Q2 2020 Texas Capital Bancshares Inc Earnings Call
[music].
Better good day, and welcome to be Texas Capital Bancshares Q2, 2020 earnings Conference call. All participants will be any listen only noted during the presentation. Please note. This event is being recorded.
Do you need assistance, we signaling conference specialist I parts in the Starkey followed by zero.
I would now like to turn the conference over to Shannon, where it director of Communications. Please go ahead.
Thank you for joining us for PCB <unk> second quarter 2020 earnings Conference call I'm CNN married director of Communications.
We began please be aware this call will include forward looking statements that are based on our current expectations of future results or event.
Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statement.
Our forward looking statements are out of the data this call and we do not assume any obligation to update or revise them.
Statements on this call should be considered together with the cautionary statements and other information contained in todays earnings release, our most recent annual report on form 10-K, and subsequent filings with the FCC.
We will refer to slides during today's presentation, which can be found along with the press release any investor Relations section of our website at Texas Capital Bank Dot Com.
Speakers for the call today, or Larry home Executive Chair, President and CEO and Julie Anderson CFO.
At the conclusion of our prepared remarks, our operator will facilitate acuity session and now I will turn the call over to Larry for opening remarks.
Hi, Thanks, Shannon and thanks, everybody for joining us today, we've we've got a quite a group on the call maybe a record number so a word to a hearing what's on your mind as well I'm going to make a few comments about some things and then I'll ask you lead to a go over our actual.
Results, So look I'm not going to spend a lot of time today talking about the past as the necessary actions. We began this quarter will put us back on a path to the type of earnings growth, we want to once again be known for.
Instead I wanted to take a few minutes and review with you some of the things I've learned in eight weeks as CEO of Texas capital.
This franchise was built on hiring experienced bankers, who focused heavily on the middle market commercial and industrial business. We then took this banker centric model and built specialized groups like mortgage finance builder finance lender finance premium finance energy real estate and private wealth management.
Organic growth was rapid and we rose to the level. We're at today in a relatively short period of time.
Underpinning that growth was peer leading credit performance and earnings levels throughout the years with consistent reinvestment in an increasingly compelling franchise.
However in the last couple of years, we falter.
Primarily in our energy in middle market sectors.
I'm, making a handful of loans that frankly, we shouldn't have my.
And energy, we took a few outsized exposures that hit us hard in the downturns in middle market Sienna, we took our out the ball too often and gravitated to calling the private equity sponsors for some leverage loans instead of doing the hard work of building long lasting relationships directly.
With strong clients and prospects that we had done for a long time.
Several of these leveraged loans from the sponsors experienced weakness prior to the crashes and we have been paying for it for several quarters.
And in an effort to share ensure our bankers were equipped with the right tools and systems to compete in meeting our clients' needs. We continue to invest and that limited short term earnings.
Now, let's talk about where we can and where we will go from here.
First and foremost I want you to know we have a great franchise staffed with outstanding people with a great opportunity in front of others.
In addition to our best in class specialized units, we continue to have significant presence capability and opportunity in our primary middle markets in Dallas, Houston, Austin, San Antonio and Fort worth.
I believe we will see strong organic growth in these markets over the coming years.
I have spent much of my time with our employees since I've been here learning, what theyre doing and what they can do it.
Reviewed our client and prospect list in the products, we have to meet our clients' needs and I've worked closely with our risk management and finance teams on capital and liquidity management.
We have plans in place to get us back to an earnings level in the next six to 18 months that will give us the strategic options. We once enjoyed while managing strong liquidity and capital levels.
Those plans began with a significant cut to our run rate expense base, which will pay off beginning this quarter.
These plans also include managing the assets out of our balance sheet to get more yield from the excess liquidity, we prudently held at this time.
Back to basic strategy in middle market to capture new clients and to increase our share of wallet.
And the lower provision expense as we have dealt with a large exposures within the energy and leverage loan portfolio.
I strongly believe that we have a great team in place that is more than capable of successfully executing a back to basic strategy of growing our middle market franchise, while continuing to take advantage of our outstanding specialty grades.
