Texas Capital Bancshares Inc (TCBIO) 2008 Q1 法說會逐字稿

Hello, and welcome to the Texas Capital Bancshares conference call. All participants will be in a listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded.

At this time, I would like to turn the conference call over to your moderator.

Thank you very much, [Jamie], and thank all of you for joining us today for our first quarter conference call. I'm Mryna Vance, Director of Investor Relations. Should you have any follow-up questions, please give me a call at 214-932-6646.

Now, before we get into our discussion today, I need to read the following statements. Certain matters discussed on this call may contain forward-looking statements which are subject to risk and uncertainties. A number of factors, many of which are beyond Texas Capital Bancshares' control, could cost actual results to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties include the risk of adverse impacts from general economic conditions; competition; interest rate sensitivity; and exposure to regulatory and legislative changes. These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in our annual report on Form 10-K for the year ended December 31, 2007 and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now, let's begin. With me on the call today are Jody Grant, Chairman and CEO; George Jones, President; and Peter Bartholow, our CFO. And after a few prepared remarks, our Operator Jamie will facilitate a Q&A session. At this time, let me turn the call over to Jody.

Thanks, Mryna and welcome, everyone. It's another beautiful day in Texas and I'm delighted to say that's both in the perspective of weather and the economy. Fortunately, the economy is a little more predictable than forecasting the weather. The state is in very good shape and I'll come back to that in a minute.

First, however, I'd like to just congratulate George Jones who, as you know, will be elected to CEO -- President and CEO of the Company at our annual meeting on May 19. And I'm looking forward to that happening. And if George doesn't stub his toe between now and then, it will happen. He'll do a great job and you'll be in good hands.

We had another very, very good quarter, particularly, I think, in view of the economic surroundings that we find ourselves in; albeit they're better in Texas than elsewhere. Our earnings per share were 30%, which was in line with guidance and in line with -- well, we didn't give guidance, I guess, on a quarterly basis, come to think of it -- but it's in line with expectations by the analysts that cover us.

Net income was up 6% on an adjusted basis; that is, if our provision had been the same as it was last year, that number would have been 28%. EPS was up 3%. And again, if you normalize that adjusting the provision back to what it was in the first quarter of last year, that would have been up 24%. The only reason I emphasize this -- and obviously there are good reasons to have a higher provision this year than last -- but the underlying fundamental earnings power of the Company remains very, very strong.

And this is in spite of the impact on margins. As you know, the Fed has reduced the Fed funds rate by 200 basis points since December 11 of last year. And this obviously has caused our margin to go down. We're at 3.65 versus 3.85 for the fourth quarter of last year. The Fed's next meeting is April 30 and we'll see what happens then. And I'll comment more on that in my closing remarks.

The provision was in line with the guidance that we've given you -- $3,750,000 for the quarter. This compares to $1,200,000 for the first quarter of last year. This leaves our reserves as a percentage of loans held for investment at 0.97 versus 0.95 for the fourth quarter of last year. And George is going to comment more and give you more granularity on this when we turn over to him.

We also had an improvement in non-performing loans. They were down by $7,366,000 to $16,690,000. That's a decline of 31%, which we feel very good about, again, given the environment and the country as a whole. Growth was also in line with our expectations. Loans held for investment were up 4% from the last quarter. And that would be, of course, 16% on an annualized basis. They were up 26% year-over-year.

The Texas economy remains in very, very good shape, and particularly strong compared to the rest of the country. As an example and focusing on a few data points, unemployment rate in Texas -- and the latest number we have is February, I don't know why it takes them so long to calculate numbers for the state when it seems like they can do it pretty rapidly for the nation as a whole -- but we were at 4.1% in February versus the nation's 5.1% in March.

Again, to give you some data points with regard to how that relates to specific cities -- Austin was at 3.5%, clearly the strongest economy in the state if you use the unemployment rate as an indicator. San Antonio was at 3.9%; Fort Worth at 4%; Houston 4.0%; and Dallas was 4.2%. I guess both intuitively and by these measures you'd have to say that Dallas is probably overall the weakest market in the state, although at 4% relatively speaking, we're very, very strong.

Just again to underline the strength of the Texas economy as a whole, for the first two months of this year, we added 33,000 jobs. This compares to the nation for the first two months of the year, which lost 152,000 jobs. So we're doing exceedingly well, again, compared to the rest of the country.

I got some housing statistics this morning which haven't really been released yet. We use a firm called Metro Study that tracks housing statistics, particularly in the Dallas-Fort Worth Metroplex. But they look at the state as a whole as well. I'm going to give you few data points as it relates to Dallas.

Our inventory of unsold houses at the end of March was 20,000 units. And this is down from a high of 30,000 units. So, we are eating into that inventory at a steady rate. And as a consequence of that, it's the expectation of Metro Study that we'll reach equilibrium sometime toward the end of the year.

