Texas Capital Bancshares Inc (TCBI) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by and welcome to the Texas Capital BancShares Corp. fourth quarter 2005 earnings conference call.

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

We will be facilitating a question-and-answer session towards the end of today's prepared remarks, at which time if you would like to ask a question you may do so (OPERATOR INSTRUCTIONS).

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

Please proceed.

Good afternoon to all of you.

We are glad you could join us today for our fourth quarter and year end 2005 earnings call.

As Carlo said, I am Myrna Vance, Director of Investor Relations.

And I would like to invite any of you who have any follow-up questions to give me a call after the call or tomorrow at 214-932-6646.

Before we begin our formal discussion, I'd like to read the following statement.

Certain matters discussed on this call may contain forward-looking statements which are subject to risks and 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 risks of adverse impact from general economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes.

These and other factors that could cost results to differ materially from those described in the forward-looking statements can be found in our annual report on Form 10-K for the year ended December 31st, 2004, and other filings made by Texas Capital BancShares with the Securities and Exchange Commission.

With that done, let's begin the discussion of this quarter.

With me on the call today are Jody Grant, our Chairman and CEO;

George Jones, President of Texas Capital Bank; and Peter Bartholow, our CFO.

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

Jody.

Hi, everybody.

Really delighted to have you on the call today.

We think we have had another outstanding year and outstanding quarter.

We continue to experience the kind of growth that we believe keeps us in the growth category of banks.

I would like to just comment for a minute on kind of where we've come from and what our philosophy has been.

As it relates to the investment community, our goal is to be a high-performance bank and we've had that goal from the get-go when we were founded just a little over seven years ago now.

And we define high-performance -- and everybody may have a different definition -- but high-performance of 15% or more in terms of return on equity and in terms of growth and EPS above 15% probably gets you there.

We have had goals that have been a little loftier than that and unfortunate to say that in 2005, on our ROE front, our year as a whole was 13.3; but in the fourth quarter our return on equity was 13.5% which is getting us very close to that magical number that we hope to obtain in the not-too-distant future.

In terms of EPS, in 2005, our EPS grew 36%, fourth quarter to fourth quarter 26.1%.

So again we've recorded both on a quarterly basis and on a yearly basis numbers that we think are more than respectable and certainly put us into that high-growth category that we attain to achieve as long as we can.

The guidance that we gave you for the year, in terms of net income, was 26.5 million to 28 million.

And I'm pleased to say that we hit that guidance almost exactly in the middle of the range, in terms of the final results of 27.2 million.

On an earnings per share basis, we were $0.29 for the quarter and $1.02 for the year.

In growth in both loans and deposits, we had another exceptional quarter and another exceptional year, exceeding 30% in growth in both loans and deposits in the fourth quarter.

None of this can be accomplished without exceptional credit quality; and we were fortunate during the year in that we had a net recovery of loans.

George Jones is going to talk more about this in-depth later on, but we did recover nearly $200,000.

This enabled us to invest more heavily in the future.

And we have done that and we've done that deliberately.

We think we have successfully executed our business strategy, as well as investing heavily in the future.

If you look at the pace of growth -- and George again will have some more comments about that -- we enjoyed an exceptionally fine fourth quarter.

The numbers speak for themselves and Peter will review those with you in-depth in just a minute.

I want to take just a couple of minutes and talk about the investment that we've made this year in the future and will continue to make.

I think as everyone knows and as we have said in the past, we don't take large bets.

We play small bets.

We identify quality people.

We build businesses around those people.

In the third and fourth quarter we've done that in the insurance business.

Specifically, in the fourth quarter, we hired 16 people for that business.

That brings the total to about 21.

We hired a real pro in the form of Brook Crawford in July of 2005.

Brook has over 35 years of experience in building insurance companies.

He's done this over and over again.

He has also not only built insurance companies, he has successfully bought and sold agencies.

Our mode of operation is not to buy an agency.

Again we attempt to attract people and we've done that; and as we done it we've bought books of business to go along with that.

And you'll notice if you look at our equity that we have incurred about $4.3 million in additional intangibles during the fourth quarter as we have bought books of business from the agents that we've brought over.

That business lost money overall in 2005.

But as we exited the year, we were making money and we expect it to be positive from this point forward.

We will continue to make investments in entities like what we call TexCap Insurance but let me also comment on other areas where we have made exceptional investments.

One is Houston.

Houston just continues to be a wonderful market for us.

The growth in loans and deposits there has exceeded our expectations.

We think we've got a great team on the ground and we are going to continue to spend a disproportionate amount of our resources building that market.

Another relatively new line of business for us is our lender finance group.

And that group, we hired from another bank a group of people about a year and a half ago and we had just added two additional people in Louisiana to continue to build that business.

Louisiana may not sound like the best market to you but this is just where they operate from.

They solicit business from across the Southwest.

The other line of business that I might comment on briefly is BankDirect Capital Vinance.

That's a business that we bought on June 15th of this year or rather of 2005.

It is a business that makes loans to premium -- to small companies acquiring property and casualty insurance.

We have had a great experience with that line of business so far.

It continues to grow and we think it is going to be very significant as we move into the future.

