Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jody Grant - Chairman and CEO

George Jones - President

Peter Bartholow - CFO

Myrna Vance, Director of Investor Relation

Analysts

John Pancari - J.P. Morgan

Erika Penala - Merrill Lynch

Brad Milsaps - Sandler O'Neill

Jennifer Demba - SunTrust

Brent Christ - Fox-Pitt

Neil Kasaty - Morgan

Andrea Jao - Lehman Brothers

Texas Capital BancShares Inc.(TCBI) Q3 2007 Earnings Call October 17, 2007 5:00 PM ET

Operator

Good day, ladies and gentlemen. Thank you very much for your patience and welcome to the Third Quarter 2007 Texas Capital Bancshares Incorporated Earnings Call. My name is Bill and I'll be your conference coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of today's presentation. (Operator Instructions) As a reminder today’s conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s conference call Ms. Myrna Vance, Director of Investor Relations. Please proceed.

Myrna Vance

Thank you, Bill, and good afternoon to all of you. We are glad you could join us today to hear the results of our third quarter. As Bill said, I am Myrna Vance, Director of Investor Relations, and I invite you to call me if you have any follow-up questions, you can reach me at 214-932-6646.

Now, before we begin our discussion today, I need to read the following statement. Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainty. A number of factors, many of which are beyond Texas Capital Bancshares' control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

These risks and uncertainties include the risk of adverse impacts from general economic conditions, competition, interest rate sensitivity, and exposure to regulatory and legislative changes. These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in our annual report on Form 10-K for the year ended December 31st, 2006, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Okay. Now, let's begin our discussion of the quarter. With me on the call today are Jody Grant, our Chairman and CEO; George Jones, President; and Peter Bartholow, our CFO. And after our prepared remarks, our conference coordinator Bill, will facilitate a Q&A session. At this time I'd like to turn the call over to Jody.

Jody Grant

Hi everyone and welcome to the call. We had another record in nearly every aspect of our business. Some of the most important aspects of our business, net income was up $8.8 million, earnings per share were up $0.33, and both of those were up 10%.

Our loan growth was a best quarter in the Company's history, and we measure that by loans held for investment beating the second best quarter, which happened coincidentally to be the second quarter of this year. Just to give you some numbers, average loans held for investment were up $231 million, that's 29% year-over-year or 8% on a linked quarter basis, and at period end the growth was $204 million that's 30% year-over-year and 7% linked quarter. Year-to-date we've made $0.93 per share, which compares to $0.80 last year, which is an increase of 16%.

Before turning it over to Peter Bartholow and George Jones to talk about the numbers, let me make a few words, make a few remarks about the economy in that, suddenly the economy, nationally is receiving a lot of attention these days, a lot of it negative, and I am pleased to report that the local economy is strong. Texas seems to be bucking the trends, employment hit an all-time high at August in spite of the fact that we do have weakness in single-family housing.

We created 280,000 jobs in the last 12 months, and interesting that includes 31,000 in July and August of this year versus 43,000 in the same period in 2006. So we are still performing well. The Dallas, Fort Worth area was number one in the nation, in job creation in the last 12 months with 90,000 jobs. Houston was the second in the nation last year creating 82,000 jobs.

In particular we had strength in professional and business services, leisure and hospitality and oil and gas, and all of you are aware of the Barnett Shale and the continued activity there, and needless to say with oil at over $88 a barrel that helps us as well. As a consequence, we have the highest rig count in the State of Texas since August of 1984.

Even construction employment was up by approximately 20,000 jobs in the latest period with weakness in single-family being offset by strength in multi-family, commercial and the public sector, that period being year-over-year. While we are concerned about the weakness in the single-family housing sector and watching it carefully, and George will comment more on that in a few minutes. And just to highlight that total residential permits in August were about 31% below the same period in 2006. On the other hand multi-permit, multi-family permits were up 54% from last year, and in the latest four months were up 65%. People have to have some place to live and what we are experiencing is an increase in multi-family construction versus single-family construction.

