Texas Capital Bancshares Inc (TCBIO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Texas Capital Bancshares Incorporated earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

And now I have the pleasure in turning the conference over to Ms. Myrna Vance, Director of Investor Relations.

Please proceed.

(technical difficulty) call me at 214-932-6646.

Now, before we get into our discussion today, let me read the following statement.

Certain matters discussed on this call may contain forward-looking statements, which are subject to risks and uncertainties and are based on Texas Capital's current estimates or expectations of future events or future results.

Texas Capital is under no obligation and expressly disclaims such obligation to update, alter or revive forward-looking statements, whether as a result of new information, future events or otherwise.

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 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 change.

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in the prospectus supplement related to the offering and the annual report on Form 10-K and other filings made by Texas Capital with the Securities and Exchange Commission.

We are currently undertaking a public offering of 1.75 million shares of our common stock.

Securities laws preclude us from commenting on that offering or taking any questions relating to that offering.

Now, let's begin the discussion.

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

After a few prepared remarks, operator Eucenia will facilitate a Q&A session.

Now let me turn the call over to George.

Thank you, Myrna.

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

Well, this has been another outstanding quarter for Texas Capital Bancshares.

In addition to achieving dramatic improvements in ROA and ROE, we experienced excellent growth in total loans, deposits and earnings.

We have a very strong pipeline in place to continue this trend.

This growth opportunity is the basis for our separately announced common equity offering.

This offering is consistent with objectives for taking advantage for what we believe is a significant opportunity to enhance our market share and competitive position.

As mentioned a moment ago, we have had continued strong growth in loans.

Loans held for investment grew 5% [late] quarter and 22% from Q2 2011, our deposit base 7% late quarter and 19% from Q2 2011, and earnings per share 9% late quarter and 73% year over year.

Return on assets and equity have reached record levels at Q2 of 1.4% and 18.1%.

We have continued to see our credit costs and nonperforming asset ratios come down in Q2.

Nonperforming asset ratio of nonperforming assets of the loans plus ORE was 1.35% down from 1.42% in Q1 2012.

I mentioned our strong growth in loan sales for investment, and we continue to have a good pipeline of transactions remaining for that segment of our business.

Loans held for sale, our mortgage warehouse line of business, continues to grow.

We are adding a number of new relationships, and they have been taking advantage of the market demand for this product that should extend through this period of low rates.

I'll be back in a moment, but let me turn the financial review over to Peter.

Thank you, George.

Beginning at slides four and five with the financial review, net revenue, net income and EPS were all very strong late quarter and year over year.

This resulted in very favorable performance, building on the season -- during the seasonally strong quarter on the great growth we had at the end of Q1.

In terms of core earnings power and NIM, this is exceptional performance again resulting from superior operating leverage and the improvement in credit cost.

Net revenue growth was driven by obviously growth in loans, with a relatively stable net interest margin.

For solid NIM, results in the strong in both LHI, loans held for investment, and loans held for sale has provided for us a much-improved composition of earning assets and the growth in net interest income.

I'll have more to sale later on the net interest margin.

We had good growth in noninterest income, primarily in the mortgage warehouse, also with loan swap fees and a gain of $400,000 from the sale of ORE.

In terms of the expense management, we've seen a significant reduction in legal, professional, problem asset recovery and ORE countering costs with the improvement in credit quality metrics.

Loan growth showed strength across a wide range of lines of businesses and regions reaching $6.2 billion at quarter end.

That's near record growth for us at $442 million or 77.6% from the very high level at the end of the first quarter.

Loan held for sale balances remained very high with a small increase from Q1 net of $100 million in average participation sold during the quarter.

Obviously we designed our business to build a larger customer base while managing the balance sheet concentration.

It's grown to $2.4 billion at quarter end net of $245 million in participation sold.

We expect strong performance in Q3, and we anticipate the addition of new customers and loan purchase participants in Q3.

