Texas Capital Bancshares Inc (TCBIO) 2009 Q2 法說會逐字稿

Good day, and welcome to the Texas Capital Bancshares second quarter earnings release conference call and webcast. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note this conference is being recorded.

Now, I'd like to turn the conference over to Myrna Vance. Miss Vance, the floor is yours, ma'am.

Thank you very much, Mike. Thank you all for joining us today for our second quarter conference call. As Mike said, I'm Myrna Vance. I head up Investor Relations here, and I would invite any of you who have any follow-up questions to give me a call at 214-932-6646.

Now, before we get into our meat of the discussion today, I'd like 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, 2008 and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now, let's begin. With me on the call today are George Jones, our CEO, and Peter Bartholow, our CFO. After a few prepared remarks, our operator, Mike, will facilitate our Q&A session. At this time, let me turn the call over to George.

Thanks, Myrna. Good afternoon, everyone, and welcome to our second quarter earnings call.

In a challenging economy, our business model has produced very strong core earnings, driven by significant margin expansion, 49 basis points. Our already strong capital position was improved with a common stock offering of almost $60 million. With cash on hand, we redeemed our TARP-preferred stock, $75 million, in May of 2009.

We continue to place an intense focus on credit quality. We're pleased to say that asset quality issues remain manageable and are consistent with our expectations during this volatile time.

You've heard me say many times that out of chaos comes opportunity, and with that in mind, we continue to extend our growth strategy in all of our Texas markets. While many competitors are shrinking their balance sheet and not extending credit, we've been cautiously and selectively taking exceptional relationships from other banks. Loans grew 4% linked quarter and 24% compared to Q2 2008. And demand deposits grew 14% linked quarter and 41% compared to Q2 2008.

Big drivers of the loan deposit and income growth was our mortgage warehouse corporate banking business.

Now, Peter will discuss in more detail in a moment, but a few financial points to keep in mind. Net income from continuing operations of $6.5 million in Q2 was an increase of 6% linked quarter and 12% increase year-over-year.

Our bottom-line earnings in Q2 include our new FDIC assessment of $2.4 million, or $0.05 a share, our preferred TARP dividend one-time repurchase expense of $4.5 million, or $0.13 per share after tax.

As mentioned before, net interest margin increased from 3.39% in Q1 to 3.88% in Q2, or 49 basis points.

We had significant cost reductions in all our major funding sources, and our repricing initiatives that we've talked about a lot in the loan portfolio have improved our yield, particularly in the floating rate loan portfolio.

Now, let me turn it to Peter to go through some of the detailed financials.

George, thank you.

I do think the results are very good under very challenging industry conditions from which Texas is clearly not immune. We had solid growth driven by market opportunity that George alluded to. We've had major improvement in core earnings power. We improved operating leverage. Core earnings power previously masked by declining net interest margins has demonstrated much stronger results.

We reported net income of $6.5 million. That equates to $0.19 a share before the effects of the TARP redemption. It also reflects $2.4 million special FDIC assessment, or a nickel a share in the second quarter of 2009. Special assessment-- including the special assessment costs, the FDIC overall costs have risen sharply, $5 million or $0.10 a share year-to-date versus just a penny for the year-to-date 2008.

TARP redemption, I mentioned a moment ago, resulted in a $0.13 per share charge for the cash in the deemed dividend, resulting in the earnings available to common stock of $0.06 per share.

George mentioned the margin increase of 49 basis points. I'll discuss that in more detail in a moment, but it comes from much improved cost of all categories of funding, success in loan repricing that George discussed, exceptional DDA growth and growth in common equity compared to first quarter and the year-over-year number.

Turning to the next slide, credit quality -- the provision was $11 million for the quarter. We saw a modest increase in non-performing asset levels. We do expect credit costs to remain high but manageable with much-improved earnings power. Saw a small reduction in the ratio of non-performing assets of 1.91% compared to 1.93% at the end of Q1.

Increase in provision to $11 million from $8.5 million produced a $4 million reserve build and an increase in reserves of 48% compared to the year-ago quarter.

Saw net charge-offs of 47 basis points year-to-date, after a 66-basis point charge-off in the second quarter. We'll mention that over half of the second quarter net charge-off related to a single lease relationship involving fraud by a customer. George will discuss that in more detail. Excluding this fraud loss, the net charge-off ratio was 30 basis points.

Provision coverage to net charge-offs, excluding that fraud number, was just over 3.5 times. We saw solid loan growth despite a much more stringent credit standard, 3% linked quarter, loans held for investment, and 4% for total loans.

