Texas Capital Bancshares Inc (TCBIO) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Texas Capital Bancshares earnings conference call. My name is Katie and I will be your coordinator for today.

At this time, all participants will be in a listen-only mode. We will be facilitating a question-and-answer session toward the end of the conference. (Operator Instructions).

I would like to now hand the call over to your host for today, Myrna Vance, Director of Investor Relations. Ma'am,?

Thank you, Katie, and thank all of you for joining us on our call today. If have any follow-up questions, I'd 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 in this call may contain forward-looking statements which are subject to risks and uncertainties.

A number of factors, many of which are beyond to 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, 2009 and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let's begin our discussion. With me on the call today are George Jones, our CEO; and Peter Bartholow, our CFO. After a few prepared remarks, our operator, Katie, will facilitate our Q&A session. At this time, I'd like to 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. Net income of $9.5 million for Q3 is a record for Texas Capital and particularly gratifying in the most challenging economic environment for the banking industry since the Great Depression.

We're also extremely pleased with our exceptional total deposit growth of over $400 million or 9% on a linked-quarter basis with demand deposits growing 12% linked quarter. These are average balances fourth quarter.

Loans held for investment were up just 1% from Q2. The total loans increased 9%, reflecting excellent performance from our warehouse lending line of business as a result of the refinance market and our significant increase in marketshare.

Loans held for sale in the warehouse group averaged about $1.1 billion, up 62% from Q2 averages and we expect strong performance from that group through year-end. As we have said previously, this is a very profitable line of business for us and carries little risk.

Our tangible common capital ratio of approximately 8% and our total capital ratio of about 12% continue to position us well in each of our markets across the state. Our intense focus on credit quality continues with a reserve provision and charge-offs for the quarter that is consistent with our expectations.

Very little of our quarterly loan loss provision for the past few quarters has been used to cover charge-offs. Most of our loans have had significant reserves covering our recognized exposure so that we have had to place few incremental reserves on those loans at charge-off.

As I said before, we're building a reserve to support our plan of aggressively selling, collecting or charging off non-performing assets over the next two to three quarters. We will be able to add a few additional dollars to complete the sale or collection of NPAs without impacting earnings significantly.

Non-performing assets were 3.66% of loans held for investment plus ORE. That's down from Q2 at 4%.

Total NPAs to loans including loans held for sale plus ORE are 2.82%. We believe that we will see a reduction in overall credit costs in 2011.

Now I'll return in a moment after Peter's remarks and have a definitive narrative on credit, charge-offs and non-performing assets. Peter?

Thank you, George. As you mentioned, Q3 was another very good quarter especially in terms of earnings power and net revenue growth.

We saw growth in net revenue of 7% compared to the second quarter and 20% year over year. The net income of $9.5 million represents an increase of 17% from the second quarter and 78% from the year ago. We saw results of $0.25 per share compared to $0.22 in the second quarter and $0.15 a year ago.

As we've commented before, the performance has been driven by a significant expansion in the net interest margin since the low point of 2009. We've had substantial net interest income growth 8% linked quarter and 21% year over year.

We experienced a small NIM contraction of 5 basis points in the third quarter about which I'll discuss more later. George, you mentioned exceptional growth in deposits especially demand deposits, 1% growth in linked quarter and held for investment and just over 5% year over year and exceptional growth in held for sale which growth in profit contribution offsetting a portion of above normal credit costs that we have experienced.

We've defined this as a very important business in providing a countercyclical benefit when rates are low and general demand for loans is weak. George commented on credit costs.

There were $17.2 million in the quarter as anticipated compared to $15.1 million in Q2 and $15.7 million a year ago. Plus or minus a relatively small variation, we've had quite consistent results for the last five or six quarters.

[Had a] provision down $1 million from the second quarter at $13.5 million but an increase in ORE valuation expense from $0.5 million or $550,000 in Q2 to $3.7 million in Q3 and compared to $2.2 million in the third quarter of last year. As George mentioned, this represents a more aggressive approach in reducing the future credit costs and the impact of non-performing loans and ORE.

Net charge-offs were $12.1 million or 107 basis points for the quarter, down slightly from $12.6 million and 113 basis points in the previous quarter. As George commented, non-performing assets fell to 2.8% of total loans in ORE or 3.7% held for investment plus ORE; so a decrease in non-accrual loans by 11 million to 2.2% loans and 2.8% of held for investment.

Loan growth linked quarter of $444 million or 8.7% of loans, representing as we mentioned modest loans held for investment growth of 1%, 5% year over year and held for sale growth of $410 million and an average balance of $100 million more than the level outstanding at quarter-end in June.