That inventory represents 6.7 months of inventory versus a high of 7.8 months. Another point -- housing starts in the first quarter were 5,200 in the Dallas-Fort Worth area, which is the lowest in 10 years. Obviously, that's good. The builders are being very cautious. They're being very prudent and this is helping us to lower this inventory.

Again, another indicator of the strength of the overall economy in Texas -- in spite of the terrible housing market and certainly we've seen declines here in both permits and starts that are quite high and are pretty much in line with the nation as a whole -- but if you look at total construction jobs, we've added 4,000 jobs in the first two months of the year in the state as a whole. So if you take commercial construction, everything that's going on in the public sector and even with the weak housing market, we're still adding construction jobs. So, all in all, we're delighted to be in Texas. And I'm sure every other bank in the country wishes that they were in Texas as well and weren't in a lot of other places.

With that, let me turn it now over to Peter, who will go into the financials in more depth, then Peter will turn it over to George, who will cover the rest of the presentation.

If you'll turn to the sixth slide, as Jody commented, net income was $8 million and $0.30 a share. And we do regard that as very good performance in light of some tough comparisons in our own balance sheet and, of course, the issues specific to Q1 and those to the industry generally.

We had EPS growth of 3% from Q1 '07 and 25% from Q4 '07; the 25% obviously based on the sharp reduction in provision for loan loss from the fourth quarter.

The Company, as we will comment in more detail in a moment, is much less sensitive in terms of earning asset and margin issues. But there are a number of factors that contributed to the reduction in margin that Jody's mentioned earlier. The combination of net interest margin reduction, the reduced number of days in the quarter, represented in combination $0.06 per share. That's using Q4 as the baseline. Reduction in provision from Q4 was also very sharp, but as Jody mentioned, was essentially tripled from a year ago, last year.

FICA and other expenses related to Q1 were an additional $0.02 per share. We had much improved operating leverage throughout 2007 and, again, for Q1 compared to Q1 2007. That good trend in operating results in operating leverage continued into 2008 compared to Q4 '07, but it was masked by the reduction in net interest margin and the impact of the Q1 variables that we've spoken to so many times.

Now George will comment in much greater detail about credit quality, but it's good in respect to provision, non-performing assets, and net charge-offs, which are all consistent with the guidance we gave for the full year.

Turning to slide seven, we had very strong performance on a year-over-year basis in net revenue; a growth of 15%. It's obviously driven by loan growth of 25% and the improved composition of earning assets, which largely overcame the reduction in net interest margin. Expense growth of 9% is a significant reduction from prior-year comparisons or earlier-year comparisons. The level of build-out expense relative to our total expense base has decreased significantly.

We saw a substantial linked quarter contraction in net; it's not that substantial, but it's for the first time that we've actually had a linked quarter contraction in net revenue by $128,000. Debt interest income was down $932,000 due entirely to the reduction in NIM with an added benefit of -- or cost of the reduced number of days. A loan growth of 5.6% with loans held for investment of 4% were consistent with the guidance and really reflect the very strong growth on an average basis that began with a strong Q4 of '07.

Before the effect of the net interest margin reduction, the efficiency ratio was actually just under 60%. We have the difference in days, which equates to about $400,000. We had Q4 '07, we had a reduction in the incentive accrual of $2 million. In Q1, we have an increase in FICA and other related expenses of over $700,000. As adjusted, we saw a good improvement in the ratio of non-interest expense to earning assets as well as, as I mentioned, the efficiency ratio.

We saw in Q1, for the first time in several quarters, a very strong contribution from our mortgage warehouse division; very strong growth. We did have lower spreads there because of the nature of the pricing in the portfolio, but that's offset by substantial increases in fee income. Obviously, with margin compression, ROA and ROE are obviously reduced, but given the circumstances that we've spoken about, I think are good performance.

Turning to slide eight, strong growth continues organically in balances for average loans held for investment; linked quarter growth obviously very good and, again, really showing the impacts of such strong growth at the end of Q4 '07.

As stated earlier, this reflects a much improved productivity on an average basis of the employed relationship managers. The section will also, I think, compare to peers anywhere in the United States despite what we recognize as a downward slope in the trend of growth. A linked quarter growth of 4% is consistent with our view that over 2008, we will see total loan growth at perhaps approximately half of the rate of growth that we have experienced in the years 2004 to 2007.

We have seen -- and George will comment briefly later -- a sharp increase in loans held for sale due to a very strong position we have in that industry. We have a balance sheet which is helping mitigate the effect of the Fed rate decreases, with loans now 90% of earning assets. Deposit levels are flat with Q1 '07 and down slightly from Q4 '07. This is very consistent with what we already see as an industry trend where we see the costs associated with growing deposits, especially with reduced growth in loans held for investment, emphasizing for us the use of other funding sources. The reduction in Q1 is due, again, to transaction-specific maturities as well as some seasonal factors which affect commercial banks every year.

