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Texas Capital Bancshares Inc
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Good afternoon and welcome to the Texas Capital Bancshares Full-Year 2017 Earnings Conference Call. All participants will be in listen-only mode during the presentation. Please note that this event is being recorded. [Operator Instructions]
I’d now like to turn the call over to Heather Worley, Director of Investor Relations. Please go ahead.
Thank you for joining us for the TCBI Fourth Quarter and Full-Year 2017 Earnings Conference Call. I’m Heather Worley, Director of Investor Relations.
Before we begin our call, please remember, it will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today’s earnings release, our most recent Annual Report on Form 10-K, and in subsequent filings with the SEC.
Speakers for the call today are Keith Cargill, President and CEO; and Julie Anderson, CFO. At the conclusion of our prepared remarks, our operator, William, will facilitate a question-and-answer session.
And now, I’ll turn the call over to Keith who will begin on Slide 3 of the webcast. Keith?
Thank you, Heather. Julie will offer her comments on our fourth quarter after my opening. I will wrap up the presentation and Julie and I will open the call for Q&A
Slide 3 highlights the fourth quarter results, traditional LHI growth was strong at 4% linked quarter growth and 18% growth year-over-year on average. Mortgage finance loans including MCA increased on average about 7% from the third quarter and increased 17% year-over-year. Annual average total deposits grew 7% year-over-year overcoming the outsized decrease in Q1 2017. Average demand deposits increased 4% linked quarter from the third quarter.
Net revenue growth increased 3% linked quarter and 21% year-over-year. ROE was a strong 11.58% in Q4, excluding the DTA write-off. The ROE of 11.58% increased from 11.2% in Q3. Total costs were much reduced from Q3 at $8.1 million comprised of $2 million in pervasion and $6.1 million in OREO write-off.
On Slide 4, we have at the hurricane issues, energy exposure and retail, CRE and commercial exposures. To summarize, we remain optimistic and see no near-term signs of deterioration in any of these three exposures at the present time.
On Slide 5, we provide an update on our geographic diversification. All major Texas metro markets in which we operate remain healthy and continue to grow jobs and population. Julie?
Thanks, Keith. My comments will cover Slide 6 through 13. We will start with the NIM review. Our reported NIM decreased by 12 basis points from the third quarter. The increase of $628 million in average liquidity assets since the third quarter accounted for nine of the 12 basis point decline. Traditional LHI yields were down 3 basis points from the third quarter, primarily related to fees. The impact on fees on traditional LHI yields has been pretty consistent for several quarters, but the B component decreased about 4 basis points from Q3 to Q4, which accounts for more than a decrease in LHI yield.
Some impact from the December rate move in the number – is in the numbers, but not at full impact as the 30 day LIBOR move started in mid-November and LIBOR processing can happen with up to a 30 day lag at individual loans reprice at different times. We would expect to see additional yield pickup reflected in the first quarter numbers. Additionally with significant loan growth in the third and fourth quarter a slight drop in yield with not surprising as new loans are not being put on at the same effective rate at the overall portfolio yields.
The yield on mortgage finance loans remained flat from third quarter level. The continued increase percentage of loans in mortgage finance and MCA has a negative impact on NIM, but very favorable to our net interest income. Fourth quarter seasonality impact was less than expected for mortgage finance, which was very positive for earnings. We continued to see growth in deposits from the third quarter, primarily an interest bearing, but also some modest growth in DDAs.
Our overall deposit costs increased by 6 basis points from 47 basis points in the third quarter to 53 basis points in the fourth quarter. The increase was expected as we discussed the most of the deposit growth would be in interest bearing and we started to see that in the fourth quarter. We’re still not changing posted rate, but expect 2018 deposit growth to be weighted toward interest bearing deposit with some migration based on overall relationship.
We expect we could see more pickup in the magnitude of rate change request with the prospect of additional rate moves in 2018. We continue to have a good deposit top line, but as we said in the past it can involve a long sales cycle. So difficult to forecast exact timing and it can be lumpy and how it comes on. Change in loans with floors shifted a little bit with the rate change in December that’s now around $565 million down from $800 million at the end of September, but there’s really no significant difference in the rate on floored versus unfloored loan.
As a reminder, approximately 70% of our floating rate loans are tied to LIBOR and about 80% of that tied to 30 day LIBOR. As Keith commented earlier, we had continued good traditional LHI growth in the quarter consistent with the third quarter levels and in line with our full year guidance. Traditional LHI average balances grew 4% from the third quarter and up 18% from the fourth quarter last year. Strong growth later in the quarter with ending balances above average by over $350 million providing a good start for 2018.
The level of payoffs remained high in the fourth quarter and there’s no sign that that will slow in 2018. Total mortgage finance continued to be strong with average balances increasing 7% from the third quarter and 17% from last year this time. Fourth quarter can be seasonally weaker for volumes, but fourth quarter volumes were better than expected as seasonal strength from the third quarter lasted longer extending into October and early November.
