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ViewPoint Financial Group (NASDAQ:VPFG)

Q3 2013 Earnings Call

October 23, 2013 9:00 am ET

Executives

Scott A. Almy - Chief Risk Officer, Executive Vice President and General Counsel

Kevin J. Hanigan - Chief Executive Officer, President, Director, Member of Lending Committee, Chief Executive Officer of Viewpoint Bank, President of Viewpoint Bank and Director of Viewpoint Bank

Kari Anderson - Principal Financial Officer, Chief Accounting Officer and Senior Vice President

Analysts

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Operator

Good morning, everyone, and welcome to the ViewPoint Financial Group Third Quarter 2013 Earnings Call and Webcast. [Operator Instructions] Please note that today's event is also being recorded.

At this time, I'd like to turn the conference call over to Mr. Scott Almy, EVP and Chief Risk Officer and General Counsel. Sir, please go ahead.

Scott A. Almy

Thanks, Jamie, and again, good morning, everyone. Welcome to ViewPoint's Third Quarter 2013 Earnings Call. At this time, if you're logged into the webcast, I would direct your attention to Slide 2, which includes our Safe Harbor Statement. If you're participating only by phone, the webcast presentation, including our Safe Harbor Statement may be found on our website at viewpointfinancialgroup.com.

I'm joined today by ViewPoint President and CEO, Kevin Hanigan; and Interim Chief Financial Officer and Chief Accounting Officer, Kari Anderson. We'll take questions if time permits at end of the presentation.

At this time, I'll turn it over to Kevin.

Kevin J. Hanigan

Great. Thanks Scott, and thank you all for joining us on the call this morning. I will cover the high-level results for the quarter and then Kari will walk us through the bulk of the slide deck. Finally, I'll make some closing remarks, and time permitting, as Scott said, we'll entertain any questions you might have. For those of you following along on the slide deck, I'll start my remarks on Slide 3.

We continue to successfully execute our commercial bank strategy by growing organically and hiring talented commercial lenders. Our earning assets continue to shift into loans from lower-yielding securities, and we are increasing our mix of non-interest-bearing deposits, which now represent 18% of total deposits. Our loans held for investment increased by $98.5 million in the quarter or 5.4% on a linked-quarter basis. We had very strong C&I and commercial real estate growth of $121.4 million or 9.2% on a linked-quarter basis. It's worth noting, this is the second consecutive quarter of over 9% linked-quarter growth in these 2 important categories.

The average balance in our Warehouse Purchase Program was down nearly $70 million or 9.2% from the second quarter. I believe much of this was expected by both of us and the marketplace. Despite the drop in our warehouse balances, our earnings were up modestly to $8.2 million. The earnings for the quarter on both a GAAP and core basis was $0.22 versus $0.21 on a GAAP basis for the second quarter. Our net interest margin was down 9 basis points from last quarter to 3.63%, and I'll have more to say about NIM momentarily. Our tangible common equity of $509 million equated to 15.2% of tangible assets, up from 14.1% in the second quarter. Our nonperforming loans are just $22.3 million, the lowest level we've reported in eight consecutive quarters. Our combination of high levels to TCE and low levels of problem loans puts us in a unique position amongst our peers. Finally, we announced a 20% increase in our quarterly dividend from $0.10 to $0.12.

Before moving on to the next slide, let me call your attention to the footnote at the bottom of Slide 3. On October 7, the FFIEC issued Supplemental Instructions for the September 30 Call Reports. The supplemental is to clarify the regulatory position on Mortgage Purchase Programs like our mortgage warehouse program and whether they should be classified as loans held for sale or loans held for investment. We have been discussing this matter with our primary regulator and our audit firm since the new instructions came out. As many of you are aware, it's always been our intent and practice to move these loans off our balance sheet very quickly. In fact, in Q3, the average holding period for these loans was just 17 days. Nevertheless, we're evaluating the impact this may have on our financial reporting. If we were to change our classification to loans held for investment, the change would have no material impact on net income or our balance sheet.

Looking at Slide 4, let me update you on our commercial bank transformation. Strategically, we're focused on hiring talented commercial bankers, shifting our assets away from securities and consumer loans, building out our core C&I platform, and emphasizing low-cost core deposits. In terms of results, we have hired 12 commercial bankers in the past year, including 6 in the most recent quarter. Our commercial portfolio now makes up 74% of our loans held for investment, up from just 29% in 2007.