I believe we had the strongest leadership and bankers we have ever had.
Necessary to execute our strategy.
Personally would put this team up against any body based on 30 years of experience in commercial banking and 15 years of being on the other side of the banker reservoir.
We need to invest in a couple of our markets and we're doing so and we're continuing to recruit some very strong bankers and having success at that.
I know in our management knows that we have to approve these things over time and prove their sustainable.
We have confidence I have confidence that we can get this.
Our recent results are not what our shareholders grew to expect from Texas capital and are certainly not what we expect from ourselves. We're excited to prove we can do it.
I look forward to leading this team and now I'm going to turn the call over to Julie to review our specific results for the quarter.
Thanks, Larry.
First one six or nine with some references to slide four.
I'll start by emphasizing that our second quarter revenue of 280 million what the record revenue increased on a linked quarter and year over year basis, we're leveraging our mortgage finance business and we'll continue to do so as the market allows driving meaningful revenue using our lowest risk loan category.
As we've explained for years, the Optionality of the mortgage finance business gives us an advantage as it mitigates the negative impact the low rate environment has on our traditional loaned up.
The result of the actions taken during the quarter, we're reducing our annualized noninterest expense run rate by approximately 30 million.
Just on salaries and amortization of capitalized software. We've also targeted some additional GNS expense saves for the second half of 2020 and 2021 that are not included in that 30 million. It's other expenses non FTC related and I would estimate that to be at least 10 million in annual run rate.
The based non interest expense were starting with the normalized first half a 2020 noninterest expense.
This kind of cost realignment is unprecedented for us, but the years, an outsized investment has positioned us to be able to proactively take action that won't hurt our franchise, but rather make gets stronger.
Our second quarter results also include an outsize provision for loan losses, which we expected. The good news is that an includes final charges on two large energy credits that we discussed in past quarters actual disposition won't occur until the third quarter, but they've been charged down to amounts that are contractually agreed to at this point.
The remainder of that book is more granular and better hedged and we believe that positions us for meaningfully lower provision provision levels for the second half of 2020, assuming economic factors don't deteriorate significantly compared to our assumptions and now a few more details for the quarter our average elite.
Excluding mortgage finance was up slightly on a linked quarter basis, and was primarily driven by PPP loan fundings, which offset the continued reductions in energy and leveraged despite the negative impact to our core Elijah yields from declining LIBOR rates, we were able to offset that with the linked.
Quarter decrease in funding cost and the increase in mortgage finance yield.
As expected, we continue to see meaningful growth in deposit.
The catch up of the fed move repricing was fully realized during the quarter opportunities remain to achieve further reductions in interest bearing cost our focus will continue with building client relationships in our core markets as well as vertical.
Additional liquidity build is the biggest driver of the decrease in linked quarter now, which based on our balance sheet composition is not the most informative metric net of liquidity, our core NIM actually expanded linked quarter, but we're focused on maximizing earning some net interest income is clearly the more meaningful measure of improvement link.
Quarter noninterest income was down less than 20 million, but was more than offset by the increase in gain on sale as we shifted our and see a strategy as we've discussed in the past we pivot based on market dynamics. So a gain on sale spreads weekend, we have the option to move back to longer haul Todd.
The negative impact of core loan yields was offset by improvement in funding cost and it's important to note that the second quarter Didnt have any meaningful PPP fees included but we would expect to realize the impact of those over the next two to four quarters as loans are forgiven.
Additional liquidity build in the quarter resulted from continued success in growing deposits well excess deposits generated a modest negative carry in the quarter. We've already begun deploying some of the excess liquidity and securities driving a positive spread as we position for core loan demand to pick up.
I will be delivered in how we manage the balance sheet and the coming quarters as we expect deposit growth to exceed loan demand in this environment.
Warehouse pricing held up well as a result of less volume pricing in place core HR was affected by lower lower levels with the impact partially counteracted by existing floors as of the ended June roughly 20% of our core Elie try had floors in place and we expect that number to continue to increase.
Over the coming quarters, with new loans and renewals during the second quarter, we added over 700 million of new floors, which represent a meaningful improvement.
