Texas Capital Bancshares Inc (TCBI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Texas Capital Bancshares earnings conference call.

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

Later we will conduct a question and answer session.

(Operator Instructions) .I would now like to turn the conference over to your host for today, Miss Myrna Vance, Director of Investor Relations.

Please proceed.

Thank you, Jeremy, and thank you all for joining us today on our third quarter call.

If you have any questions following the call, you're welcome to call me at 214-932-6646.

Now, before we get into our discussion, let me read the following statements.

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

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 including the risks 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, 2010, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now, let's begin.

With me on the call today are George Jones, our CEO, and Peter Bartholow, our CFO, and after a few prepared remarks our operator, Jeremy, will facilitate our Q and A session.

Let me turn the call over to George.

Thank you, Myrna.

Good afternoon, everyone, and thanks for joining us.

We had another quarter of outstanding earnings at Texas Capital.

We continued to grow and to strengthen our core earnings power.

Our funding costs improved, and return on assets and return on equity reached record levels.

We experienced reductions in credit costs with a 40% reduction in net charge-offs and further progress in reducing nonperforming assets.

We believe that we'll continue to experience a reduction in credit costs for the balance of this year and throughout 2012.

The third quarter again showed strong growth in loans held for investment.

Average growth linked quarter was $329 million, or 7%, and $726 million, or 16%, year-over-year.

We continue to see excellent loan production from our existing relationship managers, as well as our new hires.

We also saw significant growth in our loans held-for-sale.

As you know, that's our mortgage warehouse line of business.

Similar to the last half of 2010, we experienced a large amount of mortgage refinancing activity in Q3 2011, and we expect to see it continue into Q4 and 2012 as mortgage rates remain very low.

In Q3, on a linked quarter basis, we grew $383 million, or 47%.

We completed the quarter with a period end balance of almost $2 billion.

While we expect that balance to be down due to seasonal conditions at year end in early 2012, the growth in the customer base and refinancing activity should produce strong growth compared to this quarter and the year ago period.

We're also very pleased with our demand deposit growth in Q3, increasing 5% linked quarter, and 33% year-over-year.

Overall, an exceptional quarter.

I'll be back in a moment to further discuss credit quality, but now Peter will review the financials.

Thank you, George.

As George commented, we had very strong linked quarter in year-over-year growth in both net income and earnings per share.

We saw EPS growth of 27% from the second quarter, and 124% from the year ago quarter.

In terms of core earnings power in net interest margin, had strong growth in net revenue, linked quarter of 10% to $86.8 million from $79 million in the second quarter.

That produced a year-over-year increase of 23%.

Obviously this is driven by the growth in loans with very stable NIM, to produce very exceptional growth in net interest income.

In terms of NIM, it remained very strong.

We did see a very small reduction of 5 basis points to 4.81%, but if you'll recall, the second quarter NIM had approximately 10 basis point benefit from interest-free capture on nonaccrual loans.

The obviously strong growth in held-for-sale had an impact, approximately 5 basis point reduction, because of the 32 basis point lower yield on the held-for-sale portfolio.

The strong growth in held-for-investment and held-for-sale loans did produce a much improved composition of earning assets, and the growth in net interest income.

We think this demonstrates how volume driven improvement in earnings can result when strong loan growth produces very minor reductions in net interest margin.

I'll have more comments on net interest margin in a moment.

We did have a small reduction in non-interest income.

The modest improvement in total mortgage warehouse fees did not offset rental income on leased equipment and a few other reductions.

George mentioned the improvement in credit quality.

The trends do remain very positive.

Net charge-offs of $6.3 million compared to $10.5 in Q2, and nearly double the current level, $12.1 million in the year ago quarter.

As a result, we experienced a reduction to provision, down $1 million from Q2, and down by $6.5 million from the year ago quarter.

We did see less than $0.5 million dollars of the provision was associated with net charge-offs that were, as I mentioned, $6.3 million.

Total credit cost, including OR evaluation charge, were stable and improving, and sharply lower by $8.5 million from the year ago quarter.

As George mentioned, we see nonperforming assets coming down.

Now under 2% of loans held for investment, and under 1.6% of total loans.

George will comment more about credit quality in a moment.

The non-interest expense level was very flat with the second quarter.

