Q1 2021 Texas Capital Bancshares Inc Earnings Call
Pardon me, ladies and gentlemen, thank you for standing by your conference will begin momentarily again your conference will begin in just a few moments. Thank you for your patience.
[music].
Welcome to the Texas Capital Bancshares, Q1, 2021 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 would now like to turn the call over to Jamie Britain Director of Investor Relations and corporate Finance. Please go ahead.
Thank you good afternoon, and thank you for joining us for <unk> first quarter 2021 earnings Conference call I'm, James Britton Director of Investor Relations before we begin please be aware. This call will include forward looking statements that are based on our current expectations of future results or events.
Forward 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 day of this call and we do not assume any obligation to update or revise.
Statements made on this call should be considered together with cautionary statements and other information contained in today's earnings release. Our most recent annual report on form 10-K, and subsequent filings with the SEC, we will refer to slides during today's presentation, which can be found along with the press press release in the Investor Relations section.
Our web site at <unk>.
Capital Bank Dot Com, our speakers for the call today are Rob <unk>, President and CEO and Julie Anderson CFO.
<unk> of our prepared remarks, our operator will facilitate for Q&A session.
And now I'll turn the call over to Rob for opening remarks, Rob. Good afternoon, everyone. This is Rob holds and I am excited to be hosting our first quarter conference call as Texas capital Bank's New President and CEO here, what we as Jamie said as Julie Anderson our CFO.
As many of you know I left a wonderful position running a global business and one of the best financial services firms in the world to join the team here.
I believe this is evidenced the board's true commitment to investing and build a best in class regional bank through a disciplined organic strategy.
With that backdrop I would like to take a couple of minutes to speak more broadly about why I came here, what I discovered and where we've been focused during the quarter.
The why is quite simple first I was born and raised from Texas I went to both college and graduate school in this day and while I have been primarily focused outside of Texas for the last 20 plus years I'm Isabela.
Intimately familiar with its great community institutions companies and people there is no region with a more constructive business climate and because of these pro business policies and attitude, Texas has one of the largest and most diverse economies of the world with a GDP of one nine trillion, which puts our footprint and one of the top economies world.
Why.
For strongholds here of continuing to even greater investments in this day and more importantly, many others continue to enter the market with over 25 significant corporate relocations announced last year and over 15 announced so far this year.
More people are moving to Texas today than any other state in the nation.
Being responsible for a complex global business focus on wholesale clients offers a unique perspective on what allows businesses to thrive.
Coupling that with insights <unk> gained through my deep relationships with business leaders across all industries in Texas and civic leaders at both the local and state level I have no doubt the opportunities available in Texas today, which are extraordinary.
We have a super unique opportunity to build a flagship in this state for businesses institutions and the people who run them.
Doing so will enable us to engage support and strengthen the communities we serve in a more profound manner.
We acknowledge there have been missed in our recent past the brand is indeed bruised, but the brand's promise is still very strong.
I know it resonates because prior to accepting this role I personally called many of the Ceos business owners and other stakeholders and the Texas ecosystem.
Day confirm Theres, a strong mandate for Texas capital, if we can deliver on our promise.
I am committed to do so since I've joined I have spoken to our bankers prospective bankers and talent across the enterprise day.
To see the opportunity in Egypt excited and committed to moving forward as we build a better Texas capital Bank.
I can assure you I did not meet my last role to lead an average bank I left for the opportunity to build something special and a place for that care about with the team I believe them.
I talked to the Texas capital Bank before making the decision to move.
And after a very busy and productive 12 weeks.
And our new management team or even more steadfast in our resolve to deliver.
Now, let's talk about the things I've discovered since my arrival.
The derisking, but the Texas capital Bank team did for the better part of 18 months. Prior tomorrow arrival deserves praise the benefits are tangible today and position us well for the future.
I know firsthand the focus for diligence it takes to operate with world class risk management.
The deliberate actions to remediate select outsides concentrations were quick decisive and most importantly effective.
Grateful for their assets.
There is plenty of talent at Texas capital that we're proud of but we also have areas that we will supplement to achieve our goals and reached the position in the market we desire.
That is a recognition by all of this and we have aggressively begun that journey.
