Texas Capital Bancshares Inc (TCBI) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Texas Capital Bancshares, Incorporated, third quarter 2003 earnings results conference call.

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

After the presentation we'll open the call to your questions.

Should you require operator assistance at any point, key star, zero on your tone dial phone and we'll be happy to assist you.

As a reminder, this call is being recorded for replay.

Now, I would like to turn the call over to Tricia Linderman, Director of Marketing and Investor Relations.

Thank you, Ron.

Good afternoon, everyone, and thanks for joining us.

We're here today to discuss Texas Capital Bancshares third quarter performance, which is being Webcast at streetevents.com and texascapitalbank.com.

As Ron mentioned, there will be a question and answer period following management's comments and Ron is going to facilitate those calls at that time.

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

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

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

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in the registration statement on Form S-3 as amended, relating to the initial public offering and other filings made with the Securities and Exchange Commission.

I would now like to introduce our team for today's call.

Jody Grant, Chairman and CEO, George Jones, President, our new CFO, Peter Bartholow and

, Senior Vice President of Finance.

And with that, I'll turn it over to Jody.

Good afternoon, everyone, and welcome to our first conference call post-IPO.

As you know, we priced on August the 12th, and I'd like to take this opportunity, in particular, to welcome new shareholders as well as analysts on both the buy and sell side who are following the company.

It's a real privilege for us to be a public company in the public arena.

We like the discipline of the street and we certainly hope that we will live up to our own expectations as well as yours.

I'd like, at this time, to just introduce Peter Bartholow with a little bit more depth and that he joined us on October the 6th.

So, those of you who met us on the Road Show or who have met us in the past have met George and myself, but haven't had the opportunity to meet Peter.

Peter comes to us with a great financial background.

He was the Chief Financial Officer of MCorp, which was a $30 billion company located in Texas, preceded by Bank One, or succeeded by Bank One, rather.

He then was the Chief Financial Officer of First U.S.A. and then joined me at EDS, where he was the number two person in the financial organization there.

So, Peter does bring a wealth of experience, and we're delighted to have him with us.

Before we get into the numbers themselves, let me just make a couple of comments about the Texas economy and about the performance of Texas Capital Bancshares from a 35,000-foot view.

The Texas economy, from all appearances, bottomed out in the fourth quarter of last year.

That's based upon the Federal Reserve's Index of Economic Indicators.

It remained sluggish or at, or close to, bottom for the next couple of quarters, but in recent months it has surged ahead.

The index of leading economic indicators has been up three quarters in a row now.

Employment was up 30,000 jobs in Texas in the last two months.

The unemployment rate has declined for the third straight month in a row after having bottomed out in May of 2003.

Austin and San Antonio, as measured by the unemployment rate, are the strongest economies in the state, although Dallas showed the largest decline in unemployment in September from August.

So, all of our markets are in pretty good shape.

We're going to go as the U.S. economy goes.

And for us to see the kind of robust growth that we've been expected to see here in the past, we're going to need to see that robust growth in the general economy as well.

But in this environment we have continued to produce solid performance.

Our earnings per share, we're up 54% year-over-year.

Our net income up over 59%, loans up 16% and deposits up 27%.

In terms of some key developments or key initiatives over the course of the last quarter, there are a couple I'd like to mention.

I think most of you know that we had plans to open a Houston office.

We did open an office in the third quarter in temporary space.

It was only on October 10th that we moved to our permanent headquarters there, so we've only been in a permanent facility for a little over a week and it's too early to get results from that.

But based upon what we've seen so far, we're pleased with our reception in the Houston market, and we've got about 16, 17 people down there working for us.

It's a pretty full crew.

We hired a whole team out of Wells Fargo as some of you may know, transferred approximately 11 people out of a major branch that they had there, including a top team of lenders.

These people have been together for some 20 years and have a good following in the Houston market.

And we complemented that with a team of senior lenders, primarily in the energy and real estate arenas at the moment, but we're hoping to acquire a first class commercial lender in the near future.

