Texas Capital Bancshares 4Q15 Earnings Call Notes

Texas Capital Bancshares’ (TCBI) CEO Keith Cargill on Q4 2015 Results

Nice work by a Texas Bank avoiding energy loans

“I will begin by noting that of the 10 basis points in loan losses in 2015, we had no losses in energy. The discipline our energy and credit teams demonstrated in 2013 and 2014 resulted in Texas Capital making a relatively few new energy loans during the two years preceding the oil price decline. Essentially, our dollars outstanding of energy loans were flat for three successive years. The competition for energy loans in 2013 and 2014 appeared irrational to our bankers and credit officers. In hindsight, this proved to be true. While we continue to see energy loans migrate to classified and nonaccrual status, thus far our energy clients have worked very hard to reduce costs and pay down their loans with us. Because we also chose to avoid loans to energy service companies that are closely involved in drilling and completion activities, we’ve reduced credit exposure outside of the E&P reserve-based clients. Thus far we have experienced no charge-offs.’

Industrial and retail CRE in Houston remains strong

“Overall market intelligence indicates industrial and retail CRE remains strong in Houston. Office and multifamily appear to be softening. Single-family housing remains strong at an inventory of only three months supply. However, homebuilders are being cautious, moving into 2016 and anticipate softening demand and less new home construction.”

Don’t really want to get into what things look like with oil below $35

“That’s really not something we want to get into, Dave. It’s just going to be so difficult because it’s so volume-driven deal by deal. And that’s why the redetermination process is so much more accurate because you’re looking at a – point in time with what the properties sit at, and if you try to just extrapolate, it’s clearly inexact and can be misleading.”

72% of our clients have hedged oil at $50+

“It drops off significantly in 2017 on the hedges. Now that doesn’t take into account that we might have a bump here and there throughout 2016, but our clients will be able to extend some hedges. So just looking at a point in time when you look at a full year, it’s even more inexact but 2017, I mean 2016 rather, we have over 72% of our clients with hedges in place that are accretive, which means $50 plus in place.”

Most bankers would like to put up more reserves if they could justify it

“We would like to have the latitude, Ebrahim. I think most bankers would. They put additional reserves up if you could justify. We just can’t, we have a very solid portfolio. And I think we’ve been very conservative by all but $10 million of that $120 million that’s in – criticized, I mean, classified in our energy book.’

losses could double if prices stay here

“this is a tough, long price decline we’re experiencing. But we think it will be in the $10 million to $15 million range over the next 12 months. Now, if prices continue to drift down and stay down in the 20s for a long period that number could turn instead of $10 million to $15 million, $20 million to $30 million. But we have $30 million in reserves set aside today and as we given in guidance in over planning to have the – even further elevated provisioning as we go forward”

What we underwrite now will have great credit quality

“what we’re going to underwrite in book will probably some of the best energy that we put on the books in the next 10 years. We just don’t know how much of that we’re going to see to meet our very elevated underwriting standards that you have to have in this environment.”

Houston has weathered this so much better than people thought it would

“even though they only generated a little less than 22,000 new jobs, Houston is weathered in many respects as transitioned far better than many thought, including me. I give Houston a lot of credit. They are quite resilient. ”

Peter Bartholow

Usually you hit some sort of capitulation point

“History indicates usually you’ll hit a capitulation point, a bottom, and it doesn’t just slowly return to a better price level. Now, this time there’s some unique aspects of shale production, where there’s been quite a lot of drilled and not completed and that’s a little bit of an unknown certainly. But overall, we think that $35 that we used most recently, is realistic today.’

We haven’t seen a knee jerk pullback that we may have seen years ago

“I think Texas is still viewed as a very attractive place to do business and grow your franchise. Whatever bank you are, if you have boots on the ground here and really understand what’s happening in Texas, the economy is still quite good. In fact, North Texas is really, really strong at this point. But we have not yet seen the pullback years ago, we might have seen from time-to-time time by out-of-state-based companies and banks that would sort of knee-jerk in an environment like this. We’ve not seen that kind of reaction in this cycle. It’s still more competitive than I would have expected.”