Texas Capital Bancshares Inc (TCBI) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Texas Capital Bancshares first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Welcome to the Texas Capital Bancshares first-quarter 2015 earnings conference call. I'm Heather Worley, Director of Investor Relations. Should you have any follow-up questions please call me at 214-932-6646.

Before we get into our discussion today I'd like to read the following statement. Certain matters discussed on this call may contain forward-looking statements as defined in federal securities laws which statements are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results. These statements are not historical in nature and can generally be identified by such words as believe, expect, estimate, anticipate, plan, may, will, intend and similar expressions.

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 our forward-looking statements. These risks and uncertainties include the risk of adverse impacts from general economic conditions, the effects of recent declines in oil and gas prices on our customers, competition, changes in interest rates 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 as well as a discussion of the risks and uncertainties that may affect Texas Capital's business can be found in our annual report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this call. Texas Capital iss under no obligation and expressly disclaims any obligation to update alter or revise its forward-looking statements whether as a result of new information, future events or otherwise.

Joining me on the call today are Keith Cargill, President and CEO, and Peter Bartholow, CFO and COO. After a few prepared remarks our operator, Amy, will facilitate a Q&A session.

At this time I will turn the call over to Keith Cargill who will begin on slide 3 of the webcast. Keith?

Thank you Heather. Welcome to our first-quarter earnings call.

After my opening remarks Peter Bartholow, our CFO and Chief Operating Officer, will review the financial performance with you for handing back the reins for closing comments. After my closing remarks we will field questions. Let's get started with slide 3.

We are pleased to have again delivered strong growth in LHI balances in the first quarter. Competition remains keen, however, we're winning business as our bankers and client support teams continue to deliver exceptional service and custom tailored solutions to both long-time clients and new clients. We're growing across all lines of business and all geographic regions.

As expected even our energy business has experienced modest growth, and Houston posted the strongest percentage of growth rate of our five Texas regions. Mortgage finance showed exceptional growth for the first quarter as market share gains move and refinancing activity lifted our volumes significantly in what could've been an otherwise softer seasonal quarter.

Importantly we continue to deliver higher growth in demand and total deposits than in loan growth. The result is continuing to build our liquidity on average as we set out to accomplish two years ago.

With the robust low-cost deposit growth our asset sensitivity position continues to increase and of course our NIM declines. However, the decline in NIM does not cut us net interest income, since we're investing low-cost growth in liquidity at a slightly higher yielding rate at the Federal Reserve Bank.

Despite our continuing build out expenses in the private wealth advisors business and the new yet unnamed business, the growth in loans is producing strong net revenue and an impressive efficiency ratio during the significant investment phase of these businesses. As we mentioned before we can talk more about our new business once we get into July in our second quarter call.

The Texas Capital organic growth story continues to produce strong returns for our shareholders while building future income generating businesses as well. Credit quality remains strong although we did experience an increase in nonperforming assets and downgrades in the energy portfolio as anticipated.

Energy nonperforming assets were $2 million at quarter end, and the balance of the increase was in C&I. Net charge-offs were 12 basis point in Q1 2015 versus 10 basis points for Q1 2014 and 5 basis points in Q4 2014. None was energy related.

The provision increased to $11 million for Q1 was based on growth in core LHI and the application of our methodology with the primary effects of energy portfolio downgrades I mentioned earlier. On slide 4 we show in the bar chart the relative growth in average liquidity and average loans as well as the trend lines for total loan spread and NIM.

Clearly the outsize growth in mortgage finance loans for the quarter combined with the significant liquidity build drove much of the NIM decline, but importantly both growth categories produce significant increases in net interest income. LHI yield showed a modest decline of 6 basis points on NIM.

Slide 5 shows the relative growth in average LHI and mortgage finance loans since Q1 2014 along with the LHI yield trend. You might note that average mortgage finance loans represent 26% of total loans in Q1 2015. The end of period surge was especially pronounced due to the effect of refinance volume.

I'll hand the ball to you Peter.

Thank you, Keith. As Keith mentioned growth in net interest income was very good during the first quarter. We were able to grow well from Q4 despite the reduction in yield on total loans and the impact of two fewer days in the quarter compared to the prior quarter. Mortgage finance loan balances and the contribution were especially strong with the benefit to net interest income.