Secondly, we initiated a mortgage origination business.

That began, also, in the late summer and it's too early to have any results from it at this point in time.

We have about 17 people devoted to that operation.

In our typical mode, we look for first class winner people with track records.

We identified several of those people and brought them into the organization, most recently from

.

So, we're enthusiastic about that and delighted to have that team of people with us.

We also, in the third quarter, formed an alliance with a company out of Chicago by the name of DiMeo Schneider to provide wealth management products in the investment arena to our wealth management and private client groups.

This is an exclusive arrangement.

It's the first time DiMeo Schneider has done that.

And they bring a very sophisticated suite of products, primarily software-based, but supplemented by highly qualified people as well.

We also acquired the deposits of Bluebonnet Savings during the quarter.

This was one of those rare opportunities where we paid nothing for these deposits.

In fact, we were paid a fee of $275,000, which we're amortizing over the course of about a year to equalize the rate on the CD portfolio to market rates.

And finally, we launched a co-branded 401K product with the Princeton Group and that supplements, again, a suite of products that we have available to our products in the 401K arena.

In all, it was a very, very good quarter for us.

We're pleased with the results.

And I'm now going to turn it over to Peter Bartholow to review the finances with you.

Thank you, Jody, and I'm pleased to be part of this organization and look forward to meeting the group represented on the phone.

I've been fortunate enough to have conversations with a couple of you and look forward to a long period of a very successful and open relationship.

I want to touch base, first of all, on kind of a view that we have that it is our obligation to demonstrate that we are focused on value and sustainable performance.

I will touch on a couple of what we think are the key performance drivers and then go into, kind of, the basic details of the financial statements that we provided.

Foremost for us, as a lending institution or investing institution, is net interest income.

It increase 5.4% on a linked-quarter basis and was up 22.8% year-over-year.

The margin was compressed on a linked-quarter basis and year-over-year basis, due to the composition change in our earning asset portfolio, offset in the third quarter by a reduction in funding costs associated with the restructuring of liabilities that had been disclosed earlier.

Provision for loan loss fell to $475 from $1.6 million in the second quarter and $2.38 million in the year-ago quarter.

Other income was essentially flat with a good mix of business and trust, cash management services and insurance in mortgage origination business.

Salaries and benefits were off slightly.

Efficiency ratio increased slightly.

We'd like to point out that our efficiency ratio is compressed by the fact that net interest margins are low for us due to the asset sensitivity of our balance sheet and we are positioned to improve as we get the lift in earning asset yields that we expect.

The validation of our business model may better be reflected in the ratio of our non-interest expenses to earning assets or to total assets, where I believe we demonstrate that we generate what, for us, is the right mix of earning assets with a relatively low cost to support that in an institution that is not focused on retail and a lot of bricks and mortar.

Earnings per share grew to $0.14 from $0.11, or an increase of 27% and 56% on a year-over-year basis.

We've seen improvements in return on equity and return on assets.

Those, effectively, are constrained by the fact that we are still a new company, building, and don't have a mature base.

They are also, of course, affected by the asset sensitivity and what might be described as a hostile business environment to us.

We saw in the second quarter another rate decrease that had an effect on earning asset yields, as you all are certainly aware.

The balance sheet, loan growth was solid, as Jody described.

Securities portfolio had an increased weight in our profile.

Yields were, I think, unusually low during the third quarter because of the rate decrease that I mentioned a moment ago.

The increase in repayment on mortgage bank securities has also compressed the yield on that portfolio, but we believe we are well-positioned going forward.

Deposit growth was exceptional.

We've had very strong growth in demand deposits, 9% on a linked-quarter basis and 72% year-over-year.

Tier one capital ratios and other capital ratios remain strong and were obviously augmented by the equity offering during August.

Loan loss reserve is, in our judgment, in very good shape.

Reserve to loans, at 1.41%, has increased slightly on a linked-quarter basis.

