Texas Capital Bancshares Inc (TCBI) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the third quarter Texas Capital Bancshares, Inc. conference call.

My name is Samuel, and I will be your coordinator for today.

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

We will facilitate our question and answer session towards the end of this conference.

If at any time during the call you require assistance please key star, followed by zero and a coordinator will be happy to assist you.

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

I would now like to turn the call over to Ms. Myrna Vance.

Please proceed, ma’am.

Thank you very much, Samuel.

And good afternoon to all of you.

We’re glad you could join us today to discuss our results for the third quarter.

As Samuel said, I’m Myrna Vance, Director of Investor Relations.

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

Now, before we begin our discussion of the quarter, I would like to read our required 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 risks of adverse impact 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 in our Annual Report on Form 10-K for the year ended December 31st, 2004 and other filings made by Texas Capital Bancshares with the Securities & Exchange Commission.

Now, let’s begin our discussion of the quarter.

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

After our prepared remarks, our coordinator, Samuel, will facilitate a q and a session.

Now, let me turn the call over to Jody.

Thanks, Myrna.

Good afternoon, everybody.

We’re delighted to have you with us today.

We are very, very pleased to be able to report what we think was another outstanding quarter for Texas Capital Bancshares, highlighted in particular in this case by our ROE exceeding 14% for the first time and ROA exceeding 1% for the first time.

If you look at the numbers I think you’ll agree that the growth story is very much alive and well; the engine of growth continues to run at a very, very accelerated speed.

And we think the future looks bright, as well.

The business model that we’ve been following I believe is validated, once again.

As you know, we’re not in the retail business, and as a consequence of that we’re not suffering from a lot of the pressures that many of the retail banks are experiencing.

For example, the compression of net interest margin, the slope of the yield curve is not affecting us as dramatically as it is in much of the rest of the financial industry.

Just looking at the financial highlights, and I’m going to hit these from a very high level and cover only a few of them because Peter is going to follow and get into some of the details, and then George is going to discuss credit quality, before I make a couple of final remarks.

However, if you just look at net income of $7.6 million, we’re up 45% from the same quarter last year and 15% on a linked quarter basis.

EPS at the same time of $.28 a share is up 40% from Q3 of ’04, and up 12% on a linked quarter basis.

Growth in loans continues to be very, very strong.

Loans held for investment up 32% over last year and 7% on a linked quarter basis.

Total loans, we did get a boost from our loans held for sale in that they were up substantially, and total loans were up 33% YOY and 9% on a linked quarter basis.

Deposits continue to be very gratifying and, in fact, you might say we had a surfeit of deposits during the last quarter, and Peter will discuss the impact that that had on our net interest margin, which I might add was very healthy.

But demand deposits were the highlight, they grew 39% over 2004.

They actually declined when you look at quarter end to quarter end.

This is not unusual.

Our demand deposits based upon the nature of our customers move a lot at the very end of the quarter.

Therefore, you really have to look at the averages, and if you look at the average linked quarter demand deposits were up 6% and now represent about 22% of total deposits.

So, we’re very, very pleased with that continued progress.

And, again, I think it is an indication of the continuing maturing of not only Texas Capital Bank but also of our customers.

Going back to just discuss some other things in general, the business does remain exceptionally well positioned and strong.

We do have increased confidence in our targeted net income of 26.5 million to 28 million, or roughly $1.00 to $1.05 a share.

We’re now nine months into the year and certainly we see the end of the year with much more clarity than we did before.

Growth in our business segments also continues to be strong, and we do continue to emphasize the buildout of these lines of business, as well as the introduction and continued buildout of lines of business that we more recently have introduced.

Just as an example, our Real Estate Mortgage Lending Group, our Mortgage Warehouse, and Bank Direct Capital Finance all had very, very solid quarters.

And on the latter point, we announced for the first time that we had acquired Bank Direct Capital Finance, or more precisely we acquired part of it and the other part we actually lifted out a group of people from another bank.

But, in any event, we said that it was accretive in the first two weeks that it was on the books, and it was significantly accretive in the current quarter.

Our non-interest expense will continue to rise as we build-out this company.

You’ll note that it was up about 45% to 46% over last year, but importantly our non-interest income was up 67%, and this investment in people is driving that increase to a large extent in our non-interest income.

We continue to have very successful execution of the business strategy.

That is, of course, helped by the strong economy that we’re in.

Texas continues to look very, very good from every point of view.

The unemployment rate, for example, in Texas is about 5.1% today, lower than the national average.

Industrial production is up significantly from 2005, and it is at the pre-recession highs that were hit in mid-2000.

And that’s quite a landmark because we haven’t seen these kind of numbers in many years.

Importantly, the index of leading indicators is up about 4% over this time last year, and of special interest to us the rig count in Texas is now 669.

We haven’t seen a rig count of 669 in over 20 years.

