Texas Capital Bancshares Inc (TCBIO) 2013 Q3 法說會逐字稿

Good afternoon and welcome to Texas Capital Bancshares third-quarter 2013 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ms. Myrna Vance. Please go ahead.

Thank all of you for joining us today for our third-quarter call. For those of you that I have not met, I'm Myrna Vance, head of Investor Relations and if you have any follow-up questions, please give me a call at 214-932-6646.

Now, before we get into our discussion, let me read the following statement. Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results.

Texas Capital is under no obligation and expressly disclaims such obligation to update, alter or revise its forward-looking statement, whether as a result of new information, future events or otherwise. A number of factors, many of which are beyond Texas Capital's 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 the forward-looking statements can be found at in the prospectus supplement, the annual form on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission.

Now let's began. With me on the call today are George Jones, our CEO; Peter Bartholow, our CFO, and Keith Cargill, who is currently President and CEO of Texas Capital Bank, but who will be taking over as CEO of Texas Capital Bancshares from George at the end of the year. After a few prepared remarks, our operator, Amy, will facilitate a Q&A session.

And now, let me turn the call over to George.

Thank you Myrna. Good afternoon everyone and welcome. I thought I would start our call with a few facts about our company, since our IPO in 2003. As many of you know, Texas Capital Bancshares just celebrated its 10th anniversary being a public company, this quarter. Since that time, the compound annual rate of return from the IPO stock price of $11.00 has exceeded 15.5%.

Let me talk about a few other facts that really help define our superior performance at Texas Capital. Quarterly income in Q3 2003 was $3.3 million. That's compared to $35 million in Q3 2013. That's a compound annual growth rate of almost 27%. Total loans at Q3 2003 was $1.2 billion and $10.3 billion in Q3 2013; a CAGR of 24%. Total deposits of $1.4 billion in Q3 2003 versus $9 billion in Q3 2013, again, a CAGR of 21%. Demand deposits of $270 million in Q3 2003 versus $3.2 billion in 2013, reflect a CAGR of 28%.

Return on assets in 2003 was 0.64%. Now today, it has doubled to 1.3% in Q3 2013. And finally, our tangible book value per share, $6.65 at the IPO date, now is $21.82 after three offerings of common stock since the IPO.

One other thing that I think is interesting to note is that our company has achieved these levels of performance and growth organically, without acquiring any financial institutions.

It's my pleasure to report another operating earnings record for Texas Capital. Net income for the quarter was $33.4 million compared to $24.1 million, for a link-quarter increase of 39%. This was driven mainly by a $7.6 million increase in net interest income and a $6.7 million decrease in non-interest expenses that were related to succession planning and performance driven incentive compensation expenses that we discussed last quarter.

The company also experienced extremely strong loans held for investment average growth of $580 million or 8% link-quarter and 22% from Q3 2012. This is a record for link-quarter growth for our company. Net interest margin increased 2 basis points, coming on the heels of record loan sale for investment growth in Q2 2013 of approximately $600 million.

The current quarter non-interest expenses include a non-operating, non-reoccurring assessment of $3 million by the FDIC. This assessment relates to amended call reports of 2011 and 2012, reflecting a change in risk weighting of our capital related to loans held for sale, causing one particular capital ratio to fall below well-capitalized for each quarter in. We do not believe this is an assessment that is warranted and we have appealed the charge.

Without this charge, net income would have been $35.4 million or $0.79 a share. Return on assets would have been 1.32% and return on equity 14.5% instead of the reported 1.25% and 13.79%. Peter will discuss this last minute charge in much more detail in his report.

Demand deposits increased 11% and total deposits increased 12% on a link-quarter basis, growing 53% and 33% respectively from the third quarter of 2012. As you can see, our quality growth, both in loans held for investment and in deposits continues.

I'll now turn the discussion over to Peter first and then Keith, as we've said, our current Chief Operating Officer of Texas Capital, who will become President and CEO of TCBI upon my retirement, December 31st of this year. Peter?

Thank you George. As George said, we had a charge of $3 million and I'll discuss that a bit more in a second. But before that non-operating, non-recurring charge, operating net income was $35.4 million. That represented an increase of 23% from Q2 2013, where in that number, again, the non-recurring charge included a $7.7 million number. We also reported an increase of 8.7% compared to the year-ago quarter.

As George mentioned, the FDIC assessment occurred really at the end of Q3, on September 30th and was assessed due to the restatement of call reports. As he mentioned, it applied to Q4 of 2011 and Q4 of 2012, so there's no relationship to current operations in any way.

