Texas Capital Bancshares Inc (TCBIO) 2008 Q2 法說會逐字稿

Hello and welcome to the Texas Capital Bancshares second quarter earnings conference call. All participants will be in listen-only mode. 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. Now I would like to turn the conference over to Ms. Myrna Vance. Ms. Vance?

Thank you very much, Amy, and thank all of you for joining us today for our second-quarter conference call. As always, if you have any follow-up questions, give me a call at 214-932-6646.

Now, before we get into our discussion today, let me read the following statement. Certain matters discussed on this call may contain forward-looking statements which are subject to risks and uncertainty. A number of factors, many of which are beyond Texas Capital Bancshares' control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties 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 31st, 2007, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let's begin our discussion. With me on the call today are George Jones, our President and CEO; and Peter Bartholow, our CFO. As Amy said, after a few prepared remarks, she will facilitate a Q&A session. Let me turn the call over to George.

Thank you, Myrna. Hello, everyone, and welcome. Texas Capital Bank had another good quarter of growth. You will see that in just a few moments when we review the specific numbers for Q2.

Our margins stabilized during the quarter, and we did not see any deterioration from Q1 2008. We are, though, modestly adjusting guidance for annual net income to a range of $30 million to $33 million and we're confident about the remainder of 2008.

The Texas economy is certainly the bright spot in the country today. While we don't have all the numbers in for the second quarter, we can see that our economy continues to show resilience. The markets where we're located continue to outperform national averages. The unemployment rate is below the national average in May for four out of our five markets, and equal to the national average in the Dallas/Fort Worth area. The annual job growth rate was better in each of our markets than the national average. Houston, as an example, added more jobs in the trailing 12 months ending March 31 than any other city in the nation.

New housing inventory, May 2008 over May 2007, in all our markets declined significantly, and we believe that Texas is beginning to show that market absorption of excess inventory is beginning to take place. Now, Peter will cover Q2 results in more depth, but let me touch on some of the numbers briefly. Net income in Q2 was $5.8 million, or $0.22 a share. It decreased 27% compared to Q1 2008 and 29% decrease compared to Q2 2007. The major contributing factor to the decrease was our provision for loan losses, which I'll discuss in much more depth in just a few moments.

We had excellent growth in total loans, 5% linked quarter and 22% increase compared to Q2 2007. I'm particularly pleased with our demand deposit growth on a linked-quarter basis of 9% and 12% increase compared to Q2 2007.

Another positive element of core operating results was our net interest margin, remaining stable at 3.65% compared to Q1. As I mentioned before, we provided $8 million to our loan loss reserve in Q2 2008, supporting growth and risk rate changes in our loan portfolio. I will discuss charge-offs, NPAs and ORE in some detail after Peter reviews our financial performance, and I will turn it over to Peter.

Thank you, George. I'm talking about the performance drivers in the second quarter that produced a net income of $5.8 million reflecting what we believe is very good performance, especially in core earnings power and especially, also, in light of industry conditions. We did experience 28% decrease in earnings per share, for the reasons George has already mentioned.

With a stable net interest margin, and I'll comment more on this in a moment, we did see improvement again in net operating leverage, a reversal of the Q4 to Q1 situation when we experienced a reduction in net interest margin. The modest change in guidance obviously reflects changes in the industry since January of this year. While net interest margin was stable in Q2, the rapid change in short-term rates was not anticipated when we gave guidance. I think we've commented earlier that the pace and level of change was greater than we had anticipated. We are experiencing some impact, obviously, of the factors affecting the entire industry, only to a much more minor degree.

Provision for Q2 is clearly larger than anticipated in the guidance, about which George will comment in much more detail. Due to the strong growth we have experienced, we may have maintained guidance if only one of the two factors had changed, either net interest margin or provision, but not both. The wider range we have provided, we believe, is appropriate, due to the uncertainty in the market today and the industry conditions. I'd like to emphasize, while it's not reflected on the slide, that we've had really good growth in stockholders' equity, strong equity position we have to support growth and we have no intangibles that are going -- have become and may become a bigger issue in our industry.

You will forgive us -- we have, apparently, construction taking place on the floor above us as we speak.