Slide nine -- we had, I guess, the lowest growth that I can recall in linked quarter loans held for investment of just $31 million. That is consistent, though, with plan and the guidance that we gave earlier in the year. Q2 has been historically very strong in terms of loan growth, while Q1, we have always had or frequently had seasonal issues affecting that activity.

Again, loans held for sale volumes can be much more variable and on a date statement basis, they were up sharply. Deposits, because of the short-term nature of those, we fund those essentially incrementally with short-term funding. We saw deposits grow at quarter-end by $100 million compared to the Q1 2008 average balances. Again, deposit growth clearly is affected by seasonal rates and we would expect some improvement [in Q2].

Turning to slide 10, more comments about the net interest margin. [3.65] for us is a recent low, off 20 basis points from fourth quarter. We are much less sensitive than in past years, but the rate of decrease in the Fed funds rate place significant pressure on net interest margin in Texas Capital's model. We expect (technical difficulty) [in the end] will stabilize and improve when the Fed has finished reducing rates.

We saw for the first time that the reduction now actually produced a reduction in the net interest income, in effect because the reduction in NIM was not offset by growth in this quarter.

Attributing to a favorable trend in net interest margin, obviously our earning asset composition with loans now at 90% of earning assets. Loans held for sale are the lowest in terms of rate, I should comment, but have fees just under 100 basis points that supplements what is the effect of reducing net interest margin.

Fixed rate earning assets are obviously a plus today. Securities, loans and leases -- we have a significant portfolio, a growing portfolio of LIBOR price loans. They have a favorable spread in recent periods. There is a favorable spread between LIBOR prime and Fed funds; very strong in fourth quarter, sharply narrower in Q1, and thus far in Q2, again, widening significantly.

On the negative side related to net interest margin, obviously the steep decrease in Fed funds rate has a sharp effect on floating rate portfolio, which for us today is about 88% of the portfolio if you exclude leases and the premium finance portfolio.

We have seasonal and industry trends in DDA that put additional burden on margins. We had significant issues with the timing of repricing of our LIBOR price loans. We had a concentration of repricing that occurred after the spread between LIBOR and the Fed funds rate decreased earlier in Q1.

We had meaningful success in reducing costs in key deposit categories, but overall repricing could not keep up with the rapid decrease in rates. Our model works better in a ramp situation, obviously, than in a shock scenario.

I should mention that global liquidity issues have increased the cost of gathering new deposits, especially in a commercial business. That causes us in Q1 -- caused us to emphasize the use of other borrowed funds, especially when loans held for investment growth was not strong. Obviously, also in this environment, we have a reduced contribution from DDA and stockholders equity in terms of now very valuable, but those levels are not supportive of an increase in net interest margin.

With that, I'll turn it over to George to describe growth in credit quality and other issues.

Thanks, Peter. Turning to slide 11 -- and as we stated before, our demand deposit five-year growth rate is good, but it has slowed somewhat in the past year, as you can see. Near-term growth of average DDAs on a linked quarter basis decreased 3%, but actually were up 7% on a year-over-year basis.

If you look at the average total deposits with a five-year growth rate of 20%, they were flat or slightly down on a linked quarter and a year-over-year basis. While most of the deposit decline was related to known specific transactions, we do believe that the liquidity issues in the financial markets today has really contributed, as Peter said, to an increase in the cost of deposits.

The five-year growth rate for loans held for investment was 28%. Average loans grew $146 million or 4% in Q1 '08 and 26% on a year-over-year basis, as we've shown before. The strongest average loan growth on a linked quarter basis came from loans held for sale, as Peter mentioned, or our mortgage warehouse line of business. This was on an average basis $51 million or 26% of the total average loan growth in Q1.

We really have seen so many warehouse lenders cut back or actually go out of business that today we can selectively grow our business safely -- with better customers, better investors, better pricing, and better underwriting than we've seen in the marketplace in years. In loans held for investment, Energy, Dallas Corporate Banking and our San Antonio region each contributed approximately 14% of the loan growth. All regions outside of Dallas -- this would include the San Antonio region -- contributed 30% of that loan growth.

C&I loans contributed 36% of the total average loan growth, with real estate loans contributing 26%, and as we've said, the loans held for sale, an additional 25%.

We've talked about our growth of loans in Q1, but I want to comment on our current pipeline that's been building in Q1 and extends into Q2. Today that pipeline of future business is large and robust, and the transactions are beginning to be better structured and somewhat better priced. Customers and prospects seem to be less concerned about pricing structure but more interested in their ability to access funding. We have begun to see some of the competition turn inward and focus on capital illiquidity more than their customers. And hopefully, we can begin to reap some of the benefits from those actions. It's a little bit too early to predict at this point in time.