As I mentioned, the best bankers in the market believe in our brand and are attracted by the opportunity.
And after bringing them over delivering on our objectives will allow us to retain them.
By now you understand my excitement about our business here in Texas. We are fortunate to have several extremely strong national businesses as well.
For a great importance for the bank and every one of them for pizza very well in the markets. They serve.
I would like to take a moment to touch on one of our best.
I've heard from some of our mortgage warehouse business as quote outsized.
I was responsible for one of the largest and best mortgage warehouses in the country in my previous for Trust me when I say I know what good looks like.
Our people technology and clients across all of our mortgage finance at Texas capital or as good or better than any competitor.
You will never hear me apologize for the size for success for our mortgage finance business.
What you should criticize us about our the earnings of the rest of the bank. We are intently focused on expanding other core businesses have already taken steps to do so.
I was also pleased to discover the finance leadership teams here, we're well into the process of diligence and different options for managing to a better capitalized balance sheet. Some of those efforts came to fruition this quarter.
First <unk>.
Issuance of $300 million for perpetual preferred shares the largest capital raise in the history of our firm and then as the first regional bank to close a credit risk transfer with transfer first loss risk in our mortgage warehouse portfolio to investors, while creating a new source of funding and bringing regulatory capital treatment in la.
And with the assets true risk profile.
Lastly, we had various functions for the banks acting with urgency coordination and with great discipline.
However, the bank as a whole was not organized properly ordinary cadences and routines, we're not practiced expectations, we're not clearly communicated and commitments to long term strategies, we're not regularly adhere to.
Based on these discoveries the newly constructed leadership team and I decided to acutely focused on several fronts this quarter starting with our people.
People here have been incredibly resilient and resolute in their efforts in each one of them should be commended.
The first non founder CEO.
Third CEO in a short period of time.
We terminated merger, we experienced very large losses in our loan portfolio and like everyone else. We worked through a very difficult time, both personally and professionally as COVID-19 wound lives and put others on hold.
So intercepts.
We're trying to save the best of our past for startup.
To guide this effort I felt that critical to establish an operating committee comprised of leadership across the for the new operating committees values and expectations have been established the new level of intensity is contagious.
We are creating scale by breaking down silos, which where a tenant a past management.
We are tracking some of the best talent in the market for any financial institution, not just a regional bank I am sure you are aware that Nathan Mcdonnell attempt storm from my first hires.
What to expect with me and have helped me in so many ways, but maybe most importantly, they are helping you to retain and attract talent.
Shannon your exco, our need for HR, though.
As a super important New addition people in town, our eight quarter, so going forward.
I am highly discerning when it comes to the type of people, we want to attract to our platform. So far I've been very bullish.
We're looking at all of our expenses with a goal to reallocate the areas, which we need to invest we have identified many imperatives and as you know each will taken investing.
We have begun the process to re underwrite every dollar of the expense base and self fund as much as possible.
We began broad efforts to continue to remediate the balance sheet reallocate capital and position us for growth supported by a conservative capital position.
Resulting with consistent quality earnings.
To that end as announced today, we decided for both monetize our MSR portfolio and wind down the correspondent lending business, while the business was upscale profitable and well run it is not core to our strategy at this time.
We are excited for the employees and our clients in this channel as PHH carry this business forward building on the foundation of success created over the past five years.
We will safeguard our capital and have already implemented a new balance sheet committee going forward loans will be an outcome of our relationships not a goal.
We want to thank best in class management teams in our markets most important industries through the corporate lifecycle.
Our balance sheet Committee ensures we're using our capital wisely to support our clients. It is not a credit approval with the approval of the use of capital.
It will ensure that we are highly disciplined client selection.
Making the appropriate amount of capital for the right opportunities.
We commenced a new routine in the form of quarterly business reviews, which are deep dive into every facet of each of our businesses.
For one off less than 100 day and let's see.
We have now done this twice.
Our entire operating committee.
For day grinding through the details of how we can build better businesses to support our clients.
The findings from these reviews, coupled with our other newly established routines and cadences will culminate in our ability to share with you. How we intend to further reallocate capital and resources, I guess businesses products and services as part of our broader go forward strategy.
