Texas Capital Bancshares Inc (TCBIO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you very much for your patience, and welcome to the third-quarter 2007 Texas Capital Bancshares Inc.

earnings conference call.

My name is Bill and I will be your conference coordinator for today.

At this time, all participants are in a listen-only mode.

We will be conducting a question-and-answer session towards the end of today's presentation.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference call, Ms.

Myrna Vance, Director of Investor Relations.

Please proceed.

Thank you, Bill, and good afternoon to all of you.

We're glad you could join us today to hear the results of our third quarter.

As Bill said, I am Myrna Vance, Director of Investor Relations, and I'd invite you to call me if you have any follow-up questions.

You can reach me at 214-932-6646.

Now, before we begin our discussion today, I need to read the following statement.

Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainty.

A number of factors, many of which are beyond Texas Capital Bancshares' control, could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

These risks and uncertainties include the risk of adverse impacts from general economic conditions, competition, interest rate sensitivity, and exposure to regulatory and legislative changes.

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in our Annual Report on Form 10-K for the year ended December 31, 2006, and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Okay, now let's begin the discussion of the quarter.

With me on the call today are Jody Grant, our Chairman and CEO; George Jones, President; and Peter Bartholow, our CFO.

After our prepared remarks, our conference coordinator, Bill, will facilitate the Q&A session.

At this time, I would like to turn the call over to Jody.

Hi, everyone, and welcome to the call.

We had another record in nearly every aspect of our business, certainly the most important aspects of our business.

Net income was at $8.8 million.

Earnings per share were up 33 -- were 33% -- I'm sorry, $0.33, and both of those were up 10%.

Loan growth was the best quarter in the Company's history when we measure that by loans held for investment, beating the second-best quarter, which happened, coincidentally, to be the second quarter of this year.

Just to give you some numbers, average loans held for investment were up $231 million.

That's 29% year over year or 8% on a linked-quarter basis.

And period end, the growth was $204 million.

That's 30% year over year and 7% linked quarter.

Year to date, we've made $0.93 per share, which compares to $0.80 last year, which is an increase of 16%.

Before turning it over to Peter Bartholow and George Jones to talk about the numbers, let me make a few remarks about the economy, in that certainly the economy nationally is receiving a lot of attention these days, a lot of it negative.

And I am pleased to report that the local economy is strong.

Texas seems to be bucking the trends.

Employment hit an all-time high in August, in spite of the fact that we do have weakness in single-family housing.

We created 280,000 jobs in the last 12 months, and interesting -- that includes 31,000 in July and August of this year versus 43,000 in the same period in 2006.

So we're still performing well.

The Dallas-Fort Worth area was number one in the nation in job creation in the last 12 months, with 90,000 jobs.

Houston was the second in the nation last year, creating 82,000 jobs.

In particular, we had strength in professional and business services, leisure and hospitality, and oil and gas.

And all of you are aware of the Barnett shale and the continued activity there.

And needless to say, with oil at over $88 a barrel, that helps us as well.

As a consequence, we have the highest rig count in the state of Texas since August of 1984.

Even construction employment was up by approximately 20,000 jobs in the latest period, with weakness in single-family being offset by strength in multifamily, commercial and the public sector, that period being year over year.

While we're concerned about the weakness in the single-family housing sector and are watching it carefully, and George will comment more on that in a few minutes, and just to highlight that, total residential permits in August were about 31% below the same period in 2006.

On the other hand, multifamily permits were up 54% from last year, and in the latest four months were up 65%.

People have to have someplace to live, and what we are experiencing is an increase in multifamily construction versus single-family construction.

And even though new home purchases drive a lot of personal expenditures, total construction employment comprises only about 6% of total employment in the state.

And our unemployment in the state at 4.2% is significantly better than that in the nation as a whole.

In Austin, and in the other major cities that we operate, we're experiencing very, very low unemployment rates.

Austin is 3.4%, Dallas 3.9%, Houston 4%, San Antonio 3.8% and Fort Worth 3.9%.

These were all as of August of this year.