Exceptional deposit growth resulted in an increase in average liquidity assets of $1.3 billion with a modest benefit to net interest income until rates finally increase. These improved with the growth of 9% from Q4 representing mortgage finance fees associated with the increased volumes and swaps -- swap fees augmented with the new sales approach.

We experienced growth of over 5% in traditional LHI balances from Q4 and 20% from Q1 of 2014. Even with the increase in competition and the pressures we experience growth of nearly $600 million from the fourth quarter. Ordering balance obviously provides a favorable start to Q2. As stated repeatedly we do expect certain categories of CRE balances to level off or decline by the end of the year.

Yield trends actually remain quite favorable especially given the magnitude of the growth and the competitive environment. The mortgage finance business clearly exceeded industry trends in this highly profitable business.

As Keith mentioned we had average balances of $3.7 billion and a quarter end balance of $5.4 billion. Excluding the month-end build in balances the average balance remained consistent with our objective on mix of total loans at 26%.

We believe the continued market share shift is reflected in the average balances and in the spike of quarter end, although we do not believe the quarter end balance will represent a lead into Q2 or subsequent quarters for the average balances in those quarters. Deposit growth as Keith mentioned has been exceptional.

We've had a strategic objective in a number of target segments and we been very successful and will continue that as a way to extend the duration of low cost funding and enhance asset sensitivity. We will acknowledge that timing and magnitude of growth are difficult to predict, and Q1 was sharply above normal Q1 seasonal trends. We achieved a very favorable improvement in funding profile with demand deposit growth from your end of more than $1 billion compared to $600 million growth in traditional held for investments.

Turning to slides 4 through eight the components of net interest income and NIM are presented. The net interest income was up 2% from Q4 and 20% from the year ago quarter.

The strong growth from Q4 was especially good considering the impact of $2.9 million from the impact of fewer days. I will comment the $2.9 million represents $0.04 per share net a 2% plus impact on the growth. Major factors contributing to the 23 -- 34 basis point change in NIM are described.

The increase in liquidity was obviously the major component with a $1.3 billion increase that produced a 28 basis point change was actually a minor benefit as shown to net interest income. The yields on traditional held for investments have remained good as I said with a reduction of 9 basis points from Q4 and has a 6 basis point impact on NIM that is consistent with the record over the last several quarters.

We see a continued impact as we've commented many times on the effects of both growth and competition. The increase in the MFL balances and the decrease in yields accounted for 4 basis points in the reduction of NIM. The components of the growth of non-interest expense are shown.

$2.4 million or 3.2% growth from Q4 represents a 12% annualized growth and is consistent with the guidance we have given. Reduction in incentive expense offset most of the increase in FICA which is a component of Q1 operating results every year. The operating leverage adjusted for fewer days in the Q1 factors actually improved from Q4.

Moving to slide 8 linked quarter ROA and ROE were obviously and very significantly affected by the fewer days, Q1 expenses, the significant impact of liquidity increase. We also in Q1 had the first full quarter of the impact of the November stock price offer -- stock offering, and that's in both EPS and obviously in average balance of common stockholders equity outstanding. Efficiency ratio was also reduced by the Q1 factors.

So just allowing for those factors not representing any guidance or representation, ROA was actually on a comparable basis to Q4 above 1%. ROE approached 11.5%, and the efficiency ratio was just above 51%. Keith mentioned we have an increase in the provision for loan losses representing about $0.06 per share and with the commensurate impact on both ROA and ROE that are not reflected in the adjusted numbers I mentioned above.

On slide 9 we'll get into the 2015 outlook on the strength of Q1 growth. Our outlook for traditional held for investment growth remains positive, and guidance has been improved modestly from the low teens to a low to mid teens outlook. This is very favorable compared to inventory peers despite the intended limitation a growth over the course of 2015 in categories which did help drive 20%-plus growth over the last two years.

Excluding categories that will be limited, Q1 average was approximately 10% above the total average LHI for all of 2014. We're also upgrading guidance on mortgage finance lending through a combination of market share gains and the impact of reduced mortgage rates on refinancing activity that we saw in the first quarter.

NIM still -- we still believe NIM can achieve a 3.4% to 3.5% range excluding the outsized effect of growth like we experienced in the first quarter in liquidity assets. For example in Q1 we reported a 3.22% NIM, and of that the liquidity asset represented 28 basis points for the sum of 3.5%.

