Texas Capital Bancshares, Inc. (TCBI) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Texas Capital BancShares Earnings Conference Call. My name is Alecia, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Myrna Vance. Please proceed.

Thank you very much, Alecia, and thank you, all of you for joining us today for our fourth quarter and year-end conference call. If you have any follow-up questions after the call, you're welcome to call me at (214) 932-6646. Now before we get into our discussion, let me read the following statement. Certain matters discussed on this call may contain forward-looking statements which is subject to risks and uncertainties. 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 condition, 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 statement can be found on our annual report on Form 10-K for the year ended December 31, 2010, and other filings made by Texas Capital BancShares with the Securities and Exchange Commission. With that, we're ready to 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, Alecia, will facilitate a Q&A session. At this time, let me turn the call over to George.

Thank you, Myrna. Good afternoon, everyone, and welcome to our conference call. We're pleased to report yet another year of industry-leading growth and record profitability for Texas Capital BancShares. We are extremely proud of our improvements in operating leverage, credit quality and the market share gains we've made in key lines of business. We believe this performance is exceptional in light of what remains a challenging environment for the banking industry. Net income increased 104% for the year, 19% on a linked quarter basis and 113% for the fourth quarter of 2011 when compared to the same quarter of 2010. Earnings per share increased 99% for the year, 20% on a linked quarter basis and 109% for the fourth quarter of 2011 when compared to the same quarter of 2010. We're especially pleased with our demand deposit growth of 21% from 2010 with a linked quarter increase of 5%. Loans held for investment increased 18% and total loans increased 30% from 2010, showing linked quarter growth of 5% and 6%, respectively. Credit costs and nonperforming assets decreased substantially in 2011, and additional reductions are expected in 2012. I'll be back in a moment to further discuss our outlook for 2012 and credit after Peter's remarks. Peter?