The spike that we've had in held for sale at the end of Q3 brought the total to $1.4 billion against an average balance of just under $1.1 billion. But we certainly did not expect the average for that level in Q4.

Deposit growth trend from Q2 and year over year remained very strong. DDA growth of 11.6% linked quarter average balance and 50% from a year ago. Total deposit growth of 9% and 31% and we've had customer deposit growth of $1.9 billion since the end of Q3. Deposit growth and the pricing have been very beneficial and will be especially important when we see a return of loan held for investment growth and higher interest rates.

George mentioned that we have a strong capital position. Our ATM or [at the market] program for the third quarter, in that program we sold only 2600 shares.

The program remains in place but as indicated by our sales activity in the third quarter, we see no real need or current inclination to use that program. Turning to page six or slide six, as I mentioned, we're very pleased with the core operating performance and the improvement in operating leverage.

We saw an increase of 7% in net revenue from Q2 and 21% from the third quarter of last year driven of course with the very strong growth in net interest income. On a linked quarter basis, we saw non-interest expense excluding the ORE valuation component at just 1% growth from Q2 2010 and saw 7% growth in net revenue, building as I mentioned operating leverage, a year-over-year increase of 11.6% compared to 21% growth in net revenue.

We have of course incurred higher cost of dealing with the non-performing assets in addition to the ORE valuation charges. And those are expected to remain high as we pursue the program of reducing the effect of those on operating performance.

We obviously have had good luck this year, good performance in the last two years in building staffing and recruiting. The emphasis has been -- produced the increase in expense levels year to date but the pace slowed significantly in the third quarter.

We continue to demonstrate the ability to reduce or mitigate the impact of higher credit costs. The expansion of net interest margins and the building of loan and deposit balances excluding ORE valuation charges, we're seeing a reduction in the efficiency ratio to 55%.

That's an historic low. Consistent with improvement, although slowly, return on assets and equity, we are approaching or above 1% and 10% assuming normalized credit costs and obviously with very high levels of stockholders equity [and to] constraint on improving return on equity.

Turning to slide seven. The core net interest margin is still very strong at roughly 4.4%. We had a NIM of [427] in the third quarter, down 5 basis points from the second quarter.

We see held-for-investment yields consistently above 5%. We did see a reduction in held-for-sale yields tracking mortgage rates on conforming loans nationally.

The growth in liquidity assets compared to what we experienced in the second quarter was more modest, just $22 million linked quarter, because of the growth in held-for-sale activity. As I think we mentioned, we have a suboptimal funding profile resulting from our significant growth in deposits.

We're using deposits to support growth in held-for-sale instead of borrowed funds. That has approximately a 40 plus basis point impact in funding costs on roughly $1 billion of earning assets. We do believe it represents an acceptable cost of building the customer deposit base to support future growth in held-for-investment loans.

Funding costs have remained very low and we've seen consistent improvement quarter by quarter. Q3 again with deposit pricing, very favorable in terms of both growth and the level of interest rates paid, clearly showing benefits in treasury and numerous lines of business.

The growth in DD&A of $378 million compared to the year-ago quarter represents 50% of the total growth in loans. Cost of both interest-bearing deposits and interest-bearing funds fell by 4 basis points in the quarter.

The DD&A in equity growth reduced total funding costs to just 65 basis points, a reduction of 3 basis points from the prior quarter. In this quarter, we had no meaningful impact favorable in the reduction of non-performing assets and nothing significantly unfavorable that came from the reversal of income on any new non-performing assets.

Assets sensitivity remains of course positive and we're all looking forward to the time when we might have more economic activity and higher interest rates. Turning to slide eight, we commented about the growth in loans held for investment at just under 1%. Held-for-sale increased strongly of course the combination as George mentioned of refinancing activity and new relationships in that business.

We had an average balance for the quarter of just under $1.1 billion, representing an increase from the end of Q2 by about $100 million. As I mentioned, the yield on that portfolio was down about 27 basis points in concert with mortgage rates for conforming FHA, VHA and government-backed reverse mortgages.

The balance at the end of the quarter as I mentioned at $1.4 billion was a spike. The average balances in Q4 will come down from that level but should remain good and more comparable to the Q3 average.

The average for the full year we would expect to approach $840 million. An indication of just how successful the Company has been, we think this slide reflects it in the growth in deposits.

The remarkable trend in DD&A growth was continued, total deposit growth of 9% linked quarter, $1.2 billion or 31% from the previous year, putting us in the best position from a liquidity standpoint that the Company has ever experienced. Slide nine, held-for-investment was flat at $4.5 billion.

