Texas Capital Bancshares Inc (TCBIO) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to the Texas Capital Bancshares second quarter 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event 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 second quarter earnings conference call. I am 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 these forward-looking statements, whether as a result of new information, future results, 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 which are beyond Texas Capital's control.

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. Even other factors that could cause results to differ materially from those described in the forward-looking statements can be found in the Annual Report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission. Now let's begin the discussion. With me on the call today are Keith Cargill, President and CEO, Peter Bartholow, Chief Operating Officer and CFO. After a few prepared remarks, our operator Laura will facilitate a Q&A session. At this time I would like to turn the call over to Keith.

Thank you Heather. Good afternoon, I am Keith Cargill, President and CEO of Texas Capital Bancshares. Thank you for joining us for our second quarter earnings call. As Heather mentioned, Peter and I will have some comments on our results, and then we'll open it up to Q&A. As summarized on slide three, we delivered a solid quarter of traditional LHI growth, and an exceptional quarter of mortgage finance growth. Loans held for investment, excluding mortgage finance, grew 3% linked quarter. The level of linked quarter growth was particularly strong in light of our loan paydowns in Q2, far exceeding Q1 paydowns. Mortgage finance loans grew 38% linked quarter.

Demand deposits increased 21%, and total deposits were up 11% on a linked quarter basis. Net revenue grew nicely in Q2, overcoming the increased full quarter of subdebt expense. Credit quality remains very strong, with net charge-offs at 11 basis points, and the provision again primarily related to core growth in LHI. Net income increased 18% linked quarter, and 39% from the second quarter of 2013, a quarter which included the succession plan charge. Earnings per share increased 18% linked quarter, and 37% year-over-year. Slide four shows our revenue and expense trends with the Q2 2014 bar graph projecting an annualized result for each. As typical for us, we invested expense dollars in our continued build-out in recruiting, product extension, and support costs associated with growth. Organic growth drove improvements in both ROA and ROE. Peter.

Thank you, Keith. As Keith mentioned we had a great quarter in terms of generating earning assets at strong returns. We had net interest income and margin that was driven by the growth in both traditional held for investment loans and the mortgage finance operations. As Keith mentioned, we had a growth of 3% in traditional held for investment balances from Q1 2014, and this growth occurred despite the level of paydowns that stemmed as we have noted in the past from asset sales and refinancing. Not from adverse changes in competition. We saw the impact continuing in general deleveraging of the core middle market C&I customer, and rapid paydown associated with real estate that can have an impact certainly on each quarter, based solely on timing. Mortgage finance operation clearly exceeded industry trends in this highly profitable business, demonstrating the success of our strategy.

As I think we have made clear, this is a highly liquid, short duration asset class, generating strong returns with no credit costs, and it represents a growing source of very stable and low cost deposits. We had seasonally strong results with average balances above $2.8 billion. The spike to $3.7 billion at quarter end is not indicative of what we expect in Q3 average balances, but we do expect to have a strong position through the third quarter. As anticipated, and as part of our strategic focus, we have also experienced meaningful growth in the deposits in mortgage finance, that has continued in Q2. Pressure on spreads that we discussed in earlier quarters was sharply reduced, validating the benefit of relationship pricing, we still enjoy yield above prime, and may have reached, we believe, a low point in the yield.

Keith mentioned we saw total loan growth of 10% from Q1, and 26% from the prior year. Total deposit growth has also been very strong. Following our strategic objective to increase liquidity, extending the duration of low cost deposits. We remain unwilling to increase interest rate risk with the focus on earning asset duration at current rates. The increase in liquidity is not expected to have an impact on net interest income for the year, with the average cost of new deposits below 25 basis points. GDA growth has continued to be strong, with a pace of growth increasing at quarter end, $500 million more at quarter end than the average for the quarter. Total deposit growth has also been very strong, exceeding $10 billion for the first time in our history. These trends remain very positive, and we expect to see very good growth in the last half of 2014.

