Texas Capital Bancshares Inc (TCBIO) 2010 Q4 法說會逐字稿

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

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

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today to Ms.

Myrna Vance, Director of Investor Relations.

You may proceed.

Thank you, Caitlin.

Welcome to all of you, and thank you for joining us today for our fourth quarter and year-end call.

If you have any follow-up questions you know I am available, give me a call at 214-932-6646.

Now before we get into our discussion 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 Texas Capital Bancshares control could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

These risks and uncertainties include the risk of adverse impacts from general economic conditions, competition, interest rate sensitivity, and exposure to regulatory and legislative changes.

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in our Annual Report on Form 10-K for the year-ended December 31st, 2009, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let's begin the discussion.

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

After we have a few prepared remarks, our operator Caitlin will facilitate the Q&A session.

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

Thanks Myrna.

Good afternoon everyone.

Thank you for joining us on Q4 conference call today.

We are pleased to end the year with record earnings, assets and deposits on a quarterly and annual basis.

We had another year of solid earnings growth reaching record levels despite persistence of above normal credit costs.

We are extremely pleased with our customer deposit growth, especially in demand deposits that grew 61% from Q4 2009 to Q4 2010.

Compared to the industry, we also experienced significant loan growth during 2010 with loans held for investment growing 6% from Q4 2009 to Q4 2010, and with the strong surge of growth we saw in Q4 2010, we have begun Q1 2011 with a nice tailwind.

Our loan growth prospects look very good and our pipeline is robust.

We believe growth in loans held for investment will exceed 2010, with fairly stable loan spreads and reduced funding costs throughout the year of 2011.

Loans held for sale, That is our Mortgage Warehouse line of business, has grown dramatically in 2010 from significant gains in market share and refinancing activity.

Our focus on credit quality continues.

Credit costs are consistent with our expectations, and they are showing an improved trajectory that I will discuss in more detail after Peter's remarks.

Texas Capital is well-positioned in the best economy in the US, Texas.

We have extremely strong core earnings power, with improvement in net interest revenue each quarter since Q4 2009.

We are one of the very few banks in the country showing real organic growth in net revenue.

Now let me turn it over to Peter for some of the details, and I will be back in a moment.

Thank you, George.

I will try to summarize fairly briefly actually.

George commented we had record growth comparisons in both net income and EPS.

Record year of $37 million in net income, $12 million for the fourth quarter, representing $1.32 per share respectively.

George commented on the growth in net revenues of 21% year-over-year, 6% linked quarter.

He commented one of the very few banks having meaningful organic growth in net revenue.

We had strong growth in net interest income, obviously with loan growth as the most important driver coupled with year-over-year improvement in net interest margins.

We have seen great stability in loan held for investment yields through the year.

We have seen a little less stability because of market rates from mortgages and held for sale yields, but that has been offset with very strong growth, especially in the last half of the year.

We had significant funding cost reductions throughout the year, and an increase in the pace of those reductions in the fourth quarter.

We anticipate more improvement in the first quarter of 2011.

I will speak more about that later.

We did have a decrease in net interest margin in Q4 due entirely to the growth in deposit funding.

Early excessive deposit funding of liquidity assets.

Had a $260 million increase just from Q3 to Q4 resulting in a total of $387 million average balances liquidity assets.

When we look at the amount adjusted for the excess level of liquidity assets, we see a stable and high level at 4.35% on average for the year, rising at the fourth quarter.

Had good increases in noninterest income, coming from loan products and deposit products, and obviously from the Mortgage Warehouse.

Expense growth we have seen improvement in the ratio of noninterest expensed earning assets, coupled with the higher levels of net interest margin.

That has produced a significant improvement in the efficiency ratio.

We see expense growth for the year reflected in the recruiting to support the growth achieved, and that which is expected with recovery.

We have seen significant expansion in the regions and lines of business to strengthen our position going forward.

Other than the workout in collection expenses which will improve with asset quality, the expenses are consistent with our expectations with actually large and variable components for changes in our business.

In loan growth we had 12% year-over-year, and a 5% linked quarter in total loans.

Held for investment growth was 7%, compared to a general industry-wide contraction.

Obviously the level of activity in held for investment growth is limited by economic trends, and in our case much tightened underwriting standards.

