Q2 2021 Texas Capital Bancshares Inc Earnings Call
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Good day, and welcome to the Texas Capital Bancshares second quarter 2000 on 'twenty, 1 earnings conference call. All participants will be in a listen only mode. During this presentation. Please note that this event is being recorded if you need assistance. Please signal conference specialist by pressing the star key followed by zero I would now like to turn the conference over to Mr. <unk>.
Jamie Brittain, the director of Investor Relations and corporate Finance. Please go ahead Sir.
Good afternoon, and thank you for joining us for <unk> second quarter 2021 earnings conference call on Jamie Brittain 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 for.
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 data for 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.
The 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 release and the Investor Relations section of our website at Texas Capital Bank Dot com or.
Our speakers for the call today are Rob Holmes, President and CEO and Julie Anderson CFO at the conclusion of our prepared remarks, our operator will facilitate a Q&A session.
Now I'll turn the call over to Rob for opening remarks, Rob. Thank you, Jamie and thanks, everyone for joining us today to discuss what we believe was another solid quarter.
Following my remarks, Julie who will walk us through the quarter's detailed financial performance.
But first I'd like to talk about the current state of the bank debt journey, we are on and our continued areas of focus.
We are working intently to build something special and the best market with a tier we strongly believe in.
Last quarter, we communicated several commitments to you and I am happy to report that we delivered on all of them.
Number 1 we announced we began transitioning correspondent lending activities to PHH and divest our MSR portfolio. As you can see both actions have been taken and those processes are nearing completion.
We said based on a go for conservative approach.
We will continue to strengthen our capital position.
Our sub debt transactions this quarter, coupled with our first quarter transactions resulted in the strongest capital position and the history other bank.
Number 3 we promise to slowly and smartly make progress on our excess liquidity and resume our investment portfolio, which as you can see from the balance sheet we executed.
And before well communicated credit would remain but non in the short term all of the metrics continue to improve and we continue to have confidence in our portfolio's performance overall.
Number 5 when announcing the mortgage warehouse credit risk transfer transaction. We said we have multiple levers we could utilize in mortgage to better support our current clients and introduce our best in class platform to new ones. We.
We executed a number of those have material declines in refinance volume came to fruition and.
We are now better positioned going into the third quarter. In fact, we gained market share on the back half for the second quarter.
And lastly, we said we began reinvesting in talent.
Not be more excited with the team that we have and the team. We are building just last week, we on boarded the largest number of new employees ever.
We are establishing a culture of clear communication transparency and accountability, we plan to continue to be very clear and transparent with you as well and we have no doubt that you will hold us accountable.
As you can tell we are focused on enhancing our strong foundation from which we will move forward.
Now I'd like to provide more color and go deeper on the details of actions taken.
First and foremost our team is paramount.
Success depends entirely on our talent.
In the past 6 months, we have brought on additional talent at all levels of the organization and.
In April I described how excited I was to welcome Tim storms and for Mcdonald's and Shen Your Exco.
Since then we have made key additions.
Julia Harman and Rick Robyn joined US this quarter on what we eat corporate banking and business banking respectively.
Both segments are critically important and demonstrated a renewed commitment to C&I.
We see great opportunity to profitably invest in our primary markets and with the assortment we will continue to do so.
Goldman has recently joined as our new Chief Information officer with responsibility for all technology and related functions.
Digital and IP transformations at institutions, much larger and much more complex than ours and is experienced in delivering leading client experiences and banking and financial services, which is a focal point for us moving forward.
We were happy to promote Madison still well 1 time was actually quite a Texas capital and then joined as head of strategic initiatives for our mortgage businesses.
He will become president of mortgage finance upon chat and other his retirement in June at.
I told you how impressed I am with our national businesses, especially in mortgage finance.
It not be more excited that a respected industry veteran like Madison.
For you to assume this role.
The third quarter is off to a very strong start as well John Larsen has been appointed head of homebuilder and community finance.
Previously known as specialized for residential real estate with John joining us we had a more talented and knowledgeable leadership team for the homebuilder industry, which will allow us to execute on the many opportunities we see for improvement in this business. We are fully committed to the homebuilder segment.
We are also excited to see the partnership between John and are very well known director of community development, Effie Denison expand to provide value and the communities in which we work and low.
We are making tremendous progress on we will have more significant talent announcement as soon as you can clearly see we have a highly accomplished leadership team that now trained on several levels of the organization on.
Compare favorably to any team on the industry.
Importantly, our accelerated approach to attracting and adding key talent will allow us to pull our strategy for.
This is the type of experience, we need to truly build a flagship financial services firm, 1 that allows us to engage support and strength in the communities we serve.
Over the past quarter I've been lucky to spend significant amounts of time in our markets and I can tell you. What we are building is resonating.
Our clients believe in our brand and are rooting for us to deliver our current teams are fully invested.
Prospective bankers are telling us this is an opportunity on a company they want to be a part of.
Also this quarter, we have added more client facing professionals and at any point in our history.
But the numbers do not match the quality of the person and the talent does and we are not compromising on either.