This is also very important to us as an energy lender, and I know all of you continue to follow the success of the Barnett Shale, and that continues to be a big driver of income and wealth in North Texas.

Finally, our credit quality continues to remain very, very strong.

We have net recoveries through the first nine months of the year of $210,000.

George will go into that in more depth, and also pipeline and other facts related to our lending business.

Now, however, let me turn it over to Peter to talk in more depth about the financials, and then we’ll be available for questions.

Jody, thank you.

Jody mentioned the very substantial growth we had in both categories of loans, loans held for investment and loans held for sale.

That combined with the margin expansion produced 10.1% linked quarter growth in net interest income and 39% over a year ago.

The growth in non-interest income, Jody mentioned 67% YOY, 23% in the linked quarter.

Most of this resulted from expansion of RML and, as Jody mentioned, Bank Direct Capital Finance, or BDCF.

We had substantial improvements in gains on sale of loans.

We had significant improvement in fee and other income in BDCF, and non-interest income was accordingly very high.

Combined affects of these produced growth in net revenue linked quarter of 12% and up 46% from a year ago.

Non-interest expense, Jody mentioned, is up substantially.

I should comment that of the 2.1 million linked quarter increase the acquisition and development and creation of BDCF has accounted for 1.3 million of that. 600,000 of that included increased selling expense associated with RML’s gain on sale improvement, expansion of sales force, and new offices at RML.

So, the balance of only $200,000 or 1% of Q2’s non-interest expense is comprised by all other areas of Texas Capital Bank.

Jody mentioned and it’s correct that for the first time, the first full quarter we have had an ROA exceeding 1% and an ROE of 14% or greater.

The Company does have substantial room and additional leverage for, as a driver of future ROE.

You may have noticed that we did increase our trust preferred outstanding by $25 million just after the end of the quarter.

Our efficiency ratio improved slightly.

It remains low, principally, as we have mentioned many times, as a function of the buildout expenses that we’ve discussed and what we still consider sub-optimal net interest margin.

I should note that excluding RML and BDCF our efficiency ratio is already about 700 basis points, 7% lower than the consolidated rate.

And that means that we have, we believe further improvement with expansion of margin, and as we improve the performance of the relatively new groups outside of RML and BDCF.

The next slide just shows period imbalances, many of which Jody has touched upon.

Very substantial growth in both loans and deposits, loans held for investment up 30%, 31% YOY.

Securities decreased, continue to decrease due to the flat yield curve that we have commented upon many times.

We have declining balances, and those do constrain to some degree net interest margin and certainly net interest income.

Growth in loans and the decrease in securities to 24.5% of earnings assets clearly shows, though, the much improved earning composition, earning asset composition.

We do believe that the lack of opportunity to invest in securities has cost us approximately $.01 per share for the three quarters so far this year.

And with the likelihood of rising rates and no significant relief on the yield curve, extended maturity yield curve, we would expect that level to continue and perhaps increase very slightly.

We also saw excellent growth in demand deposits.

We were, as Jody mentioned, down 4% from a seasonally high number at the end of Q2, but very high, very strong growth compared to the second quarter averages.

And that’s actually, that second quarter was very high level compared to the first quarter of this year.

So, we’ve put together two linked quarters of very substantial demand deposit growth.

We mentioned in the earlier call last quarter that in connection with the acquisition of the Bank Direct Capital Finance portfolio we increased broker deposits by some, by an amount that correspondent to the size of that acquisition.

We saw a total growth of $350 million in deposits, in interest bearing deposits, and of that on a linked quarter basis at quarter end only 80 was actually in the broker category, the rest was very strong growth in customer deposits.

We are in that context still seeing no significant competitive pressure on either the availability or the rates associated with our deposit gathering capabilities.

The next page just shows the same kind of information, averages.

Again, we think as indicators of success of the strategy.

And the balance is on an average basis or actually a little stronger, strong, very strong growth, as Jody mentioned, in this quarter in loans held for sale, on top of very good growth in loans held for investment.

We have for the last two quarters now and for the last 12 months seen deposits grow more than loans.

That happened for the linked quarter on both average and quarter-end basis, and for the last 12 months.

The next slide shows traditional spread of balances, rates, and yields.

We saw margin expansion of 9 basis points, and the excess liquidity that Jody referred to actually cost us five basis points of net interest margin.

It didn’t cost us anything in net interest income, but it did result in a reduction of what could have been a 14 basis point plus improvement in net interest margin on a linked quarter basis.

We saw an expansion of yields on loans held for investment by 63 basis points.

That benefit was reduced somewhat in terms of net interest margin by the growth, as I mentioned, in liquidity assets, but above expected levels due to deposit growth.

And, also, the composition of our interest bearing liabilities.

The yield on loans held for investment improved substantially, not substantially, but somewhat compared to the average prime rate during the quarter.