We saw significant increases in Q4, especially toward the end of the year producing a year-end balance that was 4% greater than the fourth quarter average.

We expect that pace of growth to increase with improvements in a regional economy.

We saw exceptional growth as we have commented in previous quarters, held for sale loans due to the refinancing activity in the industry, and the expansion of our Mortgage Warehouse customer base.

I commented earlier the yield reduction that you have seen from Q4 2009 current strictly a reduction in what we have seen in national mortgage rates.

Today and at the end of fourth quarter those rates are higher than they were for the fourth quarter average.

We have an organic growth model clearly demonstrating improvements in Texas Capital's market share across the state in most of our lines of business.

George commented on very strong deposit growth.

I actually went back to see where it started and how it got to be to this level.

Following the industry crisis in the first half of 2009, and the six quarters thereafter, we have grown each quarter compared to the linked quarter, an average of 12% or $489 million per quarter for six quarters, $594 million in the fourth quarter of 2010 alone.

For the same period DDA has grown an average of 11% for each linked quarter, and almost $200 million in average balances in the fourth quarter, for a 17% not annualized increase, and 46% above the fourth quarter 2009.

The DDA growth for 2010 actually exceeded the total growth in loans held for investment by over $100 million.

DDA balances at year-end were more than $100 million, 8% greater than the fourth quarter averages.

As we have noted in the past, growth has changed our funding profile dramatically.

The excess deposit funding of more than $1.5 billion in the fourth quarter.

We are carrying liquidity assets and held for sale with deposits instead of borrowings, with an incremental cost in Q4 of roughly $1.4 million.

The difference representing the cost to carry liquidity assets and the differential rate between borrowings and deposits.

The strength of our balance growth has given us an opportunity to reduce balances and rates in numerous categories of deposits and funding.

We expect consistent reductions in funding costs, saw consistent reductions throughout 2010.

As I said more pronounced reductions in the fourth quarter.

And handling certain relationships as agent, TCB can move balances off our balance sheet, and still maintain control of the relationships.

Because of our growth prospects, we have historically and remain unwilling to make investments of our excess liquidities in securities with low yields, or loans with fixed rate in any significant numbers.

As George commented credit costs were consistent with expectations, a favorable trend from Q3 in both provision and ORE evaluation charts.

We saw a provision in excessive net charge-offs for the year of $2.5 million.

As George commented the persistent high levels of credit costs hurting earnings, but they have been very manageable and on text of much improved earnings power of Texas Capital.

We saw a linked quarter improvement in nonperforming assets.

George will comment more about credit trends in a moment.

As noted in the quarterly income statement on page six, we saw excellent growth in net revenue, with net interest income reaching $66 million despite the reduction in the fourth quarter in net interest margin.

Growth in noninterest income through warehouse lending reflected as brokered loan fees, and other fees in deposit products was very good throughout the year.

We had good quarterly progression of EPS, saw an increase each quarter in both ROA and ROE, still impeded obviously by high credit costs, with a high tangible common equity ratio, we will see a limit on ROE until we can improve leverage, as well as bring credit costs down.

We have a lower and more stable ratio of noninterest expense earning assets, which along as I mentioned earlier with the relatively high NIM, produced really good improvements in our efficiency ratio.

Looking at slide seven, this is near the end of my comments, you see an annual summary that shows the record levels of income and earnings per share.

Improvement in NIM year-over-year, growth in net revenue, credit costs elevated at $62 million versus $51 million last year.

Seeing good improvement as I mentioned in ROA and ROE, despite the high credit costs.

We are now in a much better position to produce much better levels of profitability as credit costs come down.

Our outlook for 2011, I will remind many of you on the call of seasonal and other factors related to results the first quarter of each year.

We have reduction by two compared to fourth quarter of days, and as sensitive as we are with floating rate loans, that is a meaningful number to us with today's earning asset levels.

We also have an increase in employment taxes.

You recall our business profile says we have a lot of higher paid employees who lose FICA expense along the way.

We see an increase in those as we start the new year.

We also saw last year and would expect this year a seasonal reduction in warehouse lending, but this year starting at a much higher base the fourth quarter of 2010.

We expect better growth in loans held for investment, building over the course of 2011 from the surge George mentioned at the end of the year.

My comment that year-end 2010 balances were already 5% above the average for 2011.

