Texas Capital Bancshares Inc (TCBI) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen.

Welcome to the Texas Capital Bancshares First Quarter Earnings Conference.

My name is Kaitlin.

I will be your coordinator today. [OPERATOR INSTRUCTIONS.].

I would like to now turn the presentation over to your host for today’s conference, Miss Myrna Vance, Director of Investor Relations.

Please go ahead ma’am.

Great.

Thank you Kaitlin, and good afternoon to all of you.

We’re glad you could join us today to discuss Texas Capital’s results for the first quarter of 2005.

As Kaitlin said, I am Myrna Vance, Director of Investor Relations.

And I would encourage you to call me should you have any questions after the call.

My direct line is (214) 932-6646.

Before we begin the call, I would like to read our Safe Harbor statement.

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

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

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

These, and other factors that could cause results to differ materially from those described in the forward-looking statements, can be found on our Annual Report on Form 10-K for the year ended December 31, 2004, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let’s begin the call.

With me on the call today are Jody Grant, Chairman and CEO, George Jones, President of Texas Capital Bank, and Peter Bartholow, our CFO.

And after our prepared remarks, as she said, our operator, Kaitlin, facilitate the q-and-a session.

So let me now turn the call over to Jody.

Good afternoon everybody.

We’re delighted to have you with us.

George and Peter and I are going to take about 20 minutes and walk you through the dynamics of our balance sheet and our income statement.

We’re going to try to be as concise, but as thorough as we can be, and leave ample time for q-and-a.

There are two major points that I hope you will take away from this call today.

One is that the momentum in this Company continues unabated.

We’re entering the second quarter, with what we think is a tremendous thrust toward a very successful year.

The second point is that we’ve got a high degree of confidence in the future.

I might begin by just saying that we’re extremely satisfied with the quarter, both in the context of our internal forecast, as well as the guidance that we previously provided to you for the year as a whole -- $26.5 million to $28 million in net income.

That equates to about $1.00 to $1.05 a share.

The results for the quarter were well ahead of, again, our internal plan.

But, most importantly, in terms of the metrics that really drive the future.

And that is net income, deposit growth, and loan growth.

Our net income was up 34% from last year.

Earnings per share up 33%.

The growth engine that’s been driving this Company really is the top line.

And we spend a lot of our time working on growth in deposits and growth in loans, because we know that we can’t achieve the bottom line results if the top line isn’t attaining our goals.

We had a very, very good quarter in terms of both of those metrics.

Our loans were up $113 million or the quarter.

That’s a 28% increase year over year, and 7% on a link quarter basis.

Our total deposits increased $191 million, 32% year over year, and 11% on a link quarter basis.

As importantly, the component of total deposits that we really look at very, very carefully is the demand deposit category.

That was up 31% on a year over year basis, 2% on a link basis.

But I think as Peter gets into the details, you will see that, on an average basis, it was up much more than that.

From the standpoint of credit quality, which is another one of the critical factors in determining total performance, it couldn’t get much better than it was.

We had net recoveries for the quarter of $17,000.

And if you take our total losses cumulatively, and the inception of the Company, it equates to about .12% of loans and leases.

We believe that this strong performance on the credit front continues to validate the credit culture that we’ve built, and the processes and procedures that we’ve put in place.

They’ve worked well from the outset, and they continue to work exceedingly well.

In order to sustain the superior growth that we’ve enjoyed in the past, we recognize that we have to continue to invest and invest heavily in people at the outset, and in our infrastructure.

And we’ve done that in the first quarter.

Again, Peter will get into the details of the increase in expense.

But let me just say to you that there is a pattern here, if you look at the increase in expenses in the first quarter this year they were up 12% from the fourth quarter of last year.

If you look at the same difference, fourth quarter of 2003 to first quarter of 2004, expenses were up 15%.

And there are some unique reasons for that.

Let me talk for a minute about Houston, and our residential mortgage lending.

Houston, we continue to invest heavily out in that particular market, because we recognize it as a great growth potential for the future.

Either toward the end of the fourth quarter of last year, or early in this quarter, we’ve added five relationship managers to our Houston presence.

These people are beginning to produce great results.

And just as an indicator of that, of our total loan growth in the quarter.

Houston accounted for 42% of it.

In residential mortgage lending, we continue to make progress.