We saw exceptional deposit growth of 14% linked quarter, 41% year-over-year and a total deposit increase of 2.4%.

Growth in total deposits was much stronger at the end of the quarter, up over $300 million compared to averages due to a planned shift from borrowings to deposits as the cost of deposits came down dramatically in the quarter.

Capital position is obviously very strong, the tangible common equity ratio of 8.6%.

Saw common equity growth of 17% from the first quarter and 47% from a year ago. Obviously those result from the preemptive addition we made September the 4th, as the industry began its meltdown, of $55 million. Then we completed a 4.6 million share offering in May resulting in net proceeds of $59.4 million.

We completed the redemption of 75 million of preferred during May. We paid a cash dividend during the quarter of $500,000. We incurred, as I mentioned a moment ago, a $3.9 million noncash charge related to the redemption. Redemption resulted in a total of $0.13 effect on income available to common shareholders.

Slide 6, I'd say, again, we are very pleased with this performance. We've been focused on consistent improvement in controllable operating leverage. We've been demonstrating stronger core earnings power to mitigate the impact of higher credit cost.

Linked quarter growth of $5.4 million, or 31%, in earnings before taxes, provision and the special assessment. The net interest income growth of 18% in Q2 was exceptional. 28% from the prior year's quarter.

George mentioned we saw a significant increase in net interest margin, with good growth in both loans held for investment and (technical difficulty). Net revenue increased 16.8% from the first quarter, 27% year-over-year.

We saw strong growth in non-interest income, due primarily to the strength in the mortgage warehouse activity. As I mentioned, FDIC costs are clearly a significant drag to industry profitability, a total of $3.5 million, over $0.07 in the second quarter, including the special assessment of a nickel or $2.4 million.

Non-interest expense growth of 8% before the special FDIC assessment produced an efficiency ratio using that comparison under 59. For non-interest expense growth from Q1 , we saw an increase. I mentioned the FDIC assessment; the increase in incentive compensation, which is a variable expense and was increased in line with operating results; occupancy costs resulting from new quarters and the change in operations center location; and professional fees somewhat driven by the cost of dealing with problem assets.

Credit costs and non-performing asset levels obviously limit ROA and ROE. ROE is also, of course, limited by the very strong common equity ratio that we enjoy.

Turning to Slide 7, I'll comment a little bit more about the net interest margin. George mentioned we saw a 49 basis point increase in linked quarter and a 23 basis point increase from the year ago quarter.

We saw an expansion of yields on loans held for investment and loans held for failed loan portfolios, reducing an increase in earning asset yield of 18 basis points.

We saw, for the reasons cited, a contraction of the cost of interest-bearing funds by 35 basis points, resulting in significant part from the very strong growth in DDA and in equity.

With an asset-sensitive balance sheet, we see NIM improvement after the rates stabilized, and we enjoyed that this quarter, even though rates are very low. We also used in Q1 and through the second quarter borrowed funds to mitigate the effect of declining rates. In Q2 we saw a very favorable opportunity for repricing security deposits. Deposit growth was emphasized at higher cost funds and accomplished at rates well below 1%. We now have a situation where substantially all incremental funding costs less than 1%.

We also have the benefit of loan pricing improvement that are clearly taking effect. We see improved spreads to indices on new business and upon renewal of existing loans. We have floors on a significant portion of portfolios, both loans held for investment and for sale and levels well above historical spreads to prime or to LIBOR.

We've eliminated the 30- and 60-day LIBOR options where possible, resulting in a shift to 90-day LIBOR pricing and prime.

We entered Q3 in very good position. We expect net interest margin to be generally stable at the second quarter's [prime] levels. We see loan yield trends that are very favorable, with some expected fluctuation in held-for-sale yields and volumes. We saw significant contraction in LIBOR spreads during the quarter, but that now seems to have been completed. Total funding costs remain very low despite the shift in borrowed fund deposits.

Turning to the next slide, I'm going to comment briefly on growth. We saw $103 million growth linked quarter to average in held-for-investment, just over $530 million year-over-year, or 14%.

The held-for-sale growth linked quarter 12% was driven, as we commented before, by the increased activity in the mortgage warehouse lending group, which has been very profitable in both loans and fees.

For total loans, linked quarter growth of 4%, 24% were obviously very favorable.