Deposit pricing still has some ran to come down over the next couple of quarters, but obviously first quarter to second quarter, what's the most dramatic shift as all fed moves are now priced into the index deposit.
Provision for the quarter was 100 million and included 28 million related to current quarter charge off 16 million for the two large energy deals we've discussed and 6 million for a large leverage deal. We've discussed in the past all three deals should close during Q3, the remainder of the energy book is comprised of more granular.
Our deals that are well hedged at the resolution of larger deals and multiple quarters of build we believe we're adequately reserved similarly for the leverage but the remainder is more granular and we experienced limited migration during the quarter and believe we are adequate adequately reserved the remainder of the.
Division was related to downgrade and the impact of economic factors.
It's really important to understand the context of resolution of the larger credits, which occurred this quarter that signals. The end of a select number of larger problem credits in higher risk categories that have driven elevated credit expense in previous quarters.
Certainly we can have additional migration, but the remaining book, specifically energy and leveraged is more granular and loss severity would be significantly different than what we've experienced in the larger credits. Most recently discussed based on the approach we're taking with portfolio management in response to the crisis, we believe we're being proactive with risk.
Grading, which will serve us well.
It was an increase in total criticized at 338 million with about 300 million of the increase in special mention predominantly driven by cobot impacted industry.
These industries have downgrade risk, but the last risk would be quite different from leverage lending in energy because there is strong equity in the underlying asset values.
We experienced a significant increase in noninterest income driven prim, primarily by improved gain on sale, which resulted from holding him CA loans for shorter durations than in prior periods, which reduces hedging cost based on the environment. We would expect that positive trend and gain on sale to continue for the next several quarters.
But at lower levels than Q2, Q2 was the peak. So we would expect third and fourth quarter gain numbers to be more modest say 10 to 12 million per quarter. The optionality of this business allows us to maximize profits, but can be unfavorable to NIM, which is a trade off will always take.
Noninterest expense for the quarter included meaningful charges related to actions. We took during the quarter that will result in an improved run rate as I. Previously described specifically severance related expense and write off of software totaled 39 million funnel merger related expenses were 10 million, we had almost 6 million and.
Technology to support our PPP initiative, and lastly, 9 million an MSR impairment during the quarter, we put hedges in place. So further volatility with our MSR will be limited.
Larry.
Thanks, Julie I appreciate that before we go to Q and I. Let me just say were to of course, you know Julian that known her for a long time, and then a great partner and Big helped to me over the last eight weeks or so and knows our company top to bottom John Tarpon, who you'd probably some of you have talked to in some of yet.
That has been our chief risk officer now for about two years.
And it has also been a great partner.
With me as we work through some of these credit problems that we had and and.
Continue to look at all forms of risk.
Throughout the company, so do I, Jay Tees here as well and so with that operator, we'll we'll go to Q and I am.
Thank you we will now begin the question answer session.
Ask your question. Please press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pricing Vicki.
To withdraw your question. Please press Star then.
Our first question will come from Ebrahim Poonawala from Bank of America. Please go ahead.
Good afternoon.
Good afternoon.
I guess, if you could just talk with those hotels like given the amount of brand spend on energy and leveraged lending you feel well results on both those books when we look at the reserve ratio X and the Gen leveraged lending good luck 82 basis points based on my calculations.
I know Judy you mentioned that you expect lower loss severities, but talk to us why.
We have is going to put enough in terms of reserves in ultra tied to that if you could exist.
Centered on capital Adequacy do you think you need to raise any sub debt et cetera, or just housekeeping on capital.
Sure Hi, Abraham as John Turpin, I'll I'll take the first part of this Dealix take second part on on the capital.
I think.
The question as as you are asking as just really.
Holistically about the the reserve adequacy and I would want to provide a little context, so a little longer answer.
I think than than typical but I think it's I think it warrants.
Warrants it.
So I guess first thing I would say is is that as as we look at what's what's transpired over the last 12 to 24 months and how proactive we've been at acknowledging problems and reducing our exposure and high high risk segments, especially ones that have not performed well over the last year end.