We have not reached break-even overall in residential mortgage lending.

We would anticipate doing that in the second quarter, which would represent a big plus to earnings.

The Seattle acquisition effected in the last quarter of last year, when we made that acquisition, only two months of the quarter, in that we closed that deal on November 3.

Whereas in the first quarter of this year, of course, it impacted the entire quarter.

We’re not yet to break-even in Seattle.

We are tracking our plan pretty closely.

We are just slightly behind where we’d like to be at this point in time.

As I said, we are entering the second quarter with a tremendous amount of momentum.

Just to highlight two specifics for you, of the $113 million in loan growth that we experienced here in the quarter as a whole, $99 million of that occurred in the month of March, and $28 million on the last day of the month.

We exited the quarter with a very strong net interest margin.

This momentum gives us, again, confidence in our previous guidance that we’ve given you for the year as a whole, that guidance, again, being $26.5 million to $28 million a share.

I’d also like to point out that the asset sensitivity of the Company remains a huge plus as we go forward.

Peter is going to get into, again, some of the dynamics of the Income Statement that I think you will find interesting.

So with this, let me turn it over to Peter Bartholow to go into the financials in a little more depth.

Thank you Jody, and welcome to the call.

Turn to slide 4, and make sure you understand.

We had very strong core earnings power evident in Q1 performance.

The link quarter comparison really understates the favorable impact of interest sensitivity.

A normalized net interest margin posted at 3.7%, which was in fact increasing through the end of the quarter.

We have much improved earning asset mix at the end of the quarter.

We saw loans, finally during the quarter, as Jody mentioned, overcome the rapid build-up that we had in liquidity and liquidity investments.

Loans have now displaced the leading increase in security, the decrease we’ve had in securities, and have now fully offset the amount of liquidity investments we had throughout the quarter.

As Jody mentioned, the interest sensitivity remains very strong.

It actually increased slightly during the quarter, due to exceptional loan growth, all in the category of floating rate loans, as well as the contraction, further contraction of the securities portfolio.

We expect normal margin expansion, with the benefit of the late March increase in Fed funds rates.

And we now view likely that the Fed funds rate, by year-end 2005, will exceed that currently built into the Texas Capital plans.

We have a planned assumption at 3.25%.

The market outlook now looks more like 3.75% to 4%, based on the readings that we get.

We’ll turn to the next page.

We did have some anomalous activity in the margin this quarter that we’d like you to understand.

First of all, we had very rapid growth in deposits during the early part of the quarter.

That produced for us very strong growth in liquidity investments, because we are simply not willing to make investments in investment securities, given the flatness of the yield curve.

We have a disciplined approach that says we must meet certain criteria for spread and duration before we will make those commitments.

And those conditions simply are not with us today.

We’ve seen securities decline.

And that has had an effect on net interest income.

But it has not hurt the margin.

We have had liquidity investments, as I mentioned, roll rapidly during the quarter.

The growth of that category, before the loan growth displaced it, cost us about 5 to 6 basis points in net interest margin.

Loan growth was exceptional.

But, as Jody said, most of it occurred during the end of the quarter.

So the liquidity investments remained high throughout the quarter and into March.

The normalized yield for us includes 1-2 basis points of what we’ll describe as non-interest yield variables.

They include fee adjustments.

And those can be either accelerated fees, based on payoffs, or reduced, based on adjustments that are required, prepayment penalties, premium amortization, which occurs in both certain loans, and of course securities.

We had significant changes in normalized yields in Q1.

Just the adverse effects of things happening in those categories cost us just over 5 basis points in the quarter.

So the margin adjusted for these factors, we believe, is properly reflected at about the 3.7% on a normalized basis.

We saw by the end of the quarter the margin at 3.71%, and rising with the benefit of the Fed rate increase that occurred in the last part of the quarter.

Turning to page 6, the earnings pattern, as Jody mentioned, from Q4 to Q1, is always effected by timing conditions.

We have very large increases on a link quarter basis in FICA and employment taxes.

We also, this year, had a significant increase in the cost of medical insurance, which is, I am sure, effecting the entire industry.

The results in the FICA and employment taxes come from the compensation structure of Texas Capital, which we can discuss in the q-and-a section if you’d like.

We are very interest sensitive.

A 28-day month in February has a half million dollars effect on our net interest income.

It does not effect the margins.

