Texas Capital Bancshares, Inc. (TCBI) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Texas Capital Bancshares First Quarter 2015 Earnings Conference Call. All participants are in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Heather Worley, Director of Investor Relations. Please go ahead.

Welcome the Texas Capital Bancshares' first quarter 2015 earnings conference call. I am Heather Worley, Director of Investor Relations. Should you have any follow-up questions, please call me at 214-932-6646. Before we get into our discussion today, I would like to read the following statements. Certain matters discussed on this call may contain forward-looking statements as defined in federal securities laws, which statements are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results. These statements are not historical in nature and can generally be identified by such words as believe, expect, estimate, anticipate, plan, may, will, intend and similar expressions. A number of factors, many of which are beyond Texas Capital's control, could cause actual results to differ materially from future results expressed or implied by our forward-looking statements. These risks and uncertainties include the risks of adverse impacts from general economic conditions, the effects of recent declines in oil and gas prices on our customers, competition, changes in interest rates 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, as well as the discussion of the risks and uncertainties that may affect Texas Capital's business, can be found in our Annual Report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission. Forward-looking statements speak only as of the date of this call. Texas Capital is under no obligation and expressly disclaims any obligation to update, alter or revise its forward-looking statements, whether as a result of new information, future events or otherwise. Joining me on the call today are Keith Cargill, President and CEO, and Peter Bartholow, CFO and COO. After a few prepared remarks, our operator Amy will facilitate a Q&A session. At this time, I will turn the call over to Keith Cargill, who will begin on Slide 3 of the webcast. Keith?

Thank you, Heather. Welcome to our first quarter earnings call. After my opening remarks, Peter Bartholow, our CFO and Chief Operating Officer will review the financial performance with you before handing back the reins for closing comments. After my closing remarks, we will field questions. Let's get started with Slide 3. We are pleased to have again delivered strong growth in LHI balances in the first quarter. Competition remains keen. However, we are winning business as our bankers and client support teams continue to deliver exceptional service and custom tailored solutions to both long-time clients and new clients. We are growing across all lines of business and all geographic regions. As expected, even our energy business has experienced modest growth and Houston posted the strongest percentage growth rate of our five Texas regions. Mortgage finance showed exceptional growth for the first quarter as market share gains move and refinancing activity lifted our volume significantly in what could have been an otherwise softer seasonal quarter. Importantly, we continue to deliver higher growth and demand in total deposits than in loan growth. The result is continuing to build our liquidity on average as we set out to accomplish two years ago. With the robust low-cost deposit growth, our assets sensitivity position continues to increase and of course our NIM declines. However, the decline in NIM does not cost us net interest income since we are investing the low-cost growth and liquidity at a slightly higher yielding rate at the Federal Reserve Bank. Despite our continuing build out expenses in the Private Wealth Advisors business and the new yet unnamed business, the growth in loans is producing strong net revenue and an impressive efficiency ratio during the significant investment phase of these businesses. As we mentioned before, we can talk more about our new business once we get into July in our second quarter call. The Texas Capital organic growth story continues to produce strong returns for our shareholders, while building future income generating businesses as well. Credit quality remained strong although we did experience an increase in non-performing assets and downgrades in energy portfolio as anticipated. Energy non-performing assets were $2 million at quarter end and the balance of the increase was in C&I. Net charge-offs were 12 basis points in Q1 2015 versus 10 basis points for Q1 '14 and five basis points in Q4 '14. None was energy-related. The provision increase to $11 million for Q1, was based on growth and core LHI, and the application of our methodology with the primary effects of energy portfolio downgrades I mentioned earlier. On Slide 4, we show on the bar chart the relative growth in average liquidity and average loans, as well as the trend lines for total loan spread and NIM. Clearly the outsized growth in mortgage finance loans for the quarter combined with a significant liquidity build drove much of the NIM decline, but importantly both growth categories produced significant increases in net interest income. LHI yield showed a modest decline of six basis points on NIM. Slide 5 shows the relative growth in average LHI and mortgage finance loans since Q1 2014, along with the LHI yield trend. You might note that average mortgage finance loans represent 26% of total loans in Q1 2015. The end of period surge was especially pronounced due the effect of refinanced volume. I will hand the ball to you, Peter.

