Texas Capital Bancshares Inc (TCBIO) 2008 Q4 法說會逐字稿

Hello and welcome to the Texas Capital Bancshares fourth quarter earnings release conference call. (OPERATOR INSTRUCTIONS) Now I'd like to turn the conference over to Myrna Vance. Ms. Vance, the floor is yours, ma'am.

Thank you, Mike, and thank all of you for joining us today for our call. For those of you I don't know, I'm Myrna Vance. I head up Investor Relations. And should you have any follow-up questions, please call me at 214-932-6646.

Now, before we get into our discussion, I'd like to read the follow 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 express 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, with that done let's begin our discussion. With me on the call today are George Jones, our CEO; and Peter Bartholow, our CFO. After a few prepared remarks, our operator, Mike, will facilitate our Q&A session. Now, at this time, I'd like to turn the call over to George.

Thank you, Myrna. Good afternoon, everyone, and welcome to our fourth quarter earnings call.

Well, 2008 has been an incredible year, particularly on a national and international scale with the US Treasury, the Federal Reserve and the FDIC playing a tremendous role in the global financial markets, trying to bring stability and increased liquidity in the financial system, as you all know.

Texas has not been immune to the economic downturn, but it does seem to be weathering the storm better than most parts of the US. Because of the economic environment, we will not be giving specific earnings guidance for 2009, but we will take a few minutes and discuss core earning capabilities with you.

I'm going to make a few opening remarks, and then I'm going to ask our CFO, Peter Bartholow, to discuss the financials. And then I'll return to have a more detailed discussion relating to credit and some things that we see for 2009 for Texas Capital Bancshares.

As most of you remember, because of our successful equity capital raised in September of $55 million and our participation in the Treasury's capital purchase program of $75 million in January, we have really very strong capital ratios. If you recall, Texas Capital was approved for $130 million in capital, but because of our strong capital position and that recent equity raised I discussed, the $75 million gives us an additional cushion to support what we think are our longer-term strategic plan activities and to take advantage of some near-term opportunities that we see in all our markets across the state.

After that capital injection in the Company, our leverage ratio is 11.8%. Our tier one to risk-weighted assets is 11.5%, and our tier one and tier two capital to risk-weighted assets a strong 12.5%. This gives us really an incredibly strong balance sheet to enter 2009 with.

We saw another good quarter of low growth despite the economy. On a linked-quarter basis, average basis, we grew 3% and 16% on a year-over-year basis. Our business model is intact and positioned for future opportunities, that we'll discuss in a minute, with plenty of dry powder to extend our growth strategy in the Texas market.

We did provide a larger-than-normal provision in Q4 because of our fourth quarter loan growth and the increase in our non-performing assets.

In today's difficult environment, credit is absolutely the watch word, and we continue to maintain a very intense focus on credit quality.

Now, I'll turn it over to Peter and we'll talk about financials for a moment.

Thank you, George. We are going to leave a lot more time at the end, so my comments will be fairly brief.

On Slide 4, net income of $24.9 million for the year. Obviously not consistent with our longer-term objectives, but in the context of what we're dealing with in the national economy, and in particular for Texas Capital, the margin compression that comes from very low interest rates, we consider this a very good result.

We see economic pressures obviously driving provisions for losses much higher. That's a consequence of things that, for the most part, are out of our control. But as George said, they're being addressed aggressively at Texas Capital.

We've had exceptional growth. Loans held for investments substantially above plan reflecting a total of 20% year over year. Growth in loans held for sale -- with loans held for sale of 22%.

For the fourth quarter we saw growth reach in loans held for investment just over $4 billion, providing an excellent start for 2009.

We saw DDA growth, another highlight, at 14%, total deposit growth of 5.4%, but even stronger in the fourth quarter.

As George mentioned we do enter 2009 with a very strong capital position. We did, on a preemptive basis, raise $55 million in September, and have augmented that with the capital purchase program of the Treasury with $75 million. Both totaling the amount we applied for and were approved for at $134 million -- excuse me, $130 million.

