Texas Capital Bancshares Inc (TCBIO) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2009 Texas Capital Bancshares, Incorporated earnings conference call.

My name is Katrina and I'll be your operator for today.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Myrna Vance, Director of Investor Relations.

Please proceed ma'am.

Thank you.

Thank you, Katrina, and thanks to of you for joining us today for our fourth quarter and year-end call.

If you have any follow-up questions, I would invite you to call me at 214-932-6646.

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 31, 2008 and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Our communication today is neither an offer to sell, nor solicitation of an offer to buy any shares of common stock, and shall not constitute an offer, solicitation, or sale of any shares of common stock in any jurisdiction in which such offerings, solicitations, or sale would be unlawful.

Now, let's begin our discussion.

With me on the call today are George Jones, our CEO, and Peter Bartholow, our CFO.

And after a few prepared remarks, our operator, Katrina, will facilitate our Q&A session.

Let me turn the call over to George.

Thank you, Myrna.

Good afternoon, everyone.

I'm pleased to report on what I believe to be a good quarter and full year for Texas Capital Bancshares.

We had Q4 net income of $6.4 million, representing a 20% increase from Q3 and an 84% increase compared to Q4 2008.

EPS of $0.18 increased 20% compared to $0.15 in Q3 and 64% compared to Q4 2008.

Our net income for 2009 was $24.4 million, a slight decrease from 2008.

Our net interest margin increased another 15 basis points to 4.21% from Q3 2009 and 80 basis points from Q4 2008.

We had exceptionally strong deposit growth, especially in the non-interest bearing category.

Q4 totals increased 20% and 61% from Q4 2008.

Loan growth was very strong also, especially in our loans held for sale category, which represents our mortgage warehouse line of business.

We are committed to keeping a very strong balance sheet, with all categories of capital well above required minimums for being classified as well capitalized.

We have stated earlier this year that we are taking an opportunistic approach to grow our market share in each of our five cities in Texas.

We believe that there is great opportunity today for a strong, well-capitalized, regional bank like Texas Capital to attract many great customer relationships from their existing banks who are simply not able to respond to the customer need.

With this fundamental shift of business and talent leaving their existing banks we believe it is extremely important to have capital available to support this growth.

Today we're filing an at the market $40 million capital program to be used over the next few quarters for this purpose.

This capital, in addition to our projected earnings, will ensure our ability to execute our strategy to take advantage of this unique opportunity.

We have stayed focused on the strategy we have followed since inception of our Company by hiring the best talent in each of our markets, which an emphasis on Houston and Dallas.

We have added a new president and six relationship managers to date in Houston and we have additional people identified.

We have a new president in Forth Worth, who will add additional RMs and a new president in San Antonio to assist our chairman in that market.

We continue to have an intense focus on credit quality.

And I'll return after Peter completes his remarks to give a detailed report on Q4 credit.

Turn it over to Peter.

Thank you, George.

Q4 was a very good quarter for us.

I think the results demonstrate how well this business model performs in a very tough environment.

We had strong growth demonstrated, driven by market opportunity.

We've seen major improvement in core earnings power and operating leverage, reflected especially in the growth and net revenue income before credit costs.

Net income, as George mentioned, was $6.4 million or $0.18 for the quarter.

You earned $24 million in 2009 after the $0.16 impact of the TARP dividend and redemption.

So that was $0.55 a share.

Those reflect much higher costs associated with an increase in loan and ORE reserves.

And the FDIC assessment, which I'll mention in a moment, clearly was meaningful for us this year.

Performance was obviously driven by very good loan growth and an expansion as George mentioned of the net interest margin.

We saw the 15 basis point increase from Q3 to Q4, 80 basis points in the fourth quarter over last year and 35 basis points year-over-year.

Proved cost of funding, success in loan pricing initiative, exceptional DDA in total deposit growth, and effective prices on interest bearing deposits obviously were the contributing factors.

We had a higher -- turning to the next slide five -- we had higher total credit costs obviously in the fourth quarter and for the year.