And even though new home purchases drive a lot of personal expenditures, total construction employment comprises only about 6% of total employment in the state. And our unemployment in the sate at 4.2% is significantly better than that in the nation as a whole. In Austin, and in the other major cities that we operate, we are experiencing very, very low unemployment rates. Austin is 3.4%, Dallas 3.9%, Houston 4%, San Antonio 3.8% and Fort Worth 3.9%. These were all as of August this year.

Our results this year, this quarter also reflects our increased focuses on our core business. We also spent a lot of time on expense control; I don't believe we really fully comprehended the drain on the company that was created by our residential mortgage and lending business. Fortunately as you know, we exited that business, and we'll tell you more about that in a few minutes as well.

Linked quarter net revenue, just to highlight expense control, was up 4.1%, and we were able to hold non-interest expenses to 1.9% increase on linked quarter basis. And that compares to the second quarter, when we experienced linked quarter growth in revenue of 8% and linked quarter growth in net-interest expenses of 5.5%. We continue to focus on return on equity, organic growth and credit quality. Our return on equity in the quarter was 12.7% which is one basis point above the second quarter, but less than the 13.8% in the third quarter of ’06. The difference is totally accounted for by the provision that we took in this quarter of $2 million versus $750,000 last year.

The growth story continues to be strong year-over-year. Again, our loans held for investment were up 30%, total deposits up 19%, year-to-date net income up 17% and earnings per share up 16%.

With that, let me turn it over to Peter, who will go into more depth on the numbers. Peter?

Peter Bartholow

Jody, thank you. As Jody commented a minute ago, net income for the quarter was $8.8 million, linked quarter growth of 5.5%, and a year-over-year increase of 10%. The very strong performance driven primarily by loan growth and improvements in the cost structure produced continued improvement in operating leverage with 4% growth in net revenue driven by 6.6% growth in net-interest income. We did see significant weakness in non-interest income due to our mortgage warehouse group. That group is experiencing difficulties in the -- that are associated with the mortgage industry, and while it is profitable in Q3 its reduction in net income contribution compared to Q2 was right at $0.02 per share. As Jody mentioned, our operating leverage is reflected in the comparison of the growth rate in net revenue to that for a non-interest expense. We picked up 220 basis points in difference between those growth rates in this quarter.

Obviously important to us was a expansion of the net interest margin by 3 basis points, which I'll discuss in more detail compared to the second quarter of this year. Credit quality costs were well contained as it relates to the effects of nonperforming assets and to charge-offs.

We will turn into the next slide on page seven. Again, net interest margin increased, and it was obviously due to important growth, and it produced important growth and improvement in key performance measures. We had an improvement in the efficiency ratio by a 140 basis points despite the effect of the mortgage warehouse group which I mentioned a moment ago, which caused us to have flat ROA and ROE compared to the linked quarter. Without the effects of that, we would have had some expansion in both of those key measures of profitability.

Loan growth has produced very obviously a change in the earning asset and funding composition. And we now have with the decrease in the Fed Funds rate we have now income contributions from securities portfolio and improved contributions from the fixed rate earning assets, LIBOR priced loans and the leasing activities.

Operating leverage again was a very important factor in producing these results. Jody mentioned the increase in the provision for loan loss of 33% on a linked quarter basis and 167% and despite those dramatic increases we've produced very strong growth. The growth in the provision was driven essentially entirely by the growth in the portfolio with net charge offs of only 59,000 in the quarter leaving us within a $300,000 net recovery position for the year-to-date.

Turning to slide 8, Jody mentioned some of the remarkable growth here, record loan growth this quarter on an average basis of $230 million. Loans held for investment up 7.8% linked quarter, and 29% over the prior year quarter. We did as I mentioned to have issues in loans held of sale, a much more stringent underwriting, and the industry conditions that caused significant reductions in that portfolio.

We still ended up with total loans up 6% linked quarter and 27% year-over-year. With the growth in loans, we now have loans representing 88% of earnings assets, a much more favorable position relative to net interest margin and continued growth.

Deposit growth was very strong this quarter, growth resume this quarter after what we -- as we said that it would in the prior quarter. Deposit growth is our customer base and grew $245 million on an average basis, 8% linked quarter and grew much more than the $230 million in loans held for investment and $60 million more than the growth in total loans.

