Texas Capital Bancshares Inc (TCBIO) 2014 Q1 法說會逐字稿

Good afternoon and welcome to the Texas Capital Bancshares first quarter 2014 earnings call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this is being recorded. I would now like to turn the conference over to Heather Worley, Director of Investor Relations. Please go ahead.

Thank you for joining us for our first quarter earnings conference call. I'm Heather Worley, Director of Investor Relations. Should you have any follow-up questions, please call me at 214-932-6646.

Before we get into our discussion today, I would like to read the following statement. Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and 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 statements 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 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 the prospective supplement, the annual report on Form 10-K, and other filings made by Texas Capital with the Securities and Exchange Commission. Now, let's begin their discussion.

With me on the call today are Keith Cargill, President and CEO; and Peter Bartholow, Chief Operating Officer and CFO. After a few prepared remarks, our operator, Laura, will facilitate a Q&A session. At this time, let me turn the call over to Keith.

Thanks Heather. Good afternoon and thank you for joining us for the first quarter 2014 call. I'm Keith Cargill, President and CEO of Texas Capital Bancshares. After my opening comments, I will hand off to Peter Bartholow, our Chief Operating Officer and Chief Financial Officer, then close with a few comments before opening the call to Q&A.

The first quarter showed continued strong growth in core LHI, deposits and significantly better performance than peer in mortgage finance. Due to our high growth rate and aggressive loan pricing market and the added interest expense from our debt offering, we experienced net interest margin pressure with NIM dropping just below 4%, at 3.99%.

Put in perspective, our first quarter core LHI growth, the $575 million Q1 average loan growth from Q4 2013 was more than twice as large as our prior record Q1 growth. In fact, the Q1 quarter in balance is 20% above the average for all of 2013. This record-setting start to the year positions us well for strong growth in net revenue the balance of the year, despite the drag on net interest income due to the sub-debt offering in January.

Talent acquisition continued at a steady pace in Q1, adding 7 net RMs. We are focused on improving performance across all lines of business before incrementally adding staff. Those business units delivering top performance and offering the greatest high quality revenue growth opportunities continue to win our talent acquisition resources as always.

Credit quality remains strong. I'll cover this topic in more detail later.

On slide 4, we show the revenue and expense trends since 2009. As you can see from the five-year bar chart, we continue to trend favorably on the net interest income and non-interest income with the first quarter of 2014 effected by the short number of days in sub-debt cost.

Peter will walk you through the key metrics on the financials and I'll rejoin to cover credit and wrap up with closing remarks. Peter?

Thank you Keith. Results in the first quarter clearly demonstrated our ability to generate strong growth in loans, earning assets, also of course net revenue and high returns. The commercial portfolios of exceptional quality carried a yield of more than 4.4%. Lending costs were stable, despite plans to increase liquidity that we described last quarter.

The business model is producing high returns on assets in equity. The loan spreads and returns remain high in Q1; greater than 4.2% spread, with core funding costs, meaning just deposits and borrowings, of just 17 basis points.

We had growth of 7% in traditional held for investment balances from Q4 and 27% from a year ago. As contemplated and as we have said for many quarters, the combination of growth, competition and protracted periods of low interest rates will apply pressure to yields and NIM.

The yields did, however, remain very favorable in traditional held for investment categories at 4.61%, a 12 basis point decrease driven primarily by growth, a change in one fee component from Q4 and had the total impact of 6 basis points in reduction on NIM.

As Keith mentioned, the mortgage finance business clearly demonstrated performance in excess of industry. The highly profitable business demonstrating success of our strategy and the favored status it enjoys with its customer base.

Q1 was very challenging to the industry, with sharp reductions in origination costs by seasonal factors and the weather in many parts of the country. TCB was able to maintain MFL balances above 2 billion, with a contraction of just 9% from Q4 2013. Other industry participants were down by 20% or more from Q4 and more than 40% from the first quarter of last year.

Relationship pricing decisions did result in higher utilization at lower spreads. Portfolios down to 19% of total loans on average in Q1 compared to 22% in Q4 and 26% in Q1 of last year. Even with the yield reduction, this business is still generating after-tax returns of more than 20% on allocated capital with costs of less than 5% and has a yield above prime to highly liquid asset class with near zero credit exposure, generating significant value with low-cost deposits and a highly efficient operation.

The change in composition of mortgage finance loans to total loans actually increased NIM by 2 basis points, but was offset in NIM by 4 basis points because of the yield contraction. After maintaining strong balances in Q1, we do now see the opportunity to expand the base, the balances in Q2 and believe that the yield may not be subject to further erosion of any consequence.