Turning to the next slide, as I said, good core earnings power reflected in net revenue growth, linked quarter growth of 4.3% and year-over-year of 10.9%. Loan growth linked quarter of 5% and 22% over the previous year obviously were major factors in the growth in net interest income, reversing the position from Q4 to Q1 where we for the first time had actually seen a net decrease in net interest income.

Non-interest income growth was good at 4.3%, and that was due primarily to significant improvements in service charges and mortgage warehouse fees.

Expense growth of 3.7% in the linked quarter and 7.3% in the year-over-year periods show that we are making progress in the ratio of non-interest expense to earning assets and more modestly on the efficiency ratio, compared to prior years. The core operating expense growth was less than 2%. Professional and other expenses contributed to most of the linked-quarter increase of just under $1 million.

The provision expense of $8 million was the obvious variance from which we anticipated in the guidance originally given. We saw, in the quarter, significant contribution for the mortgage warehouse group, strong growth and a meaningful yield improvement and an ability to increase fees in this market.

Turning to slide nine, the strong growth is obviously evident in the balances on an average basis for loans held for investment and loans held for sale, linked-quarter growth of 5% or just under $200 million, year-over-year growth of almost $700 million or 22%. And, stated earlier -- in earlier calls, this does reflect much improvement in the productivity of [RMs], something that has been planned for 2007 and 2008. The linked-quarter growth in loans held for investment is consistent with our view that growth rates in 2008 will be less than those for 2004 to 2007, but still very strong compared to industry and Texas peers.

We have a higher return threshold built into the models today, and we are imposing much tighter credit standards than in previous years.

The loans held for sale category is up sharply, due to our position in that industry and things that are driving business our way. Obviously, the continued shift in earning asset composition is important to us and is driven by strong loan growth with loans to earning assets now in excess of 90%.

Total deposits, we mentioned, up 3% linked quarter, 6% year over year. DDA growth was exceptional, the linked quarter up 9%, and actually most of that occurred in the last half of the quarter. DDA growth year-over-year of 12%.

To the next slide, June 30th loan held for investments were $3.7 billion, obviously a record for us at quarter end; an increase that reflects, actually, an increase of 3% from the average levels of Q2 2008, again, implying an annualized growth rate on that basis of 24%. I will say that Q2 has been historically very strong in terms of loan growth.

Total loans peaked at $4 billion for the first time. Loan linked quarter increase of over $300 million. The strongest contributors to loans held for investment were energy and Dallas corporate and had strong support also from Houston, San Antonio and Austin.

We also saw deposits grow at a record level. Q2 is, again, historically a strong period for deposit growth. With DDA, though, reaching $610 million, it was really extraordinary. The linked-quarter increase of 21% and a year-over-year increase of 23% is something, I think, that's really remarkable in light of an all-organic-growth business model.

Total deposits at quarter end was $3.6 billion, an increase of $438 million -- again, a record. We believe that our performance reflects some weaknesses in the large competitors that operate in our market. The strongest contributors on deposit growth were Dallas and various lines of business, Austin and San Antonio.

The next slide with respect to margins, the 3.65%, the same as Q1 2008 and obviously a major contributor was the strength of DDA balance growth. We also have had good repricing of interest-bearing liabilities and all interest-bearing liabilities -- interest-bearing deposits and all liabilities, essentially the same as loans. We saw spread a improvement due to greater pricing flexibility now evident in our marketplace, and we also benefited from the spread between LIBOR and Fed funds, a contribution that was greater than that during Q1 of this year.

The NIM contribution of mortgage warehouse was also important. Historically, that category of lending has been among the lowest-yielding in our portfolio. The conditions in that marketplace have seen spreads widen significantly, and we have also been able to increase fees in that business. As indicated, the Company is much less asset-sensitive than in years past, but growth will constrain net interest margin. Stability of rates, as demonstrated, is obviously very helpful, and the DDA contribution going forward, depending on the growth rate in DDA, will obviously have a significant effect at the margin.

Rising rates obviously will be helpful even if asset sensitivity, as I said, isn't as big a factor. Also contributing to net interest margin, earning asset composition with strong loan growth and the continued runoff in securities and, obviously, fixed-rate earning assets are having a bigger impact today. We have seen, as I commented earlier, such a steep decrease in the speed and the level of Fed funds that it has had an effect on our margin expectations this year.

