My name is Heidi, and I will be facilitating the audio portion of today's interactive broadcast. At this time, I would like to welcome everyone to the Cullen/Frost second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console. I would now like to turn today's call over to Mr. Greg Parker, Executive Vice President and Director of Investor Relations. Mr. Parker, you may begin.
Thank you, Heidi. This morning's conference call will be led by Phil Green, Chairman and CEO, and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call over to Phil and Jerry, 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 Phil.
Thank you, Greg. Good morning, and thanks for joining us. Today, I'll review second quarter 2017 results for Cullen/Frost, and our Chief Financial Officer, Jerry Salinas, will also provide additional comments and give insights into our outlook before we open it up to your questions. In the second quarter, Cullen/Frost earned $1.29 a share. That compared to $1.11 in the same quarter of last year and $1.28 in the first quarter of this year. Our second quarter results represented a steady continuance of the momentum we built coming out of the second half of 2016. During the second quarter, average loans were $12.3 billion, up more than 6% from the second quarter last year. On a linked quarter annualized basis at the end of the second quarter, loans were up more than 10%.
Our provision for loan losses was $8.4 million in the second quarter, down from the $9.2 million reported in the second quarter of 2016. Non-performing assets totaled $90.2 million in the second quarter, down by more than $28 million from the first quarter. This quarter-to-quarter improvement was primarily due to a combination of energy resolutions and charge-offs. Net charge-offs in the second quarter of 2017 were $11.9 million, compared with $7.9 million in the previous quarter and $21.4 million in the second quarter of 2016. Annualized net charge-offs represent 39 basis points of average loans for the second quarter. One previously non-accrual energy credit accounted for $6 million of second quarter charge-offs. Overall, delinquencies for accruing loans at the end of the second quarter were only 58 basis points of period-end loans, which is the second lowest level of delinquencies over the past eight quarters.
Total problem loans, which we define as risk grade 10 and higher, fell by about 6.5% in the second quarter when compared to the first quarter. This was primarily the result of favorable resolutions like upgrades, paydowns, and payoffs. Energy-related non-accruals decreased to $55.5 million at the end of the second quarter, compared to $78.7 million at the end of the first quarter. Outstanding energy loans at the end of the second quarter totaled $1.4 billion, or 11.3% of total loans. That compared with over 16% at its peak in 2015. Over the past several quarters, Frost has been building on momentum. We've concentrated our focus on steady and sustainable growth. We've got an attractive product mix, we're seeing positive responses from customers. We're also well-positioned as interest rates slowly climb.
Average total deposits in the second quarter rose to $25.7 billion, up by almost 7% from $24 billion in the second quarter of last year. On the consumer side, we continue to see excellent growth in accounts, customers, and balances. As an example, same-store sales growth for new account origination is up by 27% compared to the second quarter of 2016, with strong growth in all regions. 14% of our account openings came from our online channel, which includes our Frost Bank mobile app. That's more than double the level of a year ago. In the second quarter of 2016, total average consumer loans grew by 10.5% compared to the second quarter of 2016. We're seeing especially good growth in consumer real estate and private banking as we continue to work hard to develop those segments further.
Over the last several years, we've taken several steps to enhance our competitiveness in the retail segment and lower barriers to entry into our bank versus the too-big-to-fail banks. Some examples of these efforts include building the second-largest free ATM network in Texas with our company-owned machines, as well as our branded Corner Store network and our agreements with the H-E-B grocery chain. Implementing 24-hour telephone customer service with representatives who actually answer your call. Building our branded award-winning web and mobile technology. Expanding our physical presence in our major markets. Streamlining our processes for mobile and web-based account openings in order to simplify the way people can build a relationship with Frost. These digital account openings have helped us grow while still applying the same Frost standards that are in place for traditional account openings.
More recently, we took the step this week of raising interest rates on our high yield money market accounts and our CD offerings. The rates we're offering on these accounts are above most of our competitors and much higher than the largest banks. This is the right move at the right time for several reasons. Interest rates have now moved up 100 basis points from the bottom and are expected to rise further. The industry will ultimately have to respond with higher rates to compete with offerings from non-bank alternatives available to customers. It can either respond in a timely manner or risk being too late and losing relationships and trust along the way. We'd also like to see increased growth in our time account relationships, more in line with the success we've experienced building checking accounts.