We have, as we've commented before, no intangibles. That's taken on increased significance as the industry experiences what looks like a tidal wave of write-offs, reflecting poorly deployed capital with a huge and permanent cost to shareholders, something that we've been able to avoid.

Turning to the next slide, we have, despite the effect of provision and the -- and net interest margin and compression with low rates, we've seen very good improvement in operating leverage. We saw a net interest income growth of 9% after a 7% reduction in net interest margin.

We see net revenue increase by 8.6% for the year, and 3.5% for the fourth quarter. Demonstrates the ability to produce core operating growth under very difficult rate and economic conditions.

Growth of non-interest income of 9% year over year and 21% linked quarter reflects the strength of the mortgage warehouse activities. The reduction in the ratio of non-interest expense to earning assets of 14 basis points for the year and level for the year over -- excuse me, for the linked quarter, shows our commitment to improving this key ratio.

Assuming a stable net interest margin, the efficiency ratio would have been less than 59% for the year and just over 57% for the fourth quarter. The increase of problem assets, the cost associated with increases in problem assets, prevented even greater improvement.

As we'll talk about shortly, the provision nearly doubled from 2007 to $26.8 million. We saw a significant growth in income contribution from the mortgage warehouse group, representing a significant growth opportunity as rates, pricing and fees were all very favorable, especially during the last half of the year and the fourth quarter.

Turning to Slide 6, I'll comment briefly that it's obvious that industry conditions had an impact on rate levels and net interest margin for us. Despite that, performance is good.

A full year ROA of 55 basis points and ROE of 7.5% is not -- is certainly not consistent with our long-term objectives. But in light of net interest margin impact and credit cost, not a weak result.

Turning to the next, Slide 7, we have, again, exceptional growth in loans with balances of loans held for investment and loans held for sale way above plan.

We gave guidance at the beginning of 2008 saying that of those two, our growth might be half of the historical rate of 25% to 26%. Instead, we were up 20% for loans held for investment and 22% for total loans. The loans held for investment up 2% from Q3 and 16% over the year-ago quarter.

We saw a surge in growth at the end of the quarter that didn't get reflected fully in the average balances, again, starting off in an excellent position for 2005. And with the loans held for investment at yearend 3.9% higher than the average for the fourth quarter represents an implied growth rate of more than 30%, which we certainly don't plan to see in 2009.

Remarkable growth in DDA, 14% year over year, and 17% compared to the year-ago quarter.

The growth in total deposits was only 5.4%. It's limited by the fourth quarter effect of borrowed funds to reduce total funding costs in support of the dramatic increase in total loans.

Slide 8, again, just shows the level of growth balance substantially ahead of plan with held for investment average balances, excuse me, at period end of over $4 billion. Loans held for sale were up $150 million, or 45% from Q3, reflecting, again, what we see as a real opportunity in the mortgage industry.

In growth in total deposits I said reflects a preference for borrowing to support the very rapid growth that we saw really in the last one-third, the last month of the fourth quarter. Total DDA growth at $587 million represents 11% year over year.

Slide 9, net interest margin of 3.41% is only a 7 -- 6 basis point reduction from the prior quarter, but its 41 basis points were substantially down from the fourth quarter of '07 and for the full year of '07.

We will benefit significantly from liability maturities in Q1 and could -- we hope and we believe that Q1 will represent the low point for 2009 net interest margin.

We saw -- we are experiencing and will see more of spread improvement from pricing and lower funding costs as the year progresses. The spread of LIBOR to Fed funds reflecting 25% of total floating rate loans is somewhat lower but will be mitigated by pricing improvement and the imposition of floors in substantially all credit decisions.

Funding costs, strong growth again. I mentioned a DDA in equity obviously benefited total funding costs, just not nearly as much in a low-rate environment.

In terms of net interest margin at very low interest rates, DDA and equity just don't provide the impact on net interest margin that we see at more typical levels of 3.5% to 4.5% of Fed funds rate.

We are in a position where funding costs simply cannot fall as quickly as the rates on earning assets. By earning asset and funding composition, Texas Capital is less sensitive. But when rates are very low, the costs of certain funding components simply cannot fall far enough or fast enough to offset the decrease in earning asset rates.