Thank you, Keith. As Keith mentioned growth in net interest income was very good during first quarter. We were able to grow well from Q4, despite the reduction in yield on total loans and the impact of two fewer days in the quarter compared to prior quarter. Mortgage financed loan balances and the contribution were especially strong with a benefit to net interest income. Exceptional deposit growth resulted in increase in average liquidity assets of $1.3 billion with a modest benefit to net interest income until rates finally increased. Fees improved with a growth of 9% from Q4, representing mortgage financed fees associated with the increased volumes and swap fees augmented with a new sales approach. We experienced growth of over 5% in traditional LHI balances from Q4 and 20% from Q1 of 2014. [It] [ph] increased in competition and the pressures we experienced growth of nearly $600 million from the fourth quarter. Ordering balance obviously provides a favorable start to Q2. As stated repeatedly, we do expect certain categories of CRE balances to level off or decline by the end of the year. Yield trends have actually remained quite favorable, especially in the magnitude of the growth and the competitive environment. Mortgage finance business clearly exceeded industry trends in this highly profitable business. As Keith mentioned, we had average balances of $3.7 billion and the quarter end balance of $5.4 billion. Excluding the month end building balances, the average balance remained consistent with our objective on mix of total loans at 26%. We believe the continued market share shifts is reflected in the average balances and in the spike of quarter end although we do not believe this quarter end balance will represent a lead into Q2 or subsequent quarters or the average balances in those quarters. Deposit growth as Keith mentioned has been exceptional. We had a strategic objective in the number of target segments and we have been very successful and we will continue that as a way to extend the duration of low-cost funding and enhance assets sensitivity. We will acknowledge the timing and magnitude of growth are difficult to predict and Q1 was sharply above normal Q1 seasonal trends. We achieved a very favorable improvement in funding profile, with demand deposit growth from year-end of more than $1 billion compared to $600 million growth in traditional held for investments. Turning to Slide 4-8, the components of net interest income in NIM are presented. The net interest income was up 2% from Q4 and 20% from the year ago quarter. The strong growth from Q4 was especially good considering the impact of $2.9 million from the impact of fewer days. I will comment the $2.9 million represents $0.04 per share and had a 2-plus-percent impact on the growth. Major factors contributing to the 34-basis point change in NIM are described. Increase in liquidity was obviously the major component. The $1.3 billion increase that produced the 28-basis point change was actually a minor benefit as shown to net interest income. The yields on traditional held of investments had remained good as I said with a reduction of nine-basis points from Q4 and had a six-basis point impact on NIM. That is consistent with the record over the last several quarters. We’ve seen continued impact as we commented many times on the effects of both growth and competition. The increase in MFL balances in the decreasing yields accounted for four basis points in reduction of NIM. Components of the growth in non-interest expense are shown $2.4 million or 3.2% growth from Q4, represents a 12% annualized growth and is consistent with the guidance we have given. The reduction in incentive expense offset most of the increase in FICA, which is a component of Q1 operating results every year. The operating leverage adjusted for fewer days and the Q1 factors actually improved from Q4. Turning to Slide 8, linked-quarter ROA and ROE were obviously and very significantly affected by the fewer days Q1 expenses. The significant impact of liquidity increased. We also in Q1 had the first full quarter of the impact of the November stock price offer and the offering matching both EPS and obviously in average balance of common stockholders' equity outstanding. Efficiency ratio was also reduced by the Q1 factors, so just allowing for those factors not representing any guidance or representation. ROA was actually on comparable basis to Q4 above 1%. ROE approached 11.5% and the efficiency ratio was just above 51%. Keith mentioned, we had an increase in the provision for loan losses, representing about $0.06 per share and with the commensurate impact on both, ROA and ROE that are not reflected in the adjusted numbers I have mentioned above. On Slide 9, we will get into the 2015 outlook. On the strength of Q1 growth, our outlook for traditional held for investment growth remains positive and guidance has been improved modestly from the low teens to a low to mid teens' outlook is very favorable compared to industry peers despite the intended limitation of growth '15 in categories, which did help drive 20%-plus growth over the last two years. Excluding categories that will be limited, Q1 average was approximately 10% above the total average LHI for all of 2014. We also upgrading guidance on mortgage finance lending, to a combination of market share gains and the impact of reduced mortgage rates on refinancing activity that we saw on the first quarter. We still believe NIM can achieve 3.4% to 3.5% range, excluding the outsized effect of growth like we experienced in the first quarter in liquidity assets. For example, in Q1, we have reported to 3.22% NIM and of that the liquidity asset represented 28 basis points for the sum of 3.5%. Growth in deposits in Q1 was stronger than we would have been willing to predict and we are updating guidance to reflect that stronger growth. It is highly beneficial in terms of funding profile and structure for the long-term, so we remain unwilling to limit our focus in that area. We stick with an NCO ratio of less than 25%, but we acknowledge the uncertainty around the provision expense in 2015, as reflected in the Q1 results which were heavily affected by downgrades in energy. The outlook for NIE growth is still expected in the low to mid teens. Turning to Slide7, the extensive build out was modest in Q1, but it is likely to increase in anticipation of the earnings contribution, private client, wealth advisors and for the expansion of other businesses in the last half of 2015. Focus remains on more significant improvements for the last half of the year as we have said many times and into the coming years. The improvement in Q1 efficiency ratio compared to 2014 in prior guidance is a positive, but we are not yet prepared to modify the guidance. Mortgage financing activity overcame Q1 earnings factors a fewer days and identified expenses. The linked-quarter growth as I mentioned of 12% annualized has been consistent with the expense guidance. We remain cautious about predicting continued improvement due to planned build out expense that will be incurred for expect improvement in 2015 second half. Keith has already commented on credit quality indicators, I will now therefore turn it back to Keith.