Total of $15.1 million in Q4 compared to $15.7 million in Q3 and $11 million in Q4 of 2008.

We had a provision of $10.5 million in Q4, along with an ORE valuation expense or charge of $5.6 million.

Combination of ORE charges and provision were $51 million for the year, almost double the $26.8 million in 2008.

Provision was $43.5 million for the year, against net charges offs of just $19.5 million, 46 basis points for the year.

We had a small increase at the end of Q4, primarily in net -- in non-performing assets.

They were contained, obviously, by the effect of charge offs and the increase in ORE valuation costs.

Loan growth was very good compared to peer performance, reflecting I think clearly a proved market position.

Loan held for sale was very strong and has been an important contributor, especially while credit costs remain so high.

Deposit growth trends from Q3 in 2008 were obviously again very strong.

DDA growth, as George mentioned, 20% linked quarter, 61% from the fourth quarter of last year, and year-over-year 44%.

We had obviously exceptional growth in total deposits also, and I'll mention the impact on that in terms of funding.

Capital is obviously very strong with tangible common equity ratio of 8.2% at the end of the year.

Year-over-year growth at 24%, even after the effect of the TARP reduction.

Yet a possible increase coming with sales of the ATM equity program, which we've announced today.

We will pursue that opportunistically on timing and in pricing that the customer -- or the client decides are appropriate.

Turning to the next slide, slide six, we are very pleased with the operating performance, as I've noted with much success in controllable operating leverage.

We had net revenue growth of 7.2% linked quarter, 41% from a year ago, and 30% year-over-year as a contribution from the net interest margin weighted more heavily to the last half of 2009.

With growth in deposits and the special assessment, FDIC costs had a big impact on expense.

$8.5 million in 2009 for $0.16 a share compared to just $1.8 million a year ago.

They represented 24% of the year-over-year expense, excluding the ORE valuation charges.

Before the increase in FDIC expense, the FDIC -- the efficiency ratio was at the lowest level, net income was up 15% in 2008, even with the higher credit costs.

Mortgage warehouse costs were also very high due to the exceptional volumes there.

But non-interest income in mortgage warehouse essentially covers all of its non-interest expense for the year.

So it has an extremely low efficiency ratio for that business.

The expense of recruiting and the growth profile certainly played a significant effect -- or played a significant factor in year-over-year staffing costs.

The earnings results and the potential for the development of our Company clearly warrant that investment.

We demonstrated again stronger core earnings power to mitigate the effect of high interest cost, again with the net interest margin, managing controllable costs, and managing capital to support our future growth.

Turning to the next slide for net interest margin.

Again very strong performance.

Benefit of repricing activities offset some spread compression between LIBOR and prime.

For the year -- linked quarter basis actually, the held for investment yield increased by 10 basis points and decreased just 20 basis points from the fourth quarter of 2008.

Held for sale yield basically fell in line with the movement in mortgage rates through the year.

Funding costs were down sharply.

Q4 was very favorable in terms of both growth and pricing.

Cost of interest bearing funds was down by 127 basis points from Q4 2008 while the yield on earning assets was down just 20 basis points for the same period.

DDA and equity growth also reduced funding costs to amount to just 73 basis points for the fourth quarter compared to 168 points -- basis points in the fourth quarter of 2009.

Even the long-term debt cost held.

We're repricing again early in 2010 a slug of the trust preferred for the fourth quarter, 240 basis point reduction from the year ago.

Saw a major benefit of treasury management products and a focus on deposit growth in all lines of business.

We have, as we've noted, accomplished repricing the floors on a significant portion of the portfolio at levels well above historical spreads.

We do remain asset sensitive, but with some mitigation from the imposition of floors.

The Company enters Q1 of 2010 in a very good position.

Loan yield trends are favorable.

Total funding costs remain very low.

In terms of growth, obviously solid growth in held for investment 13% from the year, 3% linked quarter.

Held for sale growth was 11% linked quarter and up 90% year-over-year.

Just as an indication of how successful the Company has been at growing deposits, remarkable trend in DDA growth continued.

