Texas Capital Bancshares Inc (TCBIO) 2004 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Texas Capital Bancshares' third quarter earnings conference call. My name is Will and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

If at any time during the call you require assistance, please press star followed by zero and a coordinator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Tricia Linderman. Please proceed.

Thank you Will, and good afternoon everyone and thank you for joining us for today's third quarter conference call.

Certain matters discussed on this call may contain forward-looking statements which are subject to risks and uncertainties and a number of factors, many of which are beyond Texas Capital Bancshares' control because actual results differ materially from results expressed or implied by such forward-looking statements. These risks and uncertainties include the risk of adverse impacts from general economic conditions, interest-rate sensitivity, and exposure to regulatory and legislative changes. These and other factors that can cause results to differ materially from those described in the forward-looking statements statements can be found in our annual report on form 10-K for the year ending December 31st and other filings made by Texas Capital Bancshares with the SEC.

Now I'd like to introduce the team that will be leading today's call. Jody Grant, Chairman and CEO; George Stone, president; and Peter Bartholow, CFO. After their prepared comments, Will will facilitate a Q&A session and finally I think most of you know that our director of industrial relations, Myrna Vance, is on a vacation that was scheduled prior to joining us.

So if you have any questions following this call, please contact Peter Bartholow at (214)932-6778. Jody?

Hi everyone and welcome to the third quarter conference call. It was a great quarter from our point of view and from my point of view, it was the most gratifying quarter that we've had since the bank was started almost six years ago.

When we designed the model for Texas Capital Bank, it was one that was designed to operate at its optimum in a normal rate environment, and we have been in anything but a normal rate environment since then.

As all of you know, we have -- shortly after we started the bank we entered the recession of 2001. The economy has certainly been lackluster for most of our existence. The declining rate environment that we've been experiencing until recently began in mid-2000 and extended through 2003. And in fact it's been the lowest rate environment we've been in in 46 years.

Fortunately we've seen a vastly improved economy in recent months and we've had three interest-rate increases. These rate increases, together with the expansion in the economy and the expansion in our asset base, I think serves to validate the model that we've built and hopefully you'll agree with us after we review some of the results with you.

The model is very much one of a business bank. As I think everybody knows, about 90% of our loans are tied to Prime or to LIBOR and obviously, as rates increase our income increases accordingly.

We are a highly rate-sensitive bank. Just to give you some benchmarks as to the interest rate environment and what it means to us, in the third quarter, the average Fed funds rate was 40 basis points higher than it was in the second quarter. In the fourth quarter, if there are no continued increases, just based on the timing of those rates, the average rate will be another 34 basis points higher.

If we get above 25 basis points on November 10th, the average Fed funds rate will be 48 basis points higher than it was in the third quarter and if we get another bump on December the 14th, the average Fed funds rate for the quarter will be 52 basis points higher than it was in the second quarter -- during the third quarter, rather.

This bank optimizes its results, again, in a normal rate environment, which we would identify as one with the Fed funds rate of at least 3.5% but ranging up to 5%.

Just to cover a couple of the highlights before I turn the call over to Peter Bartholow to review the financials in more detail, we did meet the earnings per share consensus of 20 cents. More importantly, I think, is the momentum that we demonstrated during the quarter and the momentum we have going into the fourth quarter.

Just looking at return on equity, for example, our return on equity was at 11.25% versus 10% in the second quarter and 9% in the previous year second quarter.

Return on average assets was .85 versus .77 in the second quarter and .64 a year ago. Net interest margin was 3.37 versus 3.23 in the second quarter and 2.76 in the third quarter of last year.

Obviously, the increase in interest rates has impacted all these ratios, but also the growth in our loans has impacted these numbers as well.

If you look at the linked EPS growth on an annualized basis from the second quarter to the third quarter, it was 70.6%. Our linked loan growth, based upon average loans outstanding for each quarter on an annual basis increased 35.5% and our deposit growth, again, based on averages, was up 27. 2%.

Now, you'll note that the end of quarter deposits were less at the end of the third quarter than they were at the end of the second quarter. We view that as an anomaly and again the 27.2% increase in the average deposits on an annualized basis, we think, is a meaningful number.