A little more discussion on deposits, we experienced linked quarter growth in total deposits including DDA, while always targeting the most cost efficient deposit sources, we’ve expected growth to be heavily – more heavily weighted toward interest bearing, which is what we started to see in the fourth quarter. We expect most of the 2018 growth to come from interest bearing categories, but still at very reasonable overall effective cost.
Again with the rising rates no change in our stated rate through 5 increases but some migration to interest bearing from DDA balances still reacting to specific customer situation and evaluating on a total relationship basis. Still only two major categories that are moving in tandem with the fed rates that’s now approximately $4.5 billion to $5 billion in balances. The increase of 6 basis points in average cost of deposits from the third quarter due to the mix of deposit growth experienced in the fourth quarter with almost 80% of our growth coming from interest bearing deposit.
I’ll talk a little bit about non-interest expenses. The increase in the linked quarter non-interest expense included of a lot of noise, most of which is not part of a normal core run rate expected in 2018. I’ll try to explain give a little more detail on that. They include $1 million of non-LCI incentive related to special incentives paid as part of the tax reform announced in December, for FAS 123R expense, we had additional fluctuation in the fourth quarter compared to the third, because of the continued increase in stock price. An additional million dollar change in the fourth quarter increasing our 2017 total 123R expense to almost $22 million up from the $21 million we estimated in the third quarter and that’s compared to an actual level of about $14 million in 2016.
Our fourth quarter FAS 123R expense was $7.1 million up from Q3 of $6.1 million as the stock price continued to increase. And the actual stock price impact was $1.4 million, but with partially offset by some other items. Legal and other professional was abnormally high in the fourth quarter with some non-recurring expenses and not considered a new run rate. Q3 levels were lower than normal exacerbating the fluctuation on a linked quarter basis. The ongoing run rate is closer to first quarter and second quarter levels for this category.
For the [indiscernible] $2.8 million MSR impairment taken as part of the fourth quarter servicing expenses. $2.3 million of the total is related to an expected sale of the majority of our Jennie book. We believe the Jennie book is higher risk and not as liquid as a conventional book and have made the decision to sell that portion first. We expect that sale to close in the first or second quarter.
The remaining $500,000 impairment is related to some normal market movements and not expected to be permanent. Additionally, we expect we could have some additional sales of portions of the conventional book sometime in 2018 and pricing is expected to be at or above the current capitalized levels. For the $6.1 million OREO write-down that’s included in non-interest expense per GAAP, but obviously we look at that more as a credit cost and I’ll mention it further in that section.
Lastly, the other expense category had some catch up expenses that have the fourth quarter numbers elevated by a little over $1 million. All of the new and expanding lines of business continued to be profitable during the fourth quarter and for the full year of 2017 and continued to contribute to loan growth. The new lines of business are continuing to provide meaningful contribution on a pretax, pre-provision basis, we have no outsized build out plan for 2018 and just a few reminders about the more variable part of our non-interest expense.
As we previously noted, servicing related expenses are directly related to servicing revenue, which provided profit contribution for the year, net of the MSR impairment charges. Other categories including occupancy, technology and marketing all directly related to growth including growth in deposit.
Portion of the marketing category is more variable in nature and is related to growth in deposit balances, as well as increases in rate. The strong warehouse balances and contribution of new and expanded LOBs, net revenue increased linked quarter, while the efficiency ratio was higher at 55% in the fourth quarter and 55% for the full year.
2007 efficiency ratio includes some items worthy of mention. The MSR impairment related to the sale that we just discussed, as well as the software right off in the second quarter. We had $4 million of increase in FAS 123R related to stock price and while a continued strong stock price will drop higher FAS 123R expense in 2018, that’s been taken into consideration in the guidance will give shortly.
Also important to remember for the 2018 non-interest expense run rate is the outsized payroll related expenses in the first quarter of every year. For 2017, that was a $3 million fluctuation from the fourth quarter of 2016 levels.
Asset quality continues to be good and very strong net of the energy MPAs, which we believe haven’t properly reserved. Our non-accrual levels are still – at acceptable level of 0.49% of total loans with more than 64% comprised of energy loans, where we are continuing to see progress in the resolution.
Provision of $2 million for the fourth quarter compared to $20 million in the third quarter and $9 million in the fourth quarter of last year. Additionally, $6.1 million of OREO write-down was taken in the fourth quarter bringing the total credit cost for the fourth quarter to $8.1 million. Charge-offs for the quarter totaled less than $1 million and included $175,000 related to energy. Quarterly net charge-offs represented 3 basis points of traditional LHI and 21 basis points for 2017 of which about 60% related to energy.
Our net revenue, we saw growth in linked quarter net revenue with good loan growth both in traditional LHI and total mortgage finance, despite was expected to be a quarter more heavily impacted by seasonality. Additionally, growth in net income from the third quarter excluding the impact from the DTA write off, positive impact going into 2018 with strong earning – a strong earning asset base and favorable composition.