The net interest margin has now risen approximately 30% of the Fed funds rate movement since the Fed began increasing rates at the end of the second quarter of 2004.

That, despite the fact that the last three or four quarters a very flat yield curve has had an effect, of course, on net interest income, and a compression on spreads and the affect, and some affect on net interest margin in securities, and the small portion of our loan portfolio which is fixed rate.

The next slide just is our slide showing compound growth rates.

I might mention that actually the compound growth rate for loans and total deposits has actually increased that for the period depicted.

And DDA at 41% compound growth rate, recent growth rate, versus 48% is obviously very strong, going back to the early period of Texas Capital.

The next slide, revenue and expense growth.

Again, net interest income, net revenue, non-interest income remained very strong, and outpacing by a significant factor, the non-interest expense growth.

We do remain, looking at the next slide, asset sensitive.

Our overall balance sheet sensitivity has increased over the last several quarters.

We’ve seen the growth, obviously, in floating rate loan portfolio.

It’s now approaching three times the level of the securities portfolio and the fixed rate portion of our loan portfolio.

We’ve seen securities decline.

We, therefore, have a much better earning asset composition.

There are many, many variables that affect net interest margin in any particular month, quarter, or short-term period.

We have seen dramatic improvements in the value of DDA and our stockholders equity which, for us, stems in part from the very efficient balance sheet that we’ve discussed in the past.

We’ve improved the composition of earning assets.

The composition of funding versus – and that’s DDA versus interest bearing -- moves around based on what happens in deposit gathering activities and the growth and deposits that comes from our customer activities.

Relative growth in loan and deposit categories can certainly have an affect.

We expect continued expansion of our margin but we cannot predict in any quarter and will not be drawn into predicting in any quarter what that margin will be.

George, I’d like to turn it over to you, if you would comment on credit quality and some of the issues related to our pipeline?

Good.

Thank you, Peter.

If you look at the chart on our presentation you can see the truly exceptional credit quality existed by any measure that you might use.

We’ve had net recoveries in each quarter of 2005.

We’ve had a recovery in four of the last five quarters.

And our trailing 12-month net charge-offs of $23,000 is less than one-half of one basis point of the average loans held for investment.

Our trailing 12-month charge-off is less than 3 basis points – excuse me, trailing 24 months, less than 3 basis points.

We’ve had a reduction, a nice reduction in non-performing loans.

We’re down to .12% in the average loan portfolio.

And, again, our coverage ratios, total reserves, are quite good to non-performing loans, over eight times, and great coverage of our historical net charges.

And we ended the quarter with a large unallocated portion in our reserve for loan losses.

As Peter mentioned, loan growth has been good for the third quarter.

It did slow somewhat during the summer months, but we had a very good September.

And if you take a look at our underwriting pipeline today we see that it is looking quite strong, which we believe will mean good loan growth certainly for the fourth quarter and beyond.

Okay, George, thank you very much.

Just in terms of a couple of closing comments.

We do have increased confidence in the year, and as you might expect in addition to focusing on the fourth quarter we’re beginning to focus on 2006.

We’re in the process of putting together our profit plan.

We’re not in a position to give any guidance on 2006 at this point in time, but certainly we will be when we have our next conference call, when we report the results for the year.

And, again, we anticipate giving guidance with regard to a range of possibilities and, obviously, you hope to come in in the higher end of whatever range that we give you.

But there’s a lot of uncertainties in the world, such as Katrina’s and Rita’s, and we have no control over those things.

With that, let me turn it over to the operator for questions.

And, again, thank you for participating.

[OPERATOR INSTRUCTIONS.]

Your first question comes from Andrew Collins with Piper Jaffray.

Please proceed, sir.

Yeah, good afternoon.

Hi, Andy.

Just wondering about the cost of funds.

They’ve seemed to go up a little bit more in line with the Fed moves here recently; and yet, and I was just wondering kind of how are you planning to be a bit more competitive in terms of deposit rates?

And then, secondarily, 22% of total deposits and demand despots, just wondering, you know, how high you think you can get that number?

And what kind of customers are using demand deposits right now?

Well, probably, Peter, George, and I will all contribute to this answer.

But with regard to the cost of funds, it relates more to the mix than it does to competitive pressures.

We’re finding with rates increasing our own customers are seeking higher yielding deposits within our own deposit structure.

And we’ve seen our Euro dollar deposits, for example, grow and grow at a faster rate than they had been previously.

That having been said, Andy, the demand deposit growth continues to be really gratifying, and as I’ve said earlier I think it represents a maturing of the bank and a maturing of our customers.

We don’t think it’s unreasonable to have an expectation to see that number over time.

And I would be very careful to not predict any particular timeframes here.

But over the course of time to approach 30%.

And we are still very much a business bank.

As you know, the source of our deposits comes from our customers.