In Q2 we had continued improvement in the funding profile with small growth -- with a small reduction in costs of both deposits and total funding.

The change in funding mix was very important with DDA growth of 10% from Q1 and 28% year over year in average balances, and reflecting the success of our treasury management focus.

The balance at June 30, I'll note, was $155 million or 8% above the average for Q2, also giving us a great start for Q3.

Credit quality costs and trends, the trends obviously remained very favorable.

Total credit costs, including ORE evaluation charges have improved 28% in Q1 and are down 53% from the year-ago quarter.

We've seen significant improvement in [MPA] and net charge-off ratios, and George will cover those in more detail.

On slide six, the quarterly income statement reflects excellent progression quarterly and in year-over-year growth in net revenue, net income and EPS I mentioned.

You see EPS growth of $0.44, with $0.76 over those five quarters, producing a five-year CAGR of 19%.

Obviously the performance is driven by the growth in held for investment and held for sale loans, coupled with very good spread and NIM.

Revision is approaching normalized levels and down sharply with improved outlook for credit metrics over the remainder of the year.

George mentioned that our ROA at 1.40% and ROA at 18.1% reach new record highs.

Slide seven, average balances, yields and rates.

Loan growth and the funding profile are drivers of a very high NIM and the growth in net interest income.

Loan growth has had a major impact in maintaining the yield on earning assets, compared to industry trends.

Yield reductions directly related to growth in LHI and LHS were noted, but they were very modest.

The effective use of growth in DDA and all deposits, coupled with the (inaudible) utilized borrowed funds to support bill-for-sale balances has obviously been beneficial.

We did see a minor increase in 5 basis points in the net interest margin in Q1 due exclusively or primarily to the growth and changes in health for investment yields and the effect of national mortgage rates.

We saw LHS yields down just 10% -- excuse me, 10 basis points, and held for investment yields at just a 6 basis point decrease.

Held for investment has grown by $1 billion from second quarter of '11, with yields maintained at almost 5%.

Pricing is more competitive, but we've been successful with yield-related fees, enhanced spread to index and [floor] protection.

I think this clearly demonstrates the benefit of our growth model, our strong growth in loans have had an impact on NIM not as a result of business weakness.

On average balances, on slide eight, you see held for investment growth has remained well above industry levels and ahead of our own expectation.

Held for investment growth at 5% for Q1, again, was building off of very strong growth at the end of Q1.

[EDA] and total deposit growth are strong in this seasonally important quarter, and late quarter growth in equity 20% annualized occurred because of very strong returns.

On slide nine on the quarter-end balances, we saw exceptional growth in stockholders' equity again of 21% year over year and 21 -- excuse me, 20% annualized in the second quarter.

As good as those numbers are, they did not keep pace with the growth in loans and did factor into the equity offering that we reported.

The excellent LHI growth that occurred over the course of the year leaves us in great shape for Q3.

We have a quarter-end balance of $284 million or 4.8% over the second quarter average.

We had very high held for sale balance at quarter end.

We do see that those balances build at the end of the quarter, but we kept them partially checked with an increase in participations sold of $245 million.

Obviously we've had very strong growth in deposits, especially in DDA.

I'll refer you now to slides 11, 12 and 13.

The CAGR and net revenue and net income are exceptionally high, 22% and 36% respectively, obviously driven by the growth in loans and deposits shown on slide 12 -- or 13, excuse me, and with the EPS growth CAGR and the six-month growth rates depicted on slide 12.

George?

Thanks, Peter.

If you look at page 14, this page really should be familiar to you, I'm sure.

The pie chart showing loan collateral by type with the credit quality overview on the right side of the page.

Our loans held for investment for approximately 72% of our loan book through $290 million in Q2 on an average basis.

As Peter said, from period end Q1 2012 to period end Q2, loan sales for investment actually grew $443 million net giving us a great tailwind going into Q3.

If you look at page 15, as mentioned previously, credit trends continue to improve.