On an annual basis, net revenue growth was 19% and net income growth of 27%, excluding the impact of the DTA write off. ROE and ROA levels much improved in 2017 following the impact of elevated provisions in results for most of 2016. Our full year ROE for 2017 excluding the DTA write off was back over 10% related to higher net revenue and lower provision levels and despite the impact of the equity raised in the fourth quarter of 2016.
Additionally, lower provision levels this quarter was very favorable to ROE, which was over 11.5% excluding the impact from the DTA write off. Strong mortgage finance contribution had positive impact on the ROE levels in the second quarter through the fourth quarter, which could be diminished somewhat in the first quarter with expected seasonal weakness.
Move on to the 2018 outlook and the 2018 numbers – the outlook is compared to our 2017 actual. Our outlook for traditional LHI for 2018 is low to mid double-digit percent growth. That’s consistent with the 2017 growth level.
We expect average balances for mortgage finance loans to be flat to low single-digit growth for the year, with some seasonal decline expected in the first quarter of 2018, but not as dramatic as what we experienced in the first quarter of 2017. The MCA guidance at $1 billion for average outstanding for 2018. We’re still taking market share, but with mortgage industry volumes expected to be down in 2018, we expect averages will remain flat and are focused on continuing to prove profit margins with the flat average levels.
Our total deposits, we think growth keep pace with traditional LHI growth of low to mid teens percent growth. We expect to see more growth in interest bearing categories and some shift from non-interest bearing to interest bearing. Deposit growth can be lumpy, which can mean that liquidity level of could vary some from quarter-to-quarter.
Our outlook for NIM – core NIM is 3.35% to 3.45%. Our guidance takes into account the December rate increase, but assumes no additional rate increases in 2018. With expected LHI growth levels and more of our deposit growth coming in interest bearing deposit, it’s reasonable that full year NIM would be slightly compressed from the 2017 level assuming no additional rate increases.
Our outlook for net revenue is low to mid teens percent growth, that’s down slightly from growth rates in 2017 and primarily related to our assumption that deposit cost will be higher in 2018. Provision guidance is mid $50 million to mid $60 million level. As in prior years, we’re starting with a wire range on provision guidance and will tighten it as we go through the year. There’s too much uncertainty at this point regarding economic growth outlook.
Our guidance for non-interest expense is high single-digit to low teens percent growth, and that as compared to our reported amount excluding the OREO write off. So basically that’s compared to the $459 million for 2017. There are quite a few outsized items in 2017, that we don’t expect to see in 2018 including the software write off and the MSR impairment related to the Jennie sale. Additionally, FAS 123R expense was elevate in 2017, related to stock price, but our guidance assumes that current levels of stock price are maintained, which adds additional expense run rate for 2018.
Based on the net revenue assumptions and our non-interest expense assumptions we described, guidance for efficiency – efficiency ratio was set at low to mid $50 million. Lastly, with the new tax reform, we thought that necessary to get some guidance on our new effective rate which we estimate to be 22%.
Thank you, Julie. Texas Capital recorded record earnings for 2017 and continues to show progress in the third and fourth quarters on elevating our ROE. A key strategic push we’ve made the last two years. We expect strong traditional LHI growth to continue in 2018, with the positive growth more in line with loan growth. There are strong asset sensitivity, the expected shift in deposit composition as rates rise should still allow us to demonstrate a positive spread on future rate moves.
Credit metrics are improving the focus on increasing our ROE is occurring as a profit contribution increases from our new or expanded businesses and while we continue to grow our core businesses alongside. NIE growth is slowing, operating leverage is increasing and the new corporate tax rate at 22% is a meaningful improvement from our previous 34% plus, right.
We’re optimistic that 2018 will be yet another excellent year protect this capital This concludes our comments, operator we’re ready to open it for QA.
Thank you. [Operator Instructions] And our first questioner today will be Ebrahim H. Poonawala with Bank of America Merrill Lynch. Please go ahead.
Good afternoon guys.
Hello, Ebrahim.
I just wanted to – make sure I heard Julie correctly. Did you say that the NIE guidance is off of $459 million base for 2017?
Right. So it’s the reported amount less the OREO expense because we consider that more of a credit cost.
Understood. And two things on the expense guidance, one the high single-digits to low teens seem like a fairly wide sort of range. Can you – if you can help us understand like what brings you to the lower end versus the higher end of that range assuming growth plays out consistent with your growth forecast.
We’re really not building any interest rate increases, Ebrahim. And that’s going to have some impact on efficiency ratio too if we did in fact see some of that pickup. But we really expect after a significant additional technology integration that will happen about mid-year for us with a new loan core system that we’ll begin to realize some efficiencies out of that conversion as we’ve begun to realize some out of our mobile banking conversion that was the big one this past year. But that won’t occur until the back half of the year.
And as you know we have a significant amount of opportunity to not only pickup business but also pickup talent after bonuses have paid, so sometimes that happens in the first half of the year. But we don’t expect an outsize to push, we’re just continuing to ratchet up to the caliber of talent that’s required before we bring on the people.
