Texas Capital Bancshares Inc (TCBIO) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter, 2010 Texas Capital Bancshares, Incorporated earnings conference call.

My name is Dominique and I will be your operator for today.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to Ms.

Myrna Vance, Director of Investor Relations.

Please proceed, ma'am.

Thank you, very much, Dominique.

And thank all of you for joining us today for our second quarter conference call.

Should you have any follow up questions, please call me at 214 932 6646.

Now, before we get into discussion today, I would like to 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 impact 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 forward looking statements, can be found in our annual report on form 10K for the year ended December 31st, 2009, and other filings made by Texas Capital Bancshares with Securities and Exchange Commission.

Now, let's begin our discussion.

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

And as Dominique said, after we finish our prepared remarks, she will facilitate a Q&A session.

At this time, let me turn the call over to George.

Thank you, Myrna.

Welcome, everyone, to our call this afternoon.

As you can see, we had another good quarter of earnings, coupled with exceptional deposit growth and a strong resumption of our mortgage warehouse line of business.

Net income increased 7% on a linked quarter basis, and increased 25% for Q2, 2009.

EPS increased 5% for the linked quarter, and even more significantly, year over year.

Demand deposits grew 13% and total deposits increased 12% on a linked quarter basis and grew an astonishing 54% and 35% respectively, from Q2, 2009.

Our focus on generating deposits from new customers is really paying off and should show impressive results in future quarters.

Our loans held for investment remained consistent on a linked quarter basis.

Loans held for sale, our mortgage warehouse line of business, grew 45% on an average basis compared to Q1, 2010, ending the quarter at $1 billion.

As we've said before, this is a very profitable line of business for us and carries little risk.

We have an intense focus on credit.

We have seen our non-performing assets and chargeoffs rise in Q2 as we aggressively address these credit issues.

These issues are manageable.

Our confidence increases as we see the potential problem loans continue to decline.

We're making progress on the credit front, and we expect to improve our non-performing ratio over the next two quarters.

We have positioned the company well, with a strong capital position, with almost 9% in average tangible common equity.

We promoted strong deposit growth to meet the challenges from the national economic conditions and to support future growth of our company.

Now I'll return in a moment after Peter's remarks with a definitive narrative about credit, chargeoffs, non-performers, and what trends seem to be telling us for the future.

Peter?

George, thank you.

George mentioned that we've had continued strength in core earnings power.

We had a $3.7 million or 7% increase in net revenue in Q2, 2010, compared to the linked quarter, and 17 % year over year.

We believe those are industry leading or market leading levels.

Net income of $8 million -- George mentioned -- represented a 7% increase for the linked quarter, 25% year over year, and on a per share basis, because of the TARP [being] dividend and redemption in May of 2009, the per share results were $0.22 compared to $0.06 in the prior year.

Performance has been driven throughout 2009 and early 2010 by significant expansion of the net interest margin.

The small contraction we had of 11 basis points in the second quarter stems from the affect of the exceptional growth in deposits, where we had a $300 million increase combined in liquidity assets and composition of funding.

The balance, from roughly 50%, is related to the reversal of income and the carry costs of non-performing assets.

We've seen very strong DDA growth, as George mentioned, and we've been able to effectively price all major deposit categories.

We had modest growth, linked quarter, in loans held for investment, and strong growth in held for sale, especially in the last half of this quarter reversing the seasonal trend, which we commented on in the first quarter of 2010.

Loan pricing has remained good in both categories of lending.

Turning to Page 5 -- the persistence of high credit costs in the second quarter were consistent with expectations that such costs would remain elevated throughout the year.

Total credit costs were $15.1 million, compared to $15.5 million in the first quarter and $11 million for the second quarter of 2009.

The total is down slightly in levels realized over the three previous quarters.

Total credit costs were comprised of the provision of $14.5 million, plus an additional $557,000 for ORE valuation reserves.

Net chargeoffs in the quarter were a high of 113 basis points-- 73 basis points for the trailing 12 months.

We did have a decrease in the level of potential problem loans and have each quarter for the last four quarters.

We saw an increase in non-performing loans to 3%-- 3.1% and another 90 basis points of ORE.

We have a total of 3.3% of total loans and 4% of loans held for investment.

Loan growth and linked quarter of over $250 million or 5%, comprised a very modest held for investment growth of 1%, year over year 8%, and excellent growth in held for sale off of the seasonally weak Q1 of this year.

The deposit growth trend from Q1 in year over year remain very strong.

DDA growth on an average balance 7% linked quarter and 41% year over year.

Linked quarter and year over year growth and total deposits of 11% and 44%.

We saw a substantial reduction in all sources of non-core funding and borrowed funds, and the customer deposit growth has now averaged in excess of $500 million in each of the last three quarters.

With the level of deposit growth, we did have some impact on net interest margin, with an increase in cost of borrowed funds, which we been used, historically, to carry the held for sale loan category.

Deposit growth and the pricing are obviously very advantageous for the future, especially with increases in rates that we may one day get, and with additional loan growth that we expect to achieve.

Capital levels are, obviously, very strong with tangible common ratios in excess of 8%.