Prolonged periods of low interest rates are obviously negative, but we are working through pricing and other decisions to improve that condition.

Slide 9 is really clearly strong growth in terms of poor earnings power with CAGR of net revenue higher than growth and expense by 400 basis points. The CAGR of net interest income higher by the -- by 500 basis points.

I'm not going to -- I have no real comment on deposit and loan growth because they are obvious in our business model.

And I'll turn it back to George.

Thanks, Peter. Take a look at Slide 12 and 13, if you will. I will call your attention to the pie from Slide 12. That date should be December 31, 2008 instead of September, and we'll send a clean copy out to you.

But Slide 12 reviews loan portfolio statistics. The pie chart on your left describes our loan portfolio by collateral type, and the right side of the page outlines our non-performing assets.

Non-accrual loans total $47 million, as you can see, with real estate loans comprising $29 million, or approximately 62%.

Other real estate of $26 million brings our total NPAs to $73 million, or 1.81% of loans and ORE. Real estate loans and ORE comprise roughly 75% of all our non-performing assets.

ORE -- other real estate has grown from $6 million to $26 million. Basically, with the addition of three properties. And if you remember, all of these three properties have been identified as problems in the previous quarters, but actually we foreclosed on them in Q4.

And I'll refresh your memory. There are three. There's $7.7 million in single-family completed homes and lots in Houston. We discussed that in Q3. We foreclosed and charged down $1 million in Q4. We've sold approximately $850,000 of those homes and lots from that portfolio in Q4 with very little additional write-down.

The second property is a $7.5 million shopping center tract in Austin, Texas, previously identified. We did charge that down $2 million in Q4 to the new appraised value.

There's a $5 million townhouse development we also have discussed previously, and that's carried in ORE at appraised value with no write-down needed at this time.

We were also successful in disposing of about $4 million of ORE in Q4. With $24 million moving from the non-performing loans to other real estate, Q4 saw an increase in non-performing loans of approximately $28 million, $17 million of that related to real estate loans, and $11 million are C&I loans. All, we believe, to be probably reserved at this time.

Charge-offs of $5.2 million in Q4 were basically real estate related also. There were three significant pieces that made up the $5.2 million. One was $1 million charge-off for those homes foreclosed in Houston that I just mentioned, $2 million for the shopping center tract in Austin, and $1 million charged down on old mortgage warehouse loans generated back in 2007 before underwriting had changed. Remember, we moved some of those into the held-for-investment portfolio and had them probably reserved, but we took the charge down in Q4.

Total charge-offs year to date were $12.7 million, representing 35 basis points for the year.

Important to note though that these losses related again to identified problems which were substantially covered with allocated reserves in prior periods, prior quarters.

The increase in non-performing loans in Q4 was not unexpected due to the changing economic conditions. But we continue, as I've mentioned before, to increase our focus on resolving these issues.

Our non-performing loans were 1.28% of our loans held for investment.

Our loan loss reserve balance increased after very strong growth in the last half of Q4 to 1.16% at yearend, and it was 1.21% of average outstanding loans held for investment in Q4.

As Peter mentioned, we provided $11 million in provision, and that was driven, as we've said before, by our methodology, not necessarily by our expectation of loss. We covered our annual loss by over two times with this annual provision.

If you'll turn now to Slide 14, this graphs our net charge-offs to average loans. Our NPAs are up, as you would expect in this environment, but certainly, in our opinion, very manageable and properly reserved.

In closing, I'd like to again mention our good loan growth despite the current economic conditions and to reinforce the message that our Company has an intense focus on maintaining credit quality. We believe that $130 million of new capital positions us well to take advantage of the opportunities related to people and customers in all our Texas markets.

You know, for most US banks, the declining economy and the increases in NPAs and loan losses create a high degree of uncertainty for projected earnings in 2009. As the Texas economy suffers, the rest -- as the Texas economy continues to suffer with the rest of the country, even if it's been less severe than most other regions, Texas Capital is not totally immune.

However, excluding the impact of potential loan losses, our base revenue generation appears excellent and intact. We exited, as Peter mentioned, 2008 with strong loan growth, with our earning asset base in 2009 about 14% higher than average for 2008, even if there's no loan growth in 2009, although we do expect modest loan growth of up to 10% this year.