We did see again some increase in DDA, a 2.5% growth rate or $12 million. And that funding category is obviously important to margin and again, I think with that it probably be an industry trend and an indication obviously that DDA is hard to produce in this environment. So then growth in loans held for investment continue to the end of the quarter and Q4 begins 3% higher than the average of Q3.

So, I cannot comment a little bit more about the net interest margin mentioned earlier. We had three basis point increase. This expansion was especially significant in light of the growth. The effect of that growth on funding composition, the reduction in the fed funds rate and the flat yield curve. But reduction in the fed funds rate of 50 basis points did occur only in the last half of the quarter, so its effect for the full quarter was not substantial, but it did have an impact the one that was probably less than had been anticipated.

The exceptional loan growth, as I mentioned, had a favorable impact on earning asset composition. Overall earning asset yields were essentially flat despite the reduction in the fed funds rate. Securities, fixed credit loans, LIBOR priced loans, leasing and other categories saw improved contributions from them into net interest income. DDA growth was an important element, and despite the growth and impact on the funding composition, total interest funding costs were actually reduced by five basis points.

We saw a meaningful success in reducing the deposit cost in key categories, really unrelated, or really partly related to the decrease in the fed funds rate. The company definitely remains asset sensitive, but the impact of that sensitivity is much less than at a time when rates began to rise.

I want to make sure everybody understands there has been no meaningful change in net-interest margin from the time fed funds rose above 4% in the fourth quarter of 2005. Growth in loans has produced a change in funding composition as a principle driver of that change. The composition of funding does affect and limits or constraints net-interest margin, but liabilities now reprise much more rapidly.

Net floating rate assets funded by fixed rate or zero cost liabilities have decreased substantially, as a percent of earning assets, since rates began to increase. I’ll share one characteristic event. DDA plus equity is now just under 20% of total earning assets, compared to just under 25%, just two years ago, a full 500 basis point shift.

As I commented earlier, we are getting now for the first time, and for quite sometime an actual earnings contribution out of our securities portfolio. The yield curve for us and for the rest of the industry obviously continues to represent on opportunity cost. We really have no opportunity to have meaningful amount of free income from the securities portfolio.

And then the other contributor is what we have described is the efficiency of our balance sheet. With a lack of intangible, the lack of fixed capital on the assets, we now have earning assets to total assets in excess of 95%.

And with that I will ask George to comment on growth and credit quality.

George Jones

Thanks Peter. I'll talk a little bit more about our loan and deposit growth again, with a little bit more transparency. Again, our demand deposit growth on slide eleven, our rate over the last five years is 15%. Our average demand deposit as Peter mentioned increased $12 million or 3% in Q3 on a linked quarter basis.

Total deposit growth is 24% and on a linked quarter basis Q3 deposits as mentioned before outgrew loans, which we're very pleased to see. It increased $244 million or 8% on a linked quarter basis. Most of that growth in the deposit area however was in money market deposit, CDs and Euro-Dollar deposits. As all of us know, it's difficult to raise demand deposits in this environment today.

Our Business Banking group in Dallas and our Dallas Corporate Banking Group accounted for most of that deposit growth. Loan growth over the past five years grew to compounded rate of 28%. Loans held for investment growth in Q3 as mentioned before, established a new all-time record for quarterly average loan growth, $231 million or 8% on a linked quarter basis.

Commercial loans seen in our portfolio made up approximately 75% of the loan growth in Q3, with real estate also comprising the balance. Loans held for sale, our mortgage warehouse group is down 22% on an average basis. Our private banking and energy groups in Dallas contributed 44% of the growth, and the regions outside of Dallas contributed 31% of the overall growth in Q3. As previously noted, both by Peter and Jody, our loans held for sale, the mortgage warehouse line of business was down significantly in Q3, by design, I might add reflecting the credit issues and residential housing nationwide, it was declining from Q2 averages of a 192 million to Q3 averages of a 150 million or about 22% decline. Currently, the total period in Q3 was a 118 million, and could possibly decline further in the future.

Our significant changes to more conservative underwriting standards and investor selections in addition to the issues in the marketplace have contributed mildly for this decline. Volumes fees and mark-to-market in the warehouse have caused our non-interest income line to decline from Q2 to Q3, and as Peter stated amounts to roughly $0.02 a share.

