Texas Capital Bancshares Inc (TCBI) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TCBI fourth quarter 2004 conference call.

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

At this time all participants are in a listen-only mode, however, we will be facilitating a question and answer session towards the end of today’s conference.

If at any time during our conference today you require assistance, please press star followed by zero and an operator will be happy to assist you.

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

I would now like to turn the conference over to your host for today’s presentation, Myrna Vance, Director of Investor Relations.

Please proceed, ma’am.

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

We're glad you could join us today to discuss our fourth quarter and year-end results.

I'm Myrna Vance, as Bill said, Director of Investor Relations, and should you have any followup questions, please give me a call at 214-932-6646.

Before we begin the call, I need to read a statement for you.

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 our annual report on form 10-K and other filings made by Texas Capital Bancshares with the Securities and Exchange Commission.

Now let’s begin the call.

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

We will make some prepared comments and then our operator, Bill, will facilitate the Q and A. Let me turn the call over to Jody.

Thanks, Myrna.

Good afternoon, everyone.

It gives me great pleasure to welcome you to this conference call, and also to say happy New Year to everyone.

It’s a particularly good year for us, because we have just come off what we consider to be a great 2004, and we’re looking forward to continued excellent performance in 2005.

Let me just cover a few highlights for you before I turn it over to Peter Bartholow, who will get into the financials in detail, and then George Jones is going to talk about credit quality.

My comments are going to be pretty brief, because Peter will do this in-depth, but debt income for 2004 finished on a high note.

We had a great fourth quarter.

Total income for the year was $19.6 million, which represented a 59% increase over the adjusted income for 2003.

Let me just say a word about the adjustments.

We got a tax credit in the second quarter of 2003 of about $5 million, and we entered into transactions that were stimulated by that, and therein lie the adjustments.

All have been fully disclosed in previous filings.

Our earnings per share for the year were 75 cents, which I believe is right on the consensus for the year, compared to 53 cents last year.

You will recall that in 2003, we successfully completed our IPO, so we are comparing apples and oranges in the context that there were considerably fewer shares outstanding in 2003 than 2004.

In the fourth quarter, earnings per share were 23 cents versus 14 cents last year, which represents a 64% increase.

In the area of loans and deposits, we had excellent growth in all categories.

The only highlight I'd like to particularly mention relates to demand deposits.

We had an extraordinary experience both for the year and for the fourth quarter as it relates to demand deposits.

For the year they were up 32% on a linked quarter basis.

Looking at the last day of the quarter, we were up 23%, and that translates into 91% annualized, but if you look at it on an average basis, the linked quarter increase was 11.2% annualized to about 44%.

So, that's the kind of performance that is hard to beat and is highly gratifying to us.

Our net interest margin benefited from both our loan growth and the increase in the Fed funds rate beginning with the June 30 twenty-five basis point increase and the five subsequent increases.

Net interest margin increased from 3.07 to 3.55 for the year, and that represented a 48 basis point increase.

So, looking at it in the context of the 125 basis point increase in the Fed funds rate, we captured about 40% of that in terms of net interest margin.

Finally, let me comment on return on equity, 12.5% in the fourth quarter versus 8.5% a year earlier.

Again, reflecting increases in interest rates and increases in deposits and loans, but, again, particularly in demand deposits.

In terms of other highlights, I would like to point out and highlight activities in Houston and particularly in the energy group in Houston and as it relates to residential mortgage lending.

Both of those activities were begun in mid-2003.

They had progressed very nicely.

In Houston, in particular, we finished the year on a very strong note both in terms of deposits and loans.

We now have 20 employees there.

In particular, I would like to highlight the fact that in the closing days of 2004, we hired a team people out of Guaranty Bank.

These people are energy lenders, they are deep in experience, two senior lenders and a junior lender, and we’re delighted to have them with us.

We are now looking for an engineer to complement them in Houston, and we expect that they will add significantly to our efforts in that market.

We also in the last month of the year hired a commercial lender in Houston.

We had not had one since our inception in 2003, so the exceptional loan growth we experienced in Houston in 2004 was without having the benefit of having a commercial lender on board.

With regard to residential mortgage lending, this is the only activity that is -- in terms of geographic scope -- outside of the state of Texas as well as within Texas.

We now have 27 offices in 14 states.

That activity employs 188 people as of the end of the year.

We started the year with 35, so we added 153 people.