We had total loan growth, including both traditional held for investment categories and mortgage finance of 3.5% from Q4 and 17% from the prior year. A spread of 4.24% against 17 basis point cost of core funding. We had excellent results.

Total deposit growth, as Keith mentioned, also remained very strong. We did have, as we announced earlier, the strategic objective to increase liquidity with a benefit to long-term asset sensitivity. DDA growth has continued to be especially strong, even with Q1 seasonality that had limited growth in previous years.

Total deposit growth exceeded total loan growth on an average basis by more than $400 million compared to the year-ago quarter. Changes in loan composition and funding profile have increased the level of asset sensitivity in our balance sheet by a substantial factor over the past two years.

Referring to slide 6, major factors in reduced income and returns in Q1 2014 are described. Many are not indicative of expectations for the full year. Capital initiatives were obviously justified by the opportunity we discussed in January in connection with the offerings of both equity and debt securities. Obviously we weren't in a position at the time of the report of year-end results to discuss the magnitude of the opportunity that increased held for investment loans, the traditional category, by more than 440 million point-to-point. That's twice as much as any previous Q1 record and tied for fourth in all quarters in our history. That's a pace at a level that dramatically exceeded that of the peer group.

Even with the reduction in mortgage finance loans, total loan growth in Q1 exceeded the amount of capital raised, showing effective utilization, leverage and good returns soon after issuance.

We issued common equity of $103 million with the sale of 1.85 million shares. We have good returns already achieved with only modest additional leverage. The impact on EPS and ROE were $0.02 per share and 75 basis points respectively. The offering of bank sub-debt of $175 million increased total interest $0.06, with an impact on NIM of 6 basis points and not related to changing in core funding costs. It's a very low capital cost, as distinguished from the 17 basis point cost of core funding.

It obviously had an impact on EPS, ROA, ROE and the efficiency ratio that are depicted on the slide. Compared to Q4, the reduction in two days of yield accrual represented $2.5 million reduction in net interest income. It's a bigger impact in TCB than you'd normally expect, because of the high concentration of floating rate loans as a percent of total earning assets.

As always in Q1, we experienced link quarter increase in FICA and other employment expenses. Again, larger than prior years, due to the growth in the company. The increase in FICA was $1.9 million and there was a total of $2.5 million including FICA and other employment related costs.

I will mention, historically, FICA expenses fall between 40% and 45% between Q1 and Q2 and then decrease modestly in subsequent quarters. The impact of the stock price increase of $6.00 per share and that's average March versus average December, was much less than we experienced in Q4. It did have the effect of increasing 123R expense by $600,000, not from the Q4 level, but we did not benefit from the full $3.6 million reduction in cost from Q4.

We are now able to demonstrate more consistent impact of approximately $100,000 of expense per $1.00 of stock price change compared to the almost $275,000 per $1.00 in Q4. Obviously this has impact on EPS, ROA, ROE and the efficiency ratio.

I mentioned our planned increase in liquidity and it's reflected in the combination of the increase in average balances of liquidity assets and the decrease in the average balance of borrowed funds. Consistent with our strategic objective, we are building low-cost deposits that will increase our asset sensitivity and support growth.

The increase in these components of liquidity average $170 million compared to Q4 and over $900 million from the first quarter of 2013. We had a negative impact on NIM of 5 basis points resulting from the increase in liquidity, with no meaningful change in net interest income or funding costs of 17 basis points.

The change in profile does not optimize our funding costs; we recognize that. We have mortgage finance loans now carried with a component of interest-bearing deposits that reflects borrowed funds with a cost differential of 20 to 25 basis points.

The FDIC assessment has increased, with assets now above $10 billion. We had a $900,000 increase from Q4, obviously with an impact in the key metrics of performance.

In buildout expense, we had, as you'll recall, about 1.2 million in the fourth quarter. We experienced consistent increases in the level of salary expense for the last nine quarters, at approximately $900,000 per quarter. In the first quarter, we obviously had the full first quarter impact of recruiting in Q4 and the growth of staffing in Q1. It is offset by a reduction in incentive expense from the fourth quarter.

Loan and deposit trends are obviously very favorable. Strong growth in held for investment growth and mortgage finance loans as well. And now Keith will describe growth and composition of the portfolio.

Thanks Peter. Referring to slide 8, please note the trends in demand deposit growth, total deposit growth and core LHI growth. We continue to see an opportunity to improve our deposit mix with outsized DDA growth and grow total deposits at a faster pace than loans, as has been the case for the past four-plus years.