Okay and leverage lending both of which we've managed down.
30% year over year.
With our with our own internal internal efforts, so that would be the first point. So it. So we're coming off of a have a significant de risking of those of those portfolios.
And then I was and then our transition into our coven 19 sectors and how that looks it's around 10% of our 10% of our book and what I would want everyone to understand is the detailed portfolio reviews that we have conducted in these sectors at alone level.
On a loan level, sometimes in some names we've touched and spoken to at least at least two times to understand their specific their specific situation. How the revenues look what their expense loads look look like the liquidity in their strategic positioning so as we look at it we have a very good.
Understanding about about where those about where those.
Clients clients and then if you look at the overall reserve adequacy, excluding mortgage warehouse at 1.6%.
It's right in the middle of the mid cap peer group.
So so I feel pretty good from that perspective, and and and then I would take a look at Julie may some remarks and her opening comments around around the economy and what were what we're expecting and and we think we're certainly adequately reserve based on the severity duration.
Ian and what we expect to economic recovery to look like I guess I'll pause before Julie comments on capital hopefully that hopefully that address your question.
Hi, Joe.
Hey, Abraham you know, we feel comfortable with where capital is and we especially feel comfortable with capital where capital is knowing what kind of what kind of earnings growth rate. We have come in a PPNR that we're going to be able to generate over the next.
Six to 12 month, so we feel comfortable with that we're constantly evaluating it and and certainly we might take the opportunity to add some sub debt.
It would probably mean, maybe repricing some of what we've got an adding some that I mean, that's definitely something that we would consider but theres no. There's no particular timeline set for that.
Got it and just some that you'd given new supposed Doug what do you expect expenses will be in the back half.
And I do expect any of the deposit growth that came into Twoq leaves the bank in the third quarter and do expect and I encourage you emphasized mizumoto Julie.
Doug Gulf War will do you expect to like a decline.
There can be a slight decline in in to in revenue and missed in the third quarter. I think Q2 is probably the peak there might be a little bit I think warehouse and MC able again have a strong Q3, so it could be it could be it could be flat to down a little bit.
Deposits I don't I don't think we would expect any any meaningful deposit run off in the in the third quarter.
Got it and just one question I guess, so from that Amy's, obviously, you've been chairman for long time knowledge CEO like you have lifted within the slight talking about.
Some of the things that you did in second quarter accelerate and that'll just 50 to focus of the bank just stop loss in double of what that not doing means what are you not doing now that you were doing a year ago X. I guess energy and there was lending that we should be mindful and also if you can give us an update on the CEO search thanks.
Sure.
So it's.
It's the this is not.
Magic, what we're doing here is that bank, we're calling on clients and prospects, we're providing good quality loan and deposit products.
For them.
To use.
We have been hiring good bankers ride along we've never really stop.
But what we've been doing for the last year in half.
That we haven't done in the past is provide our bankers the tools.
And some of them.
Some of the bankers, we have hard come from pretty sophisticated bags and they are very impressed with what they see these tools will allow our bankers to outperform in my opinion.
And not just across the middle market, but across especially areas too in terms of increasing our client base and include increasing our share of wallet with the additional products that weve.
We've added if you if you look at our.
Topline meetings.
In the May June timeframe, very strong and people are excited they are glad to have the new products, the new sales management tools.
John survive, the and Vince Ackerson.
Run all of our revenue businesses and in John Advanced maybe presentation to our board yesterday, which was enthusiastically received regarding.
Where we're trying to go with this.
Look there's still plenty of opportunity in Texas, I am I'm convinced of that even in spite of this.
Big uncertainty around the economy because of the co, but it's still the best market to be in my opinion, and then our specialty units until India. They are really strong in some very countercyclical to some of our areas that have that turned down.
And so I didn't know I could talk quite a while on that but I'll stop in each of your other question. So look the CEO search is underway.
Underway, our board continues to work with our.
Outside from making sure that we.
We are looking for the right people that we have a shot at all the right people in there.
Out there we're not in a hurry.
But on the other hand, it's a it's a priority for us and we want to get it.
We want to get it right is the main thing.
And so very pleased with where that is in a more to come can't give you specific date or time other than what I told you earlier and that is that committed to the board that that I'm here for whatever time. It takes certainly the next six to 18 months, if that's what it takes and longer if we need to so hope that answers your question.
Yeah.
Thanks for taking my questions.
The next question will come from Brad Milsaps with PST. Please go ahead.
Hey, good evening.
Hi brand cigarettes.
Thanks for taking my questions just.
You adjust this a little bit Larry, but I, just kind of curious that it sounds like you are more optimistic.
On loan growth.
It sounds like Julie you are certainly optimistic on PPNR growth.
Kind of given some of the expense saves you have coming.
We are being maybe in your during peak sort of mortgage earnings can you talk a little bit about which you guys you're thinking in terms of loan growth picking up as you move into 2021, maybe to offset some of that you know slack there might be created by mortgage.
So I'm OLED, Julie answer that specifically, but.
I want to be careful that we don't just focus on loan growth that because what we're really focused on this profitability and increasing our earnings through getting a bigger share the wallet.
Loans clearly are the driver.
Get that I've been around this business long enough to know that and I feel strongly that there are plenty of opportunities out there one of the things that I've done is asked.
Our chief credit officer in our Chief.
People, who are running the revenue side to make sure we're perfectly aligned on credit and.
To make sure that that the loans, we do book or the right kind of loans.
And so that we don't go through this debacle again I've had enough at this and that a bit around about run this business long enough in through an up cycle that it's painful in and our people have worked really hard to get us through it and so we don't want to get back there again, but I just want to make sure that you're also focused on.
Profitability, because that's what we're focused.
Do you want to yes look better answer is no. That's perfect. The only thing that I would add the only thing that I would add is that you know we have invested in some some very impressive frontline talent in the last six to nine months.
Some sienna, especially areas and core Sienna and we will continue to invest in some frontline bankers and so we will we will grow as they as they bring market share, but again the growth that we're focused on its going to be the whole relationships is not just going to be loans, it's going to be they're going be closely aligned with our treasury people.
And they're going to be bringing deposits and and treasury also.
Thank you I, just just as a follow up.
Can you talk about you alluded to in some of your remarks on on mortgage warehouse, but can you talk about.
The sustainability of the improvement you saw in the yield on that portfolio and then I. Appreciate the guidance kind of near term kind of 10 to 12 million in that gain on loan cell line, but.
Just kind of curious how to sort of think about the number of loans that you'll typically move through quarter.
I know it can vary depending on the environment as you noted, but just kind of wanted to get a better sense of how to think about that.
The next year.
Yeah. So so I'm kind of focus on the rest of the year and then we'll give 2021 got its little bit later, but but for the mortgage finance yield I would say that we would expect those to be flat. They could go they could they can eat down a little bit, but flat to down a little bit and then on on EM.
See a those volumes again, it'll just be based on what the market is giving us and right now with the volumes that are in the market. You know the GE is Gs. These are not taking everything so the aggregators like ourselves are getting all are being offered a lot of business. So as long as those volumes stay like they are well continue to have very.
The short turn times and you'll see you'll see the average balances stay pretty consistent that they may tick up a little bit, but they'll stay consistent with what we've been seeing and you'll see that gain line stay pretty pretty strong.
If the volumes I mean, we don't really expect the volumes in this environment to two to start to diminish much not through the third quarter and then we'll see what seasonality does in the fourth quarter.
Okay, great. Thank you guys.
Oh expert.
The next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, Thanks for taking my questions.
I think the output you mentioned you work on that going to invest and a couple your markets can you just give us some color on some of the investments that you might plan to make and if that if some of those investments would offset some of the some of the severance costs and some of the run rate above cost of you've layered and provide for us. Thanks.
Sure. So I'll take a shot at that and then Julie.
Hey, Matt if she wants to do so what I was specifically referring to our high performing bankers like we'd always done in in looking for some teams if thats what we can do.
In in each of our markets to tell you the true, but certainly you can guess, which ones. They are there there are home market in Dallas, and certainly Houston, but San Antonio Austin Fort Worth also get looked at cost at what we're not trying to get right back to the expense of problem. We had before we were we had.
Too much expense and this guy said, we're looking at it from a revenue point of view and.
I don't think expense is really the issue here the the the the risk that we did did not really hamper our our revenue producing side.
And so the frontline and.
And but we continue to look.
So to say, we're going to grow earnings than we need some additional resources to do it with so thats, what I was talking about.
Michael I'll note that answered your question specifically, but.
Okay, and Mike I would just add those numbers that I gave you for those cost saves in the in the annualized run rate reduction I mean that factors into we've already factored into that that would that we're going to add some we're going to be adding some revenue per geysers fuel virkler.
Okay and can you provide us some color so what those planned investments might be in terms of dollars.
I mean, it it's already it's already netted into this it's netted into the numbers that I gave me. So the cost saves that I gave you assumed that we're going to do some add back.
Okay.
We just had enough that we're talking about over the next I don't know six to 12 months, we'll heart 10 to 15 bankers.
Okay. That's helpful. And then can you just get an update on bass bank, just given what's going on with with airlines and is that still a viable strategy for you guys at this point.
It's it's absolutely a Bible strategy, it's a it's a viable platform that that as we as we've talked for when we introduced it that digital platform is something that we plan to all along to leverage for additional offerings going forward. So we absolutely plan to maintain.
Platform as well as that brand.
In this environment I mean, they're still opening accounts are still opening accounts and it's growing we're not we're not throwing marketing dollars and spend about but certainly as they open accounts will will take those that were not going to make any kind of investments in trying to grow that right now, but we're looking at ways Mcauley, who runs that for us.
We certainly are looking at ways that we can leverage that digital platform in other ways, whether its later other offerings a couple of years from now when hopefully rates start to move up again, so we'll still the capabilities and the brand we will maintain but it's not something where we're going to make any outsized investment anytime in the near future.
Okay. Thanks for taking my questions.
Absolutely.
The next question will come from Jennifer Demba with Suntrust. Please go ahead.
Thank you good evening.
Sure.
Youre more pandemic sensitive industries can you kind of frame up which ones. You're you think are higher risk over the near term versus lower risk at this point and what was criticised levels are in those areas.
Sure.
Outlined it on the on slide four.
The earnings deck, what we're really.
Primary classifying as what we'd consider the most severely impacted here.
So I think.
I think we would.
Yes, I feel pretty good about what those portfolios look like we've spoken do we spoken too.
Most if not all of those clients one to two times, we understand there we understand there we understand their position.
So I think.
As far as the granularity of criticized classified.
You know by those sectors us that's that's not something that we have provided but but.
Certainly.
When you look at sea area Theres additional detail on on the on the line of business as split out as well as as well as energy as well.
Certainly give you more more more color on what we're seeing in terms of client client needs and how they reached out reach out to us but.
We haven't gotten into that level as best as today.
Jennifer on the on the theory detail. We had we do have the criticized levels and I guess I would go back to a comment that I had and I know you and I've talked quite a bit about that on the on the CRT and those those coping impacted areas. Those are not the ones that we have most of our CRM concentrations in there, but the smaller comp.
Smaller amount and we feel great about that that book the LT. The ltvs that we have the borrowers we have so yes. This.
Okay. Thank you.
Huh.
The next question will come from Brady Gailey with KBW. Please go ahead.
Okay. Thank you good afternoon guys.
Are you Brady.
So one of your peers.
Hancock Whitney announced a bulk sale.
Late last week of a bunch of their energy assets, which which was pretty costly for them, but it sounds like most of your larger.
Problematic energy loans are gear resolution, which it's great to hear but you're still up with some smaller.
Your energy elaborate blending and other loans that are still in the problem bucket would Texas capital consider a bulk sale going forward or is that at all on your radar.
So I'm going to just make a comment about that and then I'll, let the experts here.
The there that are taken on it but.
Look we've been looking at that portfolio for quite some time and looking at what options, we have to to get it behind us we've taken a lot of actions already in terms of charge offs provisions running off business and all of that to get us down to the level that we're at.
