Texas Capital BancShares Inc. (NASDAQ:TCBI) Q2 2019 Earnings Conference Call - Final Transcript
Jul 17, 2019 • 05:00 pm ET
[Operator Instructions] And our first question will come from Brady Gailey of KBW. Please go ahead.
Hey, good afternoon, guys.
C. Keith Cargill
Julie L. Anderson
I wanted to start with energy. We saw the couple of credits move into the non-performing bucket last quarter, you took some losses on this quarter, now we have another loan that has been classified special mention. I think as we headed into this year, we were all concerned about levered lending, but now most of the noise you're seeing is really on the energy side. I mean, I've heard you say these are kind of one-off deals and not TCBI's typical energy loan. But -- can you just give us some color on what's happened with these three credits? Why did -- why are they problematic? And maybe some color specifically on the new special mention energy loan?
C. Keith Cargill
Well, the new special mention energy loan, we're very encouraged, has a low probability at this point, certainly of a further downward migration. So it is one we've identified, we're working closely with the client, but feel good about the prospects on that holding up on its quality as is. The other two loans were instances where borrowers entered into very aggressive drilling programs. And in a couple of cases they were trying to prove up some large prospects and rather than only drill in the heart of the prospect properties, they stepped out a little bit. And, as a result, it created some cash flow challenges. And while we don't typically run into this kind of situation, we're very alert that with all the activity in this industry over the last 2.5 years, a lot of it being, Brady, private equity investors, we're going to be just more intense than ever at taking a careful look at the operating of the properties and not simply be convinced that we have a really great borrowing base scenario, because the decline curves are so steep on the shale properties. Even though the good news is you get your capital back very quickly on these quick decline curves, you have to be confident that the operator has a sound strategy on how to use that money on existing production we're loaning against to backfill and create that ongoing cash flow on future production. And in these cases, that was not the case. So, we feel like these are one-off deals.
But, again, as we did a year ago, I think we have been early to identify an energy situation. I think there are couple of other banks beginning to experience some of this quarter. And I think we're ahead of the curve, taking a careful look at our clients who are executing on their plans and that their sound plans.
All right. And I know when you saw some credit noise in your levered lending portfolio, you decided to shrink that portfolio like you're doing. When you look at energy in this noise, maybe just talk about longer-term, your commitment