Growth of 20% in Q3 compared to Q3, 61% from the year ago.

For the quarter, DDA growth was $150 million of the $182 million growth in loans held for investment.

Total deposit growth exceeded loans held for investment by over $70 million.

For 2009, DDA growth of almost $350 million represented 68% of the $500 million growth in held for investment.

And total deposit growth exceeded growth in total loans.

(Inaudible) statement of balances on slide nine.

We've reached a point now where we're at $4.45 billion in held for investment.

Saw a strong growth in loans held for sale, nearly $700 million at year-end.

We saw growth in DDA to almost $900 million, representing again a significant factor -- or a significant portion of the growth in total loans.

Now turning to slides 10 and 11, it's a strong growth model.

I'll comment that the effect of ORE valuation charges and the increase in FDIC costs caused a CAGR for non-interest expense to reach 24%.

Before those increases or before those factors, that number as been 20%.

George, back to you on the credit.

Good.

Thanks, Peter.

Turn to slide 12 and you can see a page showing loans by collateral type and our non-performing asset totals.

Really not much change in loan composition except market risk residential real estate is reduced from almost 7% of the total loan portfolio to today 4.5% and loans held for sale continues to grow by design.

We had a net $3 million increase in non-performing assets in Q4 2009.

That was after all additions, reductions, charge offs occurred.

Our ratio today stands at 2.74, a slight reduction from Q3.

As you know, in an environment like we have today, NPA account is changing monthly.

We had improvement on certain credits in sales of ORE properties that reduced our additions to NPAs by about 40%.

And we had charge offs of existing reserves on certain credits and ORE that netted out to the $3 million increase that I just mentioned.

We believe that the total level and future exposure to NPAs remain very manageable.

Total credit costs, as Peter mentioned, were $51 million for 2009.

We had a Q4 provision of $10.5 million and $43.5 million for the year.

Our loan loss reserve level is 1.59 compared to 1.16 in Q4 2008.

Again, this amount is derived from and is consistent with the methodology we've employed since we started the bank.

We did experience $7.8 million in valuation charges in 2009 for ORE with, as Peter mentioned, $5.6 million of that coming in Q4.

Tighter credit standards remain in place.

We believe that the loans underwritten over the past 18 months really reflect those standards.

We've been able to move strong relationships to Texas Capital, grow loans with much better pricing, more equity, and much better structure overall than what we've seen in the past.

We expect conditions though to remain challenged but with manageable credit costs in 2010.

Slide 14 simply reflects our charge off ratios since 2005 with coverage ratios of reserves to NPAs.

In closing, I want to emphasize the following points.

Texas Capital has much improved core earnings power due to the margin expansion and the management of controllable expenses.

We have had and will continue to have excellent growth in both loans and deposits.

We have a strong capital position going into 2010.

Credit issues remain challenging and credit costs are expected to be high, but again manageable in 2010.

And frankly, we are well positioned to take advantage of market opportunities for people and for customers.

We are certainly pleased with our report today reflecting our improved earnings power.

With the many opportunities facing us on the horizon, we determined that we wanted to add some increased flexibility.

Therefore, as I mentioned earlier, we also announced an at the market program sell up to $40 million in common stock if conditions warrant.

This program will be managed over a period of several quarters to limit the impact on our stock price with us controlling the timing and the pricing of any sales.

We believe this is a cost effective approach capital management and it gives us the potential to improve an already strong capital position.

It's the right thing at the right time for us to do.

Well this ends our prepared remarks and we'll now open the line for questions.

(Operator instructions) And your first question comes from the line of Brett Rabatin.

Please proceed.

Good afternoon.

Good afternoon, Brett.

How are you guys doing?

Good.

I had a -- I have actually quite a few questions, but let me just ask two here.

One is the linked quarter growth that you guys had in the held for investment portfolio of about $173 million.

Where is that coming from?

And can you give us some idea of if that's current clients or new clients?

Or can you give us a mix of that on that growth?

Sure.

It's a mix between C&I and real estate.

Most of that is coming from new customers.