Got it. I mean high single-digit low teens or so a 10% expense growth number it’s fair from our standpoint give or take will include your guidance.
I think that’s reasonable.
Understood. And you mention the efficiency ratio Keith, I think that’s been a big sort of emphasis over the last year if I’m thinking about it correctly. One, should we expect I mean, this markets implying three rate hikes over the next three quarters. Is it fair to say that the efficiency ratio could potentially be closer to 50% or actually dip below 50% this year?
I think we could have a run rate close to that by the fourth quarter if we get these interest rate increases. But that’s just something we don’t like to build into guidance.
It’s certainly not – certainly that’s not a full year run rate.
No, understood. So if we get three rate hikes the efficiency ratio could end 2018 close to 50% or lower?
We have a shot at it, we did.
Understood. And just on a separate topic very quickly. So I get the point about deposit growth should be coming from interest bearing. Could you remind us in terms of everything about each Fed rate hikes from your own? What’s the level of sort of margin sensitivity we should expect?
Julie, you want to take that?
You know, what we’ve talked about is that for everywhere where 5 rate increases into it and so for everyone it’s going to contain to be very positive to net interest revenue. But it becomes thinner, the margin for each becomes more as deposit cost catch up. And I think we don’t know if there will be a big rush for deposit cost to catch up after this one or after the next one. But there will be a more catch up. But based on what’s going on the asset side of our balance sheet that still going to continue to be a very favorable spread for us as rates increase.
Understood. Thanks for taking my questions.
And our next questioner today will be Dave Rochester with Deutsche Bank. Please go ahead.
Hey, good afternoon guys.
Hey, Dave.
Just back on the NIM guide, sorry if I miss this. Are you baking in anymore liquidity build into that as well? It seems like with the deposit growth guide maybe you are to a certain extent just any color there would be great.
So nothing – not really there maybe some – there could be some quarter-to-quarter fluctuation based on how deposit inflows come in. But the guidance for deposit growth is consistent with traditional LHI growth. So we’re not anticipating anything significant in the liquidity build.
So is the trajectory you guys are looking at is margin up in the first quarter and then it steps down through the year because you don’t have any more rate hikes in there but you’ve got deposit costs moving up. Is that the general gist of it?
Yes. You have to remember in the first quarter, we would expect to see a more seasonal impact from mortgage finance. So to the extent those balances are down, liquidity could be slightly elevated in the first quarter related to that. So there’s a – those other dynamics that go on with the NIM in the first quarter.
Even though we had an outsized benefit on seasonality coming late in the fourth quarter we’re seeing it really begin to affect first quarter as we always see it.
It would be about earning asset shift in the first quarter that could contract NIM.
Got it. That makes sense. Understood. And then just on the expense guide real quick. I think you may have already hinted at this but is there any kind of sensitivity to some rate hikes I guess. If we have a bunch of rate hikes will that actually ultimately increase the dollar amount of expenses through the year. I know that that would potentially push the efficiency ratio lower because revenues are growing. But with the dollar amount of expenses increase it maybe hit the top end of that range from that.
It’s not outside – I mentioned in the commentary the portion of the marketing expense – the portion of that is tied to both deposit growth and rate move. So there could be some additional expense there.
Got it.
It’s no, it’s not, yes.
Yes.
I think we’ve accounted for that in our guidance and to the extent we get several more rate moves that would adjust we would certainly let you know that.
Okay.
I see a small fraction but as Julie says it would move some for marketing.
Got it, that makes sense. And just one last one on the deposit side. The growth guide it’s good to see, I was just wondering what you think the biggest drivers will be whether it’s industries and then I guess with bigger picture it sounds like the DDA you’re anticipating will ultimately end up – at least a portion of it will end up shifting the interest bearing is that the general gist of it.
I mean we saw that trend really kick-in in the third and fourth quarter as you can tell by our numbers even this year that we expect more of the same this next year we’re virtually all of our deposit growth likely will be time based. But then the question is at what rate on the time based and we’ve talked about that and while we’re giving the guidance we are on NIM today without rate increases giving us some extra advantages there.
But on the loan side Dave, we expect very broad C&I opportunity, we are not having clients called us yet to talk about major new CapEx projects, we know they’re contemplating doing more though. I mean that definitely is on their agenda but they’re trying to really size up what the true effect of these tax changes might be on NIM particularly so many of our clients that are pass-through entities LLC’s as opposed to C-Corps. But we do expect some positive influence from that as we get further into the year and they evaluate just what kind of payback they’ll get on some of those CapEx expenditures in particular.
Is there any kind of expectation built to ensure deposit growth guidance for companies, businesses using deposits to fund expansion at all?
I think some of that’s been going on anyway. In Texas it’s been a very robust economy for quite some time. And I don’t think we’ll see as much effect of that as the tax rates are improving their cash flows are improving. So it balances I think in many ways we are going to offset the use of some of that money and they’re going to want to have some liquidity. But I think we’ve seen already a bit of that we don’t expect it to be a drastic shift this next year.
