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Executives

Myrna Vance - Director of Investor Relations

George F. Jones - Chief Executive Officer, President, Director and Chief Executive Officer of Texas Capital Bank

Peter B. Bartholow - Chief Financial Officer, Secretary, Director and Chief Financial Officer of Texas Capital Bank

Analysts

Matthew Clark - Crédit Suisse AG, Research Division

David Rochester - Deutsche Bank AG, Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Matt Olney - Stephens Inc., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Texas Capital BancShares (TCBI) Q4 2012 Earnings Call January 23, 2013 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Texas Capital BancShares, Inc. Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And I would now like to hand the call over to your host for today, Ms. Myrna Vance, Director of Investor Relations. Please proceed.

Myrna Vance

Great. Thank you, Caris, and good afternoon to all of you. We're glad that you could join us today on our conference call. If you have any questions after the call, I will be available to take those. But as a reminder, my number is (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 these 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 prospectus 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 our discussion. With me on the call today are George Jones, our CEO; and Peter Bartholow, our CFO. And after a few prepared remarks, our operator, Caris, will facilitate our Q&A session.

Let me now turn the call over to George.

George F. Jones

Thank you, Myrna. Good afternoon and welcome to our earnings call. As you can see from our release, we reported record earnings for 2012. Net income increased 59% for the year and 22% for the fourth quarter of 2012, as compared with the same quarter for 2011. Those results for the fourth quarter and 2012 included a one-time charge of $4 million or $0.06 after tax related to the successful settlement of our Oklahoma litigation, which we are very glad to put behind us.

We are very pleased with our operating results of $0.82, which we achieved in the fourth quarter before the one-time charge and our operating results for the year of $3.07.

We have a strong pipeline and we're confident in our ability to continue to generate industry-leading results for 2013. We experienced a significant reduction in credit cost and improvement in nonperforming assets in 2012. Charge-offs for the entire year only 10 basis points, compared favorably with 58 basis points in 2011. Nonperforming assets of 1.06% were down from 1.58% in 2011. Our strong growth and average loans held for investment continued in 2012 at 22% year-over-year. In the fourth quarter, end balance was up 2% over Q4 average, thus giving us a good tailwind moving into 2013.

Our specialty lines of business, energy, premium finance, builder finance and lender finance were instrumental in achieving exceptional growth. We also found our pipeline, as mentioned earlier, quite robust at year end. Total average deposits increased 25% year-over-year with average demand deposit showing exceptional growth, increasing 42% year-over-year. Our Treasury Management, correspondent banking and mortgage warehouse lines of business were the top contributors to that growth.

Loan held for sale, our mortgage warehouse unit, remained high in 2012, averaging $2.7 billion at year end, up from $2.1 billion or 27%, again, taking advantage of market demand and our ability to take market share in a very competitive environment. We are confident in our ability to manage this line of business in such a way to generate maximum shareholder value.

Finally, we were very pleased to complete 2 capital offerings, an $88 million equity transaction and $111 million subordinated debt issue.

Peter will cover the financials and I'll return to discuss credit. After that, as Myrna mentioned, we'll be happy to address your questions. Peter?

Peter B. Bartholow

Thank you, George. I think it's quite clear we had a great year, a very strong growth linked quarter year-over-year in net revenue, operating income and earnings per share.

Net revenue grew 25%. We did have, as George mentioned, a $4 million charge or $0.06 a share for settlement of the $65 million judgment against us, litigation in Oklahoma, did that to get behind us, and we believe we will recover cost from the insurance coverage.

Net income on an operating basis before the litigation settlement, increased 62% year-over-year and 32% in Q4, compared to the prior year. EPS growth was to $3.07 on an operating basis, $3.01 as reported, up sharply from the year ago.

In terms of core earnings power and net interest margin we, again, had exceptional performance for the quarter and obviously for the year. The results from great operating leverage and we are in that context benefiting significantly from the mortgage warehouse operation. The rate of growth and net revenue continues to exceed the rate of growth in non-interest expense and produced very strong operating leverage and improvements in efficiency ratios.

The net revenue growth was obviously driven by strong growth in held-for-sale and held-for-investment. Held for investment was up $350 million linked quarter average or 5.5% and held for investment was up $226 million or 9.3% linked quarter average.

