Texas Capital Bancshares Inc (TCBI) 2013 Q2 法說會逐字稿

Good afternoon and welcome to Texas Capital Bancshares second-quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Myrna Vance, Director of Investor Relations Please go ahead.

Thank you, Laura, and thank all of you for joining us today for our second-quarter call. If anybody has follow-up questions after the call, please give me a call at 214-932-6646. Let me start was something else.

At a little after 1 PM Central Daylight Time today Bloomberg began publishing numbers from our earnings press release. We have determined that unauthorized and improper access had been gained to an administrative server preloaded with our release. The parties who gained this unauthorized access provided a link to the non-public website that resulted in a premature release of our information. These issues will be addressed to ensure that it cannot happen again. And to avoid the possibility that not all our investors had access to our release we released a approximately one hour earlier than our intended time.

With that said let me start was saying we are pleased with our results and we're looking forward to the discussion, which is going to follow just a minute. But before that, 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 estimate or expectation 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 statement 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 impact from general economic conditions, competition, interest rate sensitivity, and exposure to regulatory and legislative change. These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found at in the prospectus supplement, the annual form on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission.

Now let's began. With me on the call today are George Jones, our CEO; Peter Bartholow, our CFO, and Keith Cargill, who is currently President and CEO of Texas Capital Bank but who will be taking over as CEO of Texas Capital Bancshares from George at the end of the year. After a few prepared remarks, our operator, Laura, is going to facilitate our Q&A session.

Let me turn the call over to George.

Thanks, Myrna. Good afternoon, everyone, and welcome to our Texas Capital second-quarter conference call. Today, before we begin, I'd like to introduce Keith Cargill.

As you know, I've announced my retirement at the end of this year, as Myrna has mentioned, and we have selected Keith to succeed me as President and CEO of Texas Capital Bancshares. Many of you have already met Keith and know him to be an extremely capable leader. I've known and worked with Keith for 35 years at three different financial institutions. He was among the group founding our Company 15 years ago.

I expect our transition to be seamless. Keith is one of the brightest, most talented leaders in the banking industry today and we're fortunate to have such strength in our Company. He will also assume the role of CEO of Texas Capital Bank where he's presently President and Chief Operating Officer. You'll hear from Keith later in the call. Fortunately, our bench strength is deep at Texas Capital and many of Keith's previous duties will be assumed by others, such as Vince Ackerson, John Hudgens and Peter Bartholow, who many of you have met.

Texas Capital had an exceptionally strong growth quarter, with loans held-for-investment and total loans increasing 9% linked quarter and 20% from second-quarter 2002. The total increase of loans held-for-investment, $591 million, is a new record for growth at Texas Capital since the Company began operations almost 15 years ago. This strong growth required a significant increase in our provision for loan losses. While the provision was up $5 million from Q1, all of the increase related to growth in the portfolio rather than problems.

Demand deposits increased 11% and total deposits increased 3% on a linked quarter basis and grew 45% and 20% respectively from second quarter of 2012. We are extremely pleased with both loan and deposit growth in Q2. We have a strong pipeline that should help us deliver superior growth and profitability the balance of this year.

Credit continues to remain very good and improving. Net charge-offs for 2013 have been only 10-basis points and nonperforming assets declined to 68-basis points from 83-basis points in Q1.

Now with that, I'll hand it over to Peter for his remarks. Keith will brief you on operations and credit and I'll return in a moment for closing comments. Peter?

Thank you George very much. We begin the discussion of the financial review on slide 4 and 5. We did have an excellent quarter in terms of growth and in core operating results.

In terms of net income and EPS we did see a decrease from Q1 of this year and Q2 of last year entirely related to the following elements. The increased provision that George mentioned required by record quarterly growth was $0.08 a share. The charge related to the CEO succession plan announced in June was $0.12 a share and we'll have more comments on this in a moment.

The increase in incentive and 123R expense related to increased profitability of achieving certain performance targets for 2013 and 2014, coupled with the higher stock price. And all of these plans we view as consistent with shareholder interest and are variable to the performance of the Company and our shareholders interest.

We had the first full quarter of impact of the preferred dividend of $0.06 a share. Assuming no growth from the provision for loan losses and before the preferred dividend, we consider normalized operating EPS at $0.81. In terms of operating leverage, core earnings power and net interest margin, again we had strong results in net revenue, consistent with Q2 seasonal strengths, 3% increase from the first quarter, 11% from the prior year.