I appreciate your time listening to these macro thoughts and areas of focus in advance of our third quarter strategic planning costs.
I Hope you will find this helpful in the interim and I commit to be very candid inaccessible as we move forward together.
With that I'd like to now pivot to our CFO Julie Anderson.
On a solid first quarter.
Rob My comments will cover slides five through 11.
We're pleased with the solid financial performance in the first quarter and more importantly, the actions taken during the quarter to strengthen our balance sheet and position us for the future with respect to our operating results total revenues for the first quarter with $239 million and as expected was down from the fourth quarter as a.
A lot of seasonality in the mortgage finance business, but consistent with the first quarter of 2020 or.
Our noninterest expense was down meaningfully from the first quarter last year and flat on a linked quarter basis, we had a very modest for lease and reserve, resulting in a small negative provision as economic conditions continue to improve as.
While I'm confident in the quality of the portfolio, we continue to be cautious and conservative in our valuation.
A few noteworthy items for the quarter I want to highlight loan fees were down from the fourth quarter and we've included additional detail, which should be helpful. In understanding the slight fluctuations that can be evidenced in core loan yields as a result, we continue to have PPP fees, yet to be earned and expect a similar led.
Will earn fees to be our next quarter.
We participated in the second round of PPP, which net of forgiven loans resulted in an additional $110 million in balances.
As Rob mentioned, we're selling the MSR portfolio and winding down the correspondent lending business. This aligns with our strategic focus on more predictable earnings while allowing for a reallocation of a substantial portion of the expense base into frontline talent and improved capabilities to support the C&I business.
It's important to understand that there will be a lag in the revenue from these investments.
Overall credit trends continue to improve net charge offs were down materially to only $6 4 million and non accruals continued to decrease from levels experienced last year. Despite.
Despite the improving economic outlook and underlying credit fundamentals, we remain disciplined and conservative with the substantial reserve built over the last 18 months.
Our allowance for credit losses on loans, excluding mortgage finance loans is 157% up from $1 one 8% at the end of the fourth quarter 2019, and currently represents 2.5 times non accrual line.
We did experience a slight increase in total criticized loans related to CRE and specifically hospitality.
Exposures, which are appropriately reserved for and we felt comfortable with underlying structures, including the ltvs and the overall borrower supports importantly, there was a slowing of negative migration from the watch category to special mention.
Our average L. A charge excluding mortgage finance was down on a linked quarter basis, but ending loans increased modestly as a result of the second round of PPP activity core loan yields normalized during the quarter down from a higher fee level in the fourth quarter. It's noteworthy that our loans spreads have remained stable and even.
Improved a bit since last year at this time as a result of continued funding cost improvement and continued growth in noninterest bearing deposit.
We experienced another quarter of meaningful average deposit growth. We expect continued reduction in funding cost is higher cost Cds are still running off in the second quarter and we are more aggressively managing down higher cost index portfolio balances.
<unk> longer term value will be driven by our focus on treasury, which is evident in one of Rob's day, one hired Nancy Mcdonald, who ranked global treasury at a much larger institution. She is working closely with the frontline banking has aggressively recruiting treasury sales talent and already focusing on initiatives to enhance the <unk>.
Treasury platform.
Net interest income was down as expected with the seasonally weaker first quarter and a normalization in lung fees. After the outsized level experienced in the fourth quarter.
NIM continued to be pressured by higher liquidity with the new CEO of rising less than 100 days ago, we paused for a bit on efforts to reposition excess cash and instead executed on capital actions needed to appropriately position the balance sheet for the future.
As we finalize the strategic plan that Rob will discuss in the third quarter, you can expect us to be more acutely focused on liquidity management, which will include not only resuming the redeployment of some excess liquidity into securities, but also more aggressively managing down certain higher cost deposit categories.
One final note on net interest margin, it's important to note the drop in NIM net of the liquidity build since the fourth quarter of 2019 has it been only 23 basis points compared to the over 150 basis points drop seen in fed funds.
Warehouse yields continued to decline slightly linked quarter, but have been extremely resilient. We would expect some continued migration in those yields in 2021.