We saw a reduction in legal, professional and marketing, and again recall that we mentioned as much as $1 million in costs incurred in Q2 would not extend to Q3.

You'll see that our FDIC assessment was down to $1.5 million from $2 million in Q2.

These reductions offset the growth and compensation and other expenses, most of which resulted on the first full quarter after the expansion we mentioned during the second quarter.

Slide Five in terms of loan growth, we had experienced held-for-investment growth in the number of lines of business in regions, clearly are achieving our objective of year-over-year double digit loam held-for-investment growth, excluding even the portfolio acquisition that we mentioned in Q2.

As anticipated, held-for-sale balances grew sharply with much higher balances at the end of the quarter.

We expected that the average balance in Q3 might be less than the quarter end Q2, but with growth in the customer base and refinancing activity that George mentioned, the average balance actually ended up slightly higher than the Q2 ending balance.

The average balance in Q4 should be very strong.

Again, not as high as the quarter end Q3, but we expect seasonal reductions in the last half of the quarter.

Funding and deposit growth, we have a much improved funding profile, with a reduction in costs of both deposits and total funding.

The change in funding mix has been very important.

We saw DDA growth of 5% compared to the second quarter and 33% compared to Q3 2010, and representing total of 29% of total deposits, on average, during the third quarter.

DDA growth of $70 million linked quarter was almost identical to the reduction in interest bearing deposits of $76 million.

The growth in held-for-sale loans provided the opportunity for a more optimal funding profile, with a larger portion of the held-for-sale balances carried with borrowed funds, not deposits as had been the case in recent quarters.

As planned, total deposits were flat compared to the second quarter, and to Q3 2010, the time when the excess deposit liquidity began, frankly, to become overwhelming.

Total deposits did increase $5.5 billion at quarter end, compared to the $5.25 billion average, with a substantial increase in deposits from treasury management programs and relationships expected during fourth quarter.

Quarterly income statement on Slide 6 speaks for itself, an excellent quarterly trend in year-over-year, in quarterly link growth in net revenue, obviously driven by the held-for-sale and investment growth, coupled with very strong NIM maintained throughout the period.

Credit costs remained slightly above, quote, normalized, whatever that is today, but down sharply in confirming the expected improvement for 2011.

We see exceptional progression of net income and EPS.

As George mentioned, the highest quarterly ROA and ROE in the company's history.

Strong growth in stockholders' equity, which averaged 8.8% of earning assets, and 9% of total loans during the quarter.

We maintain a very strong capital position.

Slide 7, average balances, yields and rates.

Loan growth and the funding profile are drivers of the high NIM and the growth in net interest income.

Loan growth has had a major impact in maintaining the yield on earning assets, meaning that we're not compelled to buy securities to deploy our excess liquidity.

Held-for-investment yields remained very good at 5.2%, down just 4 basis points from Q2, before considering the impact of the recaptured interest, which we mentioned earlier.

The held-for-sale yield did fall by 32 basis points to 4.4%, producing about a 5 basis point detriment to the net interest margin through strictly lower mortgage rates.

But the much higher volumes associated with those rates still produced a very favorable spread in a category of earning assets that is clearly very favorable to the company.

We experienced a reduction of 6 basis points in the cost of interest bearing liabilities, driven by the increase in the mix of borrowed funds at 11 basis points, and a 2 basis point reduction in the cost of interest-bearing deposits.

Throughout this period and previous years, actually, our held-for-investment growth in lending has remained well above industry levels, and obviously today ahead of expectations.

Held-for-investment growth of 7% from Q2 was building off the extremely high levels at the end of Q2.

We expect Q4 balances to remain well above Q3 averages, again building on the growth which we have in seasonally strong after Q3.

EA growth remains exceptional, has matched, actually, the planned reduction in interest-bearing deposits.

And interest-bearing and total deposit balances are consistent with the initiatives we've described in earlier calls.

Quarter end balances in held-for-investment, obviously ahead of the Q3 average.

Held-for-sale, again ahead of plan, and sharply higher than the Q3 average.

The balance is exceeding expectation, due to the refinancing activity, and again, the growth in our customer base.

We do expect again balances to be down by year end, but the average balance for the quarter should be well ahead of the Q3 levels.

Slides 10 and 11, the [taggers] are obviously strong and have remained so with the kind of income production that we've seen in the third quarter.

George?