Also, deposit pricing, especially if a bank is growing, have become more significant to us and to the industry because we think primarily of a global demand for liquidity, given the problems in our industry.

Turning to the next slide, I'll say simply that we think, again, this is a very strong growth model and one that supports the view and the commitments we've made, the very strong core earnings power reflected on that slide. The conditions have not changed in our view of that business model. And I will comment that, while we have higher than normal provisions so far this year, historically, credit costs have been maintained at very low levels compared to the industry and to our peers and have been more than offset by the growth advantage of our business model and the focus on organic growth and not acquisitions.

Slide 13 -- the CAGR's for DDA and total deposits have actually increased from the earlier periods. Strong growth in the recent past has been, obviously, a big contributor. No change in the CAGR for the loans held for investment. Again, the growth model is confirmed, and we believe the market opportunity remains very strong today.

And with that, I'll turn it back to George for more comments about credit.

Thanks, Peter. You'll see a new slide in the presentation, the loan portfolio statistics. Let me make a couple of quick changes before we discuss it.

The residential real estate market risk is 7%, rather than 10%. The commercial real estate market risk is 20%, and our business assets are 32%. We had a transposition of a couple of numbers there, and I want to clarify that before we discuss. We'll send a new slide out for your use.

We classify our portfolio a number of ways, but this way is shown as by loan collateral type, which will give you a slice of what our portfolio looks like. We classify as C&I loans the business asset segment, the energy segment, a portion of the highly liquid assets -- those loans secured by cash, marketable securities, those kinds of things -- other assets and unsecured for approximately 55% of the portfolio we deem to be C&I exposure. Our mortgage warehouse totals about 8% and is included in the liquid asset category.

We classify as real estate, as you see here, commercial real estate, market risk real estate, nonresidential at 20%, owner occupied at 10% and residential market risk at 7%.

If you move to the next slide, we show our non-pass or classified grade loans by type. This includes the nonperforming loans also and is broken down, really, as follows, as you can see -- 71% being in the C&I portfolio. Again, this category includes corporate credit, business assets, energy leasing and other lines of business. Our residential-related exposure here is 24% related to single-family market risk. These are builders and lot developers. The third category, commercial real estate, at 5%, includes every type of commercial market risk real estate, other than residential. And as we've said before and we'll say again, you can tell that the commercial real estate portfolio is performing extremely well.

If you turn to the next slide, we'll talk about our credit in specifics. Our credit experience remains good. Net charge-offs were $3.6 million in Q2 2008 and $6.1 million year-to-date. 53% or $3.2 million of the year-to-date charge-offs of $6.1 million was one credit, home solutions, that we identified and reserved in Q4 2007. 48% or $1.7 million of the Q2 2008 charge-off -- again, that same credit -- was in that total. 89% of Q2 charge-offs were represented by just two credits. As we mentioned earlier, the charge-offs related to specific problems were substantially covered with allocated reserves in 2007.

Net charge-offs represent 40 basis points for the quarter, 35 basis points year-to-date and 25 for the last 12 months. We have seen an increase in nonperforming loan levels that we believe are not excessive but require and are receiving intense focus from management. Overall, we are seeing risk rate increases and increases in nonaccruals, but we do not currently foresee significant charge-offs in the second half of the year.

As mentioned previously, of great help to us, frankly, in reducing charge-off potential in Q3 and Q4 is the disposition of three problem credits that were resolved in Q2. The largest problem loan over the last three quarters has been related to the home solutions credit. We received payment for the outstanding balance of that loan earlier this month, July. That loan represented approximately $5 million in charge-offs of the total $8.6 million charge-offs over the last three quarters. The exposure in that loan was substantially reserved for in Q4 2007. The remaining exposure was covered by a provision in Q1 2008 as the borrower's restructuring plan was developed.

The second problem loan was a C&I loan for which a substantial reserve was applied at year end 2007. That was covered all but approximately $250,000. We were able to sell that loan, and we did not provide any financing to accomplish the transaction at a discount of $1,450,000. Sale of that loan eliminated the need for a protracted workout that really would have increased expense and exposure to additional loss.

Third, one additional loan in Houston which we've discussed before had a substantial reserve that had been allocated at year-end 2007 was charged off in the amount of $1.5 million. The balance of that loan was repaid.