We have not gone outside of our customer base except in one instance, and that relates to some term brokerage CDs that we put on the books at the time we acquired the loans out of Baytree Bank.

And you will recall we acquired 10 million before the close of the second quarter, 70 million after the close of the quarter.

And we went into the term CD market and we put some CDs on the book to attempt to match fund those loans.

Peter and George, if you want to add anything to that?

Again, Jody, I think there is no issue with respect to competitive rate that we hear so much about in the rest of the industry.

We, obviously, for example, in the Euro dollar deposits have to post a market rate.

We have not increased that rate against the market competition.

We have done nothing in particular to cause the growth in deposits that we’ve seen other than what Jody mentioned with respect to match funding of the Bank Direct portfolio.

Okay.

The only other thing I’d mention, too, on the demand deposits, Andy, is basically as these rates go up slightly we’ll see the earnings credit go up somewhat and we could see our demand deposits, you know, continue to grow, more demand deposits on balance.

Okay.

And just a follow question.

I mean, you know, once the Fed stops, you know, what do you think is going to happen in terms of the margin?

Do you think it can continue to go up and, you know, however, I mean how reliant are you upon the long end of the yield curve in terms of that assessment on the margin?

Well, you know, there’s so many factors that weigh into determining margin, the mix of asset, mix of liabilities, and the duration of both.

But, Andy, good asset liability management would dictate that as we see rates beginning to reach some kind of peak, and in particular, a more normalized yield curve, we would move out on that yield curve in terms of us, particularly our purchases of securities.

And, of course, this assumes we’re able to attain the kind of spreads that we would find attractive.

But we are not going to allow ourselves to be whipsawed without taking appropriate measures to prevent that by the movement in interest rates and the vagaries of the Federal Reserve.

The Fed has a long history of being too lenient on the down side and too harsh on the up side.

And we don’t know where interest rates are going to go.

But, you know, historically there are some benchmarks.

And I think, you know, the collective wisdom of the marketplace will send signals that will indicate to us that it’s time to begin to lengthen the securities portfolio, and we’ll do that using a laddered kind of approach, dollar cost averaging.

As we’ve mentioned many times before, you know, we’re not the kind of company that pushes all the chips in the middle of the table and makes a big bet on anything.

Right.

But we do want to do the appropriate things to maximize and stabilize the return to shareholders, and that includes using derivatives to the extent that it would seem appropriate.

By derivatives in this case I’m talking about swaps.

Sure, sure.

What’s kind of the duration of your securities book currently?

Average life is now just below 3.8 years.

Okay.

And running off $12 million to $15 million a month.

Right.

So, you might see, you know, if things don’t change another, you know, $150 million runoff over the course of the next 12 months unless things change materially in the interim.

Okay.

Great.

Thank you very much.

Thank you, Andy.

And your next question comes from Jennifer Demba with SunTrust Robinson.

Please proceed, ma’am.

Hi, Jennifer.

Hi, thanks.

Good quarter.

Thank you.

Can you give us a flavor of where the loan growth came by market?

Yeah, Jennifer.

This is George.

How are you?

Hi.

Good.

We had about 75% of our loan growth in the C&I portfolio for the third quarter, and, you know, we believe we’ll continue to see that kind of mix at least in the near term in terms of growth.

So, we’re seeing more C&I growth.

How about by geography, George?

You know, we’re still seeing corporate banking in Dallas being a big part of that commercial C&I loan growth.

We continue to see Houston be a big player in our growth pattern, and we see the energy portfolio continuing to grow nicely.

Energy basically is managed out of the Dallas Office.

So, we’ve basically seen the commercial C&I corporate business being our driver.

Okay.

Jennifer, the only other thing I’d mention – this is Jody – is that, you know, we did buy the $80 million in loans, part of which were in the second quarter and part in the third quarter.

That $80 million portfolio had paid down to $44 million by the end of the quarter, so the growth that you’re seeing is coming from, you know, across the board.

Okay.

And, second, just a housekeeping thing.

Peter, you mentnioned the sequential growth in expenses.

I think at the beginning of your comments, from Bank Direct?

Yes.

Can you repeat those comments?

I’m sorry, I missed them.

Yes, we grew, the linked quarter growth, the non-interest expense was 2.1 million.

Of that, 1.3 was Bank Direct Capital Finance.

Right.

So, that’s the first full quarter that we’ve had that operation.

We had a little bit of it in Q2.

The staffing increase all occurred on about June the 15th.

Okay.

And then ran for the full quarter.

And then the balance, another 600,000 was RML, and then it’s higher commissions on sales of loans, and the gain on sale of loans was up nicely.

The only other, 200,000, that’s the net affect of everything else happening at Texas Capital Bank, basically.

Jennifer, the only thing I would add to this is that, you know, being a commercial as opposed to a retail bank, non-interest income is a challenge for us.