The RSU vesting, which we have discussed, was a half million dollars in expense, a $300,000 increase from Q4 of last year.

Again, this is an event which does not effect total expense over time, only the timing of the recognition.

All of these issues are fully contemplated in the planned results, and were incorporated in the guidance we gave for 2005.

The same conditions as Jody mentioned were evident in the first quarter of 2004. 2004 increase in these expense items was offset in part by the income from the Ace Cash or the cash management project that we had at that time.

That transaction with us, it was essentially taken in-house by the customer.

In addition to the timing events, as Jody mentioned, we also made very substantial investment in lines of business in late Q4 and early Q1.

So we’ve had now essentially the first full quarter impact, which is perhaps the largest link quarter growth in recent time, in recent years, since the beginning of RML and our initial foray into Houston.

Clearly, our expansion in these activities reflects our confidence in the strategy, and our success in recruiting very experienced relationship managers.

We also expanded wealth management.

The expansion in Houston, as I think we said earlier, covered corporate banking, the energy group.

And new to that is another real estate component.

Houston, as Jody mentioned, accounted for a very large portion of total loan growth, and is now extremely profitable.

We expanded in RML in Seattle, as Jody mentioned.

That expansion clearly cost us in the first quarter, as has been outlined.

So in addition to the three and a half cents that are related to the timing of expense issues and the number of days, we had margin and build-out investment expense that accounts for another two plus cents per share.

Turning to page 8, we mentioned the reason why our growth in net interest income was constrained -- number of days and margin issues.

We also saw a contraction, seasonal contraction, in the loans held for sale.

The mortgage industry goes through a seasonal decline in late Q4 and early Q1.

And that effected us, as it did the rest of the industry, especially with the rising rates that we saw over a portion of the quarter.

That did have an effect, therefore, on net interest income.

It did not effect the margin.

The enterprise, the loan held for sale categories, now have a very strong pipeline after that seasonal weakness.

On a link quarter basis, we had a substantial gain in the loans held for sale.

That reflects very strong production of loans in RML, despite the seasonal weaknesses.

The non-interest income comparisons to Q1 2004, as I mentioned, are effected by the fact that we no longer have the cash management project that we’ve discussed in numerous cases in the past.

For non-interest expense, 87% of the growth, totaling $1.7m of the $1.94m in growth, is attributed to four factors.

First, the restricted stock vesting of the $500,000 total, or a $300,000 increase on a link quarter basis.

We had commission expense for RML production.

High production produces high commission expense.

That was $272,000.

FICA, employment, and I’ll add to that medical expenses, totaled $765,000.

And the investment in expansion is approximately $350,000 or a little higher.

So Q1 2005 EPS increased 33%, despite what we think is the 5.5% plus per share drag from the factors that we’ve discussed, which we believe are, again, timing or self-correcting.

On page 9, you will see this is the traditional model that we show.

We do have, for the reasons described, reduction in ROA, ROE and efficiency.

When you adjust for the timing events, and the other conditions that we discussed, we’re closer to an ROA of 97 basis points, between 97 actually and 100 basis points.

ROE add at approaching 13%.

Efficiency ratio 63% to 64%, still reflecting a very high level of build-out, and margins that were not fully reflective of the earnings power of the Company.

RML also has the effect of increasing both the ratio of non-interest income to earning assets, and non-interest expense to earning asset ratios.

Adjusted for the fee income, net of the commissions, those numbers would be 49 basis points and 2.6%.

On slide 10, we commented on the very strong growth in core loans, which is not fully reflected in the average balances.

So, as Jody mentioned, we start Q2 in a very strong position.

The earning asset composition continues to improve.

We now believe that security portfolio will likely decline from the 31% level it is today to perhaps 25% or below.

We will have the loan growth to compensate for that over the course of the year.

Absent significant changes in the yield curve, we just can’t make commitments to the securities portfolio.

Demand and total deposit growth were very strong, especially against what our kind of industry wide peaks at year-end, though typically Q1 comparisons are not nearly as favorable as what we are describing today.

Looking at average balances on page 11, again, total core loans were very strong, up 26%, 5% link quarter.

I might note that at the end of Q1, core loans were already 5% above Q1 averages.

Deposit growth, again, we say has been exceptional.

DEA growth of 8% on a link quarter basis, 37% year over year.