Growth in deposits in Q1 was stronger than we would have been willing to predict, and we are updating guidance to reflect that stronger growth. It's highly beneficial in terms of funding profile and structure for the long-term, so we remain unwilling to limit our focus in that area.

We stick with an NCO ratio of less than 25%, but we acknowledge the uncertainty around the provision expense in 2015 as reflected in the Q1 results which were heavily affected by downgrades in energy. The outlook for NIE growth is still expected in the low to mid teens, referring to slide 7. The expense of buildout was modest in Q1 but is likely to increase on anticipation of the earnings contribution in private client and wealth advisors and for the expansion of other businesses in the last half of 2015.

The focus remains on more significant improvements for the last half of the year as we've said many times and into the coming years. The improvement in Q1 efficiency ratio compared to 2014 and prior guidance is a positive, but we're not yet prepared to modify the guidance. Mortgage financing activity overcame Q1 earnings factors of fewer days and identified expenses.

The linked quarter growth as I mentioned is 12% annualized has been consistence with the expense guidance. We remain cautious about predicting continued improvement due to plan buildout expense that will be incurred before expected improvement in 2015 second half.

Keith has already commented on credit quality indicators, and I'll therefore turn it back to Keith.

Thank you Peter. In closing we're encouraged by the strong LHI growth in Q1. The strong start affirms our confidence in overcoming the deliberate slowing of CRE and builder finance growth rates this year as Peter mentioned that have been outsized and really helped us the last two years to grow to an even 20% rate.

The uncertainty around energy loan pay downs and new energy client acquisitions we think again we can still overcome and achieve this somewhat increased guidance around LHI. Of course it is paramount we maintain our long-standing focus on superior credit quality and we are. Mortgage finance growth benefited in Q1 from the refinance boom and should allow us to achieve the higher guidance for 2015.

While the success continues in building deposits and increasing liquidity neither negatively affects net interest income, only NIM. We remain highly asset sensitive and better positioned to benefit from increases in short-term rates. Heather?

(Operator Instructions)

Brady Gailey, KBW.

Good afternoon, guys.

Hello, Brady.

So the increase in nonperforming loans, it's interesting that, that is not at all energy related, or at least the majority of it is not energy-related and that is non-energy C&I. Can you just expand a little bit of what specifically drove that increase in 1Q?

We had a couple of C&I credits, Brady. We don't really want to get into the weeds and talk about because of negotiations and work that we're doing on those credits, but again, only $2 million of the increase related to energy.

Okay, okay. And then really nice loan growth this quarter. How -- I know we're not ready to name the business that you guys have in the queue, but is that business already helping produce above average loan growth?

When I mentioned new unnamed -- I really need to clarify that. I'm glad you brought that up. We continue, as we've talked about the last quarter or two, with a targeted start date on that business in July.

And things appear to be tracking for us to in fact get it kicked off in July, and therefore, our earnings call for the second quarter that comes in later July, we'll be able to explain what we've been about and what we've been building for the last year.

Okay, so that new business will not even be launched until a couple months from now or a few months from now?

That's correct. We are still in the build-out phase, and it generated no revenue. The revenue will begin in July. At this time, it looks like we'll be on target.

Okay, and then a similar question on growth, but this time on the deposit side. You all had great demand deposit growth. Was that driven -- I know you all have a couple niche businesses, funding businesses, that is a great source of funding for you all. Was that driven by any outsized growth in any of those specific niches, or is it just overall deposit growth across-the-board?

We are seeing good growth in some of those niches. Our broker-dealer business has been good. Most of that has a time component to it. We're seeing some very nice growth in the homeowners association niche.

That's been a business we've been working on for some time, and we're starting to see some nice pickup there. And then in our regional markets we're seeing some growth as well as continued growth from mortgage finance.

Okay, and then lastly, the [SNIC] balances -- I know they are around $1.6 billion at the end of last year. Any change on that in 1Q?

Yes, Brady, they're up a little over $100 million.

Okay. Thanks, guys.

A little above what the overall LHI growth was linked quarter, Brady.

Okay. Great. Thanks, guys.

Dave Rochester, Deutsche Bank.

Good afternoon, guys.

Good afternoon.