Turning now to slide six, we are examining the components of changes in net interest income, net interest margin, and non-interest expense. You see that as a $7 million increase in net interest income, 6.5%, almost 7% from the first quarter of this year, and 14% from the prior year. In terms of impact on them, consistent with our expectations, we saw a 12 basis point reduction that represents 3% of the NIM, with 8.5% growth in earning assets from Q1, producing a 6.5% growth in net interest income. Obviously driven by the growth and the change in portfolio composition where the increased weighting of the mortgage finance loans brought down our NIM. The growth in the mortgage finance business, despite the minor effect on NIM, is a compelling opportunity afforded by our commanding position in the mortgage finance business, as I mentioned earlier, it creates a highly liquid asset class that is a near-perfect fit in this period of exceptionally low interest rates.

So a minor effect in the first quarter of subdebt expense in both dollars and basis points and NIM. This again our first full quarter of the transactions that we had in January of this year. We see the benefit of very effective utilization of the liquidity growth that we had in the first quarter, with such strong growth in the mortgage finance loan portfolio. Again, our liquidity is supported with no adverse impact on net interest income, but it does affect net interest margin as part of the denominator. In terms of components of growth in non-interest expense, saw linked quarter growth of just $0.5 million for the reasons that are shown.

There are no major variances from what we expected. We see that legal can be highly variable in any one quarter, the professional component does include a build-out expense that we've discussed in the past. We saw a benefit of reduction in 123R expense. $1 million during the quarter, compared with a $600,000 increase with had in Q1, for a total benefit of $1.6 million occurring from Q1. Hopefully this is a nonrecurring expense, or improvement in expense ratio. As expected, we saw a reduction in FICA expense of $1.9 million. We had normal linked quarter ramp-up in annual incentives, they track where we are relative to our plan by business unit and the organization. We saw no major change in the level of build-out expense, reflected both in salary and benefit expense, and in the professional component I mentioned earlier.

Slide seven, the quarterly highlights, we have pre-tax income as Keith mentioned, or net income of 18% from Q1 and pre-tax, pre-tax 43% from the prior year. Again, it's 18% before the succession plan expense in the second quarter of 2013. Again, obviously driven by the growth in net interest income and net revenue, we achieved improvements in ROA and ROE, and the efficiency ratio declined to 55.4%, and is on track with respect to the guidance that we gave in mid-June. And we see the first full quarter impact to the common stock in subdebt offerings, they have a minor effect on both net interest income, net interest margin, and EPS. Obviously the change in loan composition and the funding profile have increased further our level of asset sensitivity. Keith.

Thank you, Peter. We have updated our 2014 outlook on slide eight. You will note the explanation of the four changes in the full year column. We remain on target with somewhat more positive expectations for mortgage finance loan growth and overall deposit growth. Also, we expect continued margin compression in the second half of 2014 with growth in build-up and liquidity. Slide 10 describes our excellent asset quality. Non-accrual loans declined to $41,000,565, as did total nonaccruals plus ORE to $42,250,000. Again, we experienced no ORE valuation charge in Q2. Total ORE is now less than $1 million. Owed credit costs for Q2 was $4 million, compared to $5 million in Q1, and $7.4 million in Q2 2013.

In closing, our organic growth business model continues to produce strong results in a challenging, competitive environment. Strong asset and deposit growth is expected to continue through 2014 and beyond, driving solid core earnings. We remain highly asset-sensitive with our business model, and are well-positioned to take advantage of increases in interest rates. The Cullen acquisition remains a strength, and the added capacity positions us well for future growth. Our credit quality is strong. Mortgage finance remains an industry top performer. We look forward to building our wealth management over the upcoming year as well. Heather?

I'd like to remind anybody that has follow-up questions to please feel free to call me at (214)932-6646. At this time we can start Q&A.

Thank you. Well now begin the question and answer. (Operator Instructions). At this moment we will pause momentarily to assemble our roster. Our first question comes from [Abraham Kuhnwalla] of Bank of America/Merrill Lynch.

Good afternoon, guys.

Good afternoon.

I just wanted to make sure I heard you correctly. Did you say that you thought the loan yields had bottomed for the Healthpoint investment ex mortgage finance?

No. For the mortgage finance portfolio.

