Cullen/Frost Bankers, Inc. (CFR) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cullen/Frost Bank Second Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, please go ahead.

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

Thank you, Greg. Good morning, and thanks for joining us. It's my pleasure today to review Cullen/Frost's second quarter 2011 results. Our Chief Financial Officer, Phil Green, will then offer additional comments. After that, we'll both be happy to answer your questions. Cullen/Frost's strong performance this quarter reflects our ability to operate well in a slowly recovering economy. Our steady and consistent growth during a transition year of changing regulation is a credit to our employees. They're not distracted with the roller coaster markets or the gyrations within the economy. Our focus remains on providing the best possible service to our customers and the result is another solid quarter. During the second quarter, net income rose to the second-highest level in the company's history, the best since the third quarter of 2007, which was before the financial crisis began. Our net income for the second quarter was $55.7 million, up 5.3% from the $52.9 million reported in the second quarter of 2010. On a first year basis, earnings were $0.91 per diluted common share compared to $0.87 per diluted common share one year ago. Return on average assets and equity were 1.23% and 10.45%, respectively, compared to 1.26% and 10.67% for the same period in 2010. We continue to provide outstanding value to our customers, affirmed by a solid 7.4% growth in deposits. Since last year's second quarter, much of our deposit growth has come from new customers, underscoring the strides we are making through our focused and disciplined calling effort. New customer relationships are driving our growth. For the second quarter of 2011, average total deposits were $14.8 billion, up 7.4% or $1 billion over the $13.8 billion reported for the second quarter a year ago. For the second quarter of 2011, net interest income on a taxable equivalent basis increased to $159.5 million, up 2.9% over the $155.1 million a year earlier. This increase primarily resulted from an increase in the average volume of interest-earning assets, and was partly offset by a decrease in the net interest margin. Strong growth in deposits help to fund the increase and the volume of earning assets. Net interest margin was 3.95% for the second quarter, compared to 4.3% for the first quarter of this year and 4.18% for the second quarter of 2010. Noninterest income was $70.8 million for the second quarter, up almost $900,000 from $69.9 million for the second quarter of 2010. Trust fees were $19 million, up $1.9 million or 11.4% from the second quarter of 2010. Trust fees included a $1.8 million increase in investment fees, which generally are assessed based on the market value of trust assets that are managed and held in custody. Other charges, commissions and fees were $8.5 million for the quarter, an increase of 5.6% from the $8 million reported in the second quarter of last year. The largest component of this increase was mutual fund management fees from Frost Investment Advisors. Deposit service charges were down $1.3 million or 5.2% for the quarter due to new regulation, which reduced insufficient funds and overdraft surcharges on both consumer and commercial accounts. Noninterest expenses for the second quarter were $136.8 million, up 1.6% from the second quarter of 2010. The 5% increase in salaries resulted from normal annual merit raises. We also ramped up our advertising and brand promotion to help spread the word about Frost difference and to grow our customer base. Deposit insurance expense was down $2.8 million from last year and reflects well on a high percentage of funding with our core deposits. Turning to loan demand during the second quarter, average loans were $8.1 billion, the same as the second quarter last year. In this environment, holding our own and maintaining a relatively flat loan position, requires a lot of work. Our calling efforts continue to be at high levels. We also need to recognize that our collection and payoff of problem loans totaled $100 million this quarter. Although an ongoing lack of confidence among business owners continues to pressure lending, we have seen slight advances on revolving lines, as well as an increase in new customer requests. These are a sign that business customers are beginning to expand again. That positions us well for stronger growth when confidence returns. As we discussed in the first quarter, in this weak economy, many of our competitors have lost their pricing and structured disciplines. However, we are maintaining our good relationships. New loan commitments are up 27% this year compared to last year, remember that the comparison is to an extremely low base levels a year ago. On a linked-quarter basis, new commitments were up 36%, and June was our best month in 3 years. Credit quality continued steady and consistent improvement, which merits the Texas economy. Absent any significant deterioration in the national economy, we expect further improvement over the next few periods. OAEM [ph] and classified loans declined for the fourth consecutive quarter. For the second quarter of 2011, these loans declined 7.5%. Nonperforming assets experienced a slight increase during the second quarter of 2011, but are still down more than 25% from their peak in the third quarter of 2009. We expect further reductions or improvements in nonperforming assets this year. Net charge-offs were $10.6 million in the second quarter, a decrease from $11.4 million in the previous quarter. We expect this gradually-improving trend to continue like previous quarters. The second quarter write-downs were adequately reserved for -- in prior reporting periods. Delinquencies ended the quarter at $58 million or 0.72% of total loans. That's one of the lowest quarter end dollar totals in many years. Overall, credit quality measures suggest that conditions of our loan portfolio should continue to improve. I'm pleased that our capital levels remain stronger than before the financial crisis began. Tier 1 and total risk base capital ratios for Cullen/Frost were 14.37% and 16.42%, respectively, at the end of the second quarter. Each ratio is in excess of well-capitalized levels. The ratio of tangible common equity to tangible assets was 9.12% at the end of the second quarter, compared to 9.05% at the same quarter last year. Cullen/Frost posted steady results for the quarter as the economy slowly gained some traction. We expanded customer relationships and managed expenses during a challenging revenue environment and changing regulations. Before I turn the call over to Phil, I'll close with a few comments about the economy and why I'm optimistic about Cullen/Frost. It's generally accepted that bad public policy decisions from Washington and irresponsible behavior by some of the largest financial firms on Wall Street led to our current economic downturn. So it's a little ironic that everyone is looking to Washington for the answers. Our focus needs to be on Main Street and our nation's small businesses, where most jobs are created and where our economic recovery will occur. A recent U.S. Chamber of Commerce survey of small business owners confirmed some of the same things that we've been hearing from our customers. Economic uncertainty, America's growing debt and deficit problem and excessive government regulation are the most important concerns facing small business owners. Uncertainty and overregulation are job killers for businesses of any size. Well, enough about Washington. Let's talk about a few positive things. We're blessed to be in Texas. Texas entered the recession late and came out of it at a stronger pace than most states. Texas has created more than 4 out of every 10 new jobs in America since June of 2009. Projected job growth in Texas this year is 3% to 3.5%, a full 1.5% ahead of the nation. Texas unemployment is a full point lower than the national average. With stronger energy in high-tech sectors, stable housing markets that didn't go through the boom bust cycles, Texas continues to be one of the country's strongest states. Our manufacturing is strong, particularly in high-tech and petrochemical exports are booming. Energy is very strong. In fact, the rig count is almost at 2008 levels. Housing prices are flat and there's less wealth effect. Despite concerns about their economy and regulation, there's always opportunities for those with a solid business plan to treat customers the right way. At Frost, we have aggressively expanded our customer base throughout the recession and continue to reach out to new customers during the recovery. Our capital and liquidity are strong, we remain focused on our value proposition, strong culture and excellent customer service. We received the highest customer satisfaction ranking in Texas in retail banking from J.D. Power and Associates 2 years in a row. Greenwich Research recognizes Frost with more excellent awards for small business and middle-market banking than any other bank in Texas. 2011 is a transitional year in the industry and at Cullen/Frost, requiring us to adapt our business model to new rules. But regardless of what legislation or regulation come out of Washington, we will remain true to our value proposition. We will treat customers the right way, and that is how we intend to achieve our goals of consistent and superior financial performance for our shareholders. And with that, I'll turn the call over to our CFO, Phil Green.