Total of $576 million in total loans was accomplished with very strong splits. We maintained a very solid net interest margin. We're 7 basis points of a 9-basis-point reduction, resulted solely from the debt offering accomplished in September. The balance -- the small balance came from growth, offset in part by improvements in fee income. More later on net interest margin.

We've enjoyed great growth in noninterest income, primarily in these from the mortgage warehouse operation, loan swaps and fees associated with Treasury Management. I think I've mentioned before, most of Treasury Management fees show up in the growth and demand deposits, which I'll speak to later.

For 2012, we experienced the lowest efficiency ratio in the company's history, resulting from operating leverage I mentioned and the success of the warehouse lending group. Non-interest expense growth, non-interest expenses grew by 3%, excluding the litigation charge and the ORE valuation charges from Q3 and were up 15% year-over-year. Again, that compares to the year-over-year growth in net revenue of 25%.

Growth in non-interest income -- excuse me, expense, relates to business expansion generally, into the higher levels of performance. We believe problem asset recovery cost will continue to come down with the reduction in ORE and problem loans. Incentive compensation expense continues to be scaled to our performance. Legal and professional fees, which have grown significantly due to litigation should continue to come down.

In terms of loan growth, held for investment growth accrued, as George mentioned, across a number of lines of business. Held for sale balances remained at very high levels, averaging $2.7 billion for the quarter, an increase of 9% from the prior quarter.

The average was $2.3 billion for the year. As stated, our approach is designed to build the business on managing balance sheet concentration with the participation program. And we will continue to see an opportunity to expand the customer base.

The quarter end balance of $3.18 billion is net of $436 million in participations sold, so we are now managing a business that peaked at year end at $3.6 billion. Participation commitments reached $600 million at the end of the year, compared to $437 million at Q3, and we believe these will expand as needed to manage growth.

In Q4, we had saw continued improvement in our funding profile, with a 2-basis-point reduction in funding cost. The change in funding mix has, obviously, been very important with the substantial growth in DDA, again, 17% linked quarter, not annualized and 31% year-over-year. This reflects the success of Treasury Management focus throughout our lines of business and regions and growth on the business from the warehouse banking group.

We've had no apparent impact from the loss of TAG coverage, was actually where the much higher balance sheet at year end, some $200 million above the Q4 average in demand deposits.

We're especially pleased to note that DDA growth represented over the course of the year 43% of all held for investment growth. It's particularly important when that at some future date, we expect to see rates rise and will expand our margin opportunity.

The growth in held for sales supported is now supported primarily with borrowed funds. The facility with the Federal Home Loan Bank provided a great opportunity to expand this business with the net reduction in funding cost.

George mentioned credit quality trends, they remain very positive. Total cost, including ORE valuation charges, were improved 48%, compared to 2011. Saw a small increase in linked quarter cost, driven by growth and a $900,000 increase in ORE valuation cost.

George mentioned, net charge-offs were 10 basis points for the year. And he will have more comments about credit quality in a moment.

On Slide 6 and 7, we show an excellent quarterly and annual progression for both -- for growth in net income, net revenue and earnings per share exceeding 5 quarters of growth from $0.67 per share to $0.82 on an operating basis, even with the dilution from the third quarter common stock offering. This produces a 5-year CAGR of 21%.

Division credit quality cost, I mentioned, are down sharply from 2011, with an improved outlook for credit metrics in coming quarters. The efficiency ratio has shown an excellent trend in quarterly and average -- and annual levels. We maintained an ROA of 1.37% on an operating basis for the quarter and for the year.

And operating return on equity was, as George mentioned, 17% and 16.6%, again, even after the effect of the July common stock offering, demonstrating we believe our ability to leverage new capital very effectively.

We now view the likelihood with the very high return on equity, return on assets that the internal capital generation rate may exceed growth in total loans in 2013, due to what we view as modest growth expected in held for sale on year-over-year basis.

On Slide 8, a comment about average balances, yields and rates, I think they speak for themselves. Loan growth in the funding profile are drivers of very high net interest margin and the growth in net interest income.

We find ourselves with the business model that produces a nearly ideal balance sheet to the low rate environment in which we operate.