Got it. And I guess in terms of the ex mortgage finance, we saw around a 10 basis points decline this quarter, can we talk a little bit in terms where new origination yields are, and should we expect a similar kind of decline for the sort of back half of the year as well?

There has been, obviously, continued pressure on spreads. We've held the loan held for investment yield traditional categories above 4.5%, but yes, we do expect modest decreases over the course of coming quarters, driven again, primarily by growth. The core portfolio as it stands today, with obviously the benefit of some of the loans with floors, offset by the churn that comes when we see the level of paydowns that Keith mentioned coming back to grow at spreads that are less than the margin, so yes, we would expect to see that kind of trend in coming quarters.

Abraham, virtually all of our new loan growth is now ending up LIBOR priced, LIBOR placed, as opposed to prime. And so that's shifting our mix a couple of percent, I think, this quarter, Peter, to about 58% that is LIBOR based from 56% last quarter, and the good news, if there is any, it's on the ultimate asset sensitivity it's actually enhancing that a bit, so that once rates do begin to move, it should move a little earlier on the LIBOR based, but we are seeing that trend in order to be competitive.

Understood. And I guess just a second question on expenses, I guess when we look out into the back half of the year, I'm assuming we will probably see a similar pace, or should we see a similar pace of build-out expenses tied to incentives and salaries? I guess what I'm trying to get to, is should we expect positive operating leverage for Q3 and Q4 of this year, or not, if you can just give some color on that?

We still believe that we can be at or below 55% in efficiency ratio, and that does imply some modest improvement in operating leverage from here.

Our net hiring for the quarter was actually more modest this quarter, but we would anticipate some additional opportunities in the third, with relationship managers, as some of our key execs that we brought in a year ago have rolled off through nonsolicit, noncompetes. And then finally we'll begin to add additional client advisors on the wealth management side, probably some time into the fourth quarter. So as Peter suggests, in spite of those continued build-out investments we will make in personnel, we still are optimistic we'll be at 55 or better on our efficiency ratio.

Got it. Thank you very much.

You're welcome.

And our next question will come from Michael Rose of Raymond James.

Good afternoon guys. How are you?

Good, Michael.

Wanted to get some color on this quarter's deposit growth. Obviously it was very strong. I know you've obviously talked about proactively building deposits, you're sitting here at about 85% or 86% loan or deposit ratio to the core portfolio. At this point is there a certain level that you're targeting? Obviously you're going to need some of that liquidity once rates begin to rise, but if you can just kind of walk us through some of the drivers of the growth, where you're sourcing it from, maybe how we should think about it next year?

We're seeing very strong growth in some of our regions, not all five, but Houston in particular was a good standout. We're continuing to see good growth in some of our new sectors, broker dealer, and also our mortgage finance. At the end of the day we'll continue to run as fast as we can run, as we have since we ran, we first launched the company to drive deposit growth, but particularly in anticipation of ultimately rates rising, we would feel more comfortable with more liquidity and more cushion. And we're having good success at very low cost in extending low cost duration of our deposit base.

Michael, I don't think there's a specific target in mind. We just think there's an opportunity to continue to build at very low cost, and it would have been much higher, quite a bit higher had we not experienced the level of paydowns that we did. That's the other factor we can't predict very well.

Okay. That's helpful. And then, Keith, you mentioned that the hires this quarter were a little bit lower. What was the actual number and last quarter you mentioned the pipeline was stronger than it's ever been for potential hires? Where does it stand today? Thanks.

We actually had a net increase of one RM for the second quarter, and we've been running at a pace that you may recall Michael, of 6 to 7 net RMs per quarter for the four previous quarters, not every single quarter but on average we're running about 6 to 7 net new RMs. So they come as we as we have said for years and demonstrated, at a bit of an unpredictable pattern. It was more predictable looking back, to have been that consistent quarter after quarter, but that was at about twice the run rate of net new hires of RM's that we had experienced the preceding year. So if you look at the trailing four quarters preceding this second quarter, we were running at about a double net new hire rate than what we've seen in the previous year.