Obviously, the company had means to avoid that condition had we had any notice that the held for sale risk weight couldn't change or that the restatement could possibly have caused an increase in the assessment. Obviously, we think the risk profile of the assets, the performance of the company and the facts about the situation clearly support our view that the assessment was not warranted. We will dispute the charge and if we're successful, any refund will be applied to non-interest expense in the quarter in which the matter is resolved.

We did report operating EPS of $0.79 per share compared to $0.64, again, before the special charge in the second quarter. Strong quarter in terms of growth, operating leverage, core earnings power and net interest margin. George mentioned, we had exceptional growth in loans held for investment; $580 million or 8% in a quarter that's been historically quite soft. This is a record quarter, as he mentioned, in terms of average balance growth link-quarter, building off the remarkable growth experienced in the last half of Q2.

The growth in held for investment, clearly again is displacing any softness that we see in held for sale balances. Contribution from regions and lines of business was widespread. Quarter-end balance of $8 billion was again, 4% above the Q3 average going into a seasonally strong Q4. And I'll mention that it's 11% above the year to date average for loans held for investment.

We saw loan held for sale balances average down just 1.8% from Q2. Contributions to pre-tax, pre-provision income actually increased slightly in dollar terms and represented 24% of pre-tax, pre-provision contributions compared to approximately 23% of total loans. In contrast to reports of other warehouse lenders and mortgage originators, the performance clearly demonstrates we have increased market share and our strategy is working.

We had very strong results in net revenue and core earnings power and an increase in net revenue of 6% and 11% from the year-ago quarter. We experienced on an apples to apples operating basis, a reduction of non-interest expense of 2.7% from the second quarter. Non-interest expense increased 10% from the year-ago quarter.

We've seen a meaningful improvement in operating leverage, even after the additional expense associated with the major success we've enjoyed in recruiting over the last six months. We experienced a little increase in net interest margin during the quarter. In contrast to our normal trends where our held for investment growth can drive down margin, we saw a slight pick up.

Loans subject to floors has held up extremely well in terms of both balances and yields, but they now represent a much smaller portion of total held for investment loans because of the growth in the floating rate portfolio. Yield on held for sale loans increased 5 basis points as anticipated. The growth in held for investment loans relative to total loans really was the principle driver of the 2 basis point increase in the net interest margin.

We've seen a significant improvement in the funding profile, as George mentioned, with very strong growth in DDA and total deposits. The total deposit costs have stabilized now for several quarters, at 17 basis points.

From Q3 2012 DDA average balances grew just over 55% and represented more than half of the growth in total deposits. The growth in DDA of 1.1 billion represented 119% of the growth in total loans from the year-ago quarter. The balance at quarter end grew by 11% from Q2, again, going to a seasonally strong fourth quarter.

Provision for loan losses this quarter directly related to the quarterly growth in held for investment. The provision of $5 million, down from $7 million the prior quarter, net charge-offs were less than $50,000 and improvements of other metrics in credit quality and an increase in the unallocated reserves were also noted. We also, for the first time in many quarters, experienced no OREO valuation charge in total credit costs.

On slide 6, the quarter income statement comparison, we remain among a very small group of industry leaders in the growth of net interest income and net revenue. Credit metrics improved from already excellent levels and the provision related only to growth in held for investment. Non-interest expense, clearly driven by the growth in our company and is contributing to our performance.

We had strong operating returns and return on assets and equities, George mentioned; ROA above 1.3% and ROE approaching 15%. Among the best in our class. EPS improved sharply; $0.79 versus $0.64; 23% increase. We saw an improved efficiency ratio, again, below 50%, excluding the non-operating charge and even after the very strong success we've had in recruiting.

On slide 8, the balance sheet and NIM shows that the company has significantly increased its asset sensitive position over the past two years and the outlook for NIM has improved. Driven by the growth in floating rate LHI. Contribution floors has remained high but as I mentioned, it's a smaller percentage of the total portfolio. Held for sale yields have improved and they are expected to increase modestly.

The change in funding mix has been critical to our success and will contribute more as rates finally begin to rise. The growth in DDA of more than $1 billion, improved the funding profile for a long-term benefit. The company remains focused on stressing growth in total deposits, with growth of over $2 billion, even if the ratio of held for investments to total deposits and reduced use of borrowed funds is at this point slightly suboptimal for near-term results.

As a result of our business model and balance sheet structure, the outlook for NIM protection in growth and net interest income are improving. With high ROE, internal capital generation rate is still expected to exceed the growth in total loans for 2013.