Warehouse lending and the homes held for sale, our outlook there is driven by industry conditions with an expected reduction based on current rates and refinancing activity.

The reduction in volumes will be offset to some degree with new customer acquisition.

Due to the uncertainty over rates, the level of refinancing activity and predicted on-boarding of new customers, it is difficult at this time to predict balances and fees for 2011.

New product offerings to limit risk concentration and capital allocations will be in place as we work with larger customers.

We do see and expect a reduction in operating costs, new systems.

We expect in 2011 as in [2010] significant contribution in earnings from the warehouse lending activities.

I mentioned programs initiated in Q4 to reduce deposits and other funding costs.

We expect the Q1 benefit to be substantial, to be equal or exceed the change from Q3 to Q4.

The first full quarter impact will actually be in the second quarter of 2011 because programs will be implemented over the course of the first quarter, not all at once.

Seasonal trends may affect DDA in the first quarter.

We anticipate very good growth over the course the year.

In the net interest income obviously our reduction in funding costs will be important.

Growth of loans and the reduction of excess liquidity will produce significant benefit.

We have a very positive view of loan held for investment growth, but it won't be sufficient in 2011 to overcome the excess liquidity position.

Again we have no inclination to make investments in securities at yields which are now available.

The Company remains quite asset sensitive.

Credit costs we see a potential opportunity, perhaps substantial, on which George will elaborate.

Noninterest expense, we know that workout and credit related costs will remain high, until credit problems abate, build-out expense recruiting and infrastructure we have talked about, are expected to be less in 2011.

No new initiatives for build-out.

We do anticipate remaining opportunistic for hiring the best talent as they become available.

We have already really covered on slide eight, average balances, yields, and rates, and commenting that $386 million level liquidity assets in Q4, compared to $18 million in the year ago quarter, and quite a hurdle to overcome in terms of net interest margin, obviously reflects the success in our deposit gathering efforts.

That by itself caused a reduction of 23 basis points linked quarter net interest margin.

These long yields holding above 5%, a good position with floors over 60% of the floating rate loans.

Linked quarter held for sale yields were stable, and increased at the end of the quarter into 2011.

Slide nine average balances cover trends really in average, balances and clearly the levels we have shown in deposits and loans are among the best in the industry.

Quarter end balances on slide 10 we have really covered most of this.

Began the strong growth in held for investment loans at the end of the quarter, produced 5% linked quarter growth end of period balances.

Balances in held for sale were below the September 30th level, and Q4 average is due to the seasonal slowdown in refinancing activity.

Total loans therefore were flat.

Linked quarter DDA growth of 21% is a record for Texas Capital, especially since Q3 levels were also already at very high levels.

Slides 11 and 12, CAGRs in both interest and noninterest components of net revenue are exceptionally high, and they are driven as reflected in slide 12 at remarkable levels of compound growth in loans and deposits.

George?

Thanks, Peter.

Slide 13 shows our loan portfolio statistics by collateral type at year-end.

Composition changes really relate to loans held for sale, which are down slightly at 20% of the loan book, compared to 24% at Q3 2010, simply a function of the market.

Nonperforming assets remain concentrated in real estate at 68% of that total, and commercial loans at 32%.

Our nonperforming loan ratio is down to 2.38% from 2.83%, and our nonperforming asset ratio declined to 3.25% from 3.66% in Q3.

We had total credit costs of $62 million for the year and $14.3 million for Q4 of 2001.

That includes, as you know, our ORE valuation reserve in addition to the provision.

Our credit costs decreased $2.9 million from Q3 2010, reflecting an improving trend.

The provision of $53.5 million, $2.5 million greater the net charge-offs of $51 million for the year, and the provision of $12 million for Q4 2010 was less than the $13.5 million for Q3.

Our ORE valuation charge was $8.5 million for the year, with $2.3 million in Q4 2010, and that was compared to $3.7 million in Q3 2010.

We had net charge-offs of $51 million for the year and $17 million for Q4 2010.

An interesting statistic during the three-year period of economic crisis from 2008 through 2010, net charge-offs at our Company averaged just 65 basis points.

We had net charge-offs of 1.41% for the year, and 1.49% in Q4 2010.

Nonperforming asset levels remain manageable, as Peter mentioned, again due to our strong core earnings power.