And we’ve deliberately looked for ways to accelerate the growth in our non-interest income which has led us into some of these lines of business, which, incidentally, we feel are very compatible with our overall strategy and with where this Company is going and where we want to take it.

So, Jody, what’s your appetite for other niche businesses like that, over time?

Well, we’ll continue to look for them.

You know, we’re very opportunistic about that.

And we’ve only made one acquisition since the – in the history of the Company and that was the part of Bank Direct Capital Finance that we acquired in the form of premium finance holdings.

Everything else we’ve done we’ve built around people.

And, you know, that still is our main focus, finding star people, you know, class A players who can hit the long ball and building businesses around them.

And, you know, we have, for example, within this year we’ve hired an individual who has a great background in leasing.

And we would be very hopeful that, you know, we’ll be able to continue to build our leasing portfolio and that’ll become a major driver for us as we go forward.

Thanks a lot.

Thank you.

And your next question comes from Scott Alaniz with Sandler O’Neill.

Please proceed, sir.

Good afternoon.

Hi, Scott.

Hey.

Just a quick question on the funding side.

Peter, you mentioned earlier that there’s, obviously, you know, the composition of the funding tends to move around a little bit.

As you look at the relative prices for money out there today, how would you expect to fund your loan growth over the next quarter or two?

Meaning in which areas, which areas of funding?

Time, money, market, what have you?

The money market balances remain very good, and very, very good in terms of price, in particular.

At the margin I said our customers are not willing to look at the Euro dollar option.

That tends to be a very short-term opportunity for them.

We classify money market, commercial money market accounts as more almost transactional balances, and then the Euro dollar deposit is some form of near term/intermediate term excess liquidity.

So, does that show-up as a time deposit?

Yes, it does.

Okay.

And so, I mean it sounds like you would expect that, or we should expect more, you know, continued gravitation, if you will, towards the time?

Compared to money market, that’s probably accurate.

It’s, you know, a very effective, very effectively priced funding source for us.

You know, better reserve requirements, for example, for FDIC assessments.

So, the all in cost is very attractive compared to anything else out there.

Okay.

Well, I wish I had a question for George on credit, but I hope I don’t anytime soon.

Thank you, Scott.

Scott, I might just add to what Peter said.

You know, our loan deposit ratio is in pretty darn good shape.

And we were selling funds, so we had the opportunity to redeploy our existing funding into additional loans.

Okay, all right.

Well, thank you, Jody.

Thank you.

And your next question comes from [Brent Chris] with Fox-Pitt.

Please proceed, sir.

Good morning, guys.

Hi, Brent.

Good afternoon.

A quick question.

On the loan yields, you saw a nice sequential pickup this quarter.

I was wondering what the yields were that you added 80 million in loans [on your] portfolio yields?

And then, secondly, you mentioned that that 80 million had shrunk to about 44 at the end of the quarter.

Just are you expecting that to continue to decline?

Well, what we said was that’s the portion that we, the premium financed loans have very short lives.

Four to five months on average.

So, the 80 million we acquired just by natural pay-down on monthly installments paid down to 44 million.

BDCF also originated new loans; and, Brent, we really are not, we have real competitive reasons why we would not disclose that rate.

Okay.

They have spreads that are above our standard commercial portfolio.

Okay.

Fair enough.

And then, next, in terms of the credit and, obviously, you haven’t had a provision in a couple of quarters.

Assuming no change really in the outlook for credit would you expect to record one going forward?

Brent, actually, again, we, our reserve and our provisioning is driven, as we’ve said before, by the methodology that we employ virtually since we’ve started the Bank.

It’s been tested, we believe in it; we’ll follow that methodology in the future.

And if that calls for a provision, we’ll provision.

Okay, all right.

Thanks a lot, guys.

And your next question comes from Kirsten Ramstorm with Bear Stearns.

Please proceed.

Hi, thanks for taking my questions.

Hi, Kirsten.

Hi.

I was wondering what’s your total energy exposure is now in terms of a percentage of your loan portfolio?

Well, total energy loans are 155 million, 156 million.

It’s around 11% of the portfolio.

Okay.

And then I just have some questions on RML.

I know we recently hit breakeven on that.

Are we still there?

Yes, we’ve been profitable the last quarter, and we’re profitable this quarter.

And now on a YTD basis.

Okay.

Okay, great.

Can you talk a little bit about where – how you see RML fitting in going forward, where you see it going?

Do you plan to expand to more offices?

You know, if we see a big slowdown in mortgage how is that going to impact the income statement, essentially?

Like, how should we think about that if we’re trying to, you know, get some sensitivity of the earnings to a slowdown in mortgage?

Well, we’ve entered this business for the long term.

And we entered it just coincidentally at a time, you know, when refinancings were probably at their high, but not with the expectation that we were going to be a short-term player in this business.