We remain highly asset sensitive with exceptional margins and spreads, lending businesses and held for -- both held for investment and held for sale. We saw an earning asset yield that was reduced by just 4 basis points and that's what the effect of $600 million in linked quarter average balance growth.

Loan yields have held up well, with held for sale -- held for investment yields just 2 basis points below the level for Q3 and again after $360 million in growth and 4 basis point production in held-for-sale yield.

Growth in DDA and total deposits, coupled with our ability to utilize borrowed funds to support held for sale balances has, obviously, been important in reducing funding costs for the protection of our net interest margin. I mentioned of the 9-basis-point reduction in net interest margin, 7 basis point was attributed solely to the impact of the note offering in September. We view all this as a clear demonstration of the benefit of our growth model, where strong growth in loans certainly has had an impact on NIM, but also has produced exceptional growth, industry-leading growth in net revenue.

On Slides 9 and 10, we show quarterly and average and annual average balances. Held-for-investment growth has certainly remained well above industry levels and ahead actually of our expectations.

We grew 6% linked quarter. As George mentioned, 20% -- 22% year-over-year. DDA growth we commented on has already -- been exceptionally strong. And again, no recognizable impact from TAG elimination and it appears so far that we could be the net beneficiary of that event due to our performance and reputation in the marketplace due, again, to high return on assets, our growth in stockholder's equity, exclusive of the impact of the offering has been very strong.

Slide 11 shows quarter end balances, again very strong growth across lending and deposit categories. Slides 12, 13 and 14 show CAGRs in net revenue and net income that are exceptionally high, 22% and 31%, respectively.

As we've discussed, our strength in operating leverage is represented by the difference in the rates of growth between net revenue and noninterest expense.

On Slide 13, we show the EPS progression, with a CAGR of 21%. It's obviously driven by the growth in loans and deposits shown on Slide 14, all of which are especially strong compared to the industry, demonstrating market share gains in both loans and deposits. George?

George F. Jones

Good, Peter. Thank you. If you move to Slide 15, this shows our loans by collateral type. Nonperforming assets are down by approximately $5 million on a linked-quarter basis to 1.06% from 1.16% and $17 million from Q4 2011 at 1.58%. The main driver of this decline was a reduction in OREO of $18 million or 53% from Q4 2011. That leaves us with approximately $15 million in ORE that will continue to work down in 2013.

Slide 16 shows our improved credit trends for both Q4 and the year 2012. Charge-offs for Q4 and the year, as we mentioned before, were only 10 basis points, compared to 58 basis points for 2011. Our loan loss provision for 2012 was $11.5 million, compared to $28.5 million in 2011.

The provision in Q4 2012 was up somewhat on a linked-quarter basis, primarily because of growth in both our loan portfolios.

Our nonperforming asset ratio continues to decline, as mentioned earlier, with ORE down substantially from 2011. We achieved a reduction in 2012 credit costs that were consistent with improvement in our credit metrics.

Moving to Slide 17. This graphs our annual net charge-offs for the past 5 years and with the exception of 2010 during the recession, they remained well below 1%.

I'd like to close these remarks with 5 thoughts to remember about Texas Capital as we move into 2013. We have strong core earnings and organic growth that will continue into 2013. We see our return on average assets, return on equity and growth in our loans held for investment portfolio continuing to outpace most all of our regional peers.

We completed both a successful equity offering and debt issuance during 2012. Our credit costs in 2013 are expected to be slightly lower than they were in 2012. And we have a strong loans held for investment pipeline and new commitments present new opportunities for growth. Our loans held for sale balances should stay high and could grow modestly with increased market share and our participation programs mentioned previously.

Thank you very much. That's the end of our prepared remarks. I'll turn it back over to Myrna Vance.

Myrna Vance

Okay, George, thank you. And, operator, we are ready to start our Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Matthew Clark with Crédit Suisse.

Matthew Clark - Crédit Suisse AG, Research Division

Can you address the, I guess, loans held for investment? It looks like something -- there may have been payouts at year end because the average balances the growth there looked somewhat comparable to last quarter, maybe a little bit slower, but just curious as to what went on there and what I think was -- is typically a seasonally stronger quarter.

