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EX-99.1 - EXHIBIT 99.1 EARNINGS RELEASE - TEXAS CAPITAL BANCSHARES INC/TXa7222020exhibit991.htm
8-K - 8-K - TEXAS CAPITAL BANCSHARES INC/TXa7222020-8k.htm
Q2-2020 Earnings July 22, 2020


 
Forward Looking Statements This communication may be deemed to include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding our financial condition, results of operations, business plans and future performance. These statements are not historical in nature and can generally be identified by such words as “believe,” “expect,” “estimate,” “anticipate,” “plan,” “may,” “will,” “forecast,” “could,” “projects,” “intend” and similar expressions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. 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 volatility in oil and gas prices, the material risks and uncertainties for the U.S. and world economies, and for our business, resulting from the COVID-19 pandemic, expectations regarding rates of default and credit losses, volatility in the mortgage industry, our business strategies, our expectations about future financial performance, future growth and earnings, the appropriateness of our allowance for credit losses and provision for credit losses, our ability to identify, employ and retain a successor chief executive officer, the impact of changing regulatory requirements and legislative changes on our business, increased competition, interest rate risk, new lines of business, new product or service offerings and 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, our Quarterly Reports on Form 10-Q and in other filings we make with the Securities and Exchange Commission. The information contained in this communication speaks only as of its date. Except to the extent required by applicable law or regulation, we disclaim any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. 2


 
Positioned for Growth TCBI Overview Financial Positioning  Unique branch-lite, commercially-focused, organic growth model built Capital 2007–2019 Annual Avg. Q1 2020 Q2 2020 over 20 years by hand-selecting top banking talent  During a period (’16-’19) of favorable economic conditions and rising 12.0% 11.6% 11.1% interest rates, we invested aggressively in efficiency focused technology, 10.2% 9.8% 9.3% 9.5% a best-in-class digital platform, and complimentary C&I offerings 8.9%  Successful completion of this multi-year infrastructure and capability 8.0% build has positioned the bank for a period without necessary outsized Common Equity Tier 1 Tier 1 Capital Total Capital investments and properly situated to harvest broad profitability gains  Capitalizing on this foundation and focusing future expense on front-line Liquidity talent will continue to deepen middle-market commercial bank 28% 27% relationships, diversifying both revenue and funding composition 117% 90%  Counter-cyclical, volume-driven Mortgage Finance provides flexibility 85% while generating strong risk-adjusted returns and fortifying already 9% meaningful capital and liquidity levels  With these advantages in place, Texas Capital stands ready to serve our Cash + Securities / Assets Loans HFI / Deposits clients and gain market share as we have in prior downturns 1  Net loss of $34.3 million ($0.73 per share) driven by significant one-time items ($0.99 Revenue $280M per share) and provision for credit losses ($1.55 per share). Significant one-time items $268M 2Q-2020 primarily relate to deliberate actions taken to improve future core earnings outlook Earnings  Revenue 1 grew $12.5 million, or 4.7%, Y-o-Y demonstrating earnings resilience despite $240M Summary interest rate declines  Continued strong capital levels well in excess of regulatory thresholds and a highly liquid balance sheet provide flexibility in current environment Q2 2019 Q1 2020 Q2 2020 1 Net interest income and non-interest income 3


 
Second Quarter Actions and Impact Resetting the Cost Base  Decisions in late Q2-2020 signify an acceleration of actions started pre- MOE to narrow the strategic focus and realize efficiencies in the operating $387.8M $39.4M model. Reduction to annual non-interest expense of ~$30 million, with $17.8M $11 million impacting 2H-2020 financials $19.2M $9.1M $302.3M Savings ($M) 2H 2020 Comments Salaries $10 Reduction in salaries and benefits expense immediately improves operating leverage while focusing future incremental spend on revenue production Cap Ex $1 $21MM write-off of certain software assets reduces capitalized expense. Opportunities for additional reductions in Q3-2020 Total Savings $11 1H 2020 Organizational Merger MSR PPP related Normalized 2H2020 NIE Guidance Low $290s Reported NIE changes expenses impairment & other 1H 2020 NIE 1X expense  Additional non-FTE related G&A expense saves targeted for 2H-2020 and FY-2021 Credit Cycle Management  MSR hedging program should limit volatility in dynamic rate environment  Proactive problem identification and resolution  Charge-off of previously identified Energy and Leveraged 2007–2019 Annual Avg. Q1 2020 Q2 2020 Lending credits contributed to ~20% decline in NPAs 1  $ of total loans in sectors most severely impacted by COVID-19  CRE2 – $0.4B Hospitality, $0.3B Retail 1.43% 1.60%  C&I3 – $1.1B Energy, $0.5B Real Estate, $0.2B Accommodation 1.19% 1.08% & Food Service, $0.1B Retail Trade 0.93% 0.99% 1.04% 0.63%  Additional build to the allowance for credit losses (“ACL”) could be 0.49% required in future quarters if impact of COVID-19 on the economy deviates from current economic forecast ACL on Loans / Loans HFI ACL on Loans / NPAs / Earning Assets Loans HFI excl MFLs 1 Q2-2020 NPAs include $40 million of Energy Loans that have been charged down to final resolution value and are pending close in Q3-2020 4 2 Detailed on slide 12 3 Includes Leveraged Lending, Energy, PPP Loans, and other Commercial Loans


 
Q2-2020 Financial Results


 
Loan Portfolio Growth Outlook  Average LHI (excluding MFLs) increased $416 million (3%) from Q1-2020, while ending LHI (excluding MFLs) decreasing $305 million (2%) from Q1- 2020 due to the following factors:  Continuation of deliberate multi-quarter reductions in Energy and Leverage Lending; down 14% and 5%, respectively, from Q1-2020 and 33% and 40%, respectively, from YE 2018  Return to more normalized utilization rates in the low 50’s down from the high 50’s at the end of Q1-2020  Participation in Cares Act – PPP, Deferrals, and Main Street Lending Program  Period end PPP loans totaled $717 million, with $16 million in deferred fees remaining to be recognized in interest income in future periods. Deferrals granted to borrowers with loans totaling $1.2 billion, of which $0.9 billion (75%) reside in sectors most severely impacted by COVID- 19  Average total MFLs of $9.1 billion for Q2-2020 were down $1.1 billion (11%) from Q1-2020, as an increase in average MFLs, excluding MCA LHS, resulting from continued demand was more than offset by a reduction in average MCA LHS from market economics favoring shorter loan hold times  The Q-o-Q decline in LHI (excluding MFLs) yields (85bps) and mix shift contributed to the decline in NIM, as total loan spread increased slightly to 3.43% from 3.35% in the prior quarter. Liquidity build drove a Q-o-Q margin decline, but core earnings generation remains stable Period-End Loan Composition 1 Average Loans & Total Loan Spread 2 3 2 $26.0B in balances LHI (excl. MFLs) Total MFLs Total Loan Spread Business Assets Energy 26% $10.7B $11.4B 4% $9.5B $10.2B $9.1B Highly Liquid Assets Unsecured 1% 3% $16.9B $17.0B Owner Occupied R/E $16.8B $16.7B $16.6B 5% Residential R/E 3.61% 3.48% Mkt. Risk Total Mortgage 3.38% 3.35% 3.43% 4% Finance 36% Comml R/E Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Mkt. Risk 15% Other Assets Total Loan 5.09% 4.79% 4.45% 4.30% 3.86% 6% Yield 1 Includes total LHI and LHS 2 Total Loan Spread = Yield on total loans (HFI & HFS) – Total cost of deposits and other borrowings 6 3 Total MFLs include LHI, mortgage finance, and MCA LHS


 
Deposits and Fundings Highlights Funding Costs  Ending deposits increased $3.1 billion as clients built on-balance sheet cash amidst economic uncertainty, keeping low-earning liquidity balances at historical highs 1.40%  Continued focus on cost-effective deposit growth within 1.25% verticals and core client relationships 1.03%  1.29% 0.92% Brokered deposit balances decreased modestly. Laddered 1.21% maturities will allow for ongoing reduction in costs, even as 0.99% balances expected to remain stable through the near-term 0.90% 0.45%  Decrease in total funding costs of 47 bps resulting from full-quarter benefit of Fed moves  Immediate repricing down of $10.4 billion in indexed 0.42% deposits helped offset yield declines to maintain spreads  Initiatives already directed at other interest-bearing deposits Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 have achieved 59 bps in savings and more is expected Avg Cost of Deposits Total Funding Costs Period-End Deposits Balances Upcoming Maturities CD Maturity FHLB Maturity 7