Let me take a moment to give a little more transparency and color as it relates to our nonperforming loans, our ORE and our 90-day past dues. Nonaccrual loans and ORE are up from $17 million in Q1 to $22 million in Q2. The larger nonaccrual loans that make up, really, over 85% of that totals are the ones I'll talk about right now. Home solutions at $2 million -- that was paid in early July; and, as I mentioned, we took a charge-off of $1.7 million. Again, that has been reserved in Q1.

Secondly, residential mortgage loans of $4 million that have been marked to market and allocated with proper reserves.

Third, there was a lot development loan in the amount of $8.8 million with a current appraisal supporting our collateral value. But, in addition, we've also put additional reserves behind this particular loan. We have a number of prospects today for sale of this property. This particular loan is really a good example, frankly, of the need for cash equity up front on a real estate development loan. We have 35% hard cash equity invested by the owners up front and made a 65% loan-to-cost ratio on the project. While this really doesn't guarantee the value of the collateral will fully liquidate the loan, the loan balance carried on our books today is supported by an appraisal. Even in a down market, the value of cash equity is very important.

ORE totals have moved up to $5.6 million in Q2 from $3.1 million in Q1, and one-half of that amount is represented by a commercial site near Houston that we've talked about before. We have a current appraisal supporting our carrying value today, and we are actively marketing the property with some success. The other one half of our ORE portfolio is represented by single-family product and a small office building, all in Texas. We have 12 homes and 10 lots today, and we have sold three homes and four lots as of 6-30-08. We have nine of the 10 remaining lots under contract for sale, and one house is under contract for sale. This is all cash, no financing required to accomplish these transactions.

And the comment I'd make to you today is, we believe that all of our ORE portfolio is properly valued on our books today. And also, I will mention that in the sales of those particular properties we have not recognized any loss.

In looking at our loans over 90 days past due -- that total is $23 million -- the increase of $16 million from Q1 really represents two loans. Frankly, one is a non-criticized $5.9 million real estate loan to a good customer that carries an above-average credit grade, and that loan has already been renewed in early July, absolutely no problem, but did slip into the 90-day past due category.

Secondly, a C&I loan of $9.6 million that is criticized but has not been placed on nonaccrual today because the Company and the guarantors can still service the loan. It was being held past due to help in our restructure process. We believe the loan has the proper amount of reserves allocated to it at this time. The balance of the 90-day past due category we have really talked about before -- premium finance loans of $1.8 million -- they are not problems but represent canceled insurance policies waiting for return premiums to pay the loans; C&I loans of $1 million dollars waiting to be paid or renewed that are not criticized; and then, we do have $3 million of real estate loans that are less than past credits, but again, believe they are properly reserved.

As we mentioned, Peter has mentioned and I have, we made a loss provision of $8 million in Q2 '08. This provision increased our loan loss reserve balance to $38.5 million or 1.04% of loans held for investment. The provision was ahead of our guidance because, as we've said before, based on our methodology we apply to all loans, especially NPAs, our reserve balance should always be increased by more than our expected loss exposure at that time. When we identify weakness in a loan and we downgrade it or classify it, even if we cannot identify any amount of loss at that time, our formula drives a certain precautionary percentage that can be increased or decreased over time as loss exposure is recognized.

We certainly believe that conditions today in our industry continue to warrant intense focus and further tightening of standards. We've done this across our different lines of business, but we're always evaluating what we need to strengthen underwriting.

If you move to the next slide, it graphs net charge-offs to average loans. As mentioned before, year-to-date charge-offs are 35 basis points, and our loan loss reserve to average loans held for investment, 1.04%. As you can see, that percentage is as large as it has been since 2004, but frankly today's environment dictate higher reserves. We believe that 45 basis points of nonaccrual loans are slightly higher than we'd like to see, but we also believe that most all banks are going to see this ratio climb while the financial community is dealing in this economic environment.

So let me close the credit discussion; I'd like to summarize with four or five bullet points. Nonperforming assets now represent less than 1% of total loans, or 86 basis points today. The provision is driven by consistent application of the methodology. That's growth, and that's change in grade. The losses have historically been substantially below allocated resources, and our charge-off potential for Q3 and Q4 has been reduced with the disposition of the three problem loans I discussed in Q2. And, real estate exposure is more than 90% in the Texas market.