Maybe if we could start on the loan growth, obviously great surprise given 1Q's normally seasonally weaker. So if you could talk about where the growth came from geographically, as well as by product type and industry, that would be great.

We've really seen very broad growth. Houston continues to lead the pack. We talked some about this in January on our quarterly call, but in spite of all the publicity about the energy business and employment and so on, we represent such a small market share in Houston. And, we've had such success the last 1, 1.5 years attracting even more very talented bankers in Houston that we're beginning to see that market generate just outstanding C&I growth in the finest caliber companies that we have wanted to attract for the last couple of years.

So that business has been growing the last two years, Houston, faster as a percentage than our other regions, and that continues to be the story. But we are seeing good growth in each of the markets. And we're really pleased that it's as balanced as we are experiencing.

Do you have a sense for how large that Houston book is today?

The Houston book is now bumped up over $1 billion, $1.5 billion. We just crossed $1 billion not long ago in Houston, and we're seeing the percentage numbers continuing to be in line even though the math is more challenging to deliver those percentages. We're continuing to see those mid-20s to low 30s percentage rates on an annualized basis in Houston.

That's great. Thanks for the color there, and then switching to expenses. Sorry if I missed this but the $1.9 million reduction in incentives expense in the quarter, does that offset to expenses disappear next quarter, so expenses should be up by $1.9 million all else being equal? I know you have offsets with the seasonal comp items rolling off as well, but just wanted to understand what happened to that $1.9 million?

There was a very small component of that, about $300,000, that related to the stock price decrease quarter-to-quarter. And then, the balance was, basically what we do every year, which is restart the annual incentive plan based on where we are over the course of the year, compared to our plan, and estimating where we will spend the money.

Okay, so that's a temporary reduction --?

It's not temporary. It will build --

It will build over the course of the year. Got it.

Relative to Q4, it's one time, but it builds typically slowly over the course of the year.

As we hopefully beat our financial plans. That's how that works.

And then, you talked about the buildout efforts already. It sounds like you're on track for the unnamed business to get going in July. Do you think all the buildout efforts the rest of what you were doing will also be completed in 2Q?

We believe so, relatively so. There will be a few positions that we will still be adding as we get into the latter half of the year, but I'd say 90% plus of the hiring will be accomplished, finished by 2Q.

We will have, though, of course, Dave, then the carryover effect, where Q3 will be the first full quarter of the hiring that takes place for that and everything else we do during Q2.

And anytime we launch a new business, and we've done this, as you know, over the last 17 years periodically, every year or two it would seem, to try to find another complementary business that we can add to the mix. We always want to start a bit slow and be sure we're getting it right on delivery execution, so you'll see the revenue pick up more modestly in the third quarter.

Peter's indicated we'll have to more full effect of the run rate on comp, but you'll see -- we should see a really nice pickup in the fourth quarter as we tweak it and work any bugs out.

Great, and just one last one, just wondered giving that you upped your growth guidance on the loan side, as well as the deposits, and kept your margin guidance stable, why not increase your NII guidance as well?

We still feel good about and we make clear I think that of all the components that produce that number, obviously there is a lot of variation that can come about over the course of the year, but the one we felt best about was low double digits in that category. So it's just too early to say how that will come about. If you are right, then we will see that result maybe in the second quarter and adjust accordingly.

Okay. Great. Thanks, guys.

You're welcome.

Brad Milsaps, Sandler O'Neill.

Hello, good evening.

Hello, Brad.

Peter, I just wanted to ask a question about the liquidity on the balance sheet. I know comparing average to period end is sometimes a dangerous game, but it did look like the average fed funds and deposits at other banks was a little over $2.2 billion. Period end was closer to where it had been running at around $700 million. How should we think about that as you move through the year? What's close to the right number? Will it continue to build, or how do you see that playing out?

We do see deposit growth rates still being greater than loan growth rates, so we expect that to build. We said that last quarter, and I think we made clear you just can't know when long sales cycle results are going to come to pass, and they tend to come to pass -- or when they get booked, they tend to be large numbers.

So the average balance and some growth in the average balance is what we're really talking about. The spike that occurs in mortgage finance happens to occur when some of the other escrow balances, in particular in that business that we discussed, begin to turn down.

And then they build over the course of the quarter as the mortgage finance balances, loan balances are coming down. So the only way to evaluate that is with using the averages.