George F. Jones

Sure, I'd be glad to. What we saw, we really anticipated it, but what we saw happening was in our energy line of business, we had actually $140 million payoff in Q4. And actually, the last month or so of the quarter we saw $70 million of that pay down. So we had a real -- a heavy pay down in our energy group, certainly, in the fourth quarter. We also had the sale of some of our C&I customers companies based on the potential tax problems that they saw going forward. So they -- the company completed the sales of those companies and tried to get that money working prior to the end of the year. That's what happened.

Matthew Clark - Crédit Suisse AG, Research Division

Okay. And can you maybe talk to the pipeline? I think coming to the quarter, you thought the pipeline was the strongest in years. Can you just talk to how that may have changed?

George F. Jones

Well, it does continue. We made that same comment, I think, since the last conference call. Again, we think that our energy customers will actually gear back up, continue with exploration in the first and second quarter of this year. So we fully expect to see energy grow in Q1 2013. We are seeing a number of new commitments to our C&I customers that have not funded in the past, but we anticipate fundings in Q1 and Q2. We're beginning to get some traction in terms of our C&I customers wanting to take that first step and begin to do some things that they've been holding off, worrying about the economy. Some of those things are what we see.

Matthew Clark - Crédit Suisse AG, Research Division

Okay. And then the loans held for sale, the warehouses, I think, up to 32% of outstandings, I think, above your -- maybe your comfort level, at least previously, it's 25% to 30%. Can you talk to whether or not you've maybe changed your appetite internally or whether or not that might come back in?

George F. Jones

Sure. No, we still believe that 30% number is relative. After the first 2 days, we saw that $3.2 billion number come down dramatically, and that's typically what happens at quarter end and month end. As we've said in the past, those balances build dramatically at the end of the month and then typically as they're delivered to permanent investors, they come down and that's what happened also after year end. Some of the things that caused it to build past even where we anticipated was the backlog in the aggregators or the investors. There were so many loans that closed in the fourth quarter, again, anticipating tax issues, reinvesting the money, whatever, they got backlogged. And so the whole time in our warehouse expanded, in some cases, over 20 days. Not a problem because we understand the issue, but again, ballooned some of the balances primarily at month end, but that's been rectified by now. We believe that number is still accurate. We think we're managing to that. We are continuing to use our participation program where it's necessary. Sometimes, you just can't match that dramatically with the end of the month and we did slip over a little bit, but again, we knew it could come right back down.

Operator

Your next question comes from the line of Dave Rochester with Deutsche Bank.

David Rochester - Deutsche Bank AG, Research Division

On the warehouse business. Again, just given what we know of the new QM rules right now, do you guys foresee any impact on that business at all?

George F. Jones

I'm sorry, say that again?

David Rochester - Deutsche Bank AG, Research Division

On the qualified mortgage rules, is there any impact at all on that warehouse business?

George F. Jones

We -- that's fairly new coming out of consumer protection agency. We don't see anything right now that would materially change our business, but again, it's brand new and we haven't studied it the way we probably will study it in the near-term.

David Rochester - Deutsche Bank AG, Research Division

Okay. And just wondering if your outlook for modest growth in that portfolio assumes any kind of downtick at all in refi volumes going forward this year?

George F. Jones

Well, if you look at or if you listen to the mortgage bankers of their association, they predict a 25% decline in overall volumes, primarily refi obviously. But as we've said in the past, as that happens, if that happens, we believe that our line is the preferred line with 80% of our customers, we get paid down last, our participation program gives us the ability to bring some of that back-owned balance sheet, even when volumes decline. So even if we do see a decline like that, we think we will be flat to even possibly up a little bit. So we don't anticipate large volume metric issues as we go forward in 2013.

David Rochester - Deutsche Bank AG, Research Division

And you've been increasing the purchase portion of that activity also, right? Over time?

George F. Jones

Yes, and we've been increasing customer acquisition also. We have gained a significant market share in 2012 from our competitors. And that continues -- and if that does continue, we'll see the fundings stay strong.

David Rochester - Deutsche Bank AG, Research Division

And what was the purchase portion of that business in 4Q? Do you happen to have that?

Peter B. Bartholow

About 45%, I think.

George F. Jones

Oh, the purchase fee, excuse me, I'm sorry, I misunderstood you. Yes, we're about 58% to 60% refi purchase would be the difference. We do also some reverse -- small amount of reverse and a very small amount of jumbos. But, yes, it's 40-plus percent.