Peter also mentioned that spreads should improve, and that's true. We've put various initiatives in place, like higher rates and low rate floors on most of our credits on a go-forward basis.

As a result of the aggressive actions of the Fed to improve liquidity in the banking system, our cost of funds will come down. And as we've already discussed, while the amount of loan losses and deterioration in loan quality remains difficult to determine for 2009, our strong process will make the levels of non-performing assets manageable.

That is all of our prepared remarks today. We will take a moment and take questions and answers -- questions, and hopefully we'll have some answers.

Yes, sir. (OPERATOR INSTRUCTIONS) And the first question we have comes from John Pancari of JPMorgan.

Hi, John.

Good evening. Can you talk a little bit about the inflows into non-performing loans? I know you mentioned I think $28 million there. That $17 million was real estate, and $11 million was C&I. Can you give us a little bit more granularity on that, like what types of real estate credits, and the same thing on the C&I?

You know, it's, you know, primarily in the market risk real estate side, John. You know, it relates to commercial real estate.

The C&I portfolio is really pretty much broad based. There's no one particular industry or no one particular region. Just a general weakening in a few commercial credits that you would expect to see in this environment.

As I mentioned before, 75% of our existing non-performers are real estate related, and we still see that kind of ratio moving in to the NPA category. We still think it will be more heavily weighted to the real estate side than the commercial side.

We have lowered our exposure to the residential real estate market. That's moved down somewhat in the last quarter in terms of outstanding credit. And we haven't seen a lot of movement from the real estate, the residential real estate side, into the NPAs. It's been more of the commercial tracts, possibly small office categories, something like that.

Okay. And can you talk about your provisioning around the -- your oil and gas exposure? Have you upped your loss provisioning around that at all? I mean, can you just comment in general on your expectations?

I sure can. No, we have not because we have not needed to. In the last 30 days we've done two extensive energy loan reviews, and we came away very, very pleased with what we saw. The portfolio is holding up extremely well.

Why is that? Really, our long-term projections for oil never really exceeded $60 a barrel, and gas at that [$6.50] range at the highest point. And we're just -- we're not booking transactions at those very high prices.

100% of the credits that showed any sensitivity to prices, oil particularly, of $50 or below we're required to hedge. Any properties with short economic lives or high concentrations we're also required to hedge.

You know, the 2010 futures today, the average price is higher than our recommended base case. Any client today really can enter a hedge, then lock in prices in excess of those pricing assumptions today.

You know, when we see indications of stress in the borrowing base in energy for our clients, there are a number of things that we can do and that we have done. We can either reduce the borrowing base by removing line availability, we can have the client pledge additional properties if they have them. If there's a gap we can have them amortize it over a few short months, or have the clients hedge the product in the future.

Most of the clients that we've talked to on this basis have chosen one or more of those options. So it really depends today on how you underwrote the credit, six months, a year, two years ago, and if you were relatively conservative and understood that $140 oil is not going to always be the norm, you know, you're in pretty good shape.

We've -- as we've mentioned before, we've focused, as you know, on production loans, and we've avoided basically oil service business. We're not into the iron financing, rig financing, equipment financing. It's basically financing the commodity coming out of the ground, the cash flow.

So we're very pleased with our portfolio and think it's looking very good.

That's a long answer to a short question, but it's an important one today.

Okay. And then I just have one more follow-up there on the deposit side. Just you saw the outflow there on the foreign deposits. If you can just give me a little color there. And then lastly what your strategy is to grow deposits, particularly given where your loan deposit ratio is.

Sure. John, we have seen, going back from early first quarter of last year with one large customer, redeploy assets out of the Cayman branch euro dollar deposits. Since then, it's not been the most attractive source. Pricing driven by global demand for liquidity has made that price not as effective as a borrowing cost.

When we see the kind of growth that we have had, you can't ramp up deposits to meet that growth. The alternative, which is driven by cost and short-term availability, is going to be the borrowing base or the borrowing of -- the borrowed funds category.