On the top right quadrant of slide 8, you will see that the total loan portfolio mix remains well diversified with our C&I categories totaling just over 40%, followed by the next largest category, mortgage finance at 23%. Combining the market risk real estate loans; that would be CRE as well as residential, that market risk category in total is 26%.

Average DDA increased 3% link quarter and we were up 34% from Q1 2013. Total deposits grew $2 billion year-over-year compared to total loan growth of $1.5 billion.

The following slide breaks down the nonaccrual loans by category. Nonaccrual loans as a percentage of core LHI equaled 0.48%. We did show a slight increase in nonaccruals due to a new C&I loan moved to nonaccrual totaling approximately $18 million. Real estate nonaccruals and OREO both declined since Q4 2013.

Total credit cost was $5.4 million in Q4. The provision of $5 million in Q1 was the same as Q4, versus $2 million in Q1 2013. We experienced net charge-offs of $2.1 million or 10 basis points in the first quarter of this year, versus 6 basis points in the fourth quarter of 2013 and 7 basis points in Q1 2013. There was no OREO valuation charge in the first quarter of this year. Total OREO now at quarter-end was $2.4 million in total.

Before closing, I'll refer you to slide 10 for our EPS growth bar chart. We've delivered a strong five-year CAGR on EPS growth at 27%. We see the opportunity in 2014 to build out significant, high return, complimentary businesses and win the critical talent to drive significant earnings growth for years to come and are working harder than ever to exploit these opportunities.

Despite significant completion, we are winning core business and market share across business units and remain keenly focused on building high quality growth, even at some near-term pressure on pricing.

Finally, we continue to improve our asset sensitivity and at some point will benefit in NIM and earnings power whenever rates trend higher. Our organic growth model remains strong and is off to a record growth in core loans and deposits.

We appreciate your interest in Texas Capital Bancshares and now welcome your questions. Heather, I'll turn it back to you.

We'll go ahead and open the line for questions now.

(Operator Instructions) Michael Rose, Raymond James.

Can you just help walk us through kind of what's going to stick in the NIM and potentially what could come back into the NIM as we move through the year? I would expect that core held for investment yield compression would continue and that there would be further declines also in the yield in the mortgage book just from competition. You might get some relief if rates go back up in the back half of the year. But can you walk us through or help us understand how sticky this level is at 3.99[%]?

The competition in the mortgage finance business is certainly keen, but we don't see that being as big a pressure point as we go forward. We certainly put some incentives in place that, again, motivate our clients to not only consolidate other bank lines, eliminate them and move that usage to us, Michael. But, we also insist on moving additional demand deposits. It's just in this environment we're in, those incentives are giving us a little more pressure than the offsetting DDA is. But we really believe we're building a very very profitable upside with that relationship pricing negotiation we're doing there.

We don't see continued pressure to the same degree in that side of the business.

On the core LHI business, in C&I in particular, it's just very very tough competition on pricing. I'll tell you, the structure is just as competitive. That's one of those situations where we try so hard, as I'm sure all banks will tell you, we try so very hard to avoid getting drawn in to the pressure on structure and at the end of the day, if we have to make a choice and we're after picking up quality market share, we'll make that choice on meeting the pricing competition, not the structure. And that's especially true on the private equity financing business that has been so good to us over the last several years. It continues to be really cutthroat when it comes to pricing and structure, which has put added challenges in actually finding business that we're comfortable with and book in that space. But we do expect continued pressure on core LHI as we go forward in the year. Peter, you have anything to add?

Yes, Michael, obviously we issued the sub-debt at the end of the quarter so that's only two of the three months. That number will be higher in dollar terms, no real impact on NIM in the second quarter.

We had an unusual fee in Q4. Overall, loan fees have been a big contributor in making the yield stickier than even we would have been willing to project. The increase in liquidity; we see that building a little bit but not by the same magnitude as it did in Q1 compared to Q4. As Keith mentioned, we're really not looking for a significant additional erosion in the mortgage finance yields.

Held for investment loan yields, while they were down 12 basis points, that really represented only a 2 basis point reduction in NIM. So the core loan yields, the portfolio yields in traditional held for investment categories have held up actually fairly well.

The sub-debt, that's a capital cost, not a core funding cost. We're not looking for any increase in the cost of deposits or borrowed funds. We start the quarter in very good shape and Q2 historically has been strong for us. So we're expecting good growth in net revenue and improvement in volumes in the mortgage finance business in Q2.

As we kind of think about the margin going forward, given everything that you just said, it seems like this is probably a base that we're going to work off of and potentially with the liquidity that you plan to add through the year, even if it's smaller impact, we could actually see the margin go down. Is that the right way to think about it?