David Rochester - Deutsche Bank AG, Research Division

Got you. And on the yield, it looked like that held in nicely this quarter. I remember you were saying that the yield on that book reflects the -- I guess, the yield that you get on them -- those mortgage loans, the note rates. Is that right?

George F. Jones

Yes, that's correct. It's the coupon rate, typically. We charge a file fee, as we've said before, but our rate is the rate on the coupon.

David Rochester - Deutsche Bank AG, Research Division

Should we expect that yield at all to drip down to where the 30-year mortgage rate is today, over time? Or would the fees that you're talking about...

George F. Jones

I don't -- it might slightly, but we have floors on virtually 100% of that portfolio. So in effect, we will not drop down dramatically from the point we are today.

Operator

And your next question comes from the line of Brett Rabatin with Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

I wanted to first ask, could you guys provide a little more color around what you were talking about in your prepared comments about capital potentially accumulating with your high level of profitability, i.e., how we should think about capital ratios as you see them going forward? And if capital were to accumulate somewhat, what you guys would do as a result of that?

Peter B. Bartholow

Brett, this is Peter. We don't see it accumulating at a level that would predict buybacks or meaningful dividends, but I just mean that the rate, at a 17% or 15% ROE, given the likelihood of only modest growth in held for sale -- flat to modest growth, even with a mid to upper teen level of held for investment growth, the total loan growth would be less than the internal capital generation rate.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. That's good.

Peter B. Bartholow

It's not guidance, it's math.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Right, okay. [indiscernible] maybe understand that a little better. And then the other thing is just within the held for investment portfolio. I assume you guys knew you might get the question about Shared National Credits, and if you gave it I missed it. But how much that was a percent -- or how much of that grew this quarter? And then just the yields are holding up so well and your held for investment portfolio. Just curious, you've talked a little bit about competition in the past, I was just curious what your thoughts were on the relative pressures out there in terms of new loan production?

George F. Jones

Sure, I'll take the SNC [ph] portfolio first. It's still at $1.3 billion, which is about where it was the last quarter. We've had -- it's been pretty flat, but there's been a lot of activity. We've generated a lot of growth in new commitments. Well we've had some paydowns in that portfolio too, which basically have covered the amount of the fundings under the new commitment. So there's been a lot of activity, even up to a couple of $100 million, but it was flat on a net basis because of our paydowns. We still aged it to about $340 million of that portfolio and feel very good about it. Our -- we only have, basically, one problem in the entire 80 some -- 80 or so loans in that portfolio, at $17 million. A lot of development loan, which we've talked about before, that is not a problem. And frankly, we're just giving it a seasoning time and put it back on accrual. There's no loss there. A good clean portfolio with a lot of activity. Secondly, you asked about yields. You're right. We our yields on loans held for investment have hung in there really pretty good. One of the reasons, we still maintain floors on about 60% of our floating rate portfolio. Yes, the floors have come down a little bit and will continue to come down some, but we've been able to maintain a significant portion of that portfolio with the floor. If there is aggressive pricing in the marketplace today, commercial real estate, believe it or not, is extremely competitive and very aggressive pricing in that -- in our marketplace for that type of product. We're going to continue to see that. It's too early to be too aggressive, but we see some banks doing it. We take what we want and we let the rest pass. We are seeing some structure issues we're not comfortable with, we let those pass also. We're in markets that generate a lot of potential opportunity. So we don't have to work hard to do every transaction that we look at. So yes, it's aggressive. We've been able to hold our own and sell the value-added concept that we actually provide so much to the relationship. We're not a Wal-Mart, we're not a Neiman Marcus but we fall in between and expect to get pricing, and we've been able to do a pretty good job.

Operator

And your next question comes from the line of John Pancari with Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

Could you talk a little bit about the new money yield figures staying on your newly originated C&I loans? Just give us some idea of the average yield that you're bringing on paper currently.

George F. Jones

It's kind of all over the Board, John, and it varies by market, it varies by deal and by industry. Really hard to take, really hard to tell you specifically. But we've seen some LIBOR-plus-2 deals and we see the larger financial institutions continuing to stretch for asset growth. And they do that in terms of lowering pricing, and in some cases, lowering structure. But again, we're trying hard to -- we've got a project around here in terms of improving net interest margin in a difficult environment, and we believe we can do that.