Right.

The housing market, we believe, is a viable long-term market.

We recognize that it is cyclical.

We will not allow that portion of our business to rise to point where, you know, we’re going to suffer from the cyclical swings in that portfolio.

And I also might remind you, you know, that we are not holding the servicing, we’re releasing the servicing, we’re also selling those loans so they’re on our books for a very short period of time.

And if we detected a vast slowdown in the market we might very well not close offices by any matter of means but we might slow our pace in terms of acquiring or opening new offices.

Kirsten, this is Peter.

It’s also, the RML business is a relatively small portion of the entire book of loans held for sale.

It’s a profitable component but it’s smaller than our Mortgage Warehouse business.

Okay.

I mean, you know, the other thing I’m thinking about is in terms of revenue versus expenses.

Obviously, revenue can be very, it can be variable, where only a certain percentage of expenses are variable.

So, I don’t know if you have any thoughts on any – I don’t want to use the word ‘guidance,’ but you know, any – you know, any other information you can provide for me where I could try to get my arms around it?

One of the answers is that the vast majority of the people who work in RML are on commission.

Are they on full commission?

Yes.

About two-thirds of them.

Okay.

As a consequence, when, if in the case we entered a period of a marked slowdown in the origination of residential mortgages, that would be reflected also on the expense side of the income statement.

Right.

So, it’s – there’s a self-correcting mechanism built into this portfolio.

Right, which I understand.

That’s why I was trying to get a better sense, that two-thirds of employees are all commissioned based is helpful.

Okay.

And then I have another question that goes back to the outside of RML, the rest of the Bank.

When you bring over lenders, you know, the experienced lenders from competitors what do, you know, obviously they bring over a piece of their loan book, but after they’ve been there for a year do we have any sense of kind of a same-store sales growth number for the business that they bring in?

Obviously, you know, when you’re bringing over teams of people it’s hard to try to get a sense of what’s kind of the organic growth of the people in place versus the new ones that are coming on.

We don’t track those statistics, per se.

But the, one of the answers is that the organic growth of the Company is solid and alive.

I can’t tell you precisely what percentage of the business that we put on the books is represented by business that new loan officers bring over.

Once a person is employed by Texas Capital Bank, you know, their job is to build their portfolio and to continue to build their portfolio.

And the way this usually works is we’ll have a senior lender.

Once that senior lender has his or her book of business full they’ll bring in a junior lender to join them.

And, you know, we can just take the case of our most prolific lender, started out with probably 40 million in loans and today has a book of 200 million.

And, you know, this person has now been with us, it’ll be over, well over six years; and continuing to grow his own portfolio plus that of his associates who are, you know, immediately reporting to him.

Okay, thank you.

Thank you.

And your next question comes from Bain Slack with KBW.

Please proceed.

Hi, good afternoon.

Hi, Bain.

Hey, I was wondering, I guess the first question I had was could you give us the duration on the Euro dollar deposits that you all have?

Well, most of those deposits are very, very short-term in duration.

And but if you look at the whole book of business, you know, it continues to grow and grow, you know, at a nice pace.

Part of this is driven by the interest rate environment that we’re in.

Okay.

The question, Bain, is are we locking in costs there?

And the answer is no.

Okay.

So, repriced every day essentially.

Okay.

All right, that helps.

For the, on the gain-on-sale on mortgage loans, did you give us the balance of what was sold during the quarter?

You might be the first person that’s ever asked that question.

I don’t…

The problem is we have two components here.

One is RML and the other one is the Mortgage Warehouse.

They both deliver loans into the same kind of selling.

They’re packaged a little differently.

It’s essentially a different channel, but we’ve never broken out the RML component of that.

Okay.

I’m trying to back in on some sort of gain-on-sale margins?

To have maybe the margins, or?

We’ve been asked if that number is coming way down, and it really has not.

I can’t tell you that in one net branch it hasn’t, and another one it has but.

Is there kind of a level that it’s been running at?

Well, we report the gain on sale of mortgage loans, you know, that’s detailed in the press release.

And, to be specific, for the three months ended September 30th, the gain on sale was 2.198 million versus a year ago 1.083 million.

Well, then you can look at the change in average balances to get some frame of reference, Bain.

Okay, all right.

I’ll do that.

And I just, a last question, I just wanted to clarify on the BDCF, on the contribution to loans.

I think, Jody, you had said it had gone down from 80 down to 45?

Well, that’s just on the portion that we bought from Baytree Bank.

We’ve continued to book new loans; and I will say to you that the total exceeds the 80 million that we reported as having been bought from Baytree Bank.

Okay.

Well, if I remember correctly, of the 80, 10 was posted last quarter?

Right.

So, I guess from the 80 would that mean that 34 million contributed to the 129 million growth that we saw, using end of period numbers?