I don't believe today that over the year we will see mortgage finance yields where they are today. They are expected to rise. So we'll get some relief there. What we're also getting from mortgage finance is growth in deposits, which is contrary to the industry trend that is improving their contribution relative to the yield.

It's hard to argue with the central premise when you factor in the effect of subordinated note cost in NIM, but until -- and I think we've made this clear, until we see a lift in short-term interest rates, there is no fundamental change in the way that we see the model working.

Michael, it makes it a little tricky on the core LHI growth on predicting NIM, because of the syndications component, which is really more significant now but creates some more lumpiness in the business and in that actual NIM effect as well. But at the end of the day, we would expect some slippage, I would think, because of the growth rate we see as still quite strong. And with that kind of growth rate and this pricing market, even with syndication fees leveling a bit over the course of the balance of the year, on average, I would expect a little slippage still in the LHI core NIM.

Dave Rochester, Deutsche Bank.

Peter, you talked about getting the DDA from the mortgage finance business. I was just wondering if you could update us on what that balance is this quarter and where the balance was for Q4?

Link quarter average is up a little bit. We're actually trying not to get into depth on that.

We also, Dave, of course seasonally have a lot of the escrow money paid out, because of taxes and insurance and so on. So that builds back rather quickly, but that does have an impact on us in the first quarter.

It's part of the seasonal weakness that I mentioned traditionally we've experienced in demand deposit growth in Q1, that was overcome by the growth in other portions of the bank.

We still see good prospects for growth there, as we've experienced.

Then just switching to your comment on the RMs; just wondering what the timing was on the hiring for the net 7 this quarter and I'm trying to think of the buildout around them. Should we also expect to see a little bit of an increase in the comp line or just expenses generally building out that support in Q2 as well as additional hires that you would have?

Most of those came -- I think more than half came in the first month of the quarter so most of the impact is in place. Those additions did not come from changes in the profile of a business that would imply significantly different support costs.

A few of them though, over the course of the next 1.5 years, we will have some incremental buildout, but it's not going to be needle moving. But they are a special niche team and I don't want to go into a lot of detail on that right now, but nothing, as Peter suggests, immediately the next few quarters.

Then getting into some of the nitty-gritty on expenses; the FDIC insurance line, I know you mentioned that was up because you're larger. Is there anything one-time in that that we can pull out?

Really not. We're looking basically at a run rate for the year. It obviously can vary a little bit quarter by quarter because it's always in arrears, but that's the rate fundamentally we're dealing with this year. (Inaudible) being over $10 billion.

Then the legal and professional; should we expect to see that trend down a little bit at least in Q2? It seems like it's been elevated the last couple of quarters.

It might be Q3 Peter, but the last half of the year for sure -- as sure as you can be, we feel confident that's going to trend down; not as sure the second quarter.

A lot of that has to do, Dave, with supported buildout of critical technical components to our business. So it's not just traditional legal and professional; it includes contract support for business solutions.

Some big technology buildouts that are really important. As we hire these people, it's just critical that we leverage them appropriately and be sure and give them the tools to provide really excellent client service. And anymore, you've got to match up the talent with the technology.

One last one on the credit side; you mentioned the $82 million C&I credit. Can you just give a little bit more color there, where this was, what industry this was in and maybe the reserve you have against it right now?

Sure. It's a longtime company, long history, client of ours for a number of years. They had gotten involved in expanding to a couple of international markets. That didn't work out so well. They're involved in providing manufacturing of various types of metal bars and poles and equipment for utility companies. The utility industry has been a little bit of a laggard on capital investment for the last three or four quarters, so they suffered some on pipeline and then they were distracted looking at other than domestic core clients.

So we don't see it as an issue where we have a massive hole. We've begun to address the reserve. Of course when you move something to nonaccrual, you don't know as much as you will 30 days later or 60 days later. So at this point we think we're adequately reserved and we have an appropriate reserve. I can't recall exactly the number, Peter, but again, it was time to put it on nonaccrual and address it.

Was there any interest give-up because of that this quarter?

No. They were current and we just moved it I think right at the end of the quarter, as I recall, Peter.

Ebrahim Poonawala, Merrill Lynch.

Just in terms of kind of following up on Dave's question, I guess the expenses move, depending on the investments you're making. Are we still expecting the efficiency ratio to move to the low 50s towards the end of the year; is that still [called good]?

Yes, it is.

We see it today, when you factor in the adjustments and relative to the size of the company, we still see that the efficiency ratio will be less than it was for 2013.

And fair to say most of that improvement is coming on the revenue side as opposed to the expense side at this point?