Peter B. Bartholow

John, this is Peter. I think, again by simple math, you can see the things you've held up very well when you grow in the held for investment $360 million and you've suffered a 2-basis-point reduction in yield.

John G. Pancari - Evercore Partners Inc., Research Division

Yes. Now I agree. And I think that's exactly why I'm asking, just trying to get an idea these floors are ultimately coming down, just want to get an idea of what the risk may be just for your -- originating a new credit.

George F. Jones

You bet. It's a fight, but we've got great people that know how to negotiate. And the value of our bankers, we're charging for the value of our bankers and our customers are buying it.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. So on the margin front, on your outlook there, can you give us a little bit more color on how you're thinking about how the margin is going to trend here over the next several quarters? Should we continue to expect similar compression as we saw this quarter in the next few quarters?

Peter B. Bartholow

John, since 7 of the 9 basis points came from the first full quarter impact of the debt offering, you won't have that component. That will remain fixed. So then it is going to be a function of growth and obviously, growth in pricing. So with growth, as we've commented before, we expect some reduction. As George just commented, we've been able to hold yields pretty damn well and we're not looking for anything significant linked quarter.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. And then lastly, on the loan loss reserve, can you just give an idea of where you expect the back to bottom out? If you're at that 1.1% of loan to get pretty low, just want to get an idea of where that could go.

George F. Jones

Well, that's -- we discussed that with our accountants and our regulators all the time. The credit quality continues to improve. The system we use continues to drive lower reserving. But there is a point in time that we're going to stop and take a look at it and 1% wouldn't be totally out of the ballpark, but that's not, again, guidance, but that's where we would scratch our heads and begin to look at it.

Operator

And your next question comes from the line of Brady Gailey with KBW.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

So the warehouse this time last year was about 25% of assets, and you all made the strategic decision to allow for it to drift up to 30% as of the end of this year. How likely would you be to decide right we have the capacity to take this thing up to 35% or 40% of assets throughout the course of 2013?

Peter B. Bartholow

That's not realistic. And you got to look back -- again, you've got to focus on the averages. We averaged 28% during the quarter, and we expect, as George commented, the industry to tail off a little bit. We ended the fourth quarter average with 17% above the full-year average. So to maintain a little growth, we've got to, for a lack of a better term, a cushion from the Q4 averages. So we're not, by any means, saying that we expect -- we have not said we expect it to grow, on an average basis, from Q4 levels, but flat-to-modestly up on year-over-year averages.

George F. Jones

As the bank grows, we'll let the mortgage warehouse opportunity grow. But again, we like that 30% number and we manage, basically, to that number. And again it's -- if you look at it on a month-end or a quarter-end basis, as you should, but really we manage it by averages. And we're in a 2 6 range, on an average basis, now, and that might creep up a little bit, but not up a heck of a lot.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. So the odds of you all taking it to, on an end-of-period basis, 35% to 40% would be low?

George F. Jones

Yes, low.

Peter B. Bartholow

Exceedingly.

Brady Gailey - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then my second question. George, in your closing comments you mentioned that credit costs in '13 are expected to be slightly lower than '12. Do you -- or are you talking about net charge-offs there or you're talking about provision? Because your provision has been benefited by the decline in the loan loss reserve, 130 to 115. But are you talking more about the provision there or net charge-offs?

George F. Jones

Again, the provision, we believe, is going to be driven more by growth in 2013 than actual problem assets. So that might certainly keep track more with growth. And slightly, if we have problems that need to be reserved, charge-offs, it's going to be hard to beat 10 basis points. We've got some things that could happen that make that possible or recharges our way down. We think we've got the ORE portfolio well reserved today. So as we liquidate the rest of that $15 million, we don't see credit cost creeping up on that portfolio.

Peter B. Bartholow

Yes. And, Brady, we do include -- when we speak of total credit costs, we include valuation charges and the provision. That's -- you can see that on the slides.

Operator

And your next question comes from the line of Matt Olney with Stephens.

