3 and certainly Q4 we are going to see a lot of the existing ORE on the books today move out.

We have made a lot of progress on the non-performing loans as we said that number is about 78.

It has already come down dramatically, we are at $39 million in the last quarter or so.

We might not see it move quite that fast in the next quarter, but there are a lot of things working.

I will tell you I believe that we have allocated reserves to most all of these problem assets that should get them liquidated without much additional cost to the Company, other than what we have already allocated.

So most of the provisioning we believe can support growth.

So without getting into too many specifics, and telling you this asset will sell and this asset won't sell is really hard to do.

But I can tell you, definitely the inflection point has been reached.

Definitely we are on the down side.

We don't see anywhere near the problem assets coming down the pike.

We only have $13 million in potential NPAs, problem loans.

So we feel very good about the credit.

I think our charge-offs will take another quarter, maybe two to finish the process, but I don't see additional significant charges against income.

Okay.

That is great color.

The other question I wanted to ask was just around the loan-to-deposit ratio.

As you continue to grow, do you end up doing more deposit promotions, or can you give us some color on where you kind of see the ceiling on the loan-to-deposit ratio?

When I define excess liquidity, Brett, it is the extent to which held for sale are carried with deposits.

So net out Fed funds, and look at the difference with held for sale portfolio.

That number goes from $600 million or $700 million where it is today, down to $200 million to $300 million, we will begin doing a little more exploration, and we will believe that we have sources that at less than 30 or 40 basis points can provide enormous amounts of additional liquidity.

Okay, great, thanks for the color.

Your next question is coming from the line of Andy Stapp with B.

Riley & Company.

You may proceed.

Hi Andy.

Are you seeing any signs of organic loan demand from existing customers, or is it the loan growth you are realizing still primarily market-share driven?

Andy, it is mostly market-share driven.

We see very slight demand from existing customers, still very cautious, still concerned about recent economic news, about gasoline prices, food prices, the economy in general, and we still see that uncertainty holding down just our normal organic customer growth.

Okay.

And how is your pipeline for bringing over additional talent from competitors?

It is good.

We keep it good because we keep continuing to find new talent, and sometimes these searches take years to get the right people.

We mentioned to you I think earlier that we went on a real hiring bend about 18 months ago when things were really tough.

We hired really great people that had decided they weren't sure where they were would be the place where they would get the gold watch from, and that is beginning to pay off now, as I mentioned in my opening remarks.

We are beginning to see those people who are great take relationships from the companies they came from, and that is what is helping drive the growth we are seeing.

But again, the 20 or 30 really strong relationship managers we have on board here that we have had for a number of years are really hitting it out of the park too.

We develop relationships, as you know, with top competing bankers.

When they are ready, we win the talent.

Okay.

And your efficiency ratios showed some nice improvement falling down to 57%.

Is there a specific efficiency ratio that you are targeting?

Andy, it is really more a function of the NIM.

We saw an increase in the non-interest expense levels.

When we look at it, we look also very carefully at the ratio of non-interest expense to earning assets.

That number went up a little bit for the reasons I mentioned, primarily professional fees and collection costs, and so forth, related to the elimination reduction of non-performing assets.

And then it is just supporting the growth, staffing that is up, recruiting, compensation that goes with it.

Okay.

Lastly, just a point of clarification regarding your prepared remarks, did you say that the average balance for Q3 loans held for investment would be less than what they were at the end of period basis in Q2?

For the reasons George mentioned, we see the end of quarters, end of months, actually, we see a big run-up in that business.

That is why I said it looks to us like that can be a number 900-plus in average balance for the quarter.

That would be loans held for sale then you are talking about rather than investment?

That is right.

I am sorry, loans held for sale.

But the loans held for investment, obviously the latter part of the quarter we saw a tremendous amount of fundings, and the ending balances are certainly higher than what the averages are.

Yes.

But again that gives us a great head start for Q3.

Okay, Alright, thanks.

Your next question is coming from the line of Philip Gutfleish with Elm Ridge Management.

You may proceed.

Yes, Peter, I am still confused on the interest recapture.

Is that due to interest income that you had previously not accrued and took sort of all in this quarter, or is it just the movement of the NPAs in the quarter and the difference being that one is recapturing something, and you will have it performing for now on, but you won't get the recapture, or is it going to be ongoing?All you did was put it back in performing this quarter, and that will continue through?

No, it is what you collect when you get rid of the non-performing asset.

Okay, so it's the--

It is tied to a specific transactions that paid off where we had applied any cash payments to principle, and then you get more than the principle back.

Okay.

Alright.

Thank you very much.

I appreciate it.

It is non-recurring for that asset, so to speak.