I might add that between what we've raised and earned since the equity offering in summer of 2012, we've increased capital by a total of $500 million, representing almost 30% of total loan growth in that period.

Slide 9 shows the quarterly average balance shift. As indicated in our earlier commentary, the growth pace increased sharply in the seasonally weak Q3, adding to a trend from Q2 and contributing to the record growth link-quarter in average balances. DDA and total deposit growth were also especially strong and the funding profile has improved dramatically.

Quarter end balances based on LHI growth of 7% link-quarter and 23% from the year-ago, we've obviously continued to gain market share. We've overcome seasonal weakness with growth across many regions and lines of business.

The held for sale balances are high relative to industry trends. Expansion of market share is shown up there, even as the industry is producing dramatic reductions in refinancing activity. Growth in LHI, as I mentioned, is offsetting industry weakness in held for sale. The quarter end reduction in participations in the held for sale program is having the desired impact.

We are benefiting from higher utilization by our largest customers and we are adding new customer relationships. We are beginning to see a consolidation in the industry that could have a significant benefit on our customer base. Might mention from the 9-30 balance we saw 11%, as I mentioned, in held for investment loans compared to the full-year average. We saw a situation where DDA balances represented a huge percentage of the growth in total loans. Keith?

Thank you Peter. George gave you some highlights of our financial performance since our IPO 10 years ago and before I cover slides 10 through 15, I'd like to just make a few comments and share with you some highlights since George became CEO of our company. George took over as CEO in 2008, the year that the banking industry sustained the worst downturn since The Great Depression. During his tenure as CEO, Texas Capital is one of only two publicly traded banks we can identify that grew organically throughout the crisis and never posted a quarterly loss. Third, since May 2008, the stock price has a compounded annual rate of return of 19%.

Finally, let me give you a few numbers to compare Q1 2008 to the third quarter of 2013. Quarterly income in Q1 2008 was $8 million; Q3 2013 $35 million. Total loans were $3.7 billion versus $10.3 billion now; a CAGR exceeding 20%. Total deposits were $3.2 billion in Q1 2008 versus $9 billion now; again, another CAGR exceeding 20%. Demand deposits were $504 million versus $3.2 billion now; a CAGR slightly greater than 39%. ROA was 0.76% versus 1.3% now and tangible book value per share was $11.40 versus $21.82 today.

While George would be the first to acknowledge that he didn't produce these results, our Texas Capital team and clients made this happen, however, his leadership has clearly been stellar and all of us on the Texas Capital team are grateful to work for this exceptional CEO and exceptional organization. We look forward to great years ahead, in part because of his strong leadership through a challenging five-plus years.

Now let's take a quick look at slides 10 through 15. On slide 10, you will see in bar chart format, our revenue, non-interest expense and net income CAGRs. A key measure worthy of note is of course our operating revenue CAGR of 22% versus non-interest expense CAGR of 19%. The 19% non-interest expense CAGR is related to our continued high rate of growth and RM hiring and the associated new hires needed to support our new client acquisition and overall client service delivery model. However, operating revenue CAGR is running at 22%, producing a net income CAGR of 40%.

Slide 11 shows our five-year EPS CAGR of 27%. Moving on to slide 12. Slide 12 summarizes the deposit and loan growth. The demand deposit CAGR of 43% and total deposit compounded average growth rate of 23% each exceed the loans held for investment at a growth rate of 16%. As you can see, we've made substantial progress in growing customer deposits since 2008.

Page 13, we show the loan portfolio of collateral by type. Business assets is the largest category of loans, totaling 32% of our collateral portfolio. We currently have loans held for sale of 22% and commercial real estate market risk loans of 18%. From a credit quality view, we're in excellent condition with nonaccrual loans at $36 million or 0.44% of loans held for investment and 0.35% of total loans. Nonaccruals plus OREO totals 0.6 as a percentage of loans held for investment plus OREO.

Page 14 highlights our continued improvement in credit trends. Q3 2013 total credit costs was $5 million compared to $7.4 million in Q2 2013 and $3.1 million in Q3 2012. Net charge offs of $46,000 or less than 1 basis point in Q3 2013 compares to 8 basis points for Q3 of 2012.

The NPA ratio continues to drop. I'll not read the detail to you, but we are pleased with the steady decline in non-performing loans in OREO.