As we've said before, you're not seeing a lot of organic growth today in this environment from your existing customers.

But one thing, Brett, that is really great as far as we're concerned, is we're able to generate that kind of business from our competitors in a market that's really tough.

And all those loans are underwritten under these new tightened standards as I mentioned before.

So even if we have done a real estate loan, it's much more equity than we have gotten in the past in many cases, much better pricing, much better structure, and much better sponsorship.

So the growth that we've seen comes primarily from takeaway business, as we say.

Some of these RMs that we've added and some of our existing RMs, and it basically is underwritten in a much better fashion.

How much is the premium finance book at this point?

About -- it's a little over $300 million.

Okay.

The average for the quarter.

All right.

I know you guys have added quite a few RMs and you've obviously been successful in taking business, but I guess I'm just confused because I see a lot of banks in your markets that are having very aggressive calling efforts and their loan portfolios are shrinking.

And yours is actually -- to me it seems like a loan growth quarter you would have expected in 2005, 2006.

So I guess I'm struggling with reconciling.

I realize you're adding people and taking business, but I'm struggling with reconciling how others that are trying to do the same thing are falling much short of their goal and in fact are seeing shrinking portfolios and yours are -- yours is obviously growing tremendously.

Thank you for the compliment.

I guess I just can't reconcile with the differences.

Let me give you my perspective and maybe you'll sense some of the things we're talking about today.

Again, in the environment in which we see all of us living in today, there are a number of competitors that are tuning inward, shrinking balance sheets, preserving capital, and really aren't filling the needs of the customer.

Not only the new customer prospects, but the existing customers.

A lot of business that we're getting today are customers that frankly you couldn't get five years ago because they were so entrenched in their prior relationships.

Today that's simply not the case.

We have the ability, with our hires and with our existing RMs to penetrate just about in my mind any particular bank and bring business to our bank.

If you looked at our balance sheet, even though we've grown with a few real estate loans, we still have much lower commercial real estate exposure than most banks out there today.

So it really is hard work, it's hiring the right people, and they're bringing the right kind of customers to us.

And we believe that this adds franchise value to our Company and I believe that the credit is again underwritten as well as it possibly could be.

And remember again, we're in Texas and we aren't experiencing all the downturn that the rest of the nation is having to deal with.

And the strength of our balance sheet and our capital position is really important to these customers.

They really look for strength, profitability, and ability to compete in the marketplace.

And that's made a difference also.

Okay, maybe we can follow-up offline a little bit about the grade.

You mentioned capital.

I'm curious with kind of the grid prospects you're seeing in 2010 in this ATM where you want capital to be in quarter-end 2010 or maybe 1 or 2 Q 2010.

You have designs on having higher capital ratios or is it simply you're seeing so much growth that you'll need the capital to maintain the current levels?

Not so much that we have a fix on an objective level as to be ready to respond to the opportunity.

Unfortunately today, there is no debt or debt equivalent capital available.

The only capital that you can readily obtain, if you're in a position to do so, is common equity.

It's also, while in financial modeling you know that it's more expensive, it's also the easiest to manage.

As the lowest cost, obviously in terms of any fixed charge especially is a company that pays no dividend.

And it's the easiest to bring down with buyback or other programs if we get to the point where debt is available and we can use some leverage to improve or turn on equity.

But we don't have a fixed target.

We just know given the opportunity, we can't find ourselves capital short.

It also has nothing to do with any regulatory pressure, pressure from any -- of any form or source whatsoever.

Okay, I'll step back.

Thanks for the color.

You bet.

And our next question will come from the line of John Pancari from Macquarie.

Please proceed.

Good afternoon.

Hi, John.

Could you, George, just give us the size of your participations, your -- or I guess for lack of a better word, your shared national credit portfolio.

Sure, some color around that?

We have --

The size and the growth that you've seen, yes.

Yes, the size -- it hasn't grown a great deal in the last few quarters.

It's about $450 million in size.

There's about 48 or 49 loans in that portfolio.

30% of those credits we lead, 30% are energy credits, 24% is CNI business, and about 19% is lender-financed business, which we've discussed before.