Thank you, Peter. In closing, we are encouraged by the strong LHI growth in Q1. The strong start affirms our confidence in overcoming the deliberate slowing of CRE and Builder Finance growth rates this year, as Peter mentioned that have been outsized and really help us last two years to go at even 20% rate, but uncertainty around energy loan pay downs and new energy client acquisitions, we think again we can still overcome and achieve this somewhat increased guidance around LHI. Of course it is paramount we maintain our longstanding focus on superior credit quality and we are. Mortgage finance growth benefited in Q1 from the refinance boomlet and should allow us to achieve the higher guidance for 2015. While the success continues in building deposits and increasing liquidity, neither negatively affects net interest income only NIM. We remain highly asset-sensitive and better positioned to benefit from increases in short-term rates. Heather?

Amy, at this time, you can queue up for question.

Thank you. [Operator Instructions] Our first question comes from Brady Gailey at KBW.

Hey, good afternoon, guys.

Hi, Brady.

The increase in non-performing loans, it is interesting that that is not at all energy related, at least the majority of it is not energy-related and that is your non-energy C&I. Can you just expand a little bit on you what specifically drove that increase in 1Q?

We had a couple of C&I credits, Brady, We do not want to really get into the weeds and talk about negotiations and work that we are doing on those credits. But again, only $2 million of the increase related to energy.

Okay. Then really nice loan growth this quarter. I know we are not ready to name the business that you guys have in the queue, but is that business already helping produce above average loan growth?

When I mentioned new unnamed, I really need to clarify that. I am glad you brought that up. We continue as we have talked about the last quarter or two, with the targeted start date on that business in July, and things appear to be tracking for us to in fact get it kicked off in July and therefore our earnings call for the second quarter that comes in later July will be able to explain what we have been about and what we have been building for the last year.

Okay, so that new business won't even be launched until a couple months now or a few months from now?

That is correct. We are still in the build out phase and it generated no revenue. The revenue will begin in July. At this time it looks like we will be on target.

Okay. Then a similar question on growth, but this time on the on deposit side, you had a great demand deposit growth. Was that driven, I know you have a couple of kind of niche businesses, funding businesses that is a great source of funding for you all. Was that driven by any outsized growth in any of those specific niches or is it just overall deposit growth across the board?

We are seeing good growth in some of those niches. Our broker-dealer business has been good. Most of that has a time components to it. We are seeing some very nice growth in the Homeowners Association. That has been business we have been working on for some time and we are starting to see some nice pickup there. Then in our regional markets, we are seeing some growth as well as continued growth from mortgage finance.

Okay. Then lastly, the SNIC balance is another $1.6 billion at the end of last year. Any change on that in 1Q?

Yes. Brady, they are up a little over $100 million.

Okay. Thanks guys.

Little above what the overall LHI growth was linked-quarter, Brady.

Okay. Great. Thanks, guys.