I'd like to make a few closing comments before we open the call for questions. We believe that we had another good quarter of growth and operating performance. We've increased our loan loss provision above our previous guidance, but we believe that's prudent and really necessary in this economy. We continue to be cautious about the near-term future for the economy, but we do believe that Texas and the markets within Texas where we are located will perform better than the rest of the country.

We have changed the guidance to a range of $30 million to $33 million or approximately 10% below guidance given earlier this year. We are continually and are continuing our intense focus on maintaining good credit quality. And frankly, something we have not discussed today, we want to exploit our market opportunities that we see today for people and customers. We believe that banks with good credit quality, adequate capital and good people can certainly take advantage of opportunities that will arise in extremely difficult economic times. We plan to do just that.

Thanks again for your support, and be assured that Texas Capital will be working hard to be the bank of choice in the Texas market. Now we'll take a few moments for questions.

(OPERATOR INSTRUCTIONS) Erika Penala, Merrill Lynch.

My first question is two parts. One is -- are the C&I losses that you're taking concentrated in any one sector? And, are you seeing any weakness in the lender finance arena?

No and no, would be the answers to those questions. We really don't see it concentrated in any one or two industries. It's more broad-based than that, and we have not seen issues and problems in the lender finance area.

And the $8.8 million lot development loan -- does it have a structure on top of the dirt? And also, what is the bid-ask spread, so to speak, between the interested parties in a secondary market transaction, and what your expectations are?

Right, well we are involved in negotiations right now, and it probably wouldn't be the thing to do to talk about specifics of transactions that we're talking about. But I mentioned, I believe, that we have a recent appraisal, within 12 months, that supports the value that we have on the books today. And, we did have significant cash equity injected up front on that particular loan.

Back to your first question, yes, they are fully developed lots ready to be delivered to the builder, and we have additional property for future expansion pledged on the credit also.

Okay. Do you mind giving us more color on that $9.6 million C&I loan that's 90 days past due in terms of industry or -- ?

Well, let's see. It's a credit we've had for some time. We know the principles quite well. They are experiencing a downturn in this particular industry and product. They are very good folks, and we expect to be able to work out of that problem, so to speak, over a reasonable period of time, probably 18 months to two years.

Could you remind us what your average C&I loan size is?

Our average C&I loan is probably a little bit over $1 million, but it really -- we have a number of smaller loans. Our sweet spot, Erika, is between the $2 million and $10 million. So if you really look at what we would consider real average loans, it's in that category, as opposed to the $1 million. It's a little bit larger than that, we believe, probably in the $2 million, $2.5 million range.

John Pancari, JP Morgan.

Just to get more color on the paydown that you cited in the, you know, [post to quarter] that you cited in your comments and in the presentation, can you just give us a reminder -- what total did that pay down? I back into it, and I get to about $7.5 million, I guess, and I'm just trying to understand what that paydown was. Was it that non-criticized $5.9 million credit that was renewed in early July, plus some of the home solutions? Or, if you could just give us some detail on that.

Right, you've got it. It was the $5.9 million; it was a real estate loan that was really -- that we had on a very wealthy individual, and he was in the process of selling the real estate. We kept it past due to long, thinking it was going to sell or move. We have subsequently renewed it, and he has made other payments on other relationships at the bank. That was one, $5.9 million.

The other was the home solutions credit, which was about $2 million, that -- we have that done.

Okay. Then, in terms of your watch list, if you could just give us a little bit more color in terms of how that has changed this quarter and your expectation for non-performers going forward here in the near-term?

That's a little bit difficult to do. We believe that we've got things properly reserved at this point and properly classified at this point, whether it's a non-performer or not. We continually review the portfolio. We have a third-party outside loan review company that comes in and reviews about 65% of the portfolio annually. They assist us in the loan review process and are continually helping us stay on top of the portfolio in a time -- in an economic time like we are dealing with today.

We've seen a lot of movement within those portfolios today. Some of the criticized portfolio has gone down, but it's a very fluid process right now in an economy in which we are dealing today. And what I'd like to be sure and translate to everyone is that we are absolutely on top of the process, the credit process and the review process, and are making the right classifications when it is appropriate with the right allocated reserves to the credits.

Lastly, can you just give us a little bit more granularity in terms of where you're really seeing the good loan demand by product there in your markets? Thanks.