That’s correct.

Okay.

Great, thank you.

Okay.

And your next question comes from [Charlie Earnest] with Sandler O’Neill.

Please proceed, sir.

Good afternoon.

Hi, Charlie.

A couple of numbers questions.

Can you actually say what the amount of Eurodollar deposits you’ve got in the numbers now?

Yeah, hang on one second.

And the other would be brokered deposits; and also had a question on whether any of the non-interest bearing are escrow deposits?

What kind of escrow deposits?

Just mortgage escrow?

You mean mortgage like monthly payment kind of escrow?

Yes.

We don’t do that.

Are any of the deposits related to mortgage business?

We have a reasonable amount of deposits from the title business, and we’ve done that for a number of years.

And will those fluctuate with kind of the mortgage cycle?

They will fluctuate somewhat, but they’ve become quite predictable.

And they bill near the end of the month.

And, again, what we’ve done is continued to add new business, new title companies to the mix so that that flows down a little bit of the volatility of the deposits.

But they’ve become quite predictable.

Charlie, this is Peter here.

Your answer, the interest bearing in foreign branches, that’s Euro dollars, is 537 million at the end of September 30th.

I think the important thing to emphasize there is that these deposits are deposits generated from our customer base.

We’re not in the market acquiring foreign deposits per se.

These are deposits, the depositors are basically, you know, in our five markets.

Dallas, Austin, Ft. Worth, San Antonio, and Houston.

Okay.

The linked quarter change, quarter end to quarter end and in broker deposits is 80 million, and that’s basically what we did, as we commented on, to fund the purchase of the Bank Direct Capital portfolio.

Okay.

And are there any broker deposits, as well, Peter?

That’s what I meant.

Okay.

I didn’t know if you were…

There are no broker deposits in the Euro dollar deposits, that’s all customer driven.

Got you, okay.

And just back to the reserve methodology, assuming the watch list at some point goes higher will that cause your reserve to loans to go higher?

Yes.

It will?

Yes, it’s a fairly detailed methodology, but that certainly drives the provision.

If loans worsen the methodology will drive higher provisions.

Two components: loan growth that absorbs it, and change in credit quality that in the last year has essentially released it or would consume it in the example you just gave.

Okay, great.

And then on the energy portfolio, how much of that portfolio are loans that you’re participating in with another originator versus ones that you’ve originated yourself?

Very, very few.

We have, we’ve originated a couple of large credits and participated them out.

But we have less than 10% I would say would be in the participated mode.

Almost all are originated by us.

Our customers – engineered by us – documented by us, policed by us.

And those that are participation’s would be, you know, from customers who are local to Texas.

In other words, we’re not reaching out to the world to find loan participation’s.

Got you.

Are there any categories or subsectors within the energy business that you’re lending to in particular?

Well, virtually all of it is E&P business, Charlie.

It’s, you know, we’re lending money on proved producing reserves.

And it’s just mainstream energy business.

Great, thanks a lot, you guys.

Thank you.

And your next question comes from Kevin Reynolds with Stanford Group.

Please proceed, sir.

Good afternoon, everyone.

Hello, Kevin.

I’ve got couple of questions for you.

One, I guess, is more conceptual or more theoretical; you know, we’ve seen the benefit in your profitability and in your margin of a higher Fed Fund rate as we go forward or as we’ve progressed over the last year or so.

But is there a level, in your mind, I mean as you look at your borrowers out there or as your lenders look at your borrowers, is there a level in the prime rate where you start to become concerned if the Fed continues to go on and on and on forever?

Do you mean does it put pressure on borrower’s capacity to repay?

Yeah, correct.

Well, let me make a stab at this.

Number one, you know, the normal Fed Funds rate if you look at it historically is between 4 and 5%.

And there’s been no indication from the Fed that they have any inclination to take the Fed Funds’ rate higher than what they really deem to be a neutral rate today.

It would take some extraordinary forces in the marketplace to cause them to change that stance.

And essentially that would be a basic change in the core rate of inflation and the expectations for the core rate of inflation.

And as you know, the core rate is less than 2% today.

There’ve been some big PPI numbers and CPI numbers driven by energy prices, but when you strip that away, you know, core inflation is still well, well under control.

There is some concern about these commodity prices as they work their way through the economy.

But it’s our belief that, you know, we’re not headed toward any kind of hyper inflation or economic situation that would cause the Fed at least in the foreseeable future to take interest rates outside of that normal range.

As long as rates stay there, you know, I think the economy remains in good shape.

The quality of our loan portfolio remains essentially unaffected by that.

And we begin to maximize the profitability of this Company.

So, you know, you’re asking a question that, as you said, is hypothetical and theoretical; and the only kind of answer that we can give is to a large extent hypothetical and theoretical also.

