Texas Capital Bancshares Inc (TCBI) 2009 Q1 法說會逐字稿

Hello and welcome to the Texas Capital Bancshares first-quarter 2009 earnings conference call. All participants will be in listen-only mode.

There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions)

Please note that this conference is being recorded. Now I would like to turn the conference over to Myrna Vance, Director of Investor Relations.

Thank you very much. Thank you all for joining us today for our first-quarter conference call.

As Ryan said, I am Myrna Vance and should have any follow-up questions, please give me a call at 214-932-6646. Now before we get into our discussion today, I would like to read the following 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 in our Annual Report on Form 10-K for the year ended December 31, 2008 and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

With that done, let's begin. With me on the call today are George Jones, our CEO; and Peter Bartholow, our CFO. After our prepared remarks, our operator, Ryan, will facilitate a Q&A session. Now let me turn the call over to George.

Thank you Myrna. Good afternoon everyone and welcome. We're very pleased with our first-quarter earnings statement and we will spend a little time walking through that with you.

Through much of 2008, the Texas economy continued to expand while the nation fell into recession. Growth in the energy and high-tech sectors and rising home prices were really key factors in making Texas's economy one of the nation's strongest.

The last half of 2008, economic conditions in Texas weakened manically. Energy prices, high-tech activity and exports declining. Texas was in recession when 2009 began. But our economic losses -- Texas -- has been moderate compared to the rest of the country which means that Texas is still faring better than the nation as a whole.

As job growth weakened, particularly from September to December 2008, the Texas unemployment rate rose sharply from 4.4% to 6% in December and is even higher in March 2009 at 6.7% with Dallas and Austin absorbing most of those increases. The projected unemployment rate by the end of 2009 could be as high as 8%.

While the short-term outlook for the next 12 months is weak, longer-term prospects remain healthy. Job growth, low business and living costs and a young, fast-growing labor force remain positives that will help the recovery.

In looking at the Dallas (inaudible) barometer of future economic activity, the Texas lending index, they project the largest decline in employment will be the first six months of this year with stabilization sometime after March of 2010.

Core earnings this quarter, very strong. Texas Capital Bancshares has very strong capital ratios at Q1 2009 with tangible common equity of 7.8%; Tier 1 capital, 11.9%; total capital, 13%; and Tier 1 leverage at 11%. Last week we filed a shelf registration to remain flexible when the public markets permit us to raise capital if and when we need it.

We experienced a good growth quarter. Average loans held for investment up 3.8% linked quarter and 16% year-over-year. We are particularly pleased with our DDA growth of 12.4% linked quarter and 36% year-over-year; really in our minds a remarkable statistic. We continue to be positioned for future quality growth opportunities in all our Texas markets.

Credit quality, which we will discuss in more detail later, remained stable with charge-offs of only $2.6 million; NPAs, if you exclude the 90-day past dues which basically remain the same from fourth quarter of 2008, of 1.93%; and our loan-loss reserve on loans held for investment grew from 0.97% in Q1 2008 to 1.31% in Q1 2009.

As we stated previously, our methodology for reserving (inaudible) provision in a weakening economy and with our ability to control losses, certainly grows the reserve. Now I would like to take a few minutes and turn the call over to Peter Bartholow, our CFO, to discuss the financials in more detail. Peter?

Thank you George. We did have a very good quarter, very strong results in what for the rest of the industry is certainly a most challenging environment.

We had net income of $6 million for the quarter, $0.17 a share after the $0.03 per share cost associated with the preferred dividend. The dividend obviously comes off of earnings available for common stockholders.

We had strong loan growth, that George mentioned, 3.8% for loans held to investment link quarter and 10% total; [grew] in the latter case of course to the very strong growth in the loan held for sale category. We had a margin reduction of only 2 basis points this quarter.

I think earlier we indicated that we expected Q1 to be the lowest of the year in terms of net interest margin. That certainly is coming about and I will talk about that in more detail.