You are welcome.

The next question comes from Dave Rochester of Deutsche Bank.

Hey, good afternoon guys.

Good afternoon.

Maybe if we could start on the loan growth. Obviously, great surprise given 1Q is normally seasonally weaker, so if you could just talk about where the growth came from geographically as well as by product type and industry that would be great.

We have really seen very broad growth. Houston continues to lead the pack. We talked some about this in January on our quarterly call that in spite of all the publicity about the energy business and employment and so on, we represent such a small market share in Houston and we have had such success the last year, year-and-a-half attracting even more very talented bankers in Houston that we’re beginning to see that market generate just outstanding C&I growth in the finest caliber companies that we wanted to attract for the last couple of years. That business has been growing the last two years, Houston, faster as a percentage than our other regions and that continues to be the story, but we are seeing good growth in each of the markets and we are really pleased that it is as balanced as we are experiencing.

Do you have a sense for how large that Houston book is today?

The Houston book has now bumped up over $1.150 billion, so you know we just crossed $1 billion not a long ago in Houston and we are seeing the percentage numbers continue to be in line even though the math is more challenging to deliver those percentages we are continuing to see those mid-20s to low-30s percentage rates on an annualized basis in Houston.

That is great. Thanks for the color there. Then switching to expenses sorry if I missed this, but the $1.9 million reduction in incentives expense in the quarter, does that offset to expenses disappear next quarter, so expenses should be up by $1.9 million all else being equal? I know you have offsets with a seasonal comp items rolling off as well, but just wanted to understand what happens to that $1.9 million.

There was a very small component of that, about $300,000 that related to the stock price decrease quarter-to-quarter. And then the balance was basically what we do every year, Dave, which is we start the annual incentive plan based on where we are over the course of the year compared to our plan and estimating where we will spend the money.

Okay, so that is I guess just a temporary reduction, so we…

No. It is not temporary.

Not temporary? Okay.

It will build.

It will build over the course of the year got it.

Relative to Q4, it's one-time.

Right.

But it builds typically slowly over the course of the year.

As we hopefully beat our financial plans. That is how that works.

Then you talked about the build out efforts already. It sounds like you are on track for the unnamed business to get going in July. Do you think all the build out efforts, the rest of what you are doing will also be completed in 2Q?

We believe so, relatively so. There would be a few positions, it will still be adding as we get into the latter half of the year, but I would say, 90-plus percent of the hiring will be accomplished, finished by 2Q.

We will have though, of course, Dave, then the carryover effect, where Q3 will be the first full quarter of the hiring that takes place for that and everything else we do during Q2.

Any time we launch a new business and we have done this as you know over the last 17 years. Periodically, every year or two we seem to try and find another complementary business that we can add to the mix. We always want to start a bit slow and be sure we are getting it right on delivery execution, so you will see the revenue pick up more modestly in the third quarter. Peter indicated, we will have the more full effect of the run rate on comp, but we should see a really nice pickup in the fourth quarter as we tweak it and work any bugs out.

Great. Then just one last one. Just wondered given that you upped your growth guidance on the loan side as well as the deposits, and kept your margin guidance stable, why not increase your NII guidance as well?

We still feel good about and we made clear I think that of all components that produce that number, obviously, there is a lot of variation that can come about over the course of the year, but the one we felt best about was low double digits in that category, so it is just too early to say how that will come about. If you are right, then we will see that result maybe in the second quarter adjust accordingly.

Okay. Great. Thanks, guys.

You are welcome.

Next question comes from Brad Milsaps of Sandler O'Neill.

Hey, good evening.

Hi, Brad.

Hey, Peter. Just wanted to ask a question about the liquidity on the balance sheet, I know comparing average to period end is sometimes a dangerous game, but it did look like the average fed funds and deposits of other banks was a little over $2.2 billion. Period end was closer where it had been running at around $700 million. How should we think about that as you move through the year? What is close to the right number? Will it continue to build or how do you see that playing out?

We do see deposit growth rates still being greater than loan growth rate, so we expect that to build. We said that last quarter. I think we made it clear. You just can't know when long sales cycle results are going to come to past and they tend to come to past when they get booked, they tend to be large numbers, so the average balance and some growth in the average balance is what we are really talking about. The spike that occurs in mortgage financed happens to occur when some of the other escrow balances, in particular business we discussed began to turn down and then they build over the course of the quarter as the mortgage finance balances, loan balances were coming down. The only way to evaluate that is with using the averages.