 
Q2-2020 Earnings Overview Net Interest Income & Margin Commentary Net Interest Margin Detail (bps)  A mix shift towards lower yielding assets weighed on NIM, but a $243.6M decline in funding costs and stable $228.3M $209.9M Warehouse yields offset impacts  Average liquidity assets increased ~70% Q-o-Q, coupling with the full impact of the Fed moves to further 3.41% pressure NIM 2.78% 2.30%  Meaningful decrease in funding costs. Opportunities to reduce concentrations as excess liquidity Net Net Interest Income reduced Q2 2019 Q1 2020 Q2 2020  Lower LHS interest income from Other Costs Loans Yields Yields Funding shorter hold times more than offset Q12020 Q22020 Balances (net PPP) (net PPP Loans by GOS in non-interest income Liquid Asset Liquid Asset Provision for Credit Losses Commentary Criticized Loans  Economic fundamentals and higher $100.0M $1,014.0M $96.0M criticized loan levels driving Q2-2020 CECL provisioning higher ($1.55 per share) $676.0M  Energy and Leveraged charge-offs $629.1M 3.97% ($62.4 million and $8.1 million, respectively) on previously identified 2.54% 2.77% $27.0M loans  Increase in criticized loans predominantly in special mention Credit Expense  Additional ACL build could be required Q2 2019 Q1 2020 Q2 2020 in future quarters if impact of COVID-19 Q2 2019 Q1 2020 Q2 2020 on the economy deviates from current Criticized Loans economic forecast Criticized Loans % Total LHI 8


 
Q2-2020 Earnings Overview Non-interest Income Commentary Fee Income Details  Market continues to exhibit favorable economics for LHS sales. Continue to $8.5M $70.5M optimize portfolio between GOS and interest income $2.8M $6.3M  Seasonal increase in already high $5.6M Warehouse volumes drove significant $0.6M $1.5M brokered loan fees ($2.7 million Q-o-Q) $2.5M $2.1M $24.4M  Focus on diversifying non-interest $2.3M $11.8M income streams continues with steady $3.3M Q-o-Q results. 1H-2020 swap fees $2.6 $2.8M $2.5M million higher than in 1H-2019 Non - interestincome  Q2 2019 Q1 2020 Q2 2020 Despite price volatility, Wealth Q2 2019 Q1 2020 Q2 2020 Management Fees in line with recent Swap Fees quarterly performance ($2.3 million) Wealth Management Fees Deposit Service Charges Non-interest Expense Commentary Salary and Employee Benefits  As noted, Q2-2020 impacted by $222.4M significant one-time items (e.g., $100.3M headcount reduction costs, software $165.4M write-offs, merger costs) $76.9M $76.7M $141.7M  Other expense categories remained at manageable levels, with Legal & Professional showing a decline of $6.1 million from Q1-2020  Disciplined core expense management, with modest investments focused on front-line Non - interestexpense Q2 2019 Q1 2020 Q2 2020 hires, will remain a key strategic Q2 2019 Q1 2020 Q2 2020 priority 9


 
LOB Detail


 
Loan Portfolio Detail – Mortgage Finance Commentary MWH + MCA Annualized Revenue  Q2-2020 average MFLs (excluding MCA LHS) increased 23% Y-o-Y as the Bank optimized business mix to take advantage of industry volumes and GOS opportunities in MCA $174M  When combined with MCA, annualized quarterly revenue increased +108.0% ~40% from Q2-2019. A favorable outlook suggests continued near- $84M term opportunity to provide substantial risk-adjusted returns acting +67.7% as a counter-cyclical hedge to the traditional LHI portfolio $50M  Mortgage Finance’s relationship-driven pricing approach allowed for +19.3% $321M +34.3% $269M yield resilience despite the full-quarter impact of the declining rate $200M environment. Modest contraction anticipated in 2H-2020  Proven track-record of adjusting risk profile based on market Q2 2018 Q2 2019 Q2 2020 liquidity; underlying portfolio quality remains the priority Mortgage Warehouse Mortgage Correspondent Aggregation Average Mortgage Warehouse Loans and Yields $9.0B 6.0% $8.0B 5.0% $7.0B 4.0% $6.0B 3.0% $5.0B 2.0% $4.0B 1.0% $3.0B 0.0% Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Mortgage Warehouse Yield 10YR 1M LIBOR 11


 
Loan Portfolio Detail – CRE Commentary Moderating Late Cycle Growth Thru-cycle Credit Performance  Track record of proactive portfolio management evidenced by 40% % Loan Growth * 4.5% NCO Rate * changes in growth rates thru-cycle and strong credit performance TCBI TCBI 35% 1 4.0% 1 during periods of stress Peer Average Peer Average 30% 3.5% 3.0%  25% CRE managed as a line of business facilitating achievement of 2.5% 20% concentration objectives by product and geography. Underwriting 2.0% 15% focus on strong sponsors and developers with significant upfront cash 1.5% 10% equity 1.0% 5%  Construction in most markets where projects are being financed is 0.5% 0% considered essential, and related construction continues to progress 0.0% 2011 2012 2013 2014 2015 2016 2017 2018 2019 largely on schedule 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q1 2020 Q1 2020 Property Types 2 Statistics Commentary Criticized Avg LTV  $2.1B Commit, $1.2B Bal Portfolio focus on newly developed, generally Class A properties yielding benefits $14.7M 46% Multi Family 31% Total CRE  Rent collection rates remain high; virtual leasing could slow project lease up  $0.8B Commit, $0.6B Bal Office occupancies expected to soften as tenants revisit their space needs; initial $0 Office 15% Total CRE borrower feedback remains positive for rent collection from anchor tenants 57% $0.6B Commit, $0.4B Bal  Performance expected to remain consistent due to continued shift to e-commerce $2.5M Industrial 10% Total CRE  Average loan-to-cost even lower than portfolio average of ~65% 47% $0.6B Commit, $0.4B Bal  Primarily construction which is deemed “essential” and progressing as planned $27.9M 54% Senior Housing 9% Total CRE  Occupancy / leasing slowing modestly as a result of COVID protocols in facilities $0.4B Commit, $0.4B Bal  Most impacted portfolio to-date; proactively addressing issues through downgrades $149.1M 53% Hospitality 9% Total CRE  Loss exposure limited by low loan-to-values $0.4B Commit, $0.3B Bal  Strong performance during the Great Recession; anticipate similar results during this $0 Self Storage 9% Total CRE cycle 65% $0.3B Commit, $0.3B Bal  Smallest exposure; performance as expected with quality of anchor/essential tenants $14.0M Retail 8% Total CRE (i.e., large grocery stores) in most properties a risk mitigating factor 54% * Source: S&P Market Intelligence as of Q1-2020. Based on regulatory definition of Total CRE Balances 1 Peers include: ASB, BXS, BKU, BOKF, CBSH, CFR, FHN, FINN, FULT, HWC, IBKC, ISBC, SNV, UMBF, WBS, WTFC 12 2 Other collateral types comprise ~10% of total outstanding balances


 
Loan Portfolio Detail – Energy Commentary Portfolio Management  Continued loan balance contraction driven by resolution of  ~70% of E&P production hedged in 2020, ~60% in 2021 1 previously disclosed outsized problem credits resulting in a more  This compares favorably to the 2015-2016 downturn granular portfolio with lower inherent loss potential  Spring borrowing base redeterminations (~87% complete) resulted  Total Y-o-Y loan balances down ~$500 million, or 30%, in 18% reduction in borrowing bases from $1.6 billion to $1.1 billion  Modest increase to ACL but no change to expectations for thru-  Average loan sizes have also decreased, down from $17.5 cycle credit performance million at Q1-2020 to $15.3 million at Q2-2020  At Q2-2020 total ACL assigned to energy loans was 9.2%, which is  Portfolio composition remains focused on privately held or private comparable to the total cumulative losses from 2014-2019 equity backed E&P clients  $39.8 million of the $103.9 million in non-accrual energy loans  Energy Banking President now reporting directly to CEO relates to two loans that have been charged down to final resolution value and are pending close in Q3-2020 Period-End Portfolio Composition ACL Build $1.1B in balances 2 Criticized Total ACL% $324M $248M $211M 8.8% 9.2% $151M $136M 4.3% 3.1% 3.0% Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 NPAs % 2 3.9% 4.1% 8.8% 11.4% 9.1% 1 Hedge % calculated based on production volumes 2 Ratios calculated as a % of total energy loans 13


 
Loan Portfolio Detail – Leveraged Lending Commentary Portfolio Management  Diversified portfolio with some exposure to industries believed to be  Senior leverage typically in the 3.0x-4.0x range; leverage trends most impacted by COVID-19; others may be affected depending on continue to be in line with previous quarters but proactively their varying degrees of either reliance on consumer spending or monitoring for signs of weakness supply chain risks  Significant reductions in originations in the past 12 months, coupled with meaningful runoff, has reduced overall exposure by  Due to requirements for sponsor-owned clients, this portfolio had over 30%; as expected, this contraction has slowed modestly in less PPP participation than originally anticipated. Additional clarity the current environment, a trend which could continue until should emerge in Q3-2020 on the potential impacts of Main Street economic activity begins to normalize Lending Program  Allocated ACL is 6.2%; percentages can fluctuate as identified issues are resolved which may result in charge-offs  Includes $83 million of ABL loans which generally have good  Multi-period reduction in NPAs; no new inflows this quarter collateral coverage and are further governed by a borrowing base. Of the $82 million in outstanding loans to Mining, Quarrying, and Oil and Gas Extraction, $57 million benefit from the ABL structure Period-End Portfolio Composition ACL Build $0.7B in balances 1 Criticized Total ACL% $222M $204M $197M $188M $177M 8.1% 6.6% 6.3% 6.2% 6.2% Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 NPAs % 1 2.4% 2.8% 8.7% 6.4% 5.2% 1 Ratios calculated as a % of total leveraged lending loans 14


 
Conclusion


 
Summary & Outlook  Diverse, well-established lines of business balanced between differentiated national verticals and core market offerings reflective of the relationship banking approach synonymous with TCBI since inception  Organic growth model developed by hand selecting top talent fosters unique cultural alignment, innovation mindset, and Franchise client-centric focus. Bias towards action enables rapid transformation consistent with dynamic market Overview  Branch-lite since formation, a limited physical footprint enables capital allocation for core treasury focus, scalable deposit verticals, and digital offerings - compatible with accelerating customer preferences  Best-in-class Mortgage Finance business provides balance sheet optionality, strong risk-adjusted returns, and natural hedge to asset-sensitive commercially-oriented model  Leverage momentum from Q2-2020 actions to further position the company for Sustainably Higher Core Earnings  Harvest productivity gains after period of outsized investment in technology, products, and process  Continue to invest in and acquire top front-line talent; deliver on improved middle-market capabilities Strategic  Effective Credit Cycle Management Priorities  Continue forward-looking, proactive approach to Energy and Leveraged Lending  Sustain legacy of peer credit outperformance in the remainder of the loan portfolio  Realizing structural profitability improvements positions TCBI for expanded strategic optionality when economic uncertainty subsides  Actions taken this quarter set the foundation for improvements in profitability beginning in the 2H-2020 and into 2021. Completed infrastructure and technology build-out limits potential for necessary future outsized investment  2H-2020 Non-Interest Expense of low $290 millions, down from an adjusted $302 million in 1H-2020  Commitment to proactive problem identification and resolution remains; however, absent significant economic 2H-2020 deterioration, we believe we are adequately reserved for the losses inherent in our portfolio. Anticipate moderating Outlook provision expense in 2H-2020  Elevated contribution from Mortgage Warehouse will persist against the backdrop of favorable market conditions  Improving earnings generation in excess of future credit needs should result in increased capital ratios. Liquidity position likely to remain elevated given deposit growth; multi-quarter remix of cash into securities will provide earnings benefit while retaining balance sheet flexibility 16