Thanks, Peter.

Slide 12, the most significant change in the pie chart on your left showing loan collateral by type, is the increased percentage of loans held-for-sale at 26% of loans compared to 18% in Q2.

Low rates, as we mentioned before, will continue to drive the mortgage refinance activity throughout the balance of 2011, and we see it into 2012.

Total real estate declined from 35% to 30% at September 30, with market risk being 24% of total loans.

Business assets continues to be the largest segment of the portfolio at 28% of total loans.

Nonperforming assets of $103 million are 90% real estate related and 10% related to commercial loans.

If you move to Slide 13, that relates to our improved credit trends discussed earlier, when we said the total credit costs of $8.7 million were in place for Q3 2011.

That charge included a $7 million provision that was down from $8 million in Q2.

Our net charge-offs were $6.3 million, down from $11 million in Q2, representing 48 basis points, compared to 86 basis points last quarter, and 70 basis points for year-to-date.

Our ORE valuation charge was $1.7 million, compared to $725,000 in Q2, increasing as expected as we continue to move these assets out of the bank.

We also saw improvement in our nonperforming assets to the lowest level since Q2 2009.

Nonperforming assets were down almost $3 million, or 3%, from Q2, and we have seen a reduction of $78 million, or 43%, from peak level in Q2 2010.

The nonperforming asset ratio of 1.92% in Q3, compared to 2.03% in Q2, and 3.7% in Q3 2010.

Nonperforming loans at $67 million is down $60 million from Q3 2010.

Our nonperforming loan ratio is at 0.92% of total loans and 1.26% of loans held for investment.

We continue to expect credit costs and nonperforming assets to decline in Q4 of this year.

If you move to Slide 14, it shows our net charge-offs compared to average loans.

Our charge-offs are running approximately 60% of last year's charge-offs.

We believe that our 2011 charge-offs will come in well below 2010.

I'll also note that our coverage ratios remain very good also.

In closing, I'd like to stress 4 fundamental aspects of the strength of the Texas Capital story.

Number 1, Texas Capital's strong core earnings power well continue in the last quarter of 2011 and into 2012.

2, as Peter mentioned, Texas Capital maintains a very strong capital position.

3, our credit cost improvements are expected to continue in Q4 and throughout 2012, and 4 being located in Texas, loan growth potential continues to be good.

Thank you.

That concludes our prepared remarks.

We'll now turn it back to the operator and begin to take your questions.

(Operator Instructions)

Our first question comes from John Pancari with Evercore Partners.

Please proceed.

Good afternoon.

Hi, John.

Question on the mortgage warehouse.

Can you give us a little bit more color in terms of the growth you expect in that business and how much of it is still just an intentional push in gaining share and taking advantage of your position versus just the market trajectory?

It's really a little of all of that, John.

We're obviously taking advantage of low rates and refinancing activity today, but as we've said in the past, along with that, and 1 thing that keeps our averages at a very consistent and growing level, is the fact that we take market share from our competitors.

We are also growing our customer base.

So we believe that's a good opportunity for us to systematically grow this business.

We will take advantage of spikes, like the refinancing boom that we're seeing today, but the real goal is to capture enough market share to continually grow that business on a safe and sound basis.

Okay.

All right, and then secondly, in terms of the margin, the compression was less than we had expected, and I just want to see if we can get some additional color around it in terms of where you're bringing on some of your new loan yields in the held-for-investment portfolio.

And then secondly, your outlook for the margin in terms of the how the additional growth in the warehouse could impact the margin going forward.

Let me speak.

I'll let Peter speak to the margin and some of the warehouse in a minute, but in terms of where do we see yields in the core portfolio and what's happening in our marketplace, as we've said before, we continue to see intense competition in our market.

We continue to see pressure on interest rates, loan rates, loan yields.

We're meeting that competition.

We are, as best we can, holding our loan yields where we like them to be, but competing.

Where we will compete, to a certain extent, is on price.

Where we really choose not to compete very much is on the structure, and we'll work very hard to keep existing customers in place.

We'll work harder to do that, frankly, than bring in a new piece of business and be extremely competitive on the rate.

It is competitive.

It's going to continue to be competitive.

We have not seen great lowering of rates in the overall portfolio, but we understand that it's going to continue to be under that pressure, and probably come down somewhat.

John, I thank that's right.