For La <unk> yield net of fee fluctuations had been fairly stable for the past four quarters with spreads coming down only a few basis points each quarter.
First quarter noninterest income level was consistent with expectations for seasonally lower mortgage finance volume our focus on optimizing treasury pricing and relationship benefited our deposit service charge income and we saw our third quarter in a row of increasing wealth management interest fee income.
Total noninterest expense for the quarter was slightly down from fourth quarter levels as reset of benefit related expenses and incentive accruals was more than offset by reductions in servicing expense as higher long term rates led to slower prepayment speeds and a reduction in amortization expense and a reversal of MSR.
Jeremy.
We've been transparent with the fact that hiring bankers is a priority and supported those frontline bankers. We're also actively recruiting additional treasury sales and credit professionals as.
As previously mentioned, we will give more detail on our long term strategy in the third quarter, which will include quantifying those investments, but it's important to understand as Rob pointed out that were re underwriting every dollar of expense and re prioritizing all initiatives and businesses, both ensuring that our investment dollars are aligned with ours.
Strategic priorities and minimizing net new spend.
Rob.
Thank you Julie So why don't we open up or a question Sara please.
Thank you.
Ask a question press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the Keith.
To withdraw your question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brady Gailey with <unk>. Please go ahead.
Hey, Thank you good afternoon guys.
Alrighty.
Yeah.
Just start with the MSR sale.
I know that unit was profitable for you all last year and it looks like it was profitable in the first quarter Julian could you just help us understand.
Some of the dynamics that will go away, though I think there's a couple of fee income components that goes away as well as some expense components.
Cash start with just kind of why we did it and then maybe Julie can help with that but that's okay that'd be great.
Yes.
Number one.
<unk>, two and a half times of capital as a regular loans.
For us.
We don't have a broad consumer platform to fully lever the MSR assets and then lastly, it could contribute to great volatility of earnings over time, so in an effort to simplify the balance sheet.
And make it safer and earnings more consistent.
And help our capital position for all those reasons.
I think it's a good business, we actually got it to scale, but it's not a good business for this time.
Lifecycle of Texas capital.
It was it was a great business. So that's why we did it I think that will help you understand and then Julie won't catch the question sure Brady. We that's why we provided a little extra detail in the slide deck. This time slide six there's a breakout of all the different components of correspondent lending a couple of them you've always been able to see on the page.
The net financial debt the net interest income component and then there's a couple of components in noninterest income and so I think you've been able to see that what you haven't had in the past is the expense component, which we've gone ahead, and giving you an it and as I've said in my comments that we would we would expect to reallocate those.
Fences, just some of the other investments that we're focused on right now.
Okay, Alright, great and then I also wanted to ask about loan growth you know on their loans.
We're kind of flat linked quarter, which is honestly pretty good relative to the rest of the industry.
I just wanted to ask for.
As far as loan demand.
Do you see it picking up at this point a lot of people are talking about kind of the back half of the year, where we could see some nice loan growth and then maybe outside of like the near term loan growth, maybe just Rob when you think about the company.
What do you think is the potential for Texas capital could do longer term from a loan growth point of view, considering you're in such attractive markets.
It's taken you.
Do you want do you want to do the financials force allowed to answer it first and then and then if Julie has anything to point out that you can.
I think Brady, we spoke to you on that.
Investor call early on.
You may have heard me say that.
The loan growth will be an output of our clients' needs. We will not target loan growth I actually think that that may have been part of the calculus that got us to where we were last year. So that's not to say that we don't aspire to have loan growth, but we will we will.
The Kpis, if you will for loan growth would be.
Do more with our clients that we have and also add clients to our platform. We have a very low market share of clients in Texas and as you said and I've said many times, we couldnt find ourselves in a more constructive market. So we will have loan growth, but it'll be an outcome of banking these clients through the corporate lifecycle.
Alright, and then finally for me interest I know Julia had mentioned.
Expenses year over year would be roughly.
Flat, but at the same time, I know, Rob Youre, adding a bunch of great talent. So.
I just wanted an update on kind of how you are thinking about the <unk>.
Pence base from here.