Finally, we believe this move is in line with our culture-based value proposition of giving a square deal to customers that provides excellence at a fair price. We're also building momentum on the commercial side with new loan opportunities up by 27% compared with last year. Importantly, we've seen an increase in the volume of both smaller and larger commitments. We've made significant progress building our core loan portfolio, which will help provide steady, sustainable organic growth. We define the core portfolio as loan relationships under $10 million in size. New commitments under $10 million were up by 32% in the second quarter compared to last year. It has been a major priority for us to once again grow this portfolio and established a more balanced growth between larger and small to mid-size relationships. Our bankers have been working hard on this, and we've seen great results.
In dollar terms, core loans are up $400 million from last year or 7.2%. That doesn't mean we're ignoring larger deals. New commitments at or above $10 million were 53% higher than last year. Overall, new loan commitments are up by 42% from last year. The above average organic growth that we provide through great customer experiences makes people's lives better. That was confirmed once again by our financial results and the recognition we get from third parties like J.D. Power, Greenwich, and the American Banker Reputation Institute survey. Let me say that none of this could happen without great people. The achievements we've seen over the past several quarters come from our people working with our customers to nurture the long-term relationships that make Frost unique. I'd like to thank everyone at Frost for their hard work and dedication as we look further ahead to our accomplishments.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.
Thank you, Phil. I'm going to make some general comments about the Texas economy. I'll give some additional information about our financial performance for the quarter before updating our 2017 guidance. I'll turn the call back over to Phil for questions. The Texas economy strengthened in June with job growth and lower unemployment. The Dallas Fed reported that job growth in the second quarter was an annualized 2.8%. Additionally, Texas employment expanded at an annualized 3.6% in June, well above its long running 2% average. Texas unemployment, while slightly higher than the national average due to a sharp increase in the state's workforce, is down from 5% in March to 4.6% in June. Looking at the individual markets, the Dallas-Fort Worth labor market remains tight. June unemployment in Dallas was 3.8%, while the Fort Worth unemployment rate declined to 4.5%.
In the first half of 2017, Fort Worth jobs grew at an annualized 2.7%. It now leads all Texas metro areas in job growth. Austin continues to expand at a slow to moderate pace. Annualized job growth was 1.9% in June with a very tight labor market. Over the previous three months, most sectors added jobs. The fastest growth was in electronic parts and machinery production, finance, healthcare, and state government. Austin's unemployment rate in June was 2.9%, the lowest in the state. San Antonio employment grew at an annualized 1.4% in June. Growth over the past three months was strongest in construction, mining, professional services, and healthcare. San Antonio's unemployment rate was 4% in June. Leading indicators from the Dallas Fed suggest a stronger growth in San Antonio in the second half of the year. The outlook for Houston is cautiously optimistic.
The energy sector in Houston continues to improve. Mining related employment grew nearly 8,000 jobs in the first half of the year after bottoming out in December 2016. Non-farm employment grew 3.1% on an annualized basis between February and May, with the largest gains coming from professional and business services and manufacturing. Houston's unemployment rate in June was 5.1%. For Texas overall, the Dallas Fed projects 2.8% job growth in 2017. Looking at our financial performance, our net interest margin for the second quarter was 3.70%, up six basis points from the 3.64% reported last quarter. The increase was driven by higher interest rates, which had a positive effect on both our yields on loans and balances kept at the Fed. Lower yields on our investment portfolio had a negative impact on the net interest margin.
The yield on earning assets for the quarter was 3.76%, up eight basis points from the prior quarter. The taxable equivalent loan yield for the quarter was 4.32%, up 17 basis points from the first quarter. Average loans of $12.3 billion for the second quarter were up $185 million, or 6.1%, on an annualized basis from the $12.1 billion last quarter. The taxable equivalent yield on the investment portfolio was 3.93%, down six basis points from 3.99% for the previous quarter. It was impacted by a lower yield on our municipal portfolio. The taxable equivalent yield on our municipal portfolio was 5.38%, down six basis points from the prior quarter. As a reminder, we had approximately $400 million in municipal securities with an average tax equivalent yield of about 7.3%, that, as expected, were called in February, contributing to the drop in the taxable equivalent yield from the prior quarter.