So that seems to be moderating ,but having said that, we may have an opportunity to have a team of three people and another 4 RMs show up that are just all-stars, and if we do, certainly we would hire them. But we continue to raise the bar, and have been a bit more circumspect about any new hire, to be sure that the quality in fact is what we always look for and just raise the bar as time goes by. And we think that's very important. Also we've added sufficient capacity with this higher hiring level that we've enjoyed the last five quarters, that we really don't want to push to add RMs unless they truly are all-stars. So we'll just have to see what develops, our pipeline looks good. And we're looking for those key people, from the execs whose nonsolicits have run out, that we hope we're successful recruiting the next couple of quarters.

Great. Thanks for taking my questions.

You're welcome.

Next we have a question from Dave Rochester of Deutsche Bank.

Good afternoon guys. Peter, you had mentioned paydowns. I was just wondering, what was that trend this quarter? What was of the total amount of paydowns this quarter versus last quarter, just to try to get a sense for what the underlying originations or footings were this quarter?

In order, we're not giving specifics on that Dave, but in rough terms, the level of paydown increase compared to the level of paydowns in Q1 was more than the net growth point to point in Q2.

Got you. And on the loan pipeline this quarter versus last quarter, how does that look, are we at lease as strong or stronger heading into 3Q? Maybe just some thoughts there?

We think 3Q looks good. 3Q seasonally is typically not as strong as we normally see in second and fourth quarter, and then we had this unusual paydown experience in the second quarter, so 3Q, we think is on track and will be another good, strong 3Q. Not the record we had a year ago. That was just an unbelievable third quarter we had a year ago. We think a really good solid quarter is coming our way. Very unusual things happened in the second quarter on these paydowns. We had some of our energy clients, three companies combine, and end up going with an IPO. We had four or five companies sell, and I'm just very pleased that we were able to replace all of that paydown and still show a 3% linked quarter, high quality growth there. And of course, the mortgage finance was another amazing quarter.

Thanks for that color. And then also I appreciated the color on the new hires and your thoughts this year. I was just wondering if you could provide a little insight on your thought process on expansion next year, and if you're thinking that at that point as we roll into the beginning of 2015, you might see an even bigger slowdown in hiring activity for a bit, just to let production and profitability catch up. I know that's a pattern you guys have demonstrated in the past, so I just wanted to get your thoughts there?

Yes, we obviously want any new investment in talent to not just be excess capacity, obviously we want to get them up the curve and as productive as we reasonably can. That's just prudent. But at the same time we'll never pass an opportunity to bring on someone that we consider a potential top quartile performer in our Company, and those are the kinds of people we always are looking for. And we're very fortunate now that we are attracting more of those kinds of candidates.

So we have to be very disciplined, I think we demonstrated that this quarter, this most recent quarter, and it's not a matter of hiring all of the good talent that shows up, it's a matter of really being very deliberate about where we would place the person, and are they truly a notch above even those that we've brought on in the past. And we've always tried to take that approach. We're a little more focused than we have been because we had such a strong four successive quarters of hiring. And it's time to put them to more productive use, we want to get them more productive.

As far as next year is concerned, I would anticipate our shift beginning in the fourth quarter on RM acquisition to move more toward our build-out of private client wealth management, as opposed to RMs and some of the other lending areas, but we're always looking for the best bankers we compete against, so that we don't have to compete against them, that they're in the boat with us.

Got you. Understood. Great, thanks guys.

You're welcome.

And our next question comes from Jennifer Demba of Suntrust Robinson Humphrey.

Thank you. Two questions. Keith, just wondering if you could give a little more color on the core loan growth, not mortgage finance, and then if you could talk about the sequential jump in mortgage finance loans, how much of that was environmental versus market share gains for you guys?

I think it's clear when we look at peers that are coming in that we took market share, but the biggest portion of the increase was what we had shared at the end of the first quarter that we expected, and that's the businesses returning to more seasonal trends that we had experienced three years ago before refi became such a big piece of noise in the quarterly numbers, and refi has bled down to a point now that it is back to more typically the home-buying seasons for purchase mortgage volumes, and that's the second quarter and third quarter. So we anticipate another very strong quarter in the third quarter as we saw this most recent three months.