Yeah. So Brady I think that will give you more detail on that when we roll out the the more comprehensive plan in the in the third quarter I think what I will say is just reiterate a comment that for both Rob and I made that that were re underwriting all I'll spend all.
All initiatives and again now with the with the wind down of correspondent lending will certainly be focused on how some of those expenses can be reallocated, so really more to come in more granular detail on the third quarter.
And Brady I would just emphasize the spend we underwrite as kind of both soft and hard dollar spend meaning running the place then and also investing.
So it's it's both times.
Okay, great. Thanks for the color guys.
Sure.
Our next question comes from Brett Robot with Hovde Group. Please go ahead.
Hey, good afternoon, everyone.
Hey, Brett.
Wanted to just Julie a question for you.
Off the bat here like yourselves like many others continue to build on a mountain of cash and it's obviously not super attractive time to.
Deploy a ton of liquidity into securities that it might be under water at some point can you just talk about the balances as you see it with deploying some of the liquidity and you know how are you.
How do you think the next few quarters might play out from that perspective.
What you what you might do with the balance sheet to try and mitigate the excess liquidity.
Sure Brent happy to to answer that so I think that you know we took a lead with with Rob joining us less than 100 days ago, we took a little bit of a pause on redeploying any of the excess cash and at the same time, we had some additional growth in deposits. So at the end of the first quarter I will tell you that I think are.
Cash balances were too high.
You will see us.
We're still working on the final plan for how the allocation of different asset classes are going to be on the balance sheet, but one thing that you will see us start to do a little more aggressively we will pick up we will again start to redeploy some into securities. As you said I don't think were not good.
Moving to go.
Go crazy on that but I think you'll see a little bit of additional redeployment into securities and then but you also on the liability side, we're gonna be more aggressively managing some of those higher cost higher beta deposit. So you'll see I think you'll see a little bit more aggressive action on that in a second.
Quarter, and then again when we rollout for more holistic plan in the third quarter I think that will that will help inform.
And for them kind of what we think.
Liquidity levels are going to look like for the longer term.
Okay.
And then as it relates to that Julie would it be fair to say that you think that the margin. This quarter was kind of just for one quarter.
Flip here just from this.
Culmination of excess liquidity or how do you think about the margin from here then obviously, there's a lot of dynamics that go on that but maybe just any thoughts around the margin.
Sure you know what.
I try to stay away from just focusing on the margin we focus on the on the different pieces of it but again the excess liquidity, obviously continues to be a drag. So so to the extent, we're able to reduce that from that that will improve that will improve the margin.
Some outsize loan fees in the fourth quarter I think first quarter was back to a more normal our normal run rate again, and then on the you know the remixing on the liability side the deposit side, that's going to continue to them for you.
The margin.
Okay.
And then I just have one last quick one around the increase in criticized loans that you mentioned were mostly around commercial real estate hospitality. It seems like that's a bit of an outlier for the industry. I think most folks had the movement last year as opposed to this quarter and a lot of folks are talking about improved.
<unk> with hospitality was there a reason that these had been moved previously can you give us any.
Thoughts around.
Why now.
That increase in.
Criticized loans and hospitality.
Yeah. So I think that we've been we've been actually pretty aggressive at at downgrading for the past year and so the movement that we saw in the first quarter with some that were in the watch category that had already previously been had been identified so you know that that entire book.
The I think we've been pretty we've been pretty transparent about that for CRE book, the hospitality piece, which is not that large of a piece. It's about I think about 400 million overall, a meaningful percentage of that is somewhere in criticized and this was just this was just part of the category that moved from watch to special mention.
So we don't think it was it was it was what we would have expected.
Okay.
Great Fair enough. Thanks for all the color.
Our next question comes from Jennifer for Dumbo with the true Securities. Please go ahead.
Thanks, Good afternoon.
Question, Rob You said you wanted to disclose more details on the strategy in the third quarter will that be part of the earnings call or would it be a separate event.
Separately, the it'll be between the second and third quarter earnings call, we dedicated solely to the strategy.
It's too important.
We said in our call GAAP earnings mixed in and hopefully you all appreciate.
That focus.
Definitely.
