Texas Capital Bancshares, Inc. (TCBI) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Texas Capital BancShares Inc. Earnings Conference Call. My name is Chanel, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Myrna Vance. Please proceed.

Thank you, Chanel, and good afternoon to all of you. Thank you for joining us today. We're pleased to report another good quarter and glad you're with us. Again, I'm Myrna Vance and if you have any follow-up questions, please call me at (214) 932-6646. Now before we get into our discussion today, let me read the following statement. Certain matters discussed on this call may contain forward-looking statements which are 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 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 31, 2011, and other filings made by Texas Capital BancShares 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, Chanel, will facilitate a Q&A session. Let me turn it over to George.

Thank you, Myrna. Good afternoon and welcome to our first quarter conference call. As Myrna mentioned earlier, we have posted another record earnings quarter with net income increasing 5% on a linked quarter basis and 127% from the first quarter 2011. Total deposits increased 9% on a linked quarter basis, and grew 16% from first quarter 2011. Loans held for investment increased 4% and total loans increased 5% on a linked quarter basis and grew 23% and 46%, respectively, from the first quarter of 2011. Our business banking model is working well. And commercial and lending opportunities abound due to the size and breadth of our 5 key markets in Texas. Our market share for loans and deposits remain small in these markets, providing enormous potential for loan growth and market share gains without stretching in terms of pricing or credit structure. The same is true from a deposit perspective. We continue to add new deposit customers every month as we leverage our Treasury Management platform in all our Texas markets. Loans held for sale, that of course is our mortgage warehouse line of business, remained high at quarter end, but are expected to moderate somewhat during 2012. However, we believe average balances will exceed averages in 2011. Although mortgage volumes can be somewhat volatile during periods of rising rates, our warehouse outstandings and earnings contribution tend to be much more stable than the origination side of that business. We have loyal customers, because we've been a steady source of funding over the past 3 years when other institutions left the space. We also continue to add new mortgage customers, improving our base, as large competitors leave this business due to their deemphasis of mortgage lending activities. We are one of the only warehouse banks that do not compete with our customers and we have become the favorite line of credit in many instances. We are continuing to see reductions in credit costs and non-performing assets. I'll discuss this more in detail after Peter's comments. Peter?