George commented, and I have, on the remarkable growth of DDA -- 14% linked quarter, 41% over the prior year. Especially significant that the growth in DDA during the quarter on an average basis exceeded the growth in loans held for investment. This reflects the intense focus on deposit growth for every region and line of business. It reflects a major commitment to treasury management, (inaudible) and technology that are producing results.

The growth in total funds of 2% linked quarter and 5% year-over-year were evident.

Deposit growth was limited until the last half of Q2 for the reasons mentioned, namely the intentional use of borrowed funds to reduce funding costs until we saw maturity of higher cost deposits. We had a clear advantage to be exploited due to the asset-sensitive nature of our loan portfolio, and we did so. It was appropriate also for the nature of our growth, especially the short duration loans held for sale. We anticipated a reduction in deposit costs, and it was clearly realized.

Strategy reflected in growth at the end of the quarter, where total deposits increased by over $300 million compared to average for the second quarter.

Turning to the growth on a period-end basis, again, we saw loans held for investment of $4.2 billion, up 5%, over $200 million, from the prior quarter, reflecting, we believe, market opportunity and the seasonal benefit compared to the weaker Q1. We saw modest growth at the end of quarter compared to the average for Q2, but we see continued growth in Q3. The year-over-year growth of over $500 million (technical difficulty).

We saw loans held for sale growth [end of balance] just a $100 million below the Q2 2009 average level, [which] as we commented before, a highly liquid asset duration of less than two weeks. All total, DDA hit $730 million, a real high mark for us. Linked quarter and year-over-year growth were both (technical difficulty) represented a substantial portion both in loan [sheltering].

Growth in total deposits was very much planned. We saw linked quarter growth of $600 million in deposits, more than three times loans. Higher cost deposits, which were allowed to [mature] were then replaced at much lower rates. Lower cost of deposits has permitted a shift from borrowed funds to an emphasis on growth and deposits.

Earnings pages Slides 9 and 10 I really won't comment other than to say -- excuse me, 10 and 11 -- that this is clearly a strong growth model, and improvement in them that shows the advantages of what we've accomplished in controllable operating leverage, strong CAGRs for both loans and deposits. Where we have some deposit experience, it's even better than the CAGR. Additions did not change the view of our business model, and we believe our market opportunity remains very favorable.

George?

Thanks, Peter.

If you turn to Slide 12 and look at our loan portfolio statistics, our chart on the left showing loan collateral by height really hasn't changed much since Q1. Composition and diversification remain quite good. We continue to reduce our exposure to residential real estate products.

On the credit side, non-accrual loans are pretty evenly split between commercial loans of $23 million and construction real estate loans of $27 million, with the $50 million total, excuse me, being 1.04% of total loans. Loan totals were basically the same as Q1.

When you add ORE of $31 million, we have $81 million of nonperforming assets or 1.91% of loans in ORE. ORE has increased by $9.6 million in Q2, offset by $5 million ORE sales, net increase in ORE of a little over $4 million. This increase really represented a single-family lot development project, undeveloped commercial lot, and the sales of $5 million were basically single-family homes of around $3.5 million and a townhouse property for the difference.

Slide 13. Our credit experience remains consistent with our expectations. We had net charge-offs, as Peter mentioned, of $6.8 million in Q2, with $9.4 million for 2009 year-to-date. Charge-offs were related to previously identified problems and were covered with allocated reserves.

Approximately 55% of the net charge-offs for Q2, or $3.7 million, was represented, as Peter mentioned, by one loan -- actually, a lease -- where we experienced fraud by our lease customer.

27% of the enterprise charge-off was the write-down of a lot development loan previously discussed that is now part of the ORE portfolio.

We had a small overall increase in NPAs, with the expected shift from nonperforming loans to ORE. Importantly, we have current appraisals to support the carrying values of all these assets.

Peter mentioned we provided $11 million in provision for the loan loss reserve in Q2, increasing the balance to 1.35% of loans held for investment. That provision is driven by methodology, including factors related to the challenging economic conditions. To give you an example of that -- one example would be the fact that we have moved the risk factor applied to pass grade loans, calculating the reserve adequacy, up 20 basis points since the beginning of 2007. You're looking at a significant portfolio. That's quite a bit.

Although we are experiencing weakness in our loan portfolio, it remains very manageable. We have continued to tighten credit standards due to industry and economic conditions.

If you turn to Slide 14 -- this really simply graphs our net charge-offs to average loans since 2005. The calculations show below represent what we believe to be an adequate reserve coverage of problem assets.