Rob you mentioned earlier in your monologue that the company would have an organic focus would acquisitions ever become part of the strategy in your mind. We know there are a lot of discussions going on in the industry today.
Yes, there is there's a lot of activity in and I'm certainly not surprised by it there's a lot of industrial logic, but.
We see and what I mentioned in my in my opening remarks about I feel like the board and we are committed to organic strategy.
There is so much more that this bank can do.
That we haven't done yet products services markets clients.
And we don't need anybody's permission and the organic strategy to a much lesser beta day on an acquisition.
So while I'm wide open to ideas and thoughts and opportunities to.
Strategic alternatives other than organic given especially given my background doing that for a living.
I do think that the right course of action right. Now is just to focus on the organic go forward path.
Thank you.
Thank you.
Our next question comes from Ebrahim <unk> with Bank of America. Please go ahead.
Good afternoon.
I guess for Judy just to follow up I appreciate the non.
I wanted to give a new margin neutral given the moving pieces, but given the impact we saw on <unk>.
Non fees the PPP fees, if you could give some color and just in terms of AUC NII headed relative to the two.
To the first quarter levels.
So again Ebrahim I would just you know I would just take you back to the to the different the different pieces.
I think mortgage finance is seasonally lower in the first quarter again were not going to give any overall guidance on volumes, but seasonally a little bit lower in the first quarter and I think there are levers there that we have to to make to make sure that that that business remained strong.
I think that yield has held up really well, we could see a little bit of compression in net but we think it has held up well on the core book again, we'd get a little more detail for that you can kind of parse out the different components in loan fees I think growth in loan I think robs already kind of addressed that at it it will it will.
It will be what it is and you know we're not sure exactly what that looks like over the next couple of quarters and then on deposits I think we expect that deposit costs will continue to come down one we still got some brokerage seat higher cost brokered Cds that are rolling off which will get us some pick up and then again we're going.
Be a little bit more aggressive on them on some of the on managing some of the higher cost higher beta deposit categories.
Got it.
And.
I guess secondly, a question for Rob on Thanks for my prepared remarks, I think you mentioned.
The brand is bruised and I think that's not missed on anyone who'd funnel day Bang for the last several years I.
I guess I appreciate you taking your time in terms of giving a strategic update on the bank, but what would be the message for a shareholder who stuck with the company for the last several years in terms of as we think about when we start seeing the fruits of your strategic plan is that by the end of this year is that by the first half of next year.
Anything that you can at least for wide quantitatively that could allow someone to hanging there.
Yes, I mean, I would just say that.
There isn't an entirely different team.
Running this bank today than just run it in the past seven years, a different philosophy, a different strategy with different backgrounds.
I ran a business that was multiple of the size of the global on the best financial services platform in the world with every product and service.
I always thoughtful for business is incorporated Texas capital at that platform that were multiples of size.
Tim storms, the same thing on risk Nancy Treasury, we're getting that from other ads.
Soon.
As it relates to experience and depth and quality of management and you supplement that with what we have here and the people that are still here and I think it's a great that so I.
I really think you can compare seven years ago with today and I Hope what you want and you can tell me the third quarter, if you do it.
Got it.
Thanks for taking my questions.
Thank you.
Our next question comes from Brad Milsap with PSC. Please go ahead.
Hey, good evening.
Brad.
Hey, Julie Hey, Rob welcome. Thank.
Thank you I wanted to follow up on the on the.
Yes, you're welcome on the expense discussion as it relates to the MCA business.
I think the <unk>.
Responded business had about $18 million expenses in the first quarter, you mentioned wanted to reallocate those.
Assume that's not something.
That occurs you know sort of overnight.
It would be investments that you would make over time, you know the $80 million annualized with more than $70 million. So just wanted to kind of think through sort of how quickly you see expenses ramp back up.
Yeah, No that's very fair that would not that would not happen overnight it would happen over time and again.
Well get into specifics about that until the third quarter, but yes, I mean, I think we've already alluded to some of the hiring that's already happening and the hiring that we're looking to happen. So.
So I think that's that's that's meaningful parts of that but yeah again, you know to the speed and how that's gonna look we'll talk more about that in the third quarter, but your point is very fair that that's not going to be reinvested overnight.
