interest rates expectations & implications · cardinal capital management, l.l.c ... • no...
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6 0 5 1 E L T O R D O » P O B O X 1 3 2 9 » R A N C H O S A N T A F E , C A L I F O R N I A 9 2 0 6 7 » T E L 8 5 8 . 7 5 6 . 8 3 0 0 » w w w . c a s t l e c r e e k . c o m
Interest Rates
Expectations & Implications
Cardinal Capital Management, L.L.C
Investor Day
September 25, 2015
CONFIDENTIAL 1
CASTLE CREEK CAPITAL
• Overview
• History
• How We View The World
CONFIDENTIAL 2
HOW WE VIEW THE WORLD
Pay Attention to the Macro
• Global Economy
• National Economy
• Local Economy
• Regulation
• Technology
CONFIDENTIAL 3
HOW WE VIEW THE WORLD
Focus on What We Can Control
• Management Teams We Partner With
• Markets We Invest In
• Capital Levels We Invest To
• Credit Risk We Take
• Price We Pay
CONFIDENTIAL 4
HOW WE VIEW THE WORLD
Interest Rate Expectations
• No change to the yield curve
• Margin compression
CONFIDENTIAL
Banking Profitability:
The Golden Age
A look at:
1982-2002
CONFIDENTIAL
20
14
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
10 Year US Treasury Rate
5
THE GOLDEN AGE
An Apparently Challenging Rate Environment
Source: FDIC, as of 8/7/15.
x
CONFIDENTIAL
20
14
1.25%
2.71%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Pre-Tax Pre-Provision (PTPP) Ratio
6
THE GOLDEN AGE
With Significant Operating Earnings Growth
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
3.85%
3.95%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Net Interest Margin
7
THE GOLDEN AGE
Flat Margins
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
72.98%
88.02%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Loan/Deposit Ratio
8
THE GOLDEN AGE
Increased Lending
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
1.96%
0.92%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Net Expenses / Tangible Assets
9
THE GOLDEN AGE
Dramatic Expense Cuts
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
6.09%
7.72%
4%
5%
6%
7%
8%
9%
10%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Tangible Common Equity / Average Tangible Assets
10
THE GOLDEN AGE
Enhanced Capital Levels
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
16.12%
21.83%
-5%
0%
5%
10%
15%
20%
25%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Return On Tangible Common Equity
11
THE GOLDEN AGE
Superior Returns
Source: FDIC, all commercial banks.
x x
CONFIDENTIAL
Banking Profitability:
Modern Realities
A look at:
2002-2014
CONFIDENTIAL
20
14
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
10 Year US Treasury Rate
12
MODERN REALITIES
Continued Rate Pressures
Source: FDIC, as of 8/7/15.
x
CONFIDENTIAL
20
14
2.71%
1.66%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Pre-Tax Pre-Provision (PTPP) Ratio
13
MODERN REALITIES
Plummeting Operating Earnings
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
3.95%
3.06%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Net Interest Margin
14
MODERN REALITIES
Plummeting Margin
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
69.81%
88.02%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Loan/Deposit Ratio
15
MODERN REALITIES
Increased Liquidity
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
0.92%
1.19%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Net Expenses / Tangible Assets
16
MODERN REALITIES
Expense Creep
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
8.89%
7.72%
4%
5%
6%
7%
8%
9%
10%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Tangible Common Equity / Average Tangible Assets
17
MODERN REALITIES
Historically High Capital Levels
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
20
14
21.83%
11.61%
-5%
0%
5%
10%
15%
20%
25%
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
20
13
Return On Tangible Common Equity
18
MODERN REALITIES
Declining Returns
Source: FDIC, all commercial banks.
x
CONFIDENTIAL
Banking Profitability
Threat & Opportunity
CONFIDENTIAL 19
THREAT
Longer Duration
0%
25%
50%
75%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Q2
Securities and Loans with Maturity/Re-Pricing > 5 Years
Securities as a % of Investment Portfolio Loans as a % of All Loans
Source: SNL Financial as of 6/30/15, for banks with assets less than $5 billion.
CONFIDENTIAL 20
OPPORTUNITY
Rethinking Branches
Source: SNL Financial as of 6/30/15.
*Excludes HQ (>$500M in deposits)
50% of the bank’s branches
have less than $25M in deposits;
77% have less than $50M
$0
$25
$50
$75
$100
$125
$150
$175
$200
$225
1 21 41 61 81 101 121
De
po
sit
s (
Millio
ns)
Branch Identifier
Example Community Bank ($5-10B in Assets)
=One Branch (117 Total)
CONFIDENTIAL
Current Rate Environment
Implications
CONFIDENTIAL 21
CURRENT RATE ENVIRONMENT IMPLICATIONS
Focus on What You Can Control
• Interest rates are only one input in your business
• Build your brand
• Drive out costs
• Determine your “fighting weight”
• Right size your capital
• Be prepared for M&A both as a buyer and a seller