You can do the math very easily.

When you see the rates on the held-for-sale portfolio come down 32 BPS, and you had that level of growth, about $380, almost $400 million for the quarter, we compute that impact at about 5 basis points.

The margin actually was higher than we would have been willing to predict by a few basis points, but I think we said at the end of the second quarter we expected to be flattish.

We certainly, given the effect of the interest recovery on a nonperforming loan in Q2 and the effect of the dramatic growth in held-for-sale, certainly the margin remains very strong.

We're not willing to give guidance yet on the level of average outstandings in Q4 in held-for-sale, and we obviously can't predict what the mortgage rates are going to be for average for Q4.

Certainly at the levels that we're experiencing, even if they come down off of Q3 end of month basis, we'll see some pressure on them, but more than overcome with the benefits of a net interest income.

Okay, so it's not unrealistic to assume that we could see similar compression that we saw this quarter, next quarter but still the support to the NIM?

We really have not experienced any rate compression or margin compression.

When you consider again, the 10 basis points that we did not have this quarter.1 of the other points, obviously, is with the growth in the portfolio, as I mentioned in the previous notes, we're funding that basically with borrowed funds, and the average rate on those in the quarter was 11 BPS, compared to a 23 BPS average cost of funds.

Okay.

All right.

Thank you very helpful, Peter.

Thank you.

Our next question comes from Bob Patten with Morgan Keegan.

Please proceed.

Hey, everybody.

Hi, Bob.

Hey, Myrna, I think you got to check Somebody just told me John Pancari dialed in at 12.03 for this dial.

(Laughter)

He was a little early.

(Laughter)

On the loans held for investment, can you talk a little bit about the pipeline, talk a little about what the middle market client is feeling today.

Did they change from last quarter?

Yes, Bob.

We see no real improvement in the attitude of the C&I customer today from last quarter.

They're still worried about leadership in Washington, they're still worried about Congress, they're still worried about what new rules they're going to have to play by that aren't written yet.

They're confused.

So we're not seeing a lot of new organic growth from our existing portfolio.

A lot of the growth is takeaway.

Some of it relates back to our premium finance purchase in June of this year for about $95 million, that helped some, but until we get some clear direction, economically, and a sense or feeling that things are really on the uptick, it's going to be hard to convince these good customers, even though they're capable of borrowing money or they're capable of spending their own cash to expand.

They're just not really willing to do it.

Now, I will tell you, we have been active, as you know, in 2009, 2010.

We put a lot of people on the street.

A lot of new hires, and it's paying off.

We're seeing market share move.

We're seeing it on a fairly broad basis in about 7 or 8 of our lines of business.

The pipeline remains healthy.

I looked at it this morning.

It's about as good as it's ever been.

We feel pretty good about the ability to take business from the competitor.

I feel less positive about getting our organic existing customer to pull the trigger and begin to expand.

Okay, and then just 1 last question.

Do you guys have any pricing power on the fee side with the warehouse, or is the volumes, does that work against you with the volumes just going to where they are?

Really, where we really make our money, obviously, is on the spread income from the rate on the lines of credit., and that is competitive also.

Fees have actually softened a little bit from the competition in the warehouse business, but as Peter alluded, we can absorb some of that, and we can absorb some of the interest rate compression, because our volume has been so good, and we've got a significant number of customers, large customers, with large lines of credit, and we see the volume continuing, and as we grow, we worked hard to reduce our cost in that business.

We have, as we mentioned before, converted to a new software system that reduced costs pretty dramatically in this division.

Our file cost is exceedingly lower than it was before.

So we're taking every opportunity we can to reduce our costs, but to keep our volume in good shape.

Well, thanks very much, guys, and I'll let somebody else ask a question.

Thanks.

Our next question comes from Brady Gailey, please proceed.

We don't hear anything.

Brady?

Okay.

We can move on to the next question.

Our next question comes from Bill Young with Macquarie.

Please proceed.

Hey, good afternoon, guys.

Hey, Bill.

Could you just give us a little bit of color in terms of kind of the drivers of organic growth in the loan held-for-investment portfolio?

Sure.

That's again, on an average basis, the held-for-investment grew about $325 million linked quarter.

We saw it, the main growth came in about 5 or 6 lines of business.

Our premium finance business, energy business, our Houston office, our lender finance group, our builder finance group, and our San Antonio group.