Okay, and then secondly, I think I saw on the deck that.
Your $3 billion or so.
Borrowings are going to go away in the second quarter.
Do you know when they're required to buy.
By the <unk> to hold a certain percentage of advances against the warehouse is that something that's changed that you mentioned here that overnight borrowings may continued but just kind of curious on how to think about that wholesale funding sources relates to your way.
Warehouse business, you, obviously don't need it but just kind of curious how to think about it.
We do and I think we've talked about that pretty candidly before we because of the because of the facility that we have we've agreed that we will hold about 30% and.
<unk> 30 per cent of the.
The 30% of the outstanding mortgage Finance book.
Yeah, so but that flips to and that all the term all ran off in the first quarter and that flips to the 30 per cent is is overnight money is it.
Opposed to that she was a higher churn rate okay. So.
Got it.
Got it so you'll pick up you'll pick up a little bit there. Okay. That's fair and then finally, just kind of bigger picture question.
When you look at Texas capital I understand you may not be able to answer this yet, but you know at $40 billion in assets.
Clearly the balance sheets a bit bloated.
Keith.
Can you give us a sense of kind of how what you feel kind of the right size of the <unk>.
Bank should be kind of over the.
Near intermediate term as you kind of think about kind of how they approach the market from from a size standpoint.
So I'll acknowledge that my view when I looked at the balance sheet with what started in a sense is that it is.
I don't know if I would use the word bloated, but certainly it could be rationalized.
And hopefully a decision to sell the MSR assets and wind down of correspondent lending is evidence of our willingness to make.
Pretty good pretty decisive decisions pretty quickly I mean that was that was decided maybe my third week here and then it takes a while to execute so I would agree with you we're going to be very disciplined about capital.
So you know I mentioned the balance sheet Committee.
So.
We need to be more focused.
And use it with great discernment, and we will manage the balance sheet appropriately going forward.
Great. Thank you.
Thank you.
Our next question comes from Anthony Elian with J P. Morgan. Please go ahead.
Hi, everyone and welcome Rob.
My follow up.
Follow up on the sale of the correspondent business.
So you reaffirm the commitment to the other mortgage businesses I guess, how are you thinking about these business is more specifically mortgage finance, especially with the backdrop of higher rates as volumes.
Normalized lower from here.
Yeah.
A different way.
The warehouse and the Msr's.
Our house is in a different category in terms of consistency of earnings and conservative products that we put through the warehouse and the type of business that we do in the structure that we employ.
Which remember on I was responsible for a very large warehouse for my past life I understand this business cold I went through Covid with the business of.
Staring with forbearance and stop we have a safe and sound mortgage warehouse business. There's a number of things we can do to influence the volume through there through cycles.
I hope you noticed that the first quarter down.
Reduction is seasonal.
To see if it's cyclical, but certainly not out of place seasonally but we have participations that were talking about openly off balance sheet that we can break on balance sheet. We have a number of prospects many of whom I've spoken with that one.
To use us that are great.
Great clients that we'd be proud to have them that we're talking to about bringing balances on and there is other products like I said, we were were using safe and sound products.
And the mortgage warehouse with the right structures, but there are products that we can expand into that does not increase risk.
And historically, if you've looked at our warehouse were not as price sensitive as the competition. We're certainly not for me is that we have outperformed so between all of those things. We think we can manage it we will be affected.
We appreciate the earnings that it contributes.
Okay.
Then.
Julia I know you mentioned that it will take time for the new initiatives to show the signs of revenue impact I guess after you identify these new initiatives, how long will it take to start recognizing the.
The revenue from them is this more of a 2021 event or likely in 2022.
Can I take that yes, I do.
It's hard to answer that I'm, not trying to be not forthcoming or candid as I promised to be for its hard to answer that but we haven't identified the new initiatives. So whether its rollout with that if that's okay. And then we'll be very deliberate and giving great guidance.
On the ramp for those initiatives, both revenue and expense.
Okay, and then finally for me I know.
A couple of quarters ago, you guys had talked about the new deposit verticals I know bask Bank, who was one of them I guess, where do you stand on those now is there an update U S. Thank you.
So we.