Let me just make a couple of comments about our business. We've talked a lot about Houston and residential mortgages lending. I'm pleased to say that on a run rate, both of those activities are in the black and are profitable.

Houston is solidly in the black, and is proving to be a real home run for us. They had a very profitable quarter.

Residential mortgage lending, we exited the quarter on a run rate that was in the black. It has come along a little slower, quite frankly, than we had anticipated. Part of that is due to the mortgage markets itself and we are still very, very optimistic about the ultimate success of our residential mortgage lending. In fact, we continue to plow additional resources into that activity. You'll note that our expenses were up about a million dollars on a linked quarter basis. About half of that was in salary expense and two-thirds of that salary expense was devoted to the residential mortgage lending activity.

We continue to have a lot of success in recruiting people. We've added seven new relationship managers over the quarter, plus we added a very senior person in the form of Merriman Morton in Austin, who has a distinguished career when he joined us coming from 27 years at Texas Commerce.

Our credit quality was exceptional during the quarter. We'll comment in detail on that. Let me just say a word about debt income guidance. We are comfortable with the guidance we have previously given. That guidance was 18 to $20 million for the year as a whole. Given the visibility that we have with three quarters behind us, I think we can comfortably say that we can narrow that guidance to 19 to $20 million.

Before I turn it over to Peter, let me just say that we are in the planning process for 2005. We're not in a position at this point in time to really make any comments about specific guidance for 2005. We are aware of what the analysts have, which basically is $1.00 to $1.05 at this point in time. We feel comfortable with those numbers. We'll be in a position to give more specific guidance either later in the quarter or with the announcement of our fourth quarter earnings.

Let me now turn it over to Peter Bartholow, who is going to review the financials in somewhat more detail. We'll hope to make this presentation relatively short so we can get to your questions as soon as possible. Peter?

Jody, thank you.

The report will be fairly brief. I think as I have said many times before, the numbers speak for themselves. We've had net income growth to $5.2 million, an increase of 57% from the prior year, and an increase of 20% from the second quarter of this year. And annualized growth rate that Jody mentioned on an earnings per share basis was very, very high, 17.6% in the quarter, 43% over the prior year.

Jody mentioned that we have a lot of earnings momentum with the increase in interest rates. We've seen the Fed -- excuse me, a return on assets reach of just under 90 basis points, and ROE moved north of 11% for the first time.

He mentioned also the momentum that we have in long growth. 30% growth, year-over-year, 8%-plus on a link quarter basis, and September 30th, outstandings were 4% greater than the average for the quarter. Again, focusing on the momentum that we have into the fourth quarter with rising interest rates.

Total loan growth finally improving as well, with stabilization and improvement in the loans held for sale category. That's largely attributable to the improvements that Jody referenced in the operations of residential mortgage lending.

Net interest margin at 337 was substantially improved from the prior quarter and even 60 basis points from the prior year.

We saw an improved earning asset mix. We saw improvements still in [inaudible] sensitivity position of the bank, and we do remain, as Jody mentioned, very well positioned for improvement in the fourth quarter and beyond, since we benefited only from 40 basis points of the 75 basis points in Fed fund movement from June 30th.

We start there for the fourth quarter with a 35 basis point tailwind in earning asset yield. Not on the entire portfolio, but on the variable-rate portfolio.

If you'll turn to page five, we demonstrated dramatically improved efficiency in the generation of high-quality earning assets. That's our core business model, and we think, as Jody commented with rising interest rates, that it's certainly validated.

We have12% growth in net revenue to $19.4 million, 8% growth in non-interest expense. Jody commented that RML had a significant effect on that. They generate large commission expense for us, but they only do that when they are demonstrating much more success in originating and selling residential mortgage loans. So we had substantial growth on both net revenue and on non-interest expenses because of RML. Those actually are positive signs for that business.

Efficiency improved to 63.9%, sharply down from 66.3% on a link quarter basis.

Earning assets -- again, part of the efficiency of our business model -- focus on business lending without dependence on large investments in bricks and mortar, that earning assets reached 94% of total assets, and at this point, more than 95% of our stockholders' equity is invested in financial assets.