So that's been an emphasis, and it's run down because of certain deposit categories we've seen run down because of the global demand for liquidity and pricing.

Okay. Thanks.

And the next question we have comes from Erika Penala from the Bank of America, Merrill Lynch.

Hi, Erika.

Just can I follow up to one of John's questions? The $17 million in real estate NPA or NPLs, is that construction or term commercial real estate?

Erika, that's, you know, basically term real estate; a little bit of construction development, but more of a completed real estate project. In fact, it's in some land in there.

Okay. And of the income-producing component of that $17 million, what is the underlying real estate type? Is it retail? Is it office?

You know, it's retail lot development type property.

Okay. Okay. And are these located primarily in the Dallas MSA?

You know, as we've mentioned before, 90+% of all real estate we finance is in the state of Texas, but most of it would be in the Dallas, Forth Worth, Houston area. A few in some -- in our other two locations in Austin. I mentioned the shopping center tract in Austin. And so it's -- but most of it's in the larger cities.

And my last question is on expenses. Is there -- I mean, given the uncertainty in terms of earnings power because of credit for all banks in '09, is there room to rationalize expenses in order to protect some of that earnings power?

Yes, but there are no categories, Erika, that lend themselves to sharp reductions. The relationship manager base in the lending side is 75 or 80 people. We have another 25 or 30 relationship managers that are on Treasury management fee producing areas. So they're relatively small workforces in a population of a total of only 500 people.

We don't have branches that we can close, effectively. And we don't do any advertising to speak of. We do placements in some publications, but in terms of significant media type advertising, we simply don't do it.

We are, obviously, watching very carefully compensation increases. We have an incentive plan that's driven by pretax income. So that, to the extent we can't maintain an appropriate level, will come down, and has, in the past, come down quite sharply.

So it's -- that would be the principle variable.

Okay. Thank you.

Okay. The next question we have comes from Jennifer Demba of SunTrust.

Hello, Jennifer.

Hi. How are you?

Good.

Two questions. You did have a -- to follow up on Erika, you did have a reduction in personnel costs in the fourth quarter sequentially. Was that incentive reversals or?

It's a little bit of everything, but incentive reversals were a portion of that.

Okay. And question on your residential builder portfolio. You said you'd reduce that. How big is that now? And how much of it is [criticized] or on non-accrual status?

You know, it's down somewhat from what we've told you in the past. We showed it at over 7%, almost 7.5%. That includes lot development and single-family construction. And that's down, you know, close to a percent. It's about $146 million.

And how much of it is on non-accrual or problem credit right now?

Let's see. I'd have to figure that for you, but it is not a large amount. You know, we have a couple of -- we have one lot development that we've mentioned before. We've got the lot -- the shopping center lot I just mentioned to you. We've got those homes in --

Houston.

In Houston. And There's not a lot more of it. I don't have that specific percentage for you right now. We can get it.

Okay. Thank you.

And the next question we have comes from Brad Milsaps from Sandler O'Neill.

Hi, Brad.

Hey, good evening. Peter and George, the mortgage warehouse that the loans held for sale have moved up quite a bit. Just kind of curious what your appetite is there going for? I know there's some great opportunities out there, and what kind of effect that could have as those bounce, move higher on earnings in 2009.

Brad, we think it's actually one of those opportunities we mentioned earlier to take advantage of. We think we have a good program. We like -- we've got years and years of management experience in that business. We do it a little bit differently and I believe a little bit more cautiously than some.

But we've seen that grow, you're right, fairly dramatically. About half of our loan growth in Q4 was the warehouse. What were some of those reasons? The refi activity is beginning to pick up with rates coming down. Seasonability, large increase in FHA loan closings due to rule changes. And really, finally, and one of the largest and most important reasons is the lack of funding capability by many of our competitors.

And we, frankly, had the opportunity not only to grow but to grow with quality. We -- I would tell you today that our customer base in the mortgage warehouse group today is not only larger but stronger than it's ever been. And our ability to pick and choose the right customers are really important to us.

The other important thing is it's -- we're able to increase the pricing. We're able to increase fees. And these loans turn today in about eight to nine days. And another thing that we're doing that a lot of other warehouse lenders aren't doing is we're asking for and getting deposits.