As George mentioned, we had exceptional growth in held-for-investment loan balances. Average growth of 5% from the first quarter and growth of 20% consistent with prior-quarter results against the count the prior year. Strength was building in the last half of the quarter and really provides a very strong foundation for Q3 operating results. Strong growth in loans produced reduction in net interest margin by eight-basis points to 4.19%.

We had broad-based LHI growth with very favorable spreads, yields down only slightly and that accounted for four-basis points of the NIM reduction. Growth and a 15-basis point reduction in held-for-sale yields directly resulting from national market conditions produced half of the NIM reduction. And the yields are now expected to increase in the last half of 2013 from what we consider the low to be experienced in Q2. Again, the improved funding profile and reduced cost from growth in DDA and total deposits was very important to the quarter and will be much more so as we see, finally, an increase in rates.

The increase provision for loan losses, as we mentioned, was directly related to record quarterly growth of $590 million in loans held-for-investment. It's a record by over $100 million in a single quarter. Provisions consistent with the application of our methodology. It requires the application of the allowance in the quarters when the loans booked and it results in a cost.

In this case it represents more than four months of spread income at a time when the exposure to loss is actually the least it will ever be. This is absolutely not a reflection of the change in portfolio characteristics, lending philosophies or exposures of any type. We had a $9.9 million charge in net interest -- non-interest income totaling $0.15 a share. It's comprised of $7.7 million, or $0.12 a share related to the organizational change; $2.2 million, I mentioned, almost $0.04 a share related to the -- achieving the performance standards. As I mentioned earlier, these cost costs are variable and based on the Company's operating performance and stock price, so they are directly in line with the shareholders interest.

I'd like to make several important points about the charge for the retirement benefit. Texas Capital as I think most know, does not have a retirement plan or any other deferred compensation program for its executives, which might have been expensed over many years or even decades. So the retirement of the CEO sets up a need for a one-off determination where cost incurred is related both to the performance of the Company during the CEO's tenure and to future performance. Because the substantial majority of the total benefit is dependent on both performance of the stock price and performance of the Company on standards yet to be defined, it's more directly aligned, as I mentioned, with shareholder interest and other -- than any other type of retirement plan for which senior executives might be eligible.

The Company is also chose an approach which will reduce the ongoing cost by taking the full estimated cost in the quarter when the succession plan was implemented. Cost incurred does reflect an estimate and can go up or down depending on the company's performance and any changes in the stock price. The remainder in the increase in non-interest expense from Q1 levels and consensus was directly related to the success we've experienced in recruiting, build out, and new product expansion that Keith will discuss.

In terms of capital position, we still believe that the growth in common equity in 2013 will exceed the growth in total loans. Our position, as you all know, was strengthened at the very end of Q2 -- excuse me, Q1 prior to Q2 with the preferred stock offering resulting, as I mentioned earlier, in $0.06 per share EPS available to common stockholders. We've commented many times preferred offering was done to protect the mortgage finance business from any change in risk weight for loans held-for-sale. And I'll comment that if the Company does not prevail we would expect to modify the program to return at least a meaningful portion of the held-for-sale portfolio for the lower risk-wide category.

In terms of loan growth, again we experienced record growth and it occurred across a number of lines of business and regions, reaching $7.2 billion average for the quarter and with a quarter end balance of $7.5 billion over 5% above the quarterly average. And as expected, the growth in held-for-investment loans is compensating for the slower growth in held-for-sale portfolio.

The average balances for held-for-sale increased and demonstrate continued improvement in market share in this line of business over the past several years. On average we had $2.7 6 billion in this business before the participation sold of $350 million. And consistent with our objectives, the balance remained above the three point -- the $2.3 billion average for Q1 2013 and for the full year of 2012.

As stated earlier, our approach is designed to build and maintain this business by adding customers and expanding penetration within the current base. Participation balances were flat for Q1, again on average for $350 million. In that regard, as planned we provided notice of termination to participants, permitting a return of these balances to mitigate any market weakness in the mortgage business. That change will really affect us in Q4 with improved balances. I'll speak more about the mortgage finance earnings contribution in a moment.

For Q2, we had continued improvement in the funding profile, with a reduction in costs of total funding of earning assets. The change in funding mix has obviously been very important for the link quarter growth of 15% in average balances, very strong, and 56% year-over-year. Again, this reflects the success of treasury management focus throughout the business and more particularly the growth of the deposit base in our mortgage finance business.

In terms of quality and cost the trend remains very positive. Before the impact of growth on the provision total credit costs increased by only $300,000, comprised solely of ORE valuation charge compared to the first quarter. The increase of $5 million, or $0.08 a share, again was related to the $500 million -- $590 million growth in held-for-investment.