We believe that these revisions in underwriting standards that now basically reflect Fannie and Freddie agency guideline, plus our stringent review of existing customers, and their prominent investors cause us to have a product that can be sold in the market today.

You turn to slide 12, our revenue growth numbers remain very good. As previously mentioned our non-income line is down somewhat because of the mortgage warehouse area, but we are especially pleased with our reductions on a linked quarter basis of our non-interest expense growth, as Jody mentioned, the increase for Q3 was only 1.9%, basically with our closure of our retail mortgage unit and other expense reduction efforts.

We stated previously on these calls that expense growth reduction was a priority in 2007, and we were really seeing that kind of about in Q2 and Q3. We turn to slide 13, credit quality in the third quarter remained strong, no question about it. Net charge-offs were reflected at $59,000 and we saw the year-to-date 2007 a $300,000 net recovery for the year.

Our net charge-offs for the past 12-month period are two basis points, and we only show three basis points in charge-offs over the last two years. Our general outlook for credit remains favorable and we remain cautiously optimistic, but believe that the near-term credit environment could present all of this in the banking industry challenges for the next few quarters.

You turn to slide 14, again, this shows graphically our net charge-offs to average loans, and really displays the good credit history for Texas Capital Bank that we've shown you in the past.

Okay. I'll turn it to you Jody?

Jody Grant

Thanks, George. Just a couple of closing remarks. The growth story does continue to be good, and that's in the face of the moderating economy certainly in the nation, and we are seeing some signs of that in Texas as well as we peel the layers of the onion back and look at certain segments of the economy, off course, the most prominent one being single-family housing.

We are confirming our guidance that we gave at the close of the quarter when we had the last conference call; that was $33 million to $34 million, which is roughly about a $1.26 to $1.28 of share.

With that let me turn it back over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you very much sir. (Operator Instructions). Our first question comes from the line John Pancari of J.P. Morgan. Please proceed.

John Pancari - J.P. Morgan

Good evening

Jody Grant

Hi.

John Pancari - J.P. Morgan

I want to just see if you can give us some color on the increase in the loans in 90 days and more past due. Just give us some color on the types of loans we do on and any outlook on to what's happening there?

Jody Grant

George is going to comment on that, John.

George Jones

Yeah. Hi John. We had a slight increase. Some of that was our mortgage warehouse portfolio that moved into the 90-day plus past due area and the other area that was increased was our premium finance group. As you know we've said before, we continually have a portion of that portfolio that's in the 90 day plus past due.

We don’t believe there is much of any loss in that past due category, but the nature of the business actually promotes that amount of past dues. The balance primarily is the normal course of business as far as we are concerned we haven't seen a lot of change in that. We have a real estate loan or two, that is in non-accrual category but we think we're properly reserved for those and done what we needed to do to protect ourselves.

John Pancari - J.P. Morgan

Okay. So with the bulk of the increased clients from the mortgage warehouse, what's your expectations around loss of content. Are there any risk, given that increase because it's just a pretty sizeable jump.

George Jones

Sure. Well again, we properly reserve. We believe every category within that 90 day category passed due and we have what we believe proper reserves today. Behind that portfolio that in effect are held for investment portfolio. We would never say that there would never be any additional loss in that portfolio, but we do believe to date based on our visibility that we have it properly reserved.

John Pancari - J.P. Morgan

Okay.

George Jones

Along with the mark-to-market.

John Pancari - J.P. Morgan

Okay. All right and then secondly, if I could just touch on loan growth. You indicated that C&I loan growths accounted for about 75% of the growth was that on a linked quarter basis?

George Jones

Yes.

John Pancari - J.P. Morgan

Okay. And could you just a little bit of color around the types of credit there and the trends that you are seeing in terms of pure commercial demand in your markets?

George Jones

Sure. Demand has been pretty good and we are in a very competitive market obviously. But our demand has been pretty good. We actively attack the market in terms of trying to bring business to the company. These are our typical middle market customers that we've been trying to attract since the inception of the Company. They are companies basically that are privately owned who have top-line revenues of $5 million to $150 million typically that need operating lines of credit, expansion capital for facilities, warehouses.