That's sort of the make up.

Again, we typically have ties to all these companies that we're banking under a shared national credit whether we lead them or not.

And we're not necessarily trying to grow that portfolio.

It's -- we're not a sterile purchaser of credit.

Again, there needs to be some reason to be in a shared national credit other than just for the loan value.

We can generate plenty of loans in our marketplace without having to go buy loans somewhere else.

Okay, great.

And --

Does that give you a little background?

It does.

It's helpful.

And then on the credit side, can you give us a little bit of color around your -- the trend in your classified credits as well as your early stage delinquencies in the quarter?

We really don't give guidance or much color on the classifieds.

That typically is not disclosed.

But our past dues have remained fairly stable.

You look at the 30 to 89-day past due category.

They've been pretty much equal with the exception of this last quarter and that was -- the reason is was up, there was one specific loan for $12 million that did not get renewed and showed up that category, but is not a problem.

So for the last, I'd say three quarters, pretty much the same amount.

When you say the pick up last quarter, you mean the second quart to third?

Or third to fourth?

This Q4.

Okay, and what was the magnitude of that increase?

Again, that was basically one credit.

A good customer of ours, it just simply didn't get renewed and structured out of that category in time not to show it as a 30 to 89-day past due.

And do you have the size of that?

It's not a problem is what I'm saying.

Okay.

He's asking for the total of in the 30 to 89.

Oh, a total?

I believe it's $48 million.

Okay.

This is $12 million, so it would be in the -- without this one, it would be comparable to where we've -- what we've shown before.

Yes and the potential problem loans, these are just past dues, but the potential problems loans we disclose in the 10-K.

And they are down -- they will show to be down about $30 million from where we (inaudible) them in Q3.

Quarter-over-quarter.

Okay.

Thank you.

You're welcome.

And our next question comes from the line of Bain Slack from KBW.

Please proceed.

Hey, good afternoon.

Hi, Bain.

Hey, I wanted to know, do you all have roughly the impact on the net interest margin from your current NPAs in terms of basis points?

There were -- there was little, Bain, in the way of interest reversals this time.

Less than 2 basis points.

If you factor in carry costs, it's not very much, obviously just because the carry costs are so low.

5 or 10 basis points maybe is the total impact.

The 5 to 10 -- okay.

The incremental impact with the one reversal I know of that occurred during the quarter was less than 2 basis points for the quarter.

Okay.

And I guess just looking at the non-interest income and non-interest expense categories, I guess especially in the other, is anything unusual in there on a linked quarter basis?

Looked like the other -- the income was up significantly and at the same time.

The other expenses also had a little bit of a jump linked quarter.

Nothing of any great significance, Bain.

We've had obviously higher collection costs.

When you exclude the ORE related charges, the linked quarter change was just $2.3 million.

Of that, 22% of that number was the FDIC assessment increase all by itself.

Mortgage warehouse was roughly flat on the expense side.

Occupancy expenses were slightly down.

It's just kind of all other.

Yes, I'm looking I guess specifically at the actual other category.

Because on fees we look like we jumped from $646,000 to $1.3 million and on the -- I'm sorry, that was on the income.

And on the expense, $4.5 million to $5.6 million.

Bain, no category that's significant and we're not dealing with -- we've got ongoing kind of litigation expenses.

We had the settlement of one lawsuit, settlement of disposition of -- cut one problem loan settlement -- not settlement cost, liquidation cost.

Not ORE related.

Okay.

So nothing of any consequence.

And those -- so that would be in the -- that would sort of be in that other expense category.

And then I guess anything one time in nature in the other -- the income?

No.

Okay.

All right, great.

Thanks.

Year-over-year especially, and I haven't looked relative to -- year-over-year occupancy expenses were up.

We're occupying more space in two new facilities and expanding in others, but that's just business growth.

And our next question will come from the line of Brad Milsaps of Sandler O'Neill.

Please proceed.

Hey, good afternoon.

Hi, Brad.