We are currently projecting that about $200 million in municipals will be called in the third quarter at an average TE yield of around 7.5%. Our plan is to utilize that cash flow and some liquidity to purchase about $250 million in municipal securities starting in the third quarter. The total investment portfolio averaged $12.39 billion during the second quarter, down about $157 million from the first quarter average of $12.55 billion. Our municipal portfolio averaged about $7.28 billion during the second quarter, flat with the previous quarter. During the second quarter, we purchased approximately $133 million in municipal securities, yielding about 4.5% on a TE basis with an average life of about 21 years. At the end of the second quarter, about 67% of the municipal portfolio was pre-refunded or PSF insured.
The duration of the investment portfolio at the end of the second quarter was 4.9 years, down slightly from five years for the previous quarter. Regarding income taxes, the tax effects of the exercise of stock options during the second quarter had a favorable impact on income tax expense for the quarter of approximately $2.1 million. That's down about $1.5 million or $0.02 per share from the first quarter. Our effective tax rate for the second quarter was 13.9%. Without the tax benefit from the stock option exercises, our effective tax rate for the quarter would've been about 16%. Our capital levels remain strong with our common equity Tier 1 ratio at 12.81% at the end of June. Regarding full year 2017 earnings, we currently believe that the current full year mean of analyst estimates of $5.30 is reasonable. I'll now turn the call back over to Phil for questions.
Thank you, Jerry. We'll open up the call for questions.
In order to ask a question, just press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Your first question comes from the line of John Pancari from Evercore ISI. Please go ahead.
Yes, this is Rahul Patil on behalf of John. Question on expenses. If I exclude the card fraud losses of $1.4 million this quarter, the efficiency ratio came in at around 55%. It was better than recent quarters. How should we think about the efficiency ratio in the second half of this year and in 2018? Just trying to get a sense of what do you perceive to be an optimal ratio or range for the bank to operate over the long term?
Well, I guess I'd say on the efficiency ratio, you're right. We did have some improvement in that ratio, obviously driven by the increase in revenues. I'll start by just talking about the expense run rate for the quarter. We've been now for the last couple of quarters right around that $188 million level. The way I look at expenses for the rest of the quarter, I think that there's been a lot of movements between the categories, I do expect that our run rate for the rest of the year will probably be around there with some small increases as we see some additions for technology. We could also be impacted by higher revenues in the case of some of those commission businesses, as we pay higher salaries for higher revenues. That could drive the expense number somewhat higher.
I do think that that efficiency ratio in that 55 range would be kind of what we're looking at.
Okay. Just a question on your branch network. I know last quarter you talked about opening additional branches in 2017, at a slower pace compared to last year. Could you talk about your updated thoughts on that front? Are you contemplating de novo expansion beyond the current footprint? Separately, maybe just update us on your hiring efforts. Which markets are you currently focusing on?
Well, with regard to branch expansion, primarily we're doing it in the major markets, in the markets that we're already in, and we'll continue to do that. On an opportunistic basis, we'll take a look at other markets, if it makes sense. Those would be, at this point, more one-off deals. We continue to expand in the great markets that we're in, and we're going to continue to do that.
Okay. Thank you.
Thank you.
Your next question comes from the line of Brady Gailey from KBW. Please go ahead.
Hey, good morning, it's Mike Balog in for Brady. Good morning. I had a quick question on loan growth. Continue to see nice loan growth. Do you think high single digits, low double digits is kind of the right way to think about it going forward? Maybe a little color around what categories, geographies you think are going to be driving future loan growth. Thanks.
I believe that it's been a consistent story over the last few quarters for our loan growth, and that story's really been broad-based growth, and it's been in all of our markets. I wouldn't see any change in that. We've had somewhere in the, I'll say, high single digits loan growth. We definitely would like to continue that, certainly going to be our goal. I just want to reiterate, I'm really proud of the job that everyone's done in this core loan portfolio. As many of you know, just by looking at our filings over the years, that core portfolio, the relationships $10 million under, was really flat without acquisitions, and it was really down a little bit over about an eight, nine-year period. It used to be two-thirds of the portfolio, and it's about half today.
That portfolio has got to grow in order for us to prudently increase our overall portfolio. Also it's a way to generate organic growth because those relationships turn into the bigger relationships. We've been really focused on it, and we've been successful on it. I'm really proud of how that growth is going as well.