I mentioned the tangible common to loans held for investment is just over 11%, really a better measure of the effective risk because of the characteristics of the held for sale portfolio and the securities.

We've commented in the past on the ATM or at the market program being conducted through Morgan Stanley, and we've made no determination of price and volume that we might utilize in the third quarter, and we will say that there is actually no compelling reason to continue that program.

We had net proceeds of just $3.5 million, a light quarter during the second quarter, on a 182,000 shares with an average price of $19.63.

That brought the total to $12.7 million or 730,000 shares, and the year to date dilution is just under $0.01 per share.

Turning to slide six.

As I mentioned, we're very pleased with the core operating performance and much improvement in operating leverage.

Net interest-- net revenue growth, I've commented on, of 7% linked quarter, 17% year over year.

Non-interest income increased due substantially to the much greater activity in the mortgage warehouse.

We had linked quarter growth in non-interest income, principally related to build out, staffing that we've discussed in previous quarters, professional expenses for systems installation and wealth management, warehouse and treasury, and collection efforts on the loan front.

The results and the market opportunity, we believe, continue to warrant the investment in the capacity for future growth.

The year over year increase of 9% compares, obviously, very favorably to the 17% growth in net revenue.

We've been able to demonstrate stronger core earnings power, clearly mitigating the affect of the higher credit costs, NIM expansion, loan and deposit growth, and excluding ORE valuation charges, the efficiency ratio seems well established at under 60% by a meaningful amount.

Obviously, the credit costs continue to plague the return on equity and return on assets.

Turning to slide seven.

A very solid core net interest margin, we believe, can be sustained in 4.4% range.

The effects of greater liquidity can have an affect on that.

Not unfavorable for the long term but can cause some contraction in the near term net interest margin.

We can also experience some net interest margin contraction due to higher levels of loan growth, where incremental margins are not quite as high as the margin that existed previously.

We've had continued benefit of repricing activities, loan yields are now at or above 5% [Lowers] on a significant portfolio, portion of the portfolio, are well above historical spreads to prime and LIBOR.

Our funding costs remain very low and are down sharply from the prior year.

Q1, obviously, very favorable in terms of growth and pricing.

Q2 continues.

We've seen a major benefit of Treasury Management products and focus on deposit growth George mentioned, in all lines of business.

Despite the significant shift in funding to deposits from borrowings, the cost of all interest bearing funding remained at just 94 basis points, implying a cost of deposit growth of less than 75 basis points.

The value of customer deposits, obviously, justified the higher cost compared to borrowed funds.

The DDA and equity growth reduced total funding cost to just 68 basis points the, same as we had in first quarter.

I mentioned that we had an impact of reversible interest and carry costs on non-performing assets and they represented about half of the 11 basis point contraction.

We remain asset sensitive with ability to retain a high net interest margin.

Our rates are low and the funding should be very favorable position in a rising rate environment, although I think the industry does not expect that for many quarters.

Turning to slide 8.

Loan held for growth-- held for investment growth, I mentioned at about $50 million or 1% we see no real new demand, no real loan demand for new credit by existing customers.

We do, however, clearly see the benefit of new relationships to offset the contraction from pay down in industry-wide deleveraging for loans in-- among banks.

Loans held for sale increased linked quarter and year over year substantially.

Increased from seasonally weak Q1, returned to a record level for average outstandings-- third quarter.

Increase in fees and related to the much higher volumes was obviously a big contribution.

The infrastructure to support higher volumes in this business are now-- is now in place.

It's cost-- it's cost us some in the previous two quarters, but market opportunity clearly justifies that commitment.

The balance at the end of the quarter with a $1 billion for the first time, reaching a record for us, suggesting that we should have good growth in the third quarter of this year-- of this year.

The deposit growth indicates, I think, just how successful the company has been in its focus on customer deposits.

Remarkably trend in DDA growth continue, with the first quarter average balance of a billion dollars for the first time, both at 7% and 41% I've already mentioned.

For the quarter DDA growth exceeded the growth in loans held for investment and supported half of the growth of loans held for sale.

Total deposit growth from the first quarter of 2010 was 11% represented a $1.5 billion increase compared to the prior year.

As I mentioned, customer deposits representing now 100% of the total deposits, averaged over $500 million in increases in each of the three previous quarters.

This dramatic change in composition and ability to reduce or maintain funding costs is clearly going to benefit us in the future.

Slide nine.

I've really commented about loan growth, deposit growth.

I think the numbers speak for themselves.

We have in deposits a much improved composition, 100% customer base, and almost 3% or $150 million above the average for Q2-- to Q1, 2010, and 85% of the total growth in deposits was in the form of demand deposits on an average balance basis.

Clearly, a very strong growth model.

We have at the end of the quarter, essentially flat with the 2Q average, the DDA totals at $1.1 billion represented a 9% increase from the second quarter average, up $126 million.

And again, 85% of the linked quarter growth at date statement was from demand deposits.

We have a CAGR beginning on Page 10 of net revenue of 22%, CAGR for non-interest expense is under 20% if you exclude the affects of the ORE valuation charges.