I might point out that about two-thirds of those people are commissioned and the other third are salaried employees.

Importantly, in the last quarter of the year, on November 1, to be precise, we acquired seven retail offices in the Seattle, Washington area, comprising of some 50 individuals.

This was an opportunistic expansion for us.

It wasn't on the radar screen, but we feel that it was very important in terms of our strategic initiative here.

But it does delay our ability to turn the corner and be in the black as it relates to this activity.

In terms of retail mortgage lending, the only other comment I would make is, I just want to remind you that we are releasing all the servicing and we don’t hold these loans in portfolio.

They are for sale.

The average duration on our books is less than 30 days, so that reduces the risk and the variability that others who have been in various elements of the mortgage business have experienced.

Moving on to credit quality.

Our credit quality, as George will elaborate on in more detail, was excellent during the year.

We finished the year with charge-offs of 0.05 of loans and leases outstanding.

The actual number was $717,000 for the year, but that included the settlement of a long-standing dispute related to some leases that we bought in the early years of our existence.

That settlement was about $488,000 .

If you take that out of the total, our real loan losses were $229,000 for 2004, and we don’t think it gets much better than that -- it can’t get much better than that.

Finally, we are well positioned as we enter 2005.

We come out of 2004 with a lot of momentum.

Our balance sheet is well structured to take advantage of rising rates and we believe that that will continue, and we will comment a little bit more about that later on.

Now let me turn it over to Peter Bartholow to discuss the financials in a little bit more depth.

Jody, I appreciate it.

Again, I think it is very clear that we had an outstanding quarter and year.

Growth and income was, to put it quite succinctly, exceptional.

It is driven, as Jody commented, by a very substantial loan growth and an improvement in the last half of the year in our net interest margin as the Fed began to increase rates.

The net income of 6 million for the quarter and just under 20 million for the year is actually a touch ahead of consensus, when we use the actual tax rate experienced by us in the fourth quarter of 33.5% versus estimates generally in the 32 to 33% range.

EPS was also slightly ahead of consensus when we use actual number of shares, which we'll comment on or we'll see in a moment, and the tax rate, as I just commented on.

Jody mentioned the very substantial improvement in return on assets and return on equity.

Those are consistent with the benefit we’ve enjoyed from rising interest rates, which we will explore in more detail in a moment.

Loan growth has been commented upon.

Growth in earning assets and, more importantly, the shift in earning asset composition, was clearly an important element of net interest margin.

At the end of the year, or in the fourth quarter, average loans were 67% of total earning assets versus 32%, or just over 32% in the fourth quarter a year ago.

We expect composition shift to continue throughout 19- -- or through 2005.

Rate trends were certainly very positive during the last half of the year.

You will note that the December increase had minimal effect, but certainly puts us in good stead as we begin 2005.

I'll comment more about our basic business model in a moment, but you will see that we had substantial improvement in all measures of performance and key business drivers.

Composition of earning assets I mentioned.

The growth in non-interest expense was affected by major elements, which Jody has alluded to, and we’ll talk about it more later.

A continuation of general build-out, which is, for us compared to many of the companies that we know and follow, is substantially greater.

We simply don't grow through acquisition, we grow through expansion and hiring of key people.

Growth in RML that Jody alluded to was an important factor in fourth-quarter expense growth, as was the growth in commissions generated from gains on sales of loans.

Incentive compensation was also a major factor in the fourth quarter.

When you factor in incentive compensation that reflected our overall performance and increase in expenditures for RML, you allow for approximately 80% of total increase on a linked quarter basis (indiscernible) expenses.

Getting into the financial review on slide 7, this is simply a five-quarter progression of the key elements of our income statement.

A linked quarter growth and net interest income was 10%, almost 11%, net interest income 39.4% versus a year ago quarter, and 40.6% for all of 2004.

Margin improvement essentially -- especially in the last half of the year, essentially, as we’ve noted, driven by increase in Fed funds rate and the improvement in our earning asset composition.

Provision expense reflects a significant improvement in key measures to credit quality throughout the year, which George Jones will comment upon further.

Solid growth in all non-interest income categories, we saw a substantial improvement in the level of gain on sale of loans from RML.

Net gain in the expense category was offset by commissions that are associated with that activity.

We saw a growth in non-interest expense of 9% versus 11% on a linked quarter basis in net revenue.