Total deposit growth 10% link quarter, 33% year over year.

All growth is customer based, and commercial in nature.

On page 12, earning asset yields increased 26 basis points, close to the 36 basis points on an adjusted basis.

Cost of interest bearing liabilities, well contained at an increase of 30 bps.

Total cost of funding, which benefitted the growth in demand deposits, was up only 21 basis points.

The net interest margin up three, as reported, was lower than what we believe our sustainable level is today, 3.7% or above.

Slide 13, again, is the demand deposit core loan growth.

Very strong ratios, very strong growth rates.

You will notice that we dropped off finally, the first year of our existence in 1999.

That’s the only reason why these levels had come down from the prior presentations.

Same thing is true, obviously, of slide 14.

Compound growth rates in these categories are driven by, obviously, the growth in the Company.

Slide 15, the (comments) (ph) begin on interest sensitivity.

It increased during the quarter.

Securities declined as a percent of total earning assets.

We had exceptional loan growth, all concentrated in floating rate loans.

And with the level of loans, and the enhanced sensitivity, we should benefit sharply from the rising rates.

I will now ask George to comment on loan growth and credit quality.

Thanks Peter.

Again, I don’t think it’s -- I think it is very important to emphasize, again, loan growth for the quarter was excellent.

We are especially pleased with our regional loan growth.

As mentioned before, 58% of our quarterly loan growth came from our four regional markets outside of Dallas.

And as Jody mentioned, our Houston office accounted for 42% of our total growth.

We think that’s exceptional as it relates to when we started the Houston operation.

So our investment in build-out is really paying off, we believe.

Our strategy of significant investment in experienced local people, rather than brick and mortar, not only jump starts our loan and deposit generation.

But it leads to very good credit quality, because these people bring their seasoned customer relationships with them when they join our Company.

Net recoveries, as mentioned before, of 17,000 in Q1 ‘05.

Trailing 12 months charge-off experience was 2 basis points.

Trailing two year charge-off experience was only 6 basis points.

And as Jody mentioned, again, since inception, our charge-off ratio was 12 basis points.

NPLs looked good also.

They decreased to .36% of core loans.

We’ve had a substantial reduction in classified assets, not only for the quarter, but for the year.

We’ve increased our unallocated portion of the reserve, even in light of our strong loan growth, which shows you that our credit quality is certainly improving.

Our total reserve today stands at $18.7 million, and we believe quite strong as it relates to our credit quality.

The reserve itself is 1.18% of average core loans, 1.12% of year-end core loans.

Again, the multiple is over 11 times trailing, two year charge-offs and three times NPLs.

The multiple of 2.6 times net charge-offs from inception is quite good.

The next slide, again, gives you just a graphic picture of charge-offs to average loans since 2001.

The information below shows, again, describes non performers to average loans, and a multiple of our total allowance to non-performers.

Quite pleased with credit quality, certainly for the first quarter.

Jody?

Okay.

Thanks George.

Let me just close, before asking for questions, by saying that we do have a lot of momentum, which gives us very strong feelings about our success, probabilities for success during the rest of the year.

Our focus is, again, on keeping the growth engine going, on investing wisely, and producing good solid returns for you, our shareholders.

With that, let me turn it over to the operator, and we’ll begin questions.

Thank you sir. [OPERATOR INSTRUCTIONS.] Scott Alaniz of Sandler O’Neill.

Good afternoon.

A couple of questions.

First, could you shed a little light on the softness in the loan growth during the first two months of the quarter?

And secondly, related to that, talk about what type of lending opportunities you’ve seen so far in April, and shed a little more color on the pipeline.

Let me just start out by saying that as is customary in the banking business, there are customers who pay down their lines of credit, to clean up the balance sheets at year-end, and for other seasonal reasons.

And we saw a good bit of that during the first part of the year.

Also, there’s some continued movement of real estate loans from variable to permanent rate loans, in order to lock in rates, in expectation of rates going higher Scott.

With regard to what we’ve seen in the pipeline, the pipeline is as strong as we’ve ever seen it.

Our results in April, both in terms of loans and deposits, have been what I would describe as very, very solid.

We’re not going to have -- well, March was the best year we’ve ever had in this Company in terms of loan growth.

And so we’re not going to have $100 months typically in the future.