Our relationships with these customers basically we tell them they need to bring their deposits with them also. So we have grown deposits in that line of business significantly in the fourth quarter.

But we're very pleased with that. You know, there's -- we manage by concentrations. We're not going to let that get to a level where it is larger than we'd like to have it. But at this point in time it's really -- it can be one of our more profitable lines of business.

So if it grows from here you guys are comfortable with that?

We've got a little more room to grow, yes.

Any update on -- I know you had a little bit of a fraud last quarter I guess that cost you.

Right.

Any update there or is that still kind of pending?

We have taken what we believe is our exposure on that fraud. I believe we did that in --

Q3.

In Q3.

Right. Right.

Nothing new.

And we're -- no, nothing new.

Okay. And then just two more questions. You mentioned last quarter that on that Dallas condo you thought that you had maybe a couple of interested buyers. Obviously that didn't transpire. Any other interest in that project? And then just was going to see if you could give us the 30 to 89-day past-due numbers.

We do not have an assigned buyer for that project today. We do have some interest that is still there, but we haven't got a signed transaction yet, no. They put that into bankruptcy and it has delayed the process until we were able to foreclose it.

Let's see, your other question, on the 90-day past dues, we're about $4.1 million. And most of the -- remember, in that 90-day past-due category is our premium finance numbers, and that's about $2 million, which are no problems at all. That typically, historically, runs about $2 million every quarter. And we have very little or any loss anticipated in that particular category.

But the 60 to 89 days, was that -- you asked about that also?

Yes, sir, I did. Yeah, 30 to 89 or however you guys classify it.

Well, we do a 60 to 89 category and that's $12 million. Oil distributed over the C&I portfolio and the market risk real estate loans also.

The 30 to 59-day bucket we have is $22 million.

Okay, great. Thank you.

You bet.

The next question we have comes from Lewis Feldman of Wells Capital Management.

Hello.

Good afternoon, gentlemen, ma'am.

Good afternoon.

Two questions for you. One, in terms of the floors that you're putting in place, how solid do you feel those are? How willing are you to trade the floor for a relationship, et cetera, at this point in time?

I'm sorry. Repeat that?

How willing are you to trade the floor for a business relationship?

Well, every floor that you put on a credit is negotiating. So there's no hard-and-fast rule for exactly what that floor will be. And you absolutely do have to take in relationship, deposited balances, fee income, a number of things when you set that floor.

You know, we use a profitability model that is return-on-equity driven. And when you put all the profitability factors in that model and it spits out a number, we price to that number, to get to a certain number. So it's not a hard-and-fast number. It's a negotiated number based on a profitability model.

So they're more than likely to respect it and not whine and say "I'm going to take my business down the block"?

You know, I think that's a fair statement. I think that's a fair statement. You're not going to make everyone exceedingly happy, but I think we have a good story.

Okay. Second off, in terms of your ORE, how recent are the appraisals on that in terms of, say, the retail center in Austin and the various --

The retail site in Austin is -- the ink is probably not dry on it yet. That's one reason why we wrote down the amount that we did. We had a new appraisal come in. Actually, we had two appraisals done on the property just to be as sure as we could what we felt the value was at this point in time.

Okay. Thank you very much.

But they're fresh. The appraisal is fresh.

Okay. Thank you very much.

The next question we have comes from Andy Stapp of B. Riley.

Hi, Andy.

Hi there. My last question was just asked.

Oh, okay.

Thank you, sir.

Thank you.

The next question we have comes from Kyle Kavanaugh of Palisade Capital.

Hello.

Hi. Good afternoon.

Good afternoon.

I just was wondering if you could clarify a little bit your statement about the provision was driven by the methodology rather than applications. However, you know, the methodology is there and is in place for a certain reason. I would imagine to capture, you know, further weaknesses that are starting to become evident within the portfolio. So how come that's not as translatable into expectations, per se?

Of actual loss, you mean?

Of future losses and just in general.

Yes. Our history tells us that the actual loss experience on the portfolio is substantially less than the amount that has been reserved.