Thank you, George. As George mentioned, we had very strong growth year-over-year in linked quarter in net income. We saw year-over-year EPS of 99%, and as you know, the Q4 of 2010 and full year 2010 were not weak periods for us. We had good performance in those periods. As George mentioned, we had exceptional performance especially in terms of improvement in operating leverage, with linked quarter growth in net revenue of 12% producing a year-over-year increase of 22%. Obviously, this was driven by growth in loans with a very stable NIM to produce exceptional growth in net interest income. We did have strong net interest margin throughout the year resulting from strong growth in held-for-investment and held-for-sale loans producing much better composition of earning assets, and as I mentioned, the growth in net interest income and more later on net interest margins. We had good growth in net interest income in the quarter resulting from higher levels of mortgage warehouse fees, loan swap -- loan and swap fees and other. In credit quality and costs, the trend remains very positive, with a 43% reduction in both nonperforming assets and net charge-offs from 2010. We saw a provision reduced to $6 million in the fourth quarter compared to $7 million in the third quarter and $12 million a year ago. Total provision for 2011 was $28.5 million compared to $53.5 million for 2010. Including ORE valuation charges, total credit costs have improved sharply, decreasing to $35.3 million from $62 million. George will mention more about credit trends in a moment. In terms of expense management, we did see an increase in noninterest expense of 10% from the third quarter comprised of legal, professional and expenses related to credit that should come down with reductions in nonperforming assets already achieved. We saw in the fourth quarter real estate taxes on ORE. We had marketing expense related to deposit and treasury management programs with expected improvement in balances and fees during 2012. We saw an incentive compensation true up for performance above planned for 2011. In loan growth, the held-for-investment growth occurred in a number of lines of businesses and regions, reaching $5.6 billion at year end. As anticipated, the average balance of held for sale grew sharply with the balance, though, at year end approximately equal to the quarterly average. This is a result in part of high-refinancing activity and new or expanded customer relationships with average balances higher than anticipated without the seasonal reductions. As indicated, when average balances appear likely to exceed $1.5 billion for a meaningful period, we will increase emphasis on participation program. With the surge that we experienced in the fourth quarter and the uncertainty over how long the balances would be at that elevated level, we were not able to extend the participation program in a meaningful way. We do anticipate additional participants in Q1, which with the post refi reductions in activity, will bring balances down over the course of 2012. Throughout 2012, we saw improved funding profile with the reduction in costs in both deposits and total funding that were obviously very important to profitability. We saw a change in funding mix that was also very important. DDA growth was 9% from Q3 and 24% above the year-ago quarter, representing at year end 31% of total deposits. The growth in held for sale provided the opportunity for much more optimal profile for larger portion of held-for-sale balances carried with borrowed funds, not deposits. As planned with held for investment growth, we saw growth in interest-bearing deposits resume in 2000 -- in the fourth quarter, increasing 6.6% from Q3 and still down, though, from Q4 2010 at the time when excess liquidity peaked. Quarterly income statement on Slide 6. Obviously, it's a great trend in both quarterly and year-over-year growth in net revenue, driven by growth in held-for-investment and held-for-sale loans coupled with very strong NIM maintained over the year. The credit costs had come down sharply but still remain somewhat ahead of normalized for us, but they did confirm the improvement that we anticipated over the course of 2011. Obviously, this results in exceptional progression of both net income and EPS with the highest quarterly ROA and ROE in TCB history, at respectively 1.28% and 17%. Slide 7, the average balances for rates and yields, more comments on NIM. There were growth and change in funding profile where the drivers of very high NIM and the growth in net interest income. Loan growth has obviously had a major impact in maintaining the yield on earning assets. We simply have not been compelled to buy securities with excess liquidity. Yield on total earning assets have actually increased from Q4 2010 despite the decrease in held-for-sale yields, do really better to earning asset composition, considering that we have growth year-over-year quarters of $860 million and maintained yields above 5% in held for investments. In Q4, we saw a decrease in NIM of 21 basis points, due almost entirely to the $1 billion increase in total loans. We had good growth in LHI balances but with 11 basis point reduction in yield, still above 5% and then we saw our mortgage rates decrease producing a 21 basis point reduction in yield and held for sale. It was a very high -- obviously, a very favorable environment for increasing volumes resulting from much lower rates and refinancing activity. This is a very favorable and highly liquid category of earning assets that produces great spreads, and we've experienced exceptional growth in contributions to net interest income. I might add that with any indication of upward trends in short-term rates, which we've seen appears to be unlikely or any increase in treasury yields, we would expect yields on held-for-sale loans to be sharply upward. I think all of this clearly demonstrates the benefit of Texas Capital's growth model, where we can have strong growth in loans, producing a small negative impact on NIM that doesn't result from business weakness. We did experience a reduction over the year of 45 basis points in the cost of interest-bearing liabilities. We had great growth in DDA, a 40 basis point reduction in the cost of interest-bearing deposits, much improved mix of borrowed funds to support held for sale and funding costs flat linked quarter, and that's again, sharply down from the year-ago quarter. On Slide 8, the average balances saw our held-for-investment growth to 3.5% from the third quarter building off of the very high levels at the end of Q3. DDA balance growth was exceptional, again, matching the planned reduction in interest-bearing deposits. And I would say interest-bearing total deposit balances are consistent with the initiatives we've described in previous quarters. On Slide 9, the quarter-end balances. During a seasonally strong quarter, the Q4 balances suggest a great start for 2012. We saw a balance at the end of the year ahead of Q4 average by $170 million or 3% and the year-end balance was 10% above the average for the full year and 18% above the average for the first quarter of 2011. The high LHS balances at year end were comparable, as I mentioned, to the Q4 average. They exceeded expectations, as I mentioned, due to refinancing activity and though to the growth in the customer base and did not decline seasonally as we had experienced in the fourth quarter of 2010. We do expect balances will decrease over 2012 as a result of reduced refinancing activity and the participation program if the balances remain above $1.5 billion for extended period. So a great growth I mentioned in DDA. On Slides 10 and 11, we demonstrate the CAGRs in key components of the income statement. Net revenue, exceptionally high. The CAGR now with net income of 21%, recent growth is especially strong compared to the industry, which is only beginning to come out of a contraction phase. Slide 12 is simply a year-over-year comparison showing net interest income 22%, producing 22% expansion of the net revenue, substantial reduction in credit costs, very high levels of ROE, ROA and low levels of efficiency, both in DDA and total deposits of 36% and 7%, respectively. And George will now review the general outlook for 2012.