Matt Olney - Stephens Inc., Research Division

Hey, George, you've already addressed a question on the [indiscernible], you've told me are pretty strong in the fourth quarter. But some of your peer banks talk about that higher pay downs can benefit loan yields in any given quarter. So since you guys had higher paydowns in the fourth quarter, did that help contribute to loan yields in the fourth quarter?

Peter B. Bartholow

No, we don't get fees on paydowns the way we've seen other banks report.

Matt Olney - Stephens Inc., Research Division

Okay. Okay. And then lastly, given your size over of over $10 billion of assets, can you remind us what this means as far as the regulatory environment and how you think about stress testing?

George F. Jones

It's going to be exciting. We -- the stress test, you nailed it. I mean that's the one issue we're going to have to deal with probably at the end of this year or into next year, before we ever actually average that -- those 4 quarters of $10 billion. But that is an extremely onerous, difficult project. And the amount of information that needs to be developed along with just coming up with a number or 2 is daunting. So -- but what we're starting on it right now. We're looking at it. We think that we might have to add a couple of people, do a little consulting, but nothing that you're going to notice moving the needle dramatically. We think we can do that again. If we start now, we could spread that out, get it done by the time we have to actually file a report. So we're not excited about it, but that seems to be the biggest thing that we're going to be dealing with on the near-term as it relates to the $10 billion that we see.

Operator

And your next question comes from the line of Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just with regard to -- you mentioned earlier that one of the reasons you're able to maintain loan yields is you have a -- I guess, you've been pretty selective on the originations. I'm just wondering if you maybe guys had kind of an approval rate handy or maybe compare this quarter's approval rate to prior-quarter approval rates.

George F. Jones

Well, I don't really have that number on the -- right off the top of my head. I know we're having to look at a lot more transactions in terms of getting the kind of growth that we see on the balance sheet today. We're declining more than we've ever declined in the past, but I don't have that specific number.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. But I mean, as you would say, probably the approval rate have started to come down actually, given you're seeing more loans and approving fewer of them?

George F. Jones

Yes.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then just on Page 8 of, let's see, quarter-to-date average balance slide on the presentation, just noticed securities yields are actually up about, I don't know, 12 basis points from the year ago. Just wondering if there's been any material change in the portfolio in terms of content or duration?

Peter B. Bartholow

None, it will continue to drift down.

Scott Valentin - FBR Capital Markets & Co., Research Division

And that's just a reflection -- is that a duration or a mix issue?

Peter B. Bartholow

No. It's just that we haven't bought anything since the fourth quarter of 2004. So it's...

George F. Jones

These are all mature securities.

Peter B. Bartholow

Just whatever is left and what it yields.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then just one final question. Going back to a question that responds to one of David Rochester's questions. Can explain the 4 dynamics on loan held for sale? I understand floor is on loans held for investment, but I think you referred to requiring a floor on loans held for sale, I'm just wondering how that works given these loans were originated by mortgage brokers?

George F. Jones

It really is not something that we throw out there and give our model. It's very competitive. It's similar to the way we do it on normal lines of credit, with the rest of our customers, but just much more description really does cause us some competitive pressures and we rather not go into that in detail.

Operator

And your next question comes from the line of Michael Rose with Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Just wanted to get a sense on the expense side. It looks like occupancy expenses were up a little bit. And I know in the release you mentioned this might be a new kind of run rate for legal and professional expenses. Given, maybe, some elevated costs with hiring people, I don't know what your expectations are, and then maybe some costs associated with stress testing, how should we think about the efficiency ratio from here?

Peter B. Bartholow

Michael, right now the efficiency ratio is a significant product of the operating leverage in the warehouse. We didn't, by any means, imply that there was a run rate from the fourth quarter in legal and professional. We think that should come down. That reflects the build up to -- that produced the settlement. So we can hopefully see that come down perhaps in a meaningful way. The rest of it is going to be just business expansion. There's nothing odd about our occupancy expense, except for building out to support people we hire. Staffing is up and will continue to be up, with the growth that we're experiencing in both relationship managers and the support organization. We acquired talent, we expect them to produce real results or they find it that this isn't really the best place for them. So just general business growth. I don't think the stress test, as George commented, will show up in a meaningful way. Will it be a little bit of professional fees and some staffing? Absolutely. Nothing else that we think would be of consequence.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay. And then just on the REM count, kind of where does that stand? Did you make any hires in the quarter and do you have any plans for expansion in any of the markets that you're in over the next year?