That is right.

Thank you very much.

I appreciate that.

Okay.

Your next question is coming from the line of Jennifer Demba with SunTrust Robinson Humphrey.

You may proceed.

Thank you, nice quarter.

Thanks.

If I missed this in your commentary I apologize, but what was the driver, Peter, of the increase in other fee income sequentially?

That is a fabulous question, Jennifer.

$1.1 million to $1.5 million?

Trust fees were part of that.

We had an increase in trust fees, and there were two other items and I am trying to remember specifically what they were.

Yes, I think that is right.

Swaps we do--

That is right.

We do a lot of swap transactions with a third party.

We are not a principle in that swap, but we get a scrape of the fee, Jennifer.

We have had a real campaign lately to do that, obviously in a time like today when swapping to fix might not be a bad idea.

And the other one was, frankly, I can't remember.

Only other question is your net charge-offs in the commercial category did increase.

Any specific larger loan?

Anything to note there?

Nothing in particular.

We did get a lot of clean-up in Q2 on the C&I stuff that we had.

And we have made a number of partial charge-offs on some C&I that we expect would be able to be moved out or remediated because of the charge-down.

Okay.

A lot of that C&I portfolio relates to some national credits that we had on what you call the ugly house portfolio, the refurbishing, home refurbishing credits, and we took care of most of that.

And did you say during your commentary that your largest non-performing asset was sold during the second quarter?

Yes, the Company, it is an energy credit.

It was actually publicly disclosed early on.

They ended up selling the company and paid us off.

It was a $20 million credit.

There were two banks in it.

We were the smaller bank, and we got our $20 million paid off, and charged off less than $0.5 million.

Okay, great.

Thank you so much.

You are welcome.

Your next question is coming from the line of Michael Rose with Raymond James, you may proceed.

Good afternoon, everyone.

I just had a question back to loan growth.

Could you just discuss by market where the growth was strongest and maybe any color there?

Yes, let me try to do some of that.

As I mentioned energy had a strong quarter.

We were up about $70 million in the energy portfolio, our second largest contributor.

The premium finance grew at $160 million.

That was really the number one provider.

Then you break it down, we had some other C&I portfolio growth in Dallas, San Antonio, and Fort Worth, good markets that produced some really good growth.

The nice thing about what we saw with the exception of bank direct capital finance, our premium finance which outgrew just about everyone in loans held for investment, most all lines of our business produced and they produced well.

They are anywhere from $10 million to $65 millionfor the quarter.

That is nice to see.

It is not coming out of one or two spots.

So it was a very gratifying quarter for growth.

And even though our third quarter typically is a little bit softer, I think we have got a great head start on it.

That is great.

As a follow up to that, I know you have added roughly 25 RMs in the past 18 months, how much of the growth is continuing to come from them versus your--?

As I mentioned to you they are becoming productive.

They are not fully productive today.

The main producers that have been in our Company for some time carried the load.

We are beginning to get, again, production from those people, and that is simply market share take away.

I expect in the next two quarters to be talking to you about how much more productive they are than they have been today.

But we are seeing that come on board.

Great.

That is helpful.

One final question if I could, it looks like the marketing expenses were up about $600,000 from the first quarter.

Any commentary there?

One thing we are in the American Advantage program where we give miles for certain accounts, and we had a quarter where we had to buy a number of miles.

So I think that was about $0.5 million.

Treasury management also has marketing programs that find that.

Okay that is more kind of one-time?

No, it is not going to be, it is not one-time, but it is not going to be every month or every quarter.

That is helpful.

Thanks, guys.

Alright.

Your next question is coming from the line of Scott Valentin with FBR Capital Markets.

It is John Martinez for Scott.

Hi, John.

Hey, just a couple of questions, just kind of curious about the held for sale portfolio.

You mentioned the end of period growth.

Can you describe where that growth was coming from?Previously you stated that you expected the possibility of market share gains versus maybe to offset any volume declines.

I was curious how that quarter worked out?

This again is our mortgage warehouse portfolio.

As you probably know we have seven or eight RM sales managers across the country that provide business for the mortgage warehouse.

They in effect deal do a tremendous amount of business with mortgage companies.

Typically they will begin feed in mortgages with the warehouse beginning the first week of the month, and then build up their volume to a peak by the end of the month.

So you might see a couple $100 million grow in the last week of the month in the mortgage warehouse group because all of these mortgages are building up in the process of being sold, either to a GSE or to an approved purchaser, Chase, Wells Fargo, BofA, somebody like that.

You really have to look at averages in that line of business, because it is somewhat volatile.

The industry is consolidating, and we are benefiting from that consolidation.