And that really was split between, C&I was the dominant growth factor in those markets with real estate and energy coming in second and third and we also had a nice representation of health care.

The nice thing, Bill, we see is a good growth out of more than just 1 or 2 lines of business.

Great, and I think I recall earlier this year you kind of mentioned slowing the pace of RM hires for the year.

Has that thought process changed at all?

I think that's fair to say.

We're going to always take advantage of opportunities for exceptional people or exceptional groups, but I believe that, and you've already seen our hiring of RM slow somewhat.

We built a lot of capacity into the company.

We don't feel the need to dramatically hire over the next 6 to 12 months, but again, we'll take advantage of opportunities.

Great, and then my last question, I know you had mentioned you think capital strong, but as kind of tangible common equity gets a little bit close to that 7% level, how do you feel about capital going forward?

Well, that's a little bit of a misnomer by looking at the 7.3% number at the end of a month.

Our loans held-for-sale peaked dramatically close to that $2 billion level, and that put a little pressure on that capital ratio, but from the standpoint of, we're really an 8%, 8.25% tangible common equity bank, and with our earnings where they are today, our capital generation internally should be quite good.

So we don't feel any pressure near term to raise any capital.

We always are aware of the fact that long-term growth will take some additional capital, and we're prepared for that, if and when we see the growth come back at a level we're comfortable with.

And in that regard, George, we are seeing market is willing to provide debt now to companies like Texas Capital.

Rates aren't all that attractive today in the scheme we seem appropriate, but it is available at reasonable prices.

Great.

Thanks, guys.

Yes.

Our next question comes from Brett Rabatin with Stern, Agee.

Please proceed.

Hi, guys.

Good afternoon.

Hello, Brett.

I wanted to ask, I guess first I was wondering if you might have like the current balance for the held-for-sale portfolio?

Obviously, it's a big swing from end of period to average.

Was wondering if you might have a current balance number for that portfolio?

Brett, we really don't give those inter-quarter numbers.

It just is sometimes very misleading too, because there's a lot of volatility in that business and we will talk about quarter end stuff, but not inter-quarter.

Okay.

You do, see, Brett, a ramp-up typically at month end, and then a reduction thereafter.

Okay.

And that's what you saw at the end of September, also, to get the number that you see on our balance sheet.

So that's why the average numbers are always significantly less than month-end numbers, and that's really what we manage from, is the average number.

Okay.

Fair enough.

Well, I wanted just to ask, you kind of mentioned, George, that you weren't really seeing your existing customers be all that aggressive, just kind of given the environment, and so obviously you're moving market share.

And so I was just curious, I think you added, if I have the number right, 25 RMs in the past year.

Do you have any idea or an estimate, maybe, of where they might be on sort of the utilization or capacity that they've developed over the past few quarters?

Is there still a level that they could add in terms of new growth?

Yes.

Like I've said in the past, I think we have a significant amount of capacity in the company today, an that's what we want to have in the very competitive environment that we find ourselves in today.

It is very difficult to predict specifically turn times in terms of relationship managers, and when they, in effect, become productive, because lines of business are different.

Energy's different, business banking's different, the corporate side is a little bit different.

But I would tell you that while we do have a lot of capacity left in the company, those hires that you're talking about are becoming productive.

We are seeing production come out of that group of people, but they still have some room to grow.

Okay.

Then just wanted to maybe get a little more color around the growth, and I know we've talked some in the past, and this quarter had more growth along the C&I line, premium finance, that sort of thing.

Within C&I, are any new lines that are more specifically growing this quarter, like hotels or categories like that?

You know, the only thing I would probably point to that we see a little more growth in than we've had before is health care.

Okay.

We've added, not recently, but added a relationship manager in the health care business, and she is productive today, and we're getting more thrust, more follow-through from health care.

And would that primarily be assisted living facilities and things like that?

Yes.

It's not necessarily the stuff that's under fire today.

We're doing business with a number of medical groups that are putting in surgery centers and things like that.

Okay, and then just lastly around liquidity.

You obviously used the borrowings more to fund the held-for-sale portfolio this quarter.

I basically assume that in 4Q, the balances for the borrowing base moves down substantially, but the core funding piece is, as I think you mentioned in the past, not very tied to the held-for-sale portfolio.