We had 11% reduction in non-performing assets with larger percentage reductions in restructured, past due and potential problem loans. For the first half we had net charge-offs of 10-basis points and Keith will cover credit quality and cost in more detail later in the call.

Slide 6 is dedicated to all the people that have been guessing about the profit contribution from the mortgage industry. Some guesses have been better than others, but we've designed -- we've determined that we will try to provide some clarity around that business. This is a highly profitable, sustainable business with an extremely favorable earning asset and funding profile.

The strong position nationally that we've gained has given us focus on very large regional and privately-owned mortgage companies. It's really consistent with our middle market business model for the rest of the bank. The Company has consistently increased market share in this business since the industry collapse in 2007. The pace of growth has obviously declined, but was building throughout the second quarter with a June average balance of $2.65 billion.

The assets generated in this business are characterized by exceptional yield, asset quality, and low risk profile and the Company is now benefiting from the focus on purchase money mortgage originators that began in 2012. This is, in fact, a near-perfect asset class in a low rate environment with very minimal interest rate risk. We've had a reduction in yield and in related net interest margin since 2010 tracking the national mortgage rates. The yields were almost 5% in the first quarter of 2010 and now just 3.74% and consider the impact of that reduction on a portfolio has obviously been overcome with very substantial growth. The portfolio is now, we believe, positioned to produce higher yields beginning in the third quarter of this year.

We've had excellent results from growth in operating leverage, again managed a $2.75 billion business and $3.1 billion at the end of Q2. The growth from Q1 was consistent with expectations and, again, was ahead of the average for 2012. I'll comment further that funding was provided by just under $1.2 billion in deposits, $1 billion -- more with more than $1 billion of which is DEA and the balance of the portfolio is funded with borrowed funds.

Held-for-sale balances were just under 26% year-to-date of total loans, declining from 29% from the peak in the fourth quarter of 2012, really due to the growth and held-for-investment and seasonal weaknesses in the industry that began in the first quarter of this year. Pretax pre-provision -- PTPP -- contribution for mortgage finance was just under 27% year to date total contribution of all business units. It declined slightly in Q2 to just under 26% yield to -- due to the yield contraction and to the growth in the held-for-investment portfolio.

The range since the ramp up that began in the last half of 2011 has been approximately 25% to a maximum of 29%. Obviously the contribution varies between quarters because of change in national mortgage rates, volumes by customer type, seasonal conditions and the growth in this portfolio relative to loans held-for-investment.

Returns on allocated equity and invested capital were comparable to all of our other lines of business taken as a whole. We have lower spreads here in NIM compared to other businesses but those are offset with volume-driven fees and the fact that there are no credit costs. The cost of the approach we use in this business are higher than others with which we're familiar but we believe that the risks are also mitigated.

The long purchase approach requires more dedicated operations and is more staff intensive. It requires a major commitment to systems. And as you've heard from us, it provides -- requires us to maintain insurance for fraud protection. We have excellent operating leverage in this business when the volumes are high and with strategies now in place we believe that volumes will remain high for the balance of 2013. And we expect higher yields on the portfolio for the last half of the year.

I'll comment that at 100% risk weight the Company notionally allocates capital with an after-tax cost of just under 5% and earns with that a return on investment capital approaching 25% after-tax on a contribution basis. Using a standard, for example an 8% tangible common equity ratio, based on the average balances the return in this business is very consistent with the returns in the rest of our banking business.

I think it's obvious that the change in the risk weight we experienced at the end of the first quarter did not change our Company's commitment to this business. We believe our position is compelling with respect to this asset class in contrast to the ownership of securities in terms of earnings profile, deposits generated, and long-term risk characteristics. I think it's important note in this context the recent spate of very substantial reductions in other comprehensive income associated with large securities portfolios that occurred with only a very minor change in long-term interest rates.

I'll comment further that the determination of the risk weight issue is still pending. We strongly believe that the character of assets we own warrants a low risk weight. As I mentioned, we have an actual legal ownership, not secured financing arrangement. We own the assets for the 15 least risky days in the long life of mortgage loans, yet we are the only party to 100% risk weight in contrast to the originator, aggregator, and permanent investor in this asset class.

Oddly, if the assets don't sell for any reason, then they return to a 50% or 20% risk weight. From a legal contractual business and economic basis in reality, all of those argue against the 100% risk weight. Obviously it'll be beneficial if we can return to an average of approximately 40% rate -- risk weight, that really would be mostly in terms of freeing up regulatory capital, which can be deployed in other lines of business.