In closing, I'd like to leave a few thoughts with you that I think are extremely important. Texas Capital today has much improved core earnings power. We've seen a significant increase in margin being supported by a lower cost of funding coupled with the repricing initiatives in the loan portfolio.

Peter mentioned one of those initiatives relates to floors on 43% of our floating rate portfolio, with those floors averaging 5.1%. We've had good growth in loans and deposits as consistent with our initial plan.

We're particularly pleased with the 14% linked quarter average DDA. Growth of 4% linked quarter average loans also.

We have an exceptionally strong capital position, as we've mentioned today, after adding $115 million to the tangible common equity, making that ratio 8.6% tangible assets.

Tier 1 capital is 11.2%, and total capital 12.3%.

Credit quality weakness is in line with our expectations, as we've mentioned before. It certainly remains manageable.

And finally, we believe our market is well-positioned to take advantage of market opportunities for people and for customers. An example of that opportunity is reflected in our most recent hire of Bill Wilson, our new President of Texas Capital Bank in Houston. We're proud to have been able to attract Bill, and we're continuing to look for additional people to advance our brand in the marketplace.

I want to thank all of you so much for your attention these last few minutes, and all of us here at TCB significantly appreciate your support.

Now, we'll take a few minutes and open the call for questions. Myrna?

Operator, we're ready for our first question, please.

Yes, ma'am. The first question we have comes from John Pancari of Fox-Pitt Kelton.

Hello, John.

Good evening. One question around credit. Can you give us some color on the watch list trends in your portfolio and what you're seeing as well on the delinquency side, particularly 30 to 89 days? Thanks.

Yes, I think we showed in the 30 to 89 days of about $56 million in credit. We also showed, I think in our Q, about $18 million worth of potential downgrades and problems that could be occurring in the future in our portfolio. Some of those are included in that $56 million, but certainly we don't believe all the $56 million are problem loans by any stretch of the imagination. But that number today is about $56 million.

What was the other part of your question?

Well, the watch list credit. So I guess your potential problem loans, you said that was part of the Q, so that's older, that number? Do you have the updated number?

What was that?

I'm sorry. The potential problem loans, you had mentioned -- I was trying to get some color on watch list credits. I guess your potential problem loans at $18 million you just gave me, you said that's part of the Q, so do you have an updated number?

That was in the Q that we're filing.

Oh, okay. So that is the updated number. Okay.

That is the number. That is the updated number. You know, John, credit continues to weaken, frankly, across the country, and certainly Texas is not immune from all that. We've seen some deterioration across the board, but again, from our portfolio standpoint, it's all a very manageable number. And the numbers we talked to you about today, we've recognized everything that we possibly know of that can be downgraded, put on non-performing, written down, put in ORE. We are managing the process as we speak. But I think we're going to continue to see some weakness on an ongoing basis. Could see NPAs pick up a little bit. But again, we think that our performance will be at or better than the peer group.

Okay, and then, can you -- just in terms of the watch list progression and the 30 day to 90 day progression, is it more so moving into commercial realty than C&I and out of construction? Any trends there that you could talk about?

From our perspective, it's still weighted toward the real estate side. But I will tell you I do think that C&I is not going to be immune from this process across the board, not only in our bank, but in banks across the state and certainly across the nation. But again, we have great confidence in our underwriting. We feel comfortable in terms of where we are and that we can manage the issues as they do arise.

Okay, great. Thank you.

You're welcome.

And the next question we have comes from [Brad Rebotten of Synergy].

Good afternoon.

Good afternoon.

Wanted to ask, on the growth that you guys have in your loan portfolio, I'm just curious -- a lot of the banks in Texas have been indicating a lower level of demand, and so I'm just curious how you guys -- I know that there are also some banks that are looking to pair their exposure, and so I'm sure you're able to pick up some pretty good clientele from that perspective. But just how do you ensure that you're not essentially getting a credit from another bank that they're trying to get rid of just based on the fact that they're worried about their fundamentals?

Well, we again have great faith and confidence in our underwriting and due diligence ability at this company, and our credit policy process and underwriting has been what's kept us in good shape certainly up to this point, and we, again, have great faith in that.

We are, as I mentioned before, selectively and cautiously taking relationships from other banks that have, as you mentioned, either curtailed lending or slowed it dramatically. Many of these accounts are accounts that you probably couldn't get to move in the past, just because they were house accounts, so to speak, for some of these larger institutions. That's not the case today. Today, these accounts, like others, are looking for opportunities to be sure that they can get served in the future, and that's the real key for many of the great relationships.

We have had, though, much lower approval rates on our new clients. We're not certainly doing every transaction we take a look at. We do deeper due diligence today than we've ever done, certainly when times were better, and we're very cautious on a go-forward basis.

Okay. And do you have an estimate, George, maybe, of how much the new relationships were as a percentage of the growth? Or can you estimate that?

I'd say more than half would be new relationships. Again, we're seeing a number of our customers, existing customers, where their top-line revenues certainly aren't where they need to be. They're lowering those top-line revenues, not by choice, obviously, but by the economy. And people are downsizing their business. They're not looking for a lot of new opportunities for growth today. So much of the growth we see are coming from other banks with new relationships and new opportunities.

That's good to hear. I guess I'm concerned for many lenders that they end up essentially funding losses for C&I credits while the economy is weak as opposed to funding growth for new projects and that kind of thing. So it's good to hear a lot of it's relationship movement.

The other question I wanted to ask is just on land development locks and the properties you have in ORE. I've seen that the lot availability in Dallas in particular is up quite a bit even from the first quarter from an inventory perspective. And so I didn't know if you'd seen that impact where you were seeing values for properties. Can you talk a little bit about that?

Sure. Our ORE property is pretty well split 50/50 between single-family product and commercial product. The issues in the economy basically began with the residential property, and we've seen a few commercial properties weaken also, and they had to take in certain tracts of land use for future development.

I do think the lot inventory, certainly in North Texas, is way too much. I think we're going to have to work through that for the next couple of years. I do think it's manageable. I don't think that we're going to see massive reduction in values like you see in Florida and like you see in California. Definitely, the value is going to be less. They're going to depreciate in value. No question. But again, I don't think you're going to see the hole, so to speak, that the East Coast and the West Coast have dug on some of their projects.

Okay, great. Thank you.

The next question we have comes from Michael Rose with Raymond James.

Hi Michael.

Hi, good afternoon. How are you?

Good.

On the deposit growth this quarter, I know third quarter is typically a pretty weak quarter for DDA. How sticky is that, and how much of the DDA growth came from new relationships for the loan side?

Well, I'll tell you one from the DDA standpoint that we're very pleased with our mortgage warehouse group has, as you've seen from the last few quarters, been able to really garner a lot of new business, process a number of single-family mortgages. And they continue to do that.

We have been able to also garner deposits through the mortgage warehouse group. We today have almost $150 million and up in deposits, and we're getting close to half of that in DDA. So we've had significant growth in the DDA balances related to our mortgage warehouse business. Other than that, we've had good growth in DDA deposits out of our Dallas corporate banking area and our regions. We've had -- of the DDA increase we saw in Q2, 48% of it came from our regions outside of Dallas. So all that being said, we're getting extremely good coverage in production from the company as a whole, not just one or two specific types.

We are getting today four times more new treasury relationships than we had last year. We've mentioned before, I believe on this call, that we for the last 18 months have been ramping up our treasury process and making deposit growth one of our top priorities, and that's beginning to pay off, and we're seeing it in selling new relationships.

Okay, that's helpful. And can you give a little more color on the fraud busts? I seem to remember there was a fraud bust a couple quarters ago, and how do you guys think about preventing future situations like this?

Well, the loss that we took this time through our leasing -- nothing is ever totally non-preventable, but this was a unique situation with collusion involved, not by anyone in our company but by outsiders outside of this company. And it's extremely hard to detect that early on. And there were a number of institutions, financial institutions, involved in this also. This was a very difficult one.

But back to your question on just fraud in general, we're seeing more fraud today -- operationally and lending -- than we've ever seen before, but it's expected, so to speak, because in these kinds of times, people do very troublesome things. So we have an entire department dedicated to fraud detection and fraud prevention, and we're in the process of retraining all our people, from the relationship manager to the teller, in terms of fraud across the board. We're doing a lot more due diligence on individuals, individual relationships, those kinds of things. You cannot be too careful in an environment like we're operating in today.

Fair enough. And finally, if I may, can you give the loan growth by geography, similar to what you just gave for deposits?

Yes. Yes. We do. Just a second. We'll try to address the specific question you might have.

Okay, the warehouse on loans held for sale increased $116 million, or 21% on a linked quarter basis. Our premium finance group -- by the way, we haven't talked much about that, but they're doing quite well. They've increased $42 million, or 18%. The lender finance group, $32 million, 9%. Dallas corporate, as I mentioned before, significant. And our regions -- Fort Worth has done a great job, up 7%, and those are some examples of where we've seen good growth on the lending front.

Great. Thank you very much.

You're welcome.

And the next question we have comes from Bob Patten of Morgan Keegan.

Hi, guys, how are you?

Hi, Bob.

It's good to see a quarter like this after what we've been looking at for the last couple of quarters. I guess when you look at the margin -- I think everybody on the call is trying to figure out what the sustainability is, and obviously we understand the mix shift that you had with the repricing. How much of the mortgage warehouse deposits would you say -- and I know the question was asked -- are sticky? Are they growing? Are they a percentage of the loans that you're bringing through the conduit? How exactly do those tie, in terms of the relationship with the warehouse?

With the warehouse? I think they're very good, and I think they're growing. It's a requirement at Texas Capital Bank, if you have got a warehouse line that you have a significant deposit relationship with that line. As you know, many of the larger competitors have found the easy way to shrink their balance sheet is to reduce the mortgage warehouse group at their company. It's a 30-day activity. And what we have said is we want to provide that activity to credit-worthy mortgage customers, but we want to do it with a deposit relationship in addition to the loan relationship.

And I think what we see and what we feel is that certainly those deposits will stick around. We think that we have -- there's just not tremendous competition in that business today. We've been able to garner some great accounts. And we think that we'll be able to keep them and meet competition where they come -- when it does come. Excuse me.

We have an outstanding service level in the warehouse. Got a reputation for staying the course in a prudent manner. That's causing many relationships that have left some of these other banks that decided to turn (inaudible) off to move our way, and it's very gratifying. It's been a great business for us, both on the funding side and on the lending side. Our average coupon was about 4.9% last month, and our fees were pretty dramatic in that business. Very good earner for us.

Okay. And then you gave great color on the loan relationships. Any thoughts on the pipeline that's in process?

You bet. Our pipeline is good, and our deposit pipeline is good. We're approaching $100 million on both deposit and loan pipelines for the next 30 to 45 days.

Not bad, guys. Thanks.

You're welcome.

And the next question we have Andy Stapp with B. Riley & Co.

Hi guys.

Hello, Andy.

Most of my questions have been answered, but I just want to confirm that I heard correctly that the net charge-offs excluding the fraud situation were 30 basis points in Q2.

That's right.

Okay. And the increase in compensation expense that was due to the incentive accruals -- is that correct -- in linked quarter?

That is correct, Andy. They move in line with where we are relative to (technical difficulty).

So that's a good run rate? There wasn't a catch-up accrual in there?

Really not. The number -- Q1 is a weak quarter for us, so the effects of that can be that Q2 is much larger than Q1.

Okay. Thank you.

And the next question we have comes from Charlie Ernst with Diamondback Capital.

Good evening, guys.

Hi, Charlie.

Just a quick question for you. When you think about the mortgage warehouse business, what kind of expenses should we be thinking about for that business?

Well, the way we do it, it's a little more expensive to deliver the service because we've touched the product a lot. So our expenses -- if you look in the expense column, there is a fairly good number in there for increased mortgage warehouse expenses. I will tell you, though, Charlie, we are in the process of converting to a new software system, and we expect to convert in September, I believe, is the date. And that should significantly lower our expense there. Certainly our people expense. And it probably will take maybe through the fourth quarter to get it fully implemented, but we could reduce overhead fairly significantly in this business. And it's already even with the level of expense it's maintaining providing significant earnings to the company. But this will just improve it.

Okay. And then, lastly, I think you said it, but just while I have you, what is the outlook for the margin that you're saying?

Well, that's the surprise that that question's coming from you. We think it's relatively stable from here. The play that comes are we think we're still going to get some benefit from repricing, but we made a concerted effort to go from borrowed funds to deposits, which cost a little bit more. The loan held for sale yield can move in line with [ten-year], but we also are imposing floors in that line of business as well. And then obviously DDA growth. We have some variables that could move it up or down not very much from current level.

Okay, great. Thank you, guys. Congratulations.

(Operator Instructions). Miss Vance, gentlemen, it appears that we have no further questions at this time.

Thank you. I just want to thank everyone on the line for, again, dialing in, and the questions. Thank you very much for your support. We appreciate all that you do, and we at Texas Capital will continue to do a good job for our shareholders. Thanks so much, and look forward to seeing many of you soon. Thank you.

And thank you, sir. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.