Essentially flat also was the Q3 average and represented a growth of 4% compared to a year ago. Compared to an industry experiencing significant contraction, we're pleased with this position.

The slow economic recovery is clearly having an impact on demand from our current customers, but we have seen marketshare shift that's become more pronounced with industrywide contraction. Obviously we think the success in recruiting new relationship managers is producing a very good pipeline.

DD&A balances at quarter-end were $50 million above the average for the quarter and we see marketshare shift with our customer base throughout the regions and all of our lines of business. Total deposits were up 10% linked quarter.

The pace of growth there has actually increase with the balance at quarter-end $205 million above the third-quarter average. There is much improved composition as we had eliminated all non-customer sources of deposits.

On slides 10 and 11, I'll just point to the relative strength in our position and the growth, improvement in operating leverage I've commented on but it's demonstrated over an extended period with a CAGR of net revenue of 21% versus a non-interest expense level of 19%. But that 19% does exclude the cost of ORE valuation.

We believe our market opportunity remains favorable, we've got a growing and stable deposit base to support our growth, good pricing and strength in underwriting for new business and recruiting obviously is improving our growth prospects. And with that, I'll turn it back to George.

Thanks, Peter. If you look at slide 12, it will be familiar to you. We show you our pie chart describing our loan portfolio by collateral type at September 30.

The obvious difference from past periods is loans held for sale at 24% of loans at Q3. This number represents quarter-end totals as Peter mentioned at $1.4 billion but average outstandings are a little less than $1.1 billion and that's really much more representative of true volumes because the ramp-up is near the end of each month with delivery of these loans to permanent investors shortly thereafter.

As mentioned before, this is an extremely profitable line of business, it's very capital efficient as it takes only half as much capital to support outstandings compared to other loans and does not carry the same level of risk as the traditional loan. We have no put-back risk and because of the average stay in the warehouse of about 10 to 14 days, foreclosure risk is not an issue.

Our 90-day past dues still accruing, non-performing loans and ORE came down $27 million in Q3. Non-accrual loans decreased from $139 million at June 30 to $127 million at September 30.

We have also experienced a reduction of $2.6 million from sale of loans subsequent to September 30 closing date. Our Austin condo project on the lake sold in Q3, paying off our existing loan and ORE balance of approximately $14 million. And we've reached agreement with another $7 million of non-performing loans that should be paid in Q4 or early 2011.

We have a contract to sell a partially leased office building in South Central Texas that we hope will close reducing ORE by approximately $12 million. Other real estate decreased from $42 million to $39 million, this being net of reserves.

Activity in that account included the sale of the condo project we previously discussed. Approximately half of our Q3 charge-offs were related to that project and the balance of the Q3 loss was approximately $5 million represented by partial charge-offs on two loans that were both previously identified and reserved in prior quarters.

We added only one property to ORE in Q3 totaling $2.3 million but there will be likely a few more coming out of non-performing loan category as we continue to improve credit over the next two or three quarters. The important point to make here is that core earnings of the Company today is such that similar provisions and charge-offs to Q3 can be managed and we can still post very good earnings each quarter.

If you turn to slide 13, total credit costs for Q3, both provision and ORE reserve valuations were $17.2 million, up slightly from $15.1 million in Q2 and charge-offs were $12.1 million, down from $12.7 million in Q2. The balance in the loan-loss reserve was up to $78.4 million or 1.75% of loans held for investment.

Charge-offs were represented primarily by the three loans that I previously discussed. Slide 14 graphs our net charge-offs to average loans year to date of a little over 1% or 100 basis points with a trailing 12-month ratio of 95 basis points, well within national peer group averages during this recession.

On slide 15, in closing, I want to revisit five points that both Peter and I have discussed during this call. First of all, Texas Capital exhibits strong core earnings power that is simply not going away.

Topline revenues, net interest income and revenue continue to grow on a quarterly basis from Q3 2009 of $52 million to $63 million in Q3 2010 as does net income and EPS. Secondly, we strongly believe that we will see a reduction in credit costs in 2011.

Third, we continue to see and I believe will continue to see exceptional deposit growth that will be exceeding loan growth. Fourth, we will always maintain a strong capital base and credit issues while challenging, remain very manageable.

And finally, we are well positioned to take advantage of market opportunities as economic conditions improve. We believe that in the new financial world we're all living in, banks that are well capitalized, well positioned and ones that can organically grow like Texas Capital will be the real winners of the future.

Thanks very much. That's the end of our prepared remarks. And Myrna, I will turn it to you.