Yeah, agreed. Congrats. It's nice to see the initiatives starting to pay off. I guess one more question. In terms of deposit pricing, could you maybe give a little bit of color, maybe on the commercial side and then on the retail side, kind of what you're seeing and then, as it relates to your proactive rate increases for your money markets and CDs?
Of course, all our rates are out on our website, but just let me give you a little bit of color. Let me look at, let's say our 12-month jumbo CD. We were at 10 basis points prior to the change. We've moved that up to 80 basis points. On CDs under $100,000, we were at 10 basis points, and we've moved those up to 70 basis points. Looking at our consumer high yield, everything above $250,000, that would be a consumer and the business high yield both, we took those, in the case of the consumer, from six basis points up to 35, and the business high yield from eight basis points to 35 on the $250,000 and over.
Gotcha. Great. Thanks for answering my questions.
Sure. Thank you.
Your next question comes from the line of Ebrahim Poonawala from Bank of America. Please go ahead.
Good morning, guys.
Good morning.
Morning.
Just one quick follow-up. The rates that you just quoted and the increase, is that applicable to new money coming into the bank, or did that get revised upward for existing customers as well?
Well, anytime you're dealing with a money market deposit account, those all happen all at once and to everybody. The CD rate increases in CDs that Jerry gave one example of, obviously is a new money thing.
Okay, the money market is for everybody. I guess, in light of that, as we think about sort of the margin from 3.70% into the back half of the year, would appreciate if you can provide some color in terms of how you see that playing out. Do you expect the June rate hike benefit to essentially get muted because of what we had with the deposit cost strategy?
What I'd say is, I look at the year-to-date NIM percentage of about 3.67%, and I think that the full year NIM is going to be pretty flat with that.
Understood. Just switching, I guess, Phil, you spent some time talking about your consumer strategy. I just wanted to get a sense of, is that something that you have refocused on in terms of you obviously always been focused on consumer, but I'm just wondering, as you sort of laid it out there, I was wondering if there's been sort of a fine-tuning of the strategy and whether you think there is an opportunity to gain consumer market share, either from the big banks or some of the regional competitors. Would love to get your thoughts on how you're thinking about that.
Yeah. I actually do. I do think we have an opportunity there. It's not really new. It's just I think you said it right. As I recall, you said it's kind of a refocusing. We're good at this. We're great at building relationships. Consumer deposits have always been about half of our deposit base. Our culture gives a great value proposition that we've been building. As I mentioned, we're lowering barriers to entry because it's great business for us. It's one we want to grow. The lending side is one Yeah, I think we are focusing on what we're doing there. We've got a great business model, great lenders. Our credit numbers there, I think, are outstanding. We've got the ability to scale that business over what we've done. Just another thing to think about, the consumer portfolio, it's larger than our energy portfolio.
If you looked at it as one particular portfolio, it would be the largest portfolio in the bank, if you would, as one way to look at it. We don't want to forget about that. We've got a great value proposition with great people, great lenders, and we just want to do everything we can to leverage our opportunities so that we can continue to add to this sustainable above-average organic growth.
Got it. Just as a follow-up on that, the consumer real estate private banking strategy that you talked about, is that sort of led by targeting sort of higher net worth individuals, targeting jumbo mortgages, so to speak? Or is it more broader than that?
Well, we don't do mortgages per se, but we do a lot of home equity, both closed-end and lines of credit. There's that. We also do, of course, lines of credit in the private banking sector. I think we've been doing a great job of expanding our private banking offering and just the overall job we're doing in that market. Those are the products that I think we're seeing grow the fastest and grow the most.
Understood. Thanks for taking my questions.
You're welcome.
Your next question comes from the line of Brad Robertson from Piper Jaffray. Please go ahead.
Hey, guys. Good morning.
Good morning.
Wanted to ask you lowered the non-performers this quarter and had some charge-offs. Was hoping you could give us some color on kind of what you managed down in the quarter and just kind of how you see asset quality from here, i.e., can the charge-off number kind of normalize down at a little slightly lower path than 2Q?