Finally, on slide 15 you can see the Texas Capital Bank credit quality bar charts. Again, positive trends each period since 2010. Also the combined reserves to nonaccruals has now reached 2.4 times. We are proud of our credit quality record, not just this quarter, but over the course of the company's life. Credit quality is key to our business model and enables us to focus on market share takeaway and delivering high quality strategic value to our loyal clients.

Now I'll turn it over to George.

Thanks Keith, I appreciate it. I didn't realize you were going to do that. Thank you very much, you and Peter and the rest of the team. I want to share with the shareholders on the call that you have the best management team in place going forward that you could have running your company. So I am very pleased that we have this team in place and they'll do a terrific job.

Before we finish, let me just make four brief points to leave you with before we go to Q&A. As we always do, we talk about certain things that we think our company really performs extremely well. Strong core earnings power. Profitability and growth. We see that continue in 2013 and beyond.

Our credit quality, as Keith said, continues to be positive and we expect it to continue to be positive in the future. We have a strong loan held for investment pipeline. We have new commitments that really present a great opportunity for potential growth. And finally, our loans held for sale average balances, as we have told everyone in the past, we believe that they will remain in line with expectations for flat year-over-year averages and we've seen that happen in Q3.

That's all the prepared remarks we have today. Thanks for participating in our call. We'll move to Q&A and then I'll be back briefly with some closing comments. Thank you.

(Operator Instructions) Brad Milsaps, Sandler O'Neill & Partners.

Nice quarter guys. Just wanted to see if you could talk a little bit more about the loan growth in the quarter, maybe by category? You mentioned it was broad-based, but just any additional color there would be greatly appreciated.

Typically we would have a couple of categories that would be a bit lumpy and really lead the charge, but more than any quarter I recollect for the last several, our growth was really spread both geographically and by line of business and industry category. That's very encouraging. We continue to see some good pick up, specifically some very strong growth in Houston as we have been seeing. We continue to see some good strong growth in energy, as we have been seeing. But again, this time we've seeing across the company, some nice healthy pick up in other areas.

I know you guys have invested heavily in the builder finance group and the construction loans have ramped up quite a bit over the last 12 months. I'm kind of curious what those did during the quarter and do you anticipate that when those projects finish that you'll be able to keep a number of those loans on the books or are they set up to refinance out into the secondary market or to someone that would offer long-term fixed rate financing?

Our builder finance group, they focus on the interim construction component and then some very select light development financing for our builders, just to feed their turnover of inventory and build out of their projects. We've had very strong growth. This has been consistent since this team. We brought them onboard 3.5 years ago; consistent and increasingly a stronger contributor. We couldn't be more pleased with this team and the quality of what they've produced.

In fact, of each of our various business units, if you look at overall credit grade, there's no one that has a higher, more high quality credit grade mix than our builder finance team. So again, what causes Texas Capital to be able to sustain high performance, as I alluded to earlier in my comments, is very true of new businesses, new teams that we bring on. Everyone understands that the key core driver for our company is quality. And then if you deliver quality, then good growth happens. If you deviate on quality, you have issues. And this team has just been superb on the quality. This is a single family product, as I think you know, and we are really extremely pleased with how they're progressing.

Peter, you mentioned that you expect maybe the yield on the mortgage warehouse book to move up a little bit. Can you talk about that a little bit more, given the move we've seen in longer-term rates over the last 90 or 180 days? Anything else kind of holding that down that wouldn't make that maybe go up more than it did in the third quarter?

We are obviously experiencing issues with competition. The industry that was so heavily committed to the refinancing market has become, I guess it's almost fair to say desperate. We are seeing pricing pressure and we're going to respond to our best customers. I think the lag effect is longer than we might have thought as well. So it's a little hard to predict where they're going to go in Q4. The overall business mix, partly because of the deposit mix is also having some impact on the yield but is obviously contributing to the net interest margin.

Ebrahim Poonawala, Bank of America.

A question in terms of the held for sale balances. I appreciate the guidance for the fourth quarter and for year-over-year balance to be flat, but as we look out into next year, how comfortable do you feel that these balances can continue to grow and sustain that 20% to 25% range of total average loans? I want to get a sense around the market share opportunity beyond quarterly volatility that you've seen because of interest rates.

Our fourth quarter will be challenging in that category, as it is every year, just because of seasonality in that particular business, especially with the purchase business being the key driver the last few quarters. The good news is we have a very very strong purchase client mix and even though there's some seasonal softening, we continue to show very very good ability to take away market share. And that continues to be the forecast we give you is that we'll outperform peer overall on averages, as we said we would at the beginning of the year and we believe we'll still finish 2013 very close to flat, relative to 2012 on average. And relative to peer, we're very very proud of the performance of our team. I think it's a reflection, again, of the right client mix, a very loyal client mix and great service delivery.