Thank you, Dick. I would make a few additional comments about the quarter and our outlook for the year, and then I'm going to turn it back over to Dick for questions. As Dick said, we are pleased with our results for the quarter, even though the general economy continues to be softer than what we'd hoped. And in spite of the fact that loan volumes continue to be flat, we continue to make good progress building the business. I think what Dick said about organic growth helps demonstrate this, and I want to expand a little further on this subject. Our overall average deposits have grown 7.4% versus second quarter of last year, but I'd like to focus on deposit growth not including public funds, correspondent banks or brokered MMAs, so I'm essentially just dealing with our core commercial and consumer deposit base. We're talking about 91% of our overall deposits here. These deposits grew in excess of 10% versus last year, and what I'd like to do is look a little bit behind that growth. First of all, 54% of that increase, obviously over 1/2 of that increase, comes from net new customer growth. That's people who previously had no depository relationship with us and to repeat, that growth is net of account closures and we're very excited about that. I think another interesting point about this annual increase is that it's heavily weighted to commercial relationships. It represents about 70% of the total growth. I also think that this helps, put shoe leather on Dick's point that our commercial calling efforts are building the underlying business, even if we haven't yet seen robust loan growth. Looking just at this commercial deposit increase shows that almost 2/3 of the growth has come from net new customers. So it's encouraging to observe that our commercial deposit growth over the year is not just the result of the same businesses holding more and more balances in the same accounts in response to the economic uncertainty. Now while we believe that we'll see a drop in the average account balances as the economy picks up and businesses utilize excess liquidity, if our new customer trends continue, we may, in fact, be able to offset that liquidity utilization and instead of seeing an overall deposit drop, see more of a flattening such as what we saw happen during 2004. And that means we may ultimately be able to use more of our current liquidity for more core earning asset growth and less for meeting potential deposit outflows. Now turning to our net interest margin, we did see a drop of about 8 basis points from the previous quarter, however, all of these resulted from our strong deposit growth and the buildup of another $0.5 billion in liquidity during the quarter. This actually impacted the quarter by 11 basis points, so we would've shown some margin expansion without it. And that margin improvement came from a full quarter of the investments that we made in the first quarter, which we previously reported to you as well, as a slight decrease in our deposit costs. And I said last quarter, that we did not expect further deposit rate declines, but I was wrong. We saw all the major banks lower slightly over the last couple of months, which allowed us to respond with some modest cuts. Finally, looking forward at our expectations for the year, we feel that the current average of analyst estimates is reasonable. And with that, I'll turn it back over to Dick for questions.