Total credit costs of $4.1 million for Q2 compared to $5.7 million in Q1 and almost $9 million in Q2 2011.

Our provision this quarter of $1 million was a third of the provision for Q1, with net charge-offs of $533,000 or only four basis points.

We took an ORE valuation chart this quarter of $3.1 million.

That's down from Q1.

And as Peter mentioned earlier, we realized a $400,000 gain on sale of real estate for a net charge of $2.7 million.

Our nonperforming assets continue to decline as a percentage of loans, but they were up slightly in absolute dollars.

This represented one loan that we have well reserved.

Our ratio is 1.35% compared to 2.03% in Q2 2011.

We have also achieved a reduction in related credit costs that are consistent with the improvements we've discussed in the credit metrics.

Page 18 simply graphs the last five years of net charge-offs to average loans.

As you can see, we're returning to our historical level of charge-offs and our coverage ratios are quite strong.

I'd like to close the prepared remarks with the following thoughts.

We have strong core earnings, and the growth in those earnings and the growth in the assets should continue well through 2012 and beyond.

As mentioned earlier, we closed Q2 with strong loan growth that will give us a good start in Q3.

Improving capital position with our common equity offerings to support [prospectus] gross -- growth, excuse me, as reflected in the release.

Credit cost improvements have been exception, and all metrics reflect good improvement.

We have a strong loans held for investment pipeline that presents an opportunity for growth potential, certainly in the near term and beyond.

Loans held for sale balances could grow modestly with increased market share and benefits of the participation program we previously described.

We believe that our strong acquisition of relationship will continue, and the business model has produced and should continue to product industry leading results.

Well, thanks very much.

That's the end of our prepared remarks.

We'll pause and let you have an opportunity for Q&A.

(Operator Instructions) Your first question comes from the line of Brady Gailey with KBW.

Please proceed.

Hey, good afternoon, guys.

Hi, Brady.

Could you -- I guess to start off, could you update us on where the participation balance is at the end of the second quarter?

Yes, as I mentioned, Brady, it was at $245 million at the end of the quarter.

Okay.

We have commitments for more than that.

Oh, you know, I'm sorry, the [SNIC] book is what I'm talking about.

Yes, so it was $954 million at the end of March.

Relatively flat.

We're getting that number for you right now.

Okay.

But not much growth there.

And then the -- back to the warehouse participation program.

So it went from 72% to $245 million.

What were the fees associated with that program in the second quarter?

And where did those show up?

Did those show up in the --

The brokered loan fee line with the other file fees related to the warehouse.

Okay.

They weren't material.

Most of the volume in the participation sold occurred near the end of the quarter.

Okay.

Okay.

And then new loan yields, where are those or where did those come in second quarter?

Say again?

The yields on new loans, where are those running nowadays?

Spreads are still pretty good.

We're able to renew still with floors in the majority of loans.

Obviously we don't make new loans -- all new loans at a spread of [$450 million], but we really had no significant erosion.

Okay.

And then lastly on the capital raised, you -- obviously it's growth capital.

You guys are growing like crazy.

But if you could just expand on why you're raising capital.

You know, is that -- we've seen the new MPRs out.

We've seen a little more clarification on Basel III.

I mean, does any of that come into play?

I mean, your stock price is at almost an all-time high.

Does any of that come into the decision to raise capital today?

No, not really.

It's growth opportunity, the MPR, the Basel III looks to have like a less than 40 basis point impact on the total capital ratio.

It's less than $30 million, so it's only indirectly related because of the bias of the capital regs for equity instead of debt.

Not directly related.

Okay.

All right.

Thanks for the color, guys.

Oh, by the way, Brady?

Yes?

$987 million at the end of the quarter in syndicated loans.

Okay.

Thank you, Peter.

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

Please proceed.

Good afternoon.

Hi, John.

Back on the capital raised, can you just talk a little bit more around your decision to raise common versus dead?