C&I loans continue to grow, and were up $89 million over the last quarter and now represent 20% of loans held for investment versus just 1% in 2007. Commercial non-interest-bearing deposits now total $270 million, up from just $37 million, again, in 2007.

Before I turn the call over to Kari, let me talk about the C&I growth, NIM and credit quality just very briefly. As noted in our earnings release, during the quarter, we sold 3 related commercial real estate loans totaling approximately $21 million. The loans were sold at par, and we financed about $18 million of the purchase price for the buyer. This was done on an arm's-length market basis. If these 3 notes were past due and were approaching 90 days past due in September, and we're able to sell them quickly at par without the collection of about 60 days worth of accrued interest. Financially, the sale had several impacts including, but not limited to, the following. The loans, again, $21 million, on the commercial real estate side, were moved from commercial real estate to C&I loans. So, we basically took the $21 million we had in commercial real estate, financed those notes for the new buyer and booked an $18 million loan in C&I. On an inter-quarter basis, we were able to release reserves related to these credits. We backed out approximately 60 days worth of accrued interest, which negatively impacted our NIM for the quarter by about 5 basis points. If you recall, our NIM last quarter was bolstered by about 6 basis points based on the collection of some non-accrual interest. So whereas last quarter, our NIM of 3.72% was bolstered by the collection of non-accrual interest, this quarter, our NIM of 3.63% was driven down by 5 basis points on the sale of these notes. Adjusting for just these events, the collection of non- accrual interest last quarter and the impact of selling the notes this quarter, all other things equal, our NIM for both quarters was in the high 3.6%s.

With that, let me turn the call over to Kari.

Kari Anderson

Thank you, Kevin. Slide 5 represents our successful commercial bank transformation. Starting on the left, with 2007, we changed our charter from a credit union to a thrift. At that time, our commercial portfolio was only 29% of our held for investment portfolio. In 2011, we changed our charter to a National Bank and have the increased commercial book to 54%. After the successful completion of the Highlands acquisition in 2012 and the establishment of the new Energy division in 2013, we've increased the commercial portfolio to 74% as of the third quarter, with 54% in CRE and 20% in C&I.

Slide 6 reflects the improving mix of the earning asset revenue as we shift out of lower-yielding securities and consumer loans and into higher-yielding commercial loans. Commercial interest income now represents 50% of earning asset revenue, up from 16% in 2007. In 2007, our largest earning asset revenue came from consumer loans with 49% and securities with 35%. In 2013, the consumer loans represented 21% of the mix and 9% from securities.

Slide 7 shows the additional benefit of the commercial bank transformation with significant growth in commercial non-interest-bearing deposits. These deposits have grown to $270 million in 2013, up from just $37 million in 2007. You can see the impact of the Highlands acquisition in April of 2012, where we grew from $99 million at the end of 2011, up to $225 million in 2012. As a result of the increased commercial deposits, our Treasury management fees have grown to $315,000 year-to-date, up from $271,000 for all of 2012.

Loans held for investment now represent 57% of our earning assets compared to 46% at September 2012. While our lower-yielding securities have decreased to 22%, down from 28% at September 2012, and loans held for sale are now at 21% compared to 26% as a result of the refinance slowdown.

Slide 9 shows another solid quarter of strong loan growth, fueled by commercial lending. Our C&I grew $78 million linked-quarter or $112 million for the year. CRE grew $44 million linked-quarter or $209 million for the year. C&I and CRE increased a combined 9.2% linked-quarter or annualized growth at 28.7%. The green section of the C&I graph represents the contribution of the oil and gas program. In May of 2013, the Energy Finance group was formed to provide loans to oil and gas companies throughout the U.S. Oil and gas loans, which are included in our C&I portfolio, totaled $114 million at September 2013, up from $58 million at June 2013.

The lending focus is on reserve-based transactions for development drillings, capital expenditures against oil and gas reserves and acquisition of oil and gas reserves. 98% are reserve secured and 2% are midstream or other secured. The average balance on our Warehouse Purchase Program has decreased $190 million or 22% from the third quarter of 2012 and $70 million over a linked-quarter. Although we have increased from 41 clients at the third quarter of 2012 to 50 clients currently, the decrease has been anticipated with a dramatic shift from refinance towards purchase. For the third quarter, the mix was 77% purchased and 23% refinanced compared to 62% purchased and 38% refinanced in the linked-quarter. The yield has held steady at 3.86 for the third quarter.