And I believe we will continue to see these NPA levels decline in 2011.

Nonaccrual loans were down $15 million to $112 million in Q4 2010, or 2.38% as mentioned before of loans held for investment.

Our nonperforming assets decreased a little over $11 million to 3.25% of loans held for investment and other real estate.

We see the potential for a significant reduction in 2011 credit costs really for the following reasons, we are not seeing large inflows of NPA's previously observed in prior quarters.

The level of potential problem loans has come down sharply at $25.3 million year-end 2010, compared to $52.8 million in Q3, and $53.1 million at year-end 2009.

Secondly, current problem assets have been properly reserved or written down in prior quarters, and have need for little additional reserves, we believe.

Third, ORE has been marked to market at foreclosure, and subsequently written down a reserve based on current appraisals.

Our ORE total today is approximately $42 million.

That is 31 different properties.

They have all been appraised with current appraisals in 2010, and we feel they are properly valued.

Four, at 12/31/2010 we have resolved a number of problem assets that were previously identified.

Slide 15 graphs our net charge-offs to average loans for the past five years.

While 2010 was the most difficult year in the Company's history for charge-offs, our performance was significantly better than most of our industry.

In closing, I would like to emphasize five what I believe to be very important points.

One, our Company has very strong core earnings power, and that will continue to improve in 2011.

Second, we have had exceptional customer deposit growth, exceeding growth in loans held for investment in 2010.

Third, we have a very strong capital position.

Fourth, credit issues have been challenging but manageable.

We see definite improvement in credit quality, and expect lower credit costs in 2011.

And finally, Texas Capital, we believe, is well positioned to take advantage of market opportunities, as these economic conditions continue to improve.

That is the end of our prepared remarks.

We will be happy to turn it over to the operator and take a few questions, please.

(Operator Instructions).

Your first question comes from the line of Mike Zaremski of Credit Suisse.

You may proceed.

Hi, gentlemen.

Hi, Mike.

I guess if I can focus on Mortgage Warehouse for a minute, I know, Peter, you talked about seasonality in Q1.

I guess certain people in the industry are calling for just overall residential loan volumes to be down up to a third in 2011 due to the pick up in rates.

I know we are not interest rate strategists, but how should we think the warehouse lines would look in that type of a scenario?

Increasing market share?

You guys have talked about initiatives in terms of fee income as well.

Sure.

I will take that one.

Remember the warehouse has grown dramatically from Q2 2010 until today.

Basically the benefit of two things, one the refinancing activity, and we have been very fortunate and diligent in taking market share from competitors.

And that will continue.

I also believe that the mortgage financing activity could be down as you say a third, and maybe even a little bit more.

But again we have the ability in my mind to with the platform, the software, the sales team, and the infrastructure, to continue to add market share as we go forward.

We have a significant number of customers.

We have a significant number of large customers that will continue to produce mortgage activity on a go forward basis.

As you recall, we have discussed the fact that our customer base is basically larger mortgage companies that continue to be well capitalized and generate a lot of production.

We believe that the warehouse on an average basis will average less than it did in 2010, and we are planning on that.

So I think we will absolutely understand that the market could be soft, but with market share gains we think we can be a significant player in the business.

Great.

And my last question is the noninterest bearing deposit growth was phenomenal.

Any color there, and maybe a couple big accounts, or any color on what is going on?

No, it is really interesting.

I was looking at that the other day in terms of just a broad based growth.

If you look at all our lines of business, sure we have had one or two or three larger accounts come in, but realistically we are getting flow-through from virtually all of our lines of business, and our regions outside the Dallas also.

It has been pretty incredible, like you say, that we have seen, and that is very comforting from my standpoint to see that it is broad based, that it is not one, two or three particular lines of business that are generating all of these deposits.

And we just continue to improve our Treasury management relationships with all of our customers, our commercial customers.

We have 373 new relationships in 2010 through our Treasury management group.

So it has been very gratifying and very sticky.

Thanks for taking my questions, guys.

Yes.

Your next question comes from the line of John Pancari of Evercore Partners.

You may proceed.

Good afternoon.

Hi, John.

Peter, you had mentioned that the margin would likely depend on the level of loans and deposits and everything.

Is it fair to assume that given the impact of excess liquidity, and the modest but emerging turn in loan growth, that the margin could see some near term pressure here?