I think most of it will. Obviously the subordinated note interest cost is fixed. We'll benefit from a pick-up in days over the rest of the year. That has, as you know, a meaningful impact. Then it's a combination of growth that we've already put on the books and even though the FDIC insurance assessment will remain high, we'll see a big drop-off in FICA and other expenses. The incentive expenses came down sharply link quarter and they'll stay down until we demonstrate that we can be on plan again.

Ebrahim, one of the challenges for us is that we're building a couple of really significant complimentary businesses. We talked about private client wealth management and the importance of that strategically as we address all these business owners that we have brought on and banking their companies for the last 15 years. And we've never had a really strong complete offering and we didn't have all the talent we needed on the playing field. So that is still a buildout process and it will begin to accelerate some, Peter, I guess toward the last half of this year and into the first of next year.

But we see the next phase of the buildout being primarily client-facing, revenue producing people. We've got the infrastructure talent pretty well onboard and are in the process now of finishing the technology upgrade over the course of the next six months. So that's one piece that is a little bit moving target on us. But again, as we bring those people on, they'll be bringing revenue. It just will take a few months for that to offset the negative cash flow, just like on RMs. It takes a few months before the revenue build that they bring with them overcomes the expense.

It's just our organic model, only on a business that we really like long-term because of the fee component. We really want to grow fee income at a faster rate over time than spread income.

Second question, just again following up on Michael's earlier question on liquidity build; is there a specific target in terms of where you want to get on liquidity or is that going to be essentially a function of deposit growth outstripping loan growth and where the balances fall off in a given quarter?

It's primarily that. We do, as we commented at the end of Q4 or last quarter, we have a strategic opportunity in certain lines of business to keep the balances high. Obviously you can't predict quarter by quarter when those will occur, but over the course of the year, the rest of the year, we will see some additional liquidity build.

Brady Gailey, KBW.

Peter, you've mentioned the change in one fee component when you're doing a loan deal in Q1; it looks like the majority of the decline in the loan yield was driven by this change of this fee component. Can you just describe what that is and is the full impact of that felt in Q1 or will there also be some additional burden felt going forward?

No, it was a one-time event in Q4 related to the payoff of a loan where we had the chance to earn a substantial fee. So it is nonrecurring and actually, as we commented earlier, we're seeing very strong performance in syndication and the other fee components that we see in NIM. That is a one-time occurrence.

And where did shared national credit balances go quarter on quarter? I think at year end they were around 1.4 billion; where is that at the end of March?

They ended up at 1.455; they were up 35 million and --.

The agented piece actually grew more than that, Peter, so the mix improved from 28% agented to 30% quarter to quarter. A year ago is was 26% agented and now it's 30% at the end of the quarter.

Brady, we may begin to selectively let a few of our new RMs we brought on in the last year that were very very significant lead bankers at other big institutions on some of these syndicated credits, we may begin to allow them to take a piece in a relationship participation to position us over the course of the next couple of years to work our way into the co-agent or agent position.

So it is possible, and again, it won't be buying paper; it will be very strategic that this trend we've had now for about five quarters to improve agented mix, it might shift some in the next few quarters, but it will be because we believe we can significantly move the needle over the next couple of years.

And those are relationship managers that were employed by the agents of the credits that Keith is talking about. There's a relationship manager connection with all of our shared national credits.

I don't want to confuse things this quarter, but I just think it's important you guys have that heads up going forward and why our strategy should produce even better long-term yields as we work our way into agented positions.

Finally, Peter, you mentioned the math on for every dollar per share of stock change, it's about 100,000 of comp; is that both when the stock goes up and when the stock goes down or is that just when the stock goes up?

It goes both ways.

Emlen Harmon, Jeffries.

I wanted to go back to the loan yields, quickly. I hear them within the legacy held for investment book, I hear your commentary about the competitive environment out there and it's been a long grind, if you will, but you guys did a pretty good job of kind of holding in the [4.70s] through last year and we did actually kind of see a meaningful step down this quarter. Could you give us a sense of whether there's been a shift in loan types or whether there really was a meaningful competitor shift in the first quarter that would drive that?

Remember, the decline in the loan fee was a substantial portion of that. But the rest of it, actually as I commented, has held up very well. We have seen over the last two years, a shift to a LIBOR balance from prime base. So we've now just barely moved above 50% of our portfolio is LIBOR based compared to prime based. And you get with that some narrowing of spreads, as LIBOR has come down, but you will also get a much more rapid response and a leading response when there's any indication that rates will increase. So it's a dual-edged sword today. It's one that can provide us a lift in advance of a fed funds rate increase, but it's costing a little right now.

Emlen, we're trying to be more helpful on slide 5 with the chart on net interest income and margin trends and I hope it is helpful. But if you look at the purple line there on total loan spread, that still has the piece Peter mentioned in it. And if you make some adjustments for that, you can see it's more horizontal than trending down quite as much as some of the overall NIM. And obviously the overall NIM, with the new sub-debt and also two less days, we've got to get on a couple of those things.

We do see pressure. We want to continue to grow and take market share of high quality C&I business and that frees up and gives us more shelf space for other businesses we want to grow, but we are so focused on having a good diversified book, we're not willing to let just any business grow at any pace without good C&I growth. And today, C&I high quality growth is cheaper.

Then just hopping back to the expenses as well. You guys did note in your K this year that you going over $10 billion comes with additional regulatory expense this year. Do you feel like that regulatory expense is fully in the run rate or at least as best you can tell?

There's a component of it that certainly is. We've done some staffing in support to support a stress test and to build the models related to that initiative or that endeavor. There will be a little more. The FDIC expense is part of what we're addressing at the same time.

If you layer it all together, it's $5 million or $6 million that we didn't have before this year, Peter, wouldn't you say? So thankfully, our model of good strong organic growth I think is going to really help us move through and push through that stair step cost increase. But it's real and we're being sure to be proactive and have the right talent, have the right systems in place to be a bank that's highly regarded by the regulators in this new midsize category.

Matthew Clark, Credit Suisse.

Back to the core loan yields, can you give us a sense on the rate on new fundings relative to what's in that portfolio? Just also curious whether or not you're seeing customers come back to you, those with floors and try to renegotiate and if that's part of the pressure too?

There's a little of that, but overall, our floor dollar amounts actually went up. It's amazing. Our people, still in this environment, as evidenced by still a 3.99 NIM, we have something of value and our clients pay more than average in the market for what we offer.

It's just that we had a significant premium before we had so much capital pouring into Texas the last couple of years and all focused on C&I. And we're not willing to forgo high quality C&I market share growth because again, it inhibits us to grow other businesses that are important to us too. And we really want the diversification and the credit quality to be strong.

I think we're seeing now 15 to 25 basis points that's moved the last six, nine months on these credits and at the high growth rate, we're booking enormous amounts of loan growth each quarter, it begins to really move the needle. But these other things have impacted that NIM as well and we've talked a lot about that.

It does very widely by product type or by line of business, but overall it's still coming in at a quarter to half over prime, average.

Just on the average balances at the warehouse, I think previously and maybe before your latest capital raise, you guys talked about the warehouse for the year being down modestly. Any update there based on what you saw in the first quarter and what you're seeing in Q2 for the year?

This is a better seasonal quarter and we expect it to reflect that. A really solid quarter is what we think is shaping up.

Any desire at all for something more for the full year as you look out beyond that?

It's difficult. Part of that is just a function of how all the clients and market continue to adjust to QM. That's certainly having an effect on the market. Just a lot of otherwise qualified borrowers with significant passive income now get to count none of it. It has to be W-2 income in order to qualify. And over time, some of these clients are going to begin to get comfortable perhaps doing something outside the box, but that's not necessarily what we're going to be comfortable financing.

We think we've got to see how this rolls out. Even in the last 2.5 months since QM took effect January 10, we're seeing much better application, HIP rates and things of that sort with our client base. Then you get the seasonal uplift too on house purchases. We still have a much lower than average refi component; it's about 28%. The industry is at about 37%. So there still is a little refi that is deflating. But again, as we continue to show quarter by quarter, it's affecting us less than competition. We think we've got a solid quarter shaping up. It's hard to predict for the year.

The MBA is now estimating a $900 million to $1 trillion year in mortgage volume; that's about a 30% to 35% drop from last year. We're really pleased with the kind of numbers we booked in the first quarter and we think we'll continue to outperform industry and peers. That's the best I can really give you at this point.

Brad Milsaps, Sandler O'Neill.

Peter, you made a comment that you thought the rates on the warehouse would stabilize kind of going forward or maybe have the potential to rise in 2014. Correct me if I didn't hear that correctly. I'm just kind of curious what would be driving the increase in those rates as it seems to be there's a lot of capacity in that industry right now?

There is a lot of capacity in the industry. There's also a lot of turmoil and the prospect of meaningful consolidation. It's also a function basically that rates have gotten about as low as they can go; we're not experiencing the same kind of pressure or to the same degree. And the industry is looking for an increase to something closer to 5% by the end of the year and we'll get some carry from that as well.

We're also seeing some volume pick up and that helps us on the fee component that also contributes to a pick-up in yield.