On the commercial side or on the commercial real estate side, they would narrow the middle market area on the commercial side too. They look like middle market customers, but the commercial side is basically just that.

John Pancari - JP Morgan

Okay. And then the on the deposit side, just one question there, the nature of the deposit moved on the balance sheet in the quarter, Myrna mentioned they are largely money markets and CDs and etcetera, I mean, do you have any feel of the stickiness of these types of deposits, just given that we’ve seen quite a bit of volatility in your deposit numbers lately because of some larger relationships, just want to get an idea if you have some sense or some color around what moved on to the balance sheet this quarter?

George Jones

No, as Peter mentioned, they are all basically customer deposits, we don't believe there is a lot of hot money within those totals. We’ve significantly reduced in our deposits reliance on wholesale funding. We deal with a lot of larger customers that keep large deposits and actively use our euro branching. But again, we feel very good about our deposit growth in Q3.

Jody Grant

John, some of the volatility that you referred to, I assume, relates back to the second quarter, and in the second quarter we had the tax date and we had some large customers who had large tax payments. So, this is something that was out of the norm or not anticipated, and I think what we’ve seen since then is just a resumption of kind of the normal growth in deposits.

John Pancari - JP Morgan

Okay. All right. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Erika Penala of Merrill Lynch. Please proceed.

Erika Penala - Merrill Lynch

Good afternoon.

Jody Grant

Hello.

Erika Penala - Merrill Lynch

I just wanted to get some clarity on the guidance. In last quarter’s guidance, you had said that margin would be essentially flat except for the second strong growth on funding in DDA. Does that take into account any reduction in Fed funds?

Peter Bartholow

The guidance we gave did anticipate a reduction in Fed funds. We couldn't have predicted with reliability that it would go from 5 in the quarter to 475. We saw the effect of that, Erika, for the just the last half of September but with a dramatic improvement in earning asset composition. We also said that the guidance -- the margin would be heavily dependent on ability to grow DDA, which did occur in the quarter. So it's a combination of composition of funding DDA growth, as the world knows there has been now some widening of the spread between LIBOR and Fed fund’s rate because 20% roughly of our floating right portfolio is LIBOR related; we’ve benefited from that.

Erika Penala - Merrill Lynch

And as the improvement in the earning assets composition enough to stave off any pressure from floating or re-pricing in the fourth quarter, did you mention the effect of a reduction in Fed funds is only for some part of the third quarter?

Peter Bartholow

Right. We have a very substantial portion of the loan portfolio does re-price effective date of change, but as we've grown and we’ve emphasized over and over again the liability structure has changed dramatically as well. So that it re-prices much more rapidly then it did two years ago as the fed funds rate came off up the 4% level.

Erika Penala - Merrill Lynch

Okay. And I also have a follow-up question. It was mentioned a couple of times during the call that you are seeing weakness in single-family. Is that translating into concerns in your construction portfolio or do you remain -- is everything fine there?

George Jones

No, at the end of the third quarter, we feel very good of about our construction portfolio. We have very few problems in the construction portfolio today either in the single family portfolio or in the commercial real estate portfolio. But we are reflecting really our thoughts as it relates to more of a national housing market and what kind of effects are we going to see in the State of Texas from some of those reverberations.

Again we feel very good about what's going on today. We see a lot of movement nationally and some locally in the starter home market, where we see a lot of those problems happening. We have a very small starter home portfolio. It's less than 1% of the entire loan portfolio in the company. And we have virtually no problems in that particular portfolio. So we feel, today we feel pretty good about our construction portfolio.

Erika Penala - Merrill Lynch

Okay.

Jody Grant

And its also estimated that in the single-family residential arena the inventory in Texas is about 6.5% versus about 10% for the rest of the country and with the decline that we've seen in permits and starts, hopefully we will be approaching equilibrium between supply and demand sometime late this year or early next year, at least in Texas.

Erika Penala - Merrill Lynch

Okay. Thank you so much for taking my call.

Operator

Thank you very much ma'am. Ladies and gentlemen your next question comes from the line of Brad Milsaps of Sandler O'Neill. Please proceed.

Brad Milsaps - Sandler O'Neill

Hey good afternoon. Good quarter.