Operator, I think we're ready to start our Q&A session.

(Operator Instructions) Michael Zaremski, Credit Suisse.

Thanks. In terms of the net interest margin going forward, for loans held for sale then, if mortgage rates have come down subsequently, should we be thinking about continued I guess NIM compression a little bit going forward into 4Q?

You know, that number has varied pretty widely even during the last quarter, Mike. Certainly that can affect it.

It does track that rate. It's not necessarily specific to it. But when the rates are that low as you've seen in this quarter, the volume gets to be very high. And we saw a 50% increase in net interest income contribution.

Okay, in terms of the loans held for sale business, I guess, how should we be thinking about this? You gave some indication for Q4 and I know it's tough to think about for 2011, but should we be thinking about this potentially being a volatile business line in terms of based on refinance activity and repurchase activity? Or do you feel confident you have kind of built up market share that you can sustain certain levels?

I think the answer to both of those questions is yes. It is a volatile business. It is subject to rates and refinance, as we've mentioned before. But I think the real important thing to remember is a lot of the volume we are generating today is coming from new clients, new business.

We are picking up significant amounts of -- numbers of new customers today. They are typically the larger, well-capitalized mortgage companies that need significant lines to operate their business.

So while I think the business itself will be somewhat volatile and probably tick down a little bit in terms of growth, we believe that we can make up a lot of that volatility with the new client base that we're bringing on.

And I guess finally, is there a limit in terms of maybe percentage of loans, percentage of capital that you would be willing to grow this business? And I know you can overlay that with -- you said maybe other investors can participate as well.

I think that's right. I mean, we manage everything on our balance sheet by concentration review and there is a point that we will not want anymore of a number of things on our balance sheet.

This again is as I mentioned capital efficient, it's less risky, it turns three times a month in the warehouse. We have no put-back risk. We have no foreclosure risk.

So it does provide a less -- in our minds certainly a less risky type of extension of credit. But yes, to answer your question, we will reach a point when average balances on a quarterly basis reach a certain amount of predetermined volume.

We do have as you mentioned a participation program that we can implement. We have not done that yet.

It is virtually ready to go and we do have a number of clients that are anxious to participate for the reasons that we like this business. So I think that the answer to your question is we can continue to grow with new clients and should not have a problem in doing that, but still hold our risk in the right parameters on the balance sheet.

Remember, when we do these participations, we keep all the deposits, we keep all the fees and we probably get a little bit of that loan rate also. So it actually enhances profitability on a go-forward basis even though you are not keeping the balances on your balance sheet.

Brad Milsaps, Sandler O'Neill.

Just kind of a quick housekeeping question for Peter. Can you walk me through the equity account this quarter?

I was just -- it looked like common equity didn't go up that much and I couldn't see there was a big swing in AOCI, so just wondering if something else was kind of marked through equity that we couldn't see in the release.

We have a minority interest in a small company. We bought back some of the shares in that company to increase our ownership from 90% to 97%.

Okay, all right. Any color on what company that is or does or -- that probably won't be there going forward?

It's never going to be a big issue, no matter what. It's our premium finance business. It's a subsidiary. It's the only operating subsidiary of Texas Capital Bank and it just makes sense for us to do it.

That was my main question. Nice quarter. Thank you.

Bob Patton, Morgan Keegan.

Yankees are up five nothing and we're chasing Wilson, I just wanted you to know that.

Yes, we're really happy to hear that. We were going to say "Go, Rangers" but I guess we'll hold that off.

Just following up on the warehouse, when do we start breaking out some of these businesses? We talked about it before. And can you give us any color on just the profit contribution in the third quarter from the warehouse businesses? Have you guys looked at it that way yet?

Of course we look at it that way.

Of course, Peter.

We're not going to do segment reporting. It's something we've been in forever. We view it -- the way we do it is a commercial kind of activity.

So obviously as we commented before, when activity is high, the fees we generate should be comparable to the basic operating expense. As we've commented before, we spent quite a bit of money in the last six to nine months on upgrading systems.

So when I talk about operating expense, I'm not including things like that. And then the spread has come down.

The spread -- you know, when you see a 27 basis point reduction in the yield while our funding costs have come down a little bit, incrementally that business is producing about a 380 to 385 spread.

Can you comment on the pipeline, where it is today minus where it was at the end of the second quarter? Sort of where we are in terms of the competitive landscape? Has it gotten any better in the third quarter, what you saw versus what we were talking about in the first and second quarters?

In what regard? I'm sorry, I didn't hear the (multiple speakers)

Loan pipeline.