If you move to slide 12, this slide reflects growth in income and expenses over the past five years with revenue continuing to outpace expense growth. Linked quarter expense growth was up compared to Q4 '07, mainly due to FICA taxes and other issues that we see in Q1 every year. Q1 2008 compared to Q1 2007, our non-interest expenses increased roughly 9%, but Q1 always shows higher growth and we expect the growth of expenses to slow for the balance of the year. Normalized expenses on a quarter-by-quarter basis have basically averaged the same since September of 2007, if you normalize.

On slide 13, our credit experience, we believe, remains quite good. Our business model and its emphasis on credit quality have produced excellent results over an extended period of time. Net charge-offs were $2.6 million in Q1 '08 -- all from credits which had previously been identified and for which they were specific reserves. This represents 29 basis points for the quarter. And I believe, as Peter mentioned, this loss rate is consistent with the guidance that we gave you for 2008.

Looking at non-accruals in ORE, these totals decreased to $17 million from $24 million in Q4 '07. This basically was a function of some of those charge-offs of roughly $3 million and net reductions of over $3 million. We showed a provision to the loan loss reserve of $3.8 million in Q1 that increased our reserve balance to 0.97% of total loans. We believe, as Jody has mentioned, that the Texas economy will weather the credit storm better than most parts of the country. But we'll have some fall-out. We're cautiously optimistic that our strong credit culture will continue to provide above-average results in 2008 and beyond.

If you move to slide 14, this slide graphs the net charge-offs to average loans for the past four years plus Q1 '08; again, reflecting our good credit experience. And with the exception of 2004, our reserve to loans in Q1 is higher than the past three years, and our non-accrual loans are down from 2007. Our reserve to non-accruals and non-performing loans remains good, up slightly from 2007 levels.

Jody, I'll turn it back to you.

Thanks, George. We believe we've had another very, very solid quarter and we are optimistic about the rest of the year, as George indicated. We do have a strong pipeline and our funding is in good shape.

With regard to guidance, it remains at $33 million to $35 million. Like last year, we are reluctant to change guidance after only one quarter's results. Hopefully, we'll continue to perform well and we may give you some new numbers at the end of the second quarter. As George said, we are cautiously optimistic about the economy. We would much rather be in Texas than anyplace else.

With regard to rate cuts -- and I'll put my economist hat on and take my banker hat off for a second -- the Fed's next meeting is April 30. The Fed funds already stands at 2.25. Everybody will remember that the Fed funds rate got down to 1% -- the lowest in 40 years. That set the stage for the credit crisis and the subprime loan debacle that we've seen since then. I don't believe that the Fed is going to take real interest rates down below zero again. And that's what we lived with for quite a long time.

This is reinforced by the fact that we had two dissenting votes when the Fed met in March and lowered the rate to its current level. Also, yesterday's PPI number of 1.1% linked month increase was a pretty startling number. And year-over-year, the PPI has been up 6.9%. Now, a lot of people, including the Fed, have concentrated on the core rate, which, year-over-year, is up 2.7%. But I think, given what's happening in the commodities markets today, less and less attention is being paid to the core rate.

We could have another 25 basis point drop in the Fed funds rate, but I think we're pretty darn close to the bottom. Consequently, I'm more optimistic certainly than I was back in the 2003/2004 timeframe when the Fed was ratcheting rates down so rapidly. I'm more optimistic that our margin will stabilize at a level that isn't hopefully too much below where it is now, but that all depends upon what the Fed does.

As Peter said, we are less inter-sensitive than we used to be, so we should be able to ride out this interest rate cycle as we are in better shape than we did in the past.

With that, Operator, let me turn it over to you for questions. And we will be glad to try to answer any questions you may have.

(OPERATOR INSTRUCTIONS). John Pancari, JPMorgan.

Can you give us a little bit more detail on the loan and deposit growth? I know, just seeing the differences between the linked quarter growth rates on an average basis versus the period end numbers. I'm just trying to see which ones should we take as being more indicative of the ongoing trends, both on the loan and deposit side.

John, this is Peter. As I said, the strength of Q1 linked quarter averages was really built on Q4 outstandings. We had, if you'll recall, a significant surge -- really in the last third of the fourth quarter -- that did not have that big an effect on the quarterly averages, but obviously left us in a position, as I recall -- we started the quarter 4% above the linked quarter average. So we essentially maintained that level. Q1 is always our weakest quarter. George commented on the pipeline. So I don't believe the point to point growth in either loans or deposits is necessarily indicative of where the second, third and fourth quarters will be.

The pipeline is strong. Deposit issues, I addressed. We can control those to some degree provided in the commercial markets if you're willing to pay the price. But, as I commented, the demand for liquidity worldwide has made us look at alternative funding sources, especially when most of the growth is in a very short-term earning asset category -- loans held for sale.