We do see 2014 as a challenging year. I think everyone in the business is going to see 2014 to be a challenging year. And I'm not ready to give you a prediction on 2014, but I think we're all going to see, again, a year when so much is going to depend on the rate trend and we are optimistic that the housing recovery has legs and that our position as a percentage of overall client base being heavily purchase driven mortgage companies, will favor us. So we still will expect we'll definitely outperform peer. But it won't be an easy year in this category.

One thing that supports what Keith is talking about is just the fact that look at the marketplace today and see how much our competitors are reporting being down in the category and while we are down point to point, our average balances on a link-quarter basis are basically pretty flat. And that's probably about as good as you're going to see in the industry anywhere.

So I think it's important to note that all the things that we have talked about in the past, whether it be participations, whether it be customer acquisition, whether it be consolidation of customers, market share takeaway, all the things that we talked about doing to preserve this business on a go forward basis is working. And it's working in a very dramatically positive way, even in a market that is going to be very difficult, as Keith said, in 2014. We still have confidence in the business and the ability to perform well.

I just had one follow-up for Keith. If you can share with us how [hiring] trends were this quarter? I know second quarter was a record quarter for hiring and I'm just trying to get a sense of how the third quarter was and looking into the end of the year and tying that in terms of the outlook for some expense growth from Q3 levels?

We hired a total of 11 RMs during this quarter, which was the same as our hiring number last quarter. However, last quarter some of those RMs were in fact very senior leadership level positions. But we're continuing to see very very strong hiring pipeline and expect we'll continue to be able to build out the company as we have for the last several years and have had a lot of success this year. We see that continuing.

Emlen Harmon, Jefferies & Company.

Going back to the mortgage warehouse balances, could you guys let us know, have you brought any of those participations onto the balance sheet yet and historically you'd said that participations were around $350 million; just give us a sense of where those stand today, given what's going on with origination volumes broadly?

Yes, we have been able to bring those back in. In fact, as we mentioned I think in the last call, we continue to see the participation amounts drift down as our overall average has drifted down some on a customer by customer basis. Again, not counting the market share takeaway, we've been successful bringing into the overall portfolio. But we have been able to bring those back on our balance sheet and that's going to be helpful in the fourth quarter. As we engineered it to be used, when the refi tapered off, so we're pleased that we're going to get some pick up. It's not going to be an enormous amount of pick up but somewhere in the neighborhood of $150 million or so net that we'll pick up from that.

I guess you didn't get any help from them in the third quarter. That should be entirely a fourth quarter benefit?

A small portion in Q3, but only at the very end. (Inaudible) help to the average balance in Q3.

More broadly, what was the refi and purchase mix at the end of the quarter in mortgage warehouse?

We were at 28% on refi and the balance purchase.

One last quick one from me. You talked about the held for investment pipeline in the third quarter being kind of 11% above where it's been year to date. Could you give me a sense of where that is versus the second quarter and when you talk about it being higher year to date, is that a figure that's measured quarterly, monthly, just trying to get a sense of how granular that historic pipeline is?

The quarter end balance is 11% higher than the year to date daily average balance for loans held for investment. I don't recall what that number was, but it was quite a bit smaller than that at the end of the second quarter. Partly because Q1 is seasonally weak and most of the growth did occur at the very end of the quarter.

Michael Rose, Raymond James & Associates.

Just a question on the loan growth this quarter. How much of it came from [SNIC], because I know last quarter you really didn't have much growth.

We had some growth, year-over-year at SNIC, Michael. The good news and this is just what we had strategized and tried to tactically execute with bringing on that syndications team about 1.5 years ago. The good news is all the growth in SNIC year-over-year was agented led deals. And that was up about 95 million year-over-year.

Then of the 11 people you hired last quarter, did they contribute anything to this quarter's growth or is it too soon and they're still getting their business on line with you guys?

Some of them are listening and of course they're immediate contributors and some have actually booked some quality business and others have a great pipeline they're building that I'm sure will bring a lot of business. As a rule, it takes a period of time, six to nine months, to begin to really bring over business and many of your best clients wait until year two to be sure that the RM is pleased with where they've landed and that the organization in fact functions as well as they've been told. And so we're going to see for quite some time a pick up in business from this new hiring group. And of course, we don't look for them to grow for two years. We look for them to grow their business every year and they're quite good at that.

