Texas Capital Bancshares Inc (TCBIO) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Q4 2006 Texas Capital earnings conference call.

Throughout this conference all lines will be on listen only. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn the conference over to your host for today's call, Ms. Myrna Vance.

Thank you very much, Robin.

Good afternoon to all of you.

We are glad you could join us today to discuss our results for the fourth quarter and the full year of 2006.

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

Should you have any follow-up questions please give me a call at 214-932-6646.

Now before we begin our discussion today, I would like to read the following.

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

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

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

These and other factors that could cause results to differ materially from those described in the forward-looking statements can be found in our annual report on Form 10-K for the year ended December 31st, 2005 and other filings made by Texas Capital BancShares with the Securities and Exchange Commission.

Okay.

Now let's begin our discussion of the quarter and the year.

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

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

After our prepared remarks our operator Robin will facilitate our question and answer session.

At this time, let me turn the call over to Jody.

Thank you, Myrna.

Good afternoon, ladies and gentlemen.

George and Peter and I are pleased to be able to report to you what we believe is another very, very good quarter for Texas Capital BancShares.

Most importantly, we believe it is a quarter that sets the stage for a very good year in 2007.

But before we get to 2007 led me just review briefly a few things about 2006.

I will be covering the highlights and then Peter and George are going to get into the details.

Beginning with earnings per share both for the quarter and the year and adjusting for 123R, we are up 15% for both periods.

If you make another adjustment for 123R by adding the cost of 123R to 2005 results, and adding the cost of 123R to 2006 results which, respectively, are $0.04 and $0.07 you get a little different look at the power of the earnings that we are showing you today.

Those numbers would adjust to $1.00 per share for 2005, $1.17 for 2006, producing a 17% increase.

Looking at it a little different way and this is more on a cash basis and, remember, for those of you who don't know this I have a background in the technology business and we usually report it on an EBITDA basis.

I am not going to do that today but if you take our 2005 and 2006 numbers and adjust for depreciation that number in 2005 was 1.8 million.

In 2006 it was 5.3 million, primarily because of the operating leases that we put on the books.

If you adjust FASB 123R which was 0 in 2005 and 2,847,000 in 2006 and you adjust for the very modest intangibles that we amortized which was 313,000 in 2005 and 636,000 in 2006, you get a result that is strikingly different than the one you see in our reported numbers.

EPS for 2005 on that basis would be $1.05; for 2006 would be $1.31 which represents an increase of 25%.

Turning to some other facts and, looking at our loans and deposits in particular, let me begin by saying we had an exceptional year in terms of loan growth.

In fact we created, if you look at loans, a $646 million bank within Texas Capital Bank during the year.

If you look at deposits we created a $574 million bank and if you look at total assets we created a $672 million bank.

To put it into another context, our loan shelved for investment year-over-year increased 31%.

Linked quarter, 7%.

And on an average year-over-year, increased 33%.

Our total deposits on a year-over-year basis increased 23%, on a linked quarter basis, 11%, and if you look at the average for the entire year 29%.

Our DDAs which were not as strong at the end of the year as they were at the beginning of the year increased $1,700,000 year-over-year.

That is primarily because we had a very strong surge in the last quarter of 2005.

Linked quarter basis, third quarter to fourth quarter of 2006 they increased 10% and on an average basis from 2005 to 2006, demand deposits increased 13%.

Another fact which I think is interesting and not to denigrate any of our competitors, but merely to just make a comparison our little creation during 2006 of $646 million exceeded that of Colin Frost, Prosperity, and Sterling combined.

Their total being 418,000.

We exceeded that by 150%.

We did have a successful year in our lines of business and in all of our markets.

Strong growth was recorded throughout the state -- Houston, Austin, Fort Worth and San Antonio accounted for about one-third of our loan growth, Dallas accounting for the other two-thirds.

Dallas corporate was particularly strong in addition to the regions and also our developing lines of business showed strength during the year -- those being Bank Direct Capital Finance which, as you know, is our premium finance subsidiary.

Our leasing subsidiary and our insurance subsidiary all showed strength, particularly during the last half of the year.

We also had a successful year in recruiting and retaining people.

We added 20 relationship managers during the year.

Most importantly eight of those came in the last quarter.

We lost one person in the last quarter.

So the net gain was seven, but we will be incurring the full expense of those people as we enter 2007.

We will have a continued focus on recruiting proven talent.

We are going to be more careful in the future -- not that we haven't been in the past, but we will be vetting these people very, very carefully simply because they are more expensive in the marketplace and we want to make sure we have the highest quality on board, complementing the high quality that we already have.

In terms of credit quality, I think this is one of the major highlights that we are going to report to you today.

George, in a few minutes, is going to go into considerable depth.