It's we still have some problems in there, but they are manageable and we know.
What that's going to look like going forward.
Would we would we ever considered of course, we would.
If somebody came and showed us a good reason to do it.
In that particular case, I don't know anything about hancock's.
Business or have they had it valued on their books. So it's really probably inappropriate to comment, but one thing I do knows at Oaktree is the one of the largest distressed securities buyers in the world and not that they're going to buy anything that that that doesn't have significant upside for them. So I don't I think we have our.
Our business valued where it needs to be today.
And and so it would probably not appealed to me just intuitively, but again, not Julie or Jay to you I want to comment on that yet I mean, I guess I guess, what I would say is that in over the last year.
That the energy portfolio is down about about a half a billion. If you think if you think about it that way and so we've managed our way through that portfolio and by ourselves.
Obviously through through provision and charge offs and answer just.
I'm not renewing facilities when they mature.
Since we feel like we've we've right sized that continue to go down as the markets allow which it's kind of stalled out right now in terms of how much further you'll see that go down in the near term, but also taken a look it at each one of those each one of those clients on a on a quarterly basis.
Dressing their cash flows and taking the looking at their heads hedging positions, we feel like what we have less than a books.
And that is atypical from from those that have caused us problems.
And the most recent four to six quarters.
We feel adequately reserved for every you might also note that the M. P. Eight are down meaningfully in it you know in energy with those targets that we took an actually actually the theres. The remaining balance of those are referred to is still in there. So when you net that out mpsvs in energy or about 64 million so that that's a.
Meaningful drop.
Hi, Thanks, that's helpful. And then another question further Larry or Julian I heard you guys talk at all.
Plan that you have for the company, it's going to take another six to 18 months to get there where you basically targeting higher earnings levels.
Is there anything is there any goal or target that you have in mind as far as.
What you want the company there are like from an Oreo way or or are we target point of view.
So you know we're not given 2021 guidance right now, but I would tell you that in this environment. You know we're focused on P. PNR, we're focused on managing credit and so you know I we targets we've given those in the past I don't I don't know that we're going to be given any ROI we target.
It's anytime soon we're focused on again growing PPNR and managing credit and as we get closer to the end of the year, we'll start to give some more specific guidance on 2020, but yeah. No. No. No are are we targets that were that we're throwing out there right now certainly.
Okay, and then and then finally from me.
Yes, there's just so much noise at Texas capital recently was.
The merger was on and then the merger Boston and.
The new CEO has there been any.
Any meaningful loss of talent, Texas capital I mean, I feel like I've seen some press releases from some of your competitors that have talked about hiring some people away from Texas capital, but can you comment on.
Any loss of talent that you've seen over the last call two or three quarters.
So so rather than talk about loss of talent, let's just talk about the talent that we have because everybody seems to want to talk about Lawson talent.
Particularly our competitors are not yet that I do the same if I were them.
But nobody wants to talk about talent, we've hired in the last two years, which is extraordinarily good in the ones that.
That's the coming in today are also very strong they get it.
In terms of.
Going after the full wallet.
Like the tools that were giving them they like to products we have.
Our and again like I said, our specialty groups are second to none there also in our middle market bankers are second to none output enough to give us the body, so while I don't lean too.
Throw shade on our competitors. They are our competitors I don't know bloom outside they hired our top talent.
And but in terms of where we are now the team we have on the field I. If that is just not a concerns that I have.
All right they break out.
Okay.
The next question will come from Gary Tenner with da Davidson. Please go ahead.
Thanks, Good afternoon.
Carrying the.
Hi, just wanted to some more color on the cost about balance sheet remarks, I think there were some comments about investing some excess liquidity that you've historically held.
You're talking about maybe any targets of how you would like to balance sheet mix to look from earning asset perspective, and if there would be any thoughts actually contracting the balance sheet and reducing some of the borrower.
Uh huh.
HM we are planning to we've already starting even some of the excess liquidity into securities.
Definitely comfortable with some securities build over the next.
The next six months or so you know liquidity levels were still going to maintain I'm not going at work given any targets for that we're still in this environment, we still want to maintain a.