Next slide, No. 8, is a depiction of our basic business model and demonstrates a consistent improvement in our key performance drivers and measures throughout the year, mostly driven, of course, by the improvement in net interest margin.

We had a general improvement in non-interest income to earning assets.

RML significantly improved that number because of the gain on sales.

We had exceptional credit quality result in a declining cost of maintaining an adequate reserve despite the cost associated with the build-out.

Income-to-earning asset improved consistently throughout the year.

We have, as we commented in the past, a very efficient balance sheet, but now approaching 95% on average of our earning -- of our total assets and earning assets.

We have a business model in the right rate environment, and as we mature within our lines of business, can clearly demonstrate a return on assets of 1.25% or better, and a return on equity of greater than 20%.

The next slide is simply a linked quarter and year-over-year quarter of key balance sheet data.

Nothing further significantly to comment on that Jody hasn’t already discussed.

A very substantial growth in deposits.

The next slide, 10, is the same presentation related to average balances.

Again, very substantial improvement in earning asset composition.

Linked quarter deposit growth of 4% and, more importantly, demand deposit growth a more impressive 11% on a linked quarter basis.

Slide 11.

A very strong demand deposit growth, again, certainly has an effect on our net interest margin, a 20 basis point improvement driven, of course, by the rate increase, shift in composition, and a slightly larger weighting of equity and demand deposits in total funding.

Five-year compound growth rate is obviously very strong on slide 12.

It, of course, is heavily influenced by the fact that we were new in operation in the beginning year of this progression.

But even when you drop the early years from the compound growth rate computations, the growth we believe reflects the market opportunity in our markets and the market share traction within each market in light of business that we have accomplished over the last year.

On slide 13, again, just the growth rate and operating revenue, interest income, non-interest income, and net interest expense, and with the growth in loans, earning assets and deposits, we’ve seen substantial improvement in revenue and profit.

We do expect more operating leverage in our lines of business and regions as these entities that have experienced substantial growth in the last year begin to bear more fruit, reach a higher degree of maturity in operation.

We remain highly asset sensitive on the balance sheet, 90% plus percent of loans are variable rate.

We have equity invested in real earning assets, not premises and intangibles, and the growth in the DDA and equity now mean that we have just in excess of $600 million in zero rate funding.

And with that, I will ask George to comment on credit quality.

Thanks, Peter.

As we have talked about before, credit quality improved during '04 and remains as I would call superior.

We’ve talked about net charge-offs of $233,000 in Q4, only six basis points, and five basis points are $717,000 for all of 2004.

Importantly, non-accrual loans decreased 0.37 of core loans.

Our non-perfomers decreased by 41% from year-end ’03, 14% from Q3 ’04, and 2.39 of core loans.

This is coupled also with substantial reduction at year-end of classified assets.

Our reserve is quite adequate, 18.7 million, with an unallocated reserve of 6.2 million.

We believe that is exceptionally strong when you take a look at the coverage ratios on the reserve and the unallocated portion, 1.23% of average core loans, a multiple of 12 times trailing two-year charge-offs, and a multiple of 2.6 times net charge-offs from inception of the Company.

In talking about the unallocated reserve at $6.2 million, the coverage is a multiple of 8.7 times '04 charge-offs, four times trailing two-year charge-offs, and 85% of all charge-offs from inception of the company.

This represents 102% of the NPLs at the end of the year.

The next page just graphically shows the excellent charge-off history for the company.

The continued improvement in non-performing loans and our strong coverage ratio we talked about a moment ago, our low loss allowance to non-performing loans of more than three times in '04.

Very, very good year as far as credit quality is concerned.

I’ll return it to you, Jody.

Thank you, George.

On page 17 -- beginning on page 17, there are two pages devoted to guidance.

Let me just make a couple of comments related to this.

We did just conclude a wonderful year, but most importantly, we left the year with a lot of momentum going into 2005, and we would expect that these growth trends will continue during this year.

We should benefit from increasing interest rates.

We have in our plan about 100 basis point increase from where we are today to 3.25%.

As many of you know, there are forecasts out there that have Fed funds rate going to as high as 4.25.

I think the consensus is probably somewhere between 3.75 and 4% for the year.

Also, with the continued strong growth in loans, we would expect that our securities as a percentage of total earning assets would decline probably to around 27%.

That implies that the securities portfolio will remain fairly flat throughout the year as we continue to try to replace the runoff, which is now about $10 to $15 million a month.