So I'm just going to again focus on a few highlights.

Midyear of 2006 John Hudgens sent out a memorandum -- John, being our Chief Credit Officer -- advising all of our credit people that there were some signs of weakening conditions and competitive pressures in the marketplace that we found disturbing and, basically, we put people on notice that they needed to be judicious in putting new credits on the books.

And I think they have been as evidenced by the fact that, for the year, our loans to -- or charge-offs to total loans was .08, which I think is a very, very good number compared to any universe one would want to look at.

We are very aggressive in recognizing loan, losses, I would like to give you an example, because I think there are various ways you can look at the numbers.

And I would like to just emphasize one action that we took during the year.

In the second quarter we charged off $1,513,000.

Most of that consisted of two loans.

One for $1 million, one for $500,000.

In the third quarter we recovered $441,000 of the $500,000 loan that we charged off.

Now one could argue that we shouldn't have charged off a loan that we had such a substantial recovery on within such a short period of time.

The fact of the matter is it just reflects the very conservative nature of the way we like to operate our business.

The marketplace focused on the recovery in the third quarter and said that earnings would be less by $0.01.

What they failed to do was focus on the second quarter and recognize that had we not charged that loan off our earnings would have been greater by $0.01.

The net result for the year washes out.

But it would have created a different trendline than the one you saw.

Again, George is going to get into the dynamics of our charge-offs for the year.

I think we are entering 2007 from a very, very good place.

I would now like to turn it over to Peter who is going to discuss -- let me just mention net interest margins very briefly.

We did have an improvement in our net interest margin at 4 basis points from the third quarter to the fourth quarter.

That net interest margin being 3.84, in the fourth quarter.

And also 3.84 for the year.

With that, let me turn it over to Peter who is going to go into more detail with regard to the financials.

Thank you very much.

Turning to slide six, to pick up what we will describe as our performance of valuation.

As Jody reported we had $29.2 million in net income.

That was consistent with the guidance as revised in midyear.

EPS as he noted was 15% before the 123R and as he also commented, if you adjust operating earnings in 2006 for the effects of 123R, the non-cash charge of $0.07 per share, the income would have been up $0.17.

123R [is a] significant issue for us.

I think everybody understands the nature of our employment base and the productivity of our people and that does necessitate higher average 123R cost.

We believe in our peers.

It also necessitates a higher incentive compensation component of our total expense base.

Net revenue grew 7.8% during the quarter.

That's 26.8% over the prior quarter and 30% up over 2006. 2006 over 2005.

Jody commented we saw an increase in the net interest margin, 4 basis points on a linked quarter basis, 18 basis points for the year.

Net revenue growth was built on a very strong growth in net interest income plus a 66% increase in non-interest income for the year.

We do have in our numbers as reflected, a continuation of a very substantial build out during the year.

Jody commented that in the fourth quarter we actually had more in the way of RM growth than one-quarter than we have had for some time and for the full year an increase of a total of 20.

Both of those numbers were actually in excess of planned numbers.

We saw expansion in Q3 which carried over first full quarter of results in Q4.

Again, relationship managers and support personnel required to maintain the kind of growth that we've had over the last year.

We saw total expenses rise substantially in the fourth quarter.

I mentioned the increase in the AR base, the carryover from Q3.

We also had in Q4 a substantial increase in 123R expense.

We saw very heavy increase in commission revenue for our Tex Cap group as well as a substantial increase in depreciation on equipment leasing.

Those were the improvement in operating income was offset directly by certain categories of the expense, such that when you adjust for the -- you adjust the income by the amount of the directly related expense the growth in noninterest expense was 26%.

The difference between that and what we will describe as the plan for 2007 again is primarily a build out expense, the impact obviously of 123R which is a substantial component of the fourth quarter and full year results.

Other variable incentive-based expenses brought that to the total of 33%.

In general we had significant development and infrastructure costs supporting the portfolio growth of 33%.

As Jody commented the provision in the fourth quarter was $1 million, just over the amount of net charge-offs which George will discuss in more detail.

Suffice it to say, the provision was driven essentially entirely by loan growth not what was happening in the portfolio with charge-offs which were, in fact, offset by other significant improvements.

Turning to Page 7.

It's just the income indicated by quarter.

There is a five quarter period ending Q4 2006. 123R and the expenses that I discussed certainly had a significant effect on ROE, ROA and efficiency ratios for the year.

Commented that approximately 22% of the expense growth in Q4 related to development cost and build out. 123R percent just the increase another 10%.

The variable directly related expense -- expense related to income and revenue was another 7% and a total of incentive-based pay was 33% of the increase from Q3 to Q4.

Numbers are comparable for the year-over-year comparisons when those adjustments are made.

Quarter to date averages on page 9.

Excuse me -- I've skipped page 8.

This is year-over-year averages.

Jody mentioned the fourth quarter growth in loans.

We also had year-over-year of 13% increase in demand deposits.

That is a very unusual number that was essentially amassed by the fact that the year-over-year comparisons in the last half of the year have not been strong, due primarily to very substantial growth in DDA that occurred during the last half of 2005.

Jody mentioned that loan growth $658 million in total loans, year-over-year average.

We ended the quarter, if you will look at the next slide, No. 9.

This is again averages but we ended the quarter in loans held for investment, 4% higher than the average for Q4 and end of Q4 was already 23% -- 22 to 23% higher than the first quarter of 2006 average, affirming what Jody said that we entered 2007 in a very strong position in terms of growth.

We have obviously seen a continuation with the yield curve the way it is in securities run off.

I will comment -- meant to do so earlier -- but comment the yield curve represented for us a very substantial opportunity lost, not compared to having a big carried trade.

That's not our plan.

Never would have been -- but we estimate that the overall effect of the yield curve on our performance which essentially was offset through loan growth and expansion of margin was as much as $8 to $10 million.

That reflects obviously the negative carry-on securities portfolio the last half of the year.

It reflects effects on yields and mortgage warehouse group, the loans held for sale category.

Those loans are influenced by the 10-year essentially as well as the effect on lease portfolio and, of course, the fixed-rate loans.

Turning to Page 10.

Period end balances I commented on.

We had a very substantial growth year-over-year on deposits.

For the quarter, we actually saw deposits -- for the year we saw deposits exceed growth in loans.

Year-over-year, 23%. 11%, linked quarter growth.

Turning to Page 11.

I'll comment further about net interest margin.

We have seen an ability to hold rates, hold yields in line.

We have not, we had some contraction evident in the first half of the year and for the last half of the year overall spreads to prime have been relatively flat and favorable, especially given a magnitude of the loan growth and the effect of competition on pricing.

We saw a 9 basis point improvement in earning asset yields.

That is on top of 5 basis -- or included in that, of course, is a 5 basis point improvement in total loans yields.

Total loan yields as I mentioned were adversely affected by the effect of the yield curve on the loans held for sale category which were up substantially.

I will comment that the loans held for sale category while we've seen some margin pressure and yield pressure there, we are very profitable in that line of business.

And the fees which are reflected in non-interest income represent another 90 or so basis points on average outstanding.

With that we saw, as I mentioned earlier and Jody said of 3.84% net interest margin for the quarter of 4 basis points from the prior quarter.

We have seen consistently, because of the loan growth, a reduction in the composition of a DDA component of total funding.

That certainly is as long as we are maintaining the kind of growth that we have, we expect to persist even though year-over-year we enjoyed a 13% increase in average outstandings for demand deposits.

The Company remains very asset-sensitive.

But with the yield curve and the environment that we have, we are not as exposed to a decrease in rates nor will we benefit as much from the increase in rates should that happen as we experienced throughout 2005 and the first part of 2006.

We have seen, obviously, an improvement in the composition of earning assets with loans growing as rapidly as they have and the reduction in securities outstanding.

We have continued to make a modest amount of fixed rate loans.

Lease portfolio has grown nicely.

I mention again I will mention again that that has hurt our overall margins but we are confident that first of all it is profitable and it is the right thing for our business.

With that, I will turn it over to George to talk about growth and credit volume.

Thanks Peter.

You will hear us repeat a couple of times as it relates to growth and loans and deposit but we do think it is exceptional performance compared to our peer group and worth mentioning again.

On slide 12 you see the familiar slide that shows our compound annual growth rate in loans and deposits for the past five years.

Exceptional growth in all categories as we've talked about with very strong in demand deposits at 39%.

Example of that Q4 '06, average DDAs were up 13% over Q4 '05 averages and period end DDAs Q4 '06 over Q3 '06 were up 10%.

Total deposits on an average basis was up 29% for that same period.

We saw the strongest average growth in deposits on a linked quarter basis from corporate banking and private banking in Dallas and from Fort Worth, Houston and the San Antonio regions.

Growth in loans held for investment over the five-year period was 26%.

Average year-over-year change Q4 '06 over Q4 '05 as mentioned before was 33%.

The linked quarter growth was 36%.

C&I loans drove approximately 58% of the growth and real estate loans drove approximately 30%.

Our strongest average loan growth for the year came again from corporate banking in Dallas, Houston and our premium finance unit Bank Direct Capital Finance.

On slide 13 we continue to see good growth in revenue and income.

As we have discussed previously we will renew our focus on reducing non-interest expense growth in 2007.

Turn to slide 14 and I want to talk for a minute about credit quality and it is a full slide but we really need to explore how good our credit performance for the year and certainly for the fourth quarter was.

Net charge-offs of $1.9 million total in 2006 with $838,000 of that coming in Q4 2006.

That ratio was only 8 basis points in '06 and 4 basis points for the last two years on charge-offs of just $1.7 million.

We do anticipate recoveries on a majority of those loans we charged off in Q4 '06; but as Jody mentioned earlier we take a very conservative approach to the charge-off practice and we believe it is the right thing to do at this point in time.

Our provision of $1 million in Q4 '06 and $4 million for all of 2006.

As Peter mentioned the growth in the portfolio was the primary driver of our overall provision for 2006.

As we've stated before we have not changed our historical methodology and reserve adequacy.

The provisioning is consistent with that methodology.

And we don't plan to change it.

The provision reflects substantial improvement in the level of classified assets to an extremely low level.

We had a significant decline in classified assets in the fourth quarter of '06 and that is really noteworthy because of the magnitude, as you can see, of the loan growth that we've had not only in '06 but in recent years.

Our results really reflect as Jody mentioned the tightened standards and our focus on early action.

We strongly believe in moving potential problem credits out before they become a problem.

Anticipated reduction in nonaccrual loans will augment the reserve, but again determination of adequacy is not dependent on any of these future actions.

The reserve is where it needs to be today.

Our reserve position remains high as a multiple of all measurements of credit quality of classified assets, net charge-offs, NPLs.

Our nonaccrual loans at 33 basis points increased a little over $2.6 million from Q3 '06 but we do expect almost a $3 million payoff in Q1 2007 and assuming that happens we should return that ratio to about 23 basis points.

We don't have very much ORE at all.

Basically a couple of pieces of ORE, the largest one which represents about 90% of our ORE portfolio we have a contract pending for sale.

And that contract is well in excess of the carried balance on our books.

The 90-day past due loans include a little over $0.5 million that is guaranteed by the government.

You will recall we have a portfolio of about $40 million of these particular loans; principal and interest is fully guaranteed by the U.S. government.

So there is no loss on this credit -- on any of these credits.

If you will turn to slide 15, it shows our charge-offs to average loans graft over five years.

We believe these are excellent numbers.

Our ratios related to credit quality we believe are very good.

The reserve adequacy ratio, non-performance to loans and our reserve coverage to nonperformers.

All very good.

As a matter of information, our loan loss reserve today stands at $21 million and since inception of the Company in 1998, we have had only net charge-offs of $9 million.

Overall, an excellent year.

We believe a very good track record for our Company.

Jody?

George, thank you very much.

I am going to spend a few minutes talking about guidance for 2007 and, then, of course that will be followed by questions that you may have.

With regard to the economic outlook we think we couldn't be in a better place than in Texas.

Texas as it relates to the economy is operating on all cylinders.

We just learned last Friday that we hit the lowest unemployment rate in the last five years at 4.5%.

We are fortunate to be in the five major metropolitan markets and just to give you a benchmark Austin's unemployment rate is 3.4%.

Dallas 4.2, Fort Worth 4.3, Houston 4.3 and San Antonio 4.1.

All extremely good numbers and what it is really indicative of is the job creation that is taking place in Texas, as well as the number of new people who are entering the workforce and are finding employment.

There were 213,000 new jobs created last year and in addition to that Dallas leaped from being the fifth largest -- the Dallas-Fort Worth metroplex that leaped from being the fifth largest in the nation to the fourth largest behind New York, Los Angeles and Chicago.

Again I don't think we could be in a better place.

Some may wonder about the energy business.

We have seen a substantial decline in energy prices -- both on the oil and natural gas front.

Let me say that the rig count in Texas hit a 20-year high in December.

So we still continue to benefit from a high level of activity in this state as it relates to the discovery of new oil and gas.

We benefit in particular from that due to the Barnett Shale and the fact that the center of that resides essentially to meet the city of Fort Worth where they are now drilling wells in playgrounds and school yards.

Industrial production hit an all-time high in the September-November timeframe.

We don't have December numbers yet; but the importance of this is that the industrial sector largely weighted the manufacturing is healthy and has made a significant rebound since the lows hit in 2001 and 2002.

As it relates to Texas Capital Bank, we are going to focus on our current business and continue to improve those lines of business.

We do not plan to add to any new lines of business during 2007 and, in fact, as you remember we did eliminate one line of business -- that being our residential mortgage lending unit, which was operated on about a breakeven but candidly had not lived up to our expectations and was a significant diversion of energy and attention, particularly from some of the support groups such as human resources, accounting and IT.

Looking at the specific guidance for 2007, it is our assumption that interest rates are going to remain in a very narrow band during the year.

Specifically for our forecast we are assuming a 5 1/4% Fed funds rate for the first half of the year declining to 5.5% for the second half of the year.

I'm sorry -- 5% for the second half of the year.

The margin, we believe, will be essentially flat.

That will depend somewhat on loan growth and how that loan growth is funded.

As Peter described, during 2006, we did see the need to fund our loans.

And that funding came from money that was interest-bearing on the deposit side and in some borrowed funds.

With regard to the inverted yield curve we've already commented on that.

Let me just say that currently we have got a 40% negative carry on the securities portfolio. 40 basis points negative carry on, on the securities portfolio.

That will cost us about $2 million during the year but we continue to see that portfolio decline.

We would expect it to decline about $100 million from the current point.

We also believe that -- based upon the strong economy and an expectation of a continuation of the strong economy in Texas -- that we will continue to evidence strong loan growth and strong deposit growth.

We likewise believe that we will continue to see improvement in our developing lines of business, specifically Bank Direct Capital Finance, our premium finance company leasing and insurance.

George has already spoken to our sound credit quality and the modest net charge-offs that we experienced during the year.

The provision will be driven, obviously, by our credit experience as the year progresses.

Just as a matter of information, we have looked at the consensus forecasts that are available to us and the average provision seems to be about $6 million.

The high is 6.7; the low is 4 million.

We have a number in our plan that exceeds the high of the forecast.

Looking at the first quarter.

I just want to issue a word of caution here because it is easy to forget these things.

But we are impacted seasonally by the first quarter and by a number of factors that are peculiar to the first quarter.

The first is the reduction in the number of days.

It being the shortest quarter in the year in terms of number of days. 90 days.

In January through March, compared for example to 92 days in the last quarter of the year.

Staffing expense also hits us more heavily during the first quarter.

We record most of our FICA because of the high level of professionals that we have onboard and also we pay bonuses during the first quarter.

That number is accrued, but we do have merit increases that fall roughly from the first quarter to the third quarter.

And, finally, we've mentioned that we added eight new [RMs] during the less quarter of last year.

The full expense of those will be felt during the first quarter of 2007.

With regard to 123R expense, we will be experiencing the result of grants that we gave during the last quarter of this year during 2007.

I would like to expand on that for just a moment.

We, in looking at the competitive pressures in the marketplace and our desire to keep the team that we have in place and we think we have an exceptional team we decided that it would be prudent for us to issue a onetime equity grant.

That grant went to about 40 people.

It's accompanied by employee contracts that these people signed and they obviously are our key players.

We recognize the contribution all of these people make to the success of Texas Capital BancShares and Texas Capital Bank; and we believe it is in our best interest to have done this.

This will cost us $0.05 during 2007 and in subsequent years.

We don't believe there will be any significant equity grants in 2007 over and above what we have already given.

There will be some but in the context of what we did in the last quarter of this year, they will be minimal.

Let me just again put this into proper context for you.

When we look at 2004 through -- or 2005 through 2007 the impact of 123R in 2005 was $0.04.

In 2006 it was $0.07.

In 2007, we estimate it to be $0.12.

So this is something that we are going to have to overcome.

Getting specifically to the guidance, we are giving you guidance of $32 million to $33.5 million or roughly $1.21 to $1.26 per share.

If you adjusted for the $0.05 123R additional expense.

That guidance would have been $1.26 to $1.31.

Looking at how we are going to operate this business during 2007.

We have already said we are not going to add any new lines of business.

The other reality is we are going to be very, very focused on non-interest expenses whereas in the past our focus has been primarily on building out the business typified by adding new lines of business or entering new markets.

This is going to be a year of relative stability as it relates to those kinds of initiatives and a tremendous focus on making our business as efficiently as we can make it, which means a focus on non-interest expenses.

Finally let me just talk a little bit about the risks to this forecast and the mitigants to that risk.

The first is interest rates.

Obviously if rates would move significantly either up or down it will impact the numbers.

The mitigants to an interest rate movement on the upside is obvious.

We remain very interest-sensitive.

On the downside, we have an unusual mitigant that I think is almost unique to Texas Capital when we look at our universe of peer banks.

And that is, the growth machine that we have.

What we're talking about is, is trading off volume for interest rate expense and, obviously, as rates go down that affects us because we are interest-sensitive.

But we believe as we have demonstrated in the past -- specifically in 2002, 2003 and in the first part of 2004 -- a highly growth-oriented organization such as ours has the ability to overcome the negatives of declining rates by rapidly increasing volumes.

The second risk is the economy; and one might point specifically to the housing sector.

We have great confidence that the economy is going to be strong in 2007.

We see signs that the housing market is not as bad specifically in Texas as the headlines would suggest.

In fact permits let during December were at record levels.

And that augurs well for construction of the first half of the year.

In addition to that, we really have little exposure to the housing sector in the context of our overall exposures.

Our overall exposure to real estate is about 36%.

About half of that relates to owner-occupied.

The other half to development; and of the development portion, a relatively small percentage is devoted to housing.

Turning to the consumer, that has been highlighted by a number of the banking organizations that have already reported as a area of significant weakness and potential weakness in 2007.

We have no retail banking.

Therefore, we have very little exposure to the consumer.

As a point of reference we have about $18 million in consumer loans on the books.

The exposure that we have to the consumer is collateral damage to the effect that that might occur as it relates to our commercial customers.

It does take a considerable amount of time for that to work its way through the economy.

The final risk that we have is our funding mix.

Peter has already spoken to that and we have planned for rapid growth in loans and modest growth in demand deposits.

And that assumes that we are going to the funding those loans entire cost deposits and higher costs borrowed funds.

I might add that during 2006 basically.

We covered our growth with customer deposits.

With that let me just finally close by making a reference to a reorganization that we have just approved as of our Board meeting of yesterday; and we think that this will realign the banks so that it operates more effectively and more efficiently and we bring focus to bear where it needs to be.

In this, George Jones who has been elected President of Texas Capital BancShares Inc., he will retain his title as CEO of Texas Capital Bank and this will give me a little bit more backstop in terms of the burdens that I carry and, George, I welcome your help with that.

The second promotion is Keith Cargill.

Keith, as you know, is our Chief Lending Officer.

He will continue to carry that mantle Companywide but we also haven't had anybody really specifically focused on Dallas and Keith will assume the role of President of the Dallas region.

So for the first time we will have somebody so designated.

We think Keith is the right person for that job.

We think he will bring a lot to it and it will sharpen our focus as we address the Dallas market.

The third promotion is Vince Ackerson.

Vince has been running our commercial banking business; and we are going to broaden his scope by having other elements of our lending report to Vince as well.

And finally [Russell Hartsfield] will take Vince's place.

Russell is a person we have identified in the past as one of our rising stars and this recognizes his great capabilities.

Given all of these changes I think that we will bring sharper focus not only to operating more effectively and efficiently, but really looking at those areas of growth that offer the most promise as well as areas of expense that need attention.

With that, I would like to open the meeting for questions and appreciate everybody's interest in Texas Capital BancShares and Texas Capital Bank.

We will try to answer your questions.

(OPERATOR INSTRUCTIONS) Andrew Collins of Piper Jaffrey.

Congratulations, George, on the new job.

Thanks Andy.

My first question is on the expense growth.

We saw 11% linked quarters growth in the fourth quarter, if I do my math right, from the third quarter and just wondering how that plays out in terms of FAS 123R and the recent hires as we look to the first quarter.

Because I know usually the first quarter is pretty soft;

I just want to make sure that I'm heading in the right direction.

Peter is the person to answer that question.

Andy.

And we were prepared for such a question.

The 123R expense in Q4 was $1 million. 980 something, roughly, $1 million and as Jody says we will have a carryover of more than that into Q1, because of the grants that he mentioned.

About 22% -- might be as high as 24% of the increase from Q3 to Q4 -- came from the expansion of RMs that Jody mentioned and the carryover of expansion that had occurred in Q3, but which Q4 was the first full quarter.

We are not giving guidance on the specifics related to expenses in 2007's first quarter.

We expect expense growth overall in 2007 to be significantly lower than the percentage increase that we experienced in 2006 for the reasons that Jody mentioned.

We had in Q4 much higher commission expense related directly to improvements in Tex Cap insurance revenues.

We also had throughout the year a buildup in leased depreciation associated with our operating lease portfolio.

As you can see in the details in the quarterly release, we also had much sharper increases in revenue for the leasing business.

But those have been erectly on set.

Q4 is the time when there are -- there's a lot of focus on the incentive compensation, verification of performance and how the incentive approvals are managed.

And so we had in three areas -- wealth management, other general and of course the overall bank incentive approvals a meaningful increase, relative to the third quarter.

When you get to all that about 80% of the expense growth relates to growth, build-out and development.

The balance of 15 or 20% is just sort of in the all other category and is a function of our growth.

So looking at those knew of RM hires, when can we expect them to result in higher loan growth and if that is what you are -- if that is what your end goal is or will we just see continued strong growth the sway we've seen it here in the third to fourth quarter and (MULTIPLE SPEAKERS)?

Clearly you've added capacity and how that plays out in 2007 obviously remains to be seen.

These are, in several instances, very high-profile players in the markets but very successful quarter in that regard.

Probably we will begin to see real results in four to six months from these hires.

We think that that is very possible and we anticipated.

And how many people was it, exactly?

There were 20 in the year as a whole.

Eight of those people were hired in the last quarter but we lost one person in last quarter.

So net of seven.

Net of 7.

So, okay.

The other 13 were spread over the first three quarters.

I was really talking about those seven, Andy.

Four to six months from now as opposed to some others that were hired earlier in the year.

They should already be becoming productive.

And the second question related to your provisioning a little bit higher than the street was expecting.

Now does that mean that you'll be maintaining your reserve ratio?

Or would you expect a little bit more seasoning going forward in perhaps your existing portfolio?

The reserve ratio will be determined by the methodology that we use and our experience with regard to credit quality during the year.

We expect a strong year with the economy.

But we don't predict loan losses and we haven't previously disclosed beyond what we've already done; what we do as it relates to modeling either provision or charge-offs for the year.

But we think that when you look at our plan it's both reasonable and, compared to prior years, conservative.

My last question with regards to the nonperforming assets increased linked quarters.

From the sounds of its some of that may be coming off here in the first quarter?

Yes.

We believe so.

When the check is in the mail is when you really know; but we do believe that about $3 million should come off that nonperforming number in the first quarter.

A small net decrease after that happens.

Thank you very much.

Andrea Jao with Lehman Brothers.

Good afternoon.

You earlier mentioned that your interest rate assumption is that rates will remain in a narrow band.

Was hoping to get a little more detail as to what that means.

We said specifically that we expected the Fed funds rate to remain at 5.25 through the first half of the year and to decline by a quarter of a percent [2.5]% during the second half of the year.

Andrea, I don't know anybody who is perfect in forecasting interest rates; and we use the interest rate futures market and other indicators to derive the numbers that we use in our plan.

Obviously, depending upon what happens in the economy, rates could move either up or down or they could remain the same for the entire year.

But we don't believe that we are going to have any significant movements in interest rates.

We can reflect back on what happened between or during 2002 and 2003 when the Fed funds rate declined by over 4%.

So our forecast is relative stability, as it relates to interest rates and we have assumed, we think conservatively, a slight decline in the last half of the year.

So if I understand this correctly that yield curve slope the way it is right now with a little relief in the back half of the year and putting that together your margin for full year '07 should be roughly flat with '06?

Flattish.

We are not going to be specific as to too many variables as you know.

Funding composition, funding rights.

I will amplify on something Jody said a minute ago.

Funding in 2006 was all customer-based.

All growth within the deposit base was customers.

We have now found -- we are now at $4 million in the last piece of wholesale broker deposits.

We have seen the ability as rates crested actually to pull some rates down and we have a new person that came on earlier in the year whose entire focus is on managing rates and rationalizing rates to the nature of customer activity.

We have already demonstrated success in some very important elements of our funding.

The only element of this we haven't spoken on happens to be long-term rates and we don't expect any significant change in the shape of the yield curve.

In other words we are anticipating that the inverted yield curve will continue throughout the year and that is built into our assumptions.

Obviously, we would be very delighted to see the long-term rates move up a little bit.

But it doesn't seem that that is a reasonable assumption.

So for planning purposes, we've assumed an inverted yield curve and we've assumed a negative carry-on in our securities portfolio.

But that portfolio continuing to run off and in 2007 at about $100 million.

So if you are putting incremental loans for 2007 using high higher cost borrowings, I'm assuming that the 25 bip decrease you are assuming for the back half of the year, it's what kind of allows your forecast to project a flat margin.

Does that make sense?

The assumption is an assumption related to Fed funds rate.

And off of that we project both yields on loans and assets, and the cost of funds.

We didn't necessarily say that we are going to be funding or that we have an assumption that we are going to be funding all the increase in loans with the highest cost deposits.

We hope we will see what we have seen since we began this Company and that is, a increase in the mix of deposits and certainly there will be an element of that which will be more costly than other deposits.

But we did see in 2006 that demand deposits in particular did not grow as we had hoped they would.

And I think, like every other bank in the country, we saw a deceleration in the growth and demand deposits.

Matter of fact is, we did see growth in demand deposits whereas many of our competitors saw declines in demand deposits.

I think, as we continue to expand our business base, these businesses need working capital.

Working capital, typically, is kept in demand deposits and we hope we will see that reflected in our total deposit mix as we go forward.

That is sort of an ambiguous answer to the question but I don't think there is a specific answer that we can give you.

Again the best we can do is to forecast off of assumptions and, again, we use the Fed funds rate and our assumption about Fed funds rate is the benchmark on which we do that.

Understood.

This is very helpful.

Thank you.

Jennifer Demba of SunTrust Robinson.

Just wondering if you could give us some more color on your RM hires in the fourth quarter?

Where they were, were they teams, singles, individuals or what?

They were pretty well across the board.

In the five regions in which we operate.

We hired people in all regions.

We think we have significantly strengthened ourselves again across the board.

That is probably the only color we can put on that except that we are very proud of the people that we've hired.

We think that they are class A players.

They would go high in the draft if we were talking about the NFL or whatever the baseball leagues are.

I'm not a baseball guy.

They were all individuals.

There were no teams as a part of that.

They were spread out around the state.

I'm reminded there is an American league and a National league out there as it relates to baseball.

I don't know if you have these numbers in front of you, but do you have the loan and deposits outstanding by market at the end of the year?

No, we don't.

Well, we do but we don't have it available and what I said was that the loan growth in Dallas -- well, in Fort Worth, San Antonio, Austin and Houston accounted for about one-third of the total loan growth of the Company during the year, whereas Dallas accounted for about two-thirds.

I highlighted, specifically, various units within Dallas and primarily our commercial lending unit as being a bright spot along with our premium finance business, leasing, I think those were the high spots.

Thank you.

Brent Christ of Fox-Pitt.

Couple quick questions.

Just a follow-up on the RM topic.

Can you talk -- just remind us of what your RM count is up to now including these new hires?

Yes.

We can tell you in about two seconds. 123. (multiple speakers) 123.

123.

What's the typical annual loan production goal for new hire that you bring on?

It really makes a difference on who they are.

Are they a commercial middle market lender, are they a business banking member lender?

Are they a lender in premium finance?

It really depends on what areas you are looking at.

They all have different goals.

The average outstanding for this 123 people not that this means a lot is about $22 million.

Obviously the commercial lender we would expect at maximum, we've got some people at $50 to even $100 million.

Is that per year in terms of origination?

Well that is what they carry.

That's what they carry (multiple speakers) --

Outstanding loans today.

That's a very productive, we think, relationship manager in the commercial loan middle market area.

Interest banking carries a little higher yield, but the loans are smaller and those people carry more loans.

But they don't carry the total dollars.

And there is another thing that we ought to emphasize on the subject and that is there is up a coterie of new people.

In this case, 20 people who came in on as RMs and we are looking for new loan originations from that group.

But we've got another 100 RMs that are already on board and these people carry loan portfolios.

And there is natural organic growth within those portfolios as well.

I guess what I was trying to get at is what type of lift you might be seeing out of these 20 new hires or particularly the ones that you added later in the year?

I think maybe the best guidance we could give you is, look at our historical growth and if you analyze that and track it and extrapolate it, you are probably going to be in the ballpark as it relates to 2007.

And then flipping gears for a second.

In terms of the credit quality and the pickup in NPAs this quarter and then the expectation that it is going to trend that down.

I'm assuming that that is the same credit that came on, that you are expecting to resolve in the first quarter?

And if so could you give a little bit more color around that?

No, that is not the same credit, but we really don't get too specific with a problem credit.

One that we anticipate coming off is a credit that we think will be paid and moved to another financial institution within the first quarter.

What type -- a commercial loan?

It is a commercial loan.

Right.

And how about the sequential increase this quarter?

Was that granular or was that just a single credit?

There were two credits basically.

Thanks a lot.

Another really -- something George brought up is the decrease in classified levels.

That is actually probably a more important indicator than just a 1/4 change up or down in nonaccrual loans.

Just to be a little more specific.

The increase was two loans.

One, a commercial loan and one, a real estate loans.

Thank you.

(OPERATOR INSTRUCTIONS).

Andrew Collins from Piper Jaffray.

One quick follow-up as a housecleaning item.

If we look at the tax rate in '06, we saw the third quarter increase but other than that running around 35.5.

Is that a reasonable assumption for '07?

Yes.

Thank you.

Sir, I have no further questions for you at this time.

Well if there are no further questions on behalf of all of my colleagues let me just thank everybody for being on the call.

I think this may be the most people we've had on a call since the inception of the Company.

Obviously, we appreciate that interest.

We are doing the best job that we can for our shareholders.

We think our outlook is very, very good.

We are very sanguine about credit quality as we enter the year; we feel very good about the growth opportunities. 123R is a challenge for us and we don't know any other way to mitigate that than to tell you what it is costing us each year and each quarter.

Again thanks very much for your attention today and please direct any questions you may have to Myrna Vance and she will be glad to obtain the answers for you.

George, Peter, myself, the rest of our team we are all available to talk to you and welcome the opportunity to do so.

With that we will close the conference call and again thanks so much for your attention.

Thank you, sir.

Thank you again, ladies and gentlemen.

This brings your conference call to a close.

Please feel free to disconnect your lines now at any time.