Thanks, Peter. Before our credit discussion that we normally have, I'd like to review our general outlook for 2012. We expect loans held for sale, as Peter mentioned, the balances to be generally in line with 2011 average of $1.2 billion but having the potential for a very modest growth. The balances should be consistent with Q3 2011 averages, before the spike at the end of Q3 and the large increase we saw in balances during Q4. This performance is consistent with our business strategy and our market share penetration. As Peter mentioned, we also have a participation program if balances remain very high. We believe our Q1 2012 balances for loans held for sale will remain higher than the full year average for both 2010 and 2011 but declining thereafter. The contraction of loans held for sale will actually increase net interest margin compared to Q4 but reduce net interest income. We see low- to mid-double digit loan held for investment growth for the year-end 2012 balance 10% above the average for the year. We believe that internally generated capital will be comparable to loans held for investment growth. We expect a modest contraction in NIM from 2011 average of 4.68% due to growth and competitive pricing, certainly that we're seeing in the Texas market. This contraction could be offset, if mortgage rates increase, as they did in early 2010, coming closer to 5% without any increase in funding costs. We also believe that credit costs will be lower in 2012 and expense growth less than what we experienced in 2011. Now let's take a look at credit. If you'll turn to Slide 13 and look at the pie chart showing loans by type, loans held for sale grew 9% linked quarter for period end loans but on an average basis, grew 76% linked quarter and 58% year-over-year. Much of the growth, as you might imagine, came from refinancing and the low-rate environment. Improved credit trends are represented in lower provision expense, lower charge-offs, lower ORE totals and expenses and finally, lower nonperforming assets. Our provision expense, as was mentioned earlier, was $6 million for Q4 2011 compared to $8.7 million on a linked quarter basis. Net charge-offs were $3.4 million, only 25 basis points compared to 48 basis points linked quarter and 58 basis points year-to-date. And for the worst 4 years of the economic cycle, our net charge-off ratio has averaged only 63 basis points. Composition of the net charge-offs was the cleanup of various nonperforming loans. The largest net charge-off, $1.2 million, represented the sale of one note reducing our NPL total by over $6 million. We sold almost $3 million of ORE in Q4, but added approximately $3 million leaving the total about the same. However, all additions, as you know, to ORE properties were previously identified and expected, as we've said before. This is the normal course of disposition for problem commercial real estate loans. In Q4 2011, we added only 2 nonperforming loans that we had identified earlier as potential NPLs. Little, if any, loss is expected in this $5 million of nonperforming loans that were added. Our nonperforming asset totals are at the lowest levels since Q2 2009. We had a $14 million, 14% decrease linked quarter and a $92 million, 51% decrease from peak levels in Q2 2010. Our nonperforming asset ratio of 1.58% as compared to 1.92% in Q3 2011 and 3.25% in Q4 2010. Nonperforming loan ratio now stands at 0.71% of total loans and 0.98% of loans held for investment. While improvement in credit quality has been dramatic in 2011, we believe that credit costs and NPAs will continue to decline in 2012. The next slide shows the improvement in net charge-offs for 2011 and the continued improvement in credit quality that's represented by the ratios you see below. Let me take a second and close with these particular takeaways. We expect strong core earnings power to continue in 2012. We will maintain a capital position needed to grow the business. As mentioned before, we're now growing capital internally at approximately the same rate of growth of our loans held for investment. Credit cost improvements are expected to continue in 2012, and loan growth potential is excellent for loans held for investment as we have a strong pipeline in place. Loans held for sale will normalize in 2012, but balances should remain high. Reduction in refis are expected, offset by our preferred provider status that we've been able to achieve over the last year in the mortgage warehouse business. We had a great year returning 17% on equity for Q4, and we go into 2012 with a strong tailwind for growth and profitability. Thank you very much. That's the end of our prepared remarks, and we'll turn it back over to the operator to start the Q&A period.

[Operator Instructions] And the first question comes from the line of Scott Valentin with FBR Capital Markets.

Just with regard to loans held for investment. Some of your Texas peers have reported numbers and the loan growth hasn't been anywhere near what you guys are showing on a linked quarter basis. I'm just wondering, is it taking market share, is it hiring new lending teams, if you could provide any color there, it would be helpful.

Sure. It's really both those things, Scott. As we've mentioned in past calls, for the last 2 years, we've really been hiring individuals and teams that we think are very necessary going into a competitive market. We've done that. Those teams are becoming profitable now. They're becoming productive, and most of the growth is coming from market share takeaway. So we built a lot of capacity into the company. That capacity is beginning to pay off by taking market share.

And you mentioned you're holding price above 5% for now, which seems to be a little bit above what some of the peers are pricing at. We've heard from other Texas lenders that competition is quite intense on pricing. How are you holding that price at 5%? Is it that much of a difference on the service side?

It really is the way we do business. It's a relationship business. We are not the Walmart, and we're not the Neiman Marcus. We are a company that grows with relationships. We have been able to maintain a number of floors on our floating rate portfolio just slightly below the 5% level, which has helped us keep the margin up and that earning asset yield up and we deliver high value. We've got great bankers and low turnover in those bankers.

Okay, and one final question. Just on Page 8 of the press release, where it shows the quarterly trends for the income statement. I notice the service charges on the deposit accounts has been trending down, despite the increase in deposit balances. Is that just a function of clients holding greater balances in their accounts and, therefore, offsetting compensating balances?

Yes, it's a treasury, function of treasury management products where they're paying for services with balances.

And the next question comes from the line of David Rochester with Deutsche Bank.

You talked about the competition in the market. Could you expand on that perhaps and just talk about any changes you've seen from third quarter to fourth quarter and those pressures and if you're seeing any evidence of competition on structure?

Yes, we actually have seen competition enter the marketplace before fourth quarter. It's been frankly most of 2011. It's coming mainly -- there are a few regional banks but there are a number of larger banks that have chosen to try and cut price and reduce their reliance on good underwriting structure and we think that's a shame. We again, compete on relationship. As you can see from our numbers, we're getting our share of business without having to do that, and we think we'll be able to continue to do that. But the market is extremely competitive, and we do see a number of our good friends out there doing some very interesting things.

Great, thanks for that color. And as you had mentioned, you had hired a number of teams, well over 20 teams over the past couple of years. And those guys continue to ramp up. Do you foresee any new hiring in 2012? Is there any need for that or do you have plenty of capacity there still to grow the book?

Well, as we've said in the past, the way we look at this is we're very opportunistic. We never say, "We're not going to hire anybody or we're going to cut hiring in any particular quarter." Because people, great people become available when they want to become available, not when you want them to become available. So we take advantage of opportunities at any point in time in the cycle, but we have a lot of capacity built into the company today. We have not been as active in the hiring scene in the last quarter or so, doesn't mean that we won't be in Q1. But we have good capacity and can remain very competitive, we believe, where we are today.

And one last one, just switching to the warehouse book, what's the argument -- the best argument at this point against growing that portfolio from here if you can continue to grow the customer base and utilize the preferred status and really leverage that?

We're going to do that, but again, it's all -- it all relates to balance sheet management and concentrations. It's a great business. It is a low-risk business. It is a very profitable business, but we manage our business with concentration. So we, as Peter has mentioned, have put a participation program in place so that we, in effect, can continue to grow the business, get great new customers but not necessarily grow large balances on our balance sheet. Now as we grow and we grow into it, we'll take some of those balances back on our balance sheet. So we're not going to slow down at all taking the business. We're just managing the balance sheet.

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

Due to the growth of warehouse -- the leverage ratio took a hit this quarter, it looks like it's down about, I guess, almost 100 basis points. And can you talk about the trajectory of that ratio as you think about the growth in the balance sheet and at what level would you view that as being a floor for the leverage computation?

John, this is Peter. I think we actually expect that as the held-for-sale balances come back down that we'll look a lot like we did, on average, for the full year 2011. As George mentioned, we're growing common equity at approximately the same rate as we're growing what I would describe as the risk-weighted loans. Though we don't see any pressure on that in 2011, if we're wrong about the opportunity to grow the held-for-investment portfolio, that would be the biggest single driver or the opportunity to maintain very high balances in held for sale but given the outlook, as George described, we think we'll come back into where we were, on average, for the full year.

And then in terms of the loan growth you saw this quarter, can you give us how much of that growth was in syndicated credits in the held-for-investment portfolio and then also how big your shared national credit portfolio is as of December 31?

The portfolio is about $945 million outstanding today. 1/2 of that is commercial credit, and the other 1/2 is split almost evenly between oil and gas and real estate. We still do not have any additional problems in that portfolio other than what we've mentioned to you in previous quarter: 2 loans, one small one, one a little bit larger. We have selectively grown that, as you recall. If you remember the totals we reported in Q3, but it's been grown with primarily oil and gas credits that we're very comfortable with, and it's really a similar percentage mix as we had in the third quarter. I think we reported a little over $850 million or something in outstandings in Q3. We're probably $75 million or so, I'm going off the top of my head, John, but that's about the increase we saw in Q4.

Okay, all right. And then my last question is on margin. How much of the compression, and I'm sure we can back into this but how much of the compression in the margin was attributable to the warehouse this quarter?

John, this is Peter. A big factor in the warehouse, we saw 2 elements. One, we've grown $900 million. That's something that is 80 basis points above your -- I mean, below your historical margin or the recent margin, 60 to 80 basis points. It has a big impact. The surge in that activity also caused us to have to pay a little more in borrowed funds. So the combination of borrowed fund rates, the lower yield in that category, simply because mortgage rates were down, was the bulk of the change. We also had a really good growth in held for sale -- excuse me, held for investment. We did see an 11 basis point decrease in held for investment yield linked quarter.

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

Follow-up on the last question, what percentage of your growth during fourth quarter and all of 2011 was related to the energy book and what is the total size of the energy book, mixed or not, at year end?

The energy book is about 10% of our outstandings today. The last half of 2011 we saw good growth in the energy portfolio, and we're continuing to experience as we go into 2012 some good growth as it relates to that. But I'd say, 8% or so of the first of 2011 10%, close to the end in terms of growth.

And you mean of held for investment...

Held for investment.

Okay. George, do you warrantee the energy book as a percentage of total loans for held as a percentage of total loans at around 10% or what comfort level?

We wouldn't mind growing at 2% or 3%, if the mix and the composition of the loan was right. Obviously, natural gas is difficult to finance today, but we've been trending toward all, and as a matter of fact, only about 10% of our -- 10% of our 10% is related to gas only. We've really improved our mix because we looked at this and saw natural gas prices a couple of years ago beginning to trend down, so we've changed our mix fairly dramatically. We've got a very good portfolio, virtually no problems in it, and I'm comfortable growing that another 2% or 3%. But we want to grow it with the right composition of commodity.

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

I just had a question about the mortgage warehouse. I wanted to make sure I understood some guidance that I think I heard you put out. The average for the warehouse should be on an annual basis for 2012 should be roughly in line with the third quarter of this year. So on an average basis, it should be about $1.2 billion this year. Is that what I heard you say?

That's about right.

It happens to be the average for the full year, too, Brady.

And it would be front-end loaded, so it'd be heavier upfront, lower in the back.

Fair enough.

If you look at the fees generated by that book, the brokerage fees they had dropped to about 65 basis points this quarter. I know in the past you guys have grown a little over 1%. Will that return back to a more normalized level once we see the average balance drop?

That's a reflection really of the character of customer that we have that, as George mentioned, focus on being preferred provider. We want to be in a position to have good balances consistently and for that from larger companies, we can make good money with reduced fees.

Something else that would increase the fee level, too, is our participation program. That obviously will carry a fee and depending on how much we participate, it will increase that line of fee.

Okay. And then my last question is about the other borrowings that you all used to fund this. It was about $1.6 billion and about 17 basis points in the fourth quarter. Have you ever thought about trying to lock up some of that funding in case rates start to rise or is there any chance that, that 17 basis points cost could move materially higher as you come to a point where you're comfortable with the level of balances that's going to be there and you want to lock up some of that funding?

If the balances come down as we anticipate, that rate will come down. If rates begin to rise, we'd look back at last year at what happened to the 10-year. With no change in Fed policy, the 10-year was at 1.375% and our yield was nearly 5% and then we saw 1.75% near the end of year and our yield was 4.25%. So if there's a hint of change in short rates or the outlook for longer rates changes, we'll get actually a lift in yield and spreads and we do expect that rate to actually to come down, funding cost rate.