And just to clarify, Peter, on your comment about the efficiency ratio being lower in 2014 versus 2013; I guess that would mean you'd be probably somewhere below 52% or so. That would mean that on a quarterly basis you would have to probably dip below 50 to kind of get there.

Less than 2013. We were above 55 in 2013 for the year.

Okay. Maybe I'll follow up with you offline.

Jennifer Demba, SunTrust Robinson Humphrey.

My question was answered. Thank you.

John Pancari, Evercore.

Back to the comp expense, given the give and take that you gave us and all the color you gave us there, particularly around the FICA and the other costs that are lumpy about the quarter, if we back out that 2.5 million; what is a good run rate to assume for the total comp and benefits line going forward from here through the rest of the year?

It usually drops 40%-45% in the second quarter.

On FICA we'll drop 40% to 45% in the second quarter. I mentioned earlier, you go back nine quarters and we have each quarter about a $900,000 increase in salaries. Obviously incentive expense is a function of how we're doing relative to plan and it starts off low and rises as we see how we are measuring up against the plan at the unit level and on a consolidated basis.

A big factor last year was, as we've talked about many times, the impact of the increase in stock price. A lot of people would have assumed that that 3.6 million in the fourth quarter would come down and it certainly did, but December to March there was a 6 point increase that resulted in a $600,000 cost of the 123R.

As compared to the fourth quarter, where there was a $13.00 average increase and a 3.6 million impact. So as we said in January, the number of units actually finally vested at the end of last year and while there is some volatility with the way we structure our incentives with a cash based RSU type unit program, as Peter suggests, now we can give you a little better metric. And that's for each dollar movement in stock price on average in a quarter.

It ran 100,000 this time and it will vary some, but it won't be back up in that 275,000 kind of range that we experienced in the fourth quarter.

We expect to be continuing to build out in RMs and support for the year. It's very hard to predict by quarter. Pipeline is very good.

Both deposits and loans it looks solid and again, after this phenomenal first quarter, we may not see the kind of significant bump up from the first quarter because we were twice any record we've ever booked in the first quarter. But we still see a really solid second quarter.

And the reason I say this is when you're closing loans like we were in the first quarter, it does have some effect on filling the pipeline for the next quarter. But I like putting them in the bag in the first quarter rather than hoping we close them in the second.

And you have carryover from things that could have closed in Q4, but slid into Q1. When I was talking about pipeline, I also meant the talent pipeline.

Yes, exactly. Talent pipeline is very solid. We're being disciplined about being sure that we're getting better talent than ever each year and that we're really looking at performance across the company too, to be sure the talent we brought on, we're developing and getting the results we need from them. But we feel very good about, again, a very strong opportunity to build out these businesses, including our core businesses.

Then on the margin side, I know you gave the mix of the LIBOR and prime based and on that increasing percentage of LIBOR based, what is the spread over LIBOR that you're getting on your new production and then I guess on the prime base as well? Just to give us an idea of where the --.

It varies widely, John, on the product type and the company and the credit grade of that particular deal. We're seeing extremely aggressive pricing in the market that we're not matching; literally in the 1.75 over LIBOR range. We're not going to go to that kind of pricing. But we certainly have seen a 13 to 25 basis point slippage over the last couple of quarters, to book the high quality C&I business that we're after.

John, when I gave an estimate of a quarter to a half over prime, that was for the entire portfolio, including the LIBOR based.

It wouldn't be unusual for us to see a 2.25 or 2.50 over LIBOR today that we might do on a really high-quality opportunity and it would have been 15 to 25 basis points richer back midyear last year.

Then lastly on the loan volume, can you just give us a little bit more granularity on the loan growth in the quarter by your portfolio types? Ideally, if you can give us the link quarter and the period changes in some of the mixed portfolios like the energy book, the premium finance book and then the builder finance book as well?

We shared with you the mix and we'd like to kind of stay there. The energy business is building nicely. As you can see, the residential real estate, John, and also commercial real estate picked up a little from the prior quarter. It moved about 1% each. But the C&I book is solid and still growing about at the overall pace of the loan portfolio, which is important to us. And the energy book is now seeing some good growth again. We are seeing quite a bit of energy book growth be in syndicated opportunities we're leading, and so we're not getting all of that growth and just outstandings, we're also getting a disproportionate growth in fees too from the syndication lead position we're in.

Houston has also been a big contributor as it has been in the past and it's fairly broad-based C&I. This is in addition to what Keith mentioned in energy.