Yeah, I would think because we had the charge-off of the $6 million credit that I mentioned, it was elevated for this quarter. I'd expect it to be down. Remember what I've been saying for a long time about these energy loans. I mean, the portfolio is so much stronger than it was before. Our customer base is great. They've done a great job of executing their de-leveraging strategy. There's a lot more equity in the business. There's still a few credits moving through the snake, as I've said, right? This was just one of those credits that moved through the snake, and we had a situation where really agent bank got out of it. When they did, and they sold it, everyone pretty much had to take a mark on the sale price of that.
The liquidation frankly wasn't expected that way, but we just needed to recognize and move on down the road. That one's through the snake. I'd say we probably have another three, as I look at it, that got to move their way through, and I don't expect those to be in line with that particular situation. They got to move through. Other than those, again, which I don't expect to be the same as the one we just had, I think the rest of the portfolio is doing well. We're going to have some charge-offs of risk business, but I feel good about what we're doing overall.
I guess the only thing that I would add to that, just if you were looking for activity on the non-performers, just looking at the non-accruals, for example, those are down like $20 million on a linked quarter basis. If net charge-offs were around 12, you can see that there was obviously quite a bit of things that were resolved other than those charge-offs in that non-accrual portfolio.
Okay. I appreciate the color on the margin. I was curious if you could give us any color around what you're replacing the $200 million of municipal runoff in 3Q with in terms of yield.
Yeah. I guess what I said in my comments is that's probably where I'd point you to is, the best I could say at this point, since we really haven't purchased them yet, is kind of what we've done so far in the portfolio. We've been buying, I think, in a 4.5% TE yield in the second quarter. Right now, I'd have to say it's going to be somewhere in that range.
Okay, great. Appreciate the color.
Sure.
Your next question comes from the line of Scott Valentin from Compass Point. Please go ahead.
Good morning. Thanks for taking my question.
Hey, Scott.
Just with regard to capital, you guys are sitting at almost 13% CET1. Just wondering, obviously M&A is a strategy. You guys have been very disciplined on M&A. I'm just wondering maybe some of the things you're looking at to maybe manage that ratio. It seems well above peers and well above where it could be.
Well, I'm glad we got strong capital. We'll continue to be very disciplined on acquisitions, so I agree with you there. We've got a $100 million buyback in place right now. I hadn't bought anything on it yet, but that's always an option for us, and we'll employ that as we have the need. What I'd really like to do with the capital is just expand the business, right? I think that our growth has been good. I think that our loan growth has turned and we're showing some consistency there. We want to continue to do that. I want to make sure that we've got plenty of dry powder to do that, and have money available if we do see an acquisition that makes sense.
I sort of like the capital being strong at this point, and we're not going to do anything reactionary to deal with it, I don't think right now. Also like our dividend being strong.
Right. Fair enough. Just with regards to deposit pricing, you mentioned you took deposit rates up. You're still, I would say, more competitive, but definitely not a lead rate payer in the market. Deposits, end of period deposits, were down a little bit linked quarter, and wondering, one, if there's some seasonality there, muni deposits or what may occur. Also the deposit pricing, was that a reaction maybe to the decline in deposits linked quarter?
From a linked quarter basis, what I will say is that if they were down, I think if you take down public funds, which can tend to be pretty volatile, they were up a little bit. I guess what I'd say is, as Phil mentioned in his comments, we're still opening accounts and bringing in new customers on both the consumer side and commercial side of the bank. Just excuse me. In our analysis, what we've seen is that we segregate the customers that are augmenting and the customers that are diminishing. I guess what I'm inferring is that really, the change, if you will, is coming on the existing customers. For those customers that had been historically augmenting, we're just not seeing as much of an increase there as we had been. Those that are diminishing, we're actually seeing increases in diminishment.
I think that from my end of the field, I'd say that the deposit pricing wasn't reactionary to that, but we certainly hope that some of this pricing will create additional growth and stability in that portfolio.
Thanks, Jerry. I agree. I'd just add to it really wasn't a reaction to anything that happened in the quarter. It's really just getting a sense with that last Fed increase. We've been assuming that deposit rates are going to go up. They just hadn't moved. That's just not sustainable for us or for the industry. I think it's important to maintain trust with your customer and not hold your breath and wait for the bubble to burst. You just got to run the business in a prudent way going forward and do it for the long term. That's really what we're doing. I'd like to see some growth in our time deposits. Our demand deposit growth has just been, I think, spectacular.