Is it just given where your stock is here?

And then also how you came up with the amount to the raise to size just given what you're doing with the balance sheet?

I think you're going to have to return -- excuse me, return to the prospectus supplement that'll be out.

Obviously we're growing fast.

Equity pricing is favorable to us.

Taking advantage of the markets.

Okay.

And then, you know --

About 5% is all we're talking about, so it's not an exceptionally large raise.

Okay.

All right.

And then in terms of the growth in the warehouse, just what you're -- if you could talk a little bit about what you expect for that -- for the held for sale balances in coming quarters, do you think that could remain flattish given that you're now stepping up the participations?

Can you just give us some color on that?

Yes, this is George.

The -- you know, our goal really with the participation product is to right-size the concentration on our balance sheet.

The business -- we're able to develop a lot of business in the warehouse, but we manage everything by concentration limits.

We want to continue to grow our business, but we want to limit the amount that we keep on our balance sheet.

That's just risk management.

So we've created the participation program.

It will continue to grow as we continue to grow in terms of relationships.

I will tell you that we are adding relationships every month.

We are growing our outstandings.

As you can see, we ended the year at $2.4 billion, and we had $245 million participated, so you can see -- you can back into that number in terms of what really could be outstanding.

All of that is to say we like the business.

We want to continue to grow the relationship.

We're going to manage it in that 25% to 30% ratio that we're talking about on our balance sheet and be a real participant in this business.

Okay.

So based on that we could expect probably some continued growth in the warehouse held for sale balance in the coming quarters, but also some growth in the broker loan fees as you step out the participations.

That's right.

But, again, we are still in the process of approving participants and selling participation.

So while we are growing, we might not be growing a heck of a lot on our balance sheet, if you understand what I'm talking about.

Yes, I do.

This really does help us on a go-forward basis, as we've said before.

When rates do rise and volumes in this business begin to come down, the more relationships we have, the more customers we have, the more we're able to stabilize that income stream.

So that's our goal, and I think we've said that before.

Okay.

All right.

Thanks for taking my question.

You bet.

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

Please proceed.

Thank you.

Good evening.

Hi, Jenny.

Two questions.

One, can you just describe the nature of the loan growth, the held for investment growth you had this quarter?

And two, can you give us an idea of what your total relationship manager force looks like today versus a year ago and what the hiring opportunities are going forward?

Sure.

I'll take the first one first.

Where is the loan growth coming from?

It's coming, on a broad basis, from most all our regions and line of business.

The leader -- let's talk about loans held for investment now instead of growing loans for sale in there.

Energy leads the pack.

Healthcare, builder finance, which is our construction group we hired about 18 months ago to take advantage of regional builder needs.

Lender finance, which is more of a national business or regional business, they loan money to privately owned finance company operations.

And then our premium finance group has grown well.

We've taken on some larger insurance agencies that have larger customers, and we do see that business on the PNC side firming a little bit.

Not a lot but a little bit.

So that's kind of a broad-based approach, but that's where we're seeing most of it coming from.

Our RMs, you know, as we've said before, we had a real bulge, sort of speak, in hiring a couple of years ago.

Those people are becoming very productive today, and we're seeing them take a reasonable amount of market share away from the competitor.

We're still not seeing a real resurgence of organic internal growth.

It's beginning to show up, but we're not seeing it.

We're still taking business away.

Over, you know, gosh, I guess a year's period of time, we're up 11 in RMs.

We're developing a stronger-than-normal pipeline of RM recruits.

We're out in the marketplace continuing to try and hire the best.

I wouldn't say it's a heck of a lot harder to hire, but it is a little bit harder to hire.

Some of the other banks have firmed up and are not in the shape that they were a few years ago.

But we still don't have a heck of a lot of trouble hiring about who we want to hire.

Did I miss something?

What else were you asking?

That was it.

That was it.

That's all very helpful.

Thank you.

Nice quarter.

You bet.

And your next question comes from the line of Brad Milsaps with Sandler O'Neill.

Please proceed.

Hey, good afternoon, guys.

Hi, Brad.

Peter, just maybe another question on the warehouse.

Could you give me the mix, kind of refi versus purchase money?

And then the yield on that book maybe held up better than I thought.

Is that just really a timing thing as rates move down through the quarter?

And just kind of curious if maybe you could give me a little color on where that might head for the third quarter.

We've seen them fairly flat, but over the course of the quarter, even though they were down from the prior quarter, we're running close to 58% refi, and that's down from 68.3%.

Brad, our emphasis too in onboarding some of our new customers are customers that don't go after the refi business necessarily.

We're trying to build our book of new customers with people that have a great pipeline for the traditional mortgage origination, not the refi.

A lot of these companies that are 90% refi are going to go away when the rates go up and the refi business goes down, so we're building our book with people that don't necessarily depend on the refi business to survive.

Okay.

And then just another question on the loan loss provision.

I know you mentioned last quarter the majority of the $3 million provision was related to new loan growth.

This quarter only $1 million.

Just kind of curious if you could kind of give me a little more color and kind of how you feel about that going forward, considering the improvement you've had in credit.

It's a little more complicated, but the simplest answer, Brad, is that the improvement in the credit quality within the portfolio freed up more reserves than was needed for the growth.

Okay.

Nothing really different in the mix though in terms of the loan growth between the two quarters?

No.

Okay.

All right.

Great.

Thank you.

Nice quarter.

Thank you.

And your next question comes from the line of Scott Valentin with FBR Capital Markets.

Please proceed.

Good afternoon.

Thanks for taking my questions.

Just with regard to deposit growth, as you mentioned, it was quite strong.

Just wondering -- I know you focus on (inaudible) management, but I'm just wondering if it's one or two large relationships or anything special during the quarter that occurred.

And then just to correlate that, deposit fees didn't really increase that much compared to deposit growth.

Just wondering maybe if deposit growth occurred towards quarter end.

On the deposit growth side, we -- nothing really unusual, but we've seen continued growth in the warehouse.

The warehouse balances in that particular area are well over $400 million now, and about 70% of that is DDA, and we've had very good growth there.

We have also seen an expansion of our niche of broker-dealer deposit generation.

Remember, we've talked a lot about non-borrowing cash-rich lines of business that we target.

Our broker-dealer arena has expanded fairly dramatically over the last six months, and we've been able to onboard a number of deposits in that niche.

Those are just two areas that if you looked at more of the traditional lines of business, you know, it's a treasury and continues to bring in new deposits.

Energy, our correspondent division through correspondent banks.

So it's really fairly broad based, but the DDA component, a large part of that was warehouse because these are escrow deposits.

Okay.

And then that, I guess just the correlation with the fees, the fees didn't increase as much quarter over quarter?

The fees -- the costs are covered by balances for us more than they are fees.

Okay.

So a compensating balance is also at the fees, I guess.

Correct.

That's what people are doing today with all the liquidity that they have, rather than paying fees (inaudible) balance (inaudible).

Okay.

Thanks.

And then just a final question, and I'll get back in the queue.

Non-interest expense, if we exclude the OREO-related expenses, is that kind of a good run rate going forward?

I know professional expense was down, but it sounds like that's kind of a permanent level given the improvement in credit.

It can vary widely, unfortunately, but the only issue is that we build the incentive expense based on the performance, and with performance high, that number goes up.

Okay.

So I guess quarter to quarter there can be some volatility, but overall it should end up net-net.

There are no fundamental out-of-control expense category.

Okay.

All right.

That's helpful.

Thank you.

General business growth and incentive.

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

Please proceed.

Hi.

Good afternoon.

Hi, Brett.

Wanted to get a little more clarity if I could around thinking about the margin as we head into 2013, and just you obviously commented that you would have more of the growth and the health for sale portfolio be off balance sheet, so to speak.