All these lines of business should be profitable in 2006 and we think we are well-positioned to continue to enjoy this growth that they will bring.

Just to focus very briefly on some of the numbers, net income for the year at 27.2 million was up 39%.

I've already talked about the EPS growth.

Net income in the fourth quarter at 7.7 million was up 29% from the fourth quarter of 2004.

The growth in loans was up 32% from the fourth quarter of 2004.

On a linked basis it was up 6%, using averages.

If you use quarter end numbers, it was up 7%.

Those numbers are not annualized.

Obviously you'd multiply times 4.

In terms of total loans, we were up 31% in the fourth quarter and 5% on a linked quarter basis.

Our deposits grew very very nicely, particularly our demand deposits.

They grew 37% over the fourth quarter of 2004.

On a linked length basis they were up 9% using averages.

Again if you use end of quarter numbers they were up 12%.

Our increase in net interest margin to 413 was very, very gratifying to us.

It was up 16 basis points.

A lot of the analysts are looking for compressing margins, particularly in anticipation of the Fed slowing the increase in interest rates and perhaps even curtailing it sometime during 2006.

We don't disagree with those opinions.

However I think I should point out some of the differences that exist in Texas Capital Bank.

One is that we have used a very disciplinary approach in allowing our securities portfolio to run off, and we have replaced those securities with loans.

This has allowed the mix of our earnings assets to change pretty dramatically.

For example, at the beginning of the year we had 32% of earning assets in securities.

At the end of the year, that number was 23%.

Conversely loans at the beginning of the year were 68%; at the end of the year, 77%.

So we have become more interest-sensitive with the passage of time.

So not only have we've benefited from that sensitivity mix, given our overall asset-sensitivity, but we've also benefited from the fact that capital and demand deposits account for about 670 million of our liabilities -- in capital, of course -- and that funds about 25% of our earnings asset.

I should also remind you that our cost to capital really isn't as vulnerable to the kinds of expectations I think many of the analysts and economists have.

That being that there will be a "slugfest" for deposits.

We don't deny that at all.

It's just that we are not in the same arena that most banks are.

We are not competing for retail deposits.

We are competing heavily for commercial deposits.

Our customers are very loyal to us.

We have been very successful in controlling the cost of those deposits and in fact, the increase in the yields or our costs or what we pay on the interest rates we pay on those deposits has lagged slightly behind the increases in the Fed funds rate.

With that let me turn it over to Peter Bartholow who is going to go into the finances in a little bit more depth; then George Jones is going to take over and then we will come back for some closing comments.

Thank you, Jody.

I've made the statement many times that the numbers at Texas Capital -- because of the simplicity of the business model -- really speak for themselves.

We had -- and if you'll turn to slide six, we had very strong growth in net interest income on both quarterly and year-over-year basis.

That was driven of course primarily by the loan growth Jody mentioned and the expansion of the net interest margin.

We have seen ROA and ROE increase over the course of the year, maintained in Q4.

They had been limited by the extent of our investment in the future.

They do reflect and our investment in the future reflects, as we have said many times, our willingness to make expenditures where we could see the creation of long-term value.

We believe, have always believed that this is much better for stockholders than the kinds of acquisitions that we see elsewhere in the industry.

We saw especially non-interest expense growth attributed to general expansion of our business; and then as Jody mentioned more extensively, more especially at TexCap Insurance, BankDirect Capital finance, and of course RNL.

Some of these as you know were onboard in the third quarter but were only onboard for a portion of the third quarter.

So that we saw in the fourth quarter, for the first time, full quarter expense.

We have seen significant expansion in all of these lines of business.

Efficiency ratio increased entirely to the expansion that I just mentioned.

The magnitude of our Q4 investment relative to -- and full year investment -- in this form of expenditure was high by comparison to prior quarters and prior years.

We are now operating within the core bank at an efficiency ratio of approximately 58% and appear to be driving towards a level of 55% or below.

The business affecting the efficiency ratio increasing that efficiency ratio we had now demonstrated have capacity for very high returns, especially returns on equity.

Slide seven just depicts on a period end basis the exceptional growth in loans and deposits.

It is certainly the strongest that we would expect to see amongst the relative peer group.

It represents a clear shift in our judgment of market share.

Jody alluded to Houston where that's been very pronounced.

Deposits on the date statement and average basis have for the year increased more than loans.

That's a little contrary to our business model.

In fact, we've increased liquidity to the point in the last two quarters -- including Q4 -- where we've seen some compression of the net interest margin -- not net interest income but net interest margin -- because of relatively high levels of cash and liquidity assets.

As Jody commented, we had seen great deposit growth in Q4.

It was entirely customer-based.

It was no increase in BankDirect -- in fact, that was a small reduction -- or wholesale deposits during the quarter.

There is no indication of unusually competitive pricing on the rates we pay across our business segments.

Strong growth in money market deposits, along with demand deposits, of course attributed much -- contributed much to the expansion of the markets.

The Company is not having to post any special rates or any category of deposit.

Liquidity, as I've commented, has been excellent.

It cost us about 3 basis points in net interest margin but, again, nothing in net interest income during Q4.