Actually given the level of noninterest bearing deposits that Michael asked about, and given that some possibility certainly with seasonal reductions in held for sale volumes, and the deposit pricing initiatives that we have had, we would not expect a decrease in our net interest margin near term.

As the year progresses, obviously a lot of variables can change.

Alright.

So more of a flattish level here near term?

I think beyond that I really can't say.

Okay.

Alright.

I did say we had a 10 or 11 basis point reduction in funding costs in Q4 from Q3.

We are expecting that much or more in Q1.

Okay.

Alright, and then in terms of your loan growth outlook ex the held for sale, so the held for investment, can you talk about what you are seeing there, in terms of line utilization and your pipeline on the commercial side?

Sure.

Most of the pipeline really relates to our C&I portfolio.

We see in Texas a firming with a number of our customers, and a little more positive attitude than we have seen in the past, relating to just our good C&I customers, but it is pretty broad based.

We see optimism in the energy area.

We see it in healthcare, and a number of other C&I prospects.

There is still a hesitancy to a certain extent.

We are spending a lot of money, but we are seeing a lot of top line revenues in many of these companies that we are doing business with, firming up, coming back, seeing other of their customers wanting to spend some money with them.

So I think as I mentioned in my comments that we will exceed the 6% to 7% loan growth in LHI in 2011, and I stay with that comment.

I believe we will do that.

Okay.

And in terms of the brokered loan fees in the quarter, it looks like they took a pretty good jump.

Can you give us a little bit of color there?

Well, again volume on the warehouse.

We were one of the largest processors in Q4 in the Mortgage Warehouse business in the country.

And that generates a number of brokered loan fees.

So the biggest jump in that noninterest income number is the brokered loan fees that came out of the warehouse.

Right.

So that could pare back as the warehouse origination volume cools?

It should be pared back somewhat if the warehouse slows.

Again as Peter mentioned, it is really going to depend on our new business generation and interest rates.

Okay, thank you.

Your next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey.

You may proceed.

Thank you.

Hi, guys.

Hi, Jennifer.

A question on credit.

George, can you give us a sense of what the new problem or new nonaccrual inflows were in the fourth quarter, versus third quarter and second quarter?

I am just trying to reconcile your comments on thinking that credit costs could come down materially this year?

Yes, it is a hugely dynamic process, Jennifer, as you might imagine.

We have had a number of significant pay downs.

A portion of it was charged off.

There were a few new additions to that total.

And we foreclosed on some real estate, so it is a very dynamic process.

But what I can tell you, and I think I mentioned in earlier comments the inflows have slowed.

We certainly don't see the level of inflows that we saw in earlier quarters.

I think that is reflected also in the potential problem loans.

You will notice that we show very few TBRs in this particular release.

We take the approach for most of those they should be on nonaccrual anyway.

We take a fairly conservative approach in terms of handling the TBRs, so we drop those to the nonaccrual area, and that tends to push increases somewhat.

We don't give that specific number out, but again it is a dynamic process.

One more question.

Given you are expecting nice loan growth this year, would you anticipate much dollar reduction in the loan loss reserve this year, or just a reduction in loan losses going forward?

No, I think what we have said and we should reiterate again, that as we come out of this credit cycle, the provisioning will typically be less, but the charge-offs for a quarter or two will be stable or even up a little bit as they were in Q4, as we resolve some of these issues.

What that means is that you properly reserve them along the way, along the downturn, and that there is little need for a few incremental reserves as you write them down, sell them, move them off the balance sheet.

It is very hard to predict a specific level of the reserve.

As I mentioned before and I guess you are probably tired of hearing me say this, but it is all based on methodology.

There is a growth factor in there.

There is a problem asset factor, there is an economy factor, there are a number of things that relate to the methodology that drives the provisioning.

It is hard to predict that level, but what we can tell you, we believe credit costs will come down.

We believe we will support growth, and that we are just not going to see the same level of provision going into the reserve to support problem assets.

Okay.

Thanks.

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

You may proceed.

Hey, Peter, George and Myrna.

Hi, Brad.

How are you?

Good, good.

Just a quick question on the loan growth that you had in the quarter, could you talk about maybe geographically where it came from within the state, and what types of rates you are getting on the new production?