Jody Grant

Hi Brad and thank you.

Myrna Vance

Hi.

Brad Milsaps - Sandler O'Neill

Just kind of refresh my memory for a moment. You guys may have gone over this and I missed it but when will the discontinued or earnings from discontinued ops begin to fall off. Can you just give me an update on the divesture of the mortgage company, kind of when will we see those that fall off your income statement?

Peter Bartholow

Brad, this is Peter. I think when that happened and I am focused now on the March deal. We set out with everything that we thought could hit us. What we didn't anticipate was the collapse in the overall mortgage market and that has resulted in weakness in our ability to get rid the few remaining loans that had been there.

You may have seen all kinds of circulars about accounting guidelines that forced mark-to-market of loans that are held for those kinds of loans that were in the discontinued portfolio. So that has increased. I can't say that we won't have some hangover effect, but we believe after this quarter, it will be nominal and not certainly important to the results.

Brad Milsaps - Sandler O'Neill

Okay. But if I’m picking up the right number on the balance sheet, you’ve got about $863,000 of those loans left?

Peter Bartholow

That's correct.

Brad Milsaps - Sandler O'Neill

Okay. And in terms of the mortgage warehouse, I know it’s -- I don't want to put words in your mouth, but just curious, if you wanted to power down that division, can you give me an indication of what the EPS, it might be and sort of what kind of how you think through that, you’ve shown in the last year, so you guys have been pretty aggressive in jet setting off this. Is that either taking up too much time or just don't make (inaudible) kind of make sense for your long-term strategy?

George Jones

Yeah, I will address that quickly. We’ve been in the warehouse business for the last six, six and a half years and we’ve made a lot of money and had a lot of success in that business. And we don't believe it’s a business that we should exit at this point in time. As I mentioned, we’ve not talked about it before, it’s certainly down from where it was, I think in our peak we were roughly 250 million in average loans, it's a 118 today, and I mentioned it probably can go lower.

Hopefully it can be rectified in a reasonable period of time, but we think long range that's the business the way we do it. It’s a business we want to stay in, but we can adjust our costs in various ways in that particular area, and we can do that, but we don't have a desire today to in effect, as you say jettison that business, we think it’s one we want to continue to be in. But again, underwrite it properly, make the changes that the market demands today, and that's what we think we’ve done.

As I mentioned before, the way we underwrite today on a go-forward basis, it’s basically Freddie and Fannie that today we believe is still very saleable in the marketplace. I hope that answers your question, Brad.

Brad Milsaps - Sandler O'Neill

No, no. Fair enough, I mean, your near-term, are there steps you can take, it sounds like you feel like on the expense side, you've got some maybe rubbers you can pull that sort of make the hit, maybe not as severe as -- not that it was real severe this quarter, but maybe not as severe it was?

Jody Grant

Yeah. There is probably some ways we can, again, we can do that. It's not a big number on our income statement as it relates to expense of running this business right now. So we'll certainly take a look at that, and it will depend, again, on how low the average outstanding go on these kinds of business, and we'll certainly make adjustments the way we feel we should.

Peter Bartholow

Brad. This is Peter. It's a business that if you've seen in that line item doesn't produce very strong spreads. We get additional benefit from transactional volume which has been down according, off course, but their core business today is profitable.

And finally, Brad, we did lower down the amount of loans that we've had in the warehouse by making the criteria for approval much, much stringent than it was. So, any new loans coming in the warehouse should be in very, very good shape.

Brad Milsaps - Sandler O'Neill

And Jody, if I recall, you guys use a third-party to do a lot of verification there?

Jody Grant

Yes.

Brad Milsaps - Sandler O'Neill

Okay. Fair enough.

Operator

Thank you very much, sir. Ladies and gentlemen your next question comes from the line of Jennifer Demba of SunTrust. Please proceed.

Jody Grant

Hi, Jennifer.

Jennifer Demba - SunTrust

Hello. Question for you? When do you think you've had incredibly strong loan growth this year, when do you think that might start to taper off a little bit, given you have slowed down your hiring over the last few quarters?