Hey, George, I know you guys were working hard this quarter to move some other real estate out of the bank, maybe specifically with a project in Austin.

I'm just curious on that project and others kind of what success you had in terms of getting the marks pretty close to right when you were able to liquidate.

If in fact you were.

We -- some sales we've had out of the ORE portfolio, we've sold a number of lots in North Texas for about $2 million coming out of the ORE portfolio.

The project you're talking about in Austin we took a -- that's part of our charge down and additional reserves had been put up on that particular credit.

We have sold two -- a couple of project type like these lots and one or two other ORE properties, but that's really about it.

Okay, and then just kind of switching gears.

Back to some of the questions surrounding loan growth and the ATM offering.

I know, Peter and George, typically when you guys have a big loan growth quarter you also typically have a big deposit quarter that follows.

Looks like you got some of that this quarter.

I'm just curious if that's going to play out in the first quarter on the deposit side and then what kind of assumptions to make there?

Brad, that sounds like a model-building question.

We've got a registration statement that's affected us and with the ATM program we have to be a little cautious.

But our deposits have been hard to predict in terms of growth, but the demand placed on the lines of business and special products that we've developed are clearly taking hold.

Remember, what we've said for the last 18 months is the gear up in our treasury team, the gear up in our technology and our mentality change in terms of grab the deposit first, make the loan second is really working today.

So I think you're going to continue to see strong deposit growth in 2010.

Right.

I guess the second part of my question, I mean you guys are -- have improved your loan to deposit ratio from where it was a year ago, but I guess that the loan opportunities you feel that are out there are compelling enough to issue stock at -- basically at 20% premium to tangible book value versus maybe sitting back and waiting for the improvement to come in profitability?

Brad, we haven't agreed to issue a single share.

Okay.

No, fair enough.

I mean that's the purpose and the advantage of an ATM program.

Okay, thank you.

Really at our discretion.

And our next question will come from the line of Jennifer Demba from SunTrust.

Please proceed.

Thanks.

Good afternoon.

I wonder if, Peter, you could give us some more color on the big jump in ORE costs sequentially going up about $4 million.

I mean can you kind of reconcile what your marks were versus what you actually sold them for?

Can you give us any sense of that?

Jennifer, those are (inaudible) --

For quarter versus --

-- they're really appraisal adjustments.

If you've got it -- had a new appraisal and you've had it long enough to get a new one, you have to mark it to the appraised.

And if you (inaudible).

How often do you typically seek new appraisals?

Yes, and if you know you're going to actually -- willing to accept a loss, even though you haven't sold it yet, that's the $1.2 million actual charge down.

Jennifer, we had -- the increase obviously was to the $4 million or so was reserve that went up against, as what Peter said, some of these appraisals that need to be marked down.

$1.2 million was charge offs and it simply comes from just these reappraisals.

We appraise -- when we foreclose we appraise at that point in time and mark the real estate to market.

We get an appraisal at least once a year once we have it in the ORE book.

And sometimes more often if we think it is a volatile property.

So it's net of reserve today it's about $27 million.

That's about 26 properties, mostly leaning toward the residential side.

And we're liquidating as we possibly can.

It's really kind of permanent versus temporary impairment.

Okay, thank you.

And our next question will come from the line of Bob Patten of Morgan Keegan.

Please proceed.

Wow, are there any questions left?

Here's a question, guys.

Year-over-year, what in the size of total commitments did you guys put on year-over-year?

And what is the usage of your lines currently?

Yes, we haven't really seen a big up tick in commitments.

And commitment usage really depends on line of business.

I mean you've got everything from energy to real estate to C&I business.

And the C&I business is down somewhat.

Usage under those lines, we see people paying down debt.

The same way in our energy business.

We see significant pay downs in our energy book just because of where we are with the volatility, primarily of gas.

So it really -- it's really hard to tell you because we've got so many different lines of business.

That's sort of the color we see.

Not seeing a big ramp up in commitments and the usage is about the same to down.

So when we look at the loan -- you're putting on loan growth versus the ability for future loan growth to come in in terms of commitment.