1 other reasons. Our story is resonating is though we are making significant changes we.
We are taking the time needed to ensure the investments and structure, we are adding will enable our bankers to serve clients efficiently.
We are acutely aware that building trusted relationships and our core markets and industries requires not only an investment of time.
But also higher touch service and we are empowering our teams to provide it.
To that we are ensuring each new banker as a support staff and technology they need to deliver the value of the entire bank to all clients.
We are building a balance sheet net business model that enables Texas capital to support its clients through all cycles.
Full stop.
Which frankly to the actions we have taken to further strengthen our balance sheet.
By now it's clear that we are managing to a more some day clinic say conservative I would say appropriate capital position.
On supported by more consistent high quality earnings, which will earn us the right to be as opportunistic as we want to be in the future.
The first quarter's preferred raise in credit risk transfer or a much needed star.
Materially improved capital and enhanced our ability to support our clients.
The latter even help to diversify our funding which is prudent and value added.
Though we were the first regional banks to execute a CRP successfully you may have noticed that in the market are recognizing the value of the structure and we expect this to continue as an important tool in our capital and liquidity management playbook going forward.
Early in the second quarter, we made a decision to transition our correspondent lending business and sell our MSR portfolio.
We have been executing against those objectives since the announcement.
And while the second quarter's financials continue to reflect the businesses inherent volatility we expect this to be immaterial for third quarter completely removed in the fourth.
As expected revenue declined ahead of expenses.
Associated expenses will quickly follow in the third quarter.
The decision to exit these efforts is completely consistent with our goal to simplify the business and reinvest in higher quality less volatile earnings going forward, while being mindful of capital.
And importantly, we did it in a responsible way.
Thoughtfully.
<unk> and with the majority of our correspondent lending team and the majority of our clients smoothly transferring to PHH platform.
Later on this second quarter, we further supplemented capital with a $375 million sub debt issuance.
And we have a capital stack that puts our risk based capital ratios in line with desired levels and right in line with or better than where our peers want to be.
While others may be returning capital we are accelerating out of the downturn excited to be reinvesting in the many opportunities we see for sustainability and growth.
Julian will discuss this in detail, but as I briefly mentioned, it's important to note. The success, we've had in trimming our excess liquidity position.
We deliberately pause upon my arrival to assess market conditions and go forward strategies, but now we are managing towards a more efficient balance sheet.
I hope by Mike considerable actions to date to repair and improve all aspects of our balance sheet debt. It is apparent we will always take a conservative approach as it relates to all aspects of balance sheet management.
As such we recognize the importance and maintaining appropriate levels of liquidity.
But we believe we can do it more efficient debt.
More profitable and we will.
The team we are building shares the view that unquestionable financial resiliency is foundational to our success.
This core financial tenant coupled with a best in class risk management practices, Tim and his teams are implementing and reinforcing will ensure Texas capital will be here for its clients when they need us most through all market cycles.
We do have a long way to go but I am proud of our people for their dedication and effort over the past 6 months.
The operating committee continues to meet routinely to both drive consistent and thoughtful execution against our strategic objectives and determined the need for future investment to enhance client focused value.
The balance sheet committee is hitting its stride and convening regularly to ensure capital is managed wisely through diligent client selection and appropriate allocation to OLED wide opportunities with only the right clients.
And we just completed our third round of quarterly business reviews, which are already delivering on the goal of appropriately aligning capital and other resources against our businesses and client solutions, while focusing on delivering a high touch client experience.
We look forward to share additional details with you on these topics as well as unveiling our vision and our goals in a few weeks when we host our strategic update call.
That I will turn it over to Julie to comment on the quarter Julie Thanks, Rob My comments will address 1 spot for each well where.
We're reporting another solid quarter as we continued to take actions strengthening our balance sheet to ensure we are well positioned with appropriate capital levels in line with our go forward expectation with.
With respect to our operating results total revenue for the second quarter with $227 million down slightly from the first quarter the biggest impact coming from the transition of correspondent lending and associated sale of the MSR portfolio.
Net of PPP, we saw growth in the core la portfolio and see momentum going into the third quarter our.
Our non interest expense was flat linked quarter with a full quarter of expenses related to correspondent lending as we transition the business and closed the MSR sale for.
Our second consecutive quarter, we recorded a negative provision as economic conditions continue to improve and our non performing as well as criticized levels came down.
While confident about the quality of the portfolio, we continue to be cautious and conservative in our evaluation of future economic condition, and we continually refreshed that paying particular attention. This quarter 2 specific factors such as the ongoing benefits from stimulus for Delta there yet.
Inflation and continued supply chain challenges.
There were a few noteworthy items for the quarter on what Paula.
Fees, excluding PPP fees increased from first quarter levels and we've included additional detail, which will be helpful to understand the context and fluctuations in core loan yields as a result of the feet.
The current quarter speeds or higher than normalized levels, consistent with client and business activity.