And the larger surge than normal, Brad, made a bigger effect on muting the month-end relative to the average.

We've never had a month-end balance of $1.7 billion in excess of the average balance for a quarter. Nothing has ever come close to that. It tends to be in the $300 million to $500 million range.

We picked up some market share and the refi, so it was quite a surge at the end of the quarter.

Right, so thinking about going forward, that $2 billion number it's somewhere near there, depending upon how big the warehouse is in any given quarter?

It's a good estimate.

Okay, and then, guys, just bigger picture, I know there are a lot of moving parts with this quarter with the margin and profitability, but I guess you're sitting at around an 80 basis point ROA, somewhat affected by the provision this quarter as well. But, is there a level, and I know you are preparing for higher rates and that's how the balance sheet's positioned, but is there a level of profitability that you might draw the line a little bit more on growth in order to protect that ROA that starts to test 75 basis points or below? Just curious what you're thinking is from a bigger-picture perspective, balancing that growth with profitability?

As long as the levels of liquidity assets are driving changes versus say a 1% level, we wouldn't make really any alteration in that. I think people can understand, so long as we're not losing money in that enterprise, that the ROA can be tolerated at lower levels as we're building, as you commented, for a higher-rate environment.

Again, what we're doing is not for the higher-rate environment. Higher-rate environment will benefit materially what we've accomplished and what our focus is on for strategic emphasis.

And, Peter, if you don't get higher rates and profitability stayed in this range and you continue to grow at this fairly fast clip, from a capital standpoint do you guys still feel okay from where you sit today?

We do. We would never look at a quarter-end balance on what the spike in mortgage finance does to the capital ratios, unless obviously it created an issue with regulatory suitability -- satisfactory or high levels of capital relative to regulatory standards. But, we're going to take a look at that, only as it relates to where we see the average is, primarily in traditional held for investment are relative to the return on equity.

Obviously, we don't believe that mortgage finance balances will remain anywhere close to the $5.4 billion at the end of the quarter, but should we see sustainable levels well above the average you've seen in the quarter, on an average basis, then we'll be receptive.

We also have, as you know, a history of having sold over $1 billion in participations in mortgage finance, and today we sit around $600 million. So, there's capacity there, too, over the course of the quarter, as we see how the volumes are running for us to sell additional participations.

Great. Thank you, guys.

You're welcome.

Michael Rose, Raymond James.

Good afternoon, guys. How are you?

Good, Michael. How are you?

Doing well. Just want to circle back to energy, just want to see how far -- and I'm sorry if I missed this. Just want to see how far you guys are through the borrowing base redeterminations and just get a sense for where, if you can, where reserves stand on the energy book at this point, maybe versus the end of the year, and then maybe how they compare relative to maybe the last big down cycle back in 2009? Thanks

We've made it through about 90% on the redeterminations at this point. There's quite a lot of work that is just real-time ongoing on this as you can imagine. This has been true for some time, really since the oil price decline, but as far as coverage of the portfolio, we are at about 90%. I'm trying to remember the second part of your question, Michael.

Where do reserves stand against your energy portfolio, now, versus the end of the year, and then maybe if we can compare where they stand, now, versus the last big downdraft in oil prices back in 2009?

We've really not thought it best for us to disclose detail, but I will tell you, and I mentioned in the call, the majority of our increase in provision really is dedicated toward the energy portfolio.

Okay, and is that qualitative in nature or quantitative in nature?

It actually is both, and that's part of our methodology. The way the methodology works is it has both components.

Okay that's helpful. That's all I've got. Thanks for taking my question.

You're welcome.

Scott Valentin, FBR.

Good afternoon, and thank you for taking my question. With regard to Houston you mentioned the growth there, is it all C&I, or is there a component that's commercial real estate? I know you have said at certain categories of commercial real estate you are deemphasizing. Wondering if you're seeing activity on the commercial real estate side in Houston?

Scott, it's virtually all C&I. Now, there is some commercial real estate on projects that are well down the road and ramping up construction, and we feel very good about the status of those projects. In fact, the Houston market, in some of the categories where we do have product, is much stronger than what some of the press might lead you to think.