As far as LHI and its growth, we're just very pleased again to have overcome these extraordinary paydowns. We're seeing quite a lot of early paydown, Jennifer, from refinances and sales of real estate properties. We have talked this in the past, that we're seeing more of this velocity, and it was especially pronounced in the second quarter. And because some of those loans, particularly in multifamily and CRE, now are $15 million to $25 million sized loans, it doesn't take a lot of those early paydowns to really impact your net growth for the quarter. So to have overcome such an extraordinary pickup there and still shown the growth we did, I'm really pleased. And we do see a good solid pipeline, in fact, we saw some of our fundings kind of spill over at quarter end early into this quarter, so that helps us too, feel good about the third quarter.

What percentage of your growth came from the Houston market, Keith? Do you have a sense of that?

Houston was our strongest growth market, both as a percentage, in both loans and deposits. We're very pleased with the progress we're making in Houston.

Thank you.

You're welcome.

And the next question comes from Brady Gailey of KBW.

Hey, guys.

Hi, Brady.

I had a question about Slide eight, the 2014 outlook, so you guys updated the average held for investment loan growth from mid to high-teens to the low 20% range. If I take end of period loans in 2Q and don't grow them another dollar, you still get average growth year-over-year of 22%, so it seems like even though you've increased that guidance, that guidance is still very, very conservative.

Well, we like to underpromise and overdeliver. It is a very competitive environment, and we certainly expect to continue to show healthy loan growth relative to peer, but we believe that this is directionally the right target. And the challenge is, we saw these paydowns, we don't think it's something that will be replicated, Brady, but we did experience it in a quarter that typically is our record quarter for the year. So obviously we're trying to be really thoughtful and a bit conservative, but we're encouraged by how the third quarter is starting.

Brady, we aren't talking about year-over-year average, and I'm not sure what your comparison was, was the June 30 versus the full year average from 2013. The issue is level and intensity of paydowns and timing of those. We are signaling that the growth rate as we've seen for the reasons that we've commented, that growth rate is coming down. We don't know how fast it can come down, we'd like to believe that it could hold up well, but it's a little too difficult to be confident of today.

If we normalize paydowns in the third quarter, we should see a quarter we can beat second quarter, and that's really unusual, but we can't predict paydowns, coming off the quarter we just saw, so we are being a bit conservative.

Okay. And you say low 20% growth, call it pace declining, so I guess that pace declining is what you're talking about, the possibility the loan growth might slow in the back half of the year?

What we really mean by that is, we could see the more typical softer third quarter, which usually again, first and third, before our hiring has confused those seasonality trends, usually first and third as you may remember are softer quarters, so we would expect the last half of the year, again, would have a good but not great third, much like what we experienced in the second, but if the paydowns normalize we might have a shot at beating second and third.

And then normally we have a pickup in the fourth. But in this competitive environment, Brady, we're not expecting to have a record top fourth quarter. We're being really disciplined, doing our very best to not create the next vintage of problems, whenever the next downturn comes, because it is highly competitive. So that's what's going into our thinking behind the pace declining, it's not that we see anything in terms of major deceleration at all from the second quarter, we're just saying it's not going to be the robust kind of quarter we had in the first.

Okay. And then the paydowns that happened in 2Q, were a lot of those out of the SNIC portfolio, or could you update us on the end of period SNIC balances?

In the period SNIC actually declined slightly from the first quarter, so that's not where we're going for growth. We had some slight paydown, yes, in SNIC. Overall, we just saw paydowns really hitting in CRE, a lot of multifamily, some of our build to suit product, but also the energy space that I mentioned. We had seven different, significant companies either pay down or roll out and go public, and that's very unusual for us to happen in a quarter.

Okay. And then lastly, we've seen the held for investment loan yield drift down in 1Q and 2Q, but after being very stable last year, it is at 4.5 now. Any idea where that bottoms? Is it 10 basis points lower from here, is it 30 basis points lower from here? Do you have any idea on where we could see that number start to stabilize?

We just know it will be a function of mix, and we can't anticipate a significant change in mix. If the mix continues to be similar, I think we're in the ballpark of the 10 basis points, Peter. What would you say?