Well, it's in still in the C&I portfolio, primarily. Real estate has certainly slowed down, both on the residential and on the commercial side of the real estate business. But frankly, it has really been good across most industries that we see today. The Texas market is still pretty darned good, and we still see a lot of good companies seeking credit or seeking to move their credit. One thing that I mentioned briefly in my comments is that we think there's a real opportunity even in a down cycle like what everyone's looking at today, primarily in the national market, to take advantage of the ability to find really good people and really great credit relationships, and a lot of that has happened in our marketplace. We've been able to up price to a certain extent. We've been able to get better structure today, and we believe that's going to continue for some period of time.

Brent Christ, Fox-Pitt Kelton.

A question on your capital levels. Obviously, within the really strong balance sheet growth that you guys had this quarter, it looks like your capital levels came down a little bit and your total risk-based capital is about 10.3% now, just above that well-capitalized threshold. I'm just kind of curious how you're thinking about capital on a go-forward basis and how that could potentially impact your future balance sheet, growth expectations.

Well, let me give you my thoughts. Texas Capital can manage, frankly, through 2009 with our existing resources. We really took steps in 2007 to provide for future needs when the capital markets really were becoming difficult. The trust preferred markets went away, so we did some other things. Obviously, market conditions are going to drive growth rates below those that we've enjoyed historically. But frankly, if that should change, we think the market will provide capital to those banks, even though it's probably difficult today, like Texas Capital, who can perform well even in difficult circumstances.

If we see a different opportunity or changing circumstances, we'll react accordingly. I think also an interesting point about capital -- when we do raise capital, we really have somewhat more flexibility than many other banks because, if you look at our capital structure, our Tier 1 capital is strong. We can choose to raise only Tier 2 capital, if that's what's necessary. So we feel pretty good about our capital levels, and we feel pretty good about our ability to take advantage of the marketplace and some of the opportunities that could arise.

Just a couple of follow-ups on some of the credit questions asked earlier. With the larger 90 days past due C&I loan, was that a syndicated credit? And, if so, are you guys the lead on it, or are you participating with somebody else?

No, that's one credit. It comes out of our Fort Worth area. Again, as I mentioned to you, by two good friends of the bank that, frankly, have just had a downturn in their particular business and we properly reserved it. We think we've properly classified it, and we think that we have very little loss potential in that particular credit. It's just going to take a little time for it to right itself.

With respect to the $8.8 million lot development loan, what's the geography of that particular relationship?

I'm sorry? Say that again.

Where is that loan based out of, what city?

Which one, Brent? I'm sorry.

The lot development one.

8.8?

Yes.

That is --

Because we are planning, we're in discussions about sale, it might make sense not to get into that.

Okay, fair enough. Then my last questions -- you did mention that about 10% or something less than 10% of your real estate exposure was outside of Texas. Could you give us a sense of, geographically, where that may be?

Yes. If you look at residential product, we've probably got 96% of our residential product in Texas. Of our commercial properties, it's about 90%. We would tell you, one, it's diversified. And secondly, we have less than 2% in any one particular market. So it's very little outside of the state of Texas and no concentration in any one market outside of the state of Texas.

My last question is just broadly with -- you've mentioned on a couple of these real estate-related loans getting updated appraisals. I'm just kind of curious where those are coming in, in terms of type of up price declines maybe you are seeing since the last time they were appraised and just broadly, not specific to any one loan.

I ask the same question of our folks. We're really pretty pleased where we see the appraisals coming in, and we think that, again, is a hot button today, certainly with the regulators and we're very much interested in updating our appraisals where necessary. Frankly, we feel pretty good about where we see them coming in.

Andrea Jao, Lehman Brothers.

Once again, you have posted good loan growth and pretty good deposit growth, but the loans continued to outpace deposits, and your loan-to-deposit ratio has inched higher over the quarter, since now it's 114%. At what level do you start being uncomfortable with the level of loans to deposits? And, where do you want that to be?

Andrea, a lot of it -- this is Peter -- has a lot to do with what we are seeing in the held-for-sale category. With that level reaching $300 million or so and given the fact that in today's environment the turn on that, meaning the throughput, is less than 10 or 12 days. So it's a very, very liquid market, and we obviously feel comfortable carrying that kind of asset with something other than customer deposits.