Is there any change we should expect in the core balances on the deposit side?

We had very good growth at end of quarter.

$250 million difference between end of quarter and the average balance for the quarter, and as I mentioned, we are expecting, basically have programmed, significant increases in deposits that come from the treasury management group that will occur in the fourth quarter.

Okay.

Great.

Thanks for all the color.

Yes.

Our next question comes from Jennifer Demba with SunTrust.

Please proceed.

Thank you.

Nice quarter.

You guys are obviously telling a much different story than 99.9% of the industry.

What do you think is the biggest risk to your asset growth expectations over the next few quarters?

I'm concerned about external forces.

I'm concerned about the economy.

I'm concerned about Europe.

I'm concerned about uncertainty with our Congress and our leadership.

I'm concerned about the mentality created in our customer base that things are so uncertain that they don't feel like expanding their business.

I worry about loss of focus on execution.

Also worried about other external factors that execution is not as strong as it needs to be.

I think some of those kinds of things could, not necessarily will, but could slow things down somewhat.

But again this is one of the toughest downturns we've seen ever.

We, in the past, have been through a number of these downturns and recessions, and always have managed reasonable growth through them with our model, with our hiring the competition, and they taking market share from where they lived in the past.

We think that is a lot of what's happening right now, but I don't see anything wrong with our model.

I see a lot of things right that should offset some of those external factors I talked about.

Thanks a lot.

Yes.

Our next question comes from Michael Rose with Raymond James.

Please proceed.

Good afternoon, guys.

Michael.

Is there any update to the lawsuit and judgment you guys filed a press release about?

Let me kind of give you an overview of that.

By the way, there has been no judgment entered by the trial court.

This is simply a jury verdict with no judgment filed, but we're aggressively defending it.

A $65 million jury verdict, as I mentioned that happened in August of 2011 in a small town in Oklahoma.

The case was filed by 1 of the guarantors on a defaulted loan that was in our bank.

Again, no judgment has been entered.

The case now has been removed to federal court, where we are going to pursue a dismissal of the suit, or a change in the verdict or a new trial, but obviously that removal is being contested, and if there is any adverse judgment that gets filed, we'll appeal it aggressively.

We've been advised by our counsel that there are numerous grounds for an appeal if that should happen.

On the other hand, we intend to pursue aggressively our lawsuit filed in Texas in April of 2010 against the Plaintiff in the Oklahoma case, and other guarantors on our defaulted loan.

The loss related to the loan was recognized in Q2 of 2010.

We've got no remaining balance sheet exposure on the principal balance of the loan.

We don't believe that a negative outcome is probable.

We have not established a reserve, and don't intend to for any potential exposure, and that's really about all we can say at this point in time, because obviously we're right in the middle of everything.

Okay.

As a follow-up to that, though, I know you said you're not going to establish a legal reserve, but I think last quarter you said that legal and professional fees would come down, and they did this quarter.

But as that lawsuit continues, could that cause kind of that decrease in professional fees, I think you mentioned $1.1 million to $1.5 million over the next couple of quarters, could that be less than what you said last quarter?

What I said.

I think, was that we saw specific things that occurred in second quarter that would not happen again, and they represented about a $1 million worth of non-interest expense.

We don't anticipate that the ongoing cost of this litigation will be that big a factor at all.

Transactions that I alluded to in the second quarter were the completion of the large disposition of a nonperforming asset, and at the end of those things, there's a tremendous amount of work that gets done, a fees that get paid and that one's completely gone.

Okay, thank you.

Our other loan collection fees, disposition costs in the ordinary course, are going to continue to come down.

Okay, that's helpful, and if I can switch gears a little bit.

As it relates to your credit quality, obviously you guys had stated that you expect credit costs to come down next quarter through 2012; NPAs come down.

Can you provide us with what the potential problem loans were quarter-to-quarter, and kind of what gives you confidence that you'll continue to see progress in credit quality?

Thanks.

The potential NPAs that will show on our Q, $18 million, I think that's up $3 million or $4 million from what we showed the previous quarter.

Those things aren't NPAs for sure, so I look at that as sort of a flattish number.

We are seeing ORE beginning to sell.

We sold $2.5 million of ORE in the third quarter.

We did add a couple of pieces of larger ORE to the mix.

We knew we'd get them.