Loans to non-performing assets also up slightly and reserve to net charge-offs at a very high level.

Credit quality indicators were all stable or, in some cases, improving.

Reserve balances leave us, we believe, very well positioned and we enjoy, I think, a reserve portion of which is unallocated that we left in very good stead.

In terms of the slides, we see the progression of asset growth year-over-year, producing an excess of 55% compound rate of growth.

Deposits are similar, 53%, loans 53% also.

Income at $10 million for the nine months, very strong over the comparable periods, and as I mentioned, improvement in the core profitability levels.

We are still, in the news release, following the pattern set in the prospectus disclosing adjustments that we think better reflect the operating and sustainable operating results of the company.

Those are described in detail on the footnotes that you'll see in the news release and are posted on the Web.

Jody commented on asset growth.

The next slide shows that growth on a linked-quarter basis for assets, loans and so forth.

We have had a substantial reduction in the loans for resale.

That is basically the mortgage warehouse.

George Jones will probably comment on the business issues related to that in a moment, but it is something I think is well understood in the company with an abatement of the refinancing boom that we have experienced over the last many quarters.

Deposit growth has been exceptional, other borrowing stable.

Substantially, all of the other borrowings carry the investment portfolio, which we described.

Stockholders equity has now grown to $165 million and an increase in book value per share.

I commented earlier on the growth of non-interest income on a linked-quarter basis and so forth, as well as the other key measures on the income statement for the five quarters ended September of 2003.

Loan composition, I mentioned a moment ago, has changed primarily because of the decrease in the loans held for resale in the mortgage warehouse.

We had solid growth in commercial construction and other categories.

Consumer lending, for us, is not a significant issue.

The reduction in mortgage lines, as I mentioned, was expected.

The pace of those also affected the yields in the investment portfolio.

Almost 90% of the investment securities are mortgage-backed securities.

It's definitely been very sensitive to rates.

In that portfolio we saw an acceleration of prepayments during July and August, some improvement in the month of September and this essentially balances out with the reduced rate of prepayment, balances, to some degree, the margin in the mortgage warehouse.

Selected financial ratios I've commented on, with net interest margin down two basis points.

I think people are aware that we saw some improvement in the cost of funds due to the restructuring of the liabilities.

The earning asset yields were affected by, as I mentioned, the drop in rates that occurred on June 25th and hit us for an entire quarter, as well as the increase in the securities portfolio as a portion of total earning assets.

You see return on assets and equity shown both as reported and as adjusted to reflect transactions that have been discussed in the past.

Efficiency ratio I've commented on.

It's part of a key performance indicator, something we're focused on.

It is effective, as I mentioned a moment ago.

We're impressed by the fact that net interest margin is subject to interest rate risk.

But it is not a pure measure of what we can deliver with the infrastructure and staffing that we have in place.

That ends the summary of our financial performance.

We're going to open it up for Q&A, but I think maybe George is ready to comment on questions that relate to the banking operations.

OK.

Operator, we'll be happy to take questions from the listeners.

Certainly.

If you have a question, key star, one on your tone-dial phone.

If you want to withdraw your question, key star, two.

Again star, one for questions.

We'll pause for just a moment.

Stand by for the first question.

And our first question will come from Andy Collins from Piper Jaffray.

Good afternoon.

Look forward to meeting you there, Peter.

Just a quick question on the provision run rate.

I guess you came in at about 475.

We were looking for over a million and I'm just wondering kind of what we might expect going forward.

Are we going to see additional, is that kind of the new run rate going forward?

And then I'll have a follow up.

Andy, George Jones.

How are you?

Good.

Really when you talk about the provision, obviously we have a methodology in terms of how we figure the provision and based on the quality of the portfolio.

When we looked at the economic conditions in our markets early on in '03, we expected a provision of expense sufficient to be an acceptable level and handle all charge-offs that were similar to what we had in 2002.

As you can see, credit quality through the nine months has proven, really, to be better than expectations.

And we determined that the reserve at third quarter was adequate and we provided a rather modest provision of relationship to history.

On a go-forward basis, again, we will look at the portfolio.

We will attach our methodology to it, and we'll provide what is obviously necessary to support, not only our growth, our charge-offs and what we expect to have in terms of problems going forward.

And then on service charges, I guess that dropped off a little bit against the prior quarter.

Just wondering what we can expect there going forward.

Is that cash management?

What is it that's really causing a little bit of a drop off this quarter?

Is it seasonal?

Andy, I'm not sure, in terms of the service charges, that there are any, we haven't been in business long enough to develop a lot of seasonal patterns.

That's a very good point.

And I guess one last question, are you seeing a lot more of the Bluebonnet type opportunities out there?

How many of these types of deals might you be able to do over the next year if they come available?

Well, no.

We're not seeing a lot of the Bluebonnet type opportunities in that that was one that was totally unique in that they were liquidating the company and the owner, and I say that singularly because there really was just one owner, was doing tax planning, wanted to liquidate and get out from under a federal charter.

So, we don't expect to see any more of those.

With regard to maybe the broader question in that is acquisitions.

One of the reasons that we wanted to take the company public and create a marketable securities was so that if opportunity presented itself we could be a player in the acquisition arena.

As you know, the expectations on the part of sellers and on the part of buyers is somewhat different and, candidly, we don't have any acquisitions teed up at the moment.

We're opportunistic.

We'll keep our eyes open.

If we see something that looks interesting to us like a Bluebonnet or something similar, we would be interested in it.

We're basically, though, not interested in taking dilutions.

Some of the analysts have pretty high projections for us, in terms of earnings next year, and it's hard to find another institution that is reporting those kinds of earnings or expects to.

Yeah, I think that's the right kind of answer.

And once again, great quarter, guys.

Thanks very much, Andy.

We appreciate it.

Next.

And our next question will come from

from Lehman Brothers.

Thanks very much.

Good afternoon.

Hi, Brock.

Hi.

If you could talk a little bit more about the margin.

A lot hinges on that trend, and the trend going forward, I was a little bit concerned about the margin number this quarter and had expectations of a rebound.

Are we likely to see any of that near-term or not?

Brock, I think that Peter was right in the dynamics that he explained.

To be maybe a little more specific, when we restructured the

portfolio at the end of the June quarter, we expected an impact of 16 basis points in terms of overall margin.

What we hadn't really fully contemplated at that time was the IPO and didn't even know the $33 million was part of our capital base.

And the challenge of needing to put that to work and also to leverage it in order to optimize earnings.

So we, opportunistically, added securities to the portfolio, brought the portfolio up to the levels that you've seen in this release.

Now, the strategy going forward is to make loans and make loans in lieu of adding securities.

So, we would expect that, and it's hard to predict margins as you well know, because of the many dynamics involved.

But certainly as the economy improves, as more of our CD portfolio reprices at lower levels and the continuing benefit of the restructuring of the repos, we would expect the margin to improve over time.

It's difficult to be real precise in that and that's probably about all we can say from a generic point of view at this point in time.

I think the trends should be upward and we're looking forward to that trend.

OK.

Thank you.

And the next question will come from

from SunTrust Robinson and Humphrey.

Good afternoon.

Hi, Jennifer.

Hi.

I was wondering if George could talk, in depth, about what the composition of the non-performing assets is now, specifically on the larger credits and your thoughts on recovery?

Sure, Jennifer.

Let me make a few comments on the non-performers.

At September 30th they were basically similar to where we were at June 30, '03, 0.99% of total loans.

The total of approximately $12 million of non-performers is composed of a couple of different categories. $11 million of non-performers, $1.1 million of government-guaranteed loans, which, by the way, are in the process of collection.

We've asked the government to pay those, so those should be paid off pretty soon.

I would tell you that about 60% of that $12.1 million, they're paying interest on a cash basis today, so they, today, have the capacity of paying interest.