George mentioned exceptional CDA growth, DDA growth at over 12% link quarter and 36% year-over-year. The cost of borrowing was sharply reduced due to the Fed and Treasury actions.

That borrowing was used to support our growth and that was done in anticipation of a reduction in deposit costs at maturity that are clearly now being realized and benefits of improved loan pricing already occurring and increasing in a critical time during the year. George mentioned credit quality remains good.

We had a very small increase in non-performing assets and they remain manageable. Net charge-offs were 26 basis points. Provision decreased to $8.5 million from $11 million in Q4.

But we had a $6 million reserve build or an increase of 55% since Q1 2008 in the total reserve. As George mentioned, we had an $8.5 million provision with just $2.6 million in net charge-offs.

As highlighted earlier, capital levels remain very strong especially in terms of tangible common equity. That results of course from the preemptive effort we made in September to raise $55 million in common stock, showing then a year-over-year growth in common equity of 27% and then we supplemented it with participation in the CPP with $75 million in January of this year.

Turning to pages five and six, I will comment really jointly. We remain highly focused on consistent improvement in what we consider controllable operating leverage.

This is much more significant to us as we attempt to mitigate the impact of net interest margin contraction and the higher credit costs that are associated with the current economic environment. The reduction in [NIM] has masked very solid improvements over the past year.

Net revenue in the first quarter increased 7.7% from the prior quarter and 13.8% year-over-year. These are very strong results.

Net income, net interest income was up 6.5% despite the very slight net interest margin compression. Both the non-interest income linked quarter of 16% was exceptional and 21% year-over-year, most of this due to the much increased activity in the mortgage warehouse line of business.

We've seen a reduction in the ratio of non-interest expense to earning assets of 13 basis points for the year or a level for the linked quarter. The linked quarter results in Q1 are affected significantly by -- to the extent really of about 85% of the total increase in linked quarter, non-interest expense by the new FDIC assessment and what we consider really a seasonal increase that arises from the incentive compensation program which has, as you all know, historically increased FICA expense during the quarter.

With even minor adjustment from these, we are seeing our non-interest expense [during] the asset ratio approaching or maybe below 2.4% compared to 2.48% as reported, an efficiency ratio that looks like it's headed with reasonable margin action to below 60%. These we believer reflect stronger core earnings power.

The credit quality costs obviously limit our ROA and ROE. And considering the conditions over which Texas Capital had absolutely no control and couldn't be involved, performance is really quite good. Obviously I speak in terms of the collapse of the economy, the horrendous industry conditions; and for us as an asset sensitive bank, the impact of very low interest rates.

Turning to slide seven, we obviously had very good linked quarter and year-over-year growth in average loan balances, 4% linked quarter, 15% year-over-year and loans held for investment. Loan held for sale growth was driven by the very strong activity in mortgage lending.

It's very robust for us and profitable to the low rate environment. For total loans, linked quarter growth of 10% and 26% year-over-year are very strong.

George mentioned the remarkable growth in DDA. A 12% linked quarter growth in average balances is probably going to be very high in terms of the industry, especially considering that this is all organic growth.

It does reflect intense focus on deposit growth for every region, line of business manager and relationship manager. We have significant new commitments to treasury management in both staffing and technology, which are showing results.

Growth in total deposits of 6% year-over-year and a reduction in the first quarter actually are consistent with plan. Deposit growth was limited by intentional use of borrowed funds to reduce total funding cost.

We had to take advantage of this clearly advantageous opportunity to exploit that lower cost due to the asset-sensitive nature of our portfolio. It's appropriate for the nature of the growth, especially in the short duration of loans held for sale. We anticipated reduction in deposit cost as the quarter progressed and we have seen that in very significant measure.

Turning to slide eight, loans held for investment were flat at quarter-end but up 15% from the prior year. This reflects the very strong activity at year-end 2008, a seasonally strong quarter, and seasonal weakness in Q1. It's also very clearly a reflection of much higher credit standards and stringent controls over credit extension.