Slide 12 shows our low-risk investment portfolio mix. Investments are 22% of our earning asset mix and have always been used as an asset liability tool. 46% of the portfolio is in available for sale, with a short duration of 2.4 years and an average yield of 1.9%. 88% of the portfolio is in government agency-backed with the remaining 12% in highly rated, Texas-only bank qualified municipals. There are no private label securities in the portfolio. The graph on the right shows the mix of the portfolio, with 35% in 15-year fixed, original maturity mortgage-backed securities with a short duration.

Slide 13 shows the mix of deposits as we've transitioned to a commercial bank, improving our noninterest-bearing demand deposits to 18% compared to 10% at the end of 2010. This is reducing our quarterly cost of deposits from 1.42% to 0.44%.

Slide 14 shows our strong credit quality and how we compare favorably to the industry. We had another quarter marked by resolutions of NPLs resulting in our lowest quarter of NPLs in 2 years. Our NPAs to loans and OREO has improved from 1.72 at the end of 2012 to 1.18 currently. NPAs to equity have improved as well from 5.59 to now 4.21. Our net charge-offs to average loans are at 0.13, which is minimal, although it is a slight impact -- uptick compared to the end of year 2012 at 0.11 and this is the result of the charge-off in the second quarter that led to improved NPLs and the release of $225,000 in provision.

ViewPoint continues to be among the strongest institutions in the industry with 15.2% in tangible common equity and 19.2% in Tier 1 capital. The reduction in Tier 1 capital over 2012 reflects the change to our risk-weighted assets, the Warehouse Purchase Program from 50% to 100% in March of 2013. We are still looking to deploy capital through continued organic loan growth, dividend, share repurchases and disciplined M&A. And as Kevin noted, we did declare a $0.12 cash dividend, which is a 20% increase over linked-quarter.

And with that, I will turn it back over to Kevin.

Kevin J. Hanigan

Thanks, Kari. Let me just summarize. We continue to do very well in executing our community-oriented commercial bank strategy. We exhibited strong core loan growth for the quarter and our credit quality continues to outpace our peers. And finally, with our strong capital position and credit statistics, we are well positioned to play offense.

With that, let's open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brady Gailey from KBW.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

So the loan loss reserve release, it was down about 7 basis points on a percentage basis. Was that entire 7-basis-point release related to these 3 CRE loans that were transferred to C&I? Or was it -- was there a loan loss reserve release on top of that?

Kevin J. Hanigan

No, it wasn't related just to those 3 credits. It's -- the reserve is calibrated relative to all the credits in the portfolio and in any given quarter, Brady, there's a lot of movement. The other thing I would point out and we'll probably talk about this in a moment when somebody asks about loan growth was, a fair portion of our loan growth for the quarter, just shy of probably 60% of the commercial loan growth in the quarter, was related to -- or overall loan growth in the quarter was related to oil and gas credits. And given the extremely low history, both the -- several of us who've done this and are now back together doing it together have had, i.e. we haven't had a loss in all the years we've done this in a very long period of time. And the very low loss given default in the business in general, we don't really need to put up much of a reserve on oil and gas deals. They're priced a little lower, but the reserves are also much, much lower than any other loan class we have. So risk-adjusted returns are pretty good in that space.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. In the oil and gas credits that you are doing, are you all participating with other banks in those credits? Or are these deals that ViewPoint holds the entire deal?

Kevin J. Hanigan

Yes, so of what we originated in this quarter, I think there's only one deal, Brady, where we hold the entire deal or are the sole bank. Most of the others are participations with almost, in all cases, with the banks here in town that we are well-known to and who are well-known to us. Longer term, getting beyond just this quarter, our expectation is about half of our business will be where we're the lead bank or the only bank, and the other half will be deals where we buy participations in what I would call club deals with other banks in town most notably, probably PCBI, Texas Capital, and Bank of Texas affiliated with BOK. In this quarter, that was not the case, but that's not unusual. We stepped into the business. There a lot of opportunities. And when we think about how business gets done in any other kind of -- line of business, if you got somebody that is the lead bank in a deal, you get invited to bank meeting, they call you -- ask you about it, you go to the bank meeting and 2 weeks later, you typically can fund the loan because it's already been structured, the deal terms are already been set for the client. So it's a pretty quick turnaround when you're dealing with buying into a club deal as opposed to going out and calling on clients and gen-ing up an opportunity for yourself. The lead time is far longer than 2 weeks. It can be anywhere from 6 weeks to 6 months.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then lastly, Kevin, I know you've talked about, as we approach the end of the year, you still have some excess capital, and if you haven't deployed that through either organic growth or some sort of announced M&A, you would think about giving some of that back. I know you increased the dividend 20%, but are we -- just give us an update on your thoughts on how you think about what to do with excess capital as we approach that year-end mark?