We are expanding our customers base, and our customers are expanding their market share.

Right.

Thank you.

And we saw as you mentioned a lot of consolidation in that business too, with larger companies that we do business with buying other companies, and that increases their need for volume.

Got you.

And another question that we have, over the quarter here in the markets a lot of concern for a number of factors either Europe or our own possible issues with the debt ceiling here in the US, did you see any that have play through in the level of loan demand you had over the quarter, and any expectations of how those headwinds might effect loan demand going forward for you guys?

We really don't see much interference as it relates to European issues or international issues.

In our customer base we do some foreign trade a little bit with some of our customers, letter credit of business, FX stuff, but we haven't really seen anything that would cause us to be extremely concerned about issues abroad at this point in time.

Got you.

I think only the question does it have some big impact on the US economy that spreads throughout our business and everybody elses.

Consumer confidence, those kinds of things.

Got you, okay.

And then I guess then to say, it sounds like your customer base is obviously focused on the more domestic macro- issues versus international.

In the quarter given that there are a lot of concerns over the US GDP growth in the second half, anything that you could see that would weaken Texas position vis-a-vis the US economy?

Well, if we don't continue to make progress in pulling out of this morass that we have been in for the last couple of years, what does the Fed call it, a soft patch in the economy.

If that soft patch turns into a really big soft patch, I think that will certainly slow us down.

But frankly Texas has been fortunate and blessed with a better economy than we have seen in other parts of the country, as you know.

I don't see anything immediately that is an incredible headwind on the horizon that will stop us in our tracks.

I do think the pull is going to be long and hard.

I don't think Texas is immune to some of the issues and problems.

As I have mentioned before some of our customers really have put some of their expansion plans on hold, because they don't have confidence yet to pull the trigger on some of these expansion plans.

And I think until the water clears a little bit it is going to be slow.

But I don't see it being devastating.

Got you.

Well, just one last question, gentlemen.

On the credit side, but you mentioned improving credit through the second half of the year.

It looks like it was maybe about $0.04 reserve released this quarter.

Do you think that will be the high water mark for the year, given the larger credits that were resolved this quarter, or somewhere in between the $0.02 and $0.04 per quartergoing forward?

Are you talking about provisions or charge-offs?

Provisions versus charge-offs.

Hard to tell right now.

I think I mentioned in some of my remarks, we could see charge-offs stay higher than we would like for a quarter or two, not out of the realm of where we are right now, but this $10 million is too high for us, obviously.

But we are cleaning up a lot of things.

We don't see a lot replacing it.

Yes, I think in a quarter or two we can see fewer charge-offs.

But as I mentioned even though the charge-offs will remain a little bit higher than we like, we have got most of those reserved.

So I don't think it is going to be a push against current income.

That is what we provided to the reserve in the last number of quarters.

So I mentioned before as we have talked about the provision, that probably 10% or 15% of that provision went to problem credits.

The balance of it went to support growth.

Got you.

Thank you for your time.

I appreciate it.

You are welcome.

Your next question is coming from the line of Kevin Reynolds with Wunderlich Securities.

You may proceed.

Good afternoon, everyone.

Hi Kevin.

George or Peter, either one could take this.

I am curious on two questions, one, is just a point of information that I need some clarification on, it looks like your intangible jumped a little bit this quarter, and I was curious why that was?

I didn't see that in there.

It was not a huge number.

But the second number is if your investment in recruiting talent over the last few years is starting to pay off, and you are going to get market share gains in the loan portfolio, as well as a stronger Texas economy, so we are going to get used to better than average loan growth here versus peers, should we see salary expense starting to move higher along with that?

It looks like it was kind of flat sequentially there.

Should we start building that up as well as the provision as we get into2012 and 2013 and beyond?

We'll get back to the last one and then we can go back to the first one.

I don't believe you are going to see salary expense grow exponentially.

I think that as I mentioned to you, we have built in a lot of capacity in the Company in the last 18 months, two years.

I don't see tremendous increases like we saw before.

I do, as you have heard me say before, we will take advantage of opportunities no matter when and where they arise, but I don't believe you need to put a big number on our salary expense on a go-forward basis increasing.

In the linked quarter remember the FICA expense comes way down, but as the year progresses and we see performance relative to plan, then we can see an increase in the incentive expense.

Okay, okay.

Not necessarily salaries.

And Kevin, the increase in goodwill or intangibles related to the portfolio acquisition that George mentioned.

Okay, okay, thanks a lot.

Good quarter.

Thanks.

Your next question is coming from the line of David Bishop with Stifel Nicolaus.

Hello, good evening gentlemen.

Hi David.