We invested in a new S flow platform.
And we're standing behind that I would just say the whole deposit vertical bask bank.
Asia and go forward strategy will be part of a broader initiative.
Well, we have some over price deposits on the balance sheet today. If we if we just think candidly I think Julie mentioned, we'll be more aggressive with us and fast and the deposit vertical will be a part of that overall.
Inflation that we rolled out in the third quarter.
I mean, what do you think of the bank is part of the strategy you can.
There are like so.
That'll be a big part of the discussion.
Great. Thank you.
You bet.
Our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, good afternoon. Thanks for taking my questions, maybe just one on credit. So you guys had a reserve release this quarter, Julie where where do you guys think just minus site.
Should we expect pretty low levels of provision assuming the economic backdrop remains relatively stable here in.
Do you think you can get back to kind of day, one post most seasonal day one.
Reserve levels.
If things continue to improve thanks.
So you know I think that that I'll make a few comments about kind of why we ended up with a with a small negative provision we benefited from the Derisking that we did in 2020 and you know so I thought we were ahead of all of that.
Lower charge offs lower N P a M.
I've said in my comments, I mean, well economic conditions are improving we're still gonna be cautious and conservative in how we evaluate it. So I don't I guess I'm not going to we're not going to give any guidance from what we think provision is going to be going forward. We feel good about the book, we feel like that the that the book the credit book is much different than it was a year ago.
The composition of the criticized the CRE is is solid we feel good that that book has been we have been so deliberate and client selection. All along this structure is good. So we feel good about that but again I think we want to reserve the right to be cautious and conservative and.
<unk> CEO will tell you he is very conservative with that aggressively.
Okay.
Understood and maybe just one bigger picture question, you know a lot of talk around the warehouse a lot of talk about where you where <unk> been Ravi has come from a much bigger bank with many different fee lines of business and so I guess, that's the question.
As you think about kind of intermediate term or are there any sorts of businesses that you think might make strategic fits for you to enter in obviously you're exiting some.
In the near term, but is there any just line of sight that might make sense for kind of the business bank that you seem to be as you move forward. Thanks.
Yeah, you bet so.
I'll answer part of it because.
That's part of our whole strategy around the part of the whole conversation around strategy.
No.
Well, we definitely recognize that our fee income is low for stuff here.
To be a focus going forward.
It does.
The obvious ones that we'll focus on.
In addition to our broader strategy would be what we've already said, which is P times for any of the treasury business. So what we're gonna do there and then also our wealth management business, which.
<unk> is a really great platform that needs scale. So both of those businesses. You should look you should look at going forward as contributors and then we should talk about the rest of the third quarter.
Very helpful and maybe just one final one for for me I'll try I know, you're not going to give any sort of margin guidance, but just given some liquidity deployment opportunities.
Move forward.
Just given where the margin was this quarter do you think NII actually just grows throughout the year from here.
You know again like what kind of walk through the different pieces of that we have levers on the mortgage finance, we're not you know where where yields can we would expect that they could come down some but we're usually not as affected as does the overall market with that.
You know securities, we would expect to redeploy some additional excess cash into securities, which would which would be some pick up and then again I think you know some of the work that we're doing on deposits.
So I guess I'm not going to give specific guidance on exactly what it what it's gonna look like from quarter to quarter, but those are those are the different pieces and how I think they're going to trend hopefully that's helpful.
Yeah very helpful. Thanks, Thanks for taking my questions.
Sure.
Our next question comes from Peter Winter with Wedbush Securities. Please go ahead.
That was my question on the fee income so I'm all set thank you.
Looking forward to working with true up.
Thank you Peter for me as well.
This concludes our question and answer session I will now turn the conference back over to President and CEO, Rob Holmes for any closing remarks.
Look I just wanted to say I really appreciate everybody's investing at a time and interest in Texas capital and I look forward to work with each of you in.
Being transparent and we're excited about for third quarter call and everybody stay safe. Thank you for your time.
Thank you for your participation in PCB is Q1, 2020 One earnings conference call. Please direct requests for follow up questions to Julie Anderson at Jamie Dot button at Texas Capital Bank Dot Com you may now.
Disconnect.