George Jones

As you can tell at the end of third quarter we certainly haven't experienced that yet. As we told you earlier we for a number of reason are going to use up some of the capacity we have in the Company. We still believe we have capacity in the company to continue certainly for the near-term and generate good growth in the portfolio. I think one of the bigger questions in terms of loan growth today is just the market. What will the market give us in terms of loan growth or what is -- the credit issues impact the market to a certain extend, not necessarily impact us, but just the market itself.

And as we become a little bit more conservative in terms of how we underwrite and how we look at things there might be some slowing in the growth, but I would tell you its my firm belief that we will significantly outperform our peer group in terms of growth for the forcible future in the loan portfolio, regardless of those conditions we just talked about.

Jennifer Demba - SunTrust

Are you seeing you competitors pull back a little bit and be more conservative with their underwriting, given what's happened in the last 60 days or so?

George Jones

You know it’s hard to tell. 60 days is really not an accurate measurement, so to speak it's little early to make that determination. It would not surprise me to see that happen somewhere, but it's really a little too soon to make a judgment on that.

Jody Grant

There are occasional discussions that suggest that people are pulling back or not forcing the issue in terms of market share in Texas that will be beneficial to the group, our group in any case.

George Jones

Yeah that's right. Jennifer, really we look at this to a certain extent as an opportunity. If it wins, some of this happens with our competitors and they begin to slow down somewhat and may be pull in their horns a little bit. We think there is going to be some talented bankers out there that who would want to make a change and we are opportunistic and we look forward to having an opportunity to attract some of those bankers.

Jennifer Demba - SunTrust

Okay thanks.

Operator

Thank you very much ma'am. Ladies and gentlemen, your next question comes from the line of Brent Christ of Fox-Pitt. Please proceed.

Brent Christ - Fox-Pitt

Good afternoon.

Jody Grant

Hello.

Brent Christ - Fox-Pitt

Just a couple of follow ups on a few topics you guys already touched on. First, in terms of the margin and the impact from the Fed rate cut. Obviously it was late in the quarter. Has there been any internal analysis that you guys have done, that you could share with us, in terms of what your near-term expectations are for the impact of the Fed cut on your margin and then may be any offsetting factors whether it be lower mortgage warehouse balances or continued reduction in deposit costs?

Peter Bartholow

Brent it's never occurred to us to do any analysis.

Brent Christ - Fox-Pitt

My guess is that you already did and you could share with us.

Jody Grant

Now that you've suggested, we'll get right on that. Of course we have and as I said we get very rapid repricing now on both liabilities and assets. So while the effect on the full quarter was not great. The last half of September produces evidence that's constructive. As we've told you in the past we are not going to be good about giving guidance on quarterly margins. There are lot more variables at play. DDA is very important one obviously. Composition, obviously and, and the effect for the first time now in the year of seeing a profit margin improvement in our fixed rate loans, our LIBOR loans and our securities portfolio and leases. So, we have a lot of things going force in that regard, and as I commented a minute ago on the call, you look back to Q4 of '05 and our margin is 3 basis points higher than it was then and at that time the Fed Funds rate was 4.

Jody Grant

Just to elaborate little bit Brad, just on the securities portfolio, we’ve gone from a negative 35 basis points on the carry to a little better than breakeven.

Brent Christ - Fox-Pitt

And is there a thought there now that it is contributing a little bit, that the plan is still to continue to run that down or is there any thoughts in terms of reinvesting?

Jody Grant

Still let it run down to lets something dramatic happens it would change the spreads that are available, and I doubt that's going to happen not in the near term.

Brent Christ - Fox-Pitt

Got you. And then just a follow-up on the credit question, my guess, your comment about the softening economy seem to be speaking about the national economy, as well as, Texas a little bit, but is there anything in your portfolio that outside of some loans in the mortgage warehouse that you are overly concerned about at this point or you seeing any adverse internal risk grading migration with?

Jody Grant

I think the answer to that question is no. There are always risks in the portfolio and we monitor those on a daily, weekly, monthly and quarterly basis. We are fortunate to be in Texas. Texas is performing well with the exception of the one sector that is getting all the attention, and that’s single-family housing. And I think the whole nations and sort of uncharted waters, as it relates to that because we never had a recession or a major decline in business, its being driven by the housing market. So, I think all of the economists in the country that I have looked at are, they are looking for about a 2% GDP growth next year. And if that's true Texas should do a little bit better than that.