But I think the growth prospects for the rest of the year are right on track with where they need to be to produce the kind of results that we indicated to you we’re expecting for the year as a whole.

I see.

And Jody, did you experience significant pay-downs on the loan portfolio?

I know Bank of Oklahoma, which is also energy lending, had some fairly significant pay-downs from the energy borrowers as well.

The answer is no to that question.

In fact, with the addition of our energy team in Houston, we’ve seen pretty good growth in the energy sector.

And just to remind everybody Scott, we’re on the edge of the Barnett Shale.

And that continues to be a huge factor for us, and I presume other banks that are heavily involved in that, although I think for a Texas-based bank our size, I am pretty sure we’re the largest lender in the Barnett Shale.

And we receive benefits from that in two ways.

Number one, our customers’ cash flow, given the current level of energy prices, is quite large.

And consequently our balances, demand deposits and other balances from our energy borrowers, have grown much more rapidly than we would have anticipated a number of years ago.

Secondly, there is a lot of development occurring in the Barnett Shale and elsewhere, I might add, but particularly with the Barnett Shale right now, based upon, again, the attractiveness of the price structure, and the production that’s available in that field.

I see.

Thank you.

George, anybody, have anything you want to add to that?

Well said.

Okay.

Terrific.

Thank you Jody.

Next question?

Andy Collins of Piper Jaffray.

Just wondering about, I guess you’re continuing with the guidance of $26.5 million to $28 million for the year.

I just wondered kind of how the expense numbers will play out, because obviously the first quarter, you’ve already mentioned, was a little bit abnormally high.

Would we expect that efficiency ratio to get back in line with where we’ve seen it progressing last year?

The efficiency ratio should improve, as the year progresses.

And we would expect the, as was the pattern last year, the growth in expenses to flatten materially over the course of the next several months in particular.

And we’ve got a sharp eye on expenses, Andy.

And we did have extraordinary circumstances in the first quarter, some of which we telegraphed to all of you during the conference call at the end of the year.

But that’s just the nature of our business right now.

And the incline in our earnings, based upon our plan, is a lot steeper than what has been estimated by you and some of your colleagues.

Okay great.

And then the separate question on the margin I guess.

Ended the quarter, I guess, at around 371.

And I am just wondering –

Actually Andy, that was for March.

That was for March.

And we still had about a 6 basis point impact of the high level of liquidity investments during the month of March, which has essentially been eliminated with the loan growth that occurred at and near the end of the month.

That’s the 6 basis point drag already reflected in the 371.

So I am sorry for interrupting.

Okay.

No.

But, so I guess the mix is going to help you out in terms of the margin.

But you’re also very asset sensitive.

I am wondering if you can kind of gauge how asset sensitive you are to where the Fed Funds futures might be heading, or where the Fed Funds rate might be heading towards year-end.

We’ve given some indication in the past in response to questions.

The question was posed how much of the increase in Fed Funds rate should fall to the net interest margin.

And we had only two quarters sampled at that time.

And it looked like it was between 30% and 40%.

We’d say today it’s more likely to be 25% to 35%, although that number can move around quite sharply.

So that’s kind of a long-term trend number, not necessarily what happens in any particular month or quarter.

Okay.

And that’s also absent what may be happening with the 10-year?

Yes.

Absolutely, because we’re not -- we don’t have anything that has a maturity of 10 years, except maybe an occasional mortgage loan.

And, as we’ve said before Andy, over 90% of our loans are tied to Prime or LIBOR, which change, in the case of Prime, instantaneously with changes in the Fed Funds rate.

Great.

Thank you very much.

Jay Cunningham of Hibernia Southcoast.

Just refresh me.

You talked a little bit on what you thought the normalized ROA was and ROE.

Can you hit on that again?

Sure.

If you just take the numbers that were included in the materials, in the presentation, adjust for those as timing differences, or in the case of February, just because we’re so interest sensitive, and a 28-day month hurts, just taking those factors alone to get to a 97-basis point ROA.

Between 12-3/4% and 13% ROE, and an efficiency ratio of 64%.

The enhancement of margin on the efficiency ratio obviously has a big impact.

So with the other margin related investments and the build-out, you’re actually closer back in Q1 to a 62%, 63%, 64% type level.

Keep adjusting for those anomalies.

Okay.

And then I know you’ve spoken to what you thought an exit rate for the ROE would be this year.