Okay. And you indicated the pipeline is strong. What specific areas do you really see the strength still in the pipeline? Is it specifically C&I versus commercial real estate, if you can just elaborate?

Yes, John, this is George. Primarily, we see it in the C&I portfolio, but we are seeing some very good real estate, commercial real estate, transactions today also. But I'd say preponderant it's C&I portfolio. And we are continuing to see good demand and good growth in our loans held for sale category. We're very cautious about that. We understand what the mortgage markets are today. But as I mentioned before, we really do have an opportunity here to selectively grow that portfolio, I believe, on a very safe and sound basis today, with new underwritings standards and new investors.

Okay. And then lastly, the other non-interest income bucket showed about $1.1 million in the quarter; it was pretty much essentially $0 last quarter. What was that this quarter?

Mortgage warehouse -- very strong performance there.

Okay. So it's all from the warehouse?

It's not all -- it's never all from anywhere. But in terms of linked quarter, remember, we disclosed in Q4 that we had had a mark-to-market in that portfolio. So we have a -- without having to do that, we have a strong comparison.

Okay, good. All right, thank you.

Andrea Jao, Lehman Brothers.

Last January, I believe the expectation was for 10 to 15 basis points in compression for the full year. And these are already at 20, given a greater number of Fed cuts --

Greater number and faster.

Right. So, what do you think is -- how much more compression do you think we'll see over the remainder of '08, given what's already happened?

As Jody mentioned, that's going to be a function of how far the Fed is willing to take it down.

And if we're going to assume just the cuts that we've had so far?

Oh, the cuts we've had so far -- we believe, clearly -- I mean, we had on a linked quarter average basis, 130 basis point reduction between Q4 and Q1. It's a little less than that from Q1 to Q2, we believe. Certainly so far, it is. But unless the Fed goes much farther than I think even the markets predict, it will be less than the Q1 experience.

If they go about it a little more slowly from here, things should be quite a bit better -- not only in the expansion of margin, but less contraction. Remember the guidance was predicated on reaching 2.5% by the end of April and we have reached 2.25% by the middle of March. That has a significant effect too, (multiple speakers) percent by the middle of March.

Andrea, I might just add that the biggest cuts that we had beginning with the December 11 cut were on January 22 and January 30. And those cuts were baked pretty well into the numbers that we reported for the quarter. And then, of course, the last cut was 75 basis points which occurred on March 18. And that isn't obviously, fully reflected in the quarter.

Okay. With respect to expenses, you earlier mentioned that expenses should slow for the balance of the year. So how do we interpret this? Can I assume that seasonally elevated employee costs will [lean] a bit in the second quarter? Or should we continue to grow, albeit at a slower pace, for the remainder of the year, of first quarter levels?

I think some growth at a reduced pace. Remember, we had the surge in Q1 that comes some normal Q1 events -- FICA and related. We also had a restoration, for lack of a better term, of the incentive accrual based on our progress towards plan, versus Q4 where we had the $2 million reduction. As George commented, the level of expenses hovering around $26 million and there are no expense categories that are expected to be significant in terms of increases from here; normal growth, additions to staff and so forth but nothing of significant consequence.

Okay, perfect. Thank you so much.

Erika Penala, Merrill Lynch.

Does the guidance that you gave last quarter for 15 to 20 basis points of losses still hold?

Yes.

Yes, our guidance on credit remains the same today.

Okay, and you all had talked about the global liquidity pressure really making deposit gathering more expensive than it has to be, given where Fed funds is. When do you think we're going to start seeing the easing of that pressure in '08?

Erika, you could probably talk to your people -- it's investment banks at the margin are putting the largest amount of pressure on the global liquidity. So your perspective would be much better than ours -- or your firm's would be.

I'm not sure about that. But what about -- are the more troubled commercial banks aggressive in terms of -- still aggressive in terms of their deposit offers?

We don't really see that on a retail basis, but when I am talking about commercial, we have commercial customers that can go to markets where the funding rates are driven by LIBOR. So you've got international pressures, the spread between LIBOR and Fed funds clearly has an impact on the commercial deposit rates.

Bob Patten, Morgan Keegan.

I guess, could you give us some color on the pipeline? Where the growth is coming from? What types of requests you're seeing? And just the general health of -- or I guess the general demand from your customer base?

Yes. Bob, this is George. Again, as I mentioned, most of the demand is the C&I portfolio which typically is a majority of our customer base, working capital lines of credit, a few acquisition opportunities in the commercial side -- commercial real estate side. We're seeing a few commercial projects being built. Pretty good demand in most markets. San Antonio is quite healthy, as you saw. First quarter had very good growth. Dallas, of course, Dallas is 65% of the Company, so you're going to see a greater proportion in the Dallas area.