As it relates to the energy business, one of your competitors this morning announced pretty significant growth there. They said they're working with you more and more often in participations, but where does the energy business stand as a percentage of total loans and where do you think it can go to over the next couple of years, I guess where you would be comfortable with it going as a percentage of loans held for investment?

It's at 9% of total loans today. We would be quite comfortable with this business growing to 14%, 15% but it has to be in our fairway. And what we do is E&P. We don't do the oil service and a lot of the ancillary energy business. But if the opportunities are there, we'd like it to grow.

John Pancari, Evercore Partners.

In terms of the actual growth, I wonder if you can give us a little bit more granularity behind the loan growth in HFI by those loan buckets? Do you have the actual link-quarter growth that you saw in the premium finance business as well as the builder finance and lender finance?

We don't really have that information or really even want to share it in that level of detail, because of competitive reasons in some of our businesses. If I give you only a few of the businesses, you don't get the full picture. But it really was very broad growth and more so than in most quarters.

John, I agree with Keith totally, but again, builder finance you mentioned, the premium finance business was good growth. Houston grew quite nicely. Energy and private banking, I guess were kind of our top five areas that had the most link-quarter growth, but as Keith said also, much more broad-based than that. And that was exceedingly good for us to see. We were pleased with that because we're operating on almost all cylinders.

I give all the credit to our regional execs, their teams and their line of business managers and leaders, but most importantly to our frontline RMs across the company and their systems. We have got a great team effort executing in each of our markets and as George said, we're very encouraged to see the breadth.

Then in terms of the competition you're seeing in driving that growth, can you talk about where the new money yields are on new loan originations in some of these portfolios? Can you give us that color just to get an idea of what type of competition you're seeing?

Competition remains very very strong and it's not markedly different than the last few quarters and it does vary market by market as to who is the most aggressive in terms of price and overall structure. But again, while we have to compete in this environment, we have to compete in a pretty healthy competitive environment in Texas with our growth for the last many years. We know what client fits us and we're looking for an appropriate return for the value we bring and an appropriate credit risk.

As I mentioned earlier, it's all about credit quality with us and while it's a very aggressive market, our people are doing an outstanding job, again, finding those strategic clients that match up with us and they want a long-term relationship and therefore, don't want the very most leverage they can possibly get against their company's net worth. They'd rather have their company and not have the worry in a slippage or downturn.

John, I think you can tell from the link-quarter movement that the held for investment yields are holding up extremely well. It does vary by line of business and by product set and by market, but overall, we're getting the yields that we expect and can generate the right returns for our shareholders.

Lastly, can you just comment a little bit more on the strong deposit growth you saw in the quarter, where that came from, is there any way you can help us bucket that?

Extremely widespread.

I'm glad you mentioned that, because as we look at our loan pipeline, we always look at our deposit pipeline right alongside it and in both cases, it's just heads up strong on the deposit side and it's very broad across geography and line of business. I'm just pleased that we're getting everyone contributing at the level they are.

(Operator Instructions) Brady Gailey, KBW.

When I look at the broker loan fee income line, the way that I look at it as a percentage of the average warehouse, it's run at about 80 basis points for the first half of the year and that dipped to about 68 basis points in Q3. Why the decline there? Are you starting to wave some of those broker loan fees for the warehouse customers?

No, just volume. Volume is down somewhat.

It is somewhat competitive too, but as George said, it's a function above. We're going to always relationship price, Brady, whether it's in our mortgage finance group or whether it's in one of our C&I core groups, it doesn't matter. And so in those cases where we have clients that are keeping significant demand deposits and moving more money to us, we're going to relationship price and that can affect the fees as well.

Then Viewpoint reported earnings last night. I know you had a comment in the press release how regulators are potentially wanting the banks to move the mortgage warehouse from classified as held for sale to classified as held for investment loans. If you were asked to do that, would that change anything for you guys related to the balance sheet or your capital ratios or anything?

It's an issue, not a problem. The comptroller issued on October 7th, I think it was, new call report instructions that deal with that and frankly we don't understand it. We don't think it fully presents the way we operate the business. It doesn't mean that GAAP can't be changed to fit [RAP] but today we would report that there's a GAAP-RAP difference.

It has no impact on the balance sheet. It's strictly a geography we show and all the materials you see, total loans, that wouldn't change. We've already conceded the issue of risk weight on that portfolio so while a year ago there was a distinction and somebody could say well up for sale, that's 50% and held for investment is 100%, that distinction is gone. So there's no impact on consolidated balance sheet other than geography and no impact on capital and no effect whatsoever on operating results.