The larger surge is normal Brad and made a bigger effect on muting the month end relative to the average.

Yes. We have never had month end balance of $1.7 billion in excess of the average balance per quarter. Nothing has ever come close to that. It tends to be in the $300 million to $500 million range.

We picked up some market share and the re-fi, so it was quite surge at the end of the quarter.

Right, so thinking about going forward, that the $2 billion number, it's somewhere near there depending upon how big the warehouse is in any given quarter?

I think it is a good estimate.

Okay. Then, guys, just kind of bigger picture, I know there are a lot of moving parts with this quarter with the margin and profitability, but I guess you are sitting at around an 80-basis point ROA somewhat affected by the provision this quarter as well, but is there a level. I know you are preparing for higher rates and that is how the balance sheet is positioned, but is there a level of profitability that you might draw the line a little bit more on growth in order to protect that ROA just starts attaching of 75 basis points or below. Just kind of curious kind of what your thinking is from a kind of bigger picture perspective balancing that growth with profitability?

As long as the levels of liquidity assets are driving changes versus, say, 1% level, we would not make really any alteration in that. I think people can understand, so long as we are not losing money in the enterprise, that the ROA can be tolerated at lower levels as we are building, as you commented, for a higher rate environment. Again, what we are doing is not for the higher rate environment. Higher rate environment will benefit materially what we have accomplished and what our focus is on for strategic emphasis.

Peter, if you do not get higher rates and profitability kind of stays in this range and you continue to grow at fairly fast clip. From a capital standpoint, do you guys still feel okay from where you sit today?

We do. We would never look at quarter end balance on what the spike in mortgage finance does to the capital ratios, unless obviously created an issue with regulatory suitability satisfactory or high levels of capital relative to regulatory standards, but we are going to take a look at that only as it relates to where we see the average is, primarily in an traditional held for investment are relative to the return on equity. Obviously, we do not believe that mortgage financed balances will remain anywhere close to the $5.4 billion at the end of the quarter, but should we see sustainable levels well above the average you have seen in the quarter on an average basis then we will be receptive.

We also have as you know a history of having sold over a 1 billion in participations in mortgage finance and today we sit around $600 million, so there is capacity there too over the course of the quarter as we see how the volumes are running for us to sell additional participations.

Great. Thank you guys.

You are welcome.

The next question comes from Michael Rose at Raymond James.

Hey, good afternoon guys. How are you?

Good, Michael. How are you?

Doing well, I just want to circle back to energy. Just want to see how far, I am sorry if I missed this. Just want to see how far you guys threw the borrowing base redeterminations and just get a sense for, if you can, where reserve stand. On the energy bucket at this point maybe versus the end of the year and then maybe how they compare relative to maybe the big down cycle back in '09. Thanks.

We made it through about 90% on the redeterminations at this point. There is quite a lot of work that is just real-time ongoing on this as you can imagine. This has been true for some time really since the oil price declined, but as far as the coverage of the portfolio we are at about 90%. I am trying to remember the second part of your question, Michael.

What do reserve stand against your energy portfolio now versus at the end of the year and then maybe if we can compare where they stand now versus the last big downdrafts in oil prices back in '09.

We have really not thought it would be best for us to disclose detail, but I will tell you and I mentioned in the call, the majority of our increase in provision really is dedicated towards energy portfolio.

Okay. Is that qualitative in nature or quantitative in nature?

It actually is both, and that is part of our methodology. The way the methodology works is, it has both components.

Okay. That is helpful. That is all I got. Thanks for taking my question.

The next question comes from Scott Valentin, FBR.

Good afternoon. Thank you for taking my question. With regard to Houston, you mentioned that the growth there, is it all C&I or is there a component that is commercial real estate. I know you said that certain categories of commercial real estate, you are kind of deemphasizing, just wondering if you are seeing any activity on the commercial real estate side in Houston.