We don't know how long that will last, obviously, but they are paying interest.

We are a secured lender and virtually all of the non-performers are secured.

We believe that we are adequately reserved on all the non-performing loans and we don't expect significant losses from those credits.

OK.

And can you kind of give us an outlook on what you expect for the personnel expense line in the first quarter ?

You made a lot of hires recently.

Are we looking for significant growth in personnel expenses from third quarter to fourth quarter ?

I don't think, Jennifer, this is Jody, that we're going to see a repeat, well, I know we're not going to see a repeat of the third quarter.

It was an unusual quarter for us because we launched Houston and we launched our mortgage origination business.

So, we took the total number of employees to about 371 from, I'm sorry, 271 from about 240 at the end of June.

That isn't likely to repeat itself.

We'll probably add, I would say, in the neighborhood of half a dozen to a dozen people over the course of the quarter.

And our target, with regard to those people, is focused, to the large part, upon income-producing people.

You know, whenever you add a significant number of income-producing people, you have to add a few support people as well.

But basically we're not going to do it unless we see that these people can add to the bottom line and do so within a relatively short period of time.

So, I think we've got our staff, bottom line, pretty well stabilized.

No major initiatives at the current time, no major new initiatives.

Thanks.

OK.

Again, the signal would be star, one for questions.

And our next question will come from

from Sandler O'Neill.

Good afternoon.

Just wondering if you could give us sort of your outlook on, you know, Peter mentioned that loans help for sale, that that did decline if you look at period-end balances.

Based on where that was at quarter-end and now we're into the first month of this quarter, what is your outlook on that number?

I know a lot of that is based on what happens with interest rates, but I guess I'm looking not just for how far that number goes down, but also how fast, if there's anything you could say on that.

Sure.

This is George, Kevin.

Mortgage warehouses, as you know, are categorized as the loans held for sale.

We have, in this quarter we're down about $65 million from where we were at the previous quarter, about a 40% decline in outstandings.

But as mentioned before, this is not a surprise.

We knew as rates increased our volume would decline and we'd plan for it, in terms for going forward.

We think, probably, we're in the category of where that bottom is.

We feel like we're about, today, where that should reside.

We shouldn't drop any lower than that.

And I would tell you that, even today, we see, in terms of how home sales have held up, particularly in the Texas area, we could see some slight growth in the mortgage warehouse business between now and the end of the year.

It will not be significant, but we can certainly see it stabilized at this point and possibly pick up a little bit from this point.

OK, great.

And if I could also just ask a follow up.

If you can refresh us on the mortgage origination business, I realize it's really still in its infancy and is probably not a significant number either on the revenue side and I'm sure it explained a big part of that expense growth.

But if you could just give us your sense on timing, like when do you think, what quarter will we see an actual line item, see income line items for mortgage origination or is this something that is over a year out?

As far as the mortgage origination is concerned, we started, as Jody mentioned, in late summer, early fall, got on track record people and we've been building the infrastructure and hiring the people up to this point.

And we're beginning to see production and income start today.

We obviously had start-up costs that would be booked this year.

We expect next year to virtually recoup all those costs.

We believe that it will be at break-even second quarter of '04 and it should be accretive to '04 earnings.

OK, great.

Thank you.

Good quarter.

Thanks, Kevin.

And that was our last question.

I'll turn the call back over to Jody Grant for closing statements.

Well, again, I thank everybody for being on the call.

We're very excited about our progress.

Again, we're very, very pleased to be a public company and look forward to many more such calls as this one.

We encourage all of you to contact the company at any time.

Either contact my office, Peter Bartholow's or Tricia Linderman.

Tricia can find any of us, as a matter of fact, but we'd welcome the interaction with you and want to give you as much information as we can, given our status as a public company.

Again, we appreciate our new shareholders and the following by the analysts, both on the buy and the sell side.

We're optimistic about the future.

Look forward to seeing and talking to all of you in the near future, and thank you very much.