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

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

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

It's a great question, John, and I'm optimistic. There's a lot of things happening. There's no doubt our calling effort remains strong, and our customers, as you just said and I said, have began to request some financing, and that's led to these new commitments increasing compared to a low point last year. Also, one month doesn't make a trend, but June was a good strong month of increasing commitment. But let's look at some of the headwinds. As I've said, we paid -- had a $100 million of payoff of problem loans, that's good news. Obviously, we'd prefer to heal those companies back and put them back in the performing portfolio, but you can't always do that. And then if you look at the growth, quite frankly from June of last year to June of this year, the C&I and commercial loans, they've grown $121 million. Our commercial real estate loans are down $37 million, consumer down $67 million and we only got $49 million worth of mortgage loans, our one-to-four-family, they're down $13 million. So about as fast as you ride your bicycle forward, which is the staff's doing a great job of making new calls and building commitments. And we've got to remember that most of this growth in C&I loans came this year in the last 6 months. So you battle this runoff, but -- and so it's -- I'm optimistic as I've said about the problem loans. It's a slow process, but it's improving every quarter. And we just -- we're doing the right thing to keep calling on customers and expand the base. I can't tell you how fast it's going to go up. If you come back to it, the real essence of it is, the small business and mid-sized businesses. They are still frozen. They -- I was amazed at one of our staff was looking through the information, that even where we call on a customer and there's no difference in the proposal, ours, asking for the business and the incumbent, they often stay with the incumbent because they're scared to death to make any change that would create risk. And we've just -- we're in an environment where the study that I referred to in regard to the U.S. Chamber, what you've got is you've got the people that are -- the economic uncertainty is about 55% of what they're worried about the future. There's a lack of sales, we're not at sales volumes where we were, the uncertainty about what Washington will do next, the requirements of healthcare and there's too much regulation. Those are the 5 points that small businesses talk about, and they talk about that over the next year, 64% will keep the same number of employees. That's not what's going to grow this economy, and that's the headwinds we're facing. I know that's a long answer. We're doing the right things to call on customers and build commitments and in time, that bottom number will grow, but it's tough right now.

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

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

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

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

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

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

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

Just to reinforce something Dick alluded to earlier. Our C&I growth on a linked-quarter basis was up $119 million, at an annualized almost 13%. Then you're looking at the 7% annualized drop in Commercial Real Estate and a 6% annual -- annualized drop for the quarter on linked-quarter period and basis on consumer real estate. So and then you've got just some drops in some small other areas. I think we're making progress in growing our commercial business. I think what we pointed out with regard the commercial relationships on the deposit side, say a lot about that. So we really can't speak to what other banks are doing there or have been and we just do what we do, and we think that we're making progress. And when we see things, on the whole turn around, we think we'll show some good momentum.

I might just add one other thing. We do some -- stays about real estate outlook. Of course, if I want to talk about real estate, but it's interesting in Texas to get your comparison. Vacancy levels have improved in all our cities we operate, and rent rates are up in all the cities. So it's happening. One other thing's that multi-family is very strong and it's doing well, which I think we would expect with this housing problem across the country. People were -- I remember when I started working at the bank, I couldn't afford a house, so I rented an apartment. That's, I didn't feel like a second-class citizen. It's the right thing to do. I'll share those comments with the Fed. So there -- it's getting better.

Your next question is from the line of Brady Gailey with KBW. Brady Gailey - Keefe, Bruyette, & Woods, Inc.: A question about the margin. If you look over the last year, it seems to be bouncing around the 4% level and down a little bit in the second quarter. But if we see a low-rate environment extended for the next couple of years, I was wondering what potential downside, what the downside would be to the margin? I mean, do you think that it would be under 20 basis points or over? What risk do we have to the margin from an extended low-rate environment?

Well, it wouldn't be good because it's the nature of the business. But I couldn't say it would be 20 or whatever, it depends on a lot of assumptions. I guess I'd just say you have to see what's your underlying assumption on loan growth in that, right, because loan growth is going to be a pretty big determinant of what margin does, right, particularly when you've got the kind of liquidity that we have. So if you're -- if you got a rate environment that's flat for 2 years, I think, in your example, probably means that there's going to be some challenges in the economy for that period of time. So if you assume that loan growth is not robust, and we have some runoff of some other securities, yes, there'll be some -- there will be some pressure on the margin. And you can do the math and determine how bad you want that to be or how modest you want that to be. But I mean, you're right, I mean, flat rates for 2 years will not be a good thing for margin. Brady Gailey - Keefe, Bruyette, & Woods, Inc.: Okay. And Dick, I was wondering if you could update us on your thoughts about acquisitions. Your company continues to build capital at a faster pace than the balance sheet is growing, and I know there's a lot of people talking about a consolidation wave coming in Texas with the amount of smaller banks within your state. I wondered if you could just update us on your interest in acquiring other banks and what you see over the next couple of years in the state of Texas?

Well, we hadn't really changed. We're aggressive lookers and conservative buyers. I don't have to tell you there's a lot of different dynamics with all these changes in regulation about what a bank's worth, so you got to take all of that into consideration, but certainly, we will continue to be aggressive lookers.

Your next question is from the line of Steven Alexopoulos with JPMorgan. Steven Alexopoulos - JP Morgan Chase & Co: Maybe I'll start, I know we're going to get the details in the Q, but Phil, could you give us what the average loan and security yields went to in the quarter?

Yes, I think I have it here, hang on just one second. For the second quarter, our average loan yield went from 5.01% to 5.02% so really not much change. And on the security side, we went from 4.73% to a 4.79%. One thing you did see, as I mentioned, we did see a pick up in liquidity of about $0.5 billion. Steven Alexopoulos - JP Morgan Chase & Co: What was it that drove the increase in securities yields in the quarter?

Well, we'd had some security purchases last quarter, that would have affected some. I mean, it was only -- was it 6 basis points? But as I mentioned, we would've had increase in the margin, had it not been for the liquidity increase, and that would've been driven primarily by the security purchases that we had last quarter, a full annualization of those. Steven Alexopoulos - JP Morgan Chase & Co: Any updated thoughts on the impact from Reg Q to the margin? And are you now paying interest on commercial DDA?

Well as we have always said, we don't think it's a big factor early on because rates were at 0. We have -- I think it's -- we're still shaking out in terms of what the lay of the land is going to be competitively. I'm aware of one bank that sort of a larger regional bank that I think it's got a 1.1% offering. So there's that kind of silly response that we've predicted there'd be in some corners. But on -- by and large, there's just been pretty modest reaction to it. And we haven't really seen any impact on us at this point. Steven Alexopoulos - JP Morgan Chase & Co: Maybe just one final question. Last quarter, you guys talked about competitors going back to old habits and underwriting having short memories. This quarter, you're showing pretty good C&I loan growth. Has the competitive environment improved from last quarter?

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

Your next question is from the line of Brett Rabatin with Sterne Agee. Brett Rabatin - Sterne Agee & Leach Inc.: I wanted to ask on the initiative you have with marketing, how much we should expect in terms of financial impact on expenses? And then just the rollout of that initiative, I know you've been doing that earlier in the year as well, but just maybe you can give a little more color around that implementation that you have planned.

Yes, we had mentioned before, it wasn't a big impact on the first quarter. It began to ramp up on the second. Second quarter linked-quarter basis, other expenses increased by $1.6 million related to advertising and promotion. And compared to a year ago, we were up $2.1 million. So you're beginning to see some impact on that. Brett Rabatin - Sterne Agee & Leach Inc.: Okay. And then I just wanted to ask from a credit quality perspective, and your credit quality's very good, but nonperformers were up just a little bit linked quarter, are you seeing downward migration of -- or improvement, I should say, in the problem loans? And can we expect the provisioning in the reserve levels to maybe continue to abate?

We're -- as I mentioned, we're continuing to see positive trends in all areas. Nonperformers did move up a little bit which is kind of an unusual. Performing, nonperforming loans that will continue to pay the interest and regulators allow that in this particular case. I think we'll continue to see positive trends as you know, and we've always said, the reserve is really related to the classifications and they continue to improve. Brett Rabatin - Sterne Agee & Leach Inc.: Okay. And then just one last question, on the interchange topic. I think your total revenues last quarter from a bank card interchange fees were approximately $7 million. Can you give us some thoughts on how you see that impacting you guys as the -- as Durbin is implemented in October?

I think our expectation is we'll take about a $4 million, round numbers about a $4 million a quarter hit because of the Durbin impact. Brett Rabatin - Sterne Agee & Leach Inc.: And would you anticipate changing anything in terms of pricing or policies as a way to offset the decline?

Not related to that. I mean, that is what it is. We're dealing with all of the changes that have occurred from regulations, run our business tight, continue to promote our value proposition that Dick's talking about. And where we are changing our products, it's really taking advantage of movement in the market around us or others to create products that are more to a liking of customers, frankly, and have lower barriers to entry, lower barriers to doing business with us, so that we'll be able to expand our customers more and more in this environment. It's really, and we said this before, in the loan-to-deposit ratio over time, it's going to improve our profitability more towards where it was before. I frankly don't think there's enough money to be made to make up for all of the things that have happened to the industry, just by continuing to load fees on the customers. What we know and believe is that by increasing that loan deposit ratio back to where it was, a couple of years ago, let's say, from the really low levels we are today, and utilizing these tremendous amounts of liquidity. And we believe, I should say, at some point, as the capital rules kick in, we'll see some more rationalization on pricing. We think that's really where the operating leverage is for our company. And so we're not really trying to cut our nose off despite our face with our customers by letting them bear the brunt of a regulatory change that's happening in Washington.

Your next question is from the line of Emlen Harmon with Jefferies. Emlen Harmon - Jefferies & Company, Inc.: We started to touch on fees a little bit in your last response there. I was hoping to maybe get a little bit more color on that. We've heard -- we've heard from some others that the larger banks on the commercial side are starting to take up fees, for example, commitment fees, sort of other fees that they're charging their commercial customers. Could you give us a sense of just what your outlook is there in terms of the fee growth? And just how you plan to position yourself competitively?

Quite frankly, we have looked at fees on commercial and have improved that over this last year, really to just get to a point of being competitive. Not a reaction but to just, as we looked at the market, quite frankly, there's room to, as you mentioned, one example is the commitment fee. And so we're moving more towards the market in that regard. And you just look at a lot of things in the commercial things. They ensure that we're given excellence at a fair price, and that's exactly what we're doing, which involves rate and fees and balances and the total relationship. Emlen Harmon - Jefferies & Company, Inc.: Okay, got it. If I could, as a follow-up, just could you talk about this capital deployment part in this plan? You did talk about M&A a little bit. But we're curious to -- it sounds like you're being conservative there, but just curious to hear your thoughts on kind of where the dividend goes from here and whether you're thinking about buybacks at all?

First of all, I'd say with regard to dividend, we said before that our level of payouts is pretty much in the line of where we think it ought to be, which is roughly 1/2, about 50%. So I wouldn't expect anything dramatic with regard to the dividend. With regard to buybacks, I think the thing that we've said also over time, is we've been careful with the amount of capital that we're maintaining as they roll out these capital rules. And Basel III, we've gotten some more insight of where that's going. And one aspect of it, I think that for all banks, is really a serious issue, is their decision to include the OCI impact from unrealized securities gains and losses and capital. And if they really do follow through with that, I think that what it means is, even more capital for the industry, particularly community banks, but also the larger banks or a smaller investment portfolio. And so as we -- but there's a long way to go, I think, before we finally decide what happens with those rules. So we're going to be watching those very closely to see what the impact will be. So that's something that we need to be mindful of as we consider any buybacks in the near term. I think what our expectations are, we're going to continue to husband capital, we'll watch these developments, and once they finally shake out, it'll give more clarity in terms of what our response can and should be on capital.

[Operator Instructions] Your next question is from the line of Scott Valentin with FBR Capital Markets. Scott Valentin - FBR Capital Markets & Co.: With regards to securities portfolio, you mentioned that the yield had gone up a little bit. Was there any significant change in duration or any of the characteristics to the portfolio?

No, there really wasn't. The duration of the portfolio is 3.95 years today, and that assumes the Bloomberg duration for our municipals, which have calls in it and so it adjusts that based upon expectations there. So no real change on the duration. Scott Valentin - FBR Capital Markets & Co.: And then you mentioned before or someone asked the question before about low-rate environment and the pressure that was on margin. And one of the things you can control is expenses, and just you're an efficient bank. Just wondering if there's opportunities anywhere to maybe cut expenses?

I'd say there's always something you can do just by managing $5 million, and I think our people have a good view for that. A wide ranging expense reduction program, I think, is not in the offing for us, because I think that we've got our expenses matching what it is we do, our operating levels, service levels that we provide. And I think our people have done a good job of controlling them. So a lot of times, these kind of programs are temporary anyway so I mean, just being honest, that's not really the focus of us right now. What we're focused on is trying to grow the business in the low-rate environment, a high-rate environment, flat rate environment.

And just add to that, he said it well. Certainly, the way we look at expenses is from a strategic priority, it's always a commitment of ours to reduce unnecessary expenses. But as he said, we're going to stay with our model of continuing to give outstanding service. I don't think you'll find this company wastes money in any way. We -- you have known us know that Phil and I personally look at any new expense over $10,000. That's not to play a government game, but mainly, it is to make sure that the business managers are seeing that it's rational to spend that money. And so we approve a lot of them. And so I think we've got good expense control, and it's really a compliment to our staff and the culture in which we're in. Scott Valentin - FBR Capital Markets & Co.: Okay. One final question, just you mentioned the Texas economy doing far better than the U.S. overall. Are there any MSAs that stand out in Texas like San Antonio maybe versus Houston? Where you're seeing maybe better opportunities?

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

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

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

Your next question is from the line of Brett Rabatin with Sterne Agee. Brett Rabatin - Sterne Agee & Leach Inc.: I just had a quick follow-up. Phil, I think in your prepared comments, you mentioned comfort with the current consensus. I forget how you exactly say it.

Average to average, I think. Brett Rabatin - Sterne Agee & Leach Inc.: Average, which is 3.46%, which would essentially imply kind of a pace of $0.83 in the second half of the year compared to $0.91 this quarter. Can you comment on specific variables or that's obviously a de-con from the first half of the year?

Well, I'd just say what I said, further commenting on quarterly trends. But I mean, one thing I remember is you got to, Durbin's kicking in, for example, and these regulatory things, so. I guess that's the only specific color that I'd make on it.

Your next question is from the line of Bob Patten with Morgan Keegan. Robert Patten - Morgan Keegan & Company, Inc.: All my questions have been asked but Dick, I guess my takeaway here is you're feeling a little better than you felt in the last couple of earnings calls, just about the growth starting to look a little better than it has.

That's correct. I'm scared to say it, but I've been using words like slightly, and I gave you all the numbers and they're positive. And when you talk about those commitment levels and somebody talked about it earlier, and that was the first question I asked. I mean, you look at these commitments, it's so good then you wonder, "Well, why aren't your loans up?" And of course, as I pointed out, the base was so low last year but it is positive. I mean, you just can't get around it. Robert Patten - Morgan Keegan & Company, Inc.: And if you could just take 30 seconds and just remind us about how many calls your lending officers make on a monthly, quarterly basis? What the sales culture is doing right now to take advantage of sort of this opportunity?

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

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

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

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