Scott, it is virtually all C&I. Now, there is some commercial real estate on projects that are well down the road and wrapping up construction and we feel very good about the status of those projects. In fact, the Houston market in some of the categories, where we do have product is much stronger than what some of the press might lead you to think. I have a few statistics even to share with you. Industrial deliveries, out of 260 million square feet existing in Houston market today, it is over 95.5% leased, with only about that 6 million under construction, so you can see on industrial side it is really quite a tight market, but even on the office side, which has got a little more and certainly I have alluded to that is on a statewide basis and more particularly in the Houston market, I am a little more concerned about office than it would be multi-family or industrial. Even the office market is running over 92% occupancy and the under construction is almost 60% pre-leased, what is under construction in Houston. We feel good about where we are, but we are not adding new commitments of any significance right now in CRE, in Houston.

Okay. That is very helpful. I appreciate the color. Then in terms of, you mentioned on the provision expense that, if I misheard you, I apologize. The bulk of it was on the review of the energy portfolios and allocating reserves of the various credits. Just wondering maybe you can speak to the migration of credits within the portfolio of the E&P. I think you mentioned $2 million of NPLs, but just wondering the overall trend and maybe watch those credits or any other kind of ratings information you can give?

We are seeing migration really from different past categories, the lesser past categories, but all the way through the credit grading quarter metrics. We are not seeing anything in spite of the downgrades. Again, we have been through this many times over the years and we fully expected these downgrades would begin to materialize, particularly as we got through the reviews of portfolio. We do not see anything at this point that really indicates any significant loss in any of their credits at this point, so we are still quite encouraged despite the trends that we expected that we have really very little loss exposure, at least as of now.

Okay. All right, and one final question on the mortgage finance, did you disclose? I apologize if I missed it, the re-fi versus purchase split on the mortgage finance?

The re-fi, we didn't disclose it, but the re-fi was just a little over 50% as a mix. Now, the industry is up close to 70%. Again, we are always going to come in at a lower percentage of overall mix. We have not gotten really the fully updated industry numbers at this point. This is just info that our guys get from our client base through MBA reports officially announced, but we think the 52%-ish number that we are is going to be way below as much as 18 points to 20 points below the overall industry. Even our clients in the purchase business, they have seen a big uptick. It had gotten as low as you may recall back a couple of quarters ago into the mid-20s as a mix, so that speaks to why we had the kind of surge we did that kind of increased in re-fi.

Okay. Thanks for the color.

You are welcome.

Our next question comes from John Pancari at Evercore ISI.

Good afternoon.

Hi, John.

Regarding the mortgage warehouse, again, I am trying to figure how we think about the pace of growth through the end of the year. Can you give us the size of the mortgage warehouse as of today, as of maybe?

John, we can't do that. If you look at the difference between the quarter end and the average balance, you will get a strong indication. Again, as Keith mention, the surge in refinancing activity really occurred over the last half of the quarter, so the refinancing component average for the quarter was a little less than what Keith commented on, but we have had months. I think February was maybe a record month without addressing anything particular, but we have months, where we have net increase in balances of $1 billion in the last three days of the month. It can vary so widely.

John, you may remember on the first quarter call, I had talked briefly about a little re-fi boomlet had just played out and I bet it would - a week-and-a-half, two weeks after that that we began to see the rate adjustment and re-fi build again, so that really was unusual to see to boomlets, I guess, you would call them in the same quarter, in particularly the magnitude of the second. We have a significant amount as you can imagine of securitizations occurring after each month end and it is so volatile, while we have some ability to kind of see and predict, because we live with it day-in and day-out, we do not really want to disclose anything...

Okay. That is understandable. On the margin side, you did cite in the press release as well as in your comments that the competitive pricing environment right now, particularly around the C&I portfolio, but you were still able to put up very solid growth in held for investment C&I, so what is your strategy there? Are you stepping up to the pricing competition to a degree in order to put this paper on, if you could you just comment on that here?

We have worked for a year-and-a-half at fine-tuning to be sure we are still competitive in the market, but competitive to us is always being above the overall average. We think we deliver something really of value, with our bankers, our talent, our technology, our service level, so we did fine-tune it a bit over the last year-and-a-half, but no. What we are seeing that [indiscernible] we are having in C&I are function of having great outlook and increasing the good approval of D&A and the talented bankers. As you may recall, we hired a number of bankers for that four successes of quarters that started back in '13, and they were really hitting their stride and we are seeing really good results.

Okay. Also on that, I guess, can you give a little color on the nine basis point decline in the held for investment loan yields? Is that something we could expect going forward or it is the outsized this quarter?