Thank you, George. As George mentioned, we had a very strong linked quarter and year-over-year performance in net income and EPS. This is especially favorable given that first quarter of the year is seasonally the weakest in our company's general operations. In terms of core earnings power, net interest margin, we again, had exceptional performance resulting in strong operating leverage, I'll mention later an improvement in credit costs. Net revenue growth, Q1 was slightly up compared to Q4, again, reversing the normal trend, driven by growth in loans with stable NIM, produce 37% growth in net interest income compared to 2001 first quarter -- 2011 first quarter. We really maintained a strong net interest margin throughout the year. Strong growth in both held for investment and held for sale that produced much improved composition of earning assets and the growth obviously, net interest income. We had good growth in noninterest income as well, driven primarily by the improvement in the operations of the mortgage warehouse group. In terms of expense management, noninterest expenses were up less than 1% in Q4, despite normal Q1 factors. Growth in Q1 2011 of 15% that compares in the operating leverage context to net revenue growth of 35%. Legal professional expenses have come down with the reduction in non-performing assets in recent quarters. The carry cost for ORE, that includes taxes, maintenance and other items, are down because of improvement in our position. Marketing expenses related to deposit programs produced very strong growth with successful programs. In loan growth, held for investment growth in a number of lines of business and regions was experienced in the first quarter, reaching $5.8 billion at quarter end versus approximately 4% in seasonal, and as I mentioned, the seasonally weak quarter for Texas Capital. Due to the strong growth at the end of Q4, average LHI balances grew 5% in Q4 and 20% from the first quarter of last year. Starting with Q2 with balances now at 18% above Q2 2011 averages and a strong pipeline, suggest that the outlook is very favorable. Loan for sale balances remain at very high levels, down just 2.7% from the exceptional levels of Q4. We exceeded plan with the expansion of customer base, a high level of refinancing activity, both attributed to our exceeding planned levels and overcoming normal seasonal trends. As indicated earlier, as average balances, they are likely to exceed $1.5 billion. For a meaningful period, we increased the emphasis on our participation program. We had $72 million at quarter end, with an expansion expected for the second quarter, we anticipate additional participants in that quarter. With the refinancing activity, it should bring the balances down over the course of 2012, but in higher levels than previously anticipated in comparison to the average in 2011 of $1.2 billion. In funding and deposit growth, we had continued improvement in the funding profile with the reduction of costs in both deposits and total funding from the first quarter of last year. Costs were identical in the first quarter to Q4. DDA growth of 20% year-over-year has obviously been a major factor. Growth in held for sale provided an opportunity for more beneficial funding profile. And as planned, in concert with the growth in LHI, growth in total deposits resumed from -- in Q1, increasing 4% -- excuse me, from Q4 and 10% from the prior year. Credit costs and quality trends remain very positive. Total credit costs improved 19% from Q4 and 47% from the year ago. With improved credit quality metrics in non-performing loans, net charge-offs, loss provisions is reduced to $3 million from $6 million in Q4, down from $7.5 million a year ago. Provision in the first quarter was dedicated eventually to growth the portfolio with the significant improvement in NPAs and NPLs, the reduction in net charge-offs, as George will cover more detail later. We expect good results in credit quality trends. The quarterly income statement on Slide 6, obviously, it's a strong trend quarterly and year-over-year comparisons. We had tremendous growth in LHI and LHS, coupled with maintenance of a very good net interest margin. Provision approach normalized in the first quarter and was down sharply, with an improved outlook for credit metrics over the rest of the year. An exceptional progression of net income and EPS producing the highest quarterly ROA and ROE in Texas Capital history. Response to questions about Capital, we'll address later. Slide 7, average balances, yields and rates, loan growth and funding profile were drivers of high NIM and the growth in net interest income. The better earning asset composition, the yield on total earning assets of 4.8% in Q1 has changed less than 5 basis points since the end of 2010. The nature of LHI, LHS eliminates the need for us to buy securities with excess liquidity, a very favorable and highly liquid asset category. Produces great spreads, has been obviously an exceptional provider of growth and net interest income, yet a significantly better yield compared to securities, the duration of just 15 to 20 days. LHS yields have remained stable in recent quarters, are expected to increase as rates in -- mortgage rates increased with no commensurate increase in the cost of funding. Combined with the declining level of securities, our balance of the LHS represents a commitment to total liquid earning asset categories, potentially equal to the regional banks throughout the United States, but, obviously, at much better rate, rate sensitive -- much better yields and rate-sensitive characteristics. The modest decrease in NIM for the Q4 was due essentially to the growth in LHS and LHI. NIM has increased actually from first quarter of last year with a better funding profile. We think this all clearly demonstrates some benefit of Texas Capital's growth model with strong growth in loans and an impact on net interest margin, but did not produce -- come from business weaknesses. Average balances on Slide 8, obviously, LHI growth has remained well above industry levels and ahead of our expectations. LHI growth of 5% from Q4 was really built off the extremely high levels at year-end 2011, DDA in total deposit growth had been strong giving it seasonally weak quarters. Linked quarter growth in stockholders' equity of 20% annualized coming from the excellent returns now growing at a rate exceeding the rate of loans on a risk-weighted basis. Ordering balances, again, exceptional growth in equity, 19% year-over-year, 20% annualized linked quarter. Very good LHI growth, LHS balances at the end of Q1, which we do expect to come down from the surge that occurred compared to the average for the quarter. A very solid growth in deposits, I think, are obvious on Slides 10, 11. A CAGR of net income at 34%, obviously driven by the operating leverage represented by the difference in percent growth and percent and dollar growth in net revenue compared to net interest noninterest expenses. Obviously all of this has been driven by the growth in loans and deposits shown on Slide 11. George?