We do expect to benefit from growth in non-interest income derived from a number of sources, but primarily from Treasury management fees and the continued growth of our wealth management activity.

We now have $475 million under management in that function, and that’s up about 125 million from the beginning of the year.

We also would expect the residential mortgage lending function to become profitable sometime towards the middle of the year.

We still have to absorb the acquisition we made in Seattle, but that’s coming along very nicely.

Expense growth will continue, as Peter said.

Keeping the growth going is dependent upon our ability to hire talented new people and, as we discussed on many occasions before, that's one of our major initiatives.

Accompanying these expected results, we should see continued improvement in the efficiency ratio.

Credit quality, as we said and as George indicated, our experience in 2004 was excellent.

Can we repeat that going forward?

We certainly hope so.

Given the visibility that we have today, we don’t see any credit problems looming on the horizon.

We’ll knock on wood and hope that we continue to enjoy this fine economy that we’re experiencing in Texas and in the country as a whole.

Net charge-offs accordingly should be less than 20 basis points.

Can we repeat again the 0.05 that we had for the year?

We hope so, and we’re certainly going to try to do it.

Our tax rate will be closer to 34.5% versus about 33.5 this year, and specifically the guidance that we provide you at this early stage of this year would be $26.5 million to $28 million.

We would expect to continue to see improvement in return on assets and return on equity as we have experienced in the past.

Finally, before we turn it over to you for questions, let me make a comment about an event that we expect to happen in the first quarter of this year.

I should preface this by saying that in no way does this change our guidance at all, but we don’t want you to be surprised.

The Board of Directors granted restricted stock units to the four senior executives in the Company, that being Keith Cargill, Peter Bartholow, George Jones, and myself.

These were granted with a six-year, straight line cliff vesting.

We have -- we had part of the vesting targets that related to the price of the stock, and we’ve vested to date up to 50% of those stock units.

The next vesting is at $20 a share, and the requirement is that the stock be at $20 a share for 45 out of 60 consecutive days to trigger that vesting.

We are reasonably confident that we will have another vesting, and this vesting is at 25% of the total shares granted sometime in the first quarter.

That will relate to a cost that will go through the P and L of about a half-million dollars.

Now the reason for that is that when these were originally put on the books, they were amortized over the six-year vesting period in accordance with GAP.

But as we have triggered vesting based upon the price of the stock, we have had to calibrate the charge with the amortization that has taken place, so (inaudible) occasion this expense that we’ll incur in all likelihood in the first quarter.

Again, I just wanted to give you a heads up on that and once again would like to emphasize it has no impact on the guidance that we’ve given.

With that, let me turn this back over to Bill for Q and A.

Thank you very much, sir. (OPERATOR INSTRUCTIONS)

Your first question comes from Michael Bruner.

Please proceed, sir.

Hi, this is Jennifer Demba at Robinson-Humphrey.

Hi Jennifer.

Hello.

A few questions, if I can.

First of all, on the mortgage business.

Just, Jody, kind of wondering what your thoughts are with regard to future expansion.

Will you take advantage of opportunities as you see them, or are you happy with the size that it is at this point?

Well, today, Jennifer, we have a network, again, that includes 27 offices domiciled in 14 different states.

That is circumscribed by an area that extends from Dallas westward to Phoenix, northward to Seattle, eastward from there over to Boston, and down to Atlanta.

We’ve grown this very rapidly and it’s our expectation that the growth will be slowed substantially in 2005, and we’ll allow the income to catch up with the expense line.

Okay.

And, Peter, I was wondering if you could give us an update on how many relationship managers you hired in fourth quarter, an '04 total, and what your goals are in 2005, if any.

Jennifer, I don’t have the fourth quarter number right at hand.

We will get that to you after the call.

Okay.

We started the year just at 65.

We said that we would be at 82 by the end of the year.

We have now 82 in what we would call the core bank.

We did not include in that original estimate of 82 the substantial growth that we have in RML.

RML essentially is a network of now two-thirds of 188 commission sales force generating product.

We would classify as equivalent to RMs, the office managers and the senior people within that organization George, and that might be a total of 25

Right.

or more people that would qualify in our definition of relationship managers, although they are different from the core group within the Bank.

Jody commented that we’ve had substantial growth in the fourth quarter and that expense -- that deal was closed in November.

We should note that we did not do that until we had become profitable in the core group of RML.

We proved that we were on the right path, we expanded significantly and expect to produce very strong growth in operating profit this year.

Okay.

Any thoughts in terms of goals for hiring this year, just lending relationship managers?

Well, we have a plan in place, and that plan encompasses a continuation of the trends that you’ve seen in 2004.

This is always, again, Jennifer, a major initiative for us.

We spend a lot of time on it and we anticipate having continued success in being able to attract top (inaudible) people.

Okay.

If I could ask a final question.

You obviously had a very healthy margin expansion over the last couple of quarters, and it sounds like you expect that to continue as Fed funds increase.

Can you tell us about the structure of your wholesale borrowings and how that may impact your margin going forward in the next several quarters?

Wholesale let me make sure we are on the same page in defining wholesale.

We’re down in the Merrill Lynch program that we’ve talked about over the years to just over $50 million, most of now what we would classify as deposits from bank -- or we would classify as deposits from Bank Direct at this point is core, because of the number of times those deposits have matured, rolled, the length of time they’ve been with us, and so forth.

The deposit growth that we’ve seen in the last half of the year has been core in customer driven.

We have a projection that says we will do extremely well again in 2005.

I think you’ll note for the first time that I have ever been told about, we had deposit growth in excess of earning asset growth during the fourth quarter.

We don’t expect that to happen again, but the gap between core deposits and expected loan growth is not going to be significant.

It can be comfortably handled in a number of different ways.

Thanks.

Good quarter.

Thank you very much.

Thank you very much, ma'am.

Ladies and gentlemen, your next question comes from Campbell Chaney.

Please proceed.

Good afternoon, guys.

I’m kind of following up on Jennifer’s questions on the DDAs and the deposits.

I notice some very strong growth in the DDA, I think Jody said 11% average DDA growth for the quarter.

Can we expect that to continue?

What I'm trying to get at is the lift-out strategy that you’ve been employing, are we starting to get some real traction from these relationship managers bringing in DDA accounts?

Is that

I think we are experiencing traction.

I believe, however, that there was seasonality in those numbers in the fourth quarter, and to expect that kind of trend to continue either in demand deposits or in total deposits I think is unrealistic.

I think a more realistic assumption is to extend the trend line in terms of the growth rate for the year, and I don’t think that’s unrealistic at all.

And if -- hopefully, we will have exceptional growth in the area of demand deposits, but this was an extraordinary quarter.

I can't tell you exactly why it happened, except that I do believe we've got a lot of traction in the marketplace and, again, there may have been a slight amount of seasonality in those numbers.

Okay.

Even with the average numbers, not period --

Yes, because the average numbers include December, and December was an extraordinary month.

Okay.

And then one follow up on the -- you mentioned your restricted stock expense for the quarter, and I also noticed in your third quarter options expense listing in the footnote was about a penny a share.

Can we expect that, or is that in your numbers for your net income, options expenses?

It's not in the numbers.

We're going to follow the guidelines that have been established, so we will begin expensing options during the year -- you know, options -- we live by equity incentives in an organization like this, so we will be continuing to extend options.

We’re in the process of hiring a consultant to advise us as to the most user-friendly, least cost method of rewarding our people and (inaudible) them with equity.

As it looks now, I guess from purposes of modeling, about a penny a share.

Would that be fair?

I think that’s a reasonable assumption.

Okay.

Thank you.

Thank you, Campbell.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from Scott Alaniz.

You may proceed.

Good afternoon.

Hi, Scott.

Hi.

Jody, could you spend a few moments and talk a little bit about the tone of the markets, the various markets that you operate in?

I would be happy to.

The markets are robust.

We were looking at loan growth from the other markets outside of Dallas, and for the year they accounted for about 54% of our total loan growth.

Can we expect that to continue?

We certainly expect continued robust growth from the other markets.

With the addition of the lenders that we mentioned in Houston, that should be our next area of significant growth, particularly out of the energy area, but in commercial lending as well.

All of the markets look good to us, Scott.

There are no perceived weaknesses.

Lockheed has said that they might lay off, depending upon what happens with regard to budget cuts, up to 3,000 people in Fort Worth, but that hasn’t happened yet, and Fort Worth has experienced extreme fluctuations in the aerospace industry in the past and they’ve been able to absorb them, so that doesn't concern us.

In terms of industry segments, we still don’t have an uplift in manufacturing in the state, but that’s all set by the very robust energy climate in the U.S., based upon prices -- that is, in the producing states, and particularly in Tarrant County with Barnett Shale.

Okay.

Second question.

I want to follow up on something that Jennifer had asked earlier, which was about the borrowings.

In your press release you have 635 million in an average balance for other borrowings in the fourth quarter and, maybe, Peter, if you could talk about the structure of those other borrowings as it relates to how those borrowings may, how the cost of those borrowings may move with respect to higher rates.

A portion of those, Scott, are locked, essentially, we’re carrying the securities portfolio with borrowings.

We have a net securities portfolio, if you will, a securities net of the related borrowings of about $300 million.

There are no other borrowing programs, for lack of a better term, other than those related to the securities portfolio.

We certainly expect the cost to rise as the Fed funds rate rises.

As you will note, I think among all the major players in the industry, the cost of funding has significantly lagged the Fed funds rate.

Banks are still in a catch-up mode on that.

That 

No.

That answers my questions.

Final question for you, Peter, also on the quarterly average balances.

I notice that the cash and other assets balance declined by about 20 million sequentially from 157 million to roughly 138 million.

Was that a seasonal change or was it something structural that you all have done with respect to the balance sheet?

There is nothing structural that we’ve done to accomplish that.

We’ve had substantial growth in deposits.

I guess it’s possible that we simply had a reduction in flows associated with those balances.

Scott, I apologize for not having a better answer than that.

But there is no fundamental anything we’ve done to manage the balance sheet to that effect.

I see.

All right.

Well, thanks a lot.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from Jay Cunningham.

Please proceed.

Good afternoon.

Hi Jay.

How are you all?

Doing well, thank you.

Let's see here, where can we start?

Just an easy one.

What is the head count, period end head count?

Five hundred and ten for the company as a whole, 322 of those were in the core bank, and 188 in RML.

Okay.

On the three new RMs that you talked about from Guaranty, can you give us an idea of what kind of production they might be able to bring over?

Well, they handle a very big portfolio at Guaranty Bank.

Some of that was, consisted of syndicated loans, where they were not the lead bank -- in some cases they were the lead.

We wouldn’t expect those loans to come over, but we expected a good performance out of them.

It’s difficult -- and I don’t think we want to start projecting loans by line of business, Jay, but suffice it to say, we’ve got $160 million or so in energy loans, 160 or 170 million, and we would expect significant growth in that overall category next year, and our expectation is that a good part of that will come from Houston.

And, Peter, you kind of walked through some details on expenses earlier, where you were talking about 80% contribution.

Can you go through that again?

Sure.

There are three major categories of the expense growth on a linked quarter basis.

The first is RML.

That represented right at 50% of the total.

Then the incentive compensation that we mentioned a moment ago is just, the way incentive compensation works, as the year progresses and you have a better sense of where you’re going to end up, the accruals increase, so the accrual including the RSU vesting represented just over 30% of the linked quarter increase, and the balance is just in the All Other category.

Okay.

But they are planned, they are explainable.

There is not some fundamental out-of-control condition producing the increase on a linked quarter basis.

It is continued build out and growth.

I might add, Jay, with regard to the vesting that we expect in the first quarter of this year, we did have a vesting, similar vesting in the fourth quarter of 2004, which increased our expenses by about $200,000.

So from a delta point of view, we’re talking about a $300,000 increase, expected increase from fourth quarter to first quarter.

Okay.

And can you do anything to help smooth that a little bit?

As long as the stock, as long as the price of stock goes up, assuming this vesting occurs in the first quarter of ’05.

We have another vesting, and this would complete the vesting of the RSU grant that was given to us in 2002, and that would be at a stock price of $22.50, and, again, the price has to remain for 45 of 60 consecutive days above that strike price.

And that’s at 22?

Twenty-two fifty.

The last one was at 22.50, and we would, this is not in the classic sense of what people call a non-recurring item.

It does occur and it has occurred now several times, and the reality is, it only occurs when something good is really, something really good has happened for shareholders.

Yes, a nice problem to have.

Can you help us out just a little bit, just kind of run through C revenue lines, just with a little more detail, and then I'm sorry if I missed it, but what was the total mortgage production this quarter?

We didn't say what the total production was.

Let me give you details on, just overall service charges were relatively flat, had good increases in linked quarter basis in trust.

We had, mortgage warehouse fees were flat.

We had gain on sale of mortgage loans just under 100,000 on a linked quarter basis.

The way we look at mortgage RML and the gain on sale of mortgage ties directly to the commission expense line, and then we look at the net of that.

That net balance has grown very substantially over the course of the year, but we get the effect of broad presentation of both the income and expense side when they are economically directly linked.

That’s basically it.

And

Trust fees, mortgage gains on sale of mortgage loans.

And a little more color on trust?

Jody mentioned the substantial increase in trust assets over the year.

The company is doing extremely well in managing trust relationships.

George, why don’t you comment on the attitude they have in trust about assets under management.

Most of those assets are under our management.

We have very few custody accounts that we’re not really getting full fee income on.

We see substantial growth in the assets under management, but more importantly substantial growth in the top line revenue of that particular segment.

We’ve seen 40% growth, and we’ll see that again, and that's really the way we look at the asset management side of the business.

We expect nice increases in top line revenue for the next few years.

And we’ve added the staff and will continue to add the staff in terms of sales people, like we do as it relates to the lending side, also.

We’ll be opportunistic, we’ll find the right people, and we’ll grow that business.

It’s something we believe in strongly.

And, Peter, you said you didn't say it, but will you say it, what the production was?

Production, I don't have a specific number on total production for the quarter.

Okay.

Balance outstanding, you see, the growth and we may need to comment on that.

For the first time in a long time, we’ve seen in the loans held for sale category.

It's a combination of seasonal factors in the mortgage warehouse group, and just good, solid core growth in RML.

And then finally, just a little more color on the Seattle.

Seattle was basically an expansion through hiring of 50, 47 people at year-end, now about 50, two-thirds again of those are a commission sales force.

They were very successful during the two months that we’ve owned them and generating product at a time when you’ve got adverse seasonal trends.

The toughest months are December, January, February, and yet we had good growth from that region.

And can you give us an idea of what '04 for that group looked like?

Well, they didn't come in until November --

Right, but even for the whole year, not inclusive of when they were with you.

For the Seattle group?

Yes.

Well, they were doing very, very well.

We don't, we have very, very solid projections from them, but we would be reluctant to comment on historically what they generate except to say that they did very, very well.

Perfect.

All right.

Well, I think that will cover it, at least for a little bit.

Okay.

Thanks a lot, guys.

Good quarter.

Thank you very much.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from Charles Ernst.

Please proceed, sir.

Hi Charlie.

Hi guys.

Nice quarter.

Thank you.

A couple of quick questions.

Back on the DDAs, is there any real lumpiness to those numbers, or is it pretty evenly distributed between a number of accounts?

It seems to be across the board.

Okay.

And then are there any escrow-related balances in those numbers?

There are.

We have very, very good and substantial relationships with title companies in our markets, Charlie, so there are escrow balances in those numbers.

So part of the seasonality, Jody, would be just a little bit of the softening in mortgage in the first quarter?

Could be.

Okay.

Could be.

Let me make sure, a lot of,if you're talking about escrow balances associated with mortgage loans the way some lenders have them, that’s not what Jody is talking about.

Our relationship is with title companies.

Okay.

We do not have escrow balances related to just the mortgage lending activity.

That's true.

Charlie we’ve had substantial balances from title companies for a long period of time.

This is not something that happens in the fourth quarter.

They did grow them somewhat in the fourth quarter, but these are relationships we’ve had for some time.

Okay, but the title company balances would be a little bit influenced by just overall mortgage volumes, I assume, right?

Yes, they are.

Okay.

And could you also say what the amount of loans sold this quarter were in the mortgage business to create the gain?

We may be able to get that for you in a few minutes or after the call, Charlie.

We don’t have it on the tip of our tongue at the moment.

Okay.

And then my last question is, on the reserve, I understand that credit has been very good.

Is there a level where you don’t want to fall below, or is it just based on kind of what the current experience is, and it goes where it goes.

Charlie, this is George.

We really look at credit quality quite tightly.

We believe that we have excellent methodology in terms of setting our reserve on a quarterly basis.

Our credit quality definitely drives the reserve, both in classifieds and in non-performers and in charge-offs.

And when you see, as we’ve talked about the nonspecifically allocated reserve staying strong and actually growing year over year, we're very comfortable at where we are today, but we do listen very closely to our methodology and have a lot of confidence in it, and that’s how we set the reserve.

Okay, great.

Thanks a lot, you guys.

The only thing I would add to that Charlie, is, we have a lot other observers looking at us as it relates to that, ENY on the one hand, plus the various regulators that we deal with, and we listen to them very carefully.

Again, it's driven, as George indicated, by methodology.

We also look at the peer group, although all bikes are different and we pay the most attention to our own experience.

Right Okay.

Thanks a lot.

Thank you.

Thank you very much, ladies and gentlemen.

If you do have a question, please key star one now.

The next question comes from Faye Elderne.

Please proceed.

Hi.

Nice quarter.

One question.

Do you think that going forward, your net interest margin can increase the same pace relative to the Fed funds increase as we’ve seen thus far, or do you think that as rates climb higher, you might actually get less of the benefit owing to deposit pricing pressure kind of in line with trends we are starting to see?

Well, if you could identify the extent to which we'll experience those pricing pressures, we could answer the question more definitively.

Intuitively, there is no visible reason why we can’t continue to experience increasing margins as rates rise.

You know, the modeling that we’ve done would indicate that we will experience that.

On the other hand, the marketplace is competitive.

If the battle for deposits heats up and someone gets crazy in the marketplace, that’s something that we can’t control.

But if you had, I guess, 20 basis points on 52 basis points of an average increase, and that compared to, I guess, 14 basis points with, I guess, 40 basis points average Fed funds, do you think it could move up in line going forward, or do you think that you actually might get less of a benefit?

I understand that the marketplace is getting more competitive, but for modeling purposes, do you think we’ve seen the biggest jump that we will see per Fed fund increase?

That’s a difficult question to answer, but I don't necessarily believe there is any constraint on this.

And the other thing that affects it is the timing of those increases in the Fed funds rate within the quarter.

For example, the December 14 increase, we only got half a month’s benefit from that, and we will get the entire quarter’s benefit from it in the first quarter of 2005.

Right.

He describes roughly 30 to 40% of the Fed funds movement.

That’s probably not a bad range.

Duane (ph), is that about right?

Yes.

Okay.

That's what I'm looking for.

Now you could have some reasons for Jody just described, maybe related to the maturity of some deposits.

You could have some lumpy things that would make that not right for a particular quarter.

We have eight meetings in 2005 of the Open Market Committee, and are they going to increase the Fed funds rate every time they meet?

Who knows.

But, again, the forecasters out there are basically between 350 and 4% for the year as a whole, in terms of Fed funds rate by the end of 2005.

Okay.

My question is answered.

Thanks.

Thank you very much, ma’am.

Again ladies and gentlemen, if you have a question, please key star one now.

Your next question comes from Bain Slack.

Please proceed.

Hi Bane.

Hi.

How are you all doing?

Well, thanks.

I’m not sure you went over this, but in the other expenses, it looks like it was up $400,000 for the quarter.

Is this a good run rate?

Going forward.

I think I heard the call on the salaries, but I wonder if you could go into the other expense explanation as well.

The other expenses, the single other biggest expense is commission expense from the gain on sales.

So it will parallel the gain on sales.

Okay.

And then there’s just the ordinary for us, what has become an ordinary level of build-out.

And, Bane, that number we know is significantly different from what you see in other companies and because of the way it occurs, it’s not easy to forecast that number to tell you what portion of the expense increase going forward would be in that build-out category.

When we see expansion of RNL, it’s easy to see.

When we see the growth -- the gain on sale of loans, it’s easy to identify the component that relates to that.

But the general build-out it is just harder.

Okay.

Is any of this -- I guess just noticing -- does any of this point to the non-interest column that went from like $486,000 to $702,000 with regard to this increased mortgage activity, or is there something else there as well?

Nothing related to mortgage activity that I’m aware of.

Okay.

Any indication why there isn't an increase relative to the previous three quarters or --

I don't have specifics, just general.

(INAUDIBLE).

All right.

Thanks.

Thanks, Bain.

Thanks very much sir.

Again, ladies and gentlemen, if you have a question, please key star one at this time.

At this time we have no further questions.

Let me just close the session by thanking everybody for being with us this afternoon, for the good questions you asked and for your interest in the company.

We again are very pleased with the results of 2004.

We are very enthusiastic about 2005.

We are particularly pleased that our model, as interest rates increase, is being validated as each day passes.

We think our future is in front of us, not behind us.

We are also very pleased that our growth is organic, it is not result from purchase accounting.

We have been able to employ the largest part of our assets into earning assets.

So, with that -- and again, a heartfelt thanks to you -- we will say good afternoon.