It varies. It is going to vary from 6 to 10 on a given quarter, and a lot of it has to do with mix within LHI. It is not just as simple as looking at overall effect of total loans within mortgage finance. For instance, if you are doing more C&I, you are generating less fees in a market like we had, where we were allowing CRE and builder finance to grow more rapidly. As we have tamp that growth rate down a bit, you are going to see a little bit more slippage on the yield, but I think it is very close to what we were experiencing even back when those two businesses were growing full speed, so that would tell you they were still delivering something valuable and they were not seeing any outsized erosion in margin.

Okay. If I could ask just one more? Sorry. On the increase in non-accruals, I know you could not give too much more information other than that it is C&I, but were they at all Shared National Credits?

One was a Shared National Credits, but our relationship that we have known the owner operator CEO for two decades, even before we launched the company. Again, Shared National Credits stats still mean we know the management, we know the deal. In this case, it slipped some, but we think it will be back on track and we hope to not have any loss in the credit, but for now it is an NPA.

Okay. Thank you.

You are welcome.

Next question comes from Jennifer Demba from SunTrust Robinson Humphrey.

Thank you. Good afternoon.

Hi, Jennifer.

Hi. Back to the NPA increase topic, were any of the loans in the same industry or was it broad based or, Keith, can you give us any other detail on the trend?

It is broad-based. It is really no particular industries, so we do not see anything systemic that could affect other credits in that particular industry. It is just a couple of situations that we are dealing with.

Okay. Thanks.

Welcome.

Next question is from Emlen Harmon of Jefferies.

Hey, good evening everyone.

Hi, Emlen.

Last quarter you talked about an efficiency ratio in the mid-50s to start the year and then kind of coming down through the year. Your guidance indicates that the efficiency ratio still expected to improve in the back half. Can we actually expect the efficiency to come down kind of from its current level? I think it was 52, 53 type level?

I think that will be a challenge. You know, we have had much stronger production in mortgage finance and that certainly helps our efficiency ratio and we did not anticipate that at the very beginning of the year. If we hold this line, I think it would be a big win, considering we are still building out two very significant businesses.

Got it. Okay. Thanks. Then the loan growth guide for mid-teens. Keith, you actually hit on this a little bit, but 1Q average loan held for investment already up kind of close to 13% versus the 2014 average. How should we think? How meaningful could the declines be in those CRE businesses that you mentioned that they are going to offset kind of what is happening elsewhere in your businesses?

I think the way it likely work, Emlen, is they were actually up in Q1 versus Q4. That is why I said if you take out the growth of those components, the Q1 average excluding those was 10% above the full-year average, including those, so they will, we believe, begin to rise and then crest and then fallback, so the average balance is likely to remain quite comparable to the 2014 average balance. The year end up or down a little bit, but no significant shift.

Got you.

If there is a significant shift, it will be the year-end balance and those components.

Emlen, one of the challenges is when you do something as we are doing to be sure you are managing the concentrations appropriately for some very high growth businesses that we have had for three-and-a-half, four years now, is that we have got a tap to break, but also tap the accelerator in just the right sequence, so that we slow the growth rate, but we do not in fact fail to continue to make available credit our best clients and pickup selectively good clients. It is a bit of art and science in how we are managing this, but we have done it before and we hope we can be effective and do again and get that growth rate as Peter suggests more in line with overall C&I growth.

Got you, so when you are talking about a kind of peak in loan balances mid-year, the sting of the CRE business specifically as opposed to the LHI portfolio and its entirety?

Yes, and business, and build a finance as well.

Correct. Got it. Okay. Thank you.

Welcome.

The next question comes from David Bishop of Drexel Hamilton.

Good evening gentlemen, how are you?

Good.

A question sort of circling back to the loan yields on the held for investment there, are you starting to see any sort of risk premiums reentering the pricing equation there in some of these the select products or even some of the market across your Texas footprint?

That is a great question. We should be, but we are not yet. You know, we should, and I think eventually we will, but we are not seeing it yet. We are very competitive.

Got it. Then just sort of a follow-up in terms of the Mike Rose's question, are you seeing your businesses, your commercial borrowers, especially on energy side or just on a whole acting any differently at this point in the pricing cycle relative to maybe some of the other previous energy cycles?