We now have an unusual position of having about $400 million of securities free of underlying liabilities, either in the term in the form of repurchase agreements or secure deposits.

Turning to slide eight.

Demand deposit growth as Jody mentioned has been significant; and it has been especially important in the funding position and in the expansion of net interest margin.

We think it's unusual that demand deposits on an average basis growth represented 39% of very strong loan growth during the quarter.

That was 25% on a year-over-year basis.

The growth in demand deposits is offsetting to a significant degree the narrow -- the effect of narrowing spreads between cost of funds and the securities portfolio which Jody commented upon earlier.

It's declining.

It is going to depending to decline in 2006 and should become, frankly, not a significant drag on earnings as it continues to run off.

On slide nine, we have had, as Jody mentioned again, significant improvement in earnings asset composition from 2003.

Within -- on an average basis loan representing 73% of earning assets up from 65% in 2003.

Margin expansion, of course, has been remarkable.

We've seen 54 basis points just in 2005, following 50 basis points in 2004 from the very low level I guess Jody -- our lowest level of 2.87% on a yearly basis in 2003.

Clearly a function of the demand deposits and the value of equity in the rising rate environment.

And as Jody mentioned, our sensitivity is actually continuing to increase.

On slide 10, the trends from 2003 on an annual basis has also remained in place or remained evident in quarterly comparisons during 2005.

Significant shift in earning asset continued throughout the year.

Loan yields have held and moved directly in tandem to Fed funds, relative to Q3.

In the fourth quarter, overall loan yields increased 54 -- 50 basis points compared to an average increase of 54 basis points in the Fed funds rate.

Again, demand deposit growth has been a significant factor in margin expansion.

And it represents a direct offset to the constraints placed on us by the slight yields curve and the inability to invest in investment securities.

We saw 38% of loan growth funded by demand deposits in the fourth quarter.

To slide 10, it says, a depiction of the interest sensitivity position.

We have seen it become -- ourselves -- become more interest-sensitive.

We now show approximately $670 million in net GAAP position.

Growth and loans and contractions of securities has obviously produced this.

The benefit of that however has been reduced in recent months by the increase in the decrease -- I mean -- in the spread on the securities portfolio.

We also have an increase weight Eurodollar deposits in our funding mix and those are more market-driven.

We have significant benefit from the growth in this context from demand deposits in equity.

We also saw significant growth in a rate-sensitive category but one which lags the Fed funds rates movement and that's our money market -- our commercial money market accounts.

The narrowing of spreads on the commercial -- on the securities portfolio has produced approximately $0.03 negative over the course of the year, actually closer to $0.04.

The lower -- that's the combination of effects of lower than planned volumes coupled with the spread decrease as rates have risen.

All set of course in part by the fact that the portfolio is contracting fairly dramatically.

We do expect net interest margin to increase over the -- so long as the dead continues to raise rates.

Our outlook of course is no better or different than anybody else's.

We expect that to occur or to continue, perhaps, into the second quarter but are looking and we'll comment on that shortly.

We're nothing more than a 550 to 575 rate in 2006.

With that I'll get George to talk about the growth in the bank and the outlook.

George.

Thanks Peter.

As you can see beginning on slide 12, loans and deposits have grown substantially over the past five years.

For the fourth quarter, loans held for investment grew 122 million on an average basis, or 7%, and deposits grew almost 200 million or 10%.

As mentioned earlier, total loans held for investment for the year grew 33% and total deposits grew 39%.

Obviously, extremely strong numbers in anyone's book.

Linked quarter loan growth was primarily CNI business which made up 75% of the total with real estate bringing up the remaining balance.

All lines of business and our regional offices participated in our growth numbers with corporate banking and our office in Houston providing approximately 50% of our loan growth.

Energy and private banking also had a very good year and we'd be ranked right behind those two areas.

Linked quarter deposit growth also came from corporate banking with about 50% of the growth.

And, again, our CNI business provided over 50% of our growth in demand deposits, which on a linked quarter basis grew 9% and were up 37% over the previous year.

As we've said in the past our loan pipeline continues to be robust and our underwriting pipeline -- these are opportunities already being underwritten -- is exceptionally strong and is carrying over to the first quarter.

We do expect a couple of our energy relationships to pay off in the first half of the year.

Energy business has performed very well but, again, as I have mentioned before we have seen quite a number of commercial real estate loans pay off and move to permanent financing.

However you can see that we still have posted exceptional growth numbers while absorbing these payoffs in 2005 and certainly we expect to do the same in 2006.

If you move to slide 13, it shows five-year growth of income and expense with income generation percentages obviously outpacing noninterest expense numbers.

However as Jody and Peter have mentioned before, we continue and will continue investing for the long-term in lines of business that we believe adds franchise value to our Company.

Again to remind you like BankDirect Capital Finance, our premium finance subsidiary.

Our lender finance, our Houston office, our retail mortgage group and, again, as mentioned before recently Texas -- TexCap Insurance in the fourth quarter.

All of these businesses are profitable with the exception of TexCap as Jody mentioned primarily because of its newness.

However they were profitable in December.

Finally if you look to slide 14 and 15, I will discuss our excellent credit quality results for the year.

