Texas Capital Bancshares Inc (TCBI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Texas Capital Bancshares, Inc.

earnings conference call.

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

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

Later, we will conduct a question-and-answer session.

(Operator Instructions) A reminder, this call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Ms. Myrna Vance, Director of Investor Relations.

Please proceed.

All right.

Thank you, Caris.

And good afternoon to all of you.

We're glad that you could join us today on our conference call.

If you have any questions after the call, I will be available to take those.

As a reminder, my number is 214-932-6646.

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

Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainties, and are based on Texas Capital's current estimates or expectations of future events or future results.

Texas Capital is under no obligation and expressly disclaims such obligation to update, alter or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

A number of factors, many of which are beyond Texas Capital's 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 the Prospectus Supplement, the Annual Quarter and Form 10-K, and other filings made by Texas Capital with the Securities and Exchange Commission.

Now let's begin our discussion.

With me on the call today are George Jones, our CEO, and Peter Bartholow, our CFO.

And after a few prepared remarks, our operator Caris will facilitate our Q&A session.

Let me now turn the call over to George.

Thank you, Myrna.

Good afternoon and welcome to our earnings call.

As you can see from our release, we reported record earnings for 2012.

Net income increased 59% for the year and 22% for the fourth quarter of 2012, as compared to the same quarter for 2011.

Those results for the fourth quarter and 2012 included a one-time charge of $4 million or $0.06 after-tax, related to the successful settlement of our Oklahoma litigation, which we are very glad to put behind us.

We are very pleased with our operating results of $0.82, which we achieved in the fourth quarter before the one-time charge, and our operating results for the year of $3.07.

We have a strong pipeline, and we're confident in our ability to continue to generate industry-leading results for 2013.

We experienced a significant reduction in credit cost and improvement in nonperforming assets in 2012.

Charge-offs for the entire year of only 10 basis points compared favorably with 58 basis points in 2011.

Nonperforming assets of 1.06% were down from 1.58% in 2011.

Our strong growth in average loans held for investment continued in 2012 at 22% year-over-year, and the fourth quarter end balance was up 2% over Q4 average, thus giving us a good tailwind moving into 2013.

Our specialty lines of business -- energy, premium finance, builder finance and lender finance, were instrumental in achieving exceptional growth.

We also find our pipeline, as mentioned earlier, quite robust at year-end.

Total average deposits increased 25% year-over-year, with average demand deposits showing exceptional growth, increasing 42% year-over-year.

Our treasury management, correspondent banking, and mortgage warehouse lines of business were the top contributors to that growth.

Loans held for sale, our mortgage warehouse unit, remained high in 2012, averaging $2.7 billion at year-end, up from $2.1 billion or 27% -- again, taking advantage of market demand and our ability to take market share in a very competitive environment.

We are confident in our ability to manage this line of business in such a way to generate maximum shareholder value.

Finally, we are very pleased to complete two capital offerings, an $88 million equity transaction and $111 million subordinated debt issue.

Peter will cover the financials and I'll return to discuss credit.

After that, as Myrna mentioned, we'll be happy to address your questions.

Peter?

Thank you, George.

I think it's quite clear we had a great year of very strong growth linked-quarter year-over-year in net revenue, operating income, and earnings per share.

Net revenue grew 25%.

We did have, as George mentioned, a $4 million charge or $0.06 a share for settlement of the $65 million judgment against us, litigation in Oklahoma.

Did that to get that behind us and we believe we will recover costs from the insurance coverage.

Net income on an operating basis before the litigation settlement increased 62% year-over-year, and 32% in Q4 compared to the prior-year.

EPS growth was to $3.07 on an operating basis, $3.01 as reported, up sharply from the year-ago.

In terms of core earnings power and net interest margin, we again had exceptional performance for the quarter, and obviously, for the year.

Results from great operating leverage, and we are in that context benefiting significantly from the mortgage warehouse operation.

Rate of growth in net revenue continues to exceed the rate of growth in non-interest expense, and produced very strong operating leverage and improvements in efficiency ratios.

The net revenue growth was obviously driven by strong growth in held for sale and held for investment.