Sorry.

Can we talk a little about construction?

The increase in non-accruals are about $10 million.

What type of construction?

Is this resi construction?

You're talking about the increase in the NPA?

Yes, from 35 to 44 in the construction category.

It's -- the increase primarily is represented by lot development and some single-family product.

Lot development primarily.

So you're -- in terms of the non-accrual exposure, how much is residential real estate related?

I haven't figured that percentage.

Real estate, including NPAs, real estate is about 65% of our overall NPA total.

Then you see that $120 million plus.

I'd have to calculate it and give you a more definitive answer.

And I think that does --

It leans more to the residential side than it does the commercial.

All right, thanks.

I'm good.

Thanks, guys.

Okay.

And our next question will come from the line of Michael Rose from Raymond James.

Please proceed.

Hi, good afternoon, guys.

Hi, Michael.

Good afternoon, Michael.

Want to talk a little bit about Houston.

I know you've hired a bunch of people there.

How much of this quarter's loan growth was from there?

And could that mix of growth for your overall portfolio shift to Houston, given the hires that you've made?

I think you're going to see Houston continue to perform.

I've got that number in terms of production of Houston both on loans and deposits.

Houston probably was our third biggest generator of deposits in Q4.

And in terms of DDA deposits, they were third also.

So they -- on the deposit side, very much so.

On the loan side, again quite a bit of growth.

I'm looking for the specific growth numbers, but they were probably in the top two or three, four maybe, in terms of loan production.

Okay, thank you.

And our next question will come from the line of Kevin Reynolds from Wunderlich Securities.

Please proceed.

All right.

Good afternoon, gentlemen.

I've got a question and you may have -- I think you've discussed this a little bit, but it goes back to the very beginning where you talked about the potential to offer more capital in a flexible and efficient manner.

Is there anything that you might have in mind specifically to use it for?

Or is it just to just sort of be safe and cautious and have it there?

And really what I'm getting at is we know that there aren't as many -- they're like not to be as many FDIC assisted opportunities in the state of Texas given how solid the underlying market is.

But George, I thought I heard you sort of emphasize the word regional bank when you started your comments at the first of the call.

Is there any possibility that Texas -- borders of Texas might expand a little bit in your mind?

Kevin, not really.

We have said in the past and we'll reiterate it again, that the markets we're in in our five cities are so large and our market share is really small in each one of those cities.

It provides tremendous hunting grounds for us to grow our business.

So we have no plans to go outside the state of Texas at this point in time.

Now, we have our premium finance business is housed in -- right outside of Chicago and that's a national business.

But realistically on the relationship side, the commercial side, we plan to stay in the state.

Okay, good to hear it.

Thanks.

I think we've said we're receptive to the idea of doing assisted deals but the likelihood of that occurring in Texas in a way that's meaningful where we'd be successful looks to us to be very low.

Okay, thank you.

And our next question will come from the line of Andy Stapp from B.

Riley & Company.

Please proceed.

Hi, guys.

Hello, Andy.

You touched on this before, but just wondering, you had about $4 million of net charge offs in real estate construction.

Was the bulk of that related to your auction of Lake Travis?

A good slug of the charge off dollars related to Austin.

Okay.

And another thing that you touched on before, just trying to --

Let me just clarify -- which had been reserved.

Yes, I -- you did that last quarter.

And just trying to -- another angle to get more color on the increase in the ORE charges, did you have -- is there anything that caused it such?

Did you have more updated valuations during the quarter?

Or was there one particular ORE property?

It really was based on updated appraisals.

As we get those in, we'll write them down or reserve against them, if we have a gap in the value.

Okay.

And could you provide some color for additional opportunities along the net interest margin not only on the short-term, but also how you're positioned for rising rate environment as the fed starts to hike interest rates?

I think we're in pretty good shape.

As I mentioned a minute ago, the effect of repricing with floors will limit to some degree the rise in rates on that sector of the business.

Same time though, as you know, we get the benefit of rising rates on the value of DDA and equity.

We also have a number of liability categories that we'll not reprice for one, two, and maybe three fed rate increases.