But we're seeing pretty good, pretty good loan demand state-wide. Again, it's really a little bit early to predict much, but it's encouraging to see this early in the year, the pipeline looking as full as it is today. Now obviously, we've got to close those loans, and we won't close them all. But it's encouraging even in this environment. We're getting an opportunity to take a look at some pretty good credit.

Okay. And in terms of loan offices, have you guys added any? Have you lost any to the competition over the last couple of quarters?

Yes, we added actually five in the quarter -- five relationship managers. We lost one. That's very unusual for us, as a matter of fact. We typically don't, as you know, lose many people. This was a very unique opportunity for this individual and we didn't discourage that at all. We are continuing to selectively look for good people in the marketplace in all our markets. We're adding a relationship manager in Austin. We're looking in San Antonio and Fort Worth. So we will hopefully have an opportunity to, again, selectively build staff across the state.

Okay. And where are you seeing the stress in terms of your customers right now? Is it in the middle market from an asset-based standpoint? Is it from a receivable standpoint? Where are you generally seeing the weaknesses across your customer base?

Well, you know, it's still residential. The residential development, single-family; although our portfolio looks quite good related to that. But we see a definite slowdown on the residential side. But it's -- we're encouraged with the economy, as Jody mentioned. And we think we're cautiously optimistic we'll have a good year.

And last question -- from the funding side, do you guys have any elasticity on your deposit side that you can -- say, if rates stay -- no more rate cuts -- is there anything you can do on the deposit side or on the hedging side to help your margin over the next several quarters, following up Andrea's question?

It's hard to do much with our business model, Bob. When rates catch up and when deposit -- customer deposits, including demand deposits, which historically for us has lagged loan growth -- catch up a little bit, we think we'll be just fine. We should actually -- when the rates hit bottom, we should actually see some improvement in margin.

Okay. And I guess I fibbed; I have one more question. You know you're keeping your guidance for net income for the year. With the margins, you lost 20 bps right off the top. What gives you guys the confidence and where do you think you're going to make it up?

As Jody mentioned, when we gave guidance, we knew about the first rate cuts. The second -- the first two rate cuts. The third was steeper than we would have gassed and came faster. And then you have the unique circumstances in Q1 relative to the rest of the year. So Q1 doesn't -- there's nothing about Q1 today that would make us change that guidance.

Okay. Good to hear, guys. Good job. Thanks.

Brent Christ, Fox-Pitt.

You guys have the large problem credit come on non-performing status last quarter. Can you give us an update as far as the status of that? And then to the extent it impacted the dynamic with charge-offs and non-performers this quarter?

Yes, Brent. We continue to work and negotiate with that particular company and that particular credit. And it is a little bit difficult to give real specifics today. I mentioned the exposure -- I think the last time we talked, that the exposure is down from where we were before -- where we reported it before. And we continue to work with the company. And we will continue to work with the company over a reasonable period of time. But I'm not avoiding your question, but it is very sensitive today so I can't get too specific on that specific credit. But our exposure is down from where we were.

I think I mentioned a couple of things in our previous call outside of that particular credit that were non-performers at the end of the year, but have had some progress. I mentioned that there was a commercial real estate in Houston that was supported by an appraisal and reserves. We have -- and it was in the process of foreclosure. We have foreclosed that particular property. We have valued it at what we think is a good appraisal value today and we're currently marketing that particular property. We think it's reasonable that we ought to have some progress on that before too long.

There was a $2.5 million C&I loan in Houston that we had taken a previous charge-off last year. We, in effect, recovered all of that $2.5 million and actually $0.5 million more than that, that contributed to a recovery at the end -- or in the first quarter. That was paid.

Our mortgage warehouse non-performers are about the same position. We're continuing to work some of those down. We have had very good success in selling some of the slightly stale warehouse assets that were, as you remember, caught in the bubble sometime before we actually changed the underwriting and investors. That's about the same, but we're continuing to work that down.

So we feel, as I mentioned before, the charge-offs were recognized problem credits with proper reserves placed against those credits, we believe. So this is nothing new that has popped up.

Got you. I guess what I'm kind of digging at is you guys reiterated the charge-off guidance for the full year of 15 to 20 basis points. And you're at a run rate higher than that already here in the first quarter. And to the extent that there was anything lumpy in there that may not be recurring going forward, at least that you see right now.

Well, as we have always said, provisioning and charge-offs will be lumpy. That's the nature of our model today. But we, again, feel like that we today can live within that guidance of 15 to 20 basis points that we gave you. It's a little bit hard to predict. There is no real run rate that you can look at as it relates to charge-offs in our Company. Our hope would be certainly to reduce those on a go-forward basis. But again, we feel we can live within the guidance that we gave you.

And then with respect to the loan loss reserve, you've been slowly bringing that up over the past couple of quarters, which seems like a prudent move in the current environment. And I know it's formula-driven, but is there a level longer-term that you would like to see that migrate to, to be comfortable with managing at over a longer-term time horizon?