Our results this year or this quarter also reflect our increased focus on our core business.

We also have spent a lot of time on expense control.

I don't believe we really fully comprehended the drain on the Company that was created by our residential mortgage lending business.

Fortunately, as you know, we exited that business, and we will tell you more about that in a few minutes as well.

Linked-quarter net revenue, just to highlight expense control, was up 4.1%, and we were able to hold noninterest expenses to 1.9% increase on a linked-quarter basis.

And that compares to the second quarter, when we experienced linked-quarter growth in revenue of (technical difficulty -- audio skip) and linked-quarter growth in net interest expenses of 5.5%.

We continue to focus on return on equity, organic growth and credit quality.

Our return on equity in the quarter was 12.7%, which was 1 basis point above the second quarter, but less than the 13.8% in the third quarter of '06.

The difference is totally accounted for by the provision that we took in this quarter of $2 million versus $750,000 last year.

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

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

Peter?

Jody, thank you.

As Jody commented a minute ago, net income for the quarter was $8.8 million, linked-quarter growth of 5.5% and a year-over-year increase of 10%.

The very strong performance, driven primarily by loan growth and improvements in the cost structure, produced continued improvement in operating leverage, with 4% growth in net revenue, driven by 6.6% growth in net interest income.

We did see significant weakness in noninterest income due to our mortgage warehouse group.

That group is experiencing difficulties that are associated with the mortgage industry, and while it is profitable in Q3, its reduction in net income contribution compared to Q2 was right at $0.02 per share.

As Jody mentioned, our operating leverage is reflected in the comparison of the growth rate in net revenue to that for noninterest expense.

We pick up 220 basis points in difference between those growth rates in this quarter.

Obviously important to us was an expansion of the net interest margin by 3 basis points, which I will discuss in more detail, compared to second quarter of this year.

Credit quality costs were well contained as it relates to effects of nonperforming assets and to chargeoffs.

If you will turn to the next slide on page 7, again, net margin increased, and it was obviously due to important growth -- and it produced important growth and improvement in key performance measures.

We had an improvement in the efficiency ratio by 140 basis points, despite the effect of the mortgage warehouse group, which I mentioned a moment ago, which caused us to have flat ROA and ROE compared to the linked quarter.

Without the effects of that, we would have had some expansion in both of those key measures of profitability.

Loan growth has produced very obviously a change in the earning asset and funding composition.

And we now have, with the decrease in the Fed funds rate, we have now income contributions from securities portfolio and improved contributions from the fixed-rate earning assets, LIBOR-priced loans and the leasing activities.

Operating leverage again was a very important factor in producing these results.

Jody mentioned the increase in the provision for loan loss of 33% on a linked-quarter basis and 167%, and despite those dramatic increases, we produced very strong growth.

The growth in the provision was driven essentially entirely by the growth in the portfolio, with net chargeoffs of only $59,000 in the quarter, leaving us in a $300,000 net recovery position for the year to date.

Turning to slide 8, Jody mentioned some of the remarkable growth here -- record loan growth this quarter on an average basis of $230 million, loans held for investment up 7.8% linked quarter and 29% over the prior-year quarter.

We did, as I mentioned, have issues in loans held for sale.

Much more stringent underwriting and the industry conditions have caused significant reductions in that portfolio.

We still ended up with total loans up 6% linked quarter and 27% year over year.

With the growth in loans, we now have loans representing 88% of earning assets, a much more favorable position relative to net interest margin and continued growth.

Deposit growth was very strong this quarter.

Growth resumed this quarter after what we -- as we said that it would in the prior quarter.

Loan growth was all customer -- deposit growth, excuse me, was all customer based and grew $245 million on an average basis, 8% linked quarter, and grew much more than the $230 million in loans held for investment and $60 million more than the growth in total loans.

We did see, again, some increase in DDA, a 2.5% growth rate or $12 million, and that funding category is obviously important to margin.

And again, I think we bucked what will probably be an industry trend and an indication, obviously, that DDA is hard to produce in this environment.

Slide 9, growth in loans held for investment continued through the end of the quarter.

Q4 begins 3% higher than the average of Q3.

Slide 10 -- I will comment a little bit more about the net interest margin.

We mentioned earlier we had a 3 basis point increase.

This expansion was especially significant in light of the growth, the effect of that growth on funding composition, the reduction in the Fed funds rate and the flat yield curve.

The reduction in the Fed funds rate of 50 basis points did occur only in the last half of the quarter, so its effect for the full quarter was not substantial, but it did have an effect, though one that was probably less than had been anticipated.

The exceptional loan growth, as I mentioned, had a favorable impact on earning asset composition.

Overall earning asset yields were essentially flat, despite the reduction in the Fed funds rate.

Securities, fixed-rate loans, LIBOR-priced loans, leasing and other categories saw improved contributions to NIM and to net interest income.

DDA growth was an important element, and despite the growth and impact on funding composition, total interest-bearing funding costs were actually reduced by 5 basis points.

We saw meaningful success in reducing deposit costs in key categories really unrelated or only partly related to the decrease in the Fed funds rate.

The Company definitely remains asset sensitive, but the impact of that sensitivity is much less than at a time when rates began to rise.

I want to make sure everybody understands there has been no meaningful change in net interest margin from the time Fed funds rose above 4% in the fourth quarter of 2005.

Growth in loans has produced the change in funding composition as a principal driver of that change.

The composition of funding does affect and limits or constrains net interest margin, but liabilities now reprice much more rapidly.

Net floating-rate assets funded by fixed-rate or zero-cost liabilities have decreased substantially as a percent of earning assets since rates began to increase.

I will share one characteristic of that.

DDA plus equity is now just under 20% of total earning assets compared to just under 25% just two years ago, a full 500-basis-point shift.

As I commented earlier, we're getting now, for the first time in quite some time, an actual earnings contribution out of our securities portfolio.

The yield curve for us and the rest of the industry obviously continues to represent an opportunity cost.

We really have no opportunity to have meaningful amount of free income from the securities portfolio.

And the other contributor is what we have described as the efficiency of our balance sheet.

With the lack of intangibles, the lack of fixed capital in assets, we now have earning assets to total assets in excess of 95%.

And with that, I'll ask George to comment on growth and credit quality.

Thanks, Peter.

I'll talk a little bit more about our loan and deposit growth again with a little bit more transparency.

Again, our demand deposit growth, on slide 11, our rate over the last five years was 15%.

Average demand deposits, as Peter mentioned, increased $12 million or 3% in Q3 on a linked-quarter basis.

Total deposit growth is 24%, and on a linked-quarter basis, Q3 deposits, as mentioned before, outgrew loans, which we're very pleased to see.

It increased $244 million or 8% on a linked-quarter basis.

Most of that growth in the deposit area, however, was in money market deposits, CDs and eurodollar deposits.

As all of us know, it's difficult to raise demand deposits in this environment today.

Our business banking group in Dallas and our Dallas corporate banking group accounted for most of that deposit growth.

Loan growth over the past five years grew at a compounded rate of 28%.

Loans held for investment growth in Q3, as mentioned before, established a new all-time record for quarterly average loan growth, $231 million or 8% on a linked-quarter basis.

Commercial loans, C&I portfolio, made up approximately 75% of the loan growth in Q3, with real estate also comprising the balance.

Loans held for sale, our mortgage warehouse group, is down 22% on an average basis.

Our private banking and energy groups in Dallas contributed 44% of the growth and the regions outside of Dallas contributed 31% of the overall growth in Q3.

As previously noted, both by Peter and Jody, our loans held for sale, the mortgage warehouse line of business, was down significantly in Q3, by design, I might add, reflecting the credit issues in residential housing nationwide.

It was declining from Q2 averages of $192 million to Q3 averages of $150 million or about a 22% decline.

Currently, the total at period end Q3 was $118 million and could possibly decline further in the future.

Our significant changes to more conservative underwriting standards and investor selections, in addition to the issues in the marketplace, have contributed mightily to this decline.

Volumes, fees and mark-to-market in the warehouse have caused our noninterest income line to decline from Q2 to Q3, and as Peter said, it amounts to roughly $0.02 a share.

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

If you turn to slide 12, our revenue growth numbers remain very good.

As previously mentioned, our noninterest income line is down somewhat because of the mortgage warehouse area.

But we are especially pleased with our reduction on a linked-quarter basis of our noninterest expense growth.

As Jody mentioned, the increase for Q3 was only 1.9%, basically with our closure of our retail mortgage unit and other expense reduction efforts.

We've stated previously on these calls that expense growth reduction was a priority in 2007, and we're really seeing that come about in Q2 and Q3.

If you turn to slide 13, credit quality in the third quarter remained strong, no question about it.

Net chargeoffs were reflected at $59,000, and we saw year to date 2007 a $300,000 net recovery for the year.

Our net chargeoffs for the past 12-month period are 2 basis points, and we only show 3 basis points in chargeoffs over the last two years.

Our general outlook for credit remains favorable and we remain cautiously optimistic, but believe that the near-term credit environment could present all of us in the banking industry some challenges for the next few quarters.

If you turn to slide 14, again, this shows graphically our net chargeoffs to average loans and really displays the good credit history for Texas Capital Bank that we have shown you in the past.

Okay, I'll turn it to you, Jody.

Thanks, George.

Just a couple of closing remarks.

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

We are confirming our guidance that we gave at the close of the quarter, when we had the last conference call.

That was $33 million to $34 million, which is roughly about $1.26 to $1.28 a share.

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

(OPERATOR INSTRUCTIONS) John Pancari, JPMorgan.

I wanted to see if you can give us some color on the increase in the loans 90 days or more past due.

Just give us some color on the types of loans that moved on and any outlook into what is happening there.

George is going to comment on that, John.

We had a slight increase.

Some of that was our mortgage warehouse portfolio that moved into the 90-day-plus past due area, and the other area that was increased was our premium finance group.

As you know and we have said before, we continually have a portion of that portfolio that is in the 90-day-plus past due.

We don't believe there's much, if any, loss in that past-due category, but the nature of the business actually promotes that amount of past dues.

The balance primarily is the normal course of business as far as we are concerned.

We haven't seen a lot of change in that.

We have a real estate loan or two that is in the nonaccrual category, but we think we're properly reserved for those and have done what we needed to do to protect ourselves.

Okay, so with the bulk of the increase coming from the mortgage warehouse, what are your expectations around loss content there?

Any risk, given that increase, because it's just a pretty sizable jump?

Again, we properly reserve, we believe, every category within that 90-day category past due, and we have what we believe are proper reserves today behind that portfolio that in effect is in our held for investment portfolio.

We would never say that there would never be any additional loss in that portfolio, but we do believe to date, based on our visibility, that we have it properly reserved, along with the mark-to-market.

Okay.

All right.

And then secondly, if I could just touch on loan growth, you indicated that C&I loan growth accounted for about 75% of the growth.

Was that on a linked-quarter basis?

Yes.

Okay.

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

Sure.

Demand has been pretty good.

We are in a very competitive market, obviously, but our demand has been pretty good.

We actively attack the market in terms of trying to bring business to the Company.

These are our typical middle-market customers that we have been trying to attract since inception of the Company.

They are companies, basically, that are privately owned, topline revenues of $5 million to $150 million typically, that need operating lines of credit, expansion capital for facilities, warehouses.

On the commercial side or on the commercial real estate side, they would mirror the middle-market area on the commercial side, too.

They look like middle-market customers.

But the commercial side is basically just that.

Okay.

And then on the deposit side, just one question there.

The nature of the deposits moved on the balance sheet in the quarter, I know you mentioned they're large money market and CDs, etc.

Do you have any feel of the stickiness of those types of deposits, just given that we have seen quite a bit of volatility in your deposit numbers lately because of some larger relationships?

Just want to get an idea if you have some sense or some color around what moved on to the balance sheet this quarter.

No, as Peter mentioned, they're all basically customer deposits.

We don't believe there's a lot of hot money within those totals.

We have significantly reduced in our deposit set reliance on wholesale funding.

We deal with a lot of larger customers that keep large deposits and actively use our [euro] branch.

But again, we feel very good about our deposit growth in Q3.

John, some of volatility that you referred to I assume relates back to the second quarter, and in the second quarter, we had the tax date, and we had some large customers who had large tax payments.

So it isn't something that was out of the norm or not anticipated, and I think what we have seen since then is just a resumption of kind of the normal growth in deposits.

Erika Penala, Merrill Lynch.

I just wanted to get some clarity on the guidance.

Last quarter's guidance had said that margin would be essentially flat except for the effects of strong growth on funding and DDA.

Does that take into account any reduction in Fed funds?

The guidance we gave did anticipate a reduction in Fed funds.

We could not have predicted with reliability that it would go from 5.25% to 4.75%.

We saw the effect of that, Erika, for just the last half of September.

But with the dramatic improvement in earning asset composition, we also said that the guidance, the margin would be heavily dependent on ability to grow DDA, which did occur in the quarter.

So it's a combination of composition of funding, DDA growth.

As the world knows, there's been now some widening of the spread between LIBOR and the Fed funds rate, because 20% roughly of our floating-rate portfolio is LIBOR related.

We benefited from that.

And is the improvement in the earning asset composition enough to stave off any pressure from floating-rate repricing in the fourth quarter?

Because you mentioned the effect of the reduction in Fed funds was only for some part of the third quarter.

Right.

We have -- a very substantial portion of the loan portfolio does reprice effective date of change, but as we have grown and we've emphasized over and over again, the liability structure has changed dramatically as well so that it reprices much more rapidly than it did even a year ago and certainly much more rapidly than it did two years ago, as the Fed funds rate came off of the 4% level.

I also have a follow-up question.

It was mentioned a couple of times during the call that you are seeing weakness in single-family.

Is that translating into concerns in your construction portfolio or do you remain -- is everything fine there?

At the end of the third quarter, we feel very good about our construction portfolio.

We have very few problems in the construction portfolio today, either in the single-family portfolio or in the commercial real estate portfolio.

But we are reflecting, really, our thoughts as it relates to more of a national housing market and what kind of effects are we going to see in the state of Texas from some of those reverberations.

Again, we feel very good about what's going on today.

We've seen a lot of movement nationally and some locally in the starter home market, where we see a lot of those problems happening.

We have a very small starter home portfolio.

It's less than 1% of the entire loan portfolio in the Company.

And we have virtually no problems in that particular portfolio.

So we feel, today, we feel pretty good about our construction portfolio.

Erika, it's also estimated that in the single-family residential arena, the inventory in Texas is about 6.5% versus about 10% in the rest of the country.

And with the decline that we have seen in permits and starts, hopefully we will be approaching equilibrium between supply and demand sometime late this year or early next year, at least in Texas.

Brad Milsaps, Sandler O'Neill.

Good quarter.

Just kind of refresh my memory for a moment.

You guys may have gone over this and I missed it, but when will the earnings from discontinued ops begin to fall of?

Can you just give me an update on the divestiture of the mortgage company and kind of when we will see that fall off the income statement?

This is Peter.

I think when that happened, and I'm focused now on the March deal, we set up reserves for everything that we thought could hit us.

What we did not anticipate was the collapse in the overall mortgage market.

And that has resulted in weakness in our ability to get rid of the few remaining loans that had been there.

You may have seen all kinds of circulars about accounting guidelines and forced mark-to-market of loans that are held for those kinds of loans that were in the discontinued portfolio.

So that has increased.

I can't say that we won't have some hangover effect, but we believe after this quarter, it will be nominal and not certainly important to the results.

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

That's correct.

Okay.

In terms of the mortgage warehouse, I know it's -- I don't want to put words in your mouth, but just curious, if you wanted to power down that division, can you give me an indication of what the EPS hit might be and how you would think through that?

You've shown in the last year or so that you guys have been pretty aggressive in jettisoning off businesses that are either taking up too much time or just don't make sense for your long-term strategy.

I will address that quickly.

We have been in the warehouse business for the last six, six and a half years, and we have made a lot of money and had a lot of success in that business.

And we don't believe it's a business we should exit at this point in time.

As I mentioned when I talked about it before, it's certainly down from where it was.

I think at our peak, we were roughly $250 million in average loans.

It's $118 million today, and I mentioned it probably can go lower.

Hopefully, it can be rectified in a reasonable period of time.

But we think long range that's a business -- the way we do it, it is a business we want to stay in.

But we can adjust our costs in various ways in that particular area.

We can do that.

But we don't have a desire today to in effect, as you say, jettison that business.

We think it's one we want to continue to be in.

But again, underwrite it properly, make the changes that the market demands today, and that's what we think we have done.

As I mentioned before, the way we underwrite today on a go-forward basis, it's basically Freddie and Fannie, that today we believe it's still very salable in the marketplace.

I don't know if that answers your question, but that's --

No, fair enough.

Near term, are there steps you could take?

It sounds like you feel like on the expense side, you've got some maybe leverage you can pull to sort of make the hit maybe not as severe as it -- not that it was real severe this quarter, but maybe not as severe as it was.

Yes, there's probably some ways.

Again, we can do that.

It's not a big number on our income statement as it relates to the expense of running this business right now.

So we will certainly take a look at that, and it will depend, again, on how low the average outstandings go on this kind of business, and we will certainly make adjustments the way we feel we should.

Brad, this is Peter.

It's a business that, if you have seen in that line item, doesn't produce very strong spreads.

We get additional benefit from transactional volume, which has been down, of course.

But the core business today is profitable.

Finally, Brad, we did ratchet down the amount of loans that we have had in the warehouse by making the criteria for approval much more stringent than it was.

So any new loans coming in the warehouse should be in very, very good shape.

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

Yes.

Fair enough.

Jennifer Demba, SunTrust.

A question for you.

When do you think -- you've had incredibly strong loan growth this year.

When do you think that might start to taper off a little bit, given you have slowed down your hiring over the last few quarters?

As you can tell at the end of the third quarter, we certainly haven't experienced that yet.

As we told you earlier, we, for a number of reasons, are going to use up some of the capacity we have in the Company.

We still believe we have capacity in the Company to continue certainly for the near term and generate good growth in the portfolio.

I think one of the bigger questions in terms of loan growth today, just the market -- what will the market give us in terms of loan growth?

Where does the credit issues impact the market to a certain extent, not necessarily impact us, but the just the market itself?

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

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

You know, it's hard to tell.

60 days is really not an accurate measurement, so to speak.

It's a little early to make that determination.

It would not surprise me to see that happen somewhat, but it's really a little too soon to make a judgment on that.

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

That's right.

Jennifer, really, we look at this, to a certain extent, as an opportunity.

If and when some of this happens with our competitors and they began to slow down somewhat and maybe pulling their horns a little bit, we think there's going to be some talented bankers out there that will want to make a change, and we are opportunistic, and we look forward to having an opportunity to attract some of those bankers.

Brent Christ, Fox-Pitt.

Just a couple of follow-ups on a few topics you guys already touched on.

First, in terms of the margin and the impact from the Fed rate cut, obviously it was late in the quarter.

Has there been any internal analysis that you guys have done that you could share with us in terms of what your near-term expectations are for the impact of the Fed cut on your margin?

And then maybe any offsetting factors, whether it be lower mortgage warehouse balances or a continued reduction in deposit costs?

Brent, it's never occurred to us to do any analysis on those things.

(multiple speakers) that you could share with us?

Now that you've suggested it, we'll get right on that.

Of course we have.

And as I said, we get very rapid repricing now on both liabilities and assets.

So while the effect on the full quarter was not great, it's the last half of September produces evidence that is constructive.

As we have told you in the past, we're not going to be good about giving guidance on quarterly margins.

There are a lot more variables at play.

DDA is a very important one, obviously, composition, obviously, and the effect for the first time now in a year of seeing a profit margin improvement in our fixed-rate loans, our LIBOR loans and our securities portfolio and leases.

So we have a lot of things going for us in that regard.

And as I commented a minute ago on the call, you look back to Q4 of '05, and our margin is 3 basis points higher than it was then, and at that time, the Fed funds rate was 4%.

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

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

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

Just a follow-up on the credit question.

I guess your comments about a softening economy seem to be speaking about the national economy as well as Texas a little bit.

But is there anything in your portfolio outside of the loans in the mortgage warehouse that you are overly concerned about at this point or seeing any adverse internal risk rating migration with?

I think the answer to that question is no.

There are always risks in the portfolio, and we monitor those on a daily, weekly, monthly and quarterly basis.

We're fortunate to be in Texas.

Texas is performing well, with the exception of the one sector that is getting all the attention, and that's single-family housing.

And I think the whole nation is in sort of uncharted waters as it relates to that because we've never had a recession or a real major decline in business that's been driven by the housing market.

So I think all the economists in the country that I have looked at, they are looking for about a 2% GDP growth next year.

And if that is true, Texas should do a little bit better than that.

Brent, we certainly are watching -- we're not immune to what's going on nationally in the single-family and the lot development portfolio.

We certainly watch that as one of the points of interest from our concern.

But as Jody mentioned, the nice thing about our residential portfolio, both single-family construction and lot development, is 95% of that product is Texas real estate.

So if we have issues based on what we see in the economy, we think the issues will be somewhat less than maybe other parts of the country.

Brent, to put it in perspective, we built the guidance in the plan for 2007 around the fact that we would have some losses.

Losses don't surprise us; losses don't scare us.

We have obviously benefited from a remarkable success in credit policy and having a net recovery for the year to date of $300,000.

But nobody is building plans and expectations around those kinds of numbers.

[Neil Cassidy], Morgan.

Great quarter.

I just wanted to call into question -- you have a large line of credit extended to a company called Home Solutions, and the loan amount seems to exceed the annual allowance for bad debt.

Can you just tell me how much exposure you have to that loan?

It seems like they are in violation of some of the loan covenants.

Home Solutions is a public company and we can't comment on our customers.

I think you would have to go to them for any answers like that.

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

I think you would.

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

(OPERATOR INSTRUCTIONS).

Andrea Jao, Lehman Brothers.

I just want to drill down on the funding side.

You showed good deposit growth this quarter, in contrast to some of your peers, and were able to decrease borrowed funds.

Do you think that continues into the fourth quarter and into 2008?

Andrea, we expect to have good deposit growth.

The nature of our business is driving that.

As George commented, we do get -- it can be a little lumpy because of the nature of our business, but over time, we have proven that we can grow the deposits very well.

Q2, you'll remember, we had some transactions with specific maturities and tax payments that Jody mentioned that forced a shift to borrowings, which were more -- in today's market would be more expensive than the deposits.

As George commented, 100% of the deposits were customer based.

We're now down to an insignificant number in terms of anything that looks like hot money or noncustomer or wholesale money.

Great.

Now, focusing in on deposits, could you give us a little bit more detail on are you seeing customer migration to higher-cost categories?

What kind of seasonal effects should we expect in the fourth quarter and then in the first?

Q4 has historically been a very good quarter in both demand deposits and total.

The market has gotten tougher, as we've said many times, on demand.

But we had a good quarter in that comparatively to peers, I'm sure, in Q3.

We have seen very good growth, of course, in the eurodollar accounts, but in those accounts, we have been very effective, for lack of a better term, rationalizing pricing based on the customer utilization of those funds, and we have seen a consistent improvement in the rates on that portfolio each quarter.

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

If that's the case, let me just thank everybody for being with us this afternoon.

We appreciate your questions and remind you to call Myrna Vance if you have any further questions.

We look forward to a good quarter in the fourth quarter.

We've reaffirmed our guidance, and we will look forward to talking to you either between now and then or at the next conference call.

That concludes the call, and thank you again very much.

Thank you very much, sir, and thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes your presentation for today, and you may now disconnect.

Have a good day.