If we see a fed rate ramp of 100 basis points, it really hasn't changed since Q3 when we reported the interest sensitivity position.

With that we see a very modest increase in net interest income.

Okay.

Sorry if I missed that.

I had to take a call during the call.

And what are your thoughts, what do you perceive as far as reserve build going forward?

Well, I think what we've said before and I said in some of my earlier comments, I think credit costs are going to remain high in 2010.

We don't really give guidance on that, but we believe that a lot of these issues will have to be dealt with again in 2010 and we're going to have to live with some higher credit costs along the way.

Okay, thank you.

(Operator instructions) And our next question will come from the line of Brett Rabatin of Sterne, Agee.

Please proceed.

Hi.

I just wanted to follow-up on a few things.

One is the mortgage banking business -- you obviously continue to be successful in market share movement there.

Is there a size limit that you have in mind?

Or is that a business that you might continue to grow and could that be a part of your capital plans that you're discussing?

Well, we have risk limits on everything we do in the loan portfolios.

We like the diversification model, so there will be a point in time, or could be a point in time where one particular category is more than we would like to see and we'll cut it back or stop growing it.

We are not there yet with the mortgage warehouse business.

We believe because of the level of customer we're able to attract today and the underwriting standards within that group, that it has a way to go.

But again, whether it's the warehouse business or any other line of business, we'll measure it by concentrations on our balance sheet and make the appropriate decisions.

The mortgage warehouse business, I don't know if you know this or not, but it carries a 50% capital weighting as opposed to the normal loan carrying 100% capital weighting.

So it is a much easier ride on the capital number than your typical loan.

Okay.

And can you give any color, George, on maybe what the average escrow balance was during the quarter?

Escrow balance.

I'm sorry, I --

What your average DDA would have been as you're funding these.

You obviously have a --

No, this is -- I want to be sure that I've explained it properly.

This really is loaning money to warehouse or whole mortgage loan before it is delivered to the permanent investor.

So in effect we don't have escrows behind it, we don't have anything really tied to that particular loan.

Now I will tell you that -- but we're also not in that chain of title.

We don't have the put back risk that a typical underwriter in that business would have.

We have generated, outside of just the escrow account, significant deposits related to the mortgage warehouse business.

They've probably generated approximately $200 million in balances, of which over $100 million is DDA.

So it's -- not only is it a very profitable lending business and fee income business, but it is a very productive self-funding type business also.

Compensating balances as opposed to an escrow.

Okay.

That's probably a better way to put it.

(Inaudible) make sense?

Yes.

No, I understand.

And then I wanted to just get the color, if you had it, on the remaining land exposure that you guys have.

Land exposure?

Just (inaudible)?

Yes, just land -- just -- if you can break it out.

Raw land or particularly land lots.

Well, as I mentioned, we -- in the -- we don't really give that deep a dive into some of this.

We have about 4.5% to 5% of our loan portfolio today split about evenly.

That percentage split about evenly in residential lot development and single-family construction.

So half of that number would be -- it's really developed lots, it's not simply just land.

On the other side, we're not a big land lender.

We don't have huge amounts of undeveloped land in our loan portfolio.

Okay.

4% or so, something like that.

It's very small.

Okay.

Thanks for all the color.

You bet.

And our next question will come from the line of Charlie Ernst from Diamondback Capital.

Please proceed.

Good evening.

Hi, Charlie.

Hey, my questions have been asked, but I just wanted to give you guys a roll Tide.

Have a good night.

To all the tea sippers here.

Well, you've got some people that are really gesturing up here.

Thank you for that, Charlie.

And I will now turn the call back to Myrna Vance for any closing remarks.

And with that, George, do you have any --?

Well, thank you very much for your interest.

Thank you for attending the call.

We appreciate it very much.

We do believe we had a really good year in an environment that is pretty tough in the banking business.

We're pleased to have the opportunities that we have to do business with great customers in the state of Texas and we're very pleased to try and continue to earn money for our shareholders.

With that, we'll adjourn.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.