Brent Christ - Fox-Pitt

Got you.

George Jones

You know, where I would certainly watching we are not immune to what's going on nationally in the single-family, in the lot development portfolio we certainly watch that as one of the points, the interest from our concern as Jody mentioned, the nice thing about our residential portfolio, both single-family construction and lot developments about 95% of that product is Texas real estate. So, if we have issues based on what we see in the economy we think the issues will be somewhat less than maybe other parts of the country.

Peter Bartholow

And Brent, to put it in perspective we built the guidance and the plan for 2007 around the fact that we would have some losses. Losses don't surprise us, losses don't scare us. We've obviously benefited from a remarkable success in credit policy and having a net recovery for the year-to-date of 300,000, but nobody is building plans and expectations about around those kinds of numbers.

Brent Christ - Fox-Pitt

Sure. Okay thanks a lot guys.

Operator

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Neil Kasaty of Morgan. Please proceed.

Neil Kasaty - Morgan

Hi guys. Great quarter.

Jody Grant

Thank you.

Neil Kasaty - Morgan

I just wanted to ask a question. Do you have a large line of credit percentage for a company called Home Solutions? And what amount seems to exceed the annual allowance for bad debt? Can you just tell me how much expose you have to that loan? It seems there are in violation with some of the loan covenants?

Jody Grant

Home Solutions is public company and we can't comment on our customers and I think you'd have to go to them for any answers like that.

Neil Kasaty - Morgan

For how much exposure you have with them, I have to go to them?

Jody Grant

I think you would. I mean we are not at liberty to be able to divulge that information without their permission.

Neil Kasaty - Morgan

Okay. Thanks for answering the question.

Operator

Thank you very much sir. (Operator Instructions) Our next question comes from the line of Andrea Jao of Lehman Brothers. Please proceed.

Andrea Jao - Lehman Brothers

Good afternoon everyone.

Myrna Vance

Good afternoon, Andrea.

Jody Grant

Good afternoon.

Andrea Jao - Lehman Brothers

Just want to drill down on the funding side. You showed good deposit growth this quarter in contrast to some your peers and we are able decrease borrowed funds, do you think that continues into the fourth quarter into 2008?

Peter Bartholow

Andrea we expect to have good deposit growth. The nature of our business is driving that. As George commented, it can be a little lumpy because of the nature of our business, but overtime we've proven that we can grow the deposits very well. Q2, you remember, we had transaction specific maturities and a tax payment that Jody mentioned, that force shift the borrowings which were more (inaudible) in today's market would be more expensive than the deposits. As George commented 100% of the deposits were customer based. We are now down to insignificant number in terms of anything that looks like hot money or non-customer or wholesale money.

Andrea Jao - Lehman Brothers

Great. Now focusing on deposits could you give us a little bit more detail on are you seeing customer migration to higher cost categories? What kind of seasonal effects should we expect in the fourth quarter and then in the first?

Peter Bartholow

Q4 has historically has been a very good quarter in both demand deposits in total. The market has gotten tougher as we've said many times on demand, but we had a good quarter in that comparatively to peers, I'm sure. In Q3 we have seen very good growth of course in the Euro-Dollar accounts, but in those accounts we have been very effective for lack of a better term rationalizing pricing, based on the customer utilization of those funds and we've seen a consistent improvement in the rates on that portfolio each quarter.

Andrea Jao - Lehman Brothers

Okay great. Thank you so much.

George Jones

Thanks Andrea.

Operator

Thank you very much ma'am and ladies and gentlemen you've no further questions in queue.

Jody Grant

If that's the case, let me just thank everybody for being with us this afternoon. We appreciate your questions and remind you to call Myrna Vance, if you have any further questions. We look forward to a good quarter in the fourth quarter. We reaffirmed our guidance and we will look forward to talking to you either between now and then or at the next conference call.

So that concludes the call and thank you again very much.

Operator

Thank you, very much sir and thank you, ladies and gentlemen for your participation in today's conference call. This concludes your presentation for today, and you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Texas Capital BancShares Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts