DON'T MESS WITH TEXAS.... IN TIMES OF "FRAGILE GOLDILOCKS" PDF Free Download

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DON'T MESS WITH TEXAS.... IN TIMES OF "FRAGILE GOLDILOCKS" PDF Free Download

DON'T MESS WITH TEXAS.... IN TIMES OF "FRAGILE GOLDILOCKS" PDF free Download. Think more deeply and widely.

DON’T MESS WITH TEXAS….

IN TIMES OF "FRAGILE

GOLDILOCKS"

Wednesday, October 6th

12PM CST

Hosted by:

LIVESTREAM

BILL PEROTTI

Chief Credit Officer

Frost Bank

AMITABH BHARGAVA

Sr. Managing Director, Credit

Portfolio Management

Strategic Risk Associates

Texas has significantly outperformed rest of the country since 2008 recession

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Philadelphia Fed coincident Index

TX USA

The four state-level variables in coincident index are nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary

disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index

matches long-term growth in its GDP.

Texas banks seem to have tailwinds of strong business activity, strong loan demand and

benign credit quality, but headwind of weaker structures and pricing

Texas Banking conditions survey-Oct 2021

Crude oil and natural gas price expectations have recovered smartly in the last one year

adding to the Goldilocks environment

Dallas Fed Energy Survey –3Q20 Dallas Fed Energy Survey –3Q21

•In the early 1980s, the oil and gas industry directly accounted for more than 15 percent of state gross

domestic product (GDP) and nearly 5 percent of state employment

•Diversification into Professional, scientific and technical services employment, and petrochemicals/refining

•Total electricity generation from renewable sources—primarily wind—has risen fourfold during the past 10

years, with its share of total power production increasing from 8 percent to 25 percent

Texas economy is increasingly becoming more diversified and less reliant on oil and gas

However, Texas economy has endured sharp declines in its composite leading index in the

past. Is the current all time high sustainable?

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Dallas Fed Texas Leading Index (SA)

Dallas Fed Texas Leading Index is a composite of eight leading indicators -Texas value of the dollar, U.S. leading index, real oil price, well permits, initial claims for unemployment insurance, Texas stock index,

help-wanted index and average weekly hours worked in manufacturing.

There is no dearth of bears that threaten today’s Goldilocks environment

C&I:

•High liquidity fostering looser UW standards. Are we UW for the next downturn?

•In face of excessive competition in “overbanked” Texas, are banks resorting to unnatural

product/market diversification?

•Energy lending-While prices have recovered-is it sustainable? Is expense spike “transitory”?

•Is inflation driven by supply chain breakdown “transitory”?

•Has COVID changed consumer and corporate behavior forever?

CRE:

•Is it tale of two cities by property sectors in CRE?

•Will the recovery in sectors like lodging be sustainable in wake of COVID variants?

•Could disparity in population growth across Texas geographies have a longer lasting impact?

Consumer Credit:

•In face of strong growth, why are consumer delinquencies persistently higher than national

average?

•Is Fintech lending a panacea for loan growth and yield problems for banks?

Others:

•Credit talent –Are we prepared enough?

•Are ESG related risks real? How should banks prepare for them?

•Others (Cybersecurity, legislative disfunction, etc.)

High liquidity continues to result in weaker underwriting standards

•2021 remains an issuer’s market for new-issue loans with borrowers reaching for terms that are looser and more aggressive

than anything seen since 2008.

•New issue pricing continues to flex tighter

•Cov-lite and Cov-loose loans are the norm

•Nonbank financial firms are more active in competing for traditional middle-market loans, taking market share away from

banks

–PE firms raising debt funds alongside the equity fund to finance the entire capital stack by offering higher senior leverage,

looser or no covenants, longer amortizations, and/or generous EBITDA add-backs.

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C&I Loans to large firms C&I loans to small firms Construction Loans Multifamily NFNR

Large Banks Small Banks

% of banks tightening standards in 3Q21

COVID-19: Are we done yet?

Source: DSCHS COVID-19 Dashboard (Texas Department of State Health Services)-Update-Oct 4, 2021

When will the recurring

waves of COVID-19 end?

My workforce productivity

is decreasing!

Reluctance to travel &

spend is impacting service!

This is slowing down

my economic progress!

What if lower interest

rates continue?

Click to add text

Texas vaccination rates stay low posing a risk

Businesses continue to grapple with several issues

Policy/Tax decisions in the U.S. coupled with China’s financial situation are

driving negative sentiments around the overall business outlook.

Regulations are increasing, interpretation of regulations is changing, and

inflation is continuing to increase.

Global equipment imbalances and congestion at ports and terminals have a

chokehold on ability to generate revenue and putting pressure on profit

margins.

Inventory is building while scarcity continues, with a few components limiting

production broadly.

Project delays have reduced billable revenue. Challenging to keep on manpower

without projects being ready for installation of finished materials.

Still cannot hire or find enough employees to be able to meet increasing

demand.

High turnover of the workforce and consistent absenteeism is negatively

affecting the quality of raw materials due to the learning curve of those low-or

moderately skilled jobs.

Seeing domestic and international freight costs increase.

The delivery of electrical power remains among the largest deterrents of

investment in the Permian Basin.

Fear unstable electrical supply/grid issues and are investing in backup

generators with one or more alternative fuel sources.

Increased activities by private E&P firms is leading to cost inflation. Continued

oilfield services consolidation may contribute to it further.

The lack of traditional capital sources in upstream oil and gas is a current issue

affecting E&P business.

Enactment of regulations that will result in higher operational (finding and

production) costs for producers who attempt to remain compliant.

Cash flow from E&P clients is still not translating into increased activity. The

Gulf of Mexico remains slow.

In-person meetings as a practical alternative have faded again with the Delta

variant. That limits in-person closing leverage on orders and puts budgets more

at risk of delay.

Source: Texas Manufacturing Outlook survey, Dallas Fed Energy Survey, Texas Service Sector Outlook Survey

COVID-19 impact on CRE sectors is still playing out

Industry Groups Positive Impacts Negative Impacts Aggregate Impact

Senior Housing While the pipeline remains elevated due to pre-COVID starts, medium term

supply may decline due to challenging operating environment.

While occupancy declines had tapered off and showed early signs of stabilization, occupancy is still well

below pre-pandemic levels.Expenses from personnel, cleaning, and supplies will likely remain elevated.

As seniors have had to age in place more during COVID, it may lead to the average age of move in to

increase, thus pushing out demand on the margin.

Moderate

Adverse

Skilled Nursing

Skilled nursing business is more reliant on government reimbursement acts as a

relative positive. Occupancy may improve medium and longer term driven by

positive demographic trends and areturn to “normal” in terms of patient

volumes. In addition, there may be continued muted supply.

Challenging operating environment is expected to continue.Skill mix for SNFs is expected to start to

decline.Future rent deferrals / reductions remain a possibility. Additional government support will likely

be necessary.

Moderate

Adverse

Medical Office Medical office landlords have collected asubstantial amount of rents since the

pandemic began with most tenants current

Shutdowns of voluntary medical procedures had resulted in some rent deferrals, which recovered.

Longer term, there could be changes to space requirements and some tenant needs due to the

acceleration of telemedicine.

Solid

Industrial

Strong industry fundamentals and ahealthy leasing pipeline. Covid resulted in

acceleration of e-commerce demand and consequently need to boost supply

chains through warehouse space expansion.

Bankruptcy of tenants in industrial sector. Supply is rising at fast pace.Solid

Multifamily

Household formations, job growth, wage growth, demographics, population

movements, homeownership rates, and supply will drive long-term rent growth.

In order to see additional sequential improvement, we believe a“re-opening” of

restaurants, activities, and areturn to the office will be an important catalyst.

Rising concessions on stabilized assets to maintain occupancy in many coastal /urban markets.more

densely populated urban submarkets have underperformed.Near-term apartment demand is tied to

work from home and would expect demand to increase throughout 2021 as workers return to the office.

Supply remains arisk for the apartment sector.The regulatory environment remains challenging for

apartment owners.There has been amove towards increasing rent control across states and

municipalities.

Neutral

Lodging

Limited supply growth.Leaner business models, with expectations for alower

headcount, more flexible brand standards in tune with customer wants, and

accelerated rollout of cost-saving technologies may help in long run.Pent up

near-term demand which many stated could surprise to the upside

Near-term challenging conditions for lodging companies with corporate transient and group demand far

below prior peak levels.Closed properties will continue to reopen, acting as aproxy for new supply and

pressuring pricing.

Severe Adverse

Office

Longer lease structure with large tenants.Long-term demand for office will be

driven by economic strength and overall job growth trends in the US.trade-up

of tenants taking better quality space and leaving lower quality.

Work from home trends will continue to dominate the discussion.Employee psychology, cost-benefit,

de-densification, and an urban to suburban shift.Supply remains akey concern for office investors,

especially in coastal markets, but also more broadly.Sublease supply elevated across markets

Severe Adverse

Retail

Momentum from stimulus and re-opening progress. Demand is primarily coming

from grocery, value retail, and home improvement, but is also picking back up

from non-essential categories including restaurants.Strips are also seeing more

off-mall demand.

Consumers are likely to remain cautious about where they eat and shop with COVID cases rising again.

Additionally, consumer discretionary spending remains extremely vulnerable as the full effects of more

permanent unemployment are realized and atougher economy could weigh on consumer confidence. In

order to see additional sequential improvement, we believe a“re-opening” of restaurants, activities, and

areturn to the office will be an important catalyst.

Severe Adverse

It is imperative to stay on top of differential geographic risk within the large state of

Texas

Cross-sectional Health score

How does economic health of select MSAs

compare to 390 MSAs in the country?

Geographic Health Score

Demographics Index

Credit Quality Index

Employment Index

Income Index

Business activity Index

Housing Index

Consumer DQ rates are at all-time lows. How long will the good times last?

Current credit quality at all-time lows –regression

to mean and rise of delinquency rates high likely

Consumer Finance: Installment

$60+ Delinquency rate -Aug 2021

1.30%

1.50%

0.73%

2.33%

1.46%

1.82%

0.77%

3.54%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Auto Bankcard Mortgage Unsecured

Instalment Loans

USA Texas

Texas consumer delinquency rates underperform

national average in-spite of better economic trends

Top Takeaways

Be risk-aware

Don’t lose sight of forest for the trees

Be nimble, but Don’t do unnatural things

We do not learn from experience... we learn from reflecting on

experience

Reach out to peers –learn from their experience

Focus on what you can control

Questions

Hosted by:

LIVESTREAM

Next webinar

LET’S MAKE A DEAL: M&A TRENDS AND HOW TO INCORPORATE

TECHNOLOGY INTO YOUR ONGOING STRATEGY

SAVE THE DATE:

October 25, 2021

Thanks for joining

Please fill out the survey

Hosted by:

LIVESTREAM

BILL PEROTTI

Chief Risk Officer

Frost Bank

AMITABH BHARGAVA

Sr. Managing Director, Credit

Portfolio Management

Strategic Risk Associates

www.SRArisk.com

Appendix- Metro Economic Digital Intelligence

Aggregate Health scores

Credit Quality Health scores

Demographic Health scores

Business Activity Health scores

Employment Health scores

Housing Health scores

Income Health scores

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DON'T MESS WITH TEXAS.... IN TIMES OF "FRAGILE GOLDILOCKS" PDF Free Download

DON'T MESS WITH TEXAS.... IN TIMES OF "FRAGILE GOLDILOCKS" PDF free Download. Think more deeply and widely.

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