Held for investment was up $350 million linked-quarter average or 5.5%, and held for investment was up $226 million or 9.3% linked quarter average.

Total of $576 million in total loans was accomplished with very strong spreads.

We maintained a very solid net interest margin, where 7 basis points of a 9 basis point reduction resulted solely from the debt offering accomplished in September.

The balance, the small balance, came from growth, offset in part by improvements in fee income.

More later on net interest margin.

We've enjoyed great growth in noninterest income, primarily in fees from the mortgage warehouse operation, loan swaps and fees associated with treasury management.

I think I've mentioned before, most of treasury management fees show up in the growth in demand deposits, which I'll speak to later.

2012, we experienced the lowest efficiency ratio in the Company's history resulting from operating leverage I mentioned, and the success of the warehouse lending group.

Non-interest expense growth -- non-interest expenses grew by 3%, excluding the litigation charge and the ORE valuation charges from Q3 and were up 15% year-over-year.

Again, that compares to the year-over-year growth in net revenue of 25%.

Growth in noninterest income -- excuse me -- expense relates to business expansion generally and to the higher levels of performance.

We believe problem asset recovery costs will continue to come down with a reduction in ORE and problem loans.

Incentive compensation expense continues to be scaled to our performance.

Legal and professional fees, which had grown significantly due to litigation, should continue to come down.

In terms of loan growth, held for investment growth occurred, as George mentioned, across a number of lines of business.

Held for sale balances remained at very high levels, averaging $2.7 billion for the quarter, an increase of 9% from the prior quarter.

The average was $2.3 billion for the year.

As stated, our approach is designed to build a business while managing balance sheet concentration with the participation program.

And we will continue to see an opportunity to expand the customer base.

The quarter-end balance of $3.18 billion is net of $436 million in participations sold, so we are now managing a business that peaked at year-end at $3.6 billion.

Participation commitments reached $600 million at the end of the year, compared to $437 million at Q3.

We believe these will expand as needed to manage growth.

In Q4, we had saw continued improvement in our funding profile, with a 2 basis point reduction in funding costs.

The change in funding mix has obviously been very important with the substantial growth in DDA, again, 17% linked-quarter, not annualized, and 31% year-over-year.

This reflects the success of the treasury management focus throughout our lines of business and regions, and growth in the business from the Warehouse Banking Group.

We've had no apparent impact from the loss of TAG coverage, actually with a much higher balance at year-end, some $200 million above the Q4 average in demand deposits.

We're especially pleased to note that DDA growth represented over the course of the year 43% of all held for investment growth.

It is particularly important when, at some future date, we expect to see rates rise, and will expand our margin opportunity.

The growth in held for sale supported -- is now supported primarily with borrowed funds.

A new facility with the Federal Home Loan Bank provided a great opportunity to expand this business with a net reduction in funding costs.

George mentioned credit quality trends.

They remain very positive.

Total cost, including ORE valuation charges, were improved 48% compared to 2011.

Saw a small increase in linked-quarter costs driven by growth, and a $900,000 increase in ORE valuation costs.

George mentioned net charge-offs were 10 basis points for the year.

And he will have more comments about credit quality in a moment.

On slide 6 and 7, we show an excellent quarterly and annual progression for both -- for growth in net income, net revenue and earnings per share.

We see in five quarters of growth from $0.67 per share to $0.82 on an operating basis, even with the dilution from the third quarter common stock offering.

This produces a five-year CAGR of 21%.

Provision credit quality costs, I mentioned, are down sharply from 2011, with an improved outlook for credit metrics in coming quarters.

Efficiency ratio has shown an excellent trend in quarterly and average -- and annual levels.

We maintained an ROA of a 1.37% on an operating basis for the quarter and for the year.

Operating return on equity was, as George mentioned, 17% and 16.6%, again, even after the effect of the July common stock offering, demonstrating, we believe, our ability to leverage new capital very effectively.

We now view the likelihood with the very high return on equity and return on assets that the internal capital generation rate may exceed growth in total loans in 2013, due to what we view as modest growth expected in held for sale on year-over-year basis.

On slide 8, a comment about average balances, yields and rates.