Market opportunity remains favorable to the growing and stable deposit base, able to support more growth, improved pricing and strengthened underwriting for new business, success of recruiting and the capital to afford the opportunities.

I will turn it back to George for discussions about the portfolio.

Good.

Thanks, Peter.

Slide 12 reflects our loan portfolio statistics at June 30th.

If you look at the pie chart on the left, loans by collateral type have changed slightly from Q1.

Because as we've talked about loans held for sale, that warehouse group, has increased as a percentage of loans by over 5% or moved from 12% in Q1 to almost 18% of total loans in Q2, ending the quarter at a billion dollars, up from $592 million in Q1 or 68%.

Average balances are up somewhat less, at 45% as we processed about a $1.9 billion in face value loans during the month of June.

As I mentioned before, average balances really are more-- are representative of outstandings because the ramp up is generally the last half of each month.

Increases came from the one-time government subsidy for homeowners, and our continued addition of new customers to our growing portfolio.

As Peter mentioned, I believe that we'll continued, possibly increasing, outstandings in that line of business for Q3 and filtering into Q4.

This is an extremely profitable line of business, very capital efficient.

Does not carry the same level of risk at some of the other loans in the portfolio.

Remember, we have no put back risk in this line of business, and the average time a loan spends in the warehouse is approximately 14 days today.

Real estate concentrations continue to fall as a percentage of the overall portfolio at about 3% below Q1 percentages.

Non-accrual loans increased from $116 million in Q1, to $138 million in Q2.

The largest contributor was an energy production loan of $20 million, that is well-collateralized.

The company in question, however, has experienced an interruption in its cash flow generation.

We feel that we have little exposure on this loan today.

There were other additions and deletions to this list, but this particular loan was the largest that we added to the non performers.

ORE increased $13 million to $42 million net of reserves, primarily due to our foreclosure of a completed partially leased office building.

We marked the property to market with a new appraisal and experienced a $3.7 million chargeoff in Q2.

Total non-performers increased $35 million net from Q1, or 3.24% to 4% of loans held for investment in ORE.

As we have said in the past few conference calls, we expect credit costs each quarter in 2010 to be similar to Q1 and chargeoffs to be in a similar range to Q1 as we continue to cleanse the portfolio of existing non performers.

During this process, you could see non-performers in the current range that you see today, but again, remain very manageable.

We do see opportunity between now and the end of the year to reduce non-performers as more investors are beginning to come back into our markets with more reasonable expectations of value.

While the non-performers and the chargeoffs are up this quarter, two more positive trends that we're experiencing really make us believe that credit issues could be stabilizing.

Our potential problem loans --these are loans identified as problems but still accruing -- are shrinking.

Some by chargeoff and dropping into the NPA category, but the majority, or about 70% have been resolved by pay off or positive reclassification, not chargeoff.

More importantly, we are not seeing increase in the inflow of new problems taking their place.

Also, you remember that we report each quarter on problem loans that could become non-performing.

At September 30th, 2009 we reported a number of $80 million.

At December 31st, 2009, we reported $53 million.

At March 31, 2010, we reported $46 million, and at June 30th, this quarter, 2010, we reported $24 million.

Again, while some of these loans did truly become NPAs, we're not replacing them with new problems today.

This is key to my confidence level.

As mentioned before, we are seeing new problem inflow slow, but some of the existing non-performing assets could certainly require some additional chargeoffs, if we choose to dispose of them quickly.

Fortunately, we believe that the impact on reserves and provision numbers to be small because we've reserved these loans when they began to deteriorate and have continued to allocate reserves as needed each quarter.

The important point to make here is that the core earnings power of the company today is such that similar provisions in chargeoffs to Q2 can be managed and we can remain solidly profitable on a quarterly basis.

We'll turn to slide 13.

Total credit costs, as Peter mentioned for Q2, both provision and 0RE reserve valuation, was $15.1 million, slightly less than Q1, while chargeoffs were up at 12.7, again, from the number in Q1 of $9.3 million.

Our balance from the total loan loss reserve was up about $2 million, to $77 million or 1.73% of loans held for investment.

Chargeoffs were represented primarily by three items.

A $6 million loss on a discontinued line of business that we were exiting, the dealer finance business.

A $3.7 million loss on a foreclosed office building, mentioned earlier.

And a $2 million writedown of a property we expect to sell this month that could materially reduce the non-performing totals at that time.

Slide 14 graphs our net chargeoffs to average loans year to date of 99 basis points, with a trailing 12 months' ratio of 73 basis points, well within national peer group averages during this recession.

Slide 15, in closing, I want to revisit five points that you've heard us say before.

First of all, Texas Capital exhibits strong core earnings power that is simply not going away.

We've experienced a 38 consecutive quarter of profitability.

Top line revenues, net interest income, and revenue continue to grow on a quarterly basis from Q2, 2009 of $49 million to $58 million in Q2, 2010, as does net income and earnings per share.

Two -- we will continue to see, and I believe we will continue to see, exceptional deposit growth exceeding loan growth.