On slide 7 we do a review of quarterly income trends very solid growth in net income compared to the industry performance obviously driven by the benefit of our business model with the growth in the ability to remain high NIM to do the balance sheet composition. Except for the record -- impact of record growth provision in credit costs are all well contained. Normalized for the impact of the charge that we've already discussed, EPS before preferred dividend of $0.81, ROA of 130, ROE at 14.8 and efficiency ratio only 52%.

The growth in the quarter net interest -- non-interesting, as I mentioned, directly related to business growth and was the principal factor of the increase in the normalized efficiency ratio to 52% from 48% or 49%. With high ROE the internal capital generation rate is still expected to exceed the growth rate for total loans, again due to the reduced growth expected for held-for-sale balances in 2013.

Slide 8 for the average balances yield and rates loan growth in the funding profile are drivers of the high NIM and the growth of net interest income. We have -- continue to have a highly asset sensitive balance sheet, which is obviously suboptimal in times of exceptionally low rates. Loan growth has had a major impact in maintaining the yields and spreads on its earning assets, again in contrast to what the industry has experienced.

Loan yields have held up very well. Balance subject to floors has remained very steady in dollar terms for an extended periods with a declining percent of the total due solely to held-for-investment growth. We expect an increase of held-for-sale yields, as I've mentioned, from the ramp up in rates since early May. We have a lag impact on yields for 30 day -- 30-to-60 day period from loan commitment until funding. Growth in DDA total funding and total deposits in the funding mix improvement obviously are important in maintaining strong NIM.

On slide 9 quarterly average balances, as indicated in the upper column we were going to experience strong held-for-investment growth in the second quarter, which we certainly realized. The DDA and total deposit growth was especially strong, as I mentioned. Based on held-for-investment growth of 9% linked quarter -- and this is on slide 10 actually -- linked quarter balance of 9% and 20% since a year ago we're obviously continuing to gain market share.

We had a high held-for-sale balance at the end of Q2. We have expansion of the market share with a reduction in refinancing activity and the participation program is clearly having the desired impact and is expected to be beneficial in the future. Again, very solid growth in deposits and especially DDA.

Now I'd like to ask Keith to touch on the business.

Thank you, Peter. Let me begin by acknowledging some key performance drivers that Texas Capital Bank that produced the consistent extraordinary growth in quality loan clients and deposit clients. First, our recruiting model continues to identify and successfully enable us to hire outstanding bankers. I just hire these bankers that importantly keep them really engaged with one another collaboratively and with the client.

In fact, Q2 2013 was our strongest quarter of hiring new relationship managers in our history. The build out we have had underway in Houston for the past two years continues as is the case in our mortgage finance, treasury and San Antonio markets. The addition of Alan Miller as president of our private bank has also recently launched an exciting new build out for Texas Capital Bank. Finally, the outstanding business partnership between our credit team and relationship managers not only provide the exceptional response time in the marketplace, but high-quality loan growth, a hallmark of Texas Capital Bank.

Let's now move to slide 11, please, and let's review our historical growth, which puts in context the growth we've had this quarter and that we have sustained this type of performance for quite some time. And the pipeline, both in deposits and loans, looks quite strong and is encouraging as we move into the new quarter. If you'll turn with me to review slide 11.

Page 11 shows strong CAGR for operating revenue at 23% and net income at 40%. Importantly, the key driver, net interest income growth, continues with a positive trajectory when annualized for 2013. The $591 million increase in LHI this quarter reinforces that trajectory and adds to our confidence in the future.

The following slide, slide 12, shows our five-year EPS CAGR to 27%. If we move to slide 13, the demand deposit CAGR remains north of 40%, an astounding number. The total deposit CAGR at 21% continues to outpace our very strong LHI growth of 15%, evidencing our ability to fund our growth into the future.

We continued to be focused on diversification and if you'll take a look on slide 14 we'll show you our loan portfolio pie chart. PNI represents 37% of the mortgage mix with mortgage finance at 28%. The combined market risk real estate at 23% remains at a comfortable level, allowing us to grow as the right opportunities present themselves. Our credit quality continues to be strong, as shown by non-accrual loans plus ROE at 0.68% of the LHI and ORE.

Slide 15 will highlight for you some of our credit trends. First, the larger provision in Q2 2013, as Peter mentioned, is primarily a function of record-setting LHI growth. Our reserve methodology requires that we set aside almost 80-basis points in new provision for new loans. The provision for new loans makes up almost all of entries in provision from Q1.