It was just part of the normal process of working them through the system.

A portion of our charge-offs related to marking those to market, so to speak, and getting them prepared to be sold, and you're going to see that for a quarter or 2 as we move.

If 90% is related to real estate, you're going to see real estate flow through that ORE category.

Our 90 day past dues are way down.

Some of our TDRs that you see on the sheet, 95% of that, frankly, is a pass rated loan.

It should not be looked at as a problem loan or an NPA.

So overall, I'm very positive about where things are and where things are going as it relates to credit.

Everything seems to be moving in the right direction, and you're always going to have 1 or 2 slip into the NPA category.

We're not seeing the level of deterioration in the loan portfolio that we saw in 2008 and 2009.

So even when you see 1 slip into a problem category, we're not looking at big losses in that particular credit.

So I'm very positive on where I think the credit's going.

We've got a lot of ORE under contract, and we feel good about actual loss exposure in not only existing ORE properties and the existing NPA portfolio of loans.

Okay.

That's helpful, and just 1 final question.

Are the Rangers going to beat the Cardinals?

Are they going to sweep them?

Well, we had a special plan for you later on.

We'll address that in a moment.

Thank you for the question, though.

Thanks, guys.

Our next question comes from Matt Olney with Stephens.

Please proceed.

Hey, guys.

Good afternoon.

Hi, Matt.

Hey, George, I think you touched on the brokered loan fees being down as a percent of the warehouse volume.

Did you say that was a function of more competition?

I think that's right.

We're seeing a little more competition on the file fees related to the portfolio, and larger customers that it's a little bit more difficult to charge higher file fees to.

But again, for that small amount that we don't get in brokered loan fees, we certainly make it up with volume from a number of these really large, large customers.

Okay, and then circling back to the mortgage warehouse, I think we're all trying to understand kind of what that balance could be in 2012, and it looks like in 2011, it's pretty clear you're going to outgrow the industry weakness from market share gains and produce good positive growth for the year.

Is that same thing possible in 2012 if you continue to get good market share gains?

Matt, it's hard for us to plan that, too, to tell you the truth.

I know you're trying to plug a number into your model.

We're trying to do the same thing.

It has a lot to do with interest rates.

It has a lot to do with our success at growing our customer base, and it's very difficult to predict.

That's why we work more on averages than we do on period end numbers, and that's not an exact science, either.

The fed says rates are going to be down for 18 months to 2 years.

If that's the case, you'll probably see more refinance activity than less.

So we think between lower interest rates and customer acquisition, we're going to hold our own with our balances on a go-forward basis.

How about thinking about it like this.

How has the new business wins in the mortgage market been in recent months compared to maybe this time last year?

Is the same or is it more?

I'm sorry, say that again.

You talked a lot about the new business wins and new market share gains you've had in the mortgage warehouse the last few years.

How is that paced today versus a year or 2 ago?

It's much better, and as I mentioned before, we have sort of changed our customer mix.

That has helped that dramatically.

We were doing business years ago with a smaller mortgage company that didn't have the volume that the larger companies are able to handle.

We've changed our customer base dramatically.

Most all of these customers now are large mortgage companies that need large availability for their mortgage product, and while maybe 60% plus of their volume is refi, as the economy improves, then we ought to get the benefit of some new home purchases in the financing area, too.

So we're hopeful that 2012, 2013, will improve to a certain extent, and if the refi's begin to die off somewhat, we'll see some volume coming from the new sales.

But again, it's very difficult to predict with any exact science.

All right.

Thanks for your help.

Our next question comes from Andy Stapp with B.

Riley Company.

Please proceed.

Hi, guys.

Hi, Andy.

Could you provide some color on the linked quarter increase in salaries and benefits?

Yes, Andy.

Most of that, over 80%, came from the expansion that occurred near the end of the second quarter, the portfolio purchase with the people that came with that business.

There's always other salary increases.

We're on a cycle that is basically year end on June 30.

So that can cause that uptick.

As the year progresses, and as we have better visibility of total profitability, we begin moving the incentive accruals to fit the planned versus actual performance.

Okay.

And you talked about from time to time limiting your concentration in your mortgage warehouse business, but it continue to grow pretty strongly.

Just what's your current thoughts on that?

You know, we never said that we had a concentration, but if we get to that point where we believe we have a concentration, we have a plan.