I can't say that would be the bottom, but in terms of the pace of decline, I'll amplify, Brady, on the shared national credits, we ended at $1.423 billion, that's down $32 million from the previous quarter.

Okay. Alright. Thank you, guys.

You're welcome.

And our next question is from Emlen Harmon of Jefferies.

Hey, good afternoon guys.

Hello, Emlen.

Peter, on the last question on the loan yields, I just wanted to make sure I was understanding that correctly. The decline in the quarter was about 10 basis points, so what you're saying is, if loans kind of continue to mix toward LIBOR at the pace they have the last couple of quarters, we could continue to see that loan yield leak roughly 10 basis points a quarter? Am I understanding that right?

I think what you don't, as Keith said, it's a function of in what sector, and it has a lot to do with the pace of growth. So if the pace of growth is slowing, that number could be lower.

Got you.

Q2, you have the apparent pace slow, but with the churn that comes from the paydowns, you're replacing those, it's not net growth, but you're replacing those at a lower level. So you had the impact of growth without the net growth, if that makes sense.

The net increase in net interest income.

Right.

The other component that has some effect on us when we talk about mix, is just timing on some of our syndications that we lead, because those fees certainly help our yield on the C&I book, but then it's also the speed of paydown and replacement on the CRE book, because of their coming in cheaper when you replace.

Got it. Okay. And have you guys, has your SNIC review been completed for this year? I know some have completed second quarter and we are waiting for a third quarter for some others?

Yes. It has.

Okay. And then just the last one for me, given the strong balance sheet growth again this quarter, TCE is getting back down around where you guys were back in the first quarter when you raised capital for some of this growth? How are you thinking about managing the capital ratios as we head out through the rest of the year, and kind of what level are you guys comfortable operating at before you think about adding additional capital?

The way we see profit growth and what we expect in fourth and first quarters, in what would be seasonal trends in mortgage finance, I think that's all okay. I'm not expecting to see anything look really out of kilter.

And fourth and first, as Peter suggests, is going to be more seasonal as it was this last year, and even more so this year we would expect on mortgage finance. Softer, like it typically is.

Got it. Alright. Thanks for taking the questions.

You're welcome.

And our next question comes from John Pancari, Evercore.

Good afternoon.

Hello, John.

Back to the expenses, on the legal and professional fees, just based on the color that you gave, Peter, on your prepared comments, should that line item therefore return to ballpark $5 million, $5.5 million quarterly range, based upon some of the lumpier items you saw in the quarter, or could it stay around that $7 million level near term?

Absent things over which you can exercise no control, and the timing of legal expenses, for example, that number can trend down slightly.

Okay. Okay. And then separately, on the held for investment growth in the quarter, again, I want to see if we can get a little bit more detail. I appreciate the SNIC color you gave us. Where did you see the bulk of the growth? Can you talk a little bit about, I know you talked regionally a little bit about Houston, but can you talk a little bit about loan type, including how much growth you saw in energy, and maybe by the specified businesses, like your builder finance business, premium finance, and lender finance?

All of the activity going on in energy that I alluded to earlier, John, we actually saw a slight decline in energy. We had a very strong quarter of new fundings, but with that much activity on the IPO of three of the companies, and then the sale of four others, and then we frankly we're quite pleased to let other banks take a couple off our hands, that totaled about $30 million. All-in-all, it declined about $50 million for the quarter in energy. But the good news is that's really picking up. We're very pleased with how we started this quarter on our energy book. Houston was the strongest growth overall, it grew $92 million. Builder finance was up again another solid $60 million. And then Dallas real estate was up $47 million. So those were our biggest categories. So we had some good growth across the Company, but it was an interesting dynamic with these paydowns.

Okay.

We don't think it will be replicated, but we just have to see how this market plays the next couple of quarters.

Right. Okay. And then lastly, and I think this was alluded to before in one of the other questions but I'm not sure, you commented on it, the new production yields that you're seeing in your held for investment portfolio, can you give us a little bit of color about where you're booking new loans right now, at what yields, just so we can get an idea of how the pressures are playing out? Thanks.