Three -- we will always maintain a strong capital base and credit issues while challenging remain very manageable.

Four -- we are well positioned to take advantage of market opportunities as economic conditions improve.

And five, lastly, I believe the new financial regulations will be much more punitive on large consumer driven banks, and Texas Capital will largely be unaffected by financial regulations signed into law by the President this morning.

We believe that in the new financial world, banks that are well-capitalized, well-positioned, and that can organically grow exactly like Texas Capital will be the real winners of tomorrow.

Well, that concludes my comments.

We would certainly like to entertain questions and, hopefully, some answers.

(Operator Instructions) Your first question comes from the line of Bob Patten of Morgan Keegan.

Please proceed.

Man, I never get the first call.

Hey, everybody.

Hi, Bob.

Just a couple of quick questions.

One, the mortgage warehouse.

We've talked about the scaleability of that business.

Yes.

You've talked about potentially bringing in a participant to share the risk.

Where's your thinking on that right now?

We think that that is a Q4 timetable for us, Bob.

We are, as Peter mentioned, we have just converted virtually all of our customers to a best of practices warehouse system.

It's enabling us to grow that business dramatically because there's really we really provide a value add service to that business.

And we are now perfecting and risking the process related to participating.

So I think you'll see us continue to grow that business.

We see that it will grow, even though as I mentioned, you know, mortgage apps are down and probably will be slow in the future, we've added enough customers, strong customers, big customers that will be able to maintain significant volume in the warehouse.

So it's a fourth quarter piece.

Again, the participation piece is used, frankly, to list the concentration level of this line of business in our company.

Like every other line of business, we measure concentrations, and when it gets to the point we feel it should be downsized, we will do that and hopefully in a participation way.

Okay.

And just a real small comment on this.

I noticed on one of the notes in the financial statements you had $1.5 million in mortgage warehouse loans which transferred over to NPAs and then to held for sale or to OREO.

How does that happen, just so I can understand, because it's a lower risk business?

Yeah.

This was Bob, this was a long time ago.

This-- you remember when the underwriting standards changed in 2007, and we mentioned that there were a few mortgage warehouse loans that got stuck in the warehouse when investors went away until they understood what the underwriting standards would be on a go forward basis?

Yep.

We had a number of those that we marked to market at that time, brought them into the held for the investment portfolio, reserved them, and are working them out over a period of time.

This is just a portion of those loans.

We've made material progress.

We're probably down 50% from where we brought those loans in, in 2007.

Okay.

And then the last question.

Just-- can you give some color on OREO and NPA dispositions, what your thought is on being able to work some of that stuff out in an orderly fashion?

Well, as I mentioned before, we, you know, are going to experience, you know, some growth in the ORE categories.

We worked through the non-performing loans.

We have a large-- we improved and were able to reclass one large non-performer in Q2, with additional participants coming into the credit.

We have another large real estate project that I mentioned we took a small writedown on in Q2 that we expect to close in Q3.

That could be a nice reduction in non-performing assets at this time.

We have a management plan on every asset we own.

We are actively marketing every asset we own.

And as I mentioned, the investor interest seems to be more realistic, at least in the Texas market today, regarding values.

Now, that doesn't mean they're paying us 100 cents on the dollar.

As I mentioned also, we'll probably have to add some chargeoffs to the already reserved ORE assets in the portfolio, but it should be small because we have written them down, marked them to market, or reserved them prior to foreclosure.

There's a plan on every asset.

The mentality of the company is to reduce that ORE category as quickly as possible and we're reserving to do that.

Thanks, guys.

I appreciate it.

You're welcome.

Our next question comes from the line of Dave Rochester of FBR Capital Markets.

Please proceed.

Hey.

Good evening, Guys.

Hi, Dave.

That was good to hear about the problem loans continuing to come in.

Could you, perhaps, also give us some color as to what the non accrual inflow was?

And I'm sorry if I missed this earlier, but would you happen to have the early stage delinquency total as well?

Yeah.

That-- let's see.

The one we disclosed, are you talking about the potential non-performers on a quarterly basis that we provide in our Q?

That number is $24 million for Q2.

And then the inflow for non accruals?

I think last quarter the number was 36 million?

Yeah.

The inflow in Q2 of non-performers

You mentioned more than half of it came in a single

Right.

We had we had a net increase in NPAs of $35 million.

We had about twice that inflow, and we improved about $37 million.

So we had we had about $72 million going in, we had $37 million coming out for that net $35 million increase, of which that large energy credit of $20 million I mentioned was the bulk of the increase.

Okay.

And then I would imagine-- oh, sorry.

Go ahead.

No.

Does that clarify a little bit?

That's excellent.

Thank you.

And--

--showing is yes, we're having some inflows, but we're having some real success in moving some of these NPAs out of the company.

I would imagine the early stage delinquencies were probably also down this quarter as well?

Yes.

Yes.

Great.

And lastly, can you talk about what you're hearing from business customers now and how that psychology has changed, if at all, from last quarter given macro concerns and maybe how, you know, your ability to grab market share can offset that?