We have, with our software implementation, we have a plan to participate a significant amount of that warehouse business out to players in the marketplace, and we've seen a great appetite, as you might imagine, for earning asset capability.

So we don't believe that we will stop growing our business.

We believe we'll continue to take good business in-house, but have partners to offset some of that concentration, if and when it gets to that point.

Is there substantial cushion to where you might hit that point?

We manage by averages, and if you look at the period end, it's misleading.

Yes.

It looks, on an average basis we're probably right at the billion dollar level.

So that gives us plenty of room to grow that business a little bit more on balance sheet than where the period ends.

Yes.

The average balance is already a $1.2 billion.

We're obviously comfortable with that level, and even higher.

Okay, and do you happen have early stage delinquencies, what that balance was at quarter end?

You're talking about just in the overall portfolio?

Yes, yes.

30 to 89 days is, I want to say, right at $30 million.

That's down from previous quarter.

I think the previous quarter was $39 million.

Okay.

All right.

Thank you.

You're welcome.

Our next question comes from David Bishop.

Please proceed.

Good evening, gentlemen.

David.

Quick question, sort of following up on Andy's question there.

In terms of the volume of production we saw here in the third quarter, will that have any sort of character effect in terms of salary and expense or compensation, as we head into the fourth quarter of the year that we might see an abnormal bump in those expenses?

Well, We only added a few selected staff to the group, to handle strong volume.

So that will probably increase salary and benefits somewhat, but it's not going to be a needle mover for our company.

So there won't be any sort of a variable component there that could be triggered?

No.

Not a big bump.

You're not going to see any real movement in that area at all.

Got you.

Great.

Thank you.

Welcome.

(Operator Instructions) Our next question comes from Bob Patten with Morgan Keegan.

Please proceed.

George, just a follow-up for Peter.

I'm looking at your loan loss reserve.

We've been talking to banks as they've been reporting, and I just want to get your thoughts about you talk about a murky environment, you don't know about the political environment, the geopolitical risk, all the things we can't control.

It would seem now would be a time that you'd be wanting to add sort of an economic cushion, and it would be a little easier to justify because of all these things that you talked to us on the call on.

How do those discussions work right now with the accountants?

I think, Bob, like you say, there's no significant direct discussion that says go to it.

But I mean, I think the mood, so to speak, is somewhat like you say, that a little bit more is better than less, and we don't seem to have any pressure from our accountants as it relates to doing that, or frankly the regulators.

I think we're seeing a change in mood of the regulator, also.

They would like to see higher levels of reserves.

The things we're doing, we want to be sure that we have enough in the reserve.

We want to be sure that we're covering what we need to cover, that we have the proper reserves allocated to existing problems, and the proper basis point coverage for our [pass] portfolio.

That's where you can really make a difference in the level of your reserve, is if you sense the economy, and some of these other factors, can weigh in, you can increase your provision on the pass portfolio and improve that position.

And we'll do that when it's necessary, and I've mentioned on these calls before, that while the economy was cycling down, you saw us increase fairly dramatically the amount, or the percentage we put on the pass portfolio in terms of the reserves.

Yes.

And we'll do it again, and we've done it slightly to offset some of this uncertainty, this unpredictability.

When we file the Q later this week, you'll see that despite the growth, we've maintained a very good level of not specifically allocated reserve.

Okay, and then 1 last question, and I apologize if I missed it, on the OREO, did you give the number of loans in the OREO and how many are under contract?

We did not.

We have a significant number of the larger pieces, and when I say larger pieces, there are nothing.

I mean, they're $1 million and $2 million type pieces of real estate.

We don't have any big chunks in there.

At $35 million, it's a fairly small package of nonperformers.

So there's nothing in there that would move the needle really significantly for us.

We'll continue the reserve and write down based on appraisal, but we don't see anything significant or material there.

Okay.

Thanks, guys.

Enjoy the game.

Thank you.

And at this time, there are no questions.

I'd like to hand it back to Myrna Vance.

George?

Thanks, everyone.

We appreciate your time and your attention.

Thanks for your interest in Texas Capital.

Again, you can be sure that this management team will continue to work hard to grow shareholder value.

Again, we thank you for your interest.

And 1 last comment, George, for all of our callers today, deep from the heart of Texas, go Rangers

Thanks, everyone.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.