Seeing year-over-year growth of $500 million, it's really been driven by activity in the last half of 2008. We had a strong position going into 2009 and we have one still going into into the second quarter of 2009, especially with expected improvement in net interest margins.

Loans held for sale were up $180 million or 78% from the prior quarter and reflects at quarter-end a constraint, given operations objectives and the decision to limit growth at the end of the quarter. We saw Q1 2009 average balances that were very high and are really more indicative of what to expect in Q2 and the remainder of this year.

This as you will recall is a very highly liquid asset with a duration of less than two weeks. And because of the activity in fees, in pricing, deposit relationships and yield, we are seeing a very strong contribution to earnings in this line of business.

DDA totals of $608 million, again very strong; 21% year-over-year and linked quarter 4%. As I mentioned a minute ago, the lack in growth of total deposits was planned.

We have a preference for borrowings and support growth in this kind of environment. They have a significant cost advantage and immediate availability.

It's very productive and helpful in a tough rate environment for our Company. The higher cost deposits were allowed to mature throughout the quarter and there will be some of that still in Q2.

And we did not need to compete in this quarter with companies paying way too high prices because they were struggling to complete either mergers or challenged by operation constraints. We expect much better growth as we move to take advantage of the liquidity in the marketplace and which can come today at much lower rates.

I'll comment a little bit more on the margin. Net interest margin, 339, was again a reduction of just 2 basis points. It does though reflect 28 basis point decrease from the first quarter of last year.

It benefited significantly from the maturing of more expensive liabilities, especially deposits during the quarter. We previously reported that this would be we thought the lowest quarter in terms of net interest margin. That has come to pass.

The cost of funding had come down faster and farther than we had anticipated. More repricing opportunities in key categories of deposits became evident in March. The benefit of loan pricing improvement now taking effect in what we would consider our renewal season and for all new relationships is having a significant effect.

We're seeing improved spreads to all major indices. We see floors at levels generally above historical spreads to prime and LIBOR. We have eliminated effectively in most cases the 30 and 60-day LIBOR options and we have a much greater emphasis on deposits to justify all commitments.

The Company is entering Q2 in a much better position. It's obvious I think that if the average for the quarter was only 2 basis points below Q4, that the end of the quarter, the month of March, was quite a bit better than the average.

We anticipated future improvements once rates reach more stable levels. Texas Capital really is hurt more during periods when rates are sliding than when they stabilized, even at very low levels, which are suboptimal in terms of the value of demand deposits and equity.

Obviously strong growth in DDA was hopeful to total funding cost. It's just not as important in the low rate environment; effectively, your pricing demand deposits and equity at 25 basis points or basically the price of Fed funds.

Turning to slide 10, obviously we still have a very strong growth model. Seen a CAGR of net revenue all organic and net interest income at 22%. Those are levels which I think are industry-leading.

We have had pressure on net interest margin. We are using for 2009 Q1 annualized. And with the lower margin, that understates the benefit of the operating leverage improvements that I spoke about earlier.

The conditions have not changed, in my view, about the business model and it's advantages. We would note again that historically credit cost in our Company remained low compared to industry averages and our are -- continue to be warranted by -- our model continues to justify the investment in people and the support of a strong growth organic model.

Turning to slide 11, again the growth model is confirmed with very high CAGRs for loans and deposits. Our market opportunity has improved due to conditions evident among much weakened or distracted competitors and that includes access to key customers, improved pricing and better opportunities for recruiting.

With that, I will turn it back to George to talk about credit quality.

Thanks Peter. Slide 12, this reviews our loan portfolio statistics. You have seen this slide before.

The pie chart describes our loan portfolio by collateral type and the right side of the page outlines our non-performing assets. Non-accrual loans totaled $51 million, as Peter mentioned, with real estate loans comprising $33 million or 65% of the total.

Other real estate of $27 million bring our total NPAs to $78 million or 1.93% of loans and ORE. Real estate loans and ORE comprise 78% of the non-performing assets.

ORE totals remain at the approximate $27 million level that we reflected in December of 2008. We have added three properties to that total, all of which have been identified as problems in previous quarters and reserved or charged down to current balances but actually foreclosed on in Q1.

Those three properties are defined as such. $1 million in remaining properties of the medical office complex in North Dallas. $1.6 million amount of money and properties. There are two single-family homes and five single-family lots. And the third addition was a $2.6 million commercial building property. All of these properties have current appraisals and are shown at today's values.

ORE did not increase because we had $5 million in ORE sales in Q1 also. Non-accrual loans moderately increased from $47 million at 12-31-08 to $51 million at March 31 '09. If you look back at the page, I will briefly describe those to you.

On the commercial side, under non-accrual loans, that really is not industry specific. That is a few commercial loans that actually have -- that number has declined a little bit since December of 2008.

The obvious issue and the problems in the NPAs are the construction and real estate category. In the construction side of about $29.5 million, that relates primarily to single-family, lot development, builders and some commercial lots that relate primarily to retail.

The real estate category of $3.5 million primarily is the old remnant of the mortgage warehouse of some of the portfolio in 2007 that was moved from the warehouse when underwriting standards changed. And as we've told you before, we are working out of those particular properties over a period of time. But those again are all properly reserved in our mind and are continuing to be liquidated.

If you move down to the ORE category of $27.5 million, that breaks really in three particular categories. About $19 million of that is residential real estate properties, lot development, single-family homes, the ones we foreclosed on in Houston that we described before; those type properties, $4 million in commercial buildings and $3 million in a commercial lot.

Total charge-offs year to date, as Peter mentioned, were $2.6 million representing 26 basis points. Importantly, these losses related to identified problems which were substantially covered with allocated reserves in prior periods.

The increase in non-performing loans in Q1 was not unexpected due to the changing economic conditions that all of us are aware of. But we continued to increase, as Peter mentioned, our focus on resolving issues. Our non-performing loans were 1.38% of our loans held for investment.

As mentioned earlier, our loan-loss reserve balance increased to 1.31% of outstanding loans held for investment in Q1. We provided $8.5 million in provision driven again by our methodology, not necessarily by our expectation of loss.

We covered our quarterly loss by over three times with this provision. We do believe that the economy will become worse and we will continue to see NPAs increase somewhat. But those totals, in our mind, will be manageable on a go-forward basis.

Slide 14, graphs our net charge-offs to average loans. As previously stated, our NPAs are up slightly as you would expect in this particular environment, certainly manageable and properly reserved.

In closing, I want to say again that our focus today is on maintaining credit quality by reducing non-performing assets and containing charge-offs. We also believe that Texas Capital is well-positioned to take advantage of opportunities for people and for customers.

Today we received better and more available talent than we have seen in years. Customers are willing to entertain moving their banking relationship because of their inability of many financial institutions to meet their needs.

While it's certainly a time to be cautious -- and we are -- there is great opportunity to increase quality market share statewide. And again, as we mentioned before, our earnings are core earnings, not one-time earnings. We are very pleased that we saw those core earnings well in line with what we expected for the first quarter.

Thanks for your attention. Now we will go to Q&A. Myrna?

I think we are ready for Q&A, Ryan.

(Operator Instructions) Brett Rabatin, Sterne Agee.

Really impressive asset quality numbers. I was curious if you could give an update on the potential problem loans, which I think were $22.5 million at the end of the year.

Tell me again specifically what you are relating to.

Just what you would put in your 10-K that you classify as potential problem loans?

Hang on just one moment.

While you're looking for that, I was just curious on the construction loans, can you talk about what happened in that portfolio, where the balance is flat or were they down some obviously with loan totals not going this quarter? Was that the piece that declined? And give us some color on how that portfolio is performing with maturities and payoffs and so forth.

Just the past portfolio on the construction side?

I'm sorry, that past what?

The past portfolio (multiple speakers) construction portfolio. Yes, as you might imagine in this environment, you know we're being very cautious, very careful in terms of doing any type of commercial real estate loan today.

That doesn't mean we won't do one properly structured, properly priced to track record real estate individuals. We will.

But you know, again you're going to see new originations in that business fall off fairly dramatically. And we think that is going to continue for some time.

We are concerned about the commercial -- not our commercial real estate portfolio necessarily, but commercial real estate in general. We've seen residential, as you might imagine, have some issues.

We think that we're being very careful in terms of the commercial portfolio because we certainly could see that happen. But the totals really have not changed dramatically as you mentioned. But that's just a little bit of color on what we are seeing in the market.

Okay and then I was hoping for some additional color on the potential capital raise and just if you would raise capital to do an FDIC assisted deal or if you hope to raise capital this year maybe to pay off the TARP. Or can you give us some thoughts on those two things?

Yes, we filed a shelf, as I mentioned before, to remain flexible, keep all of our options open. So if we did decide to raise capital in the future, we could do so with very little problem.

You know, if we decide that raising capital is appropriate, we'll recommend it to our Board and together we will make a decision -- the type, the amount, the usage. When we took capital under the CPP plan, we always envisioned that we would return it to the Treasury at the appropriate time. That is still our thought today.

And when management and our Board decide it's the proper time, we will redeem it. You know, our capital ratios were extremely strong. We continue to review our loan portfolio extensively.

I believe we have adequate capital today, certainly to remain well capitalized under more severely stressed conditions than we even see today in this environment. We have a nice cash level at the holding company today. So it's really a matter of timing and management decision and Board action.

Okay and then just on the potential problem lines, I don't know if you guys were able to -- George or Peter -- were able to find that number?

Yes, that's a number that's referenced in the 10-K. That's something that's simply required disclosure. It means that it's a problem loan that's not -- problem loans that are not on non-accrual but have some exposure to loss to the extent they do and we believe that every loan like that has a proper reserve allocation.

Would you have an updated number for the first quarter or is that something we have to wait for the filing?

We will actually be filing tomorrow. That number is now $22.9 million.

Great, thank you very much.

Brad Milsaps, Sandler O'Neill.

Peter, I was just going to see if you could go over your comments again regarding the loan held for sale balances. Obviously you're up pretty significantly, at least on an average basis, almost $600 million on average during the quarter. Do you anticipate that number being that high again in the second quarter? I know you provide some color there. I just didn't quite catch it all.

Yes we do. And for the remainder of the year, there's a lot of opportunity in that. That's an opportunity that we see as based on seasonal refinancing.

You can't know how long that will continue but the Fed is obviously putting enormous pressure on rates that would suggest that could remain active for some period of time. The nature of our business, as you know, is that we're only doing basically Fannie, Freddie, FHA kinds of conforming credit. There's nothing in there that is exotic of any type and that's the reason it can be sold in basically 10 to 12 days.

They had another reason obviously that that area is growing is just a lack of competition in the marketplace today with a lot of these large institutions are shedding lines of business. This is one line that they have contracted, so to speak, and we think that in today's environment we're picking up great customers, stronger customers and the underwriting is absolutely better than it has ever been.

And we like that business. It's very profitable for us. We are cautious with it and we manage it, we believe, properly but it is working well for us.

So that average earning asset number is a pretty good run rate number, you would say, Peter?

Yes.

Do you anticipate that loans held for investment, that you mentioned some seasonality there in the first quarter. Do you anticipate that will pick up as well as you kind of move in the second, third quarter?

We certainly think so. We started this year believing that this is going to be a tough environment and we obviously are not anticipating the kind of growth rates we have had in the past. We ended up with such a strong position at year-end. Given seasonality, we did not expect to see much if any growth during the first quarter.

Okay and final question along the lines of the potential problem loan question. I may have missed this as well, but do you happen to have the 30 to 89-day past due loans at quarter end?

I don't right now and we will have -- we won't have that until we finish everything associated with the call report. There are no significant issues coming down the pipe, if you will.

Okay, great. Thank you. Good quarter.

Erika Penala, Banc of America Securities-Merrill Lynch.

I was wondering if you could give us color on your ability to dispose of some of the non-performing real estate loans. For example, what type of properties -- you mentioned you sold $5 billion in OREO. What type of properties were those and what types of properties are you having more trouble moving?

We have had very good success at moving single-family homes. You remember, we talked to you about -- I guess two quarters ago -- where we had foreclosed on over 50 houses in the Houston area from one particular builder.

We have now sold basically what we carried then on the books at about 50% of those properties. So we had pretty good results in moving the single-family without appreciable value deterioration.

Lots are a little bit harder obviously. In the Texas economy today, we definitely have too many lots. And that is going to be an issue that is going to have to be worked out over a longer period of time. So lots are much harder to move.

But the retail sites of commercial lots, a little bit harder to move. We have had a sale of one particular lot. We're pleased to have that happen.

Residential lot development in this environment, based on the lot inventory, difficult to liquidate at this point in time. If you look back at our non-performing assets and our non-performing ORE that relate to real estate lot development, the thing I would say about that is even though we will probably have to hold those a little bit longer than we would like, they are virtually all in very good areas. They virtually all had good cash equity up front and they all basically are managed -- were managed and developed by a strong real estate developer.

Today we really don't have any income properties in ORE. It's more of the land type commodities.

But again, in Texas so far you haven't seen really large depreciation in real estate values today. Now it's byproduct obviously, the homes typically hold their value a little bit better.

The lots, a little bit less; retail sites are difficult. But the lot values depend on location and the status of the total development. We're just not into highly speculative (inaudible) land financing. They typically all have a purpose.

(multiple speakers) it's part of a master development where some portion of the development has already occurred.

Some of these lot developments that have slowed that are issues for us, we might be in Phase II or Phase III of that particular development where it's worked very well before but the economy has just slowed it so much that they have got a problem with the last phase or two.

Have you given any thought of participating in the PPIP for legacy loans or the strong preference is to work it out yourselves?

No, we believe where we are today, we are much better at working out the issues today. We believe a number of our properties do have value.

Their appraisals are very low today. You see a lot of bottom fishers in the marketplace that ought to take huge discounts on any of these properties and a number of these properties, we're just not willing to sell them or turn them over at these low prices we see today.

We think they have more intrinsic value and we are able to hold onto those for a little bit longer period of time if we need to. Now there's some assets obviously that we will sell and we will take a discount, we will get it out of here if we believe it's that kind of asset. But some of these lot developments, as I have mentioned, are much better developments than the fire sale at some very ridiculous low price.

Okay, my last question was on the deposit side. I just wanted to make sure I'm understanding this correctly. I think there was some commentary during the prepared remarks about the competition still being pretty fierce in the first quarter. But in March, you saw an opportunity to aggressively lower some of your deposit rates in certain products.

The deposit -- competition for deposits among the highly distressed companies has clearly abated. The pricing that was evident in Q4 simply isn't there anymore.

It's a function of a lot of things. The Treasury has pumped astounding amounts of money into the economy, liquidity into the system. So every type of deposit is just dramatically cheaper today than it was in the fourth quarter compared to December.

[Categories] in December would have been above two -- or above two are now below one. And Fed funds, access to which we have, is very effective for us. As I mentioned, the way we manage deposits was planned.

We have the ability to get more and will, frankly, in conjunction with our repricing strategies on the loan side and taking advantage of growth opportunities with new customer relationships.

Andy Stapp, B. Riley.

Nice quarter. I noticed there is a blip-up in charge-offs on C&I loans. Could you provide some color on that?

Yes. Again, charge-offs were pretty small in the quarter. The preponderance of the charge-offs, we had a $1.1 million credit that was charged off that was more of an individual private client relationship with a real reversal of fortune in this particular economy.

We had a small leasing transaction. We had a loan to one of our developers of $300,000 that we charged off. That is about $1.6 million. The other million really was spread out in smaller type transactions, nothing big, nothing that would catch your attention.

Nothing indicative of a problem of that particular category of lending.

Okay and most banks have reported decline in deposit service charges. I noticed yours was up nicely. Did you tweak your rate schedule or what drove that increase linked quarter?

It's a combination of rates, of changing rates and success of some of the treasury management initiatives.

And would you happen to have the outstanding balances of both raw land and developed land at quarter end?

I don't have that, Andy, in front of me.

And I guess, would you happen to have what the outstanding balance is of retail and hotel loans were?

Let me see. Yes, probably so. Hang on for just a moment. Sorry for the delay. (inaudible) $125 million.

That is for retail?

Yes and 92% of those are in the state of Texas.

And what about hotel loans? (inaudible) much of those?

For loans, about $40 million.

John Langston, Hodges Capital Management, Inc.

Back in January of '08, I asked Jody if there were any similarities to what he was seeing at that time to what he saw back in the 80s. And at the time, it was a question that was pretty out there.

But even though this is certainly different for a lot of reasons, what we are going through right now, the pain may be just as deep for the entire country, maybe not for the state. But is there anything that maybe you all feel like in hindsight that maybe you all missed back then that maybe you see now that you could offer us a little insight on?

That's a tough question, John, to answer. I think just one comment I would make. The severity of the downturn is so much deeper and broad in terms of what we're seeing.

We're much more a global community today. Everything is tied together. The counterparty risk is huge worldwide today.

I think it's where we saw back in the late 80s maybe a more centralized type problem, I think today we see it much more globally and frankly much more severe. We are seeing the derivative products be such a driver of losses initially for banks and for financial institutions.

But we didn't really see any of that back in the late 80s. And I would tell you today, we have none of that derivative exposure at Texas Capital. We are much more of a bread-and-butter lender in this environment.

The 80s really were worse on a regional basis, but this is a global crisis. This is a global problem and I think it touches everyone.

It touches -- when we look back at our lines of business in the Company, most all of our customers in some form or fashion -- not just energy, not just real estate -- but are all affected in some way. It doesn't mean they're a problem credit, but it means that their revenues are down and their ability to make (inaudible) their expenses are up.

There's some effect of the downturn that is troubling them. Just the breadth and depth of what we're talking about, a little bit different.

In hindsight, do you think that you all would take money again from TARP whenever that came out? I know that at least from my perspective, what you all were thinking was that if it was offered, it was a good opportunity to improve your capitals base. In hindsight, would you do that again?

You're really talking in hindsight too because when we made the decision and took the TARP money, it was under a different set of circumstances than in which we operate today. I think I would comment in two ways about the TARP.

One is reputational risk. I think the concept of people that have taken TARP back at year-end and people that have it today, I think the view in the public is very different.

If you took it back in 2008, you were a well-respected, good bank doing your civic duty so to speak; opportunistic capital. Today that image has been tarnished somewhat.

And so I think there is a reputational risk that is probably not justified, certainly not in our case, but in a number of banks. And secondly, I would say it's just a fear of the unknown.

When you are making business decisions today on the rules that are in place today and those rules could change daily, monthly, it makes it very difficult to feel comfortable in that vein. So hindsight is everything.

But as I mentioned before, when we took the TARP money, we always envisioned redeeming it. And it was just a matter of when, not if and that's still our philosophy today.

It is still -- should be redeemed. It should not be a long-term capital -- part of your capital today. And when the time is right, when we feel the time is right and management and the Board feel the time is right, we will redeem it.

I would assume from a reputational standpoint that would most affect your deposits. Do you feel like you all have lost some deposits due to the fact that (multiple speakers)

Not at all, not at all. I think it's just -- what I was speaking of more is just public perception, not anything that is affecting our deposit base.

We are proactive as it relates to getting out in the marketplace and talking about the condition of the bank and talking to our customers and hold lunches and dinners and really explain what we are doing, why we did it, how it can be positive if it's handled in the right way. So we are proactive on gathering deposits and also communicating with our customers.

Okay, thanks for the commentary. That's all I have.

Charles Ernst, Sandler O'Neill.

You mentioned that the March margin was the high month for the quarter. Can you just say what that was?

Charlie, we're not going to get drawn into that. I apologize. But I'm trying to make it where it would be obvious that if this was the lowest and it was only 2 basis points and we saw the benefit of -- some benefit, early benefit of loan rephrasing and the reduction in funding costs, that it would imply strongly if not state explicitly that March would have been the best month of the quarter. So it obviously had to be higher than 339. I don't know if that's hugely helpful.

I appreciate that. That's very helpful. I think that's it. I think you took all the wind out of my sail. Thanks a lot.

Bob Patten, Morgan Keegan.

I guess just to follow up on Charlie's question, not on the NIM as much but just really about growth. I sort of look at you guys sort of as a little Comerica.

You are more of an economy play than a real estate play. So if housing debt is de-leveraging over the next 24 months, does the economy improve sooner with the stimulus and all the spending and so forth? Where are you guys when you look at your pipeline, when you look at your client base, where do you think the growth one is coming from and two will come from in terms of (multiple speakers)

In most regards, it's going to come where it's always come from and that is C&I relationships that we are able to garner from the marketplace. People will keep deposits, borrow some money, expand their businesses.

We think the oil and gas business is a good business even though the prices are down. We think on a long-range basis, that's a good business to be in and we will continue to do that.

On the real estate side, multi-family is reasonable. But the core base of our business is C&I credits across a wide industry base with good management teams and -- that bring deposits and funding to your company.

I was thinking more in terms like industries.

We're not as industry-specific as some banks might be. It's very broad, from our standpoint.

You know, the North Texas community where we have 65% of our assets is a service-based community. So you would see the preponderance of our C&I portfolio in the service sector whereas you move south and you would see it more related to commodity and oil and gas.

But we are very -- really much more on a broad based scenario. We are much more interested in quality management teams, businesses that are scalable, businesses that are growing, businesses that are profitable and have good longevity.

Tom Alonso, Fox-Pitt Kelton.

Actually most of my questions have been asked, but just while I have you, I guess just given what's happened with the prices of natural gas more so these days, just your commentary on that and how that might impact you guys going forward.

Sure, we have about $400 million in oil and gas loans, heavier weighted to the natural gas side than the oil side. But we are handling our gas customers like we handle our oil customers six to nine months ago.

We have moved to our sensitivity case basically from our base case. We either stepped up -- and I'm speaking of responding to the prices falling particularly in the natural gas side recently. But we saw that happen in oil side also earlier.

We stepped up amortization and required a hedge floor or a collar on virtually all of our customers that were stressed at certain price levels. Oil prices for 2010 today in the futures market, still at 64. Gas is $6.00. For gas, we do the same thing. Natural gas hedge collars for 2010 are a cap of $7.00. The floor is $5.75.

So we are moving our customers in that direction. Most of our customers are drillers and at these prices, particular gas prices, they've pretty much stopped drilling which means they're not fully growing up on their loan commitments and they're using that cash flow to reduce debt. So we feel our energy portfolio is in good shape and it's going to hold up quite well even during these economic times. We haven't had really any significant problems in the oil and gas portfolio at all.

(Operator Instructions) At this time, we show no further questions. I'd like to turn the call back over to our conductors for any closing remarks.

Well thank you everyone. We appreciate the attention and we appreciate the questions.

We do believe it was a good quarter for Texas Capital Banc. We are pleased with our core earnings and please be assured that we are always working for the best interest of our shareholders. Thank you very much.

That does conclude today's conference. Thank you for participating. You may now disconnect.