Part of the methodology -- part of the model that we've built takes into consideration loss history from our Company and from peer bank companies also, in addition to a number of other factors, like economics, economic conditions and other issues to build a model.

And typically our methodology drives provision certainly well ahead of losses. And as I mentioned in my comments, that the methodology is not necessarily an expectation of loss, but it is to support the Company in terms of perceived and evident weaknesses in certain credits.

And if you look again at our charge-off history and the way we've underwritten credit, typically our provisioning is much more than we've experienced in losses.

Okay. So internally as you do your modeling, when you're going out further, are -- is your provisioning -- can you come up with a -- you don't even -- you know, not to give like an answer here, but -- or just if you could give me just the general trend. Is your provisioning showing a gradual increase going forward? Is it lumpy like the actual experience within the past year and a half?

Because, you know, as I look at the trends it's been difficult for me to see any trend in the past year and a half. Last year you were at a outsize provision. You know, it decreased in the first three quarters of this year.

Right.

And then in the fourth quarter this year it's a very high provision again, which I don't think is fully expected. So I'm just trying to get a sense of internally whether that --

As we've said in the past to you is our model, our commercial banking model is going to be lumpy in terms of provisioning. We're not a retail bank. We do not have retail exposure, so it's very hard to get an even, smooth trend, and graph it as it relates to consumer losses, car loans, whatever relates to a more retail bank.

And I think, you know, if you look at other commercial banks, typically that can be the case also. It will be lumpy. It will not be a smooth trend. Obviously the annual expense is very important. And we believe, on a long-term basis, we'll outperform our peer group.

Thirty-five basis points of losses in 2008, while more than certainly that we would like, in the economic environment in which we're operating is not a high number.

Yeah, certainly. Just to --

And one -- I might add that in the ten years -- basically we've completed the ten-year anniversary in December. And since inception the charge-offs are just over $23 million.

Okay.

And there's a lot of movement in and out of classifications or non-performings. But the acid test is what has actually been charged off over a ten-year period.

Okay. And then just one other question related to that. Your loan growth has been substantially above average versus the industry, not only in these more difficult times but even when times were a little bit better for the other banks. Does that also come into play with the more lumpy provisioning? I mean, does the rapid loan growth affect the credit quality in any way?

You know, we don't believe so. We've had strong loan growth since inception of the Company from years. I mean, if you look -- and when we started the Company in 1998, '99, we've had, for the last five years -- our loan growth has been 25+% over the last five years. And we've had extremely good loan loss history.

Again, I think it is a function of the market in which we live today. The economic environment and -- you know, fortunately we live in Texas. We're in a much better spot than most of the rest of the country to be in the business that we're in today. We're blessed to be in Texas, and we're blessed that 90+% of our business is in the state of Texas.

It is true that growth drives provision because ever new loan gets based on its loan rate and allocation of today's reserve. So $400 million worth of growth in the fourth quarter certainly had -- was a meaningful component of the $11 million provision.

Okay. All right. I guess also just one last question. Understandably, your charge-offs are very low at 35 basis points and they come off of even lower levels of below 10 basis points a year ago. The trend is upwards, and I guess kind of the question, you being a newer bank, how far does -- could that trend go is kind of I guess the question I have over -- that I think about a lot as I look at your Company.

Well, you know, that's right. And there's some -- you know, there's some -- we've got to look at the market. We've got to see how the market heals itself over a period of time.

I will tell you though that we are pleased that we don't have a lot of the instruments and credit that have cost banks so much money over the last 12 to 18 months.

Our investment portfolio has no problem. There is no impairment. There is nothing there. In fact, there's a slight gain in the portfolio in the fourth quarter. No derivative exposure.

We're pleased to have no consumer credit exposure. We think that could be, you know, some issues that banks are going to have to deal with next, everything from credit cards to consumer business. We have none of that. We do live with lumpiness of being a commercial bank and with commercial business.

But, again, I will tell you that it is our expectation that we will perform as well or better than our peer group.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) And we have a question from Erika Penala of Bank of America, Merrill Lynch.

Erika.

Hello again. I know that you gave some color on this during your prepared remarks, but could you give us a little bit more detail on how you're seeing margin trends play out for the remainder of the year?

I know you mentioned that you said that the first quarter would represent a trough and then it would -- it should improve from there.

That's correct. It's just when the rapid decrease that occurred in the fourth quarter getting to essentially zero and -- on December the 10th or whatever date that was, that's about as hostile a condition as we could have in our balance -- with our balance sheet.

Then we've had -- in the fourth quarter we saw on an average basis the spread between LIBOR and Fed funds remained fairly strong, and that's down today. It's adequate given the way we price portfolios, the way we fund ourselves, but it is down from what it was in the fourth quarter.

So as that stabilizes, as deposits mature and we replace with lower cost instruments, we are going to see improvement over the course of the remainder of the year. And as once we get to the point where rates actually would increase, we'll get a substantial benefit.

Okay. And just to clarify from a -- I think you answered in one of the analyst's questions, your bias is towards not replacing the maturing deposits and -- because the rates are so competitive it's just much cheaper to fund loan growth with borrowing at this point.

No, that's in a short-term sense.

Oh, okay.

But today the deposit costs are substantially lower than they were average for the fourth quarter.

Okay. Okay, thank you.

The next question we have comes from Ed Timmons of Sterne Agee.

Hi, Ed.

Hey guys, how you going -- how you doing?

Good.

Just a couple quick housekeeping items. The FDIC premium going up, how much -- you know, what's the difference in '09 versus '08?

Let's see. That is --

It's $100,000 a month.

Okay. And with the $75 million in --

I'm sorry, it's more than that. It's going up. It's currently about $100,000, and it's going up by almost $200,000 a month.

Okay.

Expensive.

Yeah. All right. Now, on the TARP, the $75 million, what is the amount of the warrant discount there?

We're working on that really as we speak. It's going to be approximately 1.5% a year -- or a little less per year for the five years we expect by the end of the five-year period.

Okay. All right.

So, all in, something just under 6.5%.

Okay, 6.5% or 7.5%?

6.5%, in that vicinity.

Okay. And then the $22 million that's currently in construction non-performing, do you have a split between residential and commercial there? And then can you give us an idea of kind of what type of projects, where they're located?

You know, I can't give you that specific right now. Let us get back to you there. We have a lot of that information, but let us get back to you.

Okay. And then lastly can you maybe just touch on the, you know, the competition, especially in Dallas with some of your competitors recently going away? How is that can -- how is that improved? And where do you see that going through 2009?

Well, Ed, that's, again, part of our discussion when we talk about opportunity. And one of the reasons we wanted to be sure that we had plenty of capital in place to take advantage of what we perceive to be good new opportunities out there.

We think that while a lot of our competitors are turning inward, looking at issues, dealing with the things that we've been talking about, there's great opportunity to hire great new people, and great new people can bring great new relationships. That's what we've done since we opened our doors in December of 1998. It's no different, but there's a tremendous opportunity now in the next 12 to 18 months, we believe, in all our markets. Not just in Dallas, not just in Houston, but in all our markets.

The market pricing on loans is improving. Floors are common. Our spreads are going to be better, and we want the capital and the funding to be able to take advantage of that. And we think particularly in the Dallas and Houston areas we're going to see great new opportunities like that.

Yes, it -- while it is somewhat competitive with a few banks, the landscape has really changed. And the banks like ours with plenty of dry powder and the right people to attack the marketplace I think will do very well. And quite frankly, out of chaos comes opportunity, and we plan to take advantage of that opportunity.

Okay. Thanks, guys.

You're welcome.

And we show no further questions at this time. I would like to turn the conference back over to Ms. Vance for any closing remarks.

Actually, I'll turn it over to our CEO, George.

Well, thank you very much. Thank everyone for calling in. They were very good questions. This is a challenging time in the marketplace. But as I mentioned before, I think it is a very opportunistic time also.

We think the future for Texas Capital Bancshares is great, and we are going to continue to work hard for our shareholders. So thank you for your interest and we hope to see you soon.

Okay, thank you. The conference is now concluded, and we thank you for attending today's presentation. You may now disconnect.