George, to be sensitive in terms the competitive nature of the portfolio, but in terms of the premium finance sector industry there, has there been any sort of sea change in terms of the competitive environment there, that is producing some of these opportunities for growth there?

Maybe what are you seeing out there that may be changing in terms of the outlook?

The business itself is way down.

If you look at the P&C business across the board with insurance agencies, they are not producing as much business as they would like.

So it is very competitive.

But what you see in this business is like what you see I think in the mortgage business.

There is a lot of consolidation that is going on now, and will continue to go on.

You are going to see some of the smaller players, or the people who want to get out of the business for whatever reason, or it doesn't move the needle for them, or whatever it is they're going to want to move on.

These are these nice niche opportunities in the $100 million to plus range to pick up a nice portfolio and grow the business.

We have got a fabulous team on board to do this.

They know exactly what they are doing.

This is the third one we have done.

It is the only place in the Company we let anybody acquire anything.

We all grow organically, and so does he, but he does take advantage of opportunities that are out there.

So the answer, the long answer to a short question, but I do think there are opportunities like this in the market place.

I think we will continue to be sensitive to that, and we will see what happens.

But fortunately we have got a good group that can produce organically also, even though the business is tough and it is competitive.

Great.

Thanks, George.

You bet.

(Operator Instructions).

Your next question is coming from Matt Olney with Stephens, Inc.

You may proceed.

Yes, thank you.

Hi Matt.

Hey, George, I was thinking on your components on the OREO balance, and how this could continue to improve going forward.

I think you have a reserve on that OREO balance of around $2 million.

How should we be thinking about that OREO balance reserve going forward?

It is more than that, Matt.

It is set to $8 million or $9 million.

I don't have that number specifically in front of me.

But the number I gave you, and the number we show you is a net basis, so we have a net $27 million in ORE today.

So you would have to add the reserve back to that to get the absolute balance.

That is what, $36 million or something like that.

$9.2 million.

Yes, $9.2 million in the reserve.

So it all would be $36 million of booked ORE.

And so when you are talking about OREO disposition with a limited amount of loss, I assume you are including that OREO balance, is that fair to say?

Yes, we are applying the reserve to that balance, and we believe at this point we have looked awfully hard at it, that we really have very little additional unreserved loss in that portfolio.

And to think about the OREO costs going forward, is it fair to say that we shouldn't see OREO costs elevate too much from Q2 levels of around $1 million?

It should go down, you are right.

With what has been done and what is in the process of being done, we would expect in the next quarter or two to see that those fees go down.

Okay, great.

Thank you.

We can say, by the way, Matt, migration from non-accrual of loans to foreclosed assets with no impact on valuation reserves or provision that has not been applied, reserves that have not been applied.

Sure, okay, thank you.

Your next question is coming from the line of Bill Young with Macquarie.

You may proceed, sir.

Good evening, guys.

Hi, Bill.

Most of my questions have been answered, but I have two for you here.

Could you just kind of remind us what the average book of business is for your more mature RMs versus some of your more recent hires?

Well, again it depends on the line of business, but I guess if you are talking about just typically a commercial lender, they can have anywhere from $100 million down.

But we like to see a good commercial lender handle $100 million.

Okay.

Great.

Then my second question is you have been fairly aggressive in running down time deposits.

Do you kind of see it slowing down at this level, or potentially growing, or just to follow-up on an earlier question, do you expect to be more aggressive on maybe pursuing the deposit growth in the back of the year to keep up with the growth on the asset side?

I think we have $500 million more to go in loan growth before that becomes an issue.

But we are obviously very aggressive in treasury management product pursuit.

That will increase both DEA and time deposits.

Bill, I think Peter mentioned earlier that we have a number of customer relationships that we feel we have the ability to bring back on our balance sheet when we need to in terms of funding.

These are commercial deposits that we feel comfortable are there for us when we want to go get them.

So that is some extra additional cushion.

Sure.

Could you maybe kind of generally speak to maybe the size or the balance of those kind of off-balance sheet client relationships?

Well, these are the relationships that we have talked about back and forth.

They are the treasury management relationships that we have worked hard to provide product for that helps them be profitable.

Things like title companies, broker dealers, people like this, that continue to generate a lot of issues.

Okay, great.

Thanks, guys.

With no further questions in queue, I would like to hand the call back to Mr.

George Jones, CEO, for closing remarks.

Thanks everyone for listening this afternoon.

We certainly appreciate your interest and your ownership.

You can be assured that your management team will continue to work hard on your behalf.

Thanks again, and we will end the call.

Ladies and gentlemen thank you for your participation in today's call.

The presentation has ended.

You may now disconnect.

Have a good day.