It varies widely. It really does, depending on the particular business, line of business, but the mix of LIBOR-based really has steadily shifted the last few quarters, and we saw a mix shift as I mentioned earlier from 56% of the book in first quarter to 58%, but to just throw a dart and give you an example, I think it perhaps might be more misleading because of all the variation we see by line of business, John, than it would be helpful to you. I think what we're suggesting is we're going to continue to see pressure on those yields for the foreseeable future, and it could be comparable to what we saw this quarter. We will just have to see.

Historically we've said it tends to be, whether it's LIBOR or prime based, it tends to be prime plus some, the amount of that some has decreased.

We're still delivering a quite good yield relative to competitors, even our Texas peers, but it is under pressure as we grow, as we replace these paydowns.

Alright. Thanks for the color.

You're welcome.

And our next question is from Brett Rabatin of Sterne Agee.

Hi, good afternoon.

Hello, Brett.

I just wanted to make sure I understand essentially what you're saying around liquidity going forward. Obviously really strong growth in deposits and the held for sale portfolio or the warehouse, essentially if that abates back seasonally later this year, I mean I assume the plan is the liquidity does grow, especially with continued deposit growth. I guess I'm just looking for a little more color on how you plan on managing the balance sheet with the continued deposit flows over the next few quarters?

Well, we expect, I mean it's implied on page eight, we expect deposits to outgrow total loans in the last half of the year. We expect to invest excess funds basically at the Fed, 25 basis points.

Okay. And have the regulators either asked or discussed with you guys an increased level of liquidity, or is that just mainly a function of what you want to do in terms of increasing your own flexibility in managing the balance sheet?

Nothing beyond what we plan to do.

But everyone we talk to, everything we read of banks, especially $50 billion and over, and we're certainly not in that dog fight, with all of the new regulatory pressure, but we do expect some spilldown over the course of the next couple of years when it comes to things like liquidity, and we just think, as Peter said, as a management team, it's just prudent in anticipating a rate rise at some point that we build liquidity. So for both reasons, not because someone told us go do this, we just think it's prudent to do it.

Okay. And then this last quick follow-up, the really impressive deposit growth on the GDA side, any color around how much of that was HOA, or specifically in certain quote lines of business per se?

It's really in a number of different areas we're seeing it, in different regions, as I mentioned Houston was the strongest of the five regions. And we'd rather not get into a lot of detail on it just for the sake of competitive reasons, but we're executing as we have for a long time in mortgage finance, and in our new broker-dealer business we're seeing some very nice deposit growth, and HOA has really grown over the course of the last few quarters.

Not in demand. Not in non-interest-bearing, but in total.

In total deposits. But within the DDA category, Houston and mortgage finance are two of the stars, we had a number of areas that were growing.

Okay. Great. I appreciate the color.

You're welcome.

Then next we have a question from Brad Milsaps of Sandler O'Neill.

Hey, good afternoon.

Hello, Brad.

Peter and Keith, you guys talked a lot about the paydowns. Were there any prepayment fees, or any other types of fees that helped yield or fee income as a result of either of those paydowns?

We don't get those.

We don't lock in a lot of fixed rate loans, so we don't put ourselves in a position for prepayment fees, but that's not something we benefit from, although we hope someday to benefit from the asset sensitivity by foregoing that lock-in. But today we do not see much activity at all there.

Got it. Okay. Fair enough. And, Keith, you mentioned the declining pace of growth. Are you guys backing away from more credits because of pricing or structure? I just want to see if you could maybe talk a little bit more about some of the reasoning behind your cautiousness?

It's very much structure-driven. We can compete on price, but we're not going to compete with price as the primary way we win business. We consider that really winning, we consider that being at an auction and bidding low, and that's not going to be good for our shareholders. That's not the business we're in. We're in the business of creating value and being paid for it. But the value premium today is thinner than it was two years ago, even a year ago in some categories. We're seeing structure issues as the primary reason, and thankfully we've had the success we've had recruiting some really strong RMs over the course of the last year, and because we need the incremental deal flow to find the quality opportunities that we are looking for, and we always want to attract is a relationship, but we're seeing continued aggressive structure in virtually every loan category, and we have to just look long and hard to find the business owner, or the developer who's looking for a strategic relationship in a bank that's going to understand what they're doing, not retrade the deal, be confident that we'll close, and these things that we think should be valuable, but they're a little less valuable today. There's just extraordinary aggressive pricing and aggressive structure going on in the market. We don't think it's something we should chase, so we're just not going to do it. Credit quality has always been something that we consider one of our hallmarks to the success of our business, and it's challenging today but we've got to stay the course.

