Q4 2020 Texas Capital Bancshares Inc Earnings Call

Good day and welcome to the Texas Capital Bancshares fourth quarter 2020 earnings Conference call. All participants will be in listen only mode. During the presentation. Please note. This event is being recorded.

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I'd now like to turn the call over to Shannon Wherry.

Director of Communications. Please go ahead.

Good afternoon. Thank you for joining us for PCB and fourth quarter 2020 earnings Conference call I'm, Shannon Wherry director of Communications before we begin please be aware. This call will include forward looking statements that are based on our current expectation and future results or events.

And looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements are 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 and most recent annual report on form 10-K, and subsequent filings with SEC and we will refer to slides during today's presentation, which can be found along with the press release and the Investor Relations section of our website and Texas capital Bank Dot Com.

Our speakers for the call today are Larry Helling, Executive Chair, President and CEO and Julie Anderson CFO at the conclusion of our prepared remarks, our operator will facilitate a Q&A session and now I will turn the call over to Larry for opening remarks. Thanks.

Thanks, Shannon and then.

Welcome everybody and thanks to all of you for joining US today on May 26, 2020. The board asked me to step in as interim CEO as we were terminated merger and and that leadership transition period.

And my first earnings call with you in July and said, we were putting into place a six to 18 month plan to restore our earnings to a higher and more sustainable trajectory and I've.

And said, we would do this through getting our arms around credit and increasing profitability by moving some excess liquidity into higher yielding investment portfolio.

Expense rationalization investment and C&I bankers and product sets and completing the succession planning process by hiring our next day yeah.

Our results this quarter are in line with our plan, we made significant progress with the credit portfolio, including a provision similar to the third quarter and JC and Julian will describe in a few minutes, we saw meaningful improvement and nonperforming and criticized levels and importantly, the migration to cloud.

That has slowed.

We had charge offs, resulting from issues previously identified as two thirds of that was already fully reserved.

This included the resolution of three problem energy credits, which were restructured into one smaller pass credit and the resolution of two COVID-19 impacted credits.

During the quarter payoffs of classified loans at par were approximately $100 million.

I have been very proud of our team as they have fully embraced the short term strategy.

Successfully navigating the pandemic, taking good care of our clients and improving our credit performance and our outlook.

I announced the hiring of our new CEO, Rob homes and November after a nationwide search.

He has officially been on garden leave these last 90 days. He has been studying our company our employees our markets, our clients and opportunities to improve our outlook for the long term.

Next week, we'll begin formal reviews of our lines of business and carefully assess overall strategy.

I could not be more pleased with the choice our board made and how are you Rob He will hit the ground running on Monday January 25th and with that I'm going to turn it over to Julie to walk us through the quarterly results. Thanks, Larry.

Pleased to have finished the year strong executing on the midyear planned Larry mentioned total revenue for the fourth quarter with $266 million, which is consistent with the third quarter level part of our plan was to capitalize on market conditions favorable to our mortgage finance business to drive meaningful revenue using our lowest risk loan category.

While we continue to derisk and certain categories and while demand for other risk appropriate growth has been slow during that time, we've continued recruiting and hiring and C&I bankers 10, new bankers have been hired since June 30th and the recruiting of bankers continue.

As expected the fourth quarter provision was in line with the third quarter level and is primarily reflective of changes to impair them and them out.

And the subsequent charge offs and the resolution of two COVID-19 impacted credit and additionally.

Additionally, deferrals totaled $90 million at the end of December down from $166 million at the end of September.

Since late third quarter, we've taken a more comprehensive restructuring approach and addressing deferral request that don't simply involve extending payments or suspending payments for a period of time generally. These negotiations include providing the borrowers some level of pain relief, while requiring continued interest payments and a range of covenant and support.

Requirement from the borrower and the.

As a reminder, we started with $1 2 billion of deferrals at June 30, and so the current number is representative of the work that's been done as we actively engaged with our clients and understanding the COVID-19 impact on their businesses.

It's premature to give guidance on provision at this point because certainly there are plenty of unknowns with the continued pandemic. What we will say is assuming no meaningful deterioration in the economy. We would expect 2021 provision levels to be directionally much lower than full year 2020, and now I'll move on to a few of the details.

