Texas Capital Bancshares Inc (TCBIO) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q4, 2003 Texas Capital Bancshares Earning Conference Call. [Operator Instructions] Now I'd like to turn the call over to your host, Tricia Linderman?. Ma'am, you may proceed.

Thank you and good afternoon, everyone. 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 Bank Share's control could cause actual results to differ materially from future results expressed or implied by such forward looking statements.

These risks and uncertainties include the risk of adverse impact from general economic conditions, competitions, interest rate sensitivity and exposure to regulatory and legislative changes. These and other factors that can cause results to differ material from those described in the forward looking statement can be found in the registration statements on form S3 as amended relating to the initial public offerings and other filings made by Texas Capital Bank Shares with the SEC.

Today's call will have four components. Jody Grant, our Chairman and CEO will give the opening comments. Peter Bartholow, CSO, will review the financials with you. George Jones will discuss our loan growth and pipelines and then our Operator, Jean?, will facilitate a question and answer session. Jody.

Thank you, Tricia?. Good afternoon, ladies and gentlemen. Let me apologize from the outset. I've got a voice problem, which has been lingering, I might say, since the IPO and I apologize for any raspiness that you might hear. Tricia? gave the introductions of the principal presenters. I'd like to also introduce an addition to staff, someone that many of you will be interfacing with in the future. This is Dwayne Howard?. Dwayne ? has joined us as director of financial planning and analysis. He's taking the place of Jim White? who is receiving a well deserved promotion to director of bank operations.

Just going to give you a brief thumbnail of (inaudible). After receiving his MBA, he joined the Federal Reserve Bank in Dallas where he spent several years and then joined Southwest Bancshares, where he was in charge of mergers and acquisitions and worked with Charles McMann? after which he worked for Peter Bartholow, our current CFO upon the consummation of the merger of Southwest Bancshares and Incorp. Stayed with Incorp and Peter through its liquidation and then came with Peter to EDS where Dwayne? was a valuable member of the treasury group and was involved in very, very complicated transactions there. I'm pleased to say that current problems at EDS hopefully don't reflect upon any of the four people in this room who were formally with EDS.

With that - with that in mind, just let me just again welcome everybody. We're delighted to have you. It's a particular pleasure to report on 2003. It was a terrific year from every point of view that we can imagine. The growth during the year was dynamic. We successfully executed the IPO. Fortunately the price of the stock has preformed well since then. In addition to that, we entered the Houston market and we launched our mortgage origination business.

Before getting into any of the specifics with regard to the fourth quarter or the year, let me just make a couple of comments about the Texas economy in which we are vitally involved in and, of course, our future is dependent to a certain degree on how the economy evolves in Texas.

Texas has definitely turned the corner. That happened in the late spring of 2003. The index of economic indicators in Texas, just for example, have been up 3 percent since March. The unemployment rate has declined from 6.8 percent in May to a current 6.3 percent. In Dallas, I might say, it has declined from 7.3 to 6.4 percent.

Now, most encouraging industrial production year over year has been up 2 percent and the service sector and the construction industries have led the way in terms of economic recovery. The outlook for DSW, in particular where we have 80 percent of our assets, it's projected that we'll add 230 thousand jobs through 2006, so we're very encouraged about where we are and think that the outlook here is absolutely superb.

I should comment, just for a moment, about the impact that we anticipate from the recently announced intended merger of Bank One and JP Morgan. Obviously the state most affected is Texas. There have been a number of analysts that have written about this. There was an article in Today's American Banker, which pointed out that there are 109 combined branches in Houston, 102 in Dallas.

In Dallas alone, 21 of those overlap. That having been said, I think the major opportunity for us at Texas Capital Banc will be on the business side. We anticipate that whenever there is a merger of this nature there are disruptions and as a consequence of those disruptions, customers, in particular, are impacted in many, many ways and we would expect to be a principle beneficiary of that.

Switching now to the specifics of 2003 and really focusing on the year as opposed to the quarter, Peter is going to give you the details in a minute, but we had a very strong core growth in both loans and deposits being up 23 and 21 percent respectively. Our credit quality was superb during the year with our loan losses being at point oh seven for the year and George will elaborate on that in a few minutes, and our net interest margin improved from the fourth quarter of 2002 to the fourth quarter of 2003.

In terms of non-financial highlights, we have been very successful in attracting new talent to the company. Our total hedge count increased by 100 during the year from 200 to 300. Some 56 people of those people are imbedded in our new operation in Houston and the launching of our mortgage origination business.

The rest of the people consist of quite a large number of relationship managers and the people that support those individuals. So it's been a banner year for us in many, many respects. We just celebrated our fifth anniversary and reaching the kind of goals that we've reached in five years with assets of over $2 billion, nearly 2.2 billion with no acquisitions, we think, is a remarkable and admirable accomplishment.

With that, let me turn it over to Peter Bartholow who is going to talk to you about the specifics of the financials. Peter.

Thank you, Jody. Good afternoon and welcome to this call. It is a pleasure to report such strong financial results. We've had substantial growth from - I'm turning on page four of the presentation at this point - substantial growth in assets, deposits and loans, which Jody eluded to.

Loans helped for sales decline from the first quarter levels, but we're actually a little higher than we had expected. Quarterly net income rose to $3.6 million, up from $1.8 million or $1.9 million a year ago quarter. On an as adjusted basis of net income, it was 26.54 percent reflecting in each case 93 percent increase and 36.6 percent.

Diluted earnings per share were 14 cents compared to the as reported eight cents a year ago. Last year's net income of a $1.872 million - excuse me, 2.645 million on an adjusted basis is in fourth quarter shares of calendar 2003 for 10 cents, reflecting a 40 percent increase on that pro forma computation. Improvement in ROA, ROE, Jody mentioned an improvement in the net interest margin from the fourth quarter of last year. The growth in the fourth quarter - in fourth quarter income was significantly improved (inaudible) expansion of that net interest margin coupled with the growth in loans and securities. George will discuss more about the loans in a moment.

Next slide, on page five, I'm not going to go into these numbers. I think they speak for themselves with very strong growth rates, assets, deposits and loans on a four year compound growth rate basis. Net income for the year was 18- $13.8 million, an 88 percent increase over the number from last year. Diluted EPS at 60 cents or 53 cents on the NAS adjusted basis compared to the prior year, a very strong result. Again, 88 percent.

Return on assets improvement, return on equity improvement, despite the impact on ROE computations from the IPO. Net interest margin for the year down as a result of what happened through the course of 2003 with declining interest rates. Jody eluded to net charge off ratio down sharply from 2002 and I think that a very, very strong indicator of our credit quality.

Next slide, number six, simply shows progression of earning assets. Total assets over the course of the year compared to the fourth quarter of last year. No significant commentary other than that we saw an increase in the outstanding loans as of year end, which was quite a big higher than the average for the quarter.

We saw last quarter - the last half of the quarter very good growth that did have, as I'll show in you in a minute, an impact on the ratio of the allowance per loan losses to the total loss, a slight decrease from 1.4 percent to 1.35 percent. Nothing else of any particular note, that I think hasn't been explained on that slide.

Next slide shows the quarterly progression of income. You see an improvement in - substantial improvement on a quarter basis of net interest income. We have an increase in provision for loan loss from the third quarter, building the reserves slightly net of the small amount of net charge offs in the quarter. Nothing else of any significance. Strong growth throughout the period.

We did have the growth of non-interest expenses, which on a linked quarter basis of about - just over 10 percent reflecting, as Jody mentioned, the full effect in calendar - in the fourth quarter of Houston and the mortgage origination group. On an as adjusted basis, adjusted income up to 3.6 million, up 36.6 percent from 2.645 million a year ago.

Key ratios on the next page - slide. Net interest margin 3.07 percent we mentioned. Adjusted improvements really throughout the - throughout the key performance indicators. Asset quality ratio is very strong as we mentioned and George will comment on those further.

Next slide. We have (inaudible) people to understand why there could be slight differences in earnings per share assumptions for - among the key analysts for Texas Capital's operating results. This slide gives you what we think is a fairly simple presentation of what's happened on a quarterly basis to the primary - or basic and fully diluted number of shares.

You have, in the third quarter with the IPO, obvious increase from that transaction coupled with the change in the number of shares on an average basis that converted from preferred. In the fourth quarter, that number is now stable and you have the effect, though, of rising stock prices on the shares that are included in fully diluted shares on application of the treasury stock method.

Well, we're trying to make sure everybody understands fully exactly what's happened to our share account. You see the number as of 12/31/2003, that number reflects the stock price and at year end and is the base line for measuring performance in 2004. Combination of effects of the IPO conversion to preferred, the rising stock price and the share computations and the use of average shares and average prices to determine average shares have made this, I think, more difficult or more confusing than would be the standard case.

We needed to make sure everybody was completely up to speed. Focus is on, in models, as we operate the businesses - business is on net income and total dollar terms. We need to make sure everybody is focused on the same number of shares for computing EPS estimates. George.

Thank you, Peter. As Jody and Peter have said, you can see our compounded annual growth rate is 55 percent. That is exceptional and we continue to see good growth in '03, which showed a 17 percent increase. If you look at our core loans, excluding our mortgage warehouse, our loans held for sale, as mentioned before, growth was 23 percent. Just as a matter of reference, at June 30, our outstandings were $157 million. In the warehouse it's approximately $80 million as of 12/31/03, so you can see the 23 percent total loan growth is where we stand.

If you turn to the next page, again, it's a lot of numbers and I won't go through each one of those. They're self explanatory, but again, as we've talked about before, we've seen good growth in our core lending lines of business shown by the 23 percent excluding mortgage warehouse. And as Peter mentioned, we had an exceptionally strong fourth quarter. We grew $93 million in total and, again, if you exclude that mortgage warehouse decline, we grew $105 million in the fourth quarter. We had strong growth in all our major lines of business. Our pipeline looks good and with the recovering economy, we should see good organic growth from our existing customers to supplement, again, the growth by new business that we bring in with a number of our relationship managers and our new relationship managers.

If you'll turn the page to 12, we'll talk a little bit about credit quality. As you can see, it was mentioned before, net charge offs for 2003 were quite low. An exceptional number, we're quite proud of that, .07 of loans, or in dollar amounts $836 thousand in net charge offs. Again, while maintaining an adequate reserve at 1.35 percent of the loan portfolio.

Non performers, while up from year end '02 are down from our third quarter '03 from the number of .99 of total loans to .78 and we feel comfortable that they have proper reserves. We have proper reserves on each one of those non-performing assets. I will tell you that approximately 70 percent of those non-performers are paying on a cash basis and we'll continue to watch those as we progress into the future.

Thank you very much.

OK, George. Thank you. Let's immediately go to Q&A, if we could, please, Operator.

Ladies and gentlemen, if you'd like to ask a question, please key star one on your touch-tone phone. If you'd like to withdraw your question, please key star two. Questions will be taken in the order they are received. Please hold for a first question. We have a question from Jennifer Denma? of SunTrust Capital Home.

Good afternoon. I was wondering if you could give us an update on how this Houston office is doing in terms of loans and deposits outstanding and then I have a follow up question on asset quality.

Jennifer?, in terms of Houston, we're very pleased with the progress we've made there. We're doing well both in terms of loans and deposits. We're a little bit behind our projection with regard to loans, but we're substantially ahead with regard to deposits. We're still looking at reaching a break even in that operation in the third quarter of 2004 and we're on track to do that.

OK. And on asset quality, can you give us some color on the decline in non-performing assets, was that related to one loan or...

I'm going to let George handle that one.

Hi, Jennifer?, how are you?

Hi. I'm great.

Good . We had a few non-performers off the list. The largest non-performer that we talked about before was government guaranteed loans of $1.1 million. We have had some progress in some of the commercial loans that were on non-performing also. We're down about $2 million from where we were at the end of third quarter and, again, we feel properly reserved and that we're - we've done the right thing basically on the non-performers today.

OK. Thanks.

Thanks, Jennifer?. Next question.

Again, ladies and gentlemen, that's star one for questions. And that star one for questions. Thank you for standing by as your questions are collected.

Something happened.

You have a question from Scott Ollenoff? of Sunco? Capital

Good afternoon, gentlemen.

Hi, Scott?.

Good afternoon, gentlemen. Hi, Tricia?. OK. Quick question for you, George, talk to me a little bit about how many new relationship managers Texas Capital plans on hiring this year.

In '04.

In '04.

As we - as we talked earlier, we have hired a reasonable number of relationship managers in '03. We will continue hiring as the opportunity presents itself in '04. We will continue to hire and take advantage of the marketplace looking at about 15, we think, will fit our budget numbers for '04, but again, if we have an opportunity to pick up someone special, we would certainly do that, even if it exceeded the 15.

Scott?, I think it's important - this is Jody - for you to understand that many of the additions to staff in '03 were in the last half of the year and really more tilted toward the last quarter, so we have the benefit of having those people on board as we start the year.

I see. And Jody, would - is it your thinking that those new hires that occurred in late 2003 that you would begin to see some pretty large increments in loan growth in the second half of '04? Is that business has migrated or could that happen a little earlier?

Well, it could happen a little earlier. As George said, the pipeline looks pretty good. We've got pretty good traction in terms of loan growth with the exception of mortgage warehouse, which continues to decline. We will expect that, however, to level off and begin to improve and accelerate as the year progresses. So we're very pleased with what we see so far. Now, the one thing that we haven't seen, which I think is very encouraging as it relates to the future, we haven't seen that loan growth kick in organically from the existing customer base. A lot of the new growth has been new relationships plus real estate and, you know, all of that continues to go pretty darn well.

Terrific. Thanks a lot.

You have a question from Brock Vanderbilt? of Lehman Brothers.

Thanks very much. Good afternoon, guys.

Hi, Brock?.

Just wanted to focus on deposit growth a little bit. It seems that, at least on an average basis it may not be quite pacing what we see on the loan side. If you could just characterize that for me that would be great.

Well, deposit growth, you know, based on our model has been always an issue for us in that the deposits lag the establishment of the customer relationship and you'll recall, Brock?, that when we started this company at one time we had 15 - 55 percent of our deposits represented by the internet.

That now is down to 15 percent and as these borrowing relationships mature, these borrowers become depositors and that's just the nature of the model that we have and we feel like we're very well funded on the one hand. The Blue Bonnet acquisition that we made last year has been a good one for us and added to our deposit growth, but you know, we're going to continue to look more like a money market bank than a community bank in terms of our balance sheet on the funding side.

OK. And as a follow up, you had a very significant boost in the margin and in the quarter. What's, going forward, what should we be looking towards in terms of a range?

Well, a lot of that depends upon interest rates and what happens to rates. In our forecast we have rates progressing beginning in the last half of the year, primarily, although we do have a bump in the second quarter of the year, but you know, that we have no control over and that will impact our margins greatly. Now we have in the early part of the year some Merrill Lynch CDs laying off the books that are in the three and a half, four percent range and we'll be able to replace those to the extent that we decide that it's written for us to do so with either brokerage CDs or we may just rely more heavily upon borrowed funds depending upon what the market looks like to us.

OK. Thank you.

Thank you.

You have a question from Andy Collins? of Piper Jaffray.

Hi, Andy?.

Hi, it's actually Neal Cole? for Andy?, but thanks for taking my questions. I just wanted to talk for a minute about the Ace cash applied transaction, I think it's for about 140 million and if you could just refresh us on how that runs through or how you expect that to run through the income statement and the relative contribution you'd expect.

I'll let George handle that question.

Yes, thanks. We do it primarily with fees and this should happen first quarter, some in the second quarter also. In terms of fees, we - you've seen that in our income statement for the last couple of years. It's been a pretty big number. It will come down somewhat in '04 just because we're getting - we're getting a little competition and we're having to be a little more competitive in terms of how we price that particular product, but it still will be a very good additive to income in '04 and, you know, it's something that we'd like to continue with on an ongoing basis.

Historically, about how big has that been?

Historically growth basis has been about a million dollars.

Great. Thank you.

Again, ladies and gentlemen, star one for questions. Showing no questions at this time, I'd like to turn it back over to the speakers for closing remarks.

Well, thank you very much. Nobody has asked the critical question about guidance and let me just say that, you know, in terms of giving guidance for the future, this has become a more of an art than a science and I think everyone understands that in our business there's certain elements that our out of our control, the economy, interest rates, which of course impact margins, and the economy also impacts loan growth. Loan losses also obviously affect the results and sometimes those are hard to predict. The one thing we do have completely in our control is expense control.

Having said all that, we are very optimistic about the year. We had a terrific year in 2003. We think it set a very good base for 2004. We would expect our net income to come in on the lower range in the $18 million vicinity and on the higher range closer to $20 million, which probably translates to or does translate to somewhere between 70, 76, 77 cents a share. Obviously we're going to do everything we can to outperform and again, we believe that we'll have a very good year and we're very, very optimistic about it.

Operator, you might ask if there are any further questions before we finally sign off.

Again, as a last reminder, star one for questions. You have a follow up question from Brock Vanderbilt?. Would you like to take it at this time?

Yes, indeed.

We don't even bother asking about guidance anymore, Jody, but since you offered it, can you just review for us what's in that number for interest rate increases?

We start with no increases at first of the year. We end the year with about two percent dead funds rate. Now, we use as our guidepost the blue chip economic indicators, the consensus forecast since, you know, we don't think we can probably forecast any better and more accurately than the consensus. The rates we're using fall well within the range of that consensus, the low and the high, and you know, if you can tell me what Chairman Greenspan and the Federal Reserve are going to do, we could be a lot more precise about this.

I think the other thing that's significant, Brock?, is that we've been asked before about the pattern of our provision and the way that we operate our business, we make an assumption with regard to loan losses during the year and we begin to provide based upon that assumption, but as the year progresses and we have greater clarity with regard to the actual performance, both in terms of non-performing classified assets and certain losses we adjust during the year. This year we had built into the projection about three and a half million dollars in loan losses compared to the less than one million that we had in 2003. Now, you know, there is always that surprise loan around the corner that bites you, but fortunately we don't see that on the horizon at the present time.

Got it. OK. Thank you, Jody.

Thank you, Brock?.

Sir, I'm showing no questions at this time.

No other questions?

Not at this time, sir.

That being the case, on behalf of the entire crew at Texas Capital, let me just thank everybody for listening in on the conference call. We appreciate your continued interest in the company and we appreciate your following the company. We will keep you advised of our progress as the year unfolds and we're going to be very - working very, very hard on behalf of our shareholders. Thank you very much and I wish everyone a happy new year.

Ladies and gentlemen, thank you for joining us on today's conference. You may now disconnect.