Kevin J. Hanigan

Yes, and we're still committed to doing just that. The way we think about it and, the dividend increase is, if anything is signal as to how we would do it given the circumstances as we sit today. We still have some time left in the year. I know it's getting late in the year, but we still have some time left in the year to get an M&A transaction done. We're out -- diligently trying to work on it, but we do understand it's getting late in the year. As we think about ways to give it back, dividends is a -- a higher dividend payout ratio is an interesting way to give it back in our mind in that it rewards shareholders but it also says that payout ratio could normalize if we got an M&A transactions done in the future. So dividends would be a large part of how we might give it back. Other elements of ways to give back the capital, obviously, is share repurchase which I would tell you doesn't make sense for us at these levels. I'll just be clear about that. But at some level, it does. And the last thing we could do is, we could do a special. But as I think about our long-term strategy and this is a board-related decision and we will make a board-related call on this before the end of the year, doing a special is the single most dilutive thing we can do to our currency. It gives capital back in not the most tax advantaged way. And whatever we give out by way of special probably comes off of our stock price within the first 30 days, which makes it harder for us to do M&A in the future. So if we have a preference based upon what we know today in terms of giving capital back, it would be higher levels of dividend payout ratio.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

I mean, could you go over 100% payout?

Kevin J. Hanigan

We wouldn't rule anything out. I think given our strong capital levels and otherwise, that would probably be an option to us, but we would probably approach our primary regulator if we went over 100%.

Operator

Our next question comes from Michael Rose from Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Hey, just trying to get a sense for the directionality of earning assets as we move into the fourth quarter. Obviously, the warehouse balances are down. I'd love to hear your expectations as you move to the fourth quarter and where you think the warehouse settles? And obviously, the securities have come down for the past couple of quarters, more markedly this quarter. How should we think about average earning assets? I mean, do you think they can actually grow in the fourth quarter and then into 2014? And then secondarily, if you could address kind of where your oil and gas loan pipeline stood at quarter end relative to the end of the third quarter -- or relative to the end of the second quarter?

Kevin J. Hanigan

Yes, sure, Michael. Look, I think the fourth quarter, while it hasn't been the case in the last couple of years in the warehouse it's traditionally the slowest quarter. And as we get away from the refi business, I think that's going to become more clear. There a lot of areas in the country that start getting cold weather, and a lot of folks just don't buy houses between what I call Thanksgiving and the Super Bowl. So the fourth quarter and the beginning of the first quarter, most traditionally, over long period of time, it's a slower period of the warehouse business. I think that is more likely than not to be the case this year. We're growing the rest of the franchise pretty good. And obviously, oil and gas had a really good quarter. We doubled our -- essentially doubled our outstandings from $57 million to $114-ish million. Their pipeline is very active. We've added some folks to that group, meaning, I think at the end of the last quarter, we had kind of 1.5 people in the group. And now, I would say we have 4.5 people in the group. So we've added to that group. The pipeline is active. I expect them to do really well. I've said that before. They're doing really well. And I think the pipeline is good and it is a mix, I will tell you, about some club-related deals and some direct deals. So I would be hopeful when we're on the next quarterly call, we'll be talking about some more direct deals that we've managed to close.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay, that's helpful. And then as a follow-up, if I'm doing the math right, backing out the 6 basis points in the margin from the second quarter and adding back the 5 basis points this quarter, it looks like the core margin maybe was up 2 basis points, and that's really driven by the shift in the mix of earning assets. How should we think about the margin going forward? Obviously, the trade-off between core-yield compression and securities runoff and just any outlook you have there?