Charge offs for the quarter amounted to 13-basis points versus 10-basis points year-to-date. And finally, our ORE valuation charge of $382,000 was markedly lower than the $3.1 million in Q2 2012. And the DAs continued to decline, dropping $6.3 million from Q1. The NPA ratio of 0.86% compares 0.83% in Q1 2013. If you'll move now to slide 16 you'll note while our NPAs have fallen the most modest decline in our reserve now provides more than two times coverage to the NPAs.

George, I'll hand it back you.

Good, thank you, Keith.

Just four brief points to leave with you before we go to our Q&A session. Number one, Texas Capital continues to have strong core earnings power, profitability and growth that will be present for the rest of this year. $590 million net new loans at the end of Q2 bodes well for our future. We should see very strong profitability from that growth.

Two, credit just won't get much better from what we see today. Net charge-offs to average loans has been mentioned in the last 12 months, just 12-basis points. 10-basis points for the first half of 2013, NPAs down to 68-basis points from 135-basis points one year ago.

Three, we have strong pipelines, as Keith mentioned, in both recruiting and new commercial loan relationships. These present a great opportunity for growth.

Four, finally, our loans held-for-sale portfolio will remain high with potential for modest growth, as we've said before, with our increasing market share and our participation program.

Thank you, that's at the end of our prepared remarks. Let me turn it now back to the operator to begin our Q&A session.

Certainly.

(Operator Instructions)

Our first question will come from Michael Rose of Raymond James

Good morning guys -- or good afternoon, guys, how you doing?

Hi, Michael

I think one of the concerns that I have here and I didn't really hear it addressed in the prepared remarks was or is what seems to be a higher run rate of expenses. When you -- even when you exclude the $9.9 million in charges it seems like legal and professional fees should continue at a higher rate. As you continue to grow and hire. It seems like maybe we were underestimating the expense base. Can you just spend a minute or two and discuss how we should expect, particularly the salaries expense line, to trend from here? Thanks.

Michael, this is Peter. I think, as I commented, it's all weighted to the growth from RM acquisition or recruiting to new product development, principally along in the treasury management area. And that entails new staffing commitments, new systems commitments, but all of this really relates to the growth opportunity we see.

There is no fundamental issue of a core operating expense problem, it's all about sustaining the growth. And if we didn't see the opportunity we wouldn't be taking these steps.

Michael, this is George. I think you heard Keith say that Q2 was probably the best recruiting and hiring quarter we've had in some time. We're going to see some additional expense due to that. But it will pay off in spades on a go-forward basis. And we also begin to see some of those hires we made 18-months ago really catch fire and take advantage of places like Houston.

Okay, that's helpful. And then as a follow up, can you talk about the trends in the SNIC portfolio this quarter and how much that may have contributed to the growth?

Michael, we have not had any growth in that portfolio since the end of 2012 and almost no growth since the third quarter of 2012. It's actually been down about $50 million from the end of the year to just under $1.239 billion.

Okay. And then just finally, can you give where the pipeline was at the end of the quarter relative to last quarter?

It's as strong as we've seen, Michael, really in the Company's history. And that's very interesting because third quarter, as you know, for us a pure business bank and our history tends to be a seasonally softer quarter than the second of course and we see an extremely strong pipeline. Now we have to convert that to the clients and fundings but we have had great success with that as evidenced this last quarter.

Okay, I'll step back in the queue, thanks for taking my questions.

And our next question will come from Dave Rochester of Deutsche Bank

Good afternoon, guys. On your guidance for the warehouse portfolio size from here, are you saying you're still thinking that average balances could remain stable or modestly increase year over year on an average basis?

Not necessarily by quarter, but year-over-year 2013 versus full-year 2012.

Got you. As you look of the quarterly progressions just given the drop in the refis and the fact that the participations may not come back until 4Q, I think you said, are you looking for average balances to dip a little bit in 3Q and then rebound in 4Q, is that the progression we should think about?

No, we're not that specific on it, we're sticking with year-over-year average balance growth and we've maintained that now for two quarters in a row.

Got you, and just switching to the held-for-investment book. Can you just talk about the breakdown of the loan growth there this quarter across product type and then where you're pricing new loans today just overall on --?

We're seeing some really strong growth in energy, we're also seeing some good growth in healthcare and really very broad growth across our C&I book. More geographically we're seeing Houston really show some continued strong growth as it has the last three quarters, if that gives you some flavor.

We've also seen, Dave, one of our specialty units really kick in, also premium finance unit is up to about an average of $850 million on our books today and that's up substantially this year. So we're seeing good participation from that line of business.

Got you. And in terms of new loan pricing, do you have an average yield, maybe, for the quarter or what's in the pipeline right now just to get a sense for where that's held-for-investment yield will be going?