If you look at our compound annual growth rate for the last five years, our demand deposit, our checking account growth has had a compound annual growth rate of, I think it's almost 12% or so. That's very strong. If you look at our time deposits, they've grown, and particularly money market deposit accounts, they've grown about 5.5% over that period of time. You look more recently, demand deposits have grown, let's say from 2015 to June, say a little over 8%. Our money market deposit accounts are down about two, so it's not huge. I think one of the things that's beginning to happen is you're seeing non-bank alternatives that are available to customers that they haven't seen before. We just want to be fair with our customers. We just want to do the right thing on our value proposition.
Look, rates are going to go up, and deposit rates are going to go up, and we don't want to be drag kicking and screaming doing that. We want to do that in an orderly way and just manage the business for the long term.
Okay. I appreciate the color. Real quick, on the energy portfolio, you guys talked about it's down a little over 11% of the portfolio. Do you have the amount of reserves against that portfolio? Has that come down or is it unchanged?
I think it's down a little bit because of the charge-off. Jerry, do you have that?
Yeah, sure. Hold on. Give me just a second to see if I can pull this up here for you. Our reserve on the energy portfolio was 61.8 in March. That's down to 54.3 in June.
Okay, great. All right. Thanks very much.
Sure. The reserve coverage is 3.85% on that energy book.
Thank you.
Your next question comes from the line of David Rochester from Deutsche Bank. Please go ahead.
Good morning, guys. On the muni calls you guys were talking about, I appreciated all the color there. Was just wondering if you're expecting any other calls as you look beyond 3Q or even into 2018 at this point.
I guess the only thing that I would say there, we don't give a lot of guidance going forward, but what I will say is we're projecting all in in 2017, say $600 million roughly. I will say that our projections right now for 2018 don't have anywhere near that level going into 2018.
Okay. On the deposit pricing, you guys gave some great color there. Sorry if I missed this, have you guys given any thought to raising your earnings credit rate to drive some of that commercial deposit growth as well? Have you seen any competitors doing that at this point?
We've been increasing it. I think what we've seen competitively is probably more of a one-off deal in competitive situations, and I think that's what the general market's doing. I expect that that rate will go up just as we continue to see increases in general market rates.
You guys have increased yours sort of across the board versus kind of on a one-off basis for your competitors?
When we've increased it, we have. I think that's the best way to describe it.
I guess that would put you above peers in terms of your earnings credit rate at this point?
Well, what we look at is we're sort of in the median of what the posted rates are, is what I would describe it. If you look at the too-big-to-fail banks, we're pretty much in the median on our ECR.
Okay. Just switching to your expense commentary, I just want to make sure I understood, that you're talking about growing expenses, I guess the current expense level you feel comfortable with, that could actually grow a little bit based on your investment activity in the business. Is that right?
Yeah. That's fair.
Okay. then just one last.
Hey, David, one clarification on the muni calls.
Sure.
I didn't want to leave you with the reaction that we weren't expecting any. Yeah, obviously 600 this year, again, not anywhere near that, certainly, we are projecting calls next year.
Okay. Appreciate that. Then just one last one on the tax rate. Is that 16% you mentioned a good base rate to expect outside of any benefits you guys could get going forward?
Exactly. Yes.
Okay. Great. All right. Thanks, guys. Appreciate it.
Sure.
Your next question comes from the line of Jennifer Demba from SunTrust. Please go ahead.
Good afternoon. Just curious on the energy loans. Are you expecting energy loans to be a big contributor to your commercial loan growth in the next several quarters? Or what's your expectation there?
Jennifer, I don't think it'd be a big contributor. We did have some growth overall. It's a kind of situation where we're seeing good deal flow and, heck, you could probably make it as big as you want it to be. We're being disciplined in what we're doing. We're making sure that we're doing the best properties, that it's based upon strong relationships. I expect that we'll get some growth. We've got a good pipeline right now. I think the question mark in that portfolio is going to be what do you see in terms of payoffs? Because we're seeing a lot of sales, have been seeing sales from independent operators, particularly if you've got Permian products, I mean, Permian acreage, because number one, it's so valuable, but number two, it's so expensive to play.
If you're going to drill a two-mile lateral, you got to put together a lot of acreage. You're talking big prices for that. A lot of people are moving out of that. I wouldn't say that it's a big contributor, but I think it should be a contributor. Long term, we want it to be an appropriate contributor to our growth.