Matthew Clark, Credit Suisse.

On your HFI loan growth guidance in the past, I think you've talked about mid double-digit to high teens. Obviously things are running a lot better than that this year. Any sense for whether you might rethink that guidance or are we going to wait until next year? I'm just curious how you're feeling about activity relative to expectations going forward?

We'll wait until next year. We're feeling good though.

The pipeline, again, is a strong report, I mentioned earlier, Matthew, in both loans and in deposits. We feel very good about how we'll finish the year but it's a competitive market. We'll have to execute and find the quality business. I think we will.

As you can tell, excellent back to back quarters and it's obviously too early; we wouldn't comment on Q4, but we're feeling, as Keith said, pretty good about what we see.

On the deposit growth, in the period up fairly significantly. Anything seasonal in there that we should be aware of?

Really not. We shouldn't see a seasonal pick up this quarter.

Again, following the loan patterns, historically Q3 has been a little soft.

Have had a lot of success with market takeaway.

On the margin I think you mentioned a little bit of follow through in terms of relief on the yields on held for sale here maybe in the fourth quarter but just curious with the lag effect and what market rates have done subsequently with 10-year back down to 250 or so, curious whether or not we might see that in the first quarter or second quarter of next year?

It's really too hard to say, for the reasons that we've already outlined. The relationship pricing, the competitive pressure, and where rates go. Actually with the rates dipping down, we'd love to see a mini boom to help us in refinancing, but we're not projecting that that will occur.

Dave Rochester, Deutsche Bank.

Can you talk about the timing of that hiring you did in Q3 and if there's possibly a component of those expenses that will come into the run rate in Q4 or are most of those already in the run rate for Q3?

Our hires were pretty well spread across the quarter so while you'll get a full run rate in Q4, we'll probably be doing the very same thing in Q4 that we've done in the last couple of quarters. So I don't expect you to see something that significantly different.

The loan yield on the held for investment book had some nice stability this quarter. I was just wondering what the driver was there and if you think that should remain stable here, given where your loan production yields are?

It has been very stable. Obviously we're benefiting from the book that has floors. The level of those has remained basically flat for five or six quarters in dollar terms. With the growth in the held for investment, it's declined as a percent of the total. The yield has come down slightly over the last couple of quarters, but down a little more sharply over the last year, but holding very well. There were no significant drivers from the growth that had the impact that was distorted to the trends.

On the fee side, given that the participations came back at the end of Q3, do you anticipate there being another impact on broker fees in Q4 or is that impact already baked into that Q3?

There's very little. That fee is not that significant in the first place. We did benefit from some reduction in participations basically at the end of the quarter. The balance will come in basically over the month of October, with a very minor impact on fees.

One last one to follow-up on the previous question on the warehouse being reclassified, if you do need to shift those to held for investment, would you have to take a reserve against those through the provision line?

No, based on the character of the credit and our experience, certainly anything that's in the unallocated would be more than sufficient to deal with. We've never had - I can't recall an actual charge off in that portfolio.

The risk in that portfolio doesn't change just by moving it from one line to another line. So we use our methodology to evaluate that portfolio and the loans held for investment portfolio at the same reserve and charge off when we need to do it.

Brett Rabatin, Sterne, Agee & Leach.

Wanted to just make sure there weren't any prepayment fees that impacted the held for investment yield this quarter especially and then was hoping to get a little more color around the warehouse in terms of maybe client adds this quarter and the outlook or potentially the line utilization rate this quarter versus last?

I don't recall ever having a prepayment fee.

We do so little fixed rate financing, Brett, that that's really not a material revenue item for us. However, we are seeing some of our lending areas be more effective on generating fees. One of those areas is our syndications group, as we lead more of these credits. So we hope that it's just the beginning of a very long trend. But that is perhaps what is helping us, along with the loans held for sale yield pick up that we saw.

I think your other question about the warehouse, it is going to be a competitive fourth quarter. We again, think we're going to get to the point that we told you we would get to at the end of the year. 2014 is a little more murky. We'll continue to add customers. We'll continue to see a lot of things in the marketplace that are moving our way. But volume in 2014 is going to be tough.