Loan pipeline.

Loan pipeline, Bob, let me comment on that. We mentioned to you I think on the last call that the pipeline looked really good. The pipeline looks really good this quarter also.

It's come a little bit slower than what we had anticipated, the actual funding, but the committed credit that we have is a net in the hundreds of millions of dollars between now and the end of the year. And this is without loans held for sale.

So this is -- we are anticipating as we have in the past experienced our fourth quarter being very good for loan growth. Even though the economy is like it is today, we still expect and our relationship managers expect some real activity in Q4.

Any sense -- because you guys are sort of a little microcosm of the middle-market recovery like Comerica is sort of, what types of companies are talking more optimistically about borrowing?

You know, both sides of the C&I business, you're seeing a number of the C&I customers with their topline revenues stabilizing and beginning to come back somewhat and getting a little more interested in moving forward. We have even seen in the multifamily construction area, multifamily is very intense today in the Texas market.

There's a lot of activity in the multifamily side of things even with cap rates in the 5% range. We see that.

You know, most businesses are seeing modest improvement in revenue and their prospect pipeline. They're not out of the woods yet. There's still a lot of uncertainty out there and that's the biggest thing.

It's not actually do they see a little bit of growth coming. It's the uncertainty in the market, it's the political environment, it's the regulatory environment, it's the tax environment, it's the healthcare environment. Until some of those things really get decided or there's directional approach to it, I think everyone is going to be very conservative.

But that being said, we are cautiously optimistic that Q4, we can see a spark of life in the loans held for investment on a moving forward basis. Even though we only grew 1%, remember, we're covering runoff. So that could be $50 million to $100 million.

Andy Stapp, B. Riley.

Just a follow-up question on the loans held for investment. You were getting strong growth in that in loans held for investment as you brought over lenders from [distracted] competitors. But then it's been flat for the past several quarters. Just wondering why that is.

Well, you know, we've had a significant amount of runoff also with people paying back, deleveraging, not using as much of their lines as they have in the past, a lot of this uncertainty --

Has runoff increased from a year ago?

Yes, a little bit. And we see -- also remember, it takes six to nine months to really get some of these RMs up and productive. And even some of the customers they have been looking at in the past, you know, were financed a little more aggressively in other places than what we were willing to finance.

So while we still have them in the pipeline and we still have them -- the companies that we're looking at, they're going to have to improve their performance a little bit before we bring them on. Even though that doesn't promote growth, it certainly promotes credit quality.

So we're maybe a little bit more conservative than the Wachovias and some of the other folks that we've hired people from. So I think there's a combination of things that -- and then the economy itself has just slowed us down a little bit.

I'm very optimistic though that we have the right people in the right place and it's becoming the right time. We are beginning to see our customers, some of our customers and prospects finding permanent financing for some of their real estate projects.

They're looking at life insurance companies that have reentered the market. So there is a combination of things that have slowed the growth but certainly not stopped it.

Okay, and was there anything in particular that was driving the sequential increase in REO expenses other than just the general lumpiness that can occur in that line item?

Yes, just realization of what it's going to take to get rid of it.

Right, okay, thank you.

Michael Rose, Raymond James.

You mentioned that the mortgage warehouse line was going to be strong at least in the fourth quarter probably into the beginning part of next year. In light of that, how aggressive can you be in trying to dispose of some OREO properties or move some non-performers our of the bank in light of kind of a strong topline revenue growth from that line item?

Michael, that's a very good point and I tried to indicate in my opening remarks that that was going to be a top priority for us in the next two to three quarters, that we are positioning the Company for that, we're positioning the reserve for that, [bringing in] smaller incremental dollars that are necessary to do that.

We have seen a pickup of investor interest at more reasonable prices, not reasonable necessarily. but more reasonable prices. We have been able to generate a contract or two on more troubled properties. So we're cautiously optimistic -- actually we're more than that. We're optimistic in the next two to three quarters of being able really to make some real headway on some of the NPAs. We'll.

Okay, that's helpful, and if you could, I know potential problem loans were down four quarters in a row. What were they at the end of the third quarter and also do you have the 30 to 89-day number?

Let me see, the 30 to 89-day was down from the previous quarter by about $17 million. It's going to show about $50 million this time. It was $67 million I think in Q2.

We did see an uptick in the potential problems. It was three particular credits.

Two of the three really are not perceived to be real problems. One of the credits, we're currently valuing it right now but we feel that the exposure if we have any is contained within the existing reserve that we have today. We don't see additional reserve balances having to come out of income.

What market is that relationship in?

It's in Dallas.

Tom Alonso, Macquarie.

Just real quickly since most of my questions have been asked, the linked quarter increase in real estate non-accruals, anything there, any color you can share with us?

In the real estate non-accrual, you're talking about the loans, or are you talking about NPA?

The non-accrual loans, $34.3 million?

Nothing really in particular, nothing that would jump out at you. I'm trying to pull that up now just to see if I can give you a little bit extra color.

You're talking about in the permanent real estate side, the $34 million number?

Yes.

That is not the construction side of things. That is what we call permanent real estate. I can't speak specifically to what increased that slightly, but again it's not anything that would catch a lot of action, a lot of eyes.

That's fair enough.

We can touch on that later if you want to call back. I'll be happy to give you more specifics.

That's fair enough. And then just on the mortgage warehouse, if you do get to participation type product, would your balances that you carry on the balance sheet decline or would you get to a certain level that you would want to keep and then above and beyond that, participate out and just drive greater fees?

I think we're comfortable where we are today obviously and we haven't sold any participations. So we have a range with which we're comfortable and we are not -- on an average basis and we're not at that range yet.

So, I think that we have a little way to go before we're talking about needing to do that. So, we are comfortable really where we are and you know, on the averages of 1.1, 1.2, we're very comfortable.

Okay, thanks a lot, guys.

Brett Rabatin, Sterne Agee.

Wanted to make sure I understood, when you mentioned earlier potential sale of non-performers and I think you had mentioned a $7 million credit that might come off in the fourth quarter or the first quarter, are there other loans specifically that you're looking at potentially selling or have contracts on or was that the loan that you were essentially referring to?

No, earlier I mentioned there's almost approximately $3 million that have come off in loans from the non-accrual category that you don't see that happened subsequent to September 30. So that's come down I think $2.6 million from the numbers you are looking at. $7 million is in addition to that number.

Okay and would there be then additional credits in 2010 that you are also looking at or was essentially that the color you were referring to?

I don't -- I can't tell you because this is very fluid. I can't tell you specifically what will close within the fourth quarter this year. But I assure we have a marketing plan on every asset that we own, particularly every real estate.

We are actively marketing every one of them. Every one are in the hands of brokers. We are again positioning the reserve to take care of what is necessary, if it is necessary, for any incremental, small incremental reserves to get it moved out.

And I think the market is looking a little bit better. So all of those things being said, it's hard for me to say I've got X amount of dollars other than what I know is already under contract or so close to happening that I can give you a little color on it.

But I'll tell you, the mood of the Company and the mood of what we're trying to do is reduce those NPAs as rapidly as possible.

Okay, that's good color, George, and then as it relates to that, I also wanted to ask, I think the last time we talked, you had said commercial real estate-wise you were a little concerned about the market in Dallas, but otherwise maybe things were firming up a little bit creditwise on the construction portfolio and what you were seeing out there. Can you give us some color maybe on just what you're seeing in terms of the different loan segments in terms of the market?

The commercial real estate category, most of it is pretty quiet. Again, I mentioned the multifamily side. That's the one semi-bright spot that we see in a number of our markets that continues to expand somewhat.

Some of our customers, a couple of our customers are planning first quarter of 2011 kicking off a couple of multifamily projects. We see that happening.

We see that the single-family, particularly the single-family lots, are firming. We see a few of our builders walking back into the market, beginning to take down some additional lots.

So I think we're really going to see not only in our portfolio but in our markets that a lot of inventory which I have said in the past has been problematic in the state, certainly North Texas, to begin to come down and get closer to equilibrium. But office, shopping center, that kind of stuff, pretty darn soft.

But we have been -- one thing that I think is positive, if you look at our construction loan portfolio, that continues to decline not only because a few are paying off, but we're able to move a number of those projects off the construction line because they're finished, because they're leased, because they're performing, and move them into the permanent portfolio.

So that is positive. We feel good about that and obviously we don't move anything that's non-performing into just another category. It has to meet our standards and is performing. But we see a few bright spots out there. But again, the commercial real estate side with the exception of one or two areas, still very slow.

Okay, and then just because you mentioned it, I know you have done some of that in the past, but do you know how much of the permanent real estate portfolio used to be construction loans?

It's hard to tell. I mean, it is hard to give you that number because there's been a number of those things that get completed ad move out of the construction side. A lot of those, probably more than what used to move into that portfolio, because the permanent financing outside the bank has not been as available as it has been in the past.

But again, the key to remember there is we're not moving anything out of that category just to get it out of construction. It's got to work, it's got to perform, it's got to be in the right kind of condition.

What we are seeing by the way though, and I think I mentioned it earlier, a few projects now are finding permanent financing [in like] companies. It's slow, it's not -- the floodgates are not open but some of the better projects are finding a new home.

Okay and then just lastly, I wanted to ask on loan spreads, you're still seeing fairly healthy loan yields in the portfolio. Are you seeing competition increase for better credits recently?

Yes, no question about it. So the larger credits, the better credits, because loan growth is so difficult today, we see a lot of companies slipping back into some of their more competitive modes in the pricing side.

Floors are much more difficult to get today even though we still have over 65% of our floating-rate portfolio, with 5% floors or better. It's becoming more difficult to get those on the new business and I think as the economy improves and as these companies health gets better, it's going to continue to get more competitive.

Okay, great, thanks for all the color, George.

Scott Valentin, FBR Capital Markets.

just trying to get a sense for net interest margin going forward. I know it was down 5 basis points this quarter and a lot of different drivers.

But it seems like we are kind of getting to a floor on deposit pricing. Obviously the held-for-sale loan yields will move wherever mortgage rates go. But it would seem that status quo for you remains the same, there will still be more pressure on the margin going forward at least for the next couple of quarters. Is that a fair assessment or is there something that I'm missing that would provide some relief on the margin?

It's not clear to me that the deposit prices won't continue to come down. We're enjoying some success in that area.

I'm not -- it certainly can't come down another 15 basis points but we're seeing an opportunity to bring those down in a way that could be quite helpful. The mortgage rates we don't think stay at this level for a protracted period.

And the margin came down because the spread on those which is a great spread at 380 or 390 versus the margin that we experienced in Q2, 430, you grow $440 million and $410 million or $420 million in loans, it's obvious that you can dilute the margin but not on the base business in a way that hurts net interest income.

So it's not clear to me that the margin -- I believe the core and I've mentioned the funding composition, is a big element. The core is at the 440 level.

Okay, and then you mentioned a slowdown in recruiting of some of the relationship managers. Is that just a reflection that the loans are more difficult to come by today or is that just -- is there more competition for relationship managers?

You know, I don't think there's a heck of a lot more competition for the managers today. Somewhat, there is somewhat as things pick up again.

But I think, again, as I mentioned before, we're pretty tough in terms of refinancing some of the stuff. And while they're great customers, we might want to see a quarter or two of performance before we take them on.

So that's slowed us down a little bit. And you know, all these companies that we hire relationship managers from, the last thing they want to do is give up business to someone they just lost.

So they're being very competitive on keeping the good business. So all of those things -- that's not possible to get the businesses. They do follow our relationship managers.

But it just lengthens the time sometimes that we're able to bring that in. I'm very confident that we can have the same kind of success with the relationship managers we hired that we've had in the past. These are just different times and we're all dealing with different aspects.

It's also a reflection of the fact that in the last year or year and a half, we've increased that number by 25% and it's realistic to think that a company would want to pause and let the volumes build.

We continue to be opportunistic on people. We continue to be opportunistic on hiring better people and removing the people that don't perform up to our expectations. That won't stop.

It has slowed as Peter said just because the economy slowed. But the model we believe in is intact, it's working and it will work.

Okay, thank you. One last final question. In terms of -- you mentioned I guess getting more aggressive on resolution of some of the problem assets.

Just curious as to how that may play through on the income statement. Should we expect to see more provision expense as you attack those assets and try and dispose of them? Or do you feel like the valuations are [you've already reserved] and there shouldn't be much more impairment from here?

What I had mentioned in some of the opening remarks and I need to reinforce that is for the last few quarters, we have been developing a more aggressive attitude of removing the problem assets from the balance sheet and that's again why our provisions have remained high for the last few quarters and will remain high for the next quarter or two. When I say high, I mean in the level where it is today.

But that is positioning us and positioning the reserve to be able to add a few incremental reserve dollars to the disposition program and maybe move some of these assets out a little bit quicker. So that's part of the plan.

To answer your question and I think I mentioned it too, it in our opinion will not be a drag on earnings. It will not cause us to lose momentum in the earnings stream that we are posting today.

John Pancari, Albacora Partners.

Can you talk a little bit about the deposit growth you put up in the quarter? What type of -- I saw a savings, I actually saw a pretty good jump, if you could talk about what you're doing there and then also on the CD side.

What shows up, John, is savings or money market relationships with downstream correspondence primarily. There are other categories that just fit that line item compared to others.

There has been no push to post rates to gather deposits at those levels. We're not posting CD or any other rate in an attempt to attract new deposits.