But I hope that pie chart is helpful to you to just kind of help us track the mix and we just want everyone to know that diversification is very important to us. We're going to, again, meet pricing pressure to drive the right kind of growth, the right quality diversification. At the end of the day, this growth is only as good as the quality. It really means nothing but bad if you're growing and not focused on quality first. And we will give up 15-25 basis points to be sure we're maintaining quality growth.

Brett Rabatin, Sterne, Agee.

Just hoping to get maybe a little color around loan production size this quarter versus last if you had it or versus the portfolio on average and just maybe thinking about are you increasing the size of the credits you're doing in the various businesses or is the mix changing any aspect of the size of the relative credits to the portfolio?

Over time, we're growing up our companies. We're growing with them. I will tell you, not at the pace that we're growing our equity base, our legal loan limit. We moved very modestly over the last few years on hold positions relative to the growth that has been substantial in our legal loan limit or capital base. But absolutely over time you do grow up with the customers.

We're not targeting just large syndicated opportunities. What we're doing now is with that expertise and that team, our bankers are just now able to go attract some of these opportunities that in the past passed right in front of them and they didn't reach out and engage and pursue, because we didn't have a swat team of talent like we have today to go help them win that business.

So I want to give lots of credit to our bankers across the company for being alert and aware and getting us in with our syndications team. And that's really what's happening is we're getting incremental higher credit grade C&I opportunities as well as some real estate high-grade opportunities that we're leading and able to make some arrangement fees in addition to the yield on the credit.

It's just lumpy. And so our pipeline is building really nicely for this quarter and the balance of the year on syndications. We had a good first quarter in syndications. We're working on a lot of credit that hasn't closed in the first quarter and we feel very good about the income contribution for the year in syndications.

What would be the average size maybe of your bread and butter business of new clientele you had in the C&I businesses?

It still varies widely. If you look at actual average, it's going to be lower by far than the median. On average, you're going to see something in the 2 million, 2.5 million range. But in fact, our more median type sweet spot deal is still 5 million to 10 million. It now is more frequent that we find opportunities in the 10 million up to 20 million range, but it's not moved the average significantly from what we've had over the years. It is growing as we grow, but not in a big way.

John Moran, Macquarie.

Maybe just circling back to one that was asked I think a couple of different ways and I think folks are trying to get at the same thing. But Peter, on the FICA, if I'm thinking about it right, we drop $1 million out in the second quarter but we're adding about $1 million, round numbers on average per quarter over the last nine quarters, so net net -- and the reason I ask is that I'm just kind of consistently modeling this line wrong. Net net, we shouldn't really be looking for much movement on that salary and employee benefits line quarter-over-quarter second versus first. Am I reading you right there?

Probably right. Obviously it's a function of when we are successful in recruiting. Obviously we recruited well in the first quarter. Most of the RMs, as I said, came in the early part of the quarter, so you're not having a big spillover from Q1 to Q2. Although the overall staffing levels have risen consistent with what we described. You do get the benefit of that, but along with the increased staffing comes the income from the production that occurred in Q1, for which we only got a partial quarter and going into Q2, where we may see continued significant growth in the traditional held for investment categories and some growth we expect in the mortgage finance group.

The other one that I had is really kind of housekeeping on the broker and loan fees and maybe it circles back to some of the discussion that was just had on syndications. But if I look at that line that's down kind of 40% from where it peaked last year, and understanding of course that you guys had a participation program going on in the mortgage book, but is the 2.8 level that we're at here, all that mortgage participation stuff is scrubbed out of that line at this point or most of it is anyway and we would just kind of grow with production from here? Is that fair to say?

We should, because most of the pricing pressure on the fee piece seems to have plateaued on that, John. So as we pick up volume with a seasonally better second quarter, we should see that line move linear with that volume pick up.

You mentioned it in connection with syndication. There's not a meaningful syndication number there. That's the volume of transactions in the mortgage finance group.

Got it. So that would be expected to be seasonally strong in Q2 and then just kind of going as that business goes in the back half of 2014?

Yes, and not as exposed as greatly to the competitive pressures.

Quarter two and quarter three typically are your best quarters on the house buying market and that's our core customer; not the refi customer.

(Operator Instructions) Showing no additional questions, I would like to turn the conference back over to Heather Worley for any closing remarks.

If you have any follow-up questions, please feel free to call me at 214-932-6646, and I'll hand over the call to Keith for closing remarks.

Thank you very much for your interest in Texas Capital Bancshares. We are pleased with the growth we experienced in the first quarter and the pipeline that we're looking at executing on, both talent as well as core business in loans and deposits in the second quarter. We see a really great opportunity to continue to take quality market share this year. Thanks again for your time and you're interest.

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