I think they speak for themselves.

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

We find ourselves with a business model that produces a nearly ideal balance sheet for the low rate environment in which we operate.

We remain highly asset-sensitive, with exceptional margins and spreads in the lending businesses, and held for -- both held for investment and held for sale.

We saw an earning asset yield that was reduced by just 4 basis points, and that's what the effect of $600 million in linked-quarter average balance growth.

Loan yields have held up well, with held for investment yields just 2 basis points below the level for Q3, and, again, after $360 million in growth and 4 basis point reduction in the held for sale yield.

Growth in DDA and total deposits, coupled with our ability to utilize borrowed funds to support held for sale balances, has obviously been important in reducing funding costs for the protection of our net interest margin.

I mentioned of the 9 basis point reduction in net interest margin, 7 basis point was attributed solely to the impact of the note offering in September.

We view all of this as a clear demonstration of the benefit of our growth model, where strong growth in loans certainly has had an impact on them, but also has produced exceptional growth, industry-leading growth, in net revenue.

On slides 9 and 10, we show quarterly and average -- and annual average balances.

Held for investment growth has certainly remained well above industry levels and ahead, actually, of our expectations.

It grew 6% linked-quarter; as George mentioned, 20% -- 22% year-over-year.

DDA growth, we commented on, has been exceptionally strong.

And again, no recognizable impact from TAG elimination.

And it appears so far that we could be the net beneficiary of that event, due to our performance and reputation in the marketplace.

Due to again, to high return on assets, our growth in stockholders equity, exclusive of the impact of the offering, has been very strong.

Slide 11 shows quarter-end balances; again, very strong growth across lending and deposit categories.

Slides 12, 13 and 14 show CAGRs in net revenue and net income that are exceptionally high -- 22% and 31%, respectively.

As we've discussed, our strength in operating leverage is represented by the difference in the rates of growth between net revenue and non-interest expense.

On slide 13 we show the EPS progression with a CAGR of 21%.

It's obviously driven by the growth in loans and deposits shown on slide 14, all of which are especially strong compared to the industry, demonstrating marketshare gains in both loans and deposits.

George?

Good, Peter.

Thank you.

If you move to slide 15, this shows our loans by collateral type.

Nonperforming assets are down by approximately $5 million on a linked-quarter basis to 1.06% from 1.16%, and $17 million from Q4 2011 at 1.58%.

The main driver of this decline was a reduction in OREO of $18 million or 53% from Q4 2011.

That leaves us with approximately $15 million in ORE that will continue to work down in 2013.

Slide 16 shows our improved credit trends for both Q4 and the year 2012.

Charge-offs for Q4 in the year, as we mentioned before, were only 10 basis points compared to 58 basis points for 2011.

Our loan loss provision for 2012 was $11.5 million compared to $28.5 million in 2011.

The provision in Q4 2012 was up somewhat on a linked-quarter basis, primarily because of growth in both our loan portfolios.

Our nonperforming asset ratio continues to decline, as mentioned earlier, with ORE down substantially from 2011.

We achieved a reduction in 2012 credit costs that were consistent with improvement in our credit metrics.

Moving to slide 17, this graphs our annual net charge-offs for the past five years.

And with the exception of 2010 during the recession, they remain well below 1%.

I'd like to close these remarks with five thoughts to remember about Texas Capital as we move into 2013.

We have strong core earnings and organic growth that will continue into 2013.

We see a return on average assets, return on equity and growth in our loans held for investment portfolio continuing to outpace most all of our regional peers.

We completed both a successful equity offering and debt issuance during 2012.

Our credit costs in 2013 are expected to be slightly lower than they were in 2012.

And we have a strong loans held for investment pipeline and new commitments present opportunities for growth.

Our loans held for sale balances should stay high, and could grow modestly with increased market share and our participation programs mentioned previously.

Thank you very much.

That's the end of our prepared remarks.

I'll turn it back over to Myrna Vance.

Okay, George.

Thank you.

And, operator, we are ready to start our Q&A session.

(Operator Instructions).

Matthew Clark, Credit Suisse.

Can you address the, I guess, loans held for investment?