And the quarter.

Average loans held for investment excluding mortgage finance was down on a linked quarter basis as we continue to experience accelerated.

CRE payoffs and utilization rates have remained low.

Obviously loan growth is only one output of new relationships and we're seeing positive traction and attracting new relationships as evidenced by loan deposit and treasury pop lives and the push for expanding existing relationships is showing success.

It was positive movement and core loan yields and the fourth quarter, which included a higher level of fees part of which was related to the P. P. P loans.

Low spread improved as well with funding costs continuing to come down.

We experienced another quarter and meaningful average deposit growth. We expect continued reduction in funding cost is higher cost Cds run off and its term FHL b borrowings mature and those balances going forward moved to lower overlapped rates.

Again longer term the real driver of improved funding cost will be the optimization of the funding start to lower rate of relationship deposits consistent with our core C&I strategy.

Net interest income was up compared to the last two quarters with NIM and proving in the fourth quarter and we continue to say, we're always focused on maximizing net interest income. Despite some fluctuations in there but it is important to note the drops NIM net of the liquidity build since the fourth quarter of 2019 has been only two.

This point.

And then can continue to fluctuate with chip and earning assets.

Mid year, we've been able to deploy approximately $3 billion and and securities at an average yield of one 4%. We will look we will continue to assess the strategy the pace of build could slow as we evaluate overall macro environment conditions, and our new Ceos broader strategic objective.

Warehouse yields continued declined slightly linked quarter, but it's been extremely resilient throughout 'twenty and 'twenty. We do expect some continued compression in those yields in 'twenty and 'twenty one.

Core <unk> yields improved during the quarter and included the higher level of fees only part of which was the P. P. P.

At the end of the ear and over 30% of our core early child loans have floors in place, which continues to improve despite the competitive environment again, we still believe there's some room for deposit pricing to come down as higher price Cds continued to roll off and that's H O V term borrowings mature and move to overnight borrowings.

The provision for the quarter was 32 million and approximately two thirds of that was related to additional impairment on two previously identified COVID-19 impacted front and that were resolved. This quarter. Additionally, there was continued negative migration during the quarter, primarily and CRE and specifically the hotel book, but that was partially offset by meaningful pay.

Out of problem credits and some upgrades.

Total criticized and decreased as a result of the pay offs as well as charge offs as we expected charge offs were higher and the fourth quarter and will continue to be more elevated as we move through the cycle fourth quarter included resolution of three fully reserved energy deal and that you previously identified COVID-19 impacted deal the pace of migration.

Criticized slowed during the quarter and while again, it's too early to declare victory because we have a meaningful number of deals still to be resolved. We feel comfortable that the remaining criticized book is comprised of loans that have secondary sources of repayment very different and profile than what we experienced with some of the energy and leverage credit we resolved.

Earlier this year.

Noninterest income levels were consistent with expectations as gain on sale was lower with competition and lower volume. We are of course influence fund and market and contraction of the healthy primary secondary spreads enjoyed earlier and the year, but theres certainly a variety of factors and influence the gains we realized while we expect gain on sales.

Margins to remain strong through the first half of 'twenty 'twenty, one we do expect some continued compression.

For non interest expenses for the quarter included the benefits from the actions taken earlier in the year. The fourth quarter total noninterest expense was slightly higher than expected primarily related to servicing expenses and more specifically the continued increase and amortization expense related to early pay offs were working on strategic alternative.

To lessen that exposure in 'twenty and 'twenty one.

Our initial plan for 'twenty and 'twenty, one noninterest expense culture levels to be flat to down slightly but we will be reevaluating that as we work with Rob and strategic priorities. We do know that investing and C&I bankers will continue our recruiting efforts have been very successful and the last six months and we expect that success to getting even.

Even more traction when Ralph joins us.

Great.

Thank you.

And I appreciate those comments so.

Questions Q&A and yes.

So why don't we moved to a two and a operator.

Thank you and to ask a question. Please press Star then one and you touched two and soon.

If youre using a speakerphone please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then two.

And at this time, we will pause momentarily to assemble the roster.

And our first question today will come from Brett Robinson with hub group. Please go ahead.

Hey, good afternoon, everyone.

Hi, Brett.

I wanted and wanted to first just talk about low.

Loan growth outlook, and you know obviously, you've been working through some credits and it's good to see the E M P as down and and.

Dealing with those energy and and leverage credits can you talk about maybe the pipeline and where is today maybe versus at the end of last year and at some point during this during the summer months when I was obviously impacted by Covid.

So look we're still in the middle of a pandemic and so we're not really giving guidance on what.

And the loans are going to do over the next 12 months.

And our clients have done well through this period of time.

Beginning to see opportunities that.

And that we haven't seen in the past.

We believe that there will be opportunities for for good loan demand but.

I think it will be solved certainly and the first half of the year and we'll see what the second half looks like as we get further into any economic consequences of this pandemic.

Okay. That's helpful. And then secondly, I think the P. P loans were $715 million at the end of <unk>.

What were they at the end of <unk> and then can you talk maybe about the matriculation of the fees and the first half of this year as those.

And those loans are forgiven and then just maybe any thoughts on the second round and PTC.

So I'll I'll take the fee part and then J P can talk about the balances the fees, we would expect there still to be some impact from the fees for the next two quarters at least and those pay off.

Yeah as far as the as far as the P. P. P loans, we had a we had a peak of $717 million and in Q2, and and Thats down to 617 million now so about 100 million down and then the prospect of a second round going forward at this point, we opened up we opened up.

If our application process at the beginning of this week based on early returns are and we would estimate somewhere between 30% to 50% of the volume that we saw and in the first round program.

Okay.

And if I could sneak in one last one and that was just curious on if you have news and the loss factor once you realized almost net charge offs and the energy and leveraged.

And so what kind of loss you took on those.

Yeah, that's not that's not something that that we usually that we usually give them I can tell you that debt.

You know the energy deals were energy deals that had been problems for a while so that that wouldn't really be a representative of anything that would be left and the book and then there's the COVID-19 impact and credits you know those were just and it's worth those credit for fun prior to the Covid, but yeah, we don't we don't really.

Talk about that and I guess, what I would what I would point you to Brent is that what's left when you look at the breakdown of what's what's left in nonperforming I think that the secondary sources of repayment we felt good about so.

So I think that's probably what you're focused on it is loss exposure going forward.

Right right Alright, I appreciate all the color. Thanks.

And our next question will come from Brady Gailey with <unk>. Please go ahead.

Hey, Thanks, good afternoon.

Hey, Brady.

But I just wanted to ask about the growth and the bond book I know you guys signaled that you'd be adding and you did at the back half of last year.

And what about from here, what what about into 'twenty and 'twenty, one will growth and the bond book continue at this pace or will it slow or will it be Florida, how are you thinking about.

Put in and excess liquidity to work and the bond book.

Yeah. So I think that yeah, we've been pretty aggressive since the middle of the year and moving that up because we needed to pick up the yield I think we will be cautious of what's going on with rates. We're gonna be cautious and then again and we're going to spend time with Rob and figure out what strategic objectives, and we're gonna be focused on so you know I would say you know in a in a couple of months will tell.

And more about what we're planning for the bond portfolio, but I think for now and you wouldn't you.

And we would probably expect to pause a little bit on some of that growth.

And then within the fee income.

You had the line that's the gain on the sale of loans held for sale from MCA.

And could just be all over the place and very lumpy, yes, yes. So any color on how we should something and I think and for full year 'twenty and 'twenty you did about $58 million, how should we think about that.

Going forward.

So I think that the and you know and hit its peak in the second quarter, and you know and like I said and my commentary that's the way. We're all taking advantage of the of the premium pricing and hit the peak and the second quarter was a little bit less in the third and and then a little bit less and the fourth so I think that the fourth quarter is probably a decent.

Run rate so it can be a little bit more compression, but I think the fourth quarter is probably a decent run rate for what you see going forward.

Alright, great. Thanks, guys.

Thanks.

And our next question will come from Brad Millsaps with P. S. C. Please go ahead.

Hey, good evening.

Hello, Fred how are you.

Hey, Julien are you doing.

Just to kind of follow up on Brady's question around the bond portfolio it looks like the <unk>.