Credit quality Jody referenced is remarkable. Exceptionally, it is improved from what were already very strong levels.

Net recoveries, we experienced $78,000 or two basis points on average loans, bringing year-to-date net charge-off levels to only 7 basis points. We saw improvement in nonaccrual loans and nonperforming loans, which we had actually reported that we would have at the last earnings conference.

Reserve increased by just under a half million dollars to 18.7. Because of the rapid growth in loans, the reserve as a percent of the total portfolio fell to 1.26%, but was 1.31% of average core loans during the quarter. At that level, we now have a reserve that is 9.9 times our trailing 2-year net charge-off level and over 2.6 times all net charge-offs from the inception of operations at the end of 1988 -- 98.

Slide seven, nothing really further to comment on here. We did see an improvement in earning asset mix, with the growth in loans significantly outpacing the growth in securities. We saw a dramatic improvement we have mentioned in ROA and ROE. We see a predicted progression further with the improved interest rates and the impact those rates have on our margin.

Slide eight, again, up 32%-plus on loans held for investment. Substantial growth on an average basis and deposits.

Slide nine is just a quarterly depiction for the last five quarters of the basic earning -- excuse me, basic income statement.

The next slide is the average balances, rates, and yields. Seen dramatic improvement of 28 basis points on the securities portfolio. We've benefited from buying opportunities that occurred during the quarter, but have, for all practical purposes, evaporated with the flattening of the yield curve we experienced more recently.

Loans held for investment grew by 36 basis points in yield. The same number, actually, for the spread between the total assets -- excuse me -- earning asset improvement and the rate of interest-bearing liabilities. Net interest income to earning assets, therefore, increased by 14 basis points to 337.

I mentioned slide nine. You'll notice the non-interest expensed earnings to assets. Beginning at the time that RML was ramped top, we've seen an increase in that level. That level has been offset by the significant increase -- significant improvement in the efficiency ratio, which is just below it.

Nothing significant to comment on on page 12.

You've all seen the graphic depiction of the growth rates and deposits and core loans -- core funding -- composition of loans on 14.

On 15 you see a depiction of -- now below or at or just below 20 basis points for the last four-plus years on the loss ratio and again, 131% ratio of allowance to average loans for the period.

Slide 16, just the compound growth rates of revenue, net interest income, non-interest income and expense.

The slide 17 is new to this presentation. We're missing a couple of data points, but we have taken the liberty of using approximations. What we show here, again, relates to the efficiency of our business model. We see that because of what we're focused on and because of the effect of the low interest-rate environment, the peer group, Texas and national peers, have an advantage against us in terms of yield-on earning assets.

Forty to 50 basis points among the national peers and 65 to 80 basis points among the Texas peers.

The next slide shows, though, that we enjoyed dramatic benefit of lower expense base, enjoying 99 basis points against the Texas peer advantage. That range is really more in the 60 to 120 basis point, depending on the nature of the business activity of the Texas group, and 50 to 75 basis points range among what we did would consider the relevant portion of the national peer group.

Nineteen shows again the interest sensitivity position. We saw an increase slightly in the quarter due to the fact that the loan growth was -- which is substantially all variable rate, outpaced the growth-in securities, and we had at the end of the second quarter and into the early third quarter, done some lengthening of liability maturities. So we have about a $506 million interest sensitivity gap.

With those summary comments I will turn it back over to Jody and then to Q and A..

The only thing I would say in wrapping up those -- my previous comments, and Peter's, is that we're very excited about the future. We think the business model that we have created at Texas Capital is unique and puts us in a very, very strong and advantageous position as it relates to the prospects for our future.

With a little tailwind at our back in terms of continued growth in the economy, and as rates continue to rise, which we firmly believe that they will over time, I think you'll see extraordinary results out of this organization.

With that, let me turn it back to the operator for Q and A, and we will look forward to trying to answer your questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two.

Questions will be taken in the order received. Please press star, 1 to begin. And our first question comes from Scott Alaniz. Please proceed.

Good afternoon, guys.

Hi Scott.

Question. First, Peter, you mentioned that you had lengthened some of your liability durations. Can you talk a little bit about that? Give us a little color on what you've done on that side of the balance sheet?

Not very much, frankly, but we did a little lengthening at the end the second quarter and into the first. No significant effect on overall, but it does have a minor effect on overall sensitivity.

I see. And as to go into 05, what are your intentions? With respect to that, you know, the funding side of the balance sheet, and perhaps trying to, in the duration.

Scott, we have no significant plans to do anything. We obviously are as opportunistic as we can be on picking spots that makes sense. So we continue to nibble and -- in various maturities. We will be, by the first quarter of next year, seeing the elimination of substantially all of the remaining wholesale deposit program with Merrill Lynch. No particular focus on how we will replace that, because as Jody commented, deposit levels have been quite high and funding very good.

Scott, the only thing I might add, really, is relevant to the other side of the balance sheet. As rates continue to rise, we would anticipate that some time in the future, and we don't know when that will be, that we'll be able to begin to lengthen the duration of our securities portfolio and as you know, to this point in time we have been following the strategy of keeping it as short as possible in a rising rate environment, but again, you know, we missed the last cycle of high rates because we were, you know, brand new to the business. Hopefully, we won't miss the next cycle of high rates.

I see. Do you have your net interest margin for September?

Yes, we have it.

Can you share it?

Probably not.

Okay.

I'm not trying to be glib, but, you know, Scott , we can't do that.

Okay. Let's move on to another question so someone else can ask a question. Just comment a little bit about 2005 goals for hiring relationship managers.

Let me take that one and I'll ask George Jones to add anything that he wants to add. As I mentioned earlier, we're just beginning our planning process, and we have a strategic planning conference scheduled for November 3rd and 4th.

It's our expectation that our principal goal for 2005 will be to identify and add to our ranks high caliber people and we'll probably devote an outsized amount of our resources to that, in terms of our expense increase over the course of the 2005.

With regard to where those people might be, you know, our objective is to maintain a balanced and diversified loan portfolio, so hopefully they would be in all the disciplines in which we now operate.

In terms of new lines of business, I don't anticipate anything that we would be adding at this point in time, but as you know, we are a little optimistic, so if something comes along that appears irresistible, we might -- we might add a line of business, but we're never going to, you know, take big bets or make big bets on anything.

George, do you have anything to add?

No, Jody, just we're going to stay, Scott, true to our model, as we've told you before. We're not going to put a lot of money in bricks and mortar. It's going to be in people. That's what's performed for us in the past and that's what we see is really for our strong future in '05.

Thank you.

Our next question comes from the Bain Slack. Please proceed.

Good afternoon.

Hey, how are you doing? I wanted to know if -- on the net interest margin, I don't know if you provided us the monthly margins? On a monthly basis, I guess?

No, we did not.

Can you? Or --

We could, but just as a matter of policy we are reluctant to disclose any kind of monthly averages or so forth. Let me just assure you that, you know, in terms of net interest margin, it's been going our way.

Okay. That's fine.

I just want also to ask about the [inaudible] finance group that I think started in August, I wanted to know, did they have much of an effect this quarter? If you could break that down, or give us some color on that?

Sure. We've got them up and running and they are very effective. We have -- they are true to their plan. In fact, they're a little bit ahead of what we anticipated. We expect very good results by the end of the year. They are right on track, Bain.

Bain, in terms of loans on the books, there were none in the third quarter. But we have a solid pipeline from that group and --

Great. Thank.

And we have funded loans at this point, today.

In the fourth quarter?

Yes.

Okay, great. Thanks

And the next question comes from the line of Campbell Chaney. Please proceed.

Good afternoon, guys. I have a couple of questions on compensation. Can you give us an idea or some color on what kind of growth assumptions we should look at, with regards to compensation going forward? And then maybe for this quarter, give us an idea of the breakdown of how much was in fixed compensation versus variable?

Well, in terms of what the expectations are going forward, you know, we do continue to add people. Based upon where we were at the end of the quarter, I would think that unless we do something extraordinary, like acquire a group of lenders, that you would see sort of a normal progression during the quarter.

As we mentioned, the last quarter we were up about a million dollars in terms of salaries and benefits expense. I would just make a rough guesstimate, without having detail in front of me, that the number for the fourth quarter would be between a half million and a million dollars. In terms of total expense and, you know, salary is the biggest driver of that.

So the half a million to a million would be total noninterest expense? Did I hear you correct?

Right.

Great.

And Campbell, let me amplify a little bit. As we mentioned, RM -- residential mortgage loan group, if they are successful in generating funding and selling mortgage loans, they get substantial commission income. Our benefit expense in that line.

That represented roughly a third of the total increase in noninterest expenses in Q3. We obviously have other basic salary increases for the company throughout the review cycles. And then we have incentive compensation accruals for the consolidated performance.

Okay. And can you tell me how much you're Sarbanes Oxley compliance costs could be for the fourth quarter? Is it going to be higher than the third or is it going to be pretty steady?

It's going to be relatively steady. The fourth quarter will be up always a little bit over prior quarters because that's the intent -- there's much more intensity of activity and therefore building from the public accounting sector

It's not going to be significant. Overall cost of compliance has been very well contained. We believe we will have no difficulties whatsoever. It is -- the Accountants' Full Employment Act clearly to -- they have a lot of ways to increase fees during this cycle. I'll put it that way.

Let me just make one final comment about this whole question of expenses versus income. As a growth company, our growth and expenses or increasing expenses is going to be higher than our peers', generally speaking. On the other hand, our growth and income will always outpace our growth in expenses. And that is a principal objective and a goal of the company.

I understand. Great quarter. Thanks a lot.

Thank you.

Ladies and gentlemen, as a reminder, to ask a question please press star followed by one. And our next question comes from the line of Michael Kruner. Please proceed.

Hi. It's Jennifer Demba. How are you?

Hello, Jennifer.

My first question was going to be non-interest margin by month, so I'll skip over that one.

We've taught you about that.

Yeah. My second question: can you give us a little more color on the seven relationship managers that hired during the quarter? And if my math is correct, that brings you to a total of 78?

Close. You're close. Four of those people were in the lender finance group.

Ok.

I may have a little difficulty saying where the other three are. We have Keith Cargill here with us. Keith, do you --

We have 2 corporate bankers in San Antonio and we added one in Dallas as well. Partial banking. Corporate banking sector.

Okay. And that brings your total to how many?

We're at 76.

76. And you want to have 82 by the end of the year, is that right?

That's what we said in the past. But again, Jennifer, we're opportunistic. If it's a little more, it it's a little bit less, we'll do what we can.

We've got some very good people in the pipeline currently. And we're now, Jennifer, in the process of trying to determine as best we can the capacity that we have within the organization, assuming we hired no one. And we believe that capacity is quite, quite large, in terms of the increase from our current loan base.

One more question. You commented, you thought Houston was going very well. Could you give us a sense of your loans and deposits there? And how much it was dilutive for the entire quarter?

Well it wasn't dilutive for the entire quarter, it was very positive for the entire quarter.

Okay. Okay.

And we don't disclose loans and deposits, you know, by geographic area. And I hate to get started doing that for competitive reasons. But let me just say to you that deposits are way ahead of plan, loans are still a little behind plan. We haven't found the commercial lender that we're looking for in the Houston market. As you know, Jennifer, we're very, very selective. And we want to make sure we've got the right combination of people. And we're still looking for that commercial lender. We have a candidate that we're very high on. And hopefully, we'll be successful in that area.

Okay. Thank you. Good quarter.

Thank you very much.

At this time there are no further questions, so I'd like to turn the presentation back over to the speakers.

If there are no further questions, let me just say that again we're very pleased with the results that we obtained in the third quarter. We're looking forward with great anticipation to the fourth quarter and to 2005.

Everybody around here is very charged and we're working awfully hard on behalf of the shareholders. We appreciate the interest on the part of all of you on the phone today. I would encourage you to give Peter a call or give any of us a call if you have any additional questions. We'll be glad to try to answer them. And thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.