Thanks, Peter. Turning to Slide 12, the only real change in loan composition is an increase in loans held for sale of approximately $200 million. The March real estate, market risk assets now make up 19% of our growing loan book today, and this was opposed to the 20% and 20-plus percent in the previous quarter. Nonperforming real estate loans comprise 80% of our NPLs. And real estate non-performing assets are 75% of all of our NPAs. Moving to Slide 13. This outlines some of the specific improvements in credit quality, and Peter touched on a few of those early on. Total credit costs in Q1 were $5.7 million, significantly better linked quarter and year-over-year. Charge-offs were only 6 basis points or $828,000 compared to 25 basis points linked quarter and 58 basis points in 2011. Our nonperforming assets are at the lowest level since Q2 2009 having been reduced 54% from its peak level. The nonperforming ratio of 1.4 is today as compared to Q4 2011 of 1.58 and Q1 2011 of 3.01. As mentioned earlier, we believe that we'll see further reductions this year in our credit costs and nonperforming assets. Moving to Slide 14, this reflects our level of charge-offs and our coverage ratios for problem assets. I believe our performance for the past 5 years will compare quite favorably to any peer group that is used. In closing, let me summarize a few thoughts. Our strong core earnings and growth will continue in 2012 and beyond. We will maintain a capital position that allows us to continue to grow our business with an exceptional ROE. We'll continue to improve credit quality and lower credit cost. We have an exceptionally strong pipeline for loans held for investment that will produce strong future earnings. Our mortgage warehouse group will see higher average balances this year than we saw in 2011. Our business model will continue to produce industry-leading results. Thank you very much, that's the end of our prepared remarks and now we'll move into the Q&A session.

[Operator Instructions] Your first question comes from Dave Rochester, Deutsche Bank.

So on the participation program real quick, you said you participated out, it was $72 million in the first quarter. Did I hear that right?

That's right.

Yes, at the end of the first quarter.

And how many banks were involved in that?

We had 5 banks, Dave. But I will tell you, we've been working on this program, as you recall, for a number of months. That very complicated product, we have well over 10 banks, today, or financial institutions or institutional investors that are very interested in the participation product. Peter said, I believe that you'll see a real pickup in that participation in Q2, you will, because most of these banks had to do their due diligence. There's on-site visits. It's something that takes a little bit longer than the normal participation cycle. But we have a minimum of $1 billion worth of interest at this point in time.

And so on that volume that you're going to participate the coming quarters, what's the yield on that earning asset to the participants? Is that roughly 3% or 3.5%, something like that?

We don't really talk about that specifically, but there's basically an interest rate and then there's a servicing fee that our bank will collect for servicing the entire relationship.

And in general, what are the ranges on those all-in fees? Would it be 50 basis points, 75 basis points? Just to get a sense for how quickly that broker fee income line can ramp up.

Realistically, we don't break that specific servicing fee out and we're a little apprehensive about just talking about a particular fee for a particular service, because it is very competitive out there. But it is a reasonable fee that we expect to collect, we expect to increase our net noninterest income fee over and above just the normal fees we collect for the business.

And just one quick follow-up. Just in competition in general, we heard that a couple of other banks, or at least one that announced earlier today, was getting more competitive on rates this quarter. Are you seeing any kind of spread compression at all at this point?

Oh, you know, just very little. We still have quite a number of floors in place, over 65%, on our floating rate portfolio. We're seeing a little bit on our larger loans where there tends to be a lot more competition. But if you look at our overall yield on the total portfolio, we're basically flat quarter-to-quarter. Actually, up a little bit.

And in terms of your variable rate C&I product that's in the pipeline today, where is that being priced roughly?

It's really, Dave, kind of all over the board. As you know, it depends on the relationship. I mean, if that's a big deposit relationship, a big Treasury Management relationship, that pricing can come down on a specific credit. But rates are definitely competitive today. We're definitely seeing pressure in the marketplace from a competitive nature. But we've been able to, as you can tell by looking at our rates, held pretty consistently. It's not -- we don't simply just sell a rate, we sell value added to the relationship. And that's being well received by our customer base.

Your next question comes from the line of Brady Gailey, KBW.

I was a little surprised about the increase we saw in the comp line, up from about $20 million -- a little less than $27 million or $29 million. It's a little more than I had forecast. Now I know you guys are still hiring here and there, but it's not as aggressive as it's once been. Do you think that over the course of 2012, we see that comp line continue to creep up a little bit? Or do you think $29 million is a pretty good run rate going forward?

Brady, if you'll go back to our history, we always have an increase in that line item in the first quarter compared to the fourth because of the way FICA gets treated in the incentive program. We also had a higher level of 123R cost this quarter because of vesting that occurred. And there are no fundamental changes in the nature of our compensation or no pressures that we're experiencing. So it's hard to say with us because we have good history in recruiting new people. You'll always see the impact the next quarter as the first full quarter of the impact of that hiring. But there are no fundamental issues with the compensation.

And then following up on the warehouse, it sounds like you have decent demand for that product to go to other investors. How much are you willing to let go? I think in past conversations, you've said anything over about $1.5 billion you'd be willing to participate out. Is that still a good ballpark number?

No. I don't think we've said it quite that way. It's when we see levels above $1.5 billion for an extended time period. You never know when that time -- how long that time is going to last. It's actually been much stronger and lasted longer through 2 seasons than we would have anticipated. As George commented, it takes a while to get those programs up because of the complexity. But we don't have a specific targeted balance of that. We want to use that as a means, obviously, of generating more income. We want to use that as a means of keeping larger customers to service their needs as we expand market share in that business. So that's a fund how much we'll have outstanding is directly related to the total product that we're processing. And that's a way for us to benefit in a capital return, otherwise.

And as Peter mentioned earlier, it's important for us to continue to take market share from our competitors in all lines of business, this is just one. So, it's really important for us to add those new long-term customers because refi will decline. We are processing over 50% of refis today in our portfolio and that will come down. So we want to be able to continue to add customers and add that stable that I talked about earlier, that stable, long-term, less volatile income stream that you and we can't count on as we go forward. That's all part of the plan.

And lastly, syndicated loan balances, where did those finish in the quarter? I think they're about $945 million at the end of the year.

Right about there, it's $950 million, $954 million, I think, was the exact number. And as you say, it's flat from Q4.

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

Can you talk a little bit about the loan growth in the quarter on the held for investment portfolio? Where did you see the bulk of the growth? Was it in energy, in mid-market or large corporate? And then also, I guess, why do you think it kind of bucked the trend of the seasonality that you traditionally see in the quarter?

Yes. First part of that question first. We saw in 3 or 4 specific lines of business. We had good participation across the board. But you're right, energy was a very good participant in growth. First of all, most of it was C&I. So we had a lot less in terms of real estate growth but mostly C&I energy, which is considered C&I. Private client which is anticipating and servicing the needs of our high net worth individuals, they're beginning to invest. We saw some healthcare fundings out of our Dallas corporate office. And lastly, it is a real estate component. Our builder finance group had a nice growth in Q1. Again, that's the team we were fortunate enough to attract from another bank and put together a really great product line to address the great regional builders that didn't participate in the downturn. So, that's kind of the scenario of where most of that growth came. And it's interesting. I don't have a real, great answer for you in terms of why this quarter as opposed to Q2, but it probably had something to do with the economy and the way our customers are feeling in terms of beginning to expand their businesses again. And we do see that. We're basically still growing from market share takeaway, but we're seeing selectively some of our customers beginning to expand their CapEx and plan some credit for 2012.

John, as I mentioned, a lot of the linked quarter average balance growth came from the really high levels that we had at year end.