Thanks so much.
Your next question comes from the line of Peter Winter from Wedbush Securities. Please go ahead.
Good morning.
Good morning.
Big picture question. Loan growth has been coming in better than peers for now a couple of quarters. I'm just wondering, Phil, are you doing anything differently than maybe Dick might have been doing it as you've taken over as CEO?
That's a hypothetical question. We're doing some stuff differently, I don't know that that'd be any different than Dick would've done if he was still here. We're just dealing with the business issues in accordance with our culture, which is what we've always done, I just happen to sit in the chair today. I would say that we are doing some things a little differently. One, we've got a focus on consumer. We got really good growth rates there. Also we are really working hard on this core portfolio, as I talked about. Our core portfolio really was flat for a number of years. If you read my shareholders' letter, I really talk about it in some depth. We've got our lenders focused on this. Some of it's tone, right? It's just awareness of it.
We've got great people, and when you make them aware of a business objective, they're really good at going after it. Another thing that we've done is we're really trying to utilize our human capital as effectively as we can. An example that I'd give you on that is we're trying to push decisionings on smaller deals a little closer to the customer. We got great lenders, great senior lenders, great regional presidents, and we've given them some loan authority that will allow them to decision a little faster and give a little bit better customer experience, and that's been helping us as well. We call that final authority around here. It's not any big thing, but just a lot of things trying to grow the whole portfolio in a sustainable way, hopefully doing above average, and certainly make sure it's good organic growth.
Does that make sense?
It does.
Hear me?
That's helpful. Just one more question. Can you talk a little bit about what you're seeing in terms of the economy in West Texas and the loan growth there?
In what and where?
West Texas.
West Texas? Economy's better. I think our people are doing a good job diversifying the portfolio from what was largely an energy-based portfolio, and they're still doing that, but they're also doing a good job of working the other segments of the economy. It's still slow. Because while there's a boom aspect to a lot of things going on there, you look at some of the activity and the drilling rigs, the levels of rigs that they've got there. Another example is, I've heard recently that some of the big operators are bringing in frack crews for two weeks on, and they're putting them up in hotels and giving them a week off. That's new. We're seeing some improvement in the underlying fundamentals. We haven't seen a lot of loan growth just because it's still a little bit soft, and they're still repairing themselves.
We've got great customers out there, great people, and we're, I think, doing a good job.
Great. Thank you.
Thank you.
As a reminder, in order to ask a question, just press star, then the number one on your telephone keypad. Your next question comes from the line of Matt Olney from Stephens. Please go ahead.
Greg, good morning.
Morning.
Morning. I appreciate the commentary on refocusing on more core customers within the loan growth. Can you just talk about the loan yield difference between those core customers below $10 million versus loan yields above $10 million?
Well, they're higher. In fact, one thing we've talked about with ourselves is, look, you may be doing a $2 million or a $5 million deal, but it might weigh as much as a $10 million deal that's priced on LIBOR. A lot of the credits that are in that core portfolio are prime-based, probably our biggest prime-based portfolio, if you will. Those yields just tend to be a little bit better than straight LIBOR-based deals. Yeah, also a thing about that core portfolio is these are great customers to take advantage of other services that we provide. Many of them don't have the traditional CFO infrastructure, and we can bring products to the table that we offer that can really help their business. It's not necessarily a beauty pageant when you get at that level.
You've got a relationship, you can bring in something and help somebody. It's not just the better pricing on the loans on average. I would say, in some cases, they're a little bit better targets for use of our other products.
Okay, understood. Thank you for that. I believe you mentioned the loan yield in the second quarter was about 4.32, so a nice pickup. Is that a clean number, or is there any noise in that number from some type of interest catch up from non-accruals moving back to accrual status or any other noise in that number?
I guess what I'd say is, it's pretty core, but obviously, from a noise standpoint, if you do get some loans that pay off early, if you've got any sort of deferred loan fees that are associated with that loan, they'll accelerate and come into interest income. You've probably got a little bit of that, but for the most part, it's pretty core.
Okay, great. Thank you.
Thank you.
There are no further questions in the queue. I turn the call back over to Phil Green for closing remarks.
Well, thank you. We appreciate your interest, and everyone have a great day.
This concludes today's conference call. You may now disconnect.