Kevin J. Hanigan

I tend to think of us as a mid-3.6%s kind of net interest margin company at this stage of the game, whereas shift out of securities will be beneficial but we still have certain loans that are being booked at lower margins than some of the runoff is. So you get a little compression predicated on just how big of a runoff we get particularly in the commercial real estate portfolio. So if we just think about loans in general, let me kind of cover the quarter for loans in general and offer some color. First of all, between CRE and C&I, we grew roughly $121 million, maybe a shade over that. The first thing I would point out and I went back and looked at this early this morning, on September 22, those 2 categories when we put out our daily -- balance sheet, were $1.373 billion, and I think at the end of the quarter, $1.438 billion. So we funded $65 million or more than half of our volume in the last 8 days of the quarter. So we only got 8 days worth of earnings out of those -- that half of the portfolio, and hopefully, next quarter, we get a full blast of earnings out of it. CRE was up, call it, $43 million and C&I kind of rest of the balance of it. When I look at CRE, we actually had about $108 million of new originations and I would call that new originations or some advances up in nominal levels on existing deals at a weighted average coupon of 4.98. So I think I had been talking about the likelihood of us getting it back closer to 5. We did came up 2 basis points shy where I really hope we'd be at a level 5, and we had about $65 million of payoffs in commercial real estate at a weighted average coupon of 5.35. So right there, you can see there is some compression just in that portfolio alone. Oil and gas, again, had a really great quarter. I'm not prepared yet to talk about the coupons in oil and gas. I'll just tell you, they're between 3.5 and 4. But for competitive reasons, until the portfolio gets bigger, I think I'd prefer not to talk about margins because clients may quickly identify where they are in that scale and we find ourselves with a chase to the bottom. And while our middle-market or our basic corporate banking group outside of oil and gas didn't have a monster funding quarter, they did book about $46 million worth of new deals. We just didn't have a lot of funding on those new deals. We had 3 deals in there that are large, all over $10 million, between $10 million and $15 million, that had very nominal fundings in the quarter and it's just the idiosyncrasy of the businesses. We expect those things will fund up here in the fourth quarter. So notwithstanding any other volume in the fourth quarter, C&I will do better just on funding up of those 3 credits alone in the fourth quarter. The good news is that our basic C&I business, again, held margins above 4% or coupons above 4%. Coupons on those commitments of $46 million were 4.14%. And what I actually funded was at 4.43%. So we're holding our own despite a competitive environment and competitive pricing out there. We continue to hold our coupons at above 4% in our basic blocking and tackling local business banking division.

Operator

Our next question comes from Brad Milsaps from Sandler O'Neill.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Hey, Kevin, just a follow up on the yield questions, I wanted to see if you could talk maybe more specifically about pricing in the warehouse stayed relatively stable on a linked-quarter basis. Just your thoughts as there's probably more capacity in that business as the refi volumes do dry up, kind of what your crystal ball say for kind of where pricing goes in terms of the warehouse business?

Kevin J. Hanigan

Yes. First of all, I would tell you just being down 1 basis point quarter-over-quarter given the overcapacity of banking and banking commitments into that business. I was really pleased we were only down 1 basis point. I would've thought it would have been worse, quite frankly. There is competitive pressure out there as our clients are cutting back on the number of credit facilities they have either by going back to each bank saying: Hey, we need less, or we're going to drop out the bank who's the highest priced one. And I think there will be pressure in the fourth quarter, and spreads in that business will drop. And I would hope it will only be another basis point, but I fear it'll be more.

Operator

Our next question comes from Brett Rabatin from Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

I wanted to ask around the hires you had this quarter. Maybe, Kevin, you can give a little color around what the pipeline looks for additional hires? And then the 6 you added this quarter, what kind of maybe gross book you think they might be able to bring over the next year or so?

Kevin J. Hanigan

Yes, let me kind of go through the 6. There were 2 in oil and gas and they're very talented, smart, but they're younger. So they're not going to have huge books. They are really going to make our other producers what I would call more efficient. They will help process business that may be our big monster producers or producer is head right up for himself before he's got a lot of help. And we've hired a portfolio manager in there as well. That was a more recent hire. But we've built some structure around that business that I think is a more efficient way to go about it. If we see the opportunity to get another producer, we'll go get him. But right now, it's making the one we've got much more efficient at a lower cost basis of help. So in the quarter, there were 2 in the oil and gas group. There were 2 in what I would call our Treasury management group. So they're really more -- we book a new oil and gas deal or book a new middle-market banking deal or corporate banking deal, and they are the revenue sources that goes out and arranges the Treasury management product suite and the deposit side of the house. So 2 in that group, and I would say that group is now pretty well built out. And we're really pleased that a large portion of that group, even though it's over 2 quarters, have come from the same institution. So they've worked together in the past. They're very cohesive unit. They are glad to be reunited and be reunited here. We're glad to have them. I expect really good things out of them. I think we've got a really great team in Treasury management. And the last 2 are in the Business Banking, commercial banking realm, and we do expect that they'll have a book of business and be additive to the process.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And then maybe your thoughts on just the pipeline for additional adds or kind of your thinking about hires from here?