I have a few statistics even to share with you. Industrial deliveries, out of 260 million square feet existing in Houston -- the Houston market today, it's over 95.5% leased, with only about 6 million under construction. So you can see, on the industrial side, it's really quite a tight market. But even on the office side, which has gotten a little more press, and certainly, I have alluded to that, is on a statewide basis, and more particularly in the Houston market, I'm a little more concerned about office than I would be multifamily or industrial.

Even the office market is running over 92% occupancy. And under construction is almost 60% pre-leased, what is under construction in Houston. So, we feel good about where we are. But, we're not adding new commitments of any significance right now in CRE in Houston.

That's very helpful, I appreciate the color. And in terms of -- you mentioned on the provision expense, and if I misheard you, I apologize, that the bulk of it was on the review of the energy portfolio as allocating reserves into various credits. Just wondering if you could speak to the migration of credits within the portfolio? I think you mentioned $2 million of NPLs, but just wondering the overall trend, and maybe watch-list credits or any other kind of ratings information you can give?

We're seeing migration really from different past categories to lesser past categories, but all the way through the credit grading score metrics. We're not seeing anything in spite of the downgrades. We been through this many times over the years, and we fully expected these downgrades would begin to materialize, particularly as we got through the reviews of the portfolio.

We don't see anything, at this point, that really indicates any significant loss in any of the credits at this point. So, we're still quite encouraged, despite the trends that we expected, that we have really very little loss exposure, at least as of now.

Okay, and one final question, on the mortgage finance, did you disclose -- I apologize if I missed it -- the refi versus purchase split on the mortgage finance?

The refi, we didn't disclose it, but the refi was just a little over 50% as a mix. The industry is up close to 70%, so again, we're always going to come in at a lower percentage of overall mix, and we haven't gotten really the fully updated industry numbers at this point.

This is just info that our guys get from our client base through MBA before it's officially announced, but we think the 52 percentage number that we are at is going to be way below as much as 18 to 20 points below the overall industry. But even our clients in the purchase business they've seen a big uptick.

It had gotten as low, as you may recall, back a couple of quarters ago, into the mid-20s as a mix, so that speaks to why we had the kind of surge we did, that kind of increase in refi.

Okay, thanks for the color.

You're welcome.

John Pancari, Evercore ISI.

Good afternoon.

Hello, John.

Regarding the mortgage warehouse -- again, I'm trying to figure out how we think about the pace of growth through the end of the year. Can you give us the size of the mortgage warehouse as of today, as of late April?

John, we can't do that. If you look at the difference between the quarter end and the average balance, you'll get a strong indication. Again, as Keith mentioned, the surge in the refinancing activity really occurred over the last half of the quarter, so the refinancing component average for the quarter was a little less than what Keith had commented on.

We have had months -- I think February was maybe a record month, without addressing anything in particular, but we have months where we have net increase in balances of $1 billion in the last three days of the month. It can vary so widely.

John, you may remember on the first quarter call, I talked briefly about how the little refi boomlet had just played out, and I bet it wasn't 1.5 weeks, 2 weeks after that, that we began to see the rate adjustment and refi build again. So, that really was unusual to see two boomlets, I guess you would call them, in the same quarter, and particularly of the magnitude of the second.

Got it.

We have a significant amount, as you can imagine, of securitizations occurring after each month end. And it's so volatile, while we have some ability to kind of see and predict because we live with it day in and day out, we don't really want to disclose anything inter-quarter.

Okay, that's understandable. On the margin side, you did say, in the press release, as well as in your comments, the competitive pricing environment right now, particularly around the C&I portfolio, but you were still able to put up very solid growth in held-for-investment C&I.

So what is your strategy there? Are you stepping up to the pricing competition to a degree in order to put this paper on? If you could just comment on that?

We've worked for 1.5 years at fine tuning to be sure we are still competitive in the market. But competitive to us is always being above the overall average. We think we deliver something really of value with our bankers, our talent, our technology, our service level. And so we did fine tune it a bit over the last 1.5 years, but, no, what we're seeing, the wins we're having in C&I, are a function of having great talent and increasing the good pool of DNA and the talented bankers.

As you may recall, we hired a number of bankers for that four successive quarters that started back in 2013. They are really hitting their stride, and we're seeing really good results.

Okay, and also on that, can you give a little color on the 9 basis point decline in the held-for-investment loan yields? Is that something we could expect going forward, or was it outsized this quarter?

It varies. It's going to vary from 6 to 10 on a given quarter, and a lot of it has to do with mix within LHI. It's not as simple as looking at overall effect of total loans within mortgage finance. For instance, if you're doing more C&I, you are generating less fees in a market like we had, where we were allowing CRE and builder finance to grow more rapidly. And so as we've tamped that growth rate down a bit, you are going to see a little bit more slippage on the yield.

I think it's very close to what we were experiencing even back when those two businesses were going full speed. That would tell you that we are still delivering something valuable and that we are not seeing any outsized erosion in margin.

Okay, and if I could ask just one more, sorry, on the increase in non-accruals, I know you couldn't give too much more information other than that it's C&I, but were they at all shared national credits?

One was a shared national credit. But a relationship that we have known the owner-operator CEO for two decades, even before we launched the Company. So again, shared national credits to us still mean we know the management, we know the deal. In this case, it slipped some, but we think it will be back on track, and we hope to not have any loss in the credit, but for now it's an NPA.

Okay, thank you.

You're welcome.

Jennifer Demba, SunTrust Robinson Humphrey.

Thank you, good afternoon.

Hi, Jennifer.

Back to the NPA increase topic, were any of the loans in the same industry, or was at broad-based? Can you give us any other detail on the trend?

It's broad-based. It's really no particular industry, so we don't see anything systemic that could affect other credits in that particular industry. It's just a couple of situations that we are dealing with.

Okay, thanks.

You're welcome.

Emlen Harmon, Jefferies.

Good evening, everyone.

Hello, Emlen.

Last quarter you talked about an efficiency ratio in the mid-50s to start the year and then coming down through the year. Your guidance indicates that the efficiency ratio is still expected to improve in the back half. Can we actually expect the efficiency to come down from its current level? I think it was 52-, 53-type level.

I think that will be a challenge. We've had much stronger production in mortgage finance, and that certainly helps our efficiency ratio. And we didn't anticipate that at the very beginning of the year. So, if we hold this line, I think it would be a big win considering we're still building out three very significant businesses.

Got it. Okay. Thanks, and then, your loan growth guide for mid-teens, and Peter, you actually hit on this a little bit, but 1Q average loan held for investment already up kind of close to 13% versus the 2014 average. How should we think -- how meaningful could the declines be in those CRE businesses that you mentioned that they are going to offset what's happening elsewhere in your businesses?

I think the way it will likely work, Emlen, is they were actually up in Q1 versus Q4. That's why I said if you take out the growth of those components, the Q1 average, excluding those, was 10% above the full-year average including those. They will, we believe, begin to rise and then crest and then fall back, so the average balance is likely to remain quite comparable to the 2014 average balance.

The year end up or down a little bit, but no significant shift. If there's a significant shift, it will be the year-end balance in those components.

Emlen, one of the challenges is when you do something as we are doing, to be sure you're managing the concentrations appropriately for some very high-growth businesses that we've had for 3 1/2, 4 years now, is that we have got to tap the brake but also tap the accelerator in just the right sequence so that we slow the growth rate, but we don't, in fact, fail to continue to make available credit to our best clients and pick up selectively good clients. So, it's a bit of art and science in how we're managing this, but we've done it before, and we hope we can be effective and do it again and get that growth rate, as Peter suggests, more in line with overall C&I growth.

Got you. So when you were talking about a peak in loan balances mid-year, you were speaking of the CRE business, specifically, as opposed to the LHI portfolio in its entirety?

Yes, and business -- and builder finance as well.

Correct. Got it. Thank you.

You're welcome.

David Bishop, Drexel Hamilton.

Good evening, gentlemen, how are you?

Good.

Question circling back to the loan yields on the held for investment there. Are you starting to see any risk premiums reentering the pricing equation there in some of these select products or even some of the markets across your Texas footprint?

That's a great question. We should be, but we are not yet. We should, but -- and I think eventually we will, but we're not seeing it yet. We're very competitive.

Got it. And then a follow-up in terms of Mike Rose's question, are you seeing your businesses, your commercial borrowers, especially in the energy side, or just on a whole, acting any differently at this point in the pricing cycle, relative to maybe some of the other previous energy cycles?