Any changes in that?

If I recall correctly, somewhere starting with 15?

Well, I think we said probably closer to 14% in terms of the exit rate.

14 to 15.

14 to 15.

But we haven’t changed that.

We would still hold with that forecast.

One of the issues is, with the contraction of the securities portfolio, we’re not getting quite the leverage.

So our objective is to get over time to a 15-16 leverage.

And on that point, since Peter brought up the securities portfolio, I’d like to just elaborate for one second.

As everybody knows, the 5-year and the 10-year rate has not moved in tandem with the increase in the Fed Funds rate.

So there has been a tremendous flattening of the yield curve.

There could be a great temptation on our part, and probably on the part of others as well, to replace the securities portfolio as it runs off.

And we’ve been experiencing run off of about $12.5 million a month.

One of the hallmarks of our success, and we believe the creation of shareholder value as we go forward, is to exercise the discipline that will cause us perhaps to sacrifice a few basis points earnings in the short- run, for the benefit of the long-run.

And we’re not going to allow ourselves to be seduced to leverage the balance sheet with what we would consider to be high risk investments at this point in time, related to the slope of the yield curve.

So we are going to continue to experience, as long as the yield curve looks as it does today, a run off in the securities portfolio.

And we haven’t bought a security this year as far as I know, and have no plans to.

So pardon the explanation.

But I think it’s worth the point.

No.

That’s helpful.

Thank you.

And then just a little bit on some of the fee revenue lines, just to talk to service charges.

We’ve seen some weakness in the number of competitors.

Just what are you seeing there?

And then comment as well on the large gain on sale for mortgages?

Yeah, we are, as you know, our service charge income is not a major item.

As a commercial bank, we don’t get as many NSF charges as perhaps others.

We do have, I can’t speak, George, with certainty.

But we have account analysis, where cash fees are being reduced by higher levels of interest.

The overall economic impact of that is fine with us.

The rising value of the DDA accounts, with the profit margin built into account analysis, leaves us basically in the same position.

Okay.

George, do you have anything?

That’s exactly right.

I think we’ve seen higher balances, people taking advantage of the rising rates, earnings credit.

It certainly hasn’t effected deposit growth or anything like that.

No.

Okay.

Jay, is that it?

No.

Just that last one on the –

Oh, on the gain on sale?

Yes.

Mortgage production in the first quarter was, especially for the seasonal issues in that industry, was very high.

So we saw a big pick-up in the growth.

Let me turn to my chart there.

Production was $5.7 million more on average for the quarter than it was the previous quarter.

That’s right.

They increased to $1.8 million from $1.1 million.

And that also, as I mentioned in the comments, causes commission expense to rise, which was, on a link quarter basis, $272,000 of the increase in non-interest expense.

And how much of that was attributable then to Seattle?

Of the total growth?

Yes.

Jay, I don’t know.

Okay.

And then just one last question then.

Do you have a head count number for the quarter?

And then just talk to how many RMs and what is the plan for the year?

Absolutely.

The plan for the year is to hire all we can find that meet our criteria.

And we hired, frankly, a couple more probably in the fist quarter than the plan would have shown.

And that is on top of a pretty robust Q4.

We added, George?

Eight?

Seven.

Seven RMs.

Total bank FTE grew from 322 to 343 link quarter.

RML grew from 188 to 192.

Okay.

I think one of the important facts, Jay, is that the ratio of relationship managers to non-production type people remains very good.

And basically it’s one to two.

For every relationship manager during the first quarter, we hired, two support people, which also takes into account increased activities across the board in terms of both lending and deposit servicing.

One of the points to make there also, on the balance sheet now 2.63, and driven really by a bank FTE of 340 people is remarkable.

Perfect.

Thanks a lot guys.

Jennifer Demba with SunTrust.

The other Texas banks that have reported thus far this quarter all noted intensifying competitive trends in terms of loan pricing and deposit pricing.

I am just wondering if you could comment on what you’ve seen in the last few months.

Hi Jennifer.

This is George.

Yes.

It is getting more competitive.

We certainly have seen it on the loan side.

Quite frankly, we haven’t seen as competitive pricing on the deposit side.

We’re a commercial bank.

We’re not a retail bank, as you know.

And we haven’t had to compete as aggressively on the deposit side, as possibly what maybe some of you think we would.