And then on the margin, can you give us also some more color on your margin outlook given the -- some of the pricing pressure you're starting to see in some of the larger paper and larger credits and then, also, just given the growth in the warehouse. So can you give us some color in terms of how much more compression you think you can see through the year?

I wouldn't regard it as compression based on product type or anything like that. It's a function of markets like the mortgage rate. I think that our overall earning asset yield varied only 5 basis points from a year ago quarter. Really, from the end of 2010, it seems that it's been pretty damn good, balancing the benefit of improving the funding cost. We don't see much further improvement in that category but we continue to eke out a little more in demand deposit growth even though the value of demand deposits is not high in this rate environment. The benefit of floors has lasted as well or better than we would have anticipated, but we are not the Walmart of banks in terms of loan pricing. The biggest compression in yields of pricing has happened at the high-end. What we would consider the middle market, had good growth in components outside of that toughest group. And all that said, we know it's going to come down, offset by the very strong likelihood in our judgment that we will see improvement in the yield of held for sale over the course of this year.

Your next question comes from Brad Milsaps, Sandler O'Neill.

I wanted to talk a little bit more about, George, some of your comments on capital. I know you did -- the ROE is now really at record levels, but the regulatory ratios have come down quite a bit. If I understand you correctly, you feel like the profitability along with maybe some shrinkage in the held for sale book, but due to participation, do you think you guys will be able to fund your growth internally and not need any additional capital?

No. We feel comfortable in saying that, Brad, this year, 2012. Our internal capital generation rate today, at these levels, is quite good. It's really keeping up with our growth, and we're going to manage the held for sale portfolio with the participation product that we've mentioned and talked about earlier. So with all those factors in place, we don't feel that we would need to add capital this year. But we prepare the company to do that. We're watching the markets, we're looking at the debt markets, the equity markets. And if we're fortunate enough to get a little excess growth over and above what we had planned for, and it makes sense, we would not be opposed to -- been looking at the capital markets, but probably in the debt category as opposed to equity. And so, again, we're not out there beating the bushes today to raise additional capital.

And, Brad, as a practical matter, we've always been pretty aggressive in building capital when we see the growth opportunity. But it would have to be quite a bit stronger than we view today to feel like we -- that would be very important to us.

And then, just a second question. George, you've talked about this quite a bit in the past, but -- and just in terms of energy business, I'd just be curious to get your thoughts, particularly as it pertains to natural gas. I know you guys spend a lot of time hedging with your customers and understanding kind of where the pressure points are with gas prices. But just kind of get your updated thoughts and kind of see where you guys are with that at this point.

Okay. We have been conditioning our customers for the last 18 months, at least, for lower natural gas prices. So we've had some time to work with them. We've only got 5% of our portfolio in dry gas, which is where more risk is today, obviously. That's like $30 million today. Small in comparison to the overall portfolio of small fees. We have been pushing some of that segment to pay down their lines early on. We have been putting hedges in place for them. Today you can hedge at about 2.75% out to 2013 or you can put a collar in place to 2013 at 2.50%, by 4.50% [ph] . So we've run sensitivity cases on that $30 million to $35 million to determine where these things need to be and how we need to put them in place. The portfolio is performing quite well. We really don't have any significant problems in the energy portfolio. And I believe, the way we're trying to address the dry gas issues and the low gas prices, which could be with us for a while, is the right way to do it. So we'll continue to work with those customers. And again, run plenty of sensitivity cases to see where the weak points are. As you know, we've talked before, the rest of our practice is oil related, but not oil service business. We don't do any oil service business. That's where we see some real weakness coming. We talked to some of our energy customers who are absolutely pulling rigs out of the ground right now in a number of fields. And they're going to stack these things and if you're financing the service business, you better have a backstop. And we've never done that and we don't plan to do that. I don't know if that gives you any sense of where we are and where the business is. I think gas prices could be low for some period of time. A lot of factors that weigh into that, but we're -- we believe we're well prepared.