That something that we really don't share, but as you know this is a very aggressive market. We continue to sell our value proposition, which is not to come in and price it below end of the competition but at the same time be competitive. So as Peter alluded to earlier, thankfully we're having great success maintaining floors with relationships we've had where we've proved our value proposition for some time but new business. And this new growth we're seeing we aren't able to get the floor and the rates are more aggressive.

At the same time, Dave, you can look and if you've had a 9% year of linked quarter growth of 5% on average. And we've only moved four-basis points, you can -- on LHI you can back into a number that remains very attractive in terms of spreads.

Yes. All right, good stuff, thanks, guys.

The next question is from Jennifer Demba of SunTrust Robinson Humphrey

Thank you, good afternoon. I have two questions. The first one is regarding your recruiting comment, how many people did you hire during the second quarter versus maybe first quarter of 2013 and fourth quarter of 2012? And then my second question is on credit.

We hired 11 --

I'll let you go ahead with the first one, sorry.

We had hired 11 people that we brought on board in Q2 versus seven -- I believe it was. Peter -- in Q1 -- not sure on that -- on the RM side, Jennifer. Now we do have some turnover but that is designed and natural that it would occur over a period of time.

But we continue to have great success in losing none of our people in the top quartile in the history of the Company. We don't have any problems or issues in losing these franchise players. We're so proud that our people really do view one another as partners who build this business with the mindset of the rest of their career and that's been a real success formula for us.

Thank you, and my second question is on credit. Given George's comments that credit quality can't get much better and the fact that you said you still expect pretty strong loan growth, would you expect provisioning to stay near the level it was in the second quarter for the next few quarters?

I think we would not expect $590 million in a quarter for the rest of this year. Now we were surpri -- we thought we were starting the quarter, second quarter strongly as you remember from the April call, and it continued to build. We would not expect that in a soft 3Q and can't really predict that in a 4Q.

But, Keith, Jennifer mentioned that we put up about 80-basis points for new credit as we bring it on the books so you can extrapolate what that would cost with very low credit problem cost. I think you can feel relatively comfortable in the looking at the provision almost exclusively from growth as opposed to charge offs.

Okay, thank you.

And our next question will be from John Pancari of Evercore Partners.

Good afternoon. On the comp expense again, can you help us with what is a good run rate for that item. Is it simply the -- should we assume that $37.5 million less the $7.7 million of the organizational change charge that that should be the run rate going forward here given that the other costs that you indicated -- I guess that's about another $7 million -- are more going to remain in the run rate based on performance?

No, we wouldn't expect that $2.2 million to be a quarterly charge, that's an unusual for combination of things that I mentioned. The rest of it is going to be just staff and talent acquisition, which is not a negative. I know it's -- John, I'm not minimizing the impact of making it hard for you on your modeling but that's why your make all that money.

Right, thanks, Peter. And then I guess I'm just trying to understand the $5 million, that other remaining increase in the expenses, is that something that? Was that a surprise to you that it'd even be booked this quarter, or was this a jump in the cost that you saw coming given the performance and given the investments that you've been making in the business?

It's the jump in the expected cost booked in the current quarter for the -- that's the portion of the $2.2 million. The other three, which is just sustaining the business model, is a different number. We don't expect -- we've never had a quarter like this one in terms of recruiting so we don't expect it to happen again, although as Keith has commented in the past our pipeline remains quite good.

And if we have the opportunity --

We're going to --

-- to hire these most talented bankers we'll certainly make the investment. It's paid off for us year after year for 15 years now at most.

Okay, all right, and then lastly on the loan side. Can you just comment quickly on the other businesses within the lending portfolio, specifically the lender finance, premium finance and builder finance, how they trended in the quarter?

That's a agreeing -- you're saying that provided the growth?

Yes.

All three had excellent quarters. Three of our top six businesses actually for the quarter.

Okay, thank you.

And the next question comes from Brady Gailey of KBW.

Thank you. My question's about the participation program under the warehouse. It's $350 million now, it sounds like it's going to be $350 million next quarter and then a drop in 4Q. I think I've heard you all say before that you'd like to keep at least $100 million of balances in that plan. Do you think we go from $350 million down to $100 million pretty fastly in the fourth quarter or you think it's more of a gradual decline?

As you recall we had 90-day notice to give the participants before we can take them out so we've notified all of them that we will be taking them out. We'll make a decision at the end of 90 days. That probably will happen around September -- early in September, and that's why we pushed it into the fourth quarter in terms of seeing the benefit from that.