Brent, really, no. Again, you mentioned the methodology. Part of that methodology is certainly it relates to the economy. And if the economy weakens or the economy gets a little better, we can tweak that methodology to reflect the market in which we're working in. And the reserve has gone up over the last couple of quarters because the methodology worked. And we feel comfortable in staying with that methodology. We don't have a predetermined percentage of our loan portfolio that should be kept in the reserve. We'll work with the methodology and see what it drives in terms of coverage.

And then lastly, I think the last quarter you guys gave some good details in terms of your exposure from a real estate perspective. And I was just wondering if you can kind of give us an update in terms of how the real estate-related portfolios are doing and to what extent you're seeing any stress. I know you mentioned the residential side is still holding out pretty strong.

Yes. I mentioned to you before we have a little less than 8.5% in residential market risk real estate exposure. That includes lot development and single-family construction. And that portfolio has held up and is holding up quite well, even in this environment. It's slowed obviously; we're not doing that much, certainly on the lot development side at this point in time. But it's reflective of the market.

The commercial real estate portfolio is about 26% to 27% of the overall portfolio. That includes, by the way -- the portfolio I just mentioned to you, the single-family exposure -- that portfolio has held up quite well. Again, remember, we've always told you that we do underwrite commercial projects to the permanent market with a higher rate, good coverage ratios; hopefully, a little bit more equity than some of our competitors. And we see today in the markets we're in, we're pretty comfortable with our commercial portfolio.

Brad Milsaps, Sandler O'Neill.

Just had a couple quick kind of housekeeping questions. First, I was going to see if you could talk about the mortgage warehouse business just one more time. Just curious what the volume was like in the quarter and how many loans were you able to sell versus where you were at the end of the year versus where you ended the quarter?

We probably had in March one of the biggest months we've had in a long time in terms of production. Obviously, you know, we don't keep all those on the books. They stay on the books for 10 to 20 days. So it's -- the actual production and what we show on the books is quite a different number. But we've had at least $100 million delivery days in terms of delivering mortgage loans to the permanent investors.

It is, as I mentioned before, the market, if you do it right, in today's environment, we believe there is a selective opportunity in that marketplace today. Again, you need to be cautious. You need to underwrite and you need to approve the permanent investors that you're very comfortable with. But we've done that, at this point in time, and we're comfortable with our exposure.

Our outstanding -- during the month of March probably was as high outstanding as we've ever had in the history of the portfolio, even in the refi base. We were smaller then, obviously, the bank was. But again, we are cautious. We're underwriting it, we believe, properly -- basically Freddie and Fannie guidelines. And we're having no trouble with any of our investors accepting the paper.

Okay. And then another question on deposit service charges. Given your commercial focus, when do you guys suspect that you'll see maybe a bigger jump in those fees, given rates coming down, lower earnings credit rate -- just curious as we move throughout the year as how to think about that.

Brad, if we're doing that right, we're getting about as much out of the balances as we are out of the fees. Now, the way it works for us is we actually prefer balances. And what you've described is one of the reasons why we think we can see some strengthening in the DDA balances.

Okay. And then final question -- just curious on the share count. It looks like you issued something in the neighborhood of 240,000 shares since the end of the year. I'm not sure what I missed, could be related to options or something, but the average diluted number was down a fair amount from the [end of the] year, I know the stock was off some, but just kind of curious if there's anything else in that calculation that is worth mentioning?

No share buybacks, no treasury shares; strictly just option exercises and the impact of the share price on the treasury -- on the computation for diluted shares.

I'd like to be able to say that I got all those shares as a goodbye gift, but unfortunately, that didn't happen.

Great. Thank you.

Michael Rose, Raymond James.

All my questions have been answered, thank you.

Jennifer Demba, SunTrust Robinson Humphrey.

Yes, Brad actually asked my questions as well. Congratulations on your upcoming retirement, Jody.

Thank you very much, Jennifer. Appreciate it very, very much.

Charlie Ernst, Sandler O'Neill Asset Management.

Just wanted to ask one more question on the margin. I know that we've kind of beat it to death a little bit. But in terms of the eventual rebound whenever rate cuts stop, does a big slowdown in the degree of rate cuts actually end up turning the margin? You know, because that means that within kind of three months that your funding is able to start to catch up. Or does it actually have to stop the rate cuts?

Anything that still had to mature -- and this is obvious -- anything that had to mature at the last rate cut is not going to get carried into a lower level until then. But the steepness of that means that it will reprice sharply. And I think what you're describing can occur. Now, as you know, and we state over and over again, there are way too many variables to isolate that one effect on our margin.

Composition is a huge part of it. Just the fact that we grew so much in loans held for sale, that's one area where it hurt the margin but not net interest income. The other issue is LIBOR. As we said, Q4 we had an unusually high spread -- large spread between LIBOR and Fed funds or the prime rate. Q1, that narrowed sharply. If it stays like it is today, that will be very beneficial.