The whole issue really is at what point do the lines cross, where the refi slide is overtaken by the increase in the housing recovery and in purchase mortgage lending. And we are in a great place with our core clients being primarily purchase mortgage companies. And we do believe the housing recovery, again, has legs. We'll have to see how rates affect that and consumer confidence and job growth of course, but there will be a point perhaps sometime in 201, perhaps as late as early 2015. We're hopeful that in 2014 we'll see those lines cross and begin to see some growth there. In addition to what we've been successful doing and continue to do on market takeaway to mitigate the refi slide.

Fortunately, as Keith said, we've all said, loans held for investment are really picking up and we're seeing exceptional growth for the last two quarters. And that has been a good addition to the loan growth.

That's one of the keys that we've been working on for two years, as you guys know, is investing some of the profits, our refi business, if you will, that was part of the mix in LHS and investing some of those profits and really creating more RM capacity and more LHI growth drivers and it's really showing up the last quarter and then again this quarter.

Andy Stapp, Merion Capital Group.

Nice quarter. To what extent will the failure of one of your capital ratios not meeting the well capitalized threshold impact your deposit insurance costs?

No meaningful impact whatsoever. We haven't calculated but it's a historical thing. It doesn't exist today, so there's no ongoing effect.

It was just a look-back issue when they changed our capital requirement on LHS.

And quite frankly, if we'd known about it at that point in time, we had the capacity to add the capital to the bank. We just didn't know about it.

And you talked about the refi versus purchase mix at quarter end. Was it materially different on an average basis?

It continues to trend down as it has for the last over a year now. I think to our guys' credit, they didn't believe it could last forever, as maybe some competitors were hoping it might, but they knew it wouldn't either. But our guys were much more progressive over the last two years, again, building more of the purchase core mortgage company client base, which has been harder. It's more blocking and tackling there. The refi clients were (inaudible). That trend just continues. It's not been markedly different.

And do you have a feel for what the current yield is on new loans coming into your mortgage warehousing business?

It's really very similar to what we saw last quarter; roughly now it's running around 3.8 would be a good guess, our yield.

Our yield on the loan side, but that does not include deposit credit and the fee component.

Do you have a feel what that is?

No, we look at it more in terms of return on the invested capital. I think you may have heard from our previous call, we notionally allocate capital with an after tax cost of less than 5% and that business is producing returns between 20% and 25% after tax.

Gary Tenner, DA Davidson.

My questions have mostly been answered. Just out of curiosity and this hasn't been much of a headwind apparently based on your loan growth, but could you just kind of tell us what the gross new loan production was in the quarter versus the net growth?

Well, I don't have that number, although we watch it from week to week on a client by client basis. We'd rather not probably go there and begin to give you that much detail.

Can you talk in general terms just about the level of competition, how much you're having to concede, whether it be on pricing or anything else to keep what you have?

Absolutely. I see your key issue. We don't lose clients. It's very very rare for us to lose a client, even in this environment. Now are there times when we'll have to go in and re-price to some extent? Absolutely. But we will not be a target and be easy picking for somebody to come in and take a client. We're going to make it absolutely not worth their time to pursue a client.

But largely that has to be a function of the service delivery, the RM quality, the fact we keep our relationship managers, they're just top caliber and the business owners and CFOs really like doing business with us. The support staff is excellent. So it shouldn't be a matter of us losing a client over price. We stay competitive on price but we're never going to be somebody, nor do we ever depict ourselves to be somebody that is a low-price bank. That's not our market. And so we've doing quite well on defending clients. In fact, we continue to take away market share with our value proposition.

Michael Rose, Raymond James.

Two quick follow-ups. Does the change in the mortgage warehouse business with the call report issue, does that alter the ability to fund the warehouse with the FHLB line in any way?

No.

Then the litigation recovery that you had this quarter, I assume that relates to the Oklahoma case from last year. Would you expect any additional recovery there?

We have two other claims pending; one related indirectly to Oklahoma and another related to another credit loss that we're continuing to pursue.

Matt Olney, Stephens.

All my questions have been addressed. Thank you.

I show no further questions at this time. Would you like to make any closing remarks?

Sure. Thanks Amy. I just want to tell you that we at Texas Capital, again, very much appreciate your interest and your questions today have been very informative; hopefully for you also. This being my last conference call before my retirement in December, I wanted to take a moment to say goodbye and to sincerely thank all of our supporters on this and other calls, our shareholders, our analysts, our friends, customers and employees, really for your loyalty and goodwill over the past 15 years.

Texas Capital Bancshares is quite a unique company that could not have been successful without all of your support. I speak for the entire management team in pledging to you, our best efforts in continuing our successful performance for our shareholders. Again, we are much appreciative. We thank you for your attention today and be seeing you soon. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.