On the loan side, again, it is competitive.

But, for instance, we looked at our Houston instance, as a matter of fact, and looked at the pricing that we’re getting in Houston, which again is a very competitive market.

And we believe that our pricing is holding quite well in Houston.

We’re competing.

We’re bringing in business.

The corporate side is doing extremely well.

Our yields today in the Company are about prime plus three quarters on an average basis.

And while we are competing, and we are lowering some rates to be very competitive, our overall yield structure is holding quite nicely.

And that prime plus three-quarters has been there for the last few quarters.

And Jennifer, the only thing I would add is that we’ve never been in the syndicated loan business.

And I think a lot of our competitors, or at least some of them, do have a greater percentage, much greater percentage of syndicated loans, where you’re likely to run into more price competition.

We try to, as we’ve discussed in the past, stay under the radar screen of the bigger banks.

And we’re very disciplined in staying within that middle market niche, as we define it.

And fortunately, we are, in most cases, the only bank for our customers.

And we have all of their business.

And the good news is they’ve been very loyal to us.

Where have you found the pricing environment to be most competitive?

What market?

What geographic market?

Yes.

Dallas and Houston primarily.

But again, we’ve got strong competitors in every market we’re in.

We’re in the five major growth markets in the state.

Most people are there, or are coming.

And so we compete actively in all our markets.

Okay.

And can I clarify one thing that Peter went over?

Peter, you were talking about the growth in expenses that was more seasonal oriented.

You noted four things.

You were speaking sequentially, right?

Yes I was.

Okay, thank you.

Those are all link quarter numbers.

Faye Elliott-Gurney, Lehman Brothers.

Thanks.

Nice quarter, although this initial headlines, I almost fell out of my chair.

We didn’t mean to scare you Faye.

Yeah.

You scared me.

I just wanted to clarify.

On the margin, you said you had about 6 basis points in liquidity drag, with the 371 in March.

So does that mean you ended March with about a 377?

That was average for March.

We don’t have a point in time margin.

A point in time.

Okay.

But we got a Fed rate increase late March that would have been, had diminimous effect in the March margin.

Okay.

And then also on expenses, can you give a run rate, I guess, that would help going forward?

I know -- maybe a run rate that we should look to for 2Q, given that 1Q obviously had some excess expenses.

So a run rate there wouldn’t be that helpful.

But what should we look for in the second quarter, approximately?

I would look back to 2004, and the experience run rate from Q1 to Q2, recognizing that in that particular instance we did not have the bulge resulting from the vesting of the stock.

So we would hope that the run rate from Q1 to Q2 this time around, in this year, would be a little bit better than perhaps last year.

Also with the fact that we are larger than we were then.

Right.

So basically back out the expenses you talk about in the release and in the slides, and then grow it about the amount you grew in 2Q over 1Q last year.

That would probably be a good approach.

Okay great.

Thanks a lot.

[K.C.

Ambridge] of Millennium Capital.

Thank you very much for taking my question.

I’d like to say I almost fell out of my chair when I saw that top line number.

Just a quick question on the earnings.

For the $26.5 million to $28 million guidance, should we use the same share count that you had in the first quarter of 26.6 million?

Well, it’s difficult for us to forecast share count, because that depends, to some extent, on the price of our stock.

And we can’t forecast the price of our stock.

With the prices flat from here?

26.6 would be a good number.

Okay.

That looks like it kicks out $1.00 to $1.05 then.

That would be consistent with what I said at the outset of my comments.

Okay.

Even though you’re starting at a $0.20 run rate?

Right.

Yeah.

And if you will notice from last year, we also had a significant ramp that has not, at least as we’ve seen, been reflected in the way the analysts have estimated earnings.

Okay.

I just want -- I mean I just want to make sure we’re all on the same page.

And then, and to get there, I just want to make sure, to get to the numbers you’re talking about, you’re not planning on leveraging the balance sheet at all?

Only to the extent that, not artificially leveraging the balance sheet.

We would hope that the balance sheet would be normally leveraged, as we hope to continue loan growth.

Sure.

But right now it looks like the actual excess deposit growth you’re seeing is actually costing you money instead of helping.

Yes.

That has been true in the first quarter.

Okay.

That’s not true today.

The excess liquidity basically was absorbed fully by the loan growth.