Your next question comes from Brett Rabatin, Sterne Agee.

I wanted to ask -- I wanted to see if I understood right kind of your guidance around the decline that you're looking for in the held for sale portfolio versus the growth of the held-for-investment portfolio. This, essentially, the way it works, is you're kind of looking for the run off or I should say the decline in the held for sale portfolio to be offset by the growth that you're going to experience in the held for investment portfolio and kind of keep average balances flattish? Or can you give us maybe a little more color around how you see the interplay between those 2 lines?

We really break those into 2 significant parts. We think, if you take the loans held for investment side, which is what we're spending a lot of time and effort growing, as what we've said in the past, is we think you're going to see double-digit growth this year, mid to mid-teens-plus. The warehouse business is really hard to put a number on. We think it's in pretty good shape about where it is today, maybe a little bit less, but it moves up and down a lot, particularly as we've said at the end of the month or certainly at the end of the quarter. So a 15%-plus growth in held-for-investment and a fairly flattish type loans held for sale, where we're in effect taking in new clients, offsetting the refi, beginning to go down and increasing our average outstanding, which is how you really have to measure this business, well over averages for 2011. I don't know if that makes a lot of sense to you but...

Yes. That actually helps.

We sort of need to break that up and look at it specifically. We think we have no problem in taking additional market share in the warehouse. We're just managing, with the participation program, where we wanted to be on our balance sheet.

And then, George, it seems like everyone has been talking about competition and lower rates and all that kind of stuff. So, I mean, there's obvious reasons for everyone's margin to be under pressure. But as I think about your outlook maybe a year from now, if you have a lot higher proportion of held for investment loans versus held for sale loans on your balance sheet, it would actually seem to me like your margin, relative to this quarter, could be as high as it is today or maybe even better depending on, I guess, where your loan portfolio yield ends up. But the only thought...

What we've said on that is we don't give margin guidance but within a reasonable range, we think that statement is pretty true in terms of what you've said. We've discussed it in terms of ranges and we don't see any large swings up or down.

And then you've touched on a little bit on just a minute ago, but I was curious to hear any more color if you'd care to provide it around doing some debt issuances just to kind of bolster Tier 2 and the total risk-based capital ratio.

Well, I think what I said was that we're preparing the company to be able to do that if and when we desire to do that. We don't have any pressure from any source today to put additional capital in the bank but based on our balance sheet composition, our subordinated debt issuance would not be out of the question to review on a go-forward basis. We still have our ATM in place and we've got about $27 million worth of room under our equity ATM, too. If the stock price stays up, it might be a good opportunity to use some of that. We're not really there yet, because we don't think we need to be there, but we're looking at all avenues today. And the thing we really don't want to have happen is get to a point where we have to limit our growth by not putting enough capital in place giving us the ability to grow.

Let me give you one other comment. We now have in place a line of credit with a major commercial bank that permits us to use additional debt. Placed in the bank by the parent is a subordinated capital debt to act as a shock absorber, basically.

But you don't have any outstanding this quarter, correct?

We did not at quarter end. We do at -- shortly after quarter end of just $5 million.

Your next question comes from Michael Rose, Raymond James.

Most of my questions have been asked, but just wanted to get a little bit more color on the loan pipeline quarter-to-quarter and kind of where you're still seeing strength on a geographic basis. And then also, I think I asked this last quarter, but as it pertains to your -- the lenders that you hired over the couple of years, kind of where do they stand in their ramp up process? And what's your outlook at adding additional staff at this point?

Well, we added a net 3 RMs in Q1. Pipeline, as I mentioned earlier, is quite good. It's tilted towards C&I. There's well over $100 million in that pipeline on a gross basis, and on a net basis, after payoffs, we think it will be on the $75 million to $100 million payoff, things it could fund within a short period of time, like 30 days. So we think that Dallas and Houston are 2 of the best locales and have been represented in the pipeline as such. We plan to add RMs in several lines of business. Again, basically relating to the C&I category, and that would be the home office in Dallas and that would also be in the regions outside of Dallas also. We really believe that we're going to see some ability to grow organically, hopefully sometime in 2012, certainly in 2013, we'll prepare the company to be able to manage that, give us plenty of capacity, to be very competitive.