Well, I think there's still a reasonable amount of concern out there day today, but we are detecting, particularly in our C&I customers, slightly more positive, albeit conservative, outlook of the near term future.

As we've said in the past and Peter mentioned, I believe earlier, that we're really not seeing much growth out of our existing customers in the portfolio today.

We grew about $50 million over the quarter in loans held for investment, but remember, we had fairly significant run off in every quarter, so that number in terms of generation of credit is probably double that.

And we are seeing some production, certainly coming from our new hires that we've mentioned that we brought on in the last half and the first quarter, and now two quarters, of 2010.

So I think the growth in the loan held for investment is going to be slower than what we've been accustomed to.

Fortunately, the premium finance business and mortgage warehouse business has stepped up and has given us a nice addendum to the earnings power.

I see in our customers, I've seen near term pick up in revenue but, you know, until they're confident in its sustainability, they're going to be pretty conservative.

Okay.

You talked about the new hires again there.

What's the hiring environment look like right now and do you have any specific targets for the back half of the year?

Well, as we mentioned before, we hired a net, I think, 14 last year.

We've hired a net 15 for the first half of 2010.

Again, we're concentrating mainly on our outer markets, Houston.

We've done a lot of hiring in the business banker commercial area in Houston, and we'll continue to do that.

We believe that that the second half of this year probably will not have as much opportunity to find those players and some of that momentum will slow, but we've built tremendous capacity into the company today.

If we had to stop right now for the balance of the year, we'd be extremely pleased and have enough capacity in the company to take us for the next couple of years.

Great.

All right.

Thanks for the color, guys.

Welcome.

Your next question comes from the line of Mike Zielinski of Credit Suisse.

Please proceed.

Say, Mike?

Hey.

Thanks, guys.

I'll stick with credit quickly.

Can you say how big, Peter, the materially the loans that could materially reduce NPAs is so you took a $2 million writedown this quarter?

It's well over $10 million.

Okay.

Well over 10.

It looks like TDRs this quarter went to 0 from 11 last quarter, and I think there was an asterisk saying that it went into NPA.

Was it-- was that a big TDR that went in or was that

It was the $10.7 million.

Single loan.

single loan, $10.7 million, and we moved it.

We think we're well secured on that particular credit.

We really think we have little exposure, but we did drop it to non-performers out of the TDR category.

Okay.

So

At this point we don't have TDRs that are not already classified as non-accrual.

Okay.

That makes sense.

So I've kind of I've heard what you guys were saying about the provision level and chargeoffs.

So is it kind of fair to say that OREO expense will probably jump in the coming quarters as you guys try to dispose of some of the foreclosed assets?

I think that's a true statement.

Again, I think it's all going to be within a prescribed range.

We're not going to see, you know, massive increases in any form or fashion.

But as I mentioned before, we have written a number of these properties down, certainly to appraised values when they were foreclosed on, and with new appraisals coming in, we adjust those values downward also.

So again, to move these assets out, there probably can be some additional writedown and chargeoff, but we don't think it's going to be of such a magnitude that it's a show stopper.

Mike.

Okay.

And then, last.

In terms of the deposits, extremely robust growth which is great, but how should we be thinking?

I know you can-- you could probably continue running down the wholesale volumes, but it doesn't look like the wholesale volumes are really that costly.

So how are you guys going-- if there's no loans growth, which sounds like you're-- it's not going to be much, where are you guys going to be investing those deposits?

Well, Mike, you know, we anticipate that we're going to get the loan growth, so we won't be making any long term commitments with those funds.

Obviously, the securities market does not look very promising or appealing to us.

Loan pipeline is pretty damn good.

Okay.

Whether we get those closed and whether they meet our criteria for credit are different questions, but the [locations] are meaningful.

So you're saying that it could the loan growth could be better than what you guys did this quarter based on the applications that you guys have in the pipeline?

Whether that-- the application and the underlining are going well.

Whether they get closed, you know, we'll have to wait and see.

Okay.

Can I sneak one last one in, or you want me to go back in the cue.

One last is okay.

Keep going.

Mike.

Sure.

So you said price in terms of actual loan yields, you said pricing remains good but it looks maybe it's a little less good.

I know there's lots of moving parts here.

Is it refinanced loans with floors that are maybe repricing downward or just new loans because of competition or just, you know--

No.

The linked quarter yield is basically the small decrease in held for investment is basically entirely a reversal of income on non-accrual loan.

Okay.

Our yields are holding in.

We've got floors on 65% of the floating rate portfolio, averaging over 5% today, and--

And when those refi, you can keep them at the floor, just wondering, if we stay in a low rate environment for a long time?

Hopefully, we don't.

We believe we can.

I'm sure you can't we can't guarantee that 100% of those will stay, but we certainly believe majority will.

Okay.

Appreciate it, guys.

Your next question comes from the line Andy Stapp of B.

Riley & Company.

Please proceed.

Hi, guys.

Hey, Andy.

Other non-interest income was higher than I expected.

Was there any one timers in there?

Is that where I think you made reference to $1.3 million gain on self lease equipment, was that driving that increase?

It's a combination of activity in the mortgage warehouse, it was up a big portion of the total.

Then, we also did have-- I mean, we're in the leasing business, so we will periodically have residual assets that are sold.

Right.

And I'm talking about the last line item in non-interest income, the other catch all category.

I mean, there are other things in there, but the largest one was the sale of lease residuals.

Okay.

And could you provide some more color-- I hate to beat the loan growth to death, but can you provide some color as to when you foresee new hires really kicking in and bringing over their books of business?

Well, you know, we've always said that the typical commercial RN takes about six months to get their feet on the floor, and ones we've been hiring in 2009 Q1 and Q2-- excuse me, second half of '09 are beginning to kick in.

The ones we've hired in Q1, still are working hard at prospecting some of their existing book and haven't been terribly productive yet but that will come.

And we've got history in the past to show that that works.

As Peter mentioned, the loan pipeline is increasing.

Several private equity groups are moving toward closing larger business acquisitions.

And really, the fourth quarter is seasonally our strongest loan quarter, so we expect new hires along with a few targeted type customer lines of business, that we will get not a robust loan growth, but some loan growth in our loan sale for investment.

Okay.

Great.

Thank you.

Your next question comes from the line of Brad Milsaps of Sandler O'Neill.

Please proceed.

Hey.

Good afternoon.

Hi, Brad.

Hey.

Just wanted to talk maybe a little bit about specific loan category.

In terms of your construction balances, you guys I had, I guess, in the first quarter, a number of those, I guess, went into permanent financing and you had a big reduction.

Just curious if that trend continued to play out in the second quarter and, you know, curious if you could disclose kind of what level you finished the second quarter at in regards to that category?

In the C&D category, the market risk, that we call market risk which is most of our C&D portfolio, almost all of it, was about $358 million.

We continued to selectively move some of those loans that were completed, leased, meeting occupancy levels and meeting cash flow projections because they do have to qualify before we're able to move them into the permanent portfolio.

We've done that selectively, but it wasn't a big quarter for us in terms of moving those out.

We did have a big six months within the last six months of doing that, about $250 million, moved out of that category, but we're at about the $358 million, $360 million range today.

Okay.

Got it.

And, then, Peter, I was going to see if I may have missed this in your initial comments, but with the big warehouse quarter, you guys mentioned bringing another a number of new customers into the fold.

What type of affect were those customers having on, you know, deposit balances?

I'm assuming that, I think as you mentioned in the past, you tend to get a number of DDA accounts out of each relationship.

Just curious kind of if you can quantify that a little bit more.

New customers are required to generate or to deliver certain deposit levels.

Say most of the growth was from customers that had committed deposits in earlier quarters.

We did not see substantial growth in the warehouse deposit base during the second quarter.

Okay.

Great.

And then I was just curious.

I know you've talked about the trend being down in the 30 to 89 day past due budget.

Just curious if you could, you know, just disclose that number, kind of what it was relative to the number in the first quarter?

Down about 40% from the first quarter.

Okay.

Great.

Okay.

Thank you.

Your next question comes from the line of Matt Olney of Stephens, Incorporated.

Please proceed.

Hi, guys.

Hi, Matt.

Hi.

I was just curious if you could give us any more details on the energy loan that hit the NPL bucket that was larger.

Anything else you can tell us whether it's on shore or off shore; anything like that?

Yeah.

It's-- obviously, it's all production based.

We don't do any equipment financing at all in the portfolio, so it's production based.

We have production securing the credit and it is on shore.

We have virtually no offshore exposure in the energy business.

Okay.

Perfect.

Thanks, guys.

Your next question comes from the line of Bain Slack of KBW.

Please proceed.

Hey.

Good afternoon.

Hi, Bain.

Bain Slack.

Hey.

The potential problem loans which I think what I heard was that 70% of those, of the shrinkage was due to payoffs or maybe they've gone back to performing.

I guess with regard to that, could you give color on

Reclassifications or improvements.

There are a lot of categories.

But what I was saying was that only 30% of that resulted really in chargeoff and/or ORE type.

Okay.

Okay.

I guess I was assuming that maybe more of those were payoffs.

But I guess I was just also kind of wondering--

Or a reclass.

I mean, you know

Okay.

Reclass.

Rework, something like that.

Of the ones is there a characteristic of the ones that that were being paid off?

In other words, I guess I'm wondering is there competition coming from elsewhere that maybe some of those central problem ones might have gone to with-- either within the banking industry or potentially maybe some non banks?

You know, really not.

There's not many places for problem issues to go today.

Most of the non banks are out of business or not doing anything.

Most of the other banks are struggling with their own problems.

So, you know, you pretty well have to fix what you have or you have to take care of it in some form or fashion.

One thing that has always been a hallmark of what we do in terms of loans being fixed, so to speak, was look at the sponsorship of the credit.

I don't care whether it's commercial real estate, whether it's C&I, whether it's energy, look for a good ownership, sponsorship, capital base that's willing to put money into their venture.

And that's what's happened in some of these particular credits as we see owners, investors, stepping up and supporting weakened companies during the economic downturn, even in the commercial real estate side.

So, this is not 100% of the case, but it really speaks to the fact that you bank relationships you don't bank deals.

And I think that has helped us a lot.

No, that's very helpful.

And last question, I guess, with regard to kind of thinking about the C&I sort of demand and, I guess, opportunities among the competitors.

I don't know if this really is specifically in Texas, but just in general in the industry, it seems like we've heard a lot of banks who have either come out of managed to somehow survive the construction or commercial real estate cycles and now all the sudden they all want to be C&I lenders, and we've heard of instances of where that's pressuring a little bit on the spreads.

Are we seeing that in your markets anywhere?

You know, not consistently.

I mean, there's always an outlier or two that will begin to do things like that.

You know, I have a theory and I don't know whether it's accurate or not, but if you see some of the large consumer banks that I talked about earlier, really being hit with these regulations on all their consumer business, it's going to drive profitability down, you pick a number, 20%.

I don't know what the right number is, but it will initially drive that income down.

They're going to be looking for income elsewhere.

Right.

And I think they're going to, hopefully, price for risk and price reasonably.

So I'm looking for 2011, that possibly we'll have a stabilization somewhat in the pricing arena for the kinds of credit we're going after.

Time will tell.

Historically, that hasn't happened.

But in today's environment it's a new world, and we think the spread lenders, like Texas Capital, are going to be the winners in the go forward business.

I think that's where banking is going back to.

Great.

Thanks.

You're welcome.

Your next question comes from the line of Jennifer Demba of SunTrust

Robinson Humphrey.

Please proceed.

My questions have been asked, but I guess you indicated you think deposit growth is going to continue to outstrip loan growth.

What kind of numbers do you think you could realistically generate the next 12 months or so?

Jennifer, this is Peter.

We would not have predicted and willing to go on record predicting what we've had, so it's just hard to say.

We have-- we're actively working markets.

We've, I think, explained targeted the kinds of customers that are deposit rich, frankly, deposit only, not borrower-- borrowing-- don't entail borrowing relationships.

The sale cycle on some of that is long but when it comes, it really does.

So hard to predict.

If you look at 2009, it was 2 to 1.

You know, will we be able to do that in 2010?

I don't know.

We're on track.

And even more than that.

So, again, time will tell.

There are a lot of variables in the marketplace today, as you know, that are unanswered, and as they get answered, we will answer that question a little more [extensively].

Thanks a lot.

Yep.

(Operator Instructions) And your next question comes from the line of Tom Alonso of Macquarie.

Please proceed.

Afternoon, guys.

Hi, Tom.

Just a couple of quick ones here to follow up.

Can you-- maybe you did and I just missed the number.

Did you quantify the impact on the margin this quarter from the shift into deposits from borrowings?

It's about half of the 11 basis points.

Okay.

And in the other half was just the interest reversals?

Interest reversals and the carry cost of non-performing.

Okay.

Great.

Thank you.

And then you mentioned that you sort of built up the infrastructure and that there was some cost associated with that.

Should I expect those to sort of come out of the expense run rate going forward here, or is where we are now a good run rate?

I think we'll have a few ongoing implementation costs on some of the software, but the big software purchases and hardware purchases, frankly, are in pretty good shape, and most of that behind us or amortizing over, you know, the life of the contract or the asset.

Okay.

Okay.

Just a couple of nits here.

The $36 million in non-accrual [in flows] in the first quarter, that was that was a net number, correct?

Just so that because you mentioned $72 million, $37 million out this quarter.

So I just want to be able to compare it to the first quarter number.

Maybe we can follow up offline.

Yeah.

Let me let me be sure that I know, you know, specifically what you're asking and we'll--

Sure.

No worries.

We'll get that.

That's pretty much all I had.

Thanks very much, guys.

Your next question comes from the line of Dave Bishop of Stifel Nicolaus.

Please proceed.

Hey.

Quick question for you.

I think George, you alluded to-- you've seen some improvement in terms of the value prospects there for problem assets in Texas.

Any sort of way you can scale that or frame that for us in terms of-- I don't know if there's any hard examples or just sort of frame it in terms of what the improvement's looking, where that's coming form?

You know, what we what we really see at one point in time, you know, we thought selling of pools of loans or pools of assets would really have more interest to the investor public today.

What we find is smaller investor groups wanting to buy single purpose assets or two or three.

In other words, they-- they're not looking for matched pool of assets, so to speak.

And I'm sure that's happening in the larger banks that can pool $300 million and $400 million and $500 million, but in banks our size, we're seeing the smaller investor group, you know, come out of the woodwork, so to speak, and look for those kinds of assets.

We do see the single family market firming in our marketplace.

Actually, the lots are beginning to sell again.

Our Houston bankers tell us that the builders in Houston are out of lots in the right places.

So we see that market stabilizing and beginning to pick up.

Are they taking down lots like they did before?

No.

But we see them back in the market a little bit.

Investors seem to be willing to buy for cash and leverage later, thus realized value later, but the value's higher.

One of the real issues, as all of you know, in terms of jump starting some of this market is the lack of financing.

So we see, you know, groups buying for cash and hoping to leverage at a later date.

Great.

Thank you.

That's what we're seeing in our markets, anyway.

Your next question comes from the line of Brett Rabatin of Sterne, Agee.

Please proceed.

Good afternoon.

It's Sterne, Agee.

Guys, I wanted to ask on the you mentioned early on that the mortgage warehouse business was really profitable and a good business for you.

Can you take a stab maybe at given like a segment reporting view on that business, how much that is or contributes to the overall bottom line?

No, the only thing we've been able to relate, Brett, is that when the activity is high, and that means the generation of fees, that the spread basically drops to the bottom line because the fees cover most, if not all, of the cost.

But that takes velocity, not just average balances.

Okay.

And you said 14 days was the average duration that the warehouse had on the--

--in the warehouse today.

And that's simply because the investors are so busy that with so much of this government subsidy work, it's moved from 10 days to 14 days, but it's not a credit issue, it's an activity issue.

Okay.

And I just wanted to follow up on the discussion regarding potential problem loans and just the net inflows or, actually, the gross inflows to non accruals this quarter.

You had, if I understood correctly, total inflows of $72 million, including the $20 million energy credit but potential problem loans declined from 46 to 24.

I assume the energy loan wasn't on the potential problem loan list last quarter.

Can you give some color around, if possible, basically that--

Yeah, It was on the potential problem list.

Okay.

It was?

Okay.

So that did drop into the non-performing category when the cash flow was interrupted and, you know, we-- it's one of those early identification.

We were watching it.

And sure enough, it did happen and we popped it right on non-accrual.

And we have we have-- of some of those that were added this quarter, you know, we have some fairly near-term resolutions of some of that.

As I mentioned to you, there's a significant asset that should be sold in Q3 for somewhere close to $15 million, you know, $14 million or $15 million that should come out of there.

Again, until they wire the money, it doesn't happen, we understand that.

But we're close to getting that done.

And there are a few others that are teed up.

So again, it's a dynamic process.

The key is moving as many of these things out of here as quickly as possible.

And we've begun to see the ability to do that at a more rapid pace in the last quarter or two.

And that's how we get a little-- and with the lack of significant inflows of new issues into that category gives us confidence that, you know, we might see some stabilization here pretty quick.

Okay.

That's good to hear.

It's just difficult from the surface level to understand the--

It is.

And again, it's such a dynamic process and we've gotten to a size where it's-- the inflows and outflows are quite active.

Okay.

Thank you for the color.

Our next question comes from the line of Bob Patten of Morgan Keegan.

Please proceed.

This is a question for Peter.

Peter, I know you always think we're trying to weasel guidance out of you, and that's not what I'm trying to do here.

--you're trying to do if--

I'm going to the commentary on the margin.

I'm looking at the liquidity you guys need to create over the next couple of quarters, assuming that we stay in this kind of slow growth environment in terms of loans.

So lots more deposits, less loans.

Spreads aren't good on what your options for investments in, so how should the street think about the margin over the next three quarters or four quarters, because you had such a big upside to the margin over the last five quarters that one of the big bear stories were the margin's going to fall.

So I guess that relates to how we're going to talk about the stock.

So I guess, how should we be thinking about the pressure on the margin?

Pressure on the margin is not coming from things that are adverse to the business.

I don't know how better to say that.

When we're able to have the kind of deposit growth that we have-- I mean, customarily, as you know, we carry the mortgage warehouse and held for sale with borrowed funds, so essentially, a matched maturity of the liquidity duration and so forth makes that fit fairly well.

The kind of deposit growth that we've had, where we're not able to predict reliably-- it's not like we go out and say we want $100 million in CDs.

We've been developing customers for many months, and the flow can happen on their schedule, not ours.

So we do have excess liquidity today.

It's unusual, as you know, for us to be anything less than 100% loan to deposit ratio.

And you know, we think we'll get back there.

It is much smarter for us to lose a few basis points on carrying excess liquidity and to be prepared to support loan growth than it is to go buy investment securities.

Oh, absolutely agree.

So should we

The level of compression, you know, at half of 11 basis points was not great.

It's obviously the other kind of compression we can have is when we get really good loan growth, but those things are that's also much more beneficial to the growth in net interest income.

Okay.

Thanks, Peter.

We have come to the end of the question and answer session.

I would like to hand the call back over to Ms.

Myrna Vance.

Great, operator.

Thank you very much.

And thanks to all of our participants.

And let me hand it over to George to give you a few closing comments.

Well, thanks so much for your attention this afternoon.

We appreciate it.

We are very positive on Texas Capital Bank and the Texas market today.

Again, I, in closing, want to stress deposit growth and loan growth.

Again, the outlook on a go forward basis, because of the way we structured our company today, really does give us, we think, an advantage in that-- in those markets.

And the credit, albeit increasing, in terms of non-performers, by about $35 million this quarter, it is managing and be believe stabilizing.

So, we are excited about the future.

We are well positioned.

And I really believe that that companies that can organically grow like Texas Capital have a tremendous advantage in the new world of banking.

So, we appreciate your attention and hope to talk to you soon.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a wonderful day.