Okay. And so, I mean, incrementally the math -- I mean, barring even any further rate cuts, will get a little tougher just because of the held for sale portfolio since the period-end number was so much bigger than the average.

Well, the Fed number moves around quite a bit, so you can't -- the quarter-end number will not necessarily predict the average balance number.

Right. Okay. And then my last question is, can you just remind me real quick what the events are surrounding the mark from last quarter in other fees?

Say again?

What the events were surrounding the negative mark last quarter and other fees?

Sure. It was loans held for sale that were tied up and couldn't be sold. Buyers that reneged on commitments and then they get stale and we have to go through a mark-to-market process. We've actually been able to dispose of a decent number of those -- a couple of million dollars and then have a profit on disposition.

Okay, great. So the other fees this quarter should be pretty core, that there's not a whole lot else in there?

Core, core -- I thought you said poor.

No.

That's right.

Okay, great. All right, thanks a lot, you guys.

Let me just add something to what has been said about this margin business. It's obvious that when rates are going down very, very rapidly, all of our assets -- or not all of our assets, but a vast majority of them adjust very quickly. And particularly the CD portion of our portfolio adjusts much more slowly. So intuitively, if we do have a decline or a flattening --not a decline but a flattening of the decline in rights, your CD portfolio is going to begin to catch up with the rapid decline in rates on assets. So --

Even before they reach bottom.

Yes, even before they reach bottom. So what your premise that you outlined at the outset was exactly correct. But we don't know -- nobody knows where rates are going specifically or how rapidly they're going to recover or how long they're going to stay at low levels.

We had more of a ramp scenario between Q3 and Q4, and the margins held quite firm.

Charlie, also, as I mentioned before, on the other side of the balance sheet, we are seeing loan pricing firm a little bit. And we're cautiously optimistic we can improve, on the lending side, some of our spreads. I think that is a natural progression from what we're seeing today basically with the liquidity issues that are out there. And again, as I mentioned, we're cautiously optimistic that we're going to be one of the beneficiaries of some of those issues we see out there.

Andrea Jao, Lehman Brothers.

Just wanted to check in on whether the regulators have already come to visit or if they're scheduled to visit. But if you've already spoken with them, was hoping to hear feedback on a couple of things. As well as you saw it on a couple of things -- i.e., capital levels, and the loan to deposit ratio, which is for the past couple of quarters, trended higher, above 100%.

We cannot speak to any specific issue that comes up with the regulators. Now, there are no issues with respect to either of those matters, Andrea.

Okay. They've already come to visit? They're already done?

There's so much that happens all the time.

Okay, well, great. Thank you so much.

Andy Stapp, B. Riley & Company.

All my questions have been answered.

(OPERATOR INSTRUCTIONS). Ladies and gentlemen, at this time, I'm showing no additional questions.

In that event, let me just -- this is Jody making some closing comments. Since this is my last call, I would like to say that I leave the Company with the greatest confidence both in its future short-term and long-term. We have a wonderful banking team here, wonderful leadership, and I couldn't be leaving it in better hands.

I'd also like to say that one of the greatest pleasures I've had has been interacting with the Street, which I've particularly enjoyed doing. We had our public offering in August of 2003. So I've been at this for nearly five years, a little short of that. During that time, I've made many good friends and have grown to respect each and every person that I've interacted with. It's always been challenging and interesting. I particularly enjoyed the financial conferences and road shows -- both road shows that we've gone on and those that have come through the Bank, where we've had the privilege to have personal contact with many of you.

I appreciate the many courtesies that have been extended to me over the time and the respectful manner in which I've always been treated. And I hope that you feel that I have reciprocated -- I've always intended to -- and apologize for any occasion where I may have offended anybody.

I will be officing here within Texas Capital Bank until we move to our new headquarters across the street, which is now estimated -- and I underline estimated -- for December 1 of this year. I will move across the street as well, but will be officing with Bank Cap Partners, where I'm assuming a greater role. You may recall Bank Cap Partners is a private equity fund which was incubated within Texas Capital Bank and has been functioning since its inception about a year and one-half ago.

Bank Cap now has a bank open and operating in Atlanta, and will be charting another bank very shortly. And I can't say where that's going to be. I'll be joining them as a Senior Advisor initially, and look forward to that interaction. We will be moving again across the street and will be subleasing from Texas Capital Bank. I hope when any of you are in either this building or the new building that you'll come by and say hello. I'll always welcome the opportunity to see you. And once again, just thank you very, very much for all the courtesies. I'll miss you and -- but hope this isn't good bye and that you will stay in touch.

Thanks so much. I think we've had a great quarter. And I again look forward to a great year. That concludes the call.

Thank you for attending today's conference call. You may now disconnect your lines.