It is getting more competitive, Brad, as I am sure many of your banks are telling you.

We are still able to get floors, albeit probably lower floors than we have been able to get in the past, and they are more difficult to get.

There are spreads for the really great business out there are coming under a little pressure, because a number of banks are looking for good earning assets.

So we see the 2011 being fairly competitive for the good business with interest rates and spreads.

The business typically from our standpoint is coming statewide.

We see continual, really good growth coming out of our regions.

Our four locations outside of Dallas.

We have got great teams in place.

As you know we mentioned we have a focus on Houston.

We have got a $700-plus million bank in Houston today, and they have done a great job, and we will continue to grow it.

It is really fairly broad based in terms of growth that we see.

It looks good from our standpoint at this point in time.

We will have to see if the commercial real estate market in Texas recovers somewhat in 2011.

That is the bogey out there a little bit, but we are all watching it carefully, and feel pretty good about it.

Okay.

And then just maybe a different way to ask the mortgage warehouse question, but just curious maybe how many customers you have in that business today, maybe versus a year or two years ago?

A lot more.

A lot more.

Brad, we don't give out that specific, because it is a very competitive business, but it is hundreds of customers.

And the thing that is important to us is the quality of customer, and how we have improved that customer profile over the last three to four years.

Remember we said that during the downturn so many of the larger banks got out of this business.

It was an easy business to exit.

They did.

We were there and picked up a tremendous amount of good business, and quite frankly they have long memories.

They like what we have and what we do and our platform, and I feel very good about keeping those customers in even more competitive environment today.

Okay, and then final question on that, if in fact the warehouse was down 20% or 25%, just curious what you guys would see as it relates to maybe some reduction in commission expense, or however else you track that, if there would be any, if you could peg a percentage, what you would pick up on the expense line item?

Brad, this is Peter.

I don't have a specific number in mind, but I mentioned in my remarks that there is a large component of cost there and it can be variable.

Commissions is one, staffing is another.

So can't be more specific than that.

I think it is important to note that we are not building our Company as a warehouse lending bank.

It is a nice addition to what we do, but from the standpoint of it is a wonderful, wonderful adjunct to our business lines.

But we have a tremendous plan for the loans held for investment and our growth in the relationship of mid-sized companies to this business.

When the warehouse is trending down we do reduce costs.

And our new software frankly has reduced costs per unit per file about 50% from where it was before the new system was installed.

So this is one way that we are going to, in addition, improve the profitability on a go forward basis, even in a slower environment.

Great, thank you.

You are welcome.

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

You may proceed.

Hey everybody.

Most of my questions have been answered, but let me just ask a couple of off the wall questions.

In terms of deposits, is there a percentage of your $5 billion in deposits that is linked to the warehouse, or is in the bank because of the relationship they have with the warehouse?

You bet.

I am sorry?

You bet, there are some that as we have said that is in the $300-plus million range, something like that, maybe a little bit less than that.

That is all it is?

Depending on the volumes that we are processing.

But it has been, that is the great thing about the warehouse business.

It has been a great relationship producer.

It produces deposits and liquidity along the way.

A lot of those balances are DDAs because they are servicing companies and escrow deposits.

Bob, the growth in that number year-over-year is not that substantial.

And I would also comment a lot of that has to do with omitted guidance lines, not the actual activity levels.

Okay, yes.

And I guess in terms of your lift-out strategy on hiring annually, where are you guys at this point in time?

Do you expect to hire more?

Do you expect to, it seems like there has been a little bit more of a lag than usual from the group you hired on sort of end of 2009 into 2010, in terms of production, just the environment I guess?

We built a lot of capacity in our Company, as we mentioned before.

We think that is important coming out of the economic downturn, that we need to be postured to be very competitive when the economy picks up, and that is what we have done.

Q4 we hired two or three relationship managers, and we exited two or three.

So we have been pretty flat for Q4.

We will probably not be as aggressive first half of 2011, but again we are opportunistic.

If we find a team or an individual or two that really make sense for our Company, you don't wait for that.

You go get them.

I think you could see us slow a little bit from a mentality standpoint.

And George, I have to ask you this question, when you saw Ralph pay the price he did for Sterling, what was the number that came in your mind to think what TCBI was worth when you saw those multiples?

You are not going to get me to comment on that.

Thank you very much for the opportunity, but I will take a pass.

Thanks, guys.

Thank you, Bob.

Your next question comes from the line of Michael Rose of Raymond James.

You may proceed.

Hi, Good afternoon everyone.

Hi, Michael.

Wanted to get a little more clarity on the expense line, some of the expense lines.

Looks like the marketing expense was up pretty robustly quarter to quarter, and is there some opportunities, are your FDIC assessment fees going to come down in 2011?

We do expect them to come down.

Q4 was a little bit unusual in the way that we had a campaign, a small, one of the first ever advertising campaigns, print advertising.

There were some marketing and related costs in connection with Treasury management activities.

So a lot of that, some of that is not recurring in nature.

Okay, and I am sorry if I missed this, but have you given any sort of guidance or anything for any of the Reg reform that is coming through the system?

We heard some commentary from some of your competitors over the past couple of days.

It is small.

A lot of it recently has been driven by the magnitude of deposit growth that we have had.

We wouldn't be willing to project that level of growth 2011, but it is a number today for us that is hard to pin down.

Okay.

Thanks.

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

You may proceed.

Hi, guys.

All my questions have been answered except for one.

How much of the growth in noninterest bearing deposits was related to your mortgage warehousing business?

Very, very little.

Very little.

Okay.

And one other question just touching on the marketing expenses, do you think they will come down in Q1 to levels prior to Q4?

Yes.

As Peter mentioned before, we were doing a few things internationally.

We have kicked off a small advertising campaign that we thought was necessary, and a great timing based on the economy and things recovering.

So we did that, but again we don't see that as really recurring.

Okay, so that campaign is over and done with?

Yes.

Alright, thank you.

You are welcome.

Your next question comes from the line of Tom Alonso of Macquarie.

You may proceed.

Afternoon, guys.

Hi, Tom.

Real quick, just trying to get my head around the dynamics here for the balance sheet when you are talking about bringing deposit costs down, should we expect to see continued deposit growth, or are you willing to let some higher cost stuff roll off and maybe replace it with the liquidity that you have on the balance sheet?

Mostly the latter.

Although we don't have anything truly high cost, and we don't have a lot like people that had CD maturities of any great consequence at 3% or 4%.

We just don't have a lot of that.

We do have some relationships where it is, that are either verbally or in a couple of cases by written contract where we have to go back and say for growth in that deposit relationship, we are going to be looking at lower rates on increments.

Okay.

We will be working on driving off enough to get rid of the excess liquidity.

Okay.

Fair enough.

And as much as I hate to beat a dead horse here on the Mortgage Warehouse business, as you move to larger clients who I guess do more production, do your brokered loan fees as a percent of those balances, do they decline?

Is there some sort of a sliding scale there?

They have not.

No.

Okay.

And because we handle, even though they are larger customers, we are basically handling those customers in the same way for the last few years.

And it generates fees the way we do it.

So that shouldn't, just because the customer is larger shouldn't drive down the fee income.

Okay.

Are those fees variable?

If rates move do they change?

They don't change based on rates.

What changes is with volume.

If your volumes go down, your file fees go down.

You are not processing as many files--

and so do the processing costs.

And the processing costs go down as I mentioned, certainly with the 50% number I gave you.

Okay, fair enough.

Thanks, guys.

(Operator Instructions).

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

You may proceed.

Hello, Dave.

Most my questions were answered, but George you gave a number of potential problem loans and can you review that quickly?

Sorry I didn't hear that Dave?

The number of potential problem loans.

I think 25.3.

I am sorry?

$25.3 million.

And that compares to?

About twice that in the previous quarter.

I have got it here and it is 53, I think.

So it is about 50% of what it was the previous quarter.

And also Q4 2009 it was about the same, about 52 or 53.

So we have seen a pretty nice reduction in Q4 2010.

Got you.

Thank you.

There are no further callers in the queue at this time.

I would now like to turn it over to management for closing remarks.

Well, thank you everyone.

We believe we have had a really great quarter and a great year.

It has been a record in all respects in a very difficult environment.

Over the last two to three years has been tough for our business, but I am very proud of our team, and we have tried very hard to deliver value to the shareholder.

We appreciate your interest, and your attendance to the conference call, and we will keep working on your behalf.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.