It's undetermined at this point what level we will leave in the participation program. But remember, based on the decline of the refi business some of that will normally come off anyway because the refi business is paying down. So you won't see the full benefit of the $350 million, but it would be somewhere in the 60% to 70% range probably.

Okay.

One other comment. We've been focused in building the business on new customers in which the participants are not involved, so they're becoming a little smaller portion of the total just as a result of our marketing strategies.

Okay. And George, your 60% to 70% comment, you were saying that that participation program could decline by around 60% to 70% --

No, no, no, today we have in the low to mid 40s -- 40% of our portfolio is refi and that's smaller than the industry. So assuming a lot of that comes off because the refi boom is dying off pretty quickly, you won't get the full benefit of that $350 million in terms of moving it back, so to speak. You'll get something in the -- possibly, again I'm giving you an average or a range, but possibly 60% to 70% of that number would be accurate if you were to bring all of it back.

Okay, I got you.

Make sense?

Yes, that does. And then the yield on the warehouse goes down around 15-basis points, it sounds like that's going to be a floor and it's going to be headed up in 3Q. And then you'll probably get the full benefit in 4Q from the higher mortgage rate. What do you think the opportunity is for upside in that yield on the warehouse, do you think that by year end we could be back to a 4% yield, is that -- do think that would be a good guess?

What's the ten year going to do? We're going to have to --

I think by year end the ramp up, Brady, in rates, if you go back and look at the ten-year chart, started roughly in the first week of May. And it ramped up hard and has then tailed off. So as the lag affect hits we'll pick up yield beginning roughly 45 days following any point on the timeline.

But that presumes -- Brady, this is Keith, That presumes a stable environment. This is anything but so you've got competitive pressures that are going to mitigate some of that pick up so we can't, at this point, determine how much that'll be.

Okay, and then a question. I'm just curious, what's the number of investors that you had in your participation program?

I think we had 11, Brady? But we had a number more than that that was interested in participating. We slowed it down at that point but had a number of other institutions interested in doing it and still do.

It's been very well received and as George suggests, if I need to increase participant capacity we could increase it substantially. But in this environment we don't anticipate that's going to be a need for a while.

We still want these participants around because we have some large lines that we like to lower our concentration in and we'll use them for those kinds of things.

Okay, thank you for the color guys.

And our next question comes from Brett Rabatin of Sterne Agee.

Hi, good afternoon. Wanted to follow up on the growth in held-for-investment portfolio and just think thematically. We had the growth in the first quarter that wasn't as impressive as your usually trends and this quarter obviously really strong. And you've been talking about a growth profile in the high teens to maybe 20%.

Can you give us any update on -- I know you don't give specific guidance on growth for the year or what have you? But can you give us some color on the sustainability of growth and maybe if it might continue to be lumpy in the next few quarters, or if 2Q was just part of the trend given what you've done in terms of adds?

I think you have to draw a line that goes through the quarters and gives a trend line that would take out the lumps and the troughs. We have not changed our view. We knew that -- we believed we would have a strong Q2 and we'll have a strong Q4. We always anticipate weaknesses in Q3. And given that backdrop we expected and still expect loans to be mid to upper teens in year-over-year average loan growth. Pace in Q2 would certainly imply that it's a little better than that, but we would regard that as a little bit too soon to predict that we would change that outlook for year-over-year balance.

One of the key reasons we're hesitant to change the outlook is it's a highly competitive market so we will only bring on new clients if it makes sense from a quality standpoint. So that's why we're a bit hesitant to be any more confident than we are. But we feel quite good and the pipeline, again, is extremely healthy both on loan prospect as well as on the deposit side.

Reiterated again without giving any guidance that we feel very good in terms of what we see and what we think can be accomplished. It's just a little bit early to predict.

Okay. And then maybe a follow up on the margin and you've obviously outlined some reasons why there's some tailwinds going forward with yields and the warehouse. I guess I'm just curious given the competitive landscape if the magnitude of any margin increases, in your opinion, if you give any color around that just given what we're seeing with pricing on especially C&I?

Thank you. We are going to continue to see pressure on the C&I. As we commented, we've maintained plus or minus I think $25 million, $3.1 billion as the balance that are subject to floors. The floors have come down and that's been some margin pressure.

New loan growth obviously produces margin pressure. We have had good growth in, George mentioned the premium finance business, those yields tend to be a little higher and we have other lines of business that produce yields a little better than the highly competitive C&I yield today. So growth will continue to produce margin stress offset, obviously, by the impact on net interest income. But again, if you look at this quarter with the kind of growth that we had and we experienced only a four-basis point decrease we wouldn't be prepared to say that's -- that would be the limit of it in a future quarter obviously, but things are holding extremely well.