Great. That's helpful. Thank you.

You're welcome.

And the next question is from Matt Olney of Stephens.

Hi guys. Good afternoon. I wanted to ask about the impact of higher interest rates. We obviously have your disclosures from the March 31st quarter, but is there any update on what the balance sheet could do with plus-200 basis points rise in short-term rates as of June 30?

Hi Matt.

We will file that in the 10-Q tomorrow. The number has improved, but the level of mortgage finance can move that number around so much, you really have to look more to a longer term trend. But with the growth in demand deposits, and the nature of what happened in the balance sheet in terms of growth, that number has increased.

And remind us how much of your loans would reprice immediately relative to the number of floor issues you still have out there?

Level of floors in dollar terms has not really changed, in I think, six or seven quarters.

It's around $4 billion.

And we've, no, closer to about $3.2 billion, $3.1 billion, $3.2 billion. And when we lower those rates, we do so in return for a change in the spread to index. So that we are less penalized as rates begin to rise. Again, we are rate-sensitive for every increase in the Fed funds rate. We increase rate sensitivity sharply above 50 bips, and above 75 and 100 it accelerates much faster.

But as far as overall portfolio floating rate, it's 91%, Peter?

Of the traditional held for investment, yes.

Granted there is that floor effect, but on a portion. But we are very much floating rate driven.

Pertinent to your inquiry, the level of demand deposits and common equity now significantly exceed the total volume of loans that are subject to floors and all fixed rate assets.

Okay, that is helpful. That is all from me. Thanks.

(Operator Instructions). And our next question will come from David Bishop of Drexel Hamilton.

Good evening gentlemen, how are you?

Doing well.

You spoke earlier about the private client wealth management build out there. When should we think about that in terms of showing up in the revenue base? What are you thinking about in terms of maybe the fee income benefit there, obviously fee income as a percent of revenue is still in that 8% to 9% range, any targeted goals over time with that builds to with the build-out of that group?

Our build-out has been very much about getting the infrastructure in place. We wanted to have the proper technology and the proper product set platforms before we began to bring over these additional client advisors. You may recall, we don't offer in each of our five regions, personnel to service these wealth management clients, we have done it all out of Dallas in the past. Until we begin to bring on the client advisors as we wrap up the technology build and increasing the product suite that we've been working on for this year, that's not going to really start to kick off until sometime in the fourth quarter, so I would expect to begin to really see some revenue improve over the course of the first half of next year, and then it's a process, we'll have to build out that business. Initially it will take us, my best guess would be six months or so to get most of the client advisors in Phase I in place in the different markets, at least three of the five markets within the first four to six months, but ideally we'd like to have someone in all five of our regional markets within the first four to six months.

So it's really too early to give you a prediction on moving the mix. That moving of the mix, because of the pace of growth of our overall Company, it's going to be a multiyear process, but we're very excited about really adding this robust piece to the Company. We've just missed a lot of opportunity we believe over the years, by not having something more competitive to offer here, and we have the client base. We just need to be able to refer them in to a competitive team and product offering, and that's what we're building.

Got it. Thanks.

You're welcome.

And this concludes our question and answer session. I would like to turn the conference back over to Keith Cargill, President and CEO, for any closing remarks.

We appreciate your interest in our Company, and we are, as you can tell from our comments today, dealing with a very competitive environment, and having good success in spite of the challenges. We look around at our peers in Texas and go up against them day in and day out, and I am just extremely pleased with the team we have on the field, and we continue to strengthen it, and expect good things in the quarters ahead. Thanks again for your time and attention, and this will wrap up our call for today.

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