And so a follow-up to that, I think you said that most of your growth is still coming from market share takeaway. Did you see any modest increase in line utilization this quarter among your existing customer base?

I'm sorry, repeat that. I didn't hear you. Do see an increase in...

Just trying to get a sense on line utilization in your existing customer base?

Some, but as I've said before, we don't give lines to people as backup lines or lines that we don't expect them to use. So we'll have a higher utilization than you're typical large regional bank. So we'll stay, we're not full, but we'll stay more loaned up with the level of customer we attract than maybe a backup line in New York. So we've seen some increase in utilization but we're really not a good model to look at in terms of are we seeing a real ramp-up in usage because we've always seen pretty good usage with our customers.

Your next question comes from the line of Matt Olney of Stephens, Inc.

Can you guys give us an idea of how much the warehouse benefited from the government programs like HARP 2.0 in the first quarter? Or is that more of a 2Q event for you guys?

I don't have the specific numbers and it will be much more of a Q2 than a Q1. But I can tell you that we are seeing some ramp up of HARP 2, but we did see some ramp-up of HARP 2 in Q1. We think that it will be more evident in Q2. But it looks like we're going to see the benefit of that program through our warehouse line.

And then just another question. Peter, you made some previous comments about the compensation line item and how there's no real fundamental change with that. Will that also hold true if you get some more participations over the next few quarters? Or could that jump that up hypothetically?

I don't see it having a significant effect on that aspect of the compensation expense. Compared to Q4, excluding the FDIC component, which -- excuse me, FICO component, that I've mentioned, we were up 1%. But we see, in Q1, a higher number because of that and compared to the prior year, because of the build up in new RMs and staffing to support growth over the past year.

[Operator Instructions] Your next question comes from Jennifer Demba, SunTrust.

My questions have been covered. Good quarter.

[Operator Instructions] Your next question comes from Gary Tenner, D. A. Davidson.

I just had a couple of questions following up on the warehouse business. In terms of the participations, you said, I think, $72 million at quarter end. What do you think in the second quarter, at least as a short-term view, does that grow by several times on average, do you think, in the second quarter just based on where the period end, held for sale portfolio was and your expectations for the second quarter?

Well, what we've said is a number of our potential participants are large financial institutions -- institutional-type investors, that certainly would need and want to take a larger participation than simply a $5 million or $10 million participation. But we don't know specifically what that number will be, but I feel very comfortable in telling you, it will be at least twice what we have, probably more than that.

And then just in terms of the mechanics or the way that the participations work, do you commit to utilizing some x dollar amount of a participant's line for some period of time? Or does the participant accept the volatility?

That's a little bit deeper than what we typically go into on our call. Sometimes it's structured differently, but it's difficult to particularly call [ph] A specific example as a competitive product and we just really prefer not to get into that.

Your next question comes from the line of David Bishop, Stifel, Nicolaus.

Most of my questions have been answered. But during the prelude, did you both say that the current level of provisioning is probably sort of a normalization or near-term normalization level?

Just in terms of percent of LHI, it's down to a level that's been consistent with our longer-term history. Obviously, not over the last several, but historically, our charge-offs, I think to the last 5 or 10 years of average, less than 30 basis points. So a factor of equal to that plus growth is relatively predictable.

[Operator Instructions] And there are no further questions. I'd now like to turn the call back over to management.

Well, thanks. Thanks very much for your attention this afternoon. We appreciate the questions. And hopefully we answered them to your satisfaction. Thanks, so much for being part of what we do. You can be assured that management will continue to work hard for the benefit of the shareholders. And we look forward to talking to you next quarter. Thanks very much.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.