Kevin J. Hanigan

We're talking to a few folks. The fourth quarter can be a little slower as those who get annual bonuses probably hunker down until February. As you go down and you deal with really what tends to be the most profitable unit of most banks is the smaller business banking unit that doesn't do very big deals, but they bring in lots of deposits per deal. Most of those guys out in the marketplace get paid on a quarterly basis. So we may, if we have success, I would expect it to be more there, and we are out looking for another oil and gas guy.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And then the lastly, as it relates to that, can you maybe give some color around your thoughts on the Energy platform and you're obviously going to have good success going forward. What size level would you be comfortable with in terms of the balance sheet in 1 year or 2, in terms of thinking about gross exposure to the energy business?

Kevin J. Hanigan

It wouldn't disappoint me if it got to be $300 million or $400 million. I mean -- and I don't think that's unrealistic. I'm not going to say what timeframe, but I wouldn't say, "Oh my gosh, we better be careful". Properly done, this is a really, really safe line of business.

Operator

Our next question comes from Scott Valentin from FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just with regard to the mortgage warehouse, I know in the past you mentioned the client count went up from last year, I think it went 44 to 51, I believe, was the number. Any client adds during the third quarter and maybe your outlook, I know you mentioned it's getting more competitive. Is it getting tougher to add clients going forward?

Kevin J. Hanigan

Surprisingly, I wouldn't have thought this would be the environment where who could add clients. But we have actually been talking to a couple of new clients. There's a big Mortgage Bankers Association meeting coming up here in Washington, I believe, and there's a large contingent of the bank heading up that way. We do have a couple of new prospects that look good to us. So I would've thought it would have been tougher to add clients and I'm not going to say we're going to have them at the same pace we did in the last 2 years, but it appears that there's still opportunity to add some clients.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And the characteristics of those clients in terms of size and location all typical with what you have now in the portfolio?

Kevin J. Hanigan

I would say little smaller on average in terms of the nature of the client. Whereas our typical client now is $20 million to $45 million kind of deal, these are more $10 million to $15 million to $20 million. So a little smaller, and frankly, what it is, in often cases, it's a group of producers who broke out of somewhere larger, started their own shop, got somebody to help capitalize them. I could think of one case we're looking at now they've got $5 million worth of capital. And these businesses run pretty highly leveraged, but we're talking to them about a $10 million credit facility off of their $5 million of capital. So it's opportunities like that where groups or sub-groups are broken out of larger companies and want to run their own deal.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay, thanks for the color. Then just following-up on the question of hiring additional personnel. How should we be thinking about the expense line, selling benefit line going forward? Should we expect non-expenses [ph] to kind of head up, heading up to current pace or do you think that pace will slow down?

Kevin J. Hanigan

I would hope the pace will slow down, but not because hiring slows down. So if we just think about that expense line and it was up roughly $1 million, $1 million and some change for the quarter. And as we look at the components of that, nearly $600,000, $577,000 of that quarter-over-quarter was some healthcare increases. And we've got to find a better way to deal with healthcare. I think we went several years without any real outliers in healthcare, and that the actuaries tell us that's pretty unusual. We have a good long run with no outliers. And now we've had, I think 2 of our last 4 quarters, we've had an outlier. So we are gathering around how to deal better with healthcare costs. So of that $1 million, roughly $600,000 was some healthcare claims that were outside our limits. Base salaries were up about $240,000. And call half of that, as odd as it sounds, there was one more day in the quarter then there was last quarter. And on a daily basis, our payroll runs about $112,000 a day. I know I'm getting really granular here. So good portion of our salary and benefit increase was really just the extra day in the quarter. The remainder, all right, so another $130,000 or so, part of that was new hires and part of that was there was some merit increases and just some other every now and then just somebody deserves a little bit more money and you pay it to him. And so maybe $100,000 of the $1 million total was related to new hires, that being the 6 new hires. The other increases were incentives, up moderately at $75,000, $76,000. Our ESOP because of the stock price is higher than it was in the third quarter versus second quarter and our ESOP expenses up $70,000, $75,000. And we had some restricted stock options that were issued that were maybe the last, if I'm sure, $50,000, it would've been $50,000. And that's really granular. But what it's really to say was the new hires were only about $100,000 of the total and the bulk of it was an outlier for healthcare.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. So looking forward based on -- you mentioned you're looking for a couple of more, I think, several more hires. So it shouldn't have that material impact on the expenses going forward, sounds like.

Kevin J. Hanigan

No and most of them again, most of the new hires are driving revenue or supporting revenue in that they're customer-facing in one form or another. They're making a big producer more efficient by either being a portfolio manager or a junior lender to that person. So if we hire more senior people, it will be higher. If we hire more junior people, it will be lower. But I don't think about -- I do think about it generally, but I don't think about it when we're across hiring somebody. I think is this a good long-term hire and is it going to drive profitability for the company.

Operator

Our next question comes from Gary Tenner from D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Just a couple of questions. First, on the oil and gas business, I know you mentioned you don't want to talk about yields or margin of the business. But in terms of the $57-or-so million put on the books this quarter, how many relationships or credits is that for the quarter?

Kevin J. Hanigan

Bear with me just 1 sec, 5 new relationships and some moderate increases just on some existing relationship. So think of it, if I just look at the average commitment that we put on in that business, it was just shy of $10 million per, and the average outstandings relative to that $10 million per is about $6.5 million.

Gary P. Tenner - D.A. Davidson & Co., Research Division

And is that $10 million per relationships sort of the bogey for you guys?

Kevin J. Hanigan

No, I'd say $10 million to $35 million. $35 million would be unusual. I think over time, I would think our average commitment size is probably going to tend closer to $12 million to $15 million.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Okay, great. And then just, Kevin, you had commented on kind of going through some work or working hard, I think, is what you put it in terms of M&A opportunities. Could you talk about kind of how the market looks to down there? Has there been any narrowing of expectations beyond part of the sellers and your general thoughts on that?

Kevin J. Hanigan

Yes, I don't want to talk specifically down here because our target list is so narrow, and I've said before, it's 12 or 13 companies in our backyard. We would much prefer to do something in our own backyard. We think it makes a whole lot more sense from efficiency basis. But as I look at what's going on across the country and I know overall activity doesn't seem like it's picked up, but there has been a shift, it seems in my mind, of in-market deals where banks of our size or smaller have gotten together, call it, somebody under $10 billion merging with somebody in market that is slightly smaller than them. And those seem to make a lot of sense to me. It seems that the market in general has rewarded in-market accretive deals even with what I would say are slightly longer tangible book value earn-backs than we have historically rewarded, i.e. deals with the less than 4-year tangible book value earn-backs have seem to have traded neutral to up relative to an index. So there seems to be a little bit of shift in what we're doing as an industry that being in market, larger deals putting together scale matters, and it's going to matter more in the future in our opinion. So we're cognizant of all those things as we're out in the market talking to our potential partners.

Operator

Our next question comes from Frank Bercasy [ph] from Mending Capital [ph].

Unknown Analyst

I had a question on expenses which you already addressed.

Operator

[Operator Instructions] And we do have a question from Brady Gailey from KBW.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

A quick follow-up on the warehouse. I know last quarter, if you look at the -- you all participate out, some of the warehouse balances. I think last quarter, you had $65 million in commitments. They were about 55% funded, so call it $36 million outward, what are those numbers updated for the third quarter?

Kevin J. Hanigan

We only have a $20 million facility out. We hesitate to call them commitments because we can choose to fund or not fund at any given time. So very technical but I'd just call them facilities. And that particular facility, I think at quarter-end, Brady, that portion of it had $9 million funded, so a little less than half of it funded. It would be reasonable to expect that we have put that participant on notice and that we are in the process of buying that one back. That's the only one that remains. So the other $45 million that were roughly 50% to 55% funded have been brought back in.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then so the warehouse was down, you know call it 10% in 3Q, I mean, do you think that the fourth quarter -- I mean, it sounds like the fourth quarter could be down again by even more than 10%, maybe call it 15% to 20%. Do you think that's realistic decline for 4Q?

Kevin J. Hanigan

I don't think about that for a second, Brady, and I'm not trying to...

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Yes, yes. I'm just saying...

Kevin J. Hanigan

It's going to be down more than it was. I mean, if we look quarter-over-quarter, it was down $260-ish million, right, from period-to-period. So -- and I think on average, it was only down about $92-ish million. I don't have the number in front of me, but those are roughly right. So it's going to be down more than it was and maybe another 15% is accurate. I'll go with more like 15% more, yes.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, so maybe an additional 15% decline and you're talking about on average basis?

Kevin J. Hanigan

Yes. Look, man, this is just a guess. It's, as I've said before, it's volatile business. The day it represents a smaller portion of our overall earning assets and I love the business in terms of what it's done for, so what it can do, and it's safety, but I'm not a fan of the volatility. I want to build businesses around it that are more stable and deposit-oriented, just basic blocking-and-tackling businesses. That's what we're going to be about going forward.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, so we're seeing a pretty material decline in 3Q and in 4Q. But I know it's even further out, but as you look to next year, I mean, would you expect the warehouse to somewhat stabilize? Or would you think there's still some downside as we head into '14.

Kevin J. Hanigan

It's just 1 man's opinion. I think we stabilize and hit a bottom in the fourth quarter.

Operator

And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Kevin J. Hanigan

Yes, I would like to just say a couple of things more than I normally say, maybe it's been a long week, I don't know what's causing me to be want to be more verbose. But we recognize we were below consensus, and we're very, very cognizant of that. The warehouse was off. I don't think that's surprising to anybody. We proactively dealt with some credit issues, which is part of our history and culture and that obviously, had an impact here. We had some late quarter fundings, and we had some healthcare issues. But as I look at the last 90 days, July 1 to September 30, there was really nothing I see in the way we're running the business I would change strategically or otherwise, other than I think, as a company, we need to learn how to deal with healthcare costs better than we're presently dealing with them and we intend to do just that. It's being studied and I think we have a meeting tomorrow to choose among some alternatives, and it's that time of the year when we look at benefits anyhow. But in terms of just running the basic business of banking, taking care of customers, growing loans, bringing in low-cost deposits, bringing in stable sources of Treasury management fee income and proactively managing credit, I think we're doing better than fine. I mean, running the basic business, I think we've got a good strategy and we're executing on it. I mean, we've had 2 quarters in a row of 9-plus percent linked-quarter growth in what we're trying to do, which is commercial banking. That's pretty good, guys. That commercial strategy, we've said all along, we thought would help -- drive lower cost of deposits, non-interest-bearing deposits and better levels of Treasury management fee income, and it is. So we're executing on the loan side and deposit side. We're bringing in new customers which is what, at the end of the day, this business is all about. We've got a $3.5 billion bank. It shrunk a little bit this quarter because of the warehouse. But with $500 million in TCE and I know you all know that, but we only have $21 million worth of NPAs. We are very proactive credit managers, okay? And I think that's borne out in the last 2 quarters. Last quarter, we dealt with an issue and we were able to get out of that loan and collect all of the unaccrued interest and bring it into our net interest margin. And some heralded with us in the quarter for 3.72% net interest margin, and we didn't deserve to be heralded for 3.72%. We deserved to be recognized for being good and proactive credit managers because the real margin was 3 66. And we knew that. So to anybody who wants to write a headline that 3.72% was great. 3.72% was good credit management and 3 -- whatever it is, 3.63% this quarter, it was really 3.68% and really good credit management, okay? And I will promise you when we make the decisions to deal with credit. And we have a credit culture around here that is well defined. We don't sit in there with a calculator saying, "Oh my God, should we do this? Our NIM's going to be down 5% and somebody might write that as a headline. Let me think about it." We just to what we think is right. So confronted with those decisions, whether it's this quarter or 2 quarters from now, whether it's the same decision or a similar decision, we're going to make the same call. So I would ask you all to separate NIM from proactive credit management and give us credit for proactive credit management and stop worrying about a 5-basis-point movement in NIM. Now I sound like I'm upset. I'm really just telling you, strategically, you should know how we think. When we see problems, we get after it which is why we sit here today with only $21 million of nonperforming credit. I'd like that number to be cut in half. And believe me, we're trying to cut it in half. Things happen, we deal with them. But strategically, we've got the right strategy. We're in a really good place and we're executing pretty well at the basic business of banking, which is beating everybody else in town at bringing in the customers. So thank you for letting me get on the soapbox. We'll sign off and talk to you all soon.

Operator

And ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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