As mentioned before, we had a net recovery of almost $200,000 -- 199,000 for the year.

But again with losses for the previous two years less than two basis points and since inception of the Company of less than 10 basis points.

Our reserves again continue to remain high, based on historical charge-offs and nonperforming loans.

We did experience a slight increase in nonaccrual loans as you recall from the third quarter of .1 to a .27 on a linked quarter basis but as you know .1 of loans is an unusually low number and .27 is actually lower at year-end than we have experienced at year-end since year 2000.

And we have no visibility of any meaningful losses in the portfolio.

I would also mention that our increase in loans past due over 90 days is primarily our BankDirect premium finance notes that as most of you know are secured by unearned premiums on canceled policies.

Insurance companies typically delay return of those premiums on those cancelled policies up to 150 days; and we don't believe we have any meaningful losses in this entire past due portfolio.

Year end net totaled up $2.5 million.

Again 2005 is about as good as it gets from a credit quality standpoint and we are very very pleased with our performance.

Jody.

George, thank you very much.

I think as you can see we have had a great year and we look forward to another great year in 2006.

Let me make a couple of comments about guidance for that year.

To begin with the number you're all interested in, we are giving guidance of 32 million to 35 million.

It is a little wider range than we gave last year in terms of dollars but on a percentage basis, as we grow larger it is not that much different.

We prefer to give dollar guidance simply because that's the way we plan our own profitability.

The indicated range I might add does not include the effect of FASB 123R which as you know will be implemented this year.

We are introducing some new equity compensation programs at the beginning of the year.

If you refer back to previous 10Qs and I think the same will be reflected in this year's -- the 10-K for the last quarter, our equity programs have cost us about a penny a share which heretofore have not of course been reflected in earnings per share.

Looking at the assumptions for 2006 we would anticipate an improvement in both return on assets and return on equity and, certainly, we hope we will be able to past 15% and remained there throughout the year.

But we are also returning -- retaining more earnings.

So that becomes a little bit more difficult with the passage of time.

We do expect superior growth in loans and deposits.

George has just indicated you that the pipeline looks very very good and certainly early indications in 2006 remain very positive.

Margin expansion we think will be more modest in 2006, simply because of the expectation that the Federal reserve will possibly have two more increases in subsequent meetings to the 475 level Fed funds rate.

Whereas we have had much larger increases over the course of the last two years.

That notwithstanding we do expect margin expansion and we've discussed really some of the reasons for that.

Let me comment about the yield curve and its impact on us.

Obviously it means that we can't as long as it remains this flat and the available spreads between our cost of funds and the yield on any security assets that we might buy remains as narrow as it is today, we will not be buying securities.

Therefore we expect our asset sensitivity to continue to increase as a result of the mix continuing to change as we grow loans more rapidly and the securities portfolio begins to run off.

Putting my old economist PhD hat on which I don't do very often and I'm reluctant to do.

I think that the yield curve will remain flat.

I think there are two reasons for that.

Inflationary expectation at least today remains very low and also the foreign purchases securities -- particularly at the longer end -- has put a downward pressure on yield and an upward pressure on price.

Turning back to what we expect.

We expect increased profitability from all the lines of business and as George and Peter both indicated and I indicated earlier, particularly, we expect new lines of business to contribute more fully and for the returns in particular as it relates to return on equity to be greater and to be very much a plus force in this year.

We will continue the investment in these businesses and other businesses that we might identify at an accelerated pace in order to again assure the growth that we want to be able to produce for our shareholders in the future.

I might just say a couple of words about the first quarter.

There were some anomalies in the first quarter of 2005 which we had not explained prior to entering that quarter.

I think we did explain them thoroughly at the end of the quarter but let me just again point out a couple of factors that will impact us.

One, because of the fact that we are as interest-sensitive as we are, the reduction in the number of days -- particularly the month of February -- has a significant impact on our earnings in the first quarter.

Secondly because we have more high-salaried high-paid employees and most of our peers do FICA is a much more onerous expense for us in the first quarter than it is on most of the companies that you might follow.

Finally let me talk about equity.

We do have some RSUs -- that is, restricted stock units -- that are still outstanding that could vest in the first quarter or, certainly, during the year.

If they vest in the first quarter they will have a larger incremental cost than if they vest later in the year because these were issued originally with a six-year [clip] vesting that if we reached that would occur in the second quarter of 2008.

However there is a trigger based upon the price of the stock that accelerates that vesting and so far, the acceleration has far exceeded our amortization of the cost of these particular equity instruments.

Again, I remind you that during the first quarter we will roll out a new package of equity incentives to our employees, again, tailored after the new regulations contained in FASB 123.

Just to close and get us quickly to the Q&A period, let me just say that we do look for great momentum during the year, continued strong momentum.

I think the economic outlook is positive.

I believe that is what most of the mainstream economists are saying.

There may be a few outliers but I think most of the projections on the part of those who receive recessions are really looking at 2007 and beyond.

We feel pretty confident of continued growth in 2006 and with that let me close this part of the session and open up to Q&A.

(OPERATOR INSTRUCTIONS) Andrew Collins with Piper Jaffray.

I hope nobody is lost on the fact that you met the consensus by 150 grand.

I mean, EPS up 26% and the annualized loan growth and deposit growth were pretty impressive.

Just kind of wondering about how dilutive some of those acquisitions were here this quarter?

And when how they might track going into '06?

Andy, there was no significant dilution in the quarter.

We would look for accretion in '06.

We did lose money in the insurance business but the only lines of business in which we lost money in the quarter and, consequently, we would expect it to turnaround as I already mentioned in the first quarter and that could be a plus for us and get us added momentum in the first quarter.

And we appreciate your comments about our precision with regard to planning.

To miss by $150,000 is a sin but it is one we hope we can be forgiven for.

And Andy you'll forgive us if we comment that we -- as wonderful as the analyst community is -- we are not managing our business to their consensus.

I hear you.

The other thing on the margin historically you've said it is kind of sensitive for the 30 to 40 basis points for every 100 the Fed moves.

Is that kind of --?

I think the last time we commented on that it was more like 25 to 35.

And then Q4 it ended up being 30%. 29 or 30%.

Would you expect that in terms of how the Feds moved in '06 as well?

There's no reason to expect the experience would be any different.

Again the impact of these increases is being needed a little bit by our securities portfolio but the mix in assets is pretty much offsetting that.

Kerstin Ramstorm with Bear Stearns.

Could you comment quickly on legal and professional expenses in the quarter?

They seemed up significantly from last quarter and I wanted to find out, what was driving that?

This is Peter.

The only thing of significant note was a portion of that related to the startup costs associated with TexCap Insurance.

Is that going to be a good run rate at the current rate or was that one-time related to the insurance?

That is one -- the insurance component of that is one-time.

I'm not saying there can't be a small tail into Q4 but Q1 but it is primarily a Q4 event.

And as far as the restricted stock units -- correct me if I'm wrong -- but those vest tomorrow as long as the stock stays above 22.50, right?

Your math is excellent.

And your tracking of days is even better.

Okay.

Thank you.

Last year that happened in the first quarter following a fourth quarter vesting as well.

You had a substantial catch up in the accrual required by the accounting practice related to those.

It has been a full year, the impact on Q1 if that should occur is only 125,000 increment.

Whereas it was like 500,000 last year.

Big difference.

Andrea Jao with Lehman Brothers.

Just wanted to recap the balance sheet dynamics that you are seeing for 2006 so, for example security should continue to runoff.

At what point do you say we like the level of securities?

The same with borrowings.

For one thing we need some securities for pledging against public funds.

I think the projection is about 500,000 -- $500 million excuse me -- by the end of the year based upon the rate of runoff that we see right now.

So we are not concerned about that in the lease.

We have as a matter of fact about 400 million in free securities on the books right now over and above pledging requirements.

And do you stop at 500 million by year end?

It really depends upon what's happening in the marketplace as it relates to interest rates.

Historically we've used a discipline which has produced spreads ranging in the 2% category between the yield on the portfolio and the cost of funds.

And (MULTIPLE SPEAKERS)

Without extending durations.

Yes without extending durations.

Today that number it is about 53 basis points as I recall.

2.

Against governments it's Fed funds versus five-year governance is now 2.

Two bits.

(MULTIPLE SPEAKERS) as it relates to but looking at our portfolio it is about 50 basis points.

How about on the borrowing side?

Related to --?

Well our demand deposit growth has been significant.

We have actually been reducing our borrowings and we see no reason that the -- I may have said demand deposit growth -- I meant total deposit growth.

We see no reason why that deposit growth won't continue.

If it does, we will be able to continue to reduce our reliance upon borrowings.

Now is that going to have a dramatic impact upon the cost of funds?

The answer to that is no.

A follow-up question on credit.

While credit quality looks like it is remaining good, at what point -- at what point do you want to maintain the reserve to loan ratio?

The reserve to loan ratio?

Again Andrea -- this is George.

What we have said in the past and what we firmly believe and the way we run our business is we have a methodology in place that we are very comfortable with.

And as long as that methodology continues to be in place, it will drive our decisions as it relates to provisioning and loan loss reserve levels.

And it is a fairly sophisticated methodology that when credit begins to turn the wrong way it drives higher provisions and when it's exceptionally good, like it is today, it will drive little or no provision and will let the reserve drop somewhat.

So, again, it is methodology driven and we believe in it and we will stick with it.

And it looks like that model is for now telling us that the reserve the loan ratio can continue to fall during 2006?

Well it could but we are not necessarily projecting that it will.

And we do in our plan have a reserve and a provision that we think is appropriate.

So we have incorporated into the forecast that we have given you a provision which, incidentally, is higher than if you aggregated all of your peer group analysts and produced a consensus, our number is a little higher than the number that is represented by that consensus in terms of provision.

And remember it is not only charge-offs or classifieds that drive provisioning.

Growth drives provisioning also.

So within our methodology we have a number that we placed on new loans.

And as long as the growth is in the range that we are seeing it today, that is going to drive additional provisioning even if credit quality is as pristine as it is today.

Final comment about this relates to the unallocated portion of that loan loss reserve and it has been very very adequate.

In fact at times it has exceeded the total or come close to exceeding -- I want to be careful with the precision here -- the aggregate charge-offs that we have incurred from the beginning of the inception of the bank.

Great.

This was helpful.

Thank you.

Jennifer Demba with Suntrust Robinson Humphrey.

Good quarter.

A couple of questions.

I just wanted to make sure I understood George correctly.

George, did you say that 50% of your loan growth in 2005 came from Houston and the corporate side?

Yes, actually, really that's about right. 50% came from corporate banking, primarily in Dallas and our office in Houston.

And would that be the case from third quarter to fourth quarter as well?

That's about right.

Yes.

I was thinking -- trying to recall that number but that's pretty close.

And do you have handy your loans and deposits by market?

What Dallas, for example, comprises as a total right now?

Yes, we do.

Maybe.

Whether we got the percentages computed, Dallas has traditionally run about two-thirds of the total but that's been diminishing over time.

As for example, Houston has come on-screen.

Definitely had exceptional growth in Houston and Dallas continues to grow.

Again as our regions fill out and mature, they are going to -- and continue to grow, we'd like them to be a bigger part of the mix from a diversity standpoint.

Do you want to get back to me on that?

Do you want to get back to me on that?

Yes, let me get back to you on that because I was trying to do the percentage in my head and I had rather call you back.

Finally, Jody, I was wondering if you could comment on the announcement you made I guess it was last week about the new advisory subsidiary?

Yes I'm glad you asked.

And this gives me an opportunity to provide a little color commentary on this.

We have been asked continuously not only by analysts such as yourself, Jennifer, but by others and investors, whether or not we had a model that was portable.

Specifically would we take Texas Capital BancShares out-of-state.

The answer that question was always yes we do have a portable model.

But would we take it out-of-state under the Texas Capital Bank banner?

The answer is really no.

So in contemplating the opportunity which really you all put in front of us we decided that a way to do this and not expose the income statement of Texas Capital BancShares was to help sponsor and advise a fund.

And we identified individuals that were interested in doing this.

Three of them are out of Bear Stearns and ran the financial institutions group there and we also hired Jim Graves as we said in our announcement in our press release.

Jim Graves has a loan background in banking, came out of Citibank, in fact worked in the same unit that I did there years ago but not at the same time.

Then worked for one of the major banks in Texas.

Was recruited into Dean Witter to run their investment banking office and, finally, his last assignment before becoming a consultant to us was to sell J. C. Bradford where he was chief operating officer and he did that successfully.

We believe there are some 34 markets around the country that could support a bank like Texas Capital BancShares focused very narrowly on middle market commercial business, as well as affluent individuals.

Now among those 34 markets would include places like New York.

Are we going to go into New York?

We are not that crazy yet.

There's too much competition there.

But we believe there are markets where there's a barbell situation where they are very large banks and very small banks and there is an opportunity, again, in the middle.

And that is what we intend to do through the fund.

Now one of the things I'd like to correct which has been in some of the press is, there was a comment that the fund would own no more than 25% of any bank.

What we said although it wasn't apparently articulated well enough is that we would most likely own between 25 and 50% of the stock in a new bank that we might form.

The rest of the stocks would be held locally within the local community and would be sold within the local community.

It would be an exact replica of what we attempted to do and did successfully in Texas.

The final comment that I should make relates to the services that we will provide.

I came out of EDS as did a number of the other people around here and we saw the great success EDS had with their business process outsourcing.

And we believe that we have created some very very unique products.

Some very unique approaches to doing things such as in the area of compensation.

Many of the systems that we built we have spent a lot of money enhancing those systems to the point where they are specifically tailored for a middle market bank, such as ours.

We would provide a full array of services from a to z to these banks.

Now I want to make it very clear we are not going to be involved in the management of the banks.

We won't be making loan decisions but we will provide the loan playbook so to speak, including the loan manuals.

We spent a lot of money building the infrastructure here, about $15 million.

We would like to recoup a lot of that money and we think we can over the course of time.

So we've developed what we believe is a unique partnership with BankCap.

I will also make it very clear that Texas Capital BancShares nor Texas Capital Bank itself will be an investor with BankCap.

We will be an adviser.

That isn't to say that many of our shareholders including our directors and officers will invest individually on their own part as limited partners; but it should be very clear that the bank itself is not going to do that.

We will participate in the profits of the general partner.

As well as sell the services that I've already mentioned through Texas Capital Solutions.

Keith Cargill is heading up that group.

We've spent a lot of time defining these services and getting them ready for delivery and we have been able to do this in setting up our own branch network.

We believe based on what we did in Houston that from the time that we select a site and have a team on board that we believe we can put them in business within 90 days.

So that's the story.

I may have left a few things out.

Be glad to try to answer any questions you or anybody else might have.

I'm sorry -- I have one more question on TexCap.

Are the people behind that you hired in the fourth quarter, were they all in the Dallas area or --?

Yes.

Jennifer also by the way that mix between Dallas and the other regions is 65/35.

We'll give you a little more color later on.

Campbell Chaney.

Sanders Morris Harris.

I have a couple questions.

The first one relates to the startup cost on TexCap.

I think, Peter, you said that was in the professional services line. (MULTIPLE SPEAKERS) give us an idea what that was?

How much that was?

It is in a combination of lines.

It is in salary and benefits and it's in the professional expense.

Can you give me an idea how much it costs to start it up?

I don't have -- about $0.5 million.

That's fine.

But Campbell there was income on the other side of the ledger.

So if you look at the net it did not account for a number that would be, that would change the numbers materially that we posted for the quarter.

And the second issue was the 90-day past due, the 2.8 million which relates to the premium finance business.

Is that going to be kind of a run rate going forward because as I understand it's a premium finance business outstandings really aren't going to change that much.

So is that going to (MULTIPLE SPEAKERS)

You are probably looking at an average of 2%, Campbell.

That 2.5 million is not out of the realm of reason at all but just as a rule of thumb you're probably looking at around 2%.

Okay.

So we should see that number at around 2% (MULTIPLE SPEAKERS)

Yes.

You ought to see that number and should not be concerned when you look at that portion of our 90-day past dues.

In that particular case, Campbell, there's one from I guess the highest rated insurance company in the United States that owes us about 40% of that number.

And that is due to be paid this month.

That's right.

And then I think just the clarification on a different topic.

Peter, I think you said within the bank that it's running at about a 58% efficiency going to 55.

Would I be correct in assuming that is excluding the RML and the BankDirect and some of the other startup businesses?

It would exclude Carmel Bank and BankDirect.

That's correct.

And TexCap.

My comment, some of those RML, for example, is a business that is going to always affect the efficiency ratio.

Just the nature of its operations.

Expenses will be a relatively high percentage of net revenues.

On the other hand it absorbs very little capital and it produces -- can produce -- after-tax contribution to return on equity in excess of 30%.

Scott Alaniz with Sandler O'Neill.

Couple of things.

I have come up with some new ones.

First on the demand deposit growth, how much of that growth was from existing customers or versus new customers being brought on?

As far as I know we don't really track that.

We could but we haven't and we don't have that information available right now but as far as I know most of it's from existing customers.

And I might add that as our customers mature an increasing portion of their deposits with us are in the form of demand deposits.

That is also affected by the economy.

We are in a good economy.

They need working capital.

That working capital typically is kept in a demand for them.

That's a great benefit of having so much of our business in CNI.

That all keep great operating accounts.

What about escrow deposits?

What is the size of your escrow deposit?

You're talking about our title company?

Title company, yes. (MULTIPLE SPEAKERS)

Title company business.

You know that really fluctuates up and down anywhere from, gosh, 10% to 15%.

I haven't calculated that number, specifically, of deposits.

Of demand deposits.

Oh [DVA].

I'm sorry I was talking about overall deposits.

I haven't calculated that number yet.

I was talking about total deposits as it relates to title coverage.

What was the size of the bank direct portfolio, loan portfolio in the fourth quarter and what was the effect of that business on the deposits if any in the fourth -- ?

No impact on deposits all.

If you remember we acquired $80 million in loans on June 30th and 10 million on June 30th, 70 on July 15th.

That portfolio because of the paydown rates ended the year that purchase takes at about less than $20 million and grew in his own accord to something just in excess of 100 million.

The turn rate as we commented is very high in that business.

But it does not generate deposits.

And we would expect it to continue to growth.

Charlie Ernest with Sandler O'Neill.

I hope I'm using the right numbers here but in looking at the average balance sheet it looks like you moved out of borrowings and into CDs, which are more expensive.

Can you explain why you did that?

Moved out of what?

Out of borrowings and into CDs.

They are actually the same price.

Everything we can do is essentially the same price and the borrowings matured and we paid them off because we actually were funding at lower than the [repo] pricing.

So you're saying the incremental price was the same price?

Or lower.

On the CDs?

That's correct.

And those are pretty much floating rate estimates at this point?

They're sure very short-term maturity.

A customer can pick a maturity but a big portion of it is essentially overnight.

Then back to the reserve given that MPAs went up in the quarter why wouldn't your methodology result in taking a provision in the quarter?

The methodology would require an increase in allocation from an already high unallocated.

We think we have the NPL properly reserved within our existing reserve and using a portion of our unallocated as Peter says.

So you use some of the unallocated this quarter which basically covered your need and your methodology?

Sure.

That's the way it works.

Is it possible to share what the actual assumption is for next year in terms of the reserve?

It's one of the reasons we've given a wide range.

When you start with zero there's no question that the number can move.

It's by definition going to be a big percentage increase but given the methodology it is a number that is very hard to pin down.

Charlie, the consensus that among all the analysts that we looked at at least the latest take on that was around $4 million plus.

And I already indicated that our assumption's larger than that.

We would rather not get into the business of trying to parse the plan that we have for next year.

We will talk to you about it in general terms but specific questions I would suggest you call Myrna Vance and she will direct you to the people who can answer them.

Those that we are able to answer and are willing to answer.

Bain Slack with KBW.

Just a quick question on one of the other noninterest income item.

Looked like it was up pretty significantly this quarter.

Can you break that out or give us some color of what's in there?

And if it is recurring or not?

It's nothing all that special.

We tend in the fourth quarter to have a surge in those kinds of just miscellaneous income items.

Some of them will recur.

There's nothing that we could really point to.

I mean, it looked like, you look at the previous four quarters and you run from 500 to 600,00 this was almost 1.2 million.

What do you think I guess is a good run rate going forward?

That's one of those model building questions where we are not going to provide a lot of guidance.

I know of no reason why it wouldn't be consistent with maybe an average of the prior four quarters.

An average of the prior four.

Not including this one?

No, including this one.

Now prior meaning.

Right so basically '05?

The four quarters of '05?

That is what I'm talking about.

John Martinez with Cohen Brothers.

Just a quick question for you.

Looking at your net occupancy expense, just seems to be drifting up over the course of the year.

You didn't have any significant adds in your branches during the course of the year, did you?

Numerically as far as total branch comp?

I know it's really low.

We did add a branch in San Antonio in the spring.

Any of this new line of business that you fixed up during the last two quarters driving this as well?

Yes.

And tagging onto the end of that comments during your discussion were that you were looking to make significant investments into Houston.

Is that an issue of picking out new personnel, adding a new team or possibly adding another line of business?

Or looking to just basically leverage your line of business that you have now in Houston?

Well it would relate specifically to people.

We don't anticipate at this point in time additional locations in Houston.

I can't tell you we will never have another location in Houston because Houston is a huge market and who knows.

But for 2006, we contemplate adding people.

We have the capacity to do that, whether we add any lines of business down there.

There are no current plans to do that but, again, in our mode of operation we could expand insurance into Houston, just as an example.

We don't have any specific plans on the drawing board that are going to be meaningful in your model building.

As a last follow-up to that.

Last time we discussed, you talked (indiscernible) mentioned that like adding teams with the shakeout that may be occurring here in Houston with some of the acquisitions going around, have you had any discussions with any teams that you might pursue?

No.

Nothing?

Okay.

And we wouldn't, we couldn't really comment on them if we had.

We are constantly in the market looking for opportunities.

Teams are hard to move, hard to identify.

We are focused on hiring quality individuals out of our competitors and so far we've had success in doing that.

We hope to continue to have that success.

Brent Christ.

Fox-Pitt Kelton.

Brent Christ You mentioned several times (technical difficulty) continue to do investments in businesses going forward.

Can you give us some sort of sense about what some of the businesses whether it's the insurance business or BDCF, kind of what your expectations are as far as expenses on an annual basis?

I know there's some varied ability on the revenue side of the equation but how much you are looking at?

What we try to is in terms of resource allocation, allocate resources to those lines of business that produce the highest returns on equity and also afford the highest growth potential.

Now, in terms of what we plan to do in 2006, for a lot of reasons we would really rather not comment on that.

Just suffice it to say that we will continue to follow the same kind of pattern we followed in 2005, in terms of investing in the future and that is really how we regard that.

We could quit growing tomorrow and increase our returns materially both in terms of return on equity and return on assets.

But that wouldn't be in the best interest of our shareholders.

So we are going to try to continue to be categorized as a growth organization and do the kinds of things that will enable us to do that.

It is one of the significant reasons why we put a range on our expected net income results.

In 2005, we stayed right in middle of that range and gauged the amount that we were prepared to invest, based on our ability to do that.

We are also opportunistic and we wouldn't have been able to have told you at the beginning of the year that we were going to acquire a capital premium finance.

That was an opportunity that came our way.

It is the only acquisition we have ever made and we've continued to add additional resource to that unit because we think it has tremendous potential.

Brent Christ I guess with some of the existing businesses obviously there's some sort of budget in terms of how much expense you are expecting with those.

Is there anything you can share?

No, nothing we can share with you.

Again it is based upon opportunity and our perceived impression and knowledge of what they will contribute.

So it really is a capital budgeting, expense budgeting process that we go through very carefully.

We try to allocate again resources to those units that we think offer the greatest possibility.

Houston, among our core banking, would be a case in point and we talked about that.

We have in terms of penetration, we are very very small in Houston.

In terms of what it means to us in terms of future opportunity and growth, we think it is very significant.

Brent Christ One last quick question just in terms of the guidance that you gave for '06 and the range I just want to clarify that the equity link application or stock options was about a penny per share for quarter, right?

In 2005 that's correct (MULTIPLE SPEAKERS).

Brent Christ And we would expect that to come off of that net income range that you gave.

That's correct.

Jennifer Demba.

One more quick question.

The trustees obviously grew substantially for the entire year.

Just wondering where you guys exited in terms of assets under management versus the end of last year?

We were at 600 million and that group a little bit over 100 million in the year.

That's working well for us.

We are very pleased with what we see.

Sir, we have no further questions at this time.

I will turn back over to the group for further comments.

Let me just thank everybody for your interest in Texas Capital BancShares.

We think we had a great year.

We look forward to continuing to work very, very hard as we look into 2006 to produce another great year.

Any questions that you have please direct them to Myrna and she will direct them to the parties and the bank that can answer them.

Again I'd just like to thank everybody for your interest in the Company.

We enjoy our relationship with the investment community and look forward to seeing a lot of you in 2006.

With that, we will bring the call to a close and, again, just thanks from all of us.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation.