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| 8-K - STEPHENS CEO FORUM 8-K 9.18.17 - TEXAS CAPITAL BANCSHARES INC/TX | stephensconference8k91817.htm |
Stephens 2017
Bank CEO Forum
September 20, 2017 Keith Cargill, President and CEO
Julie Anderson, CFO
Peter Bartholow, Chief Operating Officer
Heather Worley, SVP and Director of Investor Relations
Certain matters discussed within or in connection with these materials may contain “forward-looking statements” as defined in federal
securities laws, which are subject to risks and uncertainties and are based on Texas Capital’s current estimates or expectations of future
events or future results. These statements are not historical in nature and can generally be identified by such words as “believe,”
“expect,” “estimate,” “anticipate,” “plan,” “may,” “will,” “intend” and similar expressions. A number of factors, many of which are
beyond our control, could cause actual results to differ materially from future results expressed or implied by such forward-looking
statements. These risks and uncertainties include, but are not limited to, the credit quality of our loan portfolio, general economic
conditions in the United States and in our markets, including the continued impact on our customers from declines and volatility in oil
and gas prices, the unknown impact on our loan and deposit portfolios as a result of hurricanes, such as Hurricane Harvey, rates of
default or loan losses, volatility in the mortgage industry, the success or failure of our business strategies, future financial performance,
future growth and earnings, the appropriateness of our allowance for loan losses and provision for credit losses, the impact of increased
regulatory requirements and legislative changes on our business, increased competition, interest rate risk, the success or failure of new
lines of business and new product or service offerings and the impact of new technologies. These and other factors that could cause
results to differ materially from those described in the forward-looking statements, as well as a discussion of the risks and uncertainties
that may affect our business, can be found in our Annual Report on Form 10-K and in other filings we make with the Securities and
Exchange Commission. Forward-looking statements speak only as of the date of this presentation. Texas Capital is under no obligation,
and expressly disclaims any obligation, to update, alter or revise its forward-looking statements, whether as a result of new information,
future events or otherwise.
2
3
Texas Capital is a commercially-focused bank operating in the five
largest MSAs in Texas and throughout the U.S.
• All five Texas markets highly ranked in U.S. in terms of job and economic
growth, now with major business relocations to Texas
• Substantial commercial businesses with national footprint
• Focus on middle market businesses and entrepreneurs
• Clients with borrowing needs of $2 to $15MM
Growth Strategy
• Organic growth model – no bank acquisitions
• Growth in loans and deposits driven by recruiting, acclimating and
retaining highly experienced bankers with established relationships and
industry expertise
• Exceptional growth opportunities with small market share in Texas and
leading position in businesses outside of Texas
Strong Credit Culture
• Critical focus on credit quality and risk management
• Business model predicted and demonstrated success of focus
DallasFort
Worth
San
Antonio
Austin
Houston
Overview and Strategy
4
Opening Remarks & Financial Highlights
Core
Earnings
Power
Strong
Balanced
Growth
Credit
Quality
• Record traditional LHI growth in Q2-2017
• Mortgage finance balances rebounded after Q1-2017 seasonal impact and higher rates
• Improvement in deposits since Q1-2017 decline; current level indicates more efficient use of earning
assets with lower level of excess liquidity
• Significant growth in net revenue – 12% from Q1-2017 and 18% from Q2-2016
• Operating leverage improved with more progress expected in the 2nd half of 2017
• Benefit of increase in rates as expected with exceptional growth in traditional LHI
• Before $5.3 million technology charge, Efficiency Ratio of 52.8%, ROA of 1.03% and ROE of 10.79%
• NCOs for Q2-2017 $12.4 million, or 36 bps with half of total related to energy
• Credit metrics improving and exceptional in non-energy with Q2-2017 provision of $13 million, higher
than Q1-2017 level as a result of strong growth in traditional LHI growth
• Meaningful decline in NPA levels since Q1-2017
Operating
Results
Net Income
$51.1 million
EPS
$0.97
ROE
CE
10.08%
Total
LHI
$19.5 billion
Total
Deposits
$17.3 billion
• We are continuing to evaluate the impact of Hurricane Harvey on our business
– All employees are safe, and our branches have not suffered any physical damage
– Houston is an important market for us and many of our Houston clients have diversified businesses
• Too early to be specific about loss exposure, but encouraged that total should be limited, and we are considering a modest
provision for Q3-2017
• As of July 31, 2017 traditional LHI in Houston metropolitan areas totaled $2.6 billion, or approximately 14% of total loans
– Based on early assessment very few borrowers have been affected
– Market risk real estate loans - $1.2 billion (includes builder finance)
– Other real estate loans - $351.4 million (including owner occupied, and $77 million of private client mortgage)
– C&I $1.1 billion
• Insurance is generally required on all credit extensions but is based on business factors related to each customer
– Insurance proceeds and government assistance are expected to be substantial and our clients expected to benefit
directly and indirectly
– Gaps and delays in payment may create temporary liquidity and covenant issues for some clients
• Total Mortgage Finance loans in affected Houston area as of September 13, 2017 substantially lower than initial review
– Our warehouse loans total less than $20 million; agreements limit risk with recourse provisions
– Of the total Mortgage Finance, less than $10 million in MCA; assessment to determine which, if any, loans may have
been affected by flooding is continuing
– Exposure expected to be limited, but may be subject to reappraisal, lack of flood insurance and borrower capacity to
repay
• Limited exposure for traditional LHI in Florida with little or no losses expected
– As Mortgage Finance is a national business there can be loans affected when hurricanes, or other national disasters
occur; still assessing Florida impact
5
Hurricane update
6
Energy and Retail Update
Energy Exposure
• Outstanding energy loans represented 5% of total loans, or $1.1 billion, at Q2-2017 compared to $968.5 million at Q1-2017
• Addition of new loans improves composition and quality of total portfolio as problem assets are resolved
• Strong reserve position relative to criticized assets and total energy portfolio
‐ Allocated reserve of $55.4 million represents 5% of energy loans
‐ $6.4 million of energy net charge-offs in Q2-2017 previously reserved
• Decrease in energy non-accruals
‐ Non-accruals $82.6 million at Q2-2017 compared to $100.9 million at Q1-2017
‐ Criticized energy loans decreased to 12% of energy loans at Q2-2017 from 16% at Q1-2017 and 22% at Q2-2016
‐ Total criticized energy loans at Q2-2017 $128.3 million, down from a high of $259.7 million in Q3-2016
Retail CRE and commercial exposure
• No significant changes in direct exposure levels since year-end (down $50 million to $716 million, split between C&I and
CRE)
• Retail C&I have never been a significant focus, with no exposure to large malls
• Focus is concentrated in strip centers and personal services in strong markets and sub-markets
• Loans are generally smaller transactions with modest advance rates (60s%) extended to wealthy investors exhibiting
alternative sources of repayment
• Total criticized of $2.8 million, including $1.0 million in non-accrual loans
9,
15
0
11
,1
60
6,
31
2
10
,9
80
-
2,000
4,000
6,000
8,000
10,000
12,000
Texas Regions National Businesses
$
M
ill
io
ns
Loans Deposits
7
Update on Geographic Diversification
Note: (1) Texas Regions loan balances include balances from the Energy business (2) Unemployment data through May 31, 2017
• While cities directly involved in the oil/gas industry
are more exposed to the energy downturn, Texas as a
whole and TCBI markets are more resilient, due to
improvement in its economic diversification,
corporate relocations and strong population growth
• Many of our national lines of business have been
operating for many years, increasing our geographic
diversification as each gained additional market share
• National Business balances include Mortgage Finance,
Builder Finance, Lender Finance, Public Finance,
ABL, Franchise Finance, BDCF and national
depository businesses
• Our national LOBs include Texas clients, but Texas
clients represent less than 20% of their total business
Major Texas Metro Areas
Unemployment
Rate(2)
Austin-Round Rock 3.2%
DFW-Arlington 3.8%
Houston metro 5.1%
San Antonio 3.6%
(1)
Net Interest Income & Margin
8
• Net interest income increase of 12% from Q1-2017 with
record total loan growth
• Increase in traditional LHI yield of 19 bps, despite impact
of significant growth
• Growth in MFLs decreased NIM with an increase in NII
• Slightly less than $1.0 billion in loans subject to floors,
down over $400 million compared to Q1-2017
• Average Liquidity Assets 12% of average earning assets
at Q2-2017 compared to 18% at Q1-2017 – benefit to
NIM as balances deployed into higher yielding loans
Quarterly Change
NII ($MM) NIM (%)
$163.4 Q1 2017 3.29%
16.0 Increase in loan balances -
7.6
Increase in loan yields (including
impact of loan fees)
.15
1.8 Increase in day count -
-
Increase in contribution from free
funds
.05
(1.6) Mix shift in earning assets .16
(4.2) Increase in funding costs (.08)
$183.0 Q2 2017 3.57%
Earning Asset & Margin Trends
NIM Highlights
$16.7
$17.5 $17.8
$16.6
$18.2
$3.2
$3.6
$4.1
$3.6 $2.5
3.18% 3.14% 3.11% 3.29%
3.57%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
$-
$5.0
$10.0
$15.0
$20.0
$25.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
P
or
tf
ol
io
B
al
an
ce
s
($
B
)
Loans Other Earning Assets NIM
Loan Growth
9
• Broad-based growth in average traditional LHI – Growth of $738.2 million (6%) from Q1-2017 and $1.4 billion (12%) from Q2-2016
• Strong growth at end of the quarter; period-end balance $561.6 million higher than Q2-2017 average balance
• Increase in average MFL balances of $829.6 million from Q1-2017, rebounding with seasonal strong quarter; benefit of change in participations
program with higher retained balances
• Average total MFLs represent 25% of average total loans at Q2-2017 compared to 23% in Q1-2017 and 30% at period end
Growth Highlights
Average Balance Trends ($B) Total Loan Composition
($20.3Billion at 6/30/17)
Business Assets
30%
Energy
4%
Highly L iquid
Assets
2%
Total M ortgage
Finance
30%
Other Assets
4%
Comml R/E M kt.
Risk
16%
Residential R/E
M kt. Risk
6%
Owner Occupied
R/E
5%
Unsecured
3%
$12.3 $12.6 $12.7 $13.0
$13.7
$4.6
$5.1 $5.3
$3.8
$4.7
4.35% 4.34% 4.39% 4.53%
4.72%
-5.00%
-3.00%
-1.00%
1.00%
3.00%
5.00%
$-
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
$22.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
Po
rt
fo
lio
B
al
an
ce
s (
$B
)
LHI (excl. M FLs) Total M FLs LHI (excl. M FL) Yield
Deposit Growth
10
Average Balance Trends ($B) Funding Costs
• Core funding costs – deposit costs increased 6 bps from .32% at Q1-2017 to .38% at Q2-2017 compared to 36 bps increase in average earning
assets yield; borrowing costs increased in line with short-term rates and dedicated to funding of MFLs
• Deposit focus on cost-effective growth and better utilization of liquidity build
‐ Increase in linked quarter deposits after Q1-2017 seasonal impact, with liquidity at high level with much improved earning asset
composition
‐ Lower liquidity favorable to NIM in Q2-2017, where reduction funded over 70% of total loan growth; expect fluctuations from quarter to
quarter based on timing of deposit growth relative to total loan growth
‐ Significant asset sensitivity with composition and duration of low-cost funding
Growth Highlights
$9.1 $9.0 $9.5 $9.4 $9.4
$7.8
$8.8
$9.1
$7.5 $7.9
$-
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
D
ep
os
it
B
al
an
ce
s (
$B
)
Interest-Bearing Deposits DDAs
0.21% 0.20%
0.22%
0.32%
0.38%0.30% 0.29%
0.31%
0.40%
0.48%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017
Avg Cost of Deposits Total Funding Costs
Non-interest Expense
11
Quarterly Change NIE - Efficiency
Non-interest expense ($MM)
Increase/
(Decrease)
Q1 2017 $106.1
Salaries and employee benefits – FAS 123R
(includes stock price changes) (.2)
Salaries and employee benefits – non-LTI
incentives and annual incentive pool 1.5
Salaries and employee benefits – FICA and
seasonal payroll related items
(2.5)
Salaries and employee benefits – continued
build out 1.4
FDIC assessment (1.4)
Communications and technology – technology
write-off 5.3
Legal and professional – can vary from quarter
to quarter (.3)
All other – includes occupancy, technology,
marketing, MSR amortization 1.9
Q2 2017 $111.8
• Only significant fluctuation from Q1-2017 was $5.3
million technology write-off
• Before technology write-off, flat from Q1-2017 and
growth of 13% from Q2-2016
• Net Changes in Salaries & Benefits expense were
insignificant in total
• Reduction in 123R expense – less than $1 million
• Expected expense for 2017 approximately $19
million; no change in outlook from Q1-2017
• Q2-2017 expense of $4.4 million compared to
$4.6 million in Q1-2017
• Annual incentive accrual ramps in line with plan
progress and Q2 generally higher than Q1
• Improvement in Efficiency Ratio to 55.4% driven by
improvement in Net Revenue
• Growth in traditional LHI and MF
• Improvement in core expense growth and ratio
compared to 12% growth in net revenue
• Excluding the $5.3 million technology write-
off, efficiency would have been 52.8% with
much-improved operating leverage
Performance Summary - Quarterly
12
(in thousands) Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016
Net interest income $ 182,959 $ 163,359 $ 171,223 $ 166,739 $ 157,069
Non-interest income 18,769 17,110 18,835 16,716 13,932
Net revenue 201,728 180,469 190,058 183,455 171,001
Provision for credit losses 13,000 9,000 9,000 22,000 16,000
Non-interest expense 111,814 106,094 106,523 94,799 94,255
Income before income taxes 76,914 65,375 74,535 66,656 60,746
Income tax expense 25,819 22,833 26,149 23,931 21,866
Net income 51,095 42,542 48,386 42,725 38,880
Preferred stock dividends 2,437 2,438 2,437 2,438 2,437
Net income available to common shareholders $ 48,658 $ 40,104 $ 45,949 $ 40,287 $ 36,443
Diluted EPS $ .97 $ .80 $ .96 $ .87 $ .78
Net interest margin 3.57% 3.29% 3.11% 3.14% 3.18%
ROA .96% .83% .85% .78% .77%
ROE 10.08% 8.60% 10.82% 10.20% 9.65%
Efficiency 55.4% 58.8% 56.0% 51.7% 55.1%
2017 Outlook
13
Business
Driver
2017 Outlook v. 2016 Results Comments & Changes since April 19,
2017
Average LHI Low double-digit percent growth
Increased from high single to low double-digit
percent growth
Average LHI –
Mortgage Finance
$3.6 to $3.8 billion average for final 6 months of
2017, with Q3-2017 average over $4 billion
Increased from $3.2-3.5 billion average for final 9
months of 2017
Loans held for sale
(MCA)
$900 million average (shorter hold times)
Decreased from $1.2 billion average outstandings
due to shorter hold periods with no impact on
earnings
Average Deposits Mid-single digit growth Decreased from low teens percent growth
Net Revenue Mid-teens percent growth Increased from low to mid-teens percent growth
Net Interest
Margin
3.35% to 3.45% Increased from 3.25% to 3.35%
Provision Expense
Low- to mid-$50 million level, excluding any
provision related to hurricane exposure
Decreased from low-$50 to low-$60 million level
NIE Low-teens percent growth –
Efficiency Ratio Low- to mid-50s Decreased from mid-50s
Asset Quality
14
• Total credit cost of $13.0 million for Q2-2017, compared to $9.0
million in Q1-2017 and $16.0 million in Q2-2016
• NCOs $12.4 million, or 36 bps, in Q2-2017 compared to $5.7
million, or 18 bps, in Q1-2017 and 39 bps in Q2-2016
• NPL ratio reduced to .64% of total LHI
• $6.4 million in charge-offs related to energy; energy NPAs at $82.6
million for Q2-2017 compared to $ 100.9 million in Q1-2017 and
$127.0 million in Q2-2016
Asset Quality Highlights
Non-accrual loans Q2 2017
Commercial $ 119,568
Construction –
Real estate 4,162
Consumer –
Equipment leases –
Total non-accrual loans 123,730
Non-accrual loans as % of LHI
excluding MF
.87%
Non-accrual loans as % of total
LHI
.64%
OREO 18,689
Total Non-accruals + OREO $ 142,419
Non-accrual loans + OREO as %
of loans excluding MF + OREO
1.00%
Reserve to non-accrual total LHI 1.4x
NCO / Average Traditional LHI
Combined
Reserves/
Trad’l LHI
1.09% 1.06% 1.28% 1.38% 1.28%
0.07% 0.07% 0.10%
0.38%
0.28%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
2013 2014 2015 2016 YTD 2017
Closing Comments
• Exceptional earnings and improved profitability metrics
• Positive start for Q3-2017 loan growth, but not expected at pace experienced in Q2-2017
• Deposit growth improving and more balanced with loan growth; more effective utilization of liquidity and capital
• Strong asset sensitivity even with prospect of shift in composition with rising rates
• Credit metrics improving and especially good on non-energy portfolio; we remain comfortable with energy portfolio
and reserve position
• Provision guidance based on pace of growth and no adverse change in economic outlook
• Focus on ROE
• Increase in contribution from new/expanded businesses
• Leveling in pace of NIE growth
• Increase in operating leverage with reduction in Efficiency Ratio
• Emphasis on growing LOBs with top quartile, risk-adjusted returns
15
Q&A
16
Appendix
17
Average Balances, Yields & Rates - Quarterly
18
(in thousands) Q2 2017 Q1 2017 Q2 2016
Avg. Bal. Yield Rate Avg. Bal. Yield Rate Avg. Bal. Yield Rate
Assets
Securities $ 65,049 1.77% $ 32,129 2.86% $ 27,661 3.61%
Liquidity assets 2,424,594 1.04% 3,589,166 .80% 3,184,127 .52%
Loans held for sale 845,623 3.91% 1,064,322 3.63% 157,898 3.44%
LHI, mortgage finance 3,805,831 3.52% 2,757,566 3.40% 4,412,091 3.10%
LHI 13,718,739 4.72% 12,980,544 4.53% 12,276,272 4.35%
Total LHI, net of reserve 17,353,613 4.50% 15,568,792 4.38% 16,524,047 4.06%
Total earning assets 20,688,879 4.06% 20,254,409 3.70% 19,893,733 3.49%
Total assets $21,320,976 $20,861,171 $20,438,470
Liabilities and Stockholders’ Equity
Total interest bearing deposits $ 9,416,731 .70% $ 9,425,919 .57% $ 9,082,469 .40%
Other borrowings 1,456,737 1.00% 1,333,685 .69% 1,411,387 .42%
Total long-term debt 394,573 5.16% 394,482 5.16% 394,211 5.03%
Total interest bearing liabilities 11,268,041 .90% 11,154,086 .75% 10,888,067 .57%
Demand deposits 7,863,402 7,547,338 7,767,693
Total deposits 17,280,133 .38% 16,973,257 .32% 16,850,162 .21%
Stockholders’ equity 2,086,880 2,041,870 1,668,783
Total liabilities and stockholders’ equity $21,320,976 .48% $20,861,171 .40% $20,438,470 .30%
Net interest margin 3.57% 3.29% 3.18%
Total deposits and borrowed funds $18,736,870 .43% $18,306,942 .34% $18,261,549 .23%
Average Balance Sheet - Quarterly
19
(in thousands) QTD Average
Q2/Q1 %
Change
YOY %
Change Q2 2017 Q1 2017 Q2 2016
Total assets $21,320,976 $20,861,171 $20,438,470 2% 4%
Loans held for sale 845,623 1,064,322 157,898 (21)% 436%
Loans held for investment 13,718,739 12,980,544 12,276,272 6% 12%
Loans held for investment, mortgage
finance
3,805,831 2,757,566 4,412,091
38%
(14)%
Total loans held for investment 17,524,570 15,738,110 16,688,363 11% 5%
Total loans 18,370,193 16,802,432 16,846,261 9% 9%
Liquidity assets 2,424,594 3,589,166 3,184,127 (32)% (24)%
Demand deposits 7,863,402 7,547,338 7,767,693 4% 1%
Total deposits 17,280,133 16,973,257 16,850,162 2% 3%
Stockholders’ equity 2,086,880 2,041,870 1,668,783 2% 25%
Period End Balance Sheet
20
(in thousands) Period End
Q2/Q1 %
Change
YOY %
Change Q2 2017 Q1 2017 Q2 2016
Total assets $23,119,713 $20,864,874 $21,080,994 11% 10%
Loans held for sale 846,017 884,647 221,347 (4)% 282%
Loans held for investment 14,280,353 13,298,918 12,502,513 7% 14%
Loans held for investment, mortgage
finance
5,183,600 3,371,598 5,260,027 54% (1)%
Total loans held for investment 19,463,953 16,670,516 17,762,540 17% 10%
Total loans 20,309,970 17,555,163 17,983,887 16% 13%
Liquidity assets 2,142,658 2,804,921 2,624,170 (24)% (18)%
Demand deposits 8,174,830 7,094,696 7,984,208 15% 2%
Total deposits 17,292,223 16,605,380 16,703,565 4% 4%
Stockholders’ equity 2,100,553 2,050,442 1,684,735 2% 25%