Okay. Great, all right. Thanks, guys.
Welcome.
And the next questioner today will be Brady Gailey with KBW. Please go ahead.
Hey, good afternoon guys.
Hey, Brady.
Hey, Brady.
So when you look at the new tax rate guidance and the benefit you’ll get from the tax rate is the plan for at least for 2018 to see most of that tax rate benefit drop to the bottom line or did you may be put in the assumptions a little more expense growth just because you had the tax benefit coming. I’m just trying to figure out how much of that benefit if not all of it will drop to the bottom line this year?
We’ve been expecting – we’ve been investing last year and again this coming year more to a degree in technology, we’ve talked some about that and I even did the one piece of technology right off last year as we did some of that technology investment. So we’re not doing an outsized incremental portion in 2018, it’s just a commitment we made a couple of years ago that we want to make sure we reset our technology to be as current as possible and pickup efficiencies as we make these conversions happen. So that will continue to be the case in 2018 and 2019, but not in an outsized way. And so to answer your question, we expect most of that go to the bottom line.
All right. And then when you look at held for investment loan yields there are around 4.90%. I think in your prepared comments, you talked about how you’re still book in loans at a rate lower than that and that was driving some of the loan yield down. What is your new production loan yield, what’s the differential between that in the 4.90%?
We would just not be able to tell you that Brady, there might be a competitor listening right now. But it is certainly more aggressive overall than that and it does vary back category, as you would expect. So the mix of business doesn’t matter, frankly, the core C&I business is probably the most competitive other than mortgage warehouse. And those are two categories everyone wants, and for the risk reward and the diversification. But we grow – this last year, we grew at 18%. You look at our competitors some of them grew at 3% to 7% in loan. So that incremental amount of growth is at a lower price, more aggressive current pricing than the average in our portfolio. And we’re projecting again, low to mid-teens this next year. So we’ll see that continue to be a case. So good news is we drive a lot more net interest income and we’re taking good quality market share.
Got it. All right. And then finally for me just embedded in the expense growth guidance, how many of RMs, are you look into add to TCBI this year?
You know we really never know for sure. We have a range that we would target, we would like to add, if we can find the starting lineup of the All-Star team and that’s what we look for. We’d like to add RMs in each of the C&I areas. And then selectively in some of our specialty businesses, some of our new and rebuilt businesses are growing faster than even our core business. So there will be select needs there. But honestly, we develop a pipeline for every line of business and we feel really good that we’ve got a good deep pipeline.
But we’re also very careful now as we have been the last couple of years, managing the pace at which we had talent. So that we’re getting productivity as we add talent and don’t do outsized hiring, so I had capacity. We really try to manage always having sufficient capacity now and not getting behind as we did a couple years ago, which caused this to need that outsized hiring. So my best guesstimate this year would be, we would hire anywhere from 12 to 16 or 18 RMs, it’ll be across the board in all the different businesses.
All right. Got it. Thanks guys.
And the next questioner today will be Jennifer Demba with SunTrust. Please go ahead.
Thank you, good afternoon. Question on the hurricane provision, have you had any hurricane problem loans today? And when do you anticipate you might reverse that provision – and kind of have a good idea of what your losses are going to be on that front?
We really haven’t had any hurricane issues. We had – I think two C&I credits that it won’t move from full pass-through to watch, I mean that’s we have had no credits move in the classified categories and the losses yet. Over the course of the next couple of quarters at the pace we grow, I expect, we will use, what we set aside. And that will be factored into the provisioning as we go according to our methodology. So we don’t expect to quote reversal in a given quarter. But thus far that money is we’ve not had to tap that reserve.
Thanks so much.
You’re welcome
The next questioner today will be Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon guys.
Hello, Michael.
Hey, I’m just wanted to dig in a little bit to the deposits increase in costs and just you guys done a really, really good job over the past six, seven, eight, nine, 10 years – building up that GTA-based, and you just talk about some of those efforts and where they stand. And I know you guys have a thing between $4.5 billion and $5 billion broker deposits, which have pretty high debtors. What’s the – as we go forward, how should we think about the rising deposit costs juxtaposed with a lower loan to deposit ratio and just framing that into the margin got it’s. Thanks.
Sure. I know that technically we have to categorize as broker deposits. But in fact, they really are relational broker deposits. I just want to clarify that.
And that’s only a portion of that indexed amount.
That is about what half of it roughly?
Yes, half…
But as you suggest those are half debtors both of those categories that make up about $4.5 billion. We really believe that over the course the next three or four years. All banks are going to begin to see their DDA mix shift some. I think some are going to have that shift occur a little earlier than others. But everyone is going to see the mix begin to shift some of these rates increase. And so we are just being a little more conservative. I think in now we’re looking at those possibilities and because we’re more whole self-funded than we are retail-funded. We think that’s appropriate. We feel very good about where we sit relative to our competitors.