Larger than the normal liquidity balance so we're not planning, we're not planning any balance sheet reductions at all I mean, you know warehouse as warehouse if we go into the some of the seasonally weaker quarters, there could be some some runoff there, but yeah. There's no there's no plan to.
Reduce the balance sheet as of now.
Okay and then.
Okay.
I think it was mentioned a couple times during your comments Larry on kind of a six to 18 month kind of perspective in terms of a getting earnings where you want them to be it have some options and also as it relates to see CEO search.
Just wonder given the fact that obviously the board has agreed to sell the thank once I mean is that.
That timeframe to seems to.
Possibly sit in a timeframe that would be maybe a bit of a return to normalcy and simplification cleaning up of the of the.
Kind of franchise overall, so how should we read so this is that's on the table in that period of time again.
Just through this interim phase of cleaning things up.
Well if I understand your question dairy in my colleagues will correct me. If I know so are you asking if we're going to do another rip and change up is that now what I.
I think a year or are you asking about another another another upon another merger.
I apologize I didn't ask that question very in a very elegant way, yes, especially the counter around 618 months on what you're doing the right now to simplify cleanup credit focusing on PPNR.
It sounded to me as though it's really.
Sofit stop got May not be the right word to use but kind of a bridge to get to where that option could be back on the table in a more normal environment.
I don't think it's a bridge I think it's just going back to doing what we've done for years and we've had this blip in the in the last year. So that we've had to get through and we have now we'll see the earnings start to come back that's not that's certainly magow and we'll continue to grow our middle market business.
And our specialty groups.
And the reason I just said takes 18 month. It starts this quarter. So that's the first part of the six months. The 18 months includes 2021, we just.
And we'll grow through that period of time to get us back to earnings were.
Where we can grow from there and continue to do same things we've always done.
No we're not we're not looking for our partner no. Yeah Thats a question. That's what we are not an interest in.
And.
Going through another merger I know, we don't need to we have a good future and in so I don't call. This is stop gap at all I think it's just to continue to run our business right now.
Well, yes, the things that Weve some alone.
Hi, Virgo thank you.
The next question will come from Brock Vandervliet GBS. Please go ahead.
Okay great.
Just to actually follow up on Gary's question.
If you could just elaborate here on it so.
From the in terms of earning assets to Lady do you anticipate.
It really got reallocation from these interest bearing deposits held at other banks too much greater investment securities that kind of the.
Takeaway, we should be.
Making here.
There'll be some transition of yeah into investments into investments I mean, I would say that by the ended the year, we could be at all else being in a half that you know beginning to happen security.
So, we'll and we'll continue to build securities if that week with the excess liquidity, we're comfortable continuing to build some securities into 2021 as well.
Okay, and just to clarify of all the steps you're taking.
Drinking.
Shrinking the balance sheet is not is not one of them.
Claire.
Okay, Yes, that's correct.
On the funding side.
One area, where you do seem to have plenty of room is in time deposits.
I know you've got.
Disclosure on the run off cadence there if you could kind of go through that and what that might.
Settle out at that'd be helpful.
Sure. So we do have some some brokered Cds that that have some laddered maturities and we would expect that we would probably reinvest those that we would re up those at lower at low at the lower cost. So you would see as as those mature reinvest those end in brokered Cds at the lower cost.
And those are south of 100 Bips at this point.
Oh, yes, like 30 35.
Okay all right.
Savings there all right great. Thank you.
Uh-huh. Thanks.
This will conclude today's question and answer session I would now like turn the conference back over to President and CEO, Larry homes for any closing remarks.
So look thank you for your time today I hope we.
Helped you understand our view of our bank and where we're going we're excited about it we're confident in the future.
And it to the extent you have any other questions feel free to call me or jewelry or Jay TV.
I'd be happy to talk further with you. So that concludes our call today operator. Thank you.
Thank you for your participation in TCB Q2, 2020 earnings Conference call. Please direct requests for follow up questions to Julie Anderson at Julie Dot Anderson at Texas Capital Bank Dotcom you may now disconnect.
[music].