It looks like something's -- there may have been some payoffs at year-end, because the average balances, the growth there looked somewhat comparable to last quarter, maybe a little bit slower.

But just curious as to what went on there and what, I think, was -- is typically a seasonally stronger quarter?

Sure, be glad to.

What we saw, we really anticipated it, but what we saw happening was, in our energy line of business, we had actually $140 million pay off in Q4.

And actually, the last month or so of the quarter, we saw $70 million of that pay down.

So we had a real heavy paydown in our energy group, certainly, in the fourth quarter.

We also had the sale of some of our C&I customers' companies based on the potential tax problems that they saw going forward, so they -- the Company completed the sales of those companies, and tried to get that money working prior to the end of the year.

That's what we -- that's what happened.

Okay.

And can you maybe talk to the pipeline?

I think coming into the quarter, you thought the pipeline was the strongest in years.

And can you just talk to how that may have changed?

Well, it does continue.

We made that same comment, I think, since the last conference call.

Again, we think that our energy customers will actually gear back up, continue with exploration in the first and second quarter of this year.

So we fully expect to see energy grow in Q1 2013.

We are seeing a number of new commitments, our C&I customers, that have not funded in the past, but we anticipate fundings in Q1 and Q2.

We're beginning to get some traction in terms of our C&I customers wanting to take that first step, and begin to do some things that they've been holding off, worrying about the economy.

Some of those things are what we see.

Okay, and then the loans held for sale, the warehouses, I think up to 32% of outstandings, I think, above your -- maybe your comfort level, at least previously, of 25% to 30%.

Can you talk to whether or not you've maybe changed your appetite internally?

Or whether or not that might come back in?

Sure.

No, we still believe that that 30% number is relative.

After the first two days, we saw that $3.2 billion number come down dramatically.

And that's typically what happens at quarter-end and month-end.

As we've said in the past, those balances build dramatically at the end of the month.

And then typically, as they're delivered to permanent investors, they come down.

And that's what happened also after year-end.

Some of the things that caused it to bill past even where we anticipated was the backlog in the aggregators or the investors.

There was so many loans that closed in the fourth quarter -- again, anticipating tax issues, reinvesting the money, whatever -- they got backlogged.

And so the whole time in our warehouse expanded -- in some cases, over 20 days.

Not a problem, because we understand the issue; but again, ballooned some of the balances primarily at month-end.

But that's been rectified by now.

We believe that number is still accurate.

We think we're managing to that.

We are continuing to use our participation program where it's necessary.

Sometimes you just can't match that dramatically with the end of the month, and we did slip over a little bit.

But again, we knew it would come right back down.

Okay, great.

Thanks, guys.

Dave Rochester, Deutsche Bank.

On the warehouse business, again, just given what we know of the new QM rules right now, do you guys foresee any impacts on that business at all?

I'm sorry, say that again.

On the qualified mortgage rules, is there any impact at all on that warehouse business?

No.

We -- that's fairly new coming out of a consumer protection agency.

We don't see anything right now that would materially change our business, but again, it's brand-new and we haven't studied it the way we probably will study it in the near-term.

Okay, and just wondering if your outlook for modest growth in that portfolio assumes any kind of downtick at all in refi volumes going forward this year?

Well, if you look at or if you listen to the mortgage bankers, their association, they predict a 25% decline in overall volumes, primarily refi, obviously.

But as we've said in the past, as that happens, if that happens, we believe that our line is the preferred line with 80% of our customers.

We get paid down last.

Our participation program gives us the ability to bring some of that back on balance sheet, even when volumes decline.

So, even if we do see a decline like that, we think we will be flat to even possibly up a little bit.

So we don't anticipate large volumetric issues as we go forward in 2013.

And you've been increasing the purchase portion of that activity also, right, over time?

Yes, and we've been increasing customer acquisition also.

We have gained a significant market share in 2012 from our competitors.

And that continues.

And if that does continue, we'll see the fundings stay strong.

And what was the purchase portion of that business in 4Q?

Do you happen to have that?

45% I think.

Oh, the purchase fee -- excuse me -- I'm sorry.

I misunderstood you.

Yes, we're about 58 to 60 refi purchase would be the difference.

We do, also, some reverse, a small amount of reverse, and a very small amount of jumbos.

But, yes, it is 40-plus-percent.

Got you.

And on the yield, it looked like that held in nicely this quarter.

I remember you were saying that the yield on that book reflects the, I guess, the yield that you get on those mortgage loans, the note rates.

Is that right?

Yes, that's correct.

It's the coupon rate, typically.

We charge a file fee, as we've said before, but our rate is the rate on the coupon.

Should we expect that yield at all to drift down to where the 30-year mortgage rate is today over time?

Or will the fees that you're (multiple speakers) --?

You know, I don't -- it might slightly, but we have floors on virtually 100% of that portfolio.

So in effect, we will not drop down dramatically from the point we are today.

Got you.

All right, great.

Thanks, guys.

Brett Rabatin, Sterne Agee.

I wanted to first ask, could you guys provide a little more color around what you were talking about in your prepared comments about capital potentially accumulating with your high level of profitability, i.e., how we should think about capital ratios as you see them going forward?

And if capital were to accumulate somewhat, what you guys would do as a result of that?

Brett, this is Peter.

We don't see it accumulating at a level that would predict buybacks or meaningful dividends.

But I just mean that the rate -- at a 17% or 15% ROE, given the likelihood of only modest growth and held for sale, flat to modest growth, even with a mid-to-upper-teen level of held for investment growth, the total loan growth would be less than the internal capital generation rate.

Okay, that's good (multiple speakers) --

It's not guidance; it's math.

Right, okay.

That's good color.

I just wanted to maybe understand that a little better.

And then the other thing is just within the held for investment portfolio, I assume you guys knew you might get the question about shared national credits.

And if you gave it, I missed it, but how much that was a percent -- or how much that grew this quarter?

And then just the yields are holding up so well in your held for investment portfolio, I was just curious, you've talked a little bit about competition in the past, I was just curious what your thoughts were on the relative pressures out there, in terms of new loan production?

Sure, take the SNC portfolio first.

It's still at $1.3 billion, which is about where it was the last quarter.

We've had -- it's been pretty flat, but there's been a lot of activity.

We've generated a lot of growth in new commitments, but we've had some paydowns in that portfolio too, which basically have covered the amount of the fundings under the new commitment.

So there's been a lot of activity, even up to a couple of hundred million dollars, but it was flat on a net basis because of our paydowns.

We still agent about $340 million of that portfolio and feel very good about it.

We only have basically one problem in the entire 80 or so loans in that portfolio at $17 million.

A lot development loan, which we've talked about before, that is not a problem.

And, frankly, we're just giving it a seasoning time and put it back on accrual.

There's no loss there.

A good, clean portfolio with a lot of activity.

Secondly, you asked about yields.

You're right.

We have -- our yields on loans held for investment has hung in there really pretty good -- one of the reasons we still maintain floors on about 60% of our floating rate portfolio.

Yes, the floors have come down a little bit, and will continue to come down some, but we've been able to maintain a significant portion of that portfolio with a floor.

There is aggressive pricing in the marketplace today.

Commercial real estate, believe it or not, is extremely competitive, and very aggressive pricing in that -- in our marketplace for that type product.

We're going to continue to see that.

It's too early to be too aggressive, but we see some banks doing it.

We take what we want, and we let the rest pass.

We are seeing some structure issues we're not comfortable with.

We let those pass also.

We're in markets that generate a lot of potential opportunities, so we don't have to work hard to do every transaction that we look at.

So, yes, it's aggressive.

We've been able to hold our own and sell the value-added concept that we actually provide so much to the relationship.

We're not a Wal-Mart; we're not a Neiman Marcus, but we fall in between, and expect to get pricing.

And we've been able to do a pretty good job.

Okay, great.

Appreciate all the color.

John Pancari, Evercore Partners.

Could you talk a little bit about the new money yields that you're seeing on your newly originated C&I loans?

Just give us an idea of the average yields that you're bringing on paper currently?

You know, it's kind of all over the board, John.

And it varies by market.

It varies by deal and by industry.

Really hard to say.

Really hard to tell you specifically.

But we've seen some LIBOR plus 2 deals, and we see the larger financial institutions continuing to stretch for asset growth.

And they do that in terms of lowering pricing and, in some cases, lowering structure.

But, again, we're trying hard to -- you know, we've got a project around here in terms of improving net interest margin in a difficult environment.

And we believe we can do that.

John, this is Peter.

I think, again, by simple math, you can see that things have held up very well when you grow in held for investment $360 million, and you've suffered a 2 basis point reduction in yield.

So.

Yes.

No, I agree, and I think that's exactly why I'm asking, just trying to get an idea of those floors are ultimately coming down.

Just want to get an idea of what the risk may be, just where you're originating a new credit.

You bet.

It's a fight, but we've got great people that know how to negotiate.

And the value of our bankers.

We're charging for the value of our bankers.

And our customers are buying it.

Okay.

So on the margin front, on your outlook there, can you give us a little bit more color on how you're thinking about how the margin is going to trend here over the next several quarters?

Should we continue to expect similar compression as we saw this quarter in the next few quarters?

John, since 7 of the 9 basis points came from the first full quarter impact of the debt offering, you won't have that component.

That will remain fixed.

So then it is going to be a function of growth and, obviously, growth in pricing.

So, with growth, as we've commented before, we expect some reduction.

George has commented we've been able to hold yields pretty damn well, and we're not looking for anything significant linked-quarter.

Okay.

And then lastly, on the loan loss reserve, can you just give an idea of where you expect that that could bottom out?

You're at that 1.1% of loan could get pretty low.

Just want to get an idea of where that could go.

That's -- you know, we discuss that with our accountants and our regulators all the time.

The credit quality continues to improve.

The system we use continues to drive lower reserving.

But there is a point in time that we're going to stop and take a look at it.

And 1% wouldn't be totally out of the ballpark, but that's not, again, guidance.

But that's where we would scratch our heads and begin to look at it.

Okay, thank you.

Brady Gailey, KBW.

So the warehouse this time last year was about 25% of assets.

And you all made the strategic decision to allow for it to drift up to 30% as of the end of this year.

How likely would you be to decide, all right, we have the capacity to take this thing up to 35% or 40% of assets throughout the course of 2013?

That's not realistic.

And you've got to look back -- again, you've got to focus on the averages.

We averaged 28% during the quarter.

And we expect, as George commented, the industry to tail off a little bit.

We ended -- the fourth quarter average was 17% above the full-year average.

So to maintain a little growth, we've got, for lack of a better term, a cushion from the Q4 averages.

So we're not by any means saying that we expect -- we have not said we expect it to grow on an average basis from Q4 levels, but flat to modestly up on year-over-year averages.

As the bank grows, we'll let the mortgage warehouse opportunity grow.

But again, we like that 30% number and we manage basically to that number.

And, again, it's -- you look at it on a month-end or a quarter-end basis, as you should, but really, we manage it by averages.

And we're in the 26 range on an average basis now, and that might creep up a little bit, but not a heck of a lot.

Okay, so the odds of you all taking it to -- on an end-of-period basis, 35% to 40% would be low?

Yes, low.

Exceedingly.

Okay.

And then my second question, George, in your closing comments, you mentioned that credit costs in '13 are expected to be slightly lower than '12.

Are you talking about net charge-offs there?

Are you talking about provision?

Because your revision has been benefited by the decline in the loan loss reserve, you know, [130 to 115]?

Right.

But are you talking more about the provision there?

Or net charge-offs?

Again, the provision, we believe, is going to be driven more by growth in 2013 than actual problem assets.

So that might certainly keep track more with growth and slightly if we have problems that need to be reserved.

Charge-offs -- you know, it's going to be hard to beat 10 basis points.

We've got some things that could happen that make that possible.

ORE charges are way down.

We think we've got the ORE portfolio well preserved today.

So, as we liquidate the rest of that $15 million, we don't see credit costs creeping up on that portfolio.

Yes, and Brady, we do include -- when we speak of total credit costs, we include valuation charges and the provision.

That's -- you see that on the slides.

Okay.

All right, great.

Thanks, guys.

Matt Olney, Stephens.

Thanks for taking my question.

Hey, George, you've already addressed the question on the HFI loan yield totaling on pretty strong in the fourth quarter, but some of your peer banks talk about the higher paydowns can benefit loan yields in any given quarter.

So, since you guys had higher paydowns in the fourth quarter, did that help contribute to loan yields in the fourth-quarter?

No, we don't guess fees on paydowns the way we've seen other banks report.

Okay, okay.

And then, lastly, given your size, over $10 billion of assets, can you remind us what this means as far as regulatory environment, and how you think about the stress testing?

It's going to be exciting.

We -- the stress test, you nailed it.

I mean, that's the one issue we're going to have to deal with probably the end of this year or into next year before we actually average those four quarters of $10 billion.

But that it is an extremely onerous, difficult project.

And the amount of information that needs to be developed, along with just coming up with a number or two, is daunting.

So -- but we're starting on it right now.

We're looking at it.

We think that we might have to add a couple of people, do a little consulting, but nothing that you're going to notice moving the needle dramatically.

We think we can do that, again, if we start now, we can spread that out and get it done by the time we have to actually file a report.

So we're not excited about it, but that seems to be the biggest thing that we're going to be dealing with on the near-term, as it relates to the $10 billion that we see.

Okay, thanks for the color.

Scott Valentin, FBR Capital Markets.

Good evening and thanks for taking my question.

Just with regard to -- you mentioned earlier that one of the reasons you're able to maintain loan yields is you have, I guess -- you can be pretty selective on the originations.

Just wondering if maybe you guys had an approval rate handy or maybe compare this quarter's approval rate to prior quarter approval rates?

No, I don't really have that number right off the top of my head.

I know we're having to look at a lot more transactions in terms of getting the kind of growth that we see on the balance sheet today.

We're declining more than we've ever declined in the past, but I don't have that specific number.

Okay.

But I mean, you would say probably the approval rate has probably come down a little bit actually, given you're seeing more loans and approving fewer of them?

Yes.

Okay.

And then just on page 8 of, I'd say, a quarter date average balance slide on the presentation, just on the securities yields, actually up about 12 basis points from a year ago.

Just wondering if there's been any material change in the portfolio in terms of content or duration?

None.

It will continue to drift down.

And that's just a reflection of -- is that duration or a mix issue?

No, it's just that we haven't bought anything since the fourth quarter of 2004, so it's (multiple speakers) --

These are all mature securities.

Just whatever is left and what it yields.

Okay.

And then just one final question.

Going back to a question that -- or a response to one of David Rochester's questions, can you explain the floor dynamic on the loan held for sale?

I understand floors on loans held for investment, but I think you referred to requiring a floor on loans held for sale.

I'm just wondering how that works, given these are loans originated by mortgage brokers?

You know, it really is not something that we throw out there and give our model.

It's very competitive.

It's similar to the way we do it on normal lines of credit with the rest of our customers.

But just much more description really does cause us some competitive pressures, and we'd rather not go into that in detail.

Okay, fair enough.

All right, thanks for answering my questions.

Michael Rose, Raymond James.

Just wanted to get a sense on the expense side.

It looks like occupancy expenses were up a little bit.

And I know on the release you mentioned this might be a new kind of run rate for legal and professional expenses.

Given maybe some elevated costs with hiring people -- I don't know what your expectations are -- and then maybe some costs associated with stress testing, how should we think about the efficiency ratio from here?

Thanks.

Michael, right now, the efficiency ratio is a significant product of the operating leverage in the warehouse.

We didn't, by any means, imply that there was a run rate from the fourth quarter in legal and professional.

We think that should come down.

That reflects the buildup to -- that produced the settlement.

So we can, hopefully, see that come down, perhaps in a meaningful way.

The rest of it is going to be just business expansion.

There's nothing odd about our occupancy expense except for a building out to support the people we hire.

Staffing is up, and will continue to be up, with the growth that we're experiencing in both relationship managers and the support organization.

We acquire talent.

We expect them to produce real results or they find that this isn't really the best place for them.

So, just general business growth.

I don't think the stress test, as George commented, will show up in a meaningful way.

Will it be a little bit of professional fees and some staffing?

Absolutely.

Nothing that we think would be of consequence.

Okay, and then just on the RM count.

Kind of where does that stand?

Did you make any hires in the quarter?

And do have any plans for expansion in any of the markets that you're in over the next year?

Thanks.

Again, it's always opportunistic.

We had, I think, about record growth in single quarter in the third quarter.

We were flattish in the fourth quarter.

Okay, thank you.

Brad Milsaps, Sandler O'Neill.

Hey, Peter, just a question on fee income.

You guys look like you may have had a record quarter.

I know there's some swap income in there.

I think you mentioned the release, but maybe the loan fees weren't as high as I thought, given the kind of the loss at the end of warehouse.

Just kind of curious if he could kind of talk about those two categories, particularly as you move into 2013?

The other category, we had good swap fees compared to Q3.

We had some minor ORE losses in operating losses in Q3, and a couple of gains, less than $0.25 million, I think.

So the shift linked-quarter is bigger.

Brad, nothing of any real significance.

Okay, great.

Thank you.

Gary Tenner, D.A. Davidson.

Peter, I missed a couple of numbers when you were going over the loans held for sale portfolio, in terms of the amount of participation commitments you have out there, and what the average outstandings were on those in the fourth quarter.

Can you go back over those real quick?

Yes.

Well, I think the average of total loans held for sale was 28% of total.

And that includes how much -- that includes the amount you had participated out?

That's what I was trying to get to.

No, no, that's net of participation.

Right.

So, I thought you had mentioned earlier what the participate -- what the average participations were?

Yes.

At the quarter-end, it was -- the participation total was 436.

The average for the quarter was between 350 and 375, as I recall.

Okay.

And the amount of commitments to participate at the end of the year was (multiple speakers) --?

(multiple speakers) [Net] at 600 million.

600 million, okay.

And you said that you had the ability to reduce the vast majority of those outstanding participations at your --?

No, we have kind of 90-day look, a running 90-day look.

Okay, so that would be some sort of lab presumably then on what you could do?

Okay.

Yes.

Gary, this is George.

We have, in addition to that, we have $300 million to $500 million in the wings, so to speak, that would be ready to increase commitments for this product.

So, we feel pretty comfortable that we've got the capacity to continue to acquire customers and build this business, but not build it necessarily on our balance sheet.

Right, fair enough.

Okay, that's all I needed.

Thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

Really, all my questions have been asked, so I'll just try and come up with another one.

Can you give us an idea of how many new producer hires came on last year and what you think is possible in 2013?

You know, Jennifer, we asked the business managers to come up with a plan, and that's one number.

And it may or may not bear any resemblance to the actual number.

It tends to be on the low side.

We had significant unplanned variance in the number of relationship managers hired during 2012.

So, a number that you might use as guidance is going to be essentially impossible.

Okay, thank you.

David Bishop, Stifel Nicolaus.

A question for you.

Broker loan fees, nice growth in the first half of the year, sort of plateaued here at the $5 million level.

How should we think about those moving into 2013 or so?

We saw good growth this year -- same trajectory, thinking about in terms of next year?

So, fairly flat.

Last half of the year, we really built the portfolio.

Those broker loan fees really are file fees.

We're producing, gosh, anywhere from 15,000 to 20,000 or 25,000 files a month today.

But I don't see that growing dramatically.

Got it.

Thank you.

(Operator Instructions).

Matthew Clark, Credit Suisse.

Actually it was asked and answered on the other fee income.

Thanks.

And at this time, there are no further questions in queue.

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

Operator, thank you very much, and let me hand it back over to George for a few closing comments.

Thanks, Myrna, and thank all of you for dialing in this afternoon.

We think it's been a great year, as Peter said, for Texas Capital.

We've got a lot of things accomplished.

We've got our lawsuit behind us.

We've got a number of things that we're working on to improve our earnings stream.

So, we look forward to 2013.

We think it will be good.

It will be challenging, but it will be good.

And we appreciate all your interest and your ownership.

Thanks again.

And ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.