Yield stayed pretty stable linked quarter at around $1 44.

You know I was thinking here, maybe by and stuff and the low ones, but just kind of curious.

And kind of how that's changed and kind of what you might you know is that do you expect that to hold fairly stable.

And you kind of slow down.

You know some of it some of the purchases and 21.

Yeah. So yeah, I think we will slow down a little bit I don't think that that that's you know where we're going to we're cautiously evaluating that now I don't think you'll see much change in the rate if we do a little bit more but again I think we're gonna put we're going to pause on that as we kind of evaluate Rob a strategic.

Yes.

Okay great.

And then just in terms of the warehouse just curious you know.

And what the participation number was this quarter.

I know, you're probably not going to give a lot of guidance for 'twenty.

'twenty, one, but just kind of wanted to think about you know what maybe you could call back in May.

We offset some of the natural.

And maybe maybe slow down and we see this year.

So we have a little over a billion and I think it's probably 1 billion tier 1 billion three at the end of the year. So yes that would all be a be available and to the commitment levels, a little bit higher than that but outstanding at the at the end of the year was about a day and two.

So that's that's absolutely available to us to bring back on.

During the year, if we choose to do so.

Okay, Great and then just one kind of final housekeeping I apologize if I missed this and the release, but the tax rate was maybe.

Little higher and the fourth quarter or was there something specific going on there or just making more money and do you know.

And of that that re rated high or was there something else going on and the tax rate, yes, well that has to do with losing money for the first six months or a year and and some to the rate on the permanent items. So yeah that that was a little bit higher I would expect 'twenty 'twenty, one gets back to a more normalized rate.

Okay, Alright, great. Thank you guys.

<unk>, Inc.

And our next question will come from Jennifer Denver with Truth. Please go ahead.

Thank you good afternoon.

Just wanted some more color on your expense guidance and thank you.

And we thought it would be flattish this year and.

Year over year, and but he didn't want to continue doing hiring can you just talk about what your hiring objectives are and kind of what the puts and takes are on the expenses for this year. Thanks.

Yeah. So so what I said was our preliminary play and and that's preliminary free raw land is kind of flat to down a little bit, but we'll certainly be evaluating that as Ralph joins us next week, so the hiring them and and and that included the flat to down and included some expected hiring of bank.

And I think that's probably been what we've what we've heard so far what was what we planned or maybe a little bit ahead of plan. So again I think it's premature for us to give any guidance on that and you know we want when Rob after Rob gets here and and we start to reevaluate all that we'll we'll try and give you a little more guidance on that but.

But I guess I would tell you, even though you know and the support areas. What we've said is and the support areas and support areas and we're gonna be focused on and on giving the frontline what they need and and the targeted the hires are gonna be topics and the frontline primarily as of right now.

Okay. So you would think that you would hire at least the number of people that you hired and in 2020 this year.

Well I mean, what we what I said was we hired 10 10, C&I bankers and the last six months.

Again, you know that Theres, a pipeline for for mortality, but like it's premature for for Larry or I would tell you how many how many bankers, we think will hardly wait and let Rob talk to you about that.

Okay. Thank you.

Uh-huh.

And our next question will come from build to sell them with Titan Capital management. Please go ahead.

Thank you would you please discuss the $5 7 million of energy loan.

Recovery and the fourth quarter.

Yeah, Bill and that's just that was just related to a previous charge off that we took where there were some recoveries based on that.

That's kind of all there is to say it was a it was a deal where there was a previous charge off and we knew there might be some recoveries and and they've come through I don't J T or anything else.

And I wouldn't expect that to be reoccurring and that's pretty much a pretty much wrap that up and pretty much and it and it was related to one deal and stuff.

And if we were to want to take it one step further and and have he and the presumption or the hope that higher crude oil and natural gas prices.

And would actually help with future recoveries and or it takes some of your current and non performers and the energy arena and moving out and out of those buckets.

Is that something that you're thinking is possible or are most of them too far too far gone at this point.

I think I think I would say that I don't think there's going to be recoveries and I don't think there I don't I don't think that the current commodity pricing would affect future and future recoveries and certainly the overall book is more stable, but with prices at this level and it certainly factors into our reasonable and supportable forecast and how we think.

And just the economic impact on our reserve needs, but it's not our recoveries and and the prospective our natural gas and oil prices. It doesn't factor into tier two our calculations at this point nice surprises, but not anything that we're counting on or that we have specific line and <unk>.

And two.

No worries and then last question you did mentioned the provision going forward will be down in 'twenty, one will be down from the 20, <unk>, that's a little bit of and easy hurdle, Let me ask it and there's slightly question slightly different way.

How do you view the provision going forward relative to the second half of 2020.

Yeah and this is a this is a J T here.

The way that I would the way I would describe it as the next two quarters are going to be extremely telling depending on the asset class.

And the recovery is.

Quicker or elongated and commercial real estate being the Prime example, where do you like and peak to trough on commercial real estate based on based on what you read and the.

And the macroeconomic forecast, it's really I mean, we're out there still another two two and a half years before CRE has a a final a final reckoning but were.

And that's just slightly optimistic the information that we continue to get.

You know on the economy, and just how sustainable the vaccination gets rolled out and how quickly that can get administered and how that.

Decreases of volatility and the economic forecast will have a huge impact but.

But we do like we do like the mix of our criticized assets are better now than we did given that that pool. Now is represented of the lower loss given default.

Net asset pool.

And so we'll see how we'll see how it goes but what what I would suggest is we won't revisit.

<unk> and 'twenty.

And second half of 'twenty and 'twenty.

It feels it feels feels more directionally correct and the first half.

Thank you both.

And welcome.

And again, if you'd like to ask a question. Please press Star then one.

And our next question will come from Matt Olney with Stephens. Please go ahead.

Yeah. Thanks for taking the question I wanted to circle back on the discussion around liquidity and I believe.

The average overnight liquidity position was down a little bit, but still around 30% of earning assets.

You've talked about over time kind of moderating this.

How much how much realistic opportunity is there to bring this down and and in 2021 and 2022.

So where we're at.

So Keith we're focused on optimizing the funding stack and so certainly there are some actions that we will take to reduce exposures to some of the index deposits and that's you know that's going to happen over time that that doesn't happen quickly, but definitely there are already actions in motion to reduce.

The entire beta deposits over the course of 'twenty and 'twenty, one and now I mean, obviously the the overall liquidity is you know that's dependent on how core deposits growth. So.

More and more to come as we as we see how the year evolves, but but certainly we are focused on repositioning the funding net.

Okay got it. Thank you and then on the colonial side the L. A child loan yields or it was impressive in the quarter. I think you said includes some higher fees even outside of P. P. P. Can you quantify what the corner to corner change was and in the fourth quarter.

Yeah, I don't I mean, we don't like to get I don't like to get into specifics about that so I. There was I guess, what I would tell you. There's I would expect first quarter L. A chai yield there could be some compression there will still have some impact from fees and then you know just the pipeline for some new deals and related fees.

Is good so I do think that first quarter, we'll have some of that but.

But it would not be surprising if first quarter LH high yield is it's compressed a little bit from the fourth quarter.

Got it.

Yeah.

And then just lastly, you mentioned the.

And for expenses kind of flattish from here, if not down a little bit what are what's the starting base that we need to start from for that assumption.

Normalized for this year the normalized for this year, which is yeah.

Yes.

Yeah.

600, yeah and.

Normalized of about 600.

Okay.

$600 million as a starting point.

Yes, the flat to down commentary, okay, yeah, because that's that that's pretty much and normalized for 'twenty and 'twenty.

Okay, great. Thank you.

Sure.

And this will conclude our question and answer session and I'd like to turn the conference back over to President and CEO, Larry Helling for any closing remarks.

So look thank you for joining us today really appreciate your patience with us as we go through this transition and leadership.

And I promise you it will pay off and.

And we will be able to answer a lot more of your questions as we get further into.

The next to administer for administration and so again, thank you very much.

For your patience with us and your attention to our company. So I hope you guys have a great and safe weekend. Thanks.

Thank you for your participation and <unk> fourth quarter 2020 earnings Conference call. Please direct requests for follow up questions to Julie Anderson and Julie Anderson at Texas Capital Bank Dot Com you may now disconnect.

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Thanks.

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