[Operator Instructions] And the next question comes from the line of Bill Young with Macquarie.

Just kind of looking at your loan-to-deposit ratio. I know you've carried it at over 100% in the past but as it kind of gets back up to that level, how do you kind of think about funding overall?

That we are really at the right place in terms of our portfolio composition and the funding profile. We've been maintaining 90% to 95% customer deposits to held for investment and all of the growth that you've seen in the -- or the change in that mix has come about from the held-for-sale volumes. As those come back down, we'll actually see a slightly less favorable mix where more of the held for sale will be funded with deposits. But today, we're in the fourth quarter, those average balances in terms of optimal funding profile were about as good as they could be.

When you saw that reflected in the profitability in Q4.

Absolutely.

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

Just a question about utilization. Have you seen -- we heard from some other banks like Comerica that utilization rates have increased a little bit here. Are you seeing that at all?

You know modestly, but remember we get good utilization on our lines. As we've said in the past, we just don't give lines to people who don't -- we don't expect to use them. We don't give backup lines for commercial paper or anything like that so we have a little bit higher usage typically maybe than the larger bank. We have seen some utilization go up slightly but not materially.

Okay, I think Frost mentioned this morning that they've seen bigger requests from their customers for bigger lines, which could be an indicator of future growth. Are you seeing that trend at all?

A little bit. Again, not a great deal, not enough to put your faith in, so to speak, to say that things have turned to the point where we're going to see organic growth jump back, but we're offsetting that. I mean, we've -- our model, as you know, and you're very familiar with it is one that can play in good economic times and more difficult economic times and our machine can take market share when that organic growth really is pretty benign.

One final question, if I can, I think your premium finance and builder finance portfolios, collectively are about 15% of the loans held for investment. How much growth was there this quarter? And how much in your estimation is those higher-yielding products supporting the loan yield?

Premium finance has always had a higher yield than most of the rest of the portfolio, but we didn't see substantial growth in the premium finance portfolio and we saw a reasonable amount of growth early on in the builder finance. I wouldn't say that Q4 was not a big quarter for growth in the builder finance. We really got good growth, Michael, coming out of the core lines of business, not the specialty lines and it's very good from our standpoint.

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

I wanted to ask a follow-up on the mortgage warehouse, just I want to make sure I understand, you're basically saying that the balances will go back to 3Q levels. But I'm curious, is that also partially a reflection of anything above that, do you plan to be more aggressive going forward with securitizations to lower the average balances?

No, really not. I mean, what we talked about was the participation program, not the securitization. We basically feel like today, we're our company sits, we're comfortable at about $1.5 billion on an average basis of held-for-sale portfolio and so anything above that will probably try and participate out and take fees for that, but it will be handled through the participation program, not by increased securitizations or new purchasers of those particular loans.

Okay. What was the average duration of the balances during the quarter, like what was the typical, I guess, they've been 7 to 10 days. Was that any...

They went up a little bit because of just the sheer volume. You know we had 3 or 4 or 5 days additional to that take time just because the volume was so great and it has nothing to do with the quality of the takedown or the quality of the permanent investor. They were just blown away with the level of activity. We'll see that come back down in Q1 to the more traditional 10 to 12 days.

Okay. And then, secondly, George, I was just curious -- I'm assuming your guidance for lower balances as we go through '12 is also partially a function of expecting Obama's new plan to not be successful in getting passed.

Which one?

The one that he gave last night.

Well, I went to sleep early. I didn't listen. Outline that, I don't mean to be facetious. Outline that a little bit, I'll try to respond to it.

Yes. Essentially, he's trying to push through again a kind of a plan that a lot of people don't expect to be able to pass. But essentially, he's trying to push through...

Refinance, trying to get people that can't refinance.

Right. And basically, he's saying, "Hey, I'm going to push this through Congress and I'm going to save people $3,000 on their mortgage and the big banks bigger than $50 billion will have to pay a fee."

I think that's a nonstarter. I doubt it's going to mean anything, but we're not looking to that to make any difference in how we proceed with the business.

And the next question comes from the line of Pat (sic) [Matt] Olney with Stephens.

It's Matt Olney with Stephens. Peter, on the expense side, you mentioned a few items that were a little higher than usual in 4Q, and I think you said these could fall out as credit improves. Can you go through that again?

What I said was, if things did move significantly or by any meaningful factor from Q3, from marketing expenses related to deposit programs, incentive compensation, legal and professional and then ORE cost, primarily taxes.

So as we look towards 2012, how do we think about some of those items?

I think that marketing expense was weighted heavily towards the fourth quarter, but we'll judge that based on prospects over the course of 2012. Legal and professional clearly was driven by activity in the portfolio, we see the ORE taxes typically are a fourth quarter item. And as I think we've said previously, as we move through the year, we have to make adjustments to the incentive compensation pools and that is trued up in the fourth quarter.

Got it. Okay, that's helpful. And then last question, looked like the tax rate was a little bit higher than usual in the fourth quarter. Is that a good level to go off of or is there something unusual there?

No, not terribly unusual but about that level maybe a little bit less in 2012.

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

Just a question on the participation program on the held-for-sale book, you kind of partially answered this earlier, where you talked about some fees increasing as a result of that program. But as you saw the participations, is there any yield benefit. In other words, do you sell the participations at some sort of haircut to the yield on the actual loans?

For a fee.

It's basically a fee program back to us. We're charging a fee for that.

Okay. So it just goes through the fee line?

Right.

Perfect. And then -- the other question I had just regarding the loan growth that you did had and actually more to the point in terms of lending teams as you talked about kind of slowing down that a little bit but always looking, what markets would you be interested in, in terms of hiring?

Well, we're hiring and I don't mean to make this a general response but we're hiring, really, in all our markets. But if you want to say, priority-wise probably, Houston's number one. The reason because it's such a great market, and we were a little bit late getting into that market a few years ago. So we're putting a lot of resources, a lot of time and effort into making sure that Houston has the resources that they need to have but Dallas would fall in there secondly and then the rest of the markets. We don't starve anybody. I mean, we're in the 5 best markets in the state of Texas, and when we have a need in a particular market, we fill it. But I'd say, obviously, our 2 largest markets are Dallas and Houston.

And the next question comes from the line of Bob Patten with Morgan Keegan.

Just sort of [indiscernible] program, Peter. [indiscernible] could you actually cash in for the [indiscernible].

Bob, you're breaking up, I can't -- It is all fee line, if I heard you correctly. Basically, we will participate at the same rate that we earn by customer and then charge a fee for servicing that relationship on top of the file fee that we charge the originator.

So how big do you guys see that overlying going? Could it double the size of the current warehouse?

Really unknown at this time. There's a lot happening in that market. There is more competition, but we see some major players acting like they could get out of the business. So we have good targets on targeting programs for customers but a little too early to call on that.

Bob, as you heard us say before, I think we're doing a lot around the warehouse business to be sure that we create a sustainable line of income just like any other line of business in the company. We don't want this to be looked at as simply the mortgage business that is -- has high velocity in earnings. We're working hard to become the preferred provider, and we are in about 75% of our customers. We don't compete with our customers. We're the only bank that I know of that doesn't compete with our customer, and so we continue to gain market share. So these things that we're doing, we believe, will offset the volatility in the mortgage business. Now time will tell and then you guys have to watch us over the next year or 2 to see if that's right. We believe it's right, and we believe we can show you that it is a sustainable income line.

It's so different from the origination side of the business.

I agree. What I'm trying to get a feel for was as your balances came down, the fees can actually go up?

I couldn't hear you.

We couldn't hear you.

As the balances on your balance sheet come down the warehouse, your fees can actually continue to grow?

Absolutely.

Yes, that's exactly right. Yes, the return on equity is really exceptional.

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to Mr. George Jones for closing remarks.

Thank you. Well, thanks, everyone for your interest in Texas Capital and certainly your ownership. 2011 was a landmark year in our history, and we look forward to achieving our goals for 2012 that we talked about. And we look forward to working hard to continue to earn your trust. Thanks so much for your time, and we'll talk to you soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.