I'm curious to hear any thoughts around if a mixed shift change towards health or investment might keep the margin from declining much, or kind of how you think about that.

We've got to be obviously very careful about that not to provide guidance, but the math works fundamentally the way you just described it.

Okay.

And then just also wanted to get a little more color around -- you commented some about loan pricing, and it's obviously a competitive market, but things are, it sounds like, holding up pretty well.

When you say floor protection, I guess I'm curious to understand if you're building in new loans of floors or your existing floors are holding up pretty good, or what you meant when you were talking about floor protection.

Well, if you look at our floating rate portfolio, we said about 60% to 65% of our floating rate has a floor.

We've maintained reasonably the same amount, same number of -- same percentage of the portfolio that we had before, but obviously the rates are down.

So we're in the [475], [480] range for floors today, where at one time we were well over [5].

We've kept the floors on most of our existing relationship, albeit luring them somewhat.

We are still able to get floors on some new credits, but it is getting quite competitive out there, and it's more and more difficult to do that.

But we've been able to get some.

I'd say maybe 25% or something like that.

Okay.

And then just one last question around the offering.

In the past you'd done an ATM and done it sparingly.

I'm curious was that just not going to be meaningful enough in your opinion to proceed with that, or was there some other reason why you chose to go the other route?

Nothing in particular.

What we had left is going to have to be refreshed.

It was only $27 million.

So you would have had to do that and had to -- we would have chosen to do that and something else.

This is just less complicated.

Okay.

Makes sense.

Thanks for all the color.

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

Please proceed.

Hey, good afternoon.

Michael.

I'm just trying to understand why the yields in the securities portfolio went up.

And then if you could comment on the size of the securities portfolio going forward.

Again, we're not going to give any guidance, but you can expect to see the securities portfolio continue to run down.

It may be that it was a [two] 30-day months has an impact on that yield.

Michael, as you recall and have heard us say, we're not adding to the security portfolio, have not added to the portfolio in a number of years.

In Q1 we had a repo that we used to secure a letter of credit for some other transactions that brought that yield down too, and that went away.

Okay.

Thanks.

Sorry if I missed that.

And secondarily, can you give some color on your loan pipelines, kind of where they ended the quarter, utilization rates and if there's any kind of geographic skew to the loan pipeline?

Thanks.

Well, utilization rates, I think I've said before, we are a bank that does not give lines of credit if we don't expect them to be used and used fairly fully.

So our utilization is always going to be higher than a number of others in the marketplace.

We don't do backup lines.

We don't do those kinds of things.

So we're going to have a higher utilization than most.

And your other question was?

I'm sorry.

Oh, it's okay.

Loan pipelines, where they ended the quarter versus last quarter.

And sorry if I missed it.

And then if there was any geographic concentration.

Thanks.

Realistically the pipelines are good, as I said.

The market share movement has continued.

Our relationship managers have continued to move significant amounts of market share.

It's not specifically tied to any one region or any one line of business.

If you exclude the warehouse, again, you're looking at energy has had a really good quarter.

You know, healthcare a really good quarter.

But no specific geographic regions outperform on a great basis.

Thank you.

And your next question comes from the line of Matt Olney with Stephens.

Please proceed.

Hey, guys.

Good afternoon.

Hi, Matt.

George, you've already addressed the new commercial lenders you've hired in recent years, but it seems like in the past you've provided some kind of aggregate capacity of those lenders and how much (inaudible) share you think they can move over to Texas Capital.

Do you have an aggregate number that you can provide for us?

You know, it's really difficult to put a number on something like that.

It differs with the line of business you're talking about.

It differs with the person.

I will tell you that it's all in the hiring process, and if you pick the right individual or group, they are going to outperform your expectation.

Those kind of people have brought much more than we anticipated they could bring.

It's really amazing.

We surprised ourselves.

We started the Company and had this philosophy of moving the best over with us.

We saw a tremendous amount of business just absolutely move with the individual.

We've built, as I've said before, Matt, some capacity into the Company because we want to be prepared and ready to compete, heads up, when the economy does heal itself.

And we have a reasonable amount of capacity in the Company today.

But you know, the RMs we hire must have strong enough relationships to move business and then produce new clients.

So it's all in the hiring process, getting the right people, putting them in the right place and moving it over.

But we've got a reasonable amount of capacity today by design.

Thank you.

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

Please proceed.

Hi.

Good afternoon.

Hi, Gary.

Just a couple of questions in term sort of the loan-loss allowance, you know, pre-credit crisis you guys were well under 1% in some periods of time.

You know, it's -- (inaudible) right now.

Where do you think reasonably in this environment you guys could take that down to?

Well, you know -- first of all, that [116], I think you're probably throwing in the mortgage warehouse piece.

I'm not sure if you are or not.

But we've been around [1.25], something like that, [130].

And it all gets to the methodology.

And we've just done an interesting exercise.

We have looked at the adequacy of the loan loss reserve through the most difficult times we could possibly imagine, and that's been the last five years.

But see, if in effect, the provisioning and the level of the reserve was adequate and we were identifying the problems and reserving them properly.

And that survey came back absolutely yes.

So what it tells us is the methodology we've been using for the last 13 years, i.e., it takes it higher, sometimes it takes it lower, but it has been accurate.

And that's how we manage the reserve process.

We live and die by methodology.

And the search we've done in the last two or three months have proved out that that's the way to do it.

In general response to your question also is that the economy is still not strong, so there are qualitative factors that go into the methodology that are likely to keep it from ever going as low as it did during the 2004, 2005 period.

Okay.

Thanks for that.

And then in terms of the mortgage warehouse business, can you kind of give us a sense and talk about the profitability of that business as a standalone entity, if you will, maybe with ROE would be on a fully loaded basis?

Because of the offering we need to avoid that.

What we have said in the past is it's obviously very profitable.

When it's growing rapidly it provides good operating leverage, and the fees should cover -- in high volumes, the fees cover our direct operating expense, not overhead, not space, systems development and the general requirement to support the corporation.

It is obviously much better than owning security.

Okay.

Great.

And then just one last question in terms of the timing of the offering, is that -- can you comment on that at all in terms of when you expect it to (inaudible)?

I think we need to encourage you to look for the prospectus supplement on that.

I apologize, but I think that's the case.

Our lawyers are --

Sir?

-- giving me the sign to don't talk right now.

All right.

Thanks for taking my questions.

(Operator Instructions) And your next question comes from the line of David Bishop with Stifel Nicolaus.

Please proceed.

Thanks, gentlemen.

Just a -- most of my question was answered, but just wondering if we could get some color in regards to the MPL inflow you mentioned.

It sounded like it was just one larger credit.

Yes, it was one particular credit that we had been watching for some time.

We had walked it down the credit scale.

It had been at a level that was just one particular level above where we put it today, so it -- the system worked right.

And we are anticipating a recovery of that credit.

We are not anticipating a liquidation or a severe problem, but we do have it -- what we believe is very, very adequately reserved.

And -- but they just hit some bumps in the road, and we think hopefully it's fixable.

Great.

Thanks.

And there are no further questions.

I'd like to hand the conference back over to Myrna Vance.

Please proceed with any closing remarks.

Thank you very much Eucenia.

Let me let George make any remarks he'd like, and then we'll end the call.

And any further questions, please let me know.

Thanks, Myrna.

And we want to thank you for taking your time to sit and listen and give us the questions that were very good.

We appreciate all your interest.

We're working hard at Texas Capital to return to our investors the level of income they deserve, and we continue to do that.

So thanks again, and we'll talk later.

Ladies and gentlemen, that concludes the conference.

You may now disconnect.

Have a wonderful day.