No, not really. We see really good solid execution overall. I think we're not, again, seeing any irrational behavior there. They've been through this. It's not their first rodeo. They are quite synced up with reality.

Got it. Thanks.

You're welcome.

Matt Olney, Stephens.

Hi. Thank you. Going back to the LHI loan growth outlook in 2015, I hear you on the volatility of the CRE and the builder finance book this year. Is impossible for that total LHI book balances to actually decrease in any given quarter this year, or do you expect the C&I growth to offset that in any given quarter this year?

C&I growth should offset it. We should grow every quarter.

Okay.

Matt, that just doesn't seem to be a realistic possibility.

Got it. Okay, guys, that's it for me. Thanks.

You're welcome.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Hello, guys.

Hello, Ebrahim.

I want to follow-up on the energy credit issue, and we took provisions this quarter around anticipated downgrades on energy credits. Does that mean that given that you have reviewed 90% and gone through the redetermination process for 90% of the credit, 2Q provisioning should lease at lower, back to the levels we've seen, $6 million, $7 million assuming loan growth is about $400 million to $500 million?

I'm just wondering what should we anticipate in terms of additional energy-related provisioning given the review that you already conducted and the provision that you've already taken in 1Q?

I can just tell you that it's dynamic. We're going to have to see what the methodology leads us to provide. If I were just going to make an educated guess and not give guidance at all, I would estimate it'd be a little closer to this quarter than last quarter.

But it is not determined yet. We've just got to see what -- how the portfolio performs this quarter. And our methodology has been a great driver. It's delivered for us since inception, and I believe it's a good balanced system that we use.

Understood. Just a separate question in terms of the NPA move sequentially, is it fair to say that it's just a coincidence you had this big jump in NPA? I think it's the largest jump over the last couple of years. In the quarter after oil fell, was there anything tied to the energy industry? It seems like there wasn't. It seems like it was purely coincidental that NPA jumped following the oil decline. I just want to make sure we get that right.

You are right on target. It really appears to have nothing to do with energy adjustment. We just had a couple of C&I credits that slipped.

Ebrahim, this is Peter. When you get levels as low as they were, nearly anything in a company that is commercially focused like we are can make that number move around, but to put it in context, we're still below 42 basis points total loans the pre-crisis levels.

Got the point loud and clear. And one last question, just in terms of participation on the mortgage warehouse, are there competitive reasons today that you would be less open to participate in some of those loans? What I'm trying to get to is the need for additional capital at some point if mortgage warehouse continues. Or do we -- or is it as easy and are you as open to participate in some of these loans if the strength in that business continues?

We think it's wise to always have some dry powder and be able to continue to take market share, Ebrahim. We're inclined to begin to sell some incremental participations and be sure we have plenty of shelf space. Again, we manage it, on average, as a percentage of our balance sheet, and it's still quite in line with our normal target. But we want to be sure we always have dry powder and can take business.

Understood. Thanks for taking my questions.

You're welcome.

Kevin Reynolds, Wunderlich.

Good afternoon, everybody. Most of my questions have been answered. I guess one housekeeping question for you, Peter. Last quarter, and this may be fantasy land talking about the Fed ever raising rates, but last quarter, your disclosure showed -- it gave us some up 200 basis point scenarios, and I thought I heard you say earlier on this call that the balance sheet mix today, the earning asset mix and the deposit mix, might make you a little bit more asset sensitive than you were in the last quarter.

Did I hear that correctly, and is there any way, could you put some parameters around what your sensitivity modeling might suggest what happened in an up 100 and up 200 basis point environment?

Kevin, we will be filing the 10-Q shortly and that will have the measures to which you are referring that came out of the 10-K. Just in simple terms, when you see demand deposit growth average balances grow as much as they did, we see the traditional held for investment categories grow as much as they did, and then understand that we do plan, over the course of the year, to see some of those balances come down, CRE balances, you can still get a sense of the magnitude of the shift. It is a meaningful shift late quarter, and I think if you go back and check sequential quarters you'll get some indication.

Okay. Fair enough. Thanks a lot.

At this time I show no further questions. I'd like to turn the conference back over to Keith Cargill for closing remarks.

I want to thank all of you for your interest in our Company and the time today. We look forward to talking to you soon. That will close our call.

If there any further questions after the call, please contact Heather Worley at 214-932-6646. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.