And on the mix of relationships, which often include some DDA as well as time and money. And but if we have outsized DDA in a given relationship, Michael, we are seeing and have been saying in the last couple of quarters and will continue in 2018 to see some of that money shift to time too. So we will continue to generate new DDAs. We’re doing a good job with treasury, creating new accounts, new relationships, new demand deposits. But also some of the relationships, we’ve had sometime have had an outsized amount in DDA that’s beginning to shift some. And that we’re trying to build that into our guidance.
Okay, that’s helpful. And just as a follow-up on a separate topic. Just talking about your energy portfolio, obviously, there’s been somewhat of a headwind. But how do you guys think about that portfolios move forward, a couple of your peers. You have talked about growing that portfolio and how does that relate your guidance? Thanks.
Well, it was one of our three top growing segments this past quarter. We’re really pleased to see that. Our Houston market again, kind of set the pace of overall growth followed by our public finance business, and then energy. So we are seeing some very good opportunities and in those fundings, we’re overcoming some of the pay downs that still continue on some of the credits, some of the ones that we want to see pay downs on of course.
And so we feel quite good about where we stand today. Candidly, I hope the price does not go too fast nor too fast. Because today, we have good opportunities and the market is reasonably competitive already. But if the prices escalate much more, we could see just some challenges in oil field with some cost pressures and things that haven’t become a big issue yet. But that we’re optimistic about the long term portfolio and opportunity to take quality business right down energy.
Great. Thanks for taking my questions.
You’re welcome.
And the next questioner today will be Emlen Harmon with JMP Securities. Please go ahead.
Hey, evening everyone. Keith, what kind of economic environment are you anticipating in your guidance just both in terms of long growth and credit?
We think we’ll have a good economy in 2018. We’re just never going to put in gadgets that we’re going to bet the farm that, we wouldn’t potentially have some softening if disappointments occur. There’s a big mid-term election coming up in the fall and there will be a number of things it will have to take a look at collectively all the business owners that we deal with over the course of the next quarter too. As we see what the tax effect really does, in terms of demand and costs and prices and some of the things that they’ll be investing in as well. So we’re optimistic. We think 2018 will be a good solid year. But we don’t know – we don’t have the same visibility or our sense of optimism about how strong it will finish, going into 2019. And we hope that as each quarter goes by – we become increasingly more bullish, but at this point, we feel good about 2018, we’re just again going to bet it. It’s going to be a blazing finish year.
Got it. Thanks. And then on the deposit growth, your mid-teens would be a bit of an acceleration for you guys versus last year. And I think it was first quarter, we had kind of a tougher quarter on – I think particularly the DDA. Are there any kind of new initiatives that you would highlight, is kind of contributing to that deposit growth? Or was it just a matter of a kind of new initiatives that you would highlight is kind of contributing to that deposit growth or it’s just a matter of kind of blocking and tackling with the new RMs and that kind of thing?
Its primarily a better blocking and tackling our RMs have just done a fabulous job and are working more closely with our treasury team members, it’s a great partnership. And that’s just how our people react. If we have something off a quarter you can just count on our team did us rally and figure out how to get better and more competitive and we’ve done that the right way and not just trying to buy a business on the loan side or on the deposit side, but really doing a more thorough job working together as teams. I will tell you though there are constantly new initiatives at this company around deposits and funding and we have a number of them that are underway. And not that they were ready to tell the market all these new initiatives and talk about them until they become financially significant and material in that we will need to talk about them at some point. But it’s a combination of the two, but primarily it’s our team really rallying and working more closely with our clients and prospects with the treasury that we have.
Okay. Thanks a lot.
Welcome.
The next question of today will be Brett Rabatin with Piper Jaffray. Please go ahead.
Hi, Good afternoon everyone.
Hi, Brett.
Hey, Brett.
Wanted to ask – I guess first the central lines of business or national lines of business that the growth this quarter was muted by the warehouse. Can you talk about those just generally in terms of prospects for the coming year and then wealth management and you don’t get specific guidance around fee income, that was just curious about how you’re thinking about the outlook for that as well?
Well. Our overall traditional LHI grew 4% linked quarter and 18% for the year, but on a national basis if you’re looking at those charts, warehouse actually grew unexpectedly grew into the fourth quarter on an average basis, I believe about 7% nearly if you include mortgage correspondent lending. So the combination of the two and the continued strong success in public finance as well as builder finance and also premium finance. I think they all did really quite well for the finish for the year the last half of the year. We’re very optimistic at all those businesses will do well this next year, public finances some headwinds with a change in the tax law, but they have some great new strategies and tactical plans on how to attack the market and we’re still very optimistic that public finance will show nice growth this next year.
Okay. And then on fee income, just any thoughts on prospects for continued growth from that line as well?
We’re very encouraged with the progress we’re making with our private wealth team they’ve just done a phenomenal job and the connection in relationships they’ve built across our bank with the relationship managers and our core clients are really creating a lot of new momentum as well as the success are having with directionless of patient and in marketing themselves. So that’s one key area of growth we think MCA is going to continue to grow fee income and we’re very optimistic about what that can do for us in 2018. And again even with headwinds in mortgage finance it’s a great fee income generated for us and we expect it will grow some this next year despite those headwinds. We seem to find a way to overcome headwinds.
Okay, great. Appreciate the color.
You’re welcome
And the next question will be Brad Milsaps with Sandler O’Neill. Please go ahead.
Hey, good afternoon guys.
Hello, Brad.
Hello, Brad.
Julie, just want to follow-up on the margin, it looks like your NIM was up about 35 basis points last year maybe 19 excluding the quarterly appreciate the guidance in terms of it being without any future increases from the Fed, But the Fed want to follow kind of a similar path in 2018 as it did in 2017, would you expect kind of similar amount of expansion or that based on your comments around deposit partly might it be less?
I think based on the outlook right now and for how, where we would grow deposit, I think it would be something less than that. That would still be expansion and be very positive to net revenue, net interest income, but yes we would expect at this point it would be something a little bit less than that based on where we think the growth going to come on the liability side.
If we had to give your range we don’t have to but we might do a lease frowning. I would say somewhere if we got three rate hikes we might see a collective 15 basis to 20 basis points not 30 basis or 30 basis plus. That’s just a ballpark estimate because again we expect more of this shift on the deposit side. So we’ll pick up some of that benefit at the same pace.
Got it. That’s helpful. And then just to follow-up on expenses just in round numbers you look like a great expense base almost $80 million last year and at the midpoint of your guidance for 2018 would imply about $45 million in growth. Is this mean or the difference there just really kind of build out expenses, I know you called out a few things, but just kind of curious kind of what – changing the dollar guidance I guess but the most year-over-year?
I pulled out several things that were outside this year that we just don’t expect to happen next year. And then there’s just a real focus on where and how we’re growing non-interest expense. So we’ve spent a lot of time on that, and there’s been a lot of detail work to come up with these numbers. So I think we feel good about them.
We have a real buy in from our leaders across the company that we’re going to be very focused on getting – enriching the client experience always getting better client experience. But not continuing to spend money at the same pace we have in the past be really wise how we invest and certainly in terms of talent but also in technology and so on.
Right. If you back out some of those things that we talked about – that I talked about for 2017 you wouldn’t have ended up with a year-over-year increase closer to the mid teens this is where it came in. So I think that’s kind of if you look at where kind of what a normalized run rate should was for 2017 to what we’re given guidance for 2018 it makes a lot more sense.
Okay. I just kind of curious what the gap was. That’s helpful. Thank you very much.
You’re welcome.
And the next question of today will be Peter Winter with Wedbush Securities. Please go ahead.
Good afternoon.
Hi, Peter.
The question on the provision expense guidance. When I look at your credit quality trends they have really improved quite a bit throughout the year excluding the OREO write down and the thought is with the tax reform it’s going to extend this credit cycle. So I’m just curious what goes into the forecast with that increase in provision expenses. It that more reserved?
One of the key is, that’s different for us than many of our competitors Peter, and it’s simply our pace of growth. And for instance in that guidance, there’s over $20 million that simply pass growth, pass rated new business. And I think many of our competitors would be a small fraction of that. So that is a real key component of what we have to deal with and I’m glad we have it to deal with. But we’ve always believed it’s important to be conservative on the front end when you go like we did and we put aside a significant amount of money on each new loan.
Is there a range that charge offs that you’re thinking about for this year?
There is a range, but not one that we feel strongly enough about that we want to telegraph it today. But certainly that has been baked into the guidance range that we’ve given you. We think it should be very competitive relative their peers we always come in it seems better than peers and we don’t expect an outsized change at all, but when we start the year, and we have this many uncertainties about some new things that appeared to be positive, but haven’t hatched yet. We’re going to start the year with a pretty conservative provision range.
And just a wider range.
And as Julie mentioned, we’ll ratchet that and tightened up as we get quarter-by-quarter further end of the year.
Okay, thanks very much.
You’re welcome.
And the next questioner will be Matthew Keating with Barclays. Please go ahead.
Hi, thank you. So you’ve mentioned earlier that the net revenue outlook we could be considerably better if we do see multiple rate hikes this year. I guess, if we look back to the 2017 outlook at this time last year the company was calling for mid-to-high teens percent net revenue growth, it did about 20% with the benefit of three rate hikes. And so you think that’s still the same like level of improvement you’d expect from multiple rate hikes this year? Thanks.
Sure. Because our expense run rate on NIE, it should be better, and even though we won’t benefit quite as much from the rate hikes on margin, the combination should be comparable.
Okay. And then I guess given the focus Keith on improving, I guess ROE et cetera at the bank becoming more efficient. Are you surprised at all that the efficiency guidance this year is a bit higher than it was at the start of last year? So I think you’re calling for a low-to-mid 50’s efficiency ratio on 2018 and if you think back to last year the company was calling for a low-50’s efficiency ratio and so what’s driving there?
We don’t – go ahead.
I mean one of the things are again some of that non-interest expense items that we talked about things that we had through the year, the software rate of things like that if you back those out we would have been at mid-50, we’ve been I don’t know 53, 54, so and then I think one of the things that’s really driving our guidance for 2018 is that which we are trying to build in the higher deposit costs, which affect the top part of efficiency. But we think you know that’s going to affect net revenue and so that’s part of efficiency.
That’s right.
I think the trickiest part on our efficiency ratio is, we’re pretty conservative Matt, we’re not building any rate increases, but we are being very conservative about our mix of business in our cost of funding. So maybe we’re being you know overly conservative to the slight degree and that’s having some effect on that efficiency guidance.
Understood. Thanks.
You’re welcome.
And the next questioner will be Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. It’s been a little bit about mixed bag this earnings season in terms of how bank management teams are sort of indicating this kind of responses from their clients, post-tax cut some saying there’s been a huge increase in activity, some saying it’s too early to tell, where do you guys sort of shake out on what you’ve seen in last month or so?
Our clients have telling us, they’re considering, making some new investments particularly CapEx, but they just don’t have a grip yet on the new tax law, the ramifications on NIM. These are primarily clients that again are passed through entities, LLCs and the like, and like maybe some larger banks that have virtually all C-Corps. I’m not sure if that has that big a difference in the feedback you’re getting. But with our clients more of them are privately owned companies, not all of them are C-Corps, many of them are LLCs and S-Corps.
So that’s a bit more complicated for them to sort through that they do clearly see an advantage in this full write-off capability this full tax amortization component and that’s why they’re talking about looking at additional CapEx. So we do believe and that’s partly why we’ve got some good strong overall traditional LHI growth in our guidance that we will see some pick up this year in demand and it’s going to come to help offset some of the things like public finance, it has got affected the other way with the tax law change.
So as you think of your guidance for the year and maybe the timing of some of your customers serves settling on how they are going to approach things on a go forward basis, do you think that some order to grow this weighted towards the back half of the year as some of those decisions are made or do you think it’s ratable?
I think it’s certainly the last three quarters. I think it’ll be relatively slow this first quarter
Okay, thank you.
You’re welcome.
And the next question will be a follow-up from Ebrahim H. Poonawala from Bank of America Merrill Lynch. Please go ahead.
Hi guys.
Hi.
I’m sorry for asking in the tenth expense question on the call. But Keith, if I just take a step back when we look at sort of the – Julie mentioned if you’re just for one-off item, the efficiency ratio would have been in the 50% to 53% range last year. Given sort of where the focus has been and you’ve been quite vocal in terms of wanting to flex down and improve the efficiency. Right now the guidance absent any rate hike and I get you’ve been conservative on the revenue side and deposit betas implies no material improvement in the efficiency ratio, right at the midpoint of sort of your guidance in the low to mid-50s, is that again being overly conservative in terms of the expense outlook or especially given that you’re not making any major investment, I’m just saying to understand the thought process.
I think we’re just going to have to see how fast this cost of funds moves Ebrahim, because that that just really has a big effect and we are conservative and we’ve been talking about this all throughout the year particularly after we got through the first couple of rate hikes we expected that we would see movement faster than we’ve seen it. We began to see more of it in the fourth quarter, it’s still not come at the pace we really expected.
So that is a way that we look at earnings this next year it is we’re highly sensitized to be sure that we’re not betting on outsized NIM carrying us. And I think we’re going to see a much stronger overall expense management from the company as we saw in 2017 versus 2016. So I think we have a good chance at finishing the years I mentioned earlier in the range of close to 50% efficiency ratio, if we get the rate hikes and if we don’t see it more significant shift, faster accelerated shift from DDA to time than what we’ve already built in. I think we’ve got reasonably conservative, but we’ll just have to see.
And would that 50% if we get there by the end of the year be something that could be sustainable on a full year basis into 2019 or because I know does this fair amount of seasonality like do you feel comfortable that let’s assume DDA migration goes as expected more or less and we get to a 50% number by the end of the year would you say that would be something that’s sustainable given all the actions you’ve taken to improve the efficiency?
I can tell you everything we’ve been working on at the company. The last two and a half years has been about improving sustainably higher ROEs and improving efficiency. So I think we’re building a strong foundation under these improvements and it’s not something that’s just going to dissipate once rates peak, but it’s going to be really critically important we continue to drive the higher fee income from these businesses that we have built and rebuilt the last few years and also existing businesses were we’re having higher success on driving more fee income that’s really an important component to get us where we need to be on ROE and also help us with the efficiency ratio.
Understood. Thank you.
You’re welcome.
And this will conclude the question-and-answer session. I would now like to turn the conference back over to President and CEO, Keith Cargill for his closing remarks.
We appreciate you to joining us while wrap up for 2017 and we’re excited about 2018 and look forward to talking with you about further good results as the year progresses. Thanks so much.
Thank you for your participation in TCBI’s full year 2017 earnings conference call. Please direct any request or follow-up questions to Heather Worley at 214-932-6646 or heather.worley@texascapitalbank.com. You may now disconnect.