Okay, I appreciate all the color.

And the next question is from John Moran of Macquarie Capital

Hey, guys, just one quick follow up on the participation program on the warehouse. How much in fee income do you recognize in a quarter on that $350 million balance?

It's not much, John. It's -- there's a servicing fee on the average outstanding balances from each one of those institutions, but it's around 50-basis points. It wouldn't -- or below. It wouldn't give you that much.

Okay. When the $350 million starts to roll off a little bit in the fourth quarter, we shouldn't expect fee income to drop in any kind of meaningful --?

No, in fact the incremental spread of any outstandings we move back on our balance sheet will be substantially greater.

Sure, great. Okay, that's helpful.

And then I think maybe if I could just come back to that incremental spread in a different way. Sort of all else equal and excluding any competitive pressure that's on -- that you might face in that business. Mortgage rated are up 100-basis points, whatever -- a little more than that actually -- is it naive to say that 100-basis points in mortgage rates would equal 100-basis points in spread improvement in that business ex -- again, ex competitive pressure and all else equal?

Ex competitive pressure but we have competitors that were running 80% refi where we're in the low 40%s refi mix and there's a lot of concern on their part to gain some outstandings and so that's the one big caveat.

Got you.

The other part of that, John, is the ramp up. Nothing goes there immediately. If you look and you go back to the chart that shows the progression of the ten year -- I think there was an earlier question -- assuming everything stayed flat today, whatever benefit we get the first full quarter that wouldn't be until Q4, late Q3 and early Q -- and into Q4.

Understood, right, so that's just a 30-to-60 day lag there?

That's right.

Got you. Okay, --?

We should have mentioned, though, we continue to generate substantial new DDA growth in this business. So while we may not get all of the transfer of the pickup and coupons we 'e continuing to drive down our cost of funds relative to the business and that's very healthy for us.

Which again will continue to increase in value based on the rate environment.

Got you, that's really helpful. For what it's worth by the way, thanks for giving the additional detail there on the profitability of the business. That was helpful and as you alluded to a lot of people, guessing.

And John, you were the closest, by the way.

That makes you feel better.

It makes me feel a little bit better, thank you.

Our next question is from Scott Valentin of FBR Capital Markets

Good evening, thanks for taking my question. With regard to the mortgage warehouse, can you disclose how many clients were added this quarter and maybe versus last quarter, are you seeing acceleration in client adds?

We'd really rather not go there. We are continuing to pickup market share but we prefer not to make it harder on our guys on the field to do that.

Okay. And then just on credit quality or provision expense, you mentioned 80-basis points but assuming credits remain stable here -- and I guess it's gross maybe not as strong as it was this quarter, a little less -- then reserve to loans should remain around the 1% level, bounce around that 1% level?

That's probably a fair statement.

Okay, thanks very much.

And our next question is from Matthew Clark from Credit Suisse

Good evening, guys. Can you touch on the warehouse yield there? And the -- what kind of impact the floors might have with mortgage rate still up 100-basis points. Can you give us a sense for what we need to get through for you guys to --?

Inconsequential. Essentially in an economic sense, Matt, we buy the loans to produce a yield to maturity or yield to -- in our case yield to sell that we find satisfactory.

When we talk about floors on loans we're focused on LHI.

I think -- yes, I just remember, I think last quarter I think you had talked about floors on the overall HFS portfolio as well

There are some but relative to the overall mix it's not as meaningful

Again, it's really a yield to sale factor, that wouldn't really change.

Okay. The rest of my questions have been answered, thank you

And the next question is a follow up from Jennifer Demba from SunTrust Robinson Humphrey Is your phone on mute, Ms. Demba?

Okay. Well, we can move onto the next question and that is from Matthew Keating of Barclays

Yes, thank you. I apologize if I missed this but did you give out the mix of the mortgage warehouse business between purchase in refinance? Thanks.

Yes, we talked about the last month of the quarter being at about 44% refi and which, again, is much, much better than the industry average of close to 80%.

Got you. All right, thank you very much, the rest of my questions have been answered.

This concludes our question-and-answer session. I would like to turn the conference back over to Myrna Vance for any closing remarks.

All right operator, we appreciate everyone being on this call with us today and we look forward to talking to you again soon. George, do you have any last comments you want to make?

Thanks Myrna. I just want to thank everyone again for their interest in Texas Capital. We'll continue to work hard for our shareholders and produce the best possible results. Thank you very much for listing.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.