You saw the growth slide. At the end of the quarter, we're substantially reduced today in other borrowing categories. Equity, despite provision levels, and especially because we don't have intangibles cluttering up our ability to support growth, our equity is actually dedicated heavily to the financing of our loan portfolio. So I think, if you take out something that we would consider the especially high-level of held for sale and given that loan growth typically precedes deposit growth, as it has in the last couple of quarters, 105% to 110% would not surprise us -- 100% to 105, 110%.

Now, please remind us the composition of your investment securities portfolio. (multiple speakers) any color on the mark-to-markets? And just want to check in, if there are any Fannie or Freddie securities in there?

No. We own no GSE stock. We owe -- own only agency kinds of mortgage backs. We haven't purchased a security since year-end 2004. So, as I think we've said, we missed out on the opportunity to buy a lot of securities that today are giving the industry a lot of heartburn. The slight market value erosion, linked quarter, is strictly bond market. It has nothing to do with any issue within our portfolio.

Do you have the numbers for the OCI?

We have zero, other than temporarily impaired.

Brad Milsaps, Sandler O'Neill.

On the operating expense numbers, sometimes when you guys have had maybe weaker quarters than you had expected, you will go a long way to cut the incentive comp and maybe drop a little bit more to the bottom line. Didn't seem to be the case this quarter. I know you had some maybe outsized legal expenses, but just curious if your guidance includes maybe some reduction in the run rate on the incentive comp or how to think about that going forward.

Effectively, it does. The incentive comp accrual is based on the full-year performance. We are reducing, obviously, the guidance, as indicated. So that will have an effect on the incentive accrual.

But it didn't this quarter?

Nothing of any consequence because, again, we focus on it on the full-year basis.

So if you hit -- if you come in this guidance, you should be in that range in terms of where you think you're going to be in terms of incentive comp?

That's correct.

Bain Slack, KBW.

What time of the year does your (inaudible) [issue] typically occur?

In today's world, we are examined basically throughout the year on one thing or another; it's targeted exams. We don't really get into examination watches.

Okay. With regard to the demand deposit growth that you all saw, if I heard correctly, the bulk of it sounded like it was at the end of the quarter. Was there any (multiple speakers) --?

The last half of the quarter was quite a bit stronger than the growth rate on a linked-quarter basis.

Okay. I was just wondering, was there anything lumpy in there, such as a specific deposit from one customer, anything unusual -- ?

No. You know, we really looked hard at that, and it's very well spread across our customer base. We saw energy being a nice component. We saw our business banking group [was a] nice component. Really, across our commercial customers, we saw good DDA growth.

Michael Rose, Raymond James.

I wanted to ask about how the dislocations have translated into maybe your hiring plans for the year, if you guys are looking at adding additional lenders, given some of the weakness we've seen out of some of your competitors.

You bet. As we've always said in the past, we'll be opportunistic. And I think we've had -- in a couple of our markets outside of Dallas, we've seen some really good opportunities and we've hired a few people. And I think it's going to continue, and we are going to see opportunities in business banking, private client, treasury management. It's an opportunity that we want to take advantage of, when the time is right, and we think we can make some hay in this marketplace.

What kind of opportunities are you seeing in the energy lending practice, given the rise in oil prices?

We're seeing good opportunities. We've seen good growth in our energy lending portfolio. You know, we are lending on proved reserves. We are an E&P lender. We don't lend on steel and equipment and tubular. We are lending on cash flow, and it has been pretty darned good. We are seeing a lot of people drill today, and we are providing capital to help continue to develop reserves. It's production based, using the drill bit. We don't see our --we're not financing acquisitions for our customers. In today's environment, we are seeing them use the drill bit and develop reserves that they own.

Erika Penala, Merrill Lynch.

With the deposit balances, I noticed that there was an increase in -- a significant quarterly increase in average time deposit balances and a similar decrease in foreign deposits over the same time period. Was there anything going on there?

No. We had -- I think we commented at the end of Q1, we had a transaction-specific, primarily one transaction-specific outflow at the end of Q1. It's staying basically stable since then.

(OPERATOR INSTRUCTIONS). We show no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you. We appreciate your attendance on the call, want you to know that Texas Capital Bank, again, will be working very hard for the interests of the shareholders and we appreciate all your support. Thank you very much.

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