Not really. We see a really good solid execution overall. I think we are not, again, seeing any irrational behavior there. I have been through. It is not their first rodeo and they quite sync that with reality.

Got it. Thanks.

Welcome.

Our next question comes from Matt Olney of Stephens.

Hi. Thank you. Going back to the LHI loan growth outlook in '15, I hear you on the volatility of the CRE and the builder finance book this year. Is it possible for that total LHI booked balances to actually decrease in any given quarter this year or do you expect the C&I growth to offset that in any given quarter this year?

C&I growth should offset it. We should grow every quarter.

Okay.

Matt that just does not seems to be a realistic possibility.

Got it. Okay, guys. That is it from me. Thanks.

You are welcome.

The next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

Hey, guys.

Hey, Ebrahim.

I just want to follow-up on sort of the energy credit issue. We took provision this quarter around the anticipated downgrades on energy credits. Does that mean that given that you reviewed 90% and gone through the re-determination process on 90% of the credits, 2Q provisioning should lease it lower back to sort of the level we have seen $6 million, $7 million assuming loan growth is around $400 million to $500 million? I am just wondering what should we anticipate in terms of additional energy-related provisioning given the review that you have already conducted and the provisioning that you have already taken in 1Q.

Well, I can just tell you that it is dynamic. We are going to have to see what the methodology leads us to provide. If I were just going to make an educated guess and not give guidance at all, I would estimate it would be a little closer to this quarter than last quarter, but it is not determined yet. We have just got to see how the portfolio performs this quarter and our methodology has been a great driver. It has deliver for us since inception. I believe it is a good valid system that we used.

Understood. Just the separate question in terms of the NPA move sequentially, is it fair to say that it is just a coincidence that you had this big jump in NPA? I think it is a sort of largest jump over the last couple of years in the quarter after oil fell, like were there anything tied to the energy industry? It seems like there was not. It seem like it just a purely coincidental that NPAs jumped following the oil decline. I just want to make sure we get that right.

You are right on target. It really appears to have nothing to do with energy adjustment. We just had a couple of our C&I credits that slipped.

Ebrahim, this is Peter. When you get levels as low as they were, nearly anything in the company that is commercially focused like we are can make that number move around, but to put in context we are still below at 42 basis points of total loans, the pre-crisis levels.

Got the point loud and clear, and one last question just in terms of participation on the mortgage warehouse, I think competitive reasons today where you would be less open to participating some of those loans. What I am trying to get to is, the need for additional capital at some point if mortgage warehouse trends continues or is that as easy and now you are as open to participating some of these loans if the strength in that business continues?

We think it is wise to always have some dry powder and be able to continue to take market share, Ebrahim. We are inclined to begin to sell some incremental participations and this year we have shelf space. Again, we manage it on average as a percentage of our balance sheet and it is still quite in line with our normal target, but we want to be sure we always have dry powder and can take business.

Understood. Thank for taking my questions.

You are welcome.

The next question comes from Kevin Reynolds of Wunderlich.

Good afternoon, everybody. Most of my questions have been answered. I guess, one maybe housekeeping question for you, Peter. Last quarter, just maybe fantasyland talking about the Fed, they were raising rates, but last quarter your disclosure showed gave us some up 200 basis points scenarios and I thought I heard you say earlier on this call that just the balance sheet mix today the earning asset mix and the deposit mix might make you a little bit more asset-sensitive than you were in the last quarter. Did I hear that correctly? Is there anyway could you maybe put some parameters around what your sensitivity modeling might suggest what happened in an up 100-basis point and up 200-basis point environment?

Kevin, we will be filing the10-Q shortly and that will have the measures to which you are referring came out of the 10-K. Just in simple terms, when you see demand deposit growth average balances grow as much as they did, and you see the traditional held for investment categories grow as much as they did and then understand that we do plan over the course of the year to see some of those balances come down, CRE balances. You can still get a sense of the magnitude of the shift. It is a meaningful shift linked-quarter and I think if you go back and check sequential quarters, you will get some indication.

Okay. All right. Fair enough. Thanks a lot.

At this time, I show no further questions. I would like to turn the conference back over to Keith Cargill for closing remarks.

We want to thank all of you for your interest in our company and the time today and we look forward to talking to you soon. That will close our call.

If there are any further questions after the call, please contact Heather Worley at 214-932-6646. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.