We're building treasury management and other relationships really over as you know, from the last two or three years that are really bearing fruit at this point.

Some of those larger relationships we've talked about like the broker-dealers and the HOAs and (inaudible) 31s and accounts like that, in times like this, they really build liquidity, particularly the broker-dealers. A lot of people aren't interested in putting their money in the stock market today, they're keeping a lot of cash on hand and i.e. the brokers are handling it.

So I think a lot of existing accounts continue to grow and build that liquidity. It's not all new business. A lot of it is, but we see good organic growth in the deposit side too.

And the makeup of the time deposits, is it large retail or brokered or jumbo CDs?

No, brokered. It's just in the normal course of business. It's typically commercial business customers that we bank. It's all customer business, no wholesale money or brokered deposits.

And no retail.

Okay, all right. And then on the reserve, just to follow up to the credit discussion you just had, in terms of your reserve, should I take it that given that you're saying, George, that you're positioning the reserve to work out -- or to more aggressively address some credits, does that really just imply that you're likely to keep it relatively stable where it is right now at about 170 basis points of the loans portfolio?

You know, John, it's really hard to make that statement until you know exactly what it's going to take to do what we are trying to do. Plus the fact as credit improves and the economy improves, our methodology is going to drive the reserve down a little bit too as the portfolio improves in terms of credit quality.

I could guess I think what I think it will do. But from the standpoint of being able to say this is exactly the way it's going to fly, it's really hard to do.

I'm not avoiding your question, I'm just telling you that's the way it is. The methodology works really well.

It protects us in times like this and it's given us flexibility when the economy is very good. We do believe that we are getting less pressure from the regulators and from the accountants to keep that reserve really tight and down. We were able to build it a little bit to do some of the things we're talking about, to be a little more aggressive in terms of working through these issues.

John, we will reach a time when allocated reserves either get freed up because things improve or are utilized when we take charge-offs or dispose of loans.

We're still following the guidelines for sure, but there's a little more flexibility in terms of being able to get done what we would like to get done.

Okay and then lastly on the loan growth front, again I know you talked a little bit about the pipeline is firming up and is solid and utilization rates appear to be stabilizing, I guess. I am just -- want to get some feel about where the organic loan growth ex the warehouse could trend in coming quarters. Are we talking low single digits in terms of actually putting on balance sheet growth in your core markets there in Texas?

I would not classify it as low single digits. We're certainly not in a position to project by any quarter but --

Okay, then if we could just put it in terms of the the production levels that you're seeing now in terms of loans, can you just kind of characterize what you're seeing there on the front end?

Well, in the Dallas market which is about two-thirds of the Company, we're seeing about half of the -- at least half of the loan growth that I mentioned that should happen within the next 30 to 60 days. Houston, extremely strong, as we mentioned in the past.

We really added resources to the Houston market. Their deposits by the way are up 100% from last year. Fort Worth, extremely strong, a lot of activity going on there.

All our markets with the resources that we've dedicated over the last 12 months in people and in software product and treasury have done a remarkable job. And as we said, all this is by plan.

It's positioning the Company to take advantage of the market when it does recover and it really has taken a little bit longer than what we anticipated quite frankly. We got out in front of it, jumped out in front of it, and we're probably six months earlier.

But whatever that timeframe is, we're pleased with where we are and what the Company can do. We've got a lot of capacity built into the Company today and we will be extremely competitive when the market allows us to be.

Dave Bishop, Stifel Nicolaus.

I think you alluded to this in sort of following up on that question and just real quick there, in terms of commercial line usage there currently versus historical, can you just give us a sense of where that stands now versus the typical norms?

Yes, it's about 70% usage on our lines and that is higher than most really for the reason that we just don't simply give people lines if they're not going to use them. It is -- we're getting good line utilization.

(Operator Instructions) Michael Rose, Raymond James.

I just have one follow-up. As it relates to the pipeline, can you quantify the percentage that is from the 25 net new lenders that you've hired I think since 2009?

We really don't have that number, Michael, to give to you. A nice chunk of that is coming. We have a nice portfolio of energy credit that we think we're going to be able to fund in the Dallas area in the next two months.

Corporate C&I being the other half, so it's -- but there is a good -- a good portion of that comes from new RMs but we don't characterize it as such. We don't have those numbers.

At this time, I'm showing we have no further questions. I'd like to now hand the call back over to management for closing remarks.

Thanks very much. We appreciate your time and your thoughts and we appreciate you following Texas Capital Bancshares and we will work hard in your interest. Thanks so much.

And I'd like to leave you with one thought. Go Rangers!

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.