Peter B. Bartholow

Again, it's always opportunistic. We had, I think, about record growth in single quarter in the third quarter, we're flattish in the fourth quarter.

Operator

And your next question comes from the line of Brad Milsaps with Sandler O'Neill.

Brad J. Milsaps - Sandler O'Neill + Partners, L.P., Research Division

Peter, just a question on fee income, you guys look like you may have a record quarter. I know there's some swap income in there, I think you mentioned in the release. And -- but maybe the loan fees weren't as high as I thought, given the kind of lost fee in the warehouse. Just kind of curious can you kind of talk about those 2 categories, particularly as you move into 2013?

George F. Jones

The other category we had good swap fees compared to Q3, we had some minor ORE losses in -- operating losses in Q3 and a couple of gains less than $250,000, I think. So the shift linked quarter is bigger. Brad, nothing of any real significance.

Operator

And your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Peter, I missed a couple of numbers when you're going over the loans held for sale portfolio in terms of the amount of total commitments you have out there and what the average outstandings were on those in the fourth quarter? Can you go back over those real quick?

George F. Jones

Yes. Well, I think the average of total loans held for sale was 28% of total.

Gary P. Tenner - D.A. Davidson & Co., Research Division

And that includes how much -- that includes the amount you have participated out? That's what I was trying to get to.

George F. Jones

No, that's net of participations.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Right. So I thought you have mentioned earlier what you participate -- what the average participations were.

George F. Jones

Yes. At quarter end, it was -- the participation total was 436. The average for the quarter was between 350 and 375, as I recall.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Okay. And the amount of commitments to participate at the end of the year was significant?

George F. Jones

Ended at $600 million.

Gary P. Tenner - D.A. Davidson & Co., Research Division

$600 million. Okay. And you said you that you had the ability to reduce the vast majority of those assets in participations at your...

George F. Jones

No, we have kind of 90-day look -- a running 90-day look.

Gary P. Tenner - D.A. Davidson & Co., Research Division

Okay. So there would be some sort of lag presumably then in what you did. Okay.

George F. Jones

Gary, this is George, we have in addition to that, we have $300 million to $500 million in the wing, so to speak, that would be ready to increase commitments for this product. So we feel pretty comfortable that we've got the capacity to continue to acquire customers and build this business, but not build it necessarily on our balance sheet.

Operator

And your next question comes from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Really, all my questions have been asked, so I'll just try to come up with another one. Can you give us an idea of how many new producer hires came on last year? And what you think is possible in 2013?

Peter B. Bartholow

Jennifer, we asked the business managers to come up with a plan and that's one number and it may or may not bear any resemblance to the actual number. It tends to be on the low side. We had significant unplanned variance in a number of relationship managers hired during 2012. So the number that you might get -- use as guidance is going to be essentially impossible.

Operator

And your next question comes from the line of David Bishop with Stifel, Nicolaus.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

A question for you, brokered loan fees, nice growth in the first half of the year, sort of plateau-ed here at the $5 million level. How should we think about those moving into 2013 or so? We saw good growth this year, same trajectory you're thinking about in terms of next year?

Peter B. Bartholow

So fairly flat. We -- last half of the year, we really built the portfolio, those brokered loan fees really are file fees.

David J. Bishop - Stifel, Nicolaus & Co., Inc., Research Division

Okay.

George F. Jones

So we're producing, gosh, anywhere from 15,000 to 20,000 or 25,000 files a month today, but I don't see that growing dramatically.

Operator

And at this time there are no further questions in queue. And I would now like to hand the call back over to Ms. Myrna Vance.

Myrna Vance

Operator, thank you very much. And let me hand it back over to George, for a few closing comments.

George F. Jones

Thanks, Myrna, and I thank all of you for dialing in this afternoon. We think it's been a great year, as Peter said, for Texas Capital. We've got a lot of things accomplished. We've got our lawsuit behind us. We've got a number of things that we're working on to improve our earnings stream. So we look forward to 2013. We think it will be good. It will be challenging, but it will be good. And we appreciate all your interest and your ownership. Thanks again.

Operator

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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