And we never really have been in a position where we’ve had that much excess liquidity in this kind of rate environment.

But it’s hard to turn away customer deposits.

Okay.

And are you still seeing that liquidity kind of continue, as April goes on here?

We have very good deposit growth throughout the quarter.

What we had was the loan growth absorb the excess liquidity.

Okay.

And then just one last question regarding the share count.

That’s just a matter of timing for you, and the analysts might be slightly off in terms of how the quarter ends, but it’s not a concern?

That’s correct.

Okay.

Thank you very much.

Good quarter.

Thank you very much.

We appreciate it.

Bain Slack, KBW.

Hey, I was just wondering if you could give us, given the loan deposit ratio of 88%, and what you were saying regarding the liquid investments, what’s the strategy with the interest bearing foreign deposits?

I mean it looked like it doubled link quarter.

Well, that’s true.

It did.

And we had -- we were the beneficiary of some really good news.

One of our customers sold his company, and placed a very large deposit with us.

That deposit will probably be with us, we would guess, for some period of time.

But -- and frankly, there is good news/bad news associated with everything.

It cost us some money.

But then we got it.

But, as Peter said, we absorbed the liquidity with regard to the loan increases we’ve had in March.

And fortunately, we’ve been having a good experience in April as well.

So we hope all that excess liquidity will be fully explored as the year progresses.

Okay great.

Thanks.

And good quarter.

Your final question, from Kerstin Ramstorm of Bear Stearns.

Hi.

I was wondering if you could provide -- and if you already talked about this, I apologize -- but provide a little more depth on your deposit growth in the quarter.

In looking at the quarter over quarter growth rates for interest bearing specifically, it looks like it went up by about $50 million.

But when I look at the average balances, and obviously it’s kind of apples to oranges, it looks like your time deposits grew a lot.

And I was just hoping to get some color on that.

And then I had a couple things after that.

We had a large surge in demand deposits in the fourth quarter of last year.

Fortunately, we had a good experience in the first quarter of this year in terms of demand deposits.

I mentioned the customer, who sold his company and placed about $100 million with us.

That all went into Euro deposits, which of course are interest bearing.

But if you look at our deposit growth in total, we’re very pleased with not only the growth, but the mix as well.

We’ve been able to pay off a lot of our higher cost funding as a consequence of that, particularly some of the matched borrowing that was carrying our securities portfolio.

That was at a higher cost.

So net/net/net, we think we’re way ahead of the game with the deposit growth that we’ve experienced.

Does that speak to your question?

Well, and it’s kind of hard to tell, because the things I was looking at were averages for first quarter.

But it looks like time deposits had actually gone up quite a bit.

Would the Euro/dollar deposits fall in the time deposits?

Yes they did.

That was where we had the most significant growth.

Okay.

So that was the one customer.

And then the second thing was, in terms of your guidance of $26.5 million to $28 million in net income for the year, does that include the assumption of the higher Fed Funds rate now in the 3.75% to 4% range?

No, it does not.

That guidance was based upon a Fed Funds rate, built into our plan, or 3.75%, topping out at 3.75%.

Okay.

So you don’t have any further thoughts, based on your new thoughts on the Fed Funds rate?

We’re not providing any new guidance at this point.

Okay.

And then in terms of the relationship managers, did I hear correctly a couple questions ago, you had hired seven new relationship managers in the quarter, and had gone from 188 in fourth quarter to 192?

No, that was RML employees.

We did hire 7 new relationship managers.

But then the second part of that related to our Residential Mortgage Lending group.

Okay.

And how many relationship managers do you have now?

89.

Okay great.

Thank you for the clarification.

Appreciate it.

[OPERATOR INSTRUCTIONS.] Sir, that was the final question.

I’ll hand the call back to you for your closing comments.

Well, appreciate everybody’s interest and patience in staying with us through some reasonably complicated anomalies that occurred in the quarter.

Again, I’d just like to reemphasize that we think that we had a very, very good quarter.

We are particularly pleased with the momentum that we had, exiting the quarter.

We feel confident about the year.

And, again, I would encourage any of you who have further questions to direct them to Myrna.

She gave you her phone number earlier.

Myrna, you want to repeat that phone number?

Absolutely Jody.

It’s (214) 932-6646.

We appreciate all of you, and we appreciate our shareholders.

And thanks for tuning in today.