But, you know, we have positioned this Company to be in a very profitable position in a higher rate environment because of, or let me say, let me change that – in a rising rate environment because of the asset sensitivity of our balance sheet.

And as I said earlier, you know, at some point in time we will make an assessment in the market, and we’ll begin to try to lock-in some fixed rate assets.

But this is not a science nor is it an art, it’s a mixture of both.

And, you know, we’ll just use the best judgment we can, but we believe we’ve got a pretty good handle on this.

We think our asset and liability management systems are superb; and so far we’ve been able to, I think, convey to the marketplace that we know where we are and so far the data has validated that.

Okay.

And the next question I have is, you know, as you look at your business today, you know, it’s very – there are some different elements to it than there were at its inception.

Are there other pieces of your business that if you had to look out, you know, say three to five years from now that you don’t have today that you think you might need as you become a much larger bank, and your customer base evolves.

What might those types of businesses be?

And if you can identify them, you know, is there, you know, already some thought process about, you know, would you acquire something or would you build from scratch, and those kinds of things?

Well, we’re always looking for those opportunities.

And, you know, if you’d asked us that question two years ago and we wouldn’t have predicted that we’d be in the premium finance business today.

So, you know, we’re opportunistic, and we’re looking for lines of business that are complementary to the lines of business that exist.

But we don’t have a skunk work so to speak inside the Company trying to, you know, invent new lines of business that we might go into.

Some of the people may be skunks but, you know, they’re not involved in skunk works.

Just kidding, of course!

That’s a very difficult question to answer, also.

As we see it today, you know, we developed a strategy seven years ago.

We have followed that strategy.

Yes, we’ve entered some new lines of business but if you look at our core business it is essentially what it was day one of this Company.

And, you know, we believe that being focused and staying on track and remaining within the strategic game plan and our core competencies is the key to success.

So, will we go into other niche businesses?

Probably.

Can we tell you what they are today?

No, we really can’t.

I think the probability is high it’ll be with people, not acquisitions.

That’s true.

Okay.

Thanks a lot, and great quarter, guys.

Thank you.

[OPERATOR INSTRUCTIONS.]

And your next question comes from [Frank Carut], a private investor.

Please proceed, sir.

Hi, Frank.

Hey, how are you doing over there?

We’re doing well, thanks.

How are you?

Well, I’m down here in hurricane country in Florida.

Well, I know where you are!

Do you ever invest in any derivatives?

No, we do not.

Or we have not to this point in time.

And we mentioned earlier that it’s not beyond the realm of possibility that at some point in time we might engage in swaps, wherein we swap either assets or liabilities that are fixed rate for floating rate or visa-versa.

But I don’t see us going beyond that at all.

We’re not speculators, Frank, as I said earlier, we don’t gamble, we don’t push all of the chips in the middle of the table.

We’re not swingers, we’re bankers.

And that’s where we’re going to remain.

What about adjustable rate mortgages on residential?

Anything there?

Do you do any of that?

We have very, very few adjustable rate mortgages other than in the mortgage backed secruity portfolio where we do have some adjustable rate mortgages.

And Peter spoke to the duration of that portfolio earlier.

It’s becoming a smaller percentage and the total represents today about 25% of our earning assets.

But, yes, we do have some adjustable rate mortgages in that portfolio.

Frank, as you know, we have a retail mortgage operation.

And they do originate some adjustable rate mortgages but they in affect sell them, we don’t service any of them, we don’t keep them on our books.

They’re sold.

What about credit card, are you in that business?

No.

And we don’t intend to get into that business, nor are we in the merchant card processing business.

So, we’re not really in any element of the credit card business.

We do make credit cards available to our customers but that’s through an outsourced arrangement.

We’re not the providers of those cards.

When do the earnings come out?

The earnings are, they were posted at 3:00 CST, so…

Today.

Today.

I see, okay.

No, I missed it.

I just got in late on your conversation here.

Well, we’re glad to have you on the call, Frank.

Good to talk to you.

Thank you.

It’s a pleasure.

If there are no further questions, at this time I would turn the call back over to Mr. Grant for any closing remarks.

I would just like to thank everybody for their very thoughtful questions.

You know, it’s always fun to enter into these mind bending exercises with a bunch of smart people.

That’s one of the things that makes this job fun.

We do think we had a great quarter.

We look forward to closing out a great year, and to having another great year in 2006.

Again, would encourage you to call Myrna, who is our point person for receiving calls.

Obviously, all the Executive Officers are available to answer any questions that you might have.

Again, thanks for your patience.

Thanks for your interest.

And we’re doing, again, the best we can for the shareholder.

And we wish we had a better stock market to operate in, but maybe that will come in the not too distant future, at least we hope so.

So, thanks, everybody.

We really appreciate it.

Thank you, ladies and gentlemen, for your participation in today’s conference.

This concludes the presentation.

You may all now disconnect.

Good day.