P. P fees were up in the second quarter, and while Pvp fees, yet to be arent totaled $8 million those will mostly be earned over the next few quarters. So quarterly amounts will be lower going forward given the nature of the program and the forgiveness process. The pace remains uncertain as you can see from our recent results.
During the quarter, we closed on the sale on the MSR portfolio and work through the transition process for correspondent lending book.
Quarterly results included a full quarter of the business expenses, but lower revenues than prior quarters as expected third quarter results will have a few lingering expenses as we finalize the actual transfer of servicing assets as Rob mentioned, we executed on the issuance of $375 million.
Debt.
During the quarter following a successful perpetual preferred issuance and CRT transaction in the first quarter. The result of these actions leaves us with capital levels that are consistent with our go forward expectation with the timing of the issuances and subsequent redemption of higher price debt, there was about $2 million in excess interest and.
<unk> cost in the second quarter, and another 2 million on amortized debt issuance cost that was recognized through noninterest expense upon redemption.
In this quarter liquidity levels were down over 4 billion compared to the end of March as we more aggressively exited certain higher cost index deposits, even with the fed's recent decision to increase interest on excess reserves to 15 basis points.
Deposits were at a negative spread situation, so that will translate into improved revenue in future quarters.
Today, we have greater discipline on price.
Rate toward appropriate market level and each relationship is being evaluated for broader opportunity, we're comfortable with our current investment portfolio level and in the near term purchases will replace run off to maintain the current level no meaningful net increase in balances is expected liquidity is as Rob.
Mentioned, a core tenet for financial resiliency and will remain a primary focus going forward.
Our credit trends continue to improve net charge offs for the quarter were slightly over 2 million and non accruals continued to decrease from levels experienced last year. In fact, this was the sixth consecutive quarter on improved non accrual levels. Despite.
The improving economic outlook and underlying credit fundamentals, we remain disciplined and conservative with a substantial reserve built over the last 18 months, while we had another quarter of negative provision or allowance for credit losses on loans, excluding mortgage finance is 146% from $1.8.
Percentage at the end.
For 2019, and $1.2 4% on day, 1 a seesaw, while we're still carrying reserves at a higher rate than day, 1 Steve. So we note that the ratio is normalizing from its Q3.2020 of $1.8 4% as we evidenced improvements and the level and composite.
<unk> of criticized.
CLO currently represents 2.6 times non accrual loans and the ratio has increased for the past 5 quarters.
Total criticized loans were down this quarter and included some meaningful payoff at par in CRE specifically in hospitality.
Average <unk>, excluding mortgage finance was down on a linked quarter basis, but after netting out the reduction from PPP forgiveness, we actually had net growth in loans, excluding mortgage finance.
Realization on named flow, but we're seeing positive momentum.
With our more or increase and more disciplined calling efforts.
Loan yields continue to hold up and loans spreads improved slightly as a result of continued funding cost improvement and growth in noninterest bearing deposits. In addition, the volume strengthened as the quarter progressed, we experienced lower mortgage finance volume in the early months of Q2 as refinance volumes came down.
We experienced another quarter of average growth in noninterest bearing deposits, coupled with targeted reductions in higher cost interest bearing deposits specifically the index deposits.
We will continue to actively manage the portfolio mix and focus on growth in treasury relationship, which is a longer sales cycle, but will drive more operating deposits as well as fee income over time.
Now moving on to NIM and net interest income our net interest income was down with normalization in the refinance market, but the impact for somewhat offset by higher fees Those inc.
For a loan fees as well as P. B P fees NIM was up slightly as targeted reductions in some of the higher price index deposits allowed us to remove some of our lower yielding earning assets. Most of that occurred later in the quarter. So additional improvement will show up in the third quarter results.
Warehouse yields declined linked quarter as we once again focused on pricing structure as needed.
We would expect some continued compression in these yields during the next few quarter.
But all pricing decisions will take into consideration each relationship full profitability with a focus on maximizing overall return.
Our core <unk> yield net of fees fluctuations have been fairly stable for the past 4 quarters with spreads actually improving this quarter.
The loan floors continue to provide relief, even if at the expense of near term asset sensitivity.
Our second quarter non interest income level was consistent with expectations for lower mortgage finance volume as well as for the transition of correspondent lending. Our continued focus on optimizing treasury pricing and relationship profitability benefited our deposit service charge income which was princess.
With the higher level experienced in the first quarter with.
With new Treasury officers and more deliberate calling we're getting more touches with clients and prospects as we know the treasury sales cycle is longer than the momentum is positive and gaining traction on.
Additionally, positive trends in wealth management fees continue with organic growth not just positive market needs that.
Our total noninterest expense for the quarter was consistent with the first quarter level debt.
Quarter included correspondent lending expenses through the end of June 3rd quarter will have only a few carryover expenses as the servicing transfer is completed we continue to have success in hiring bankers as well as other targeted hires we look forward to giving more detail on our long term strategy call, which is scheduled for September 1 and will include.
Guidance on the pace of these index.
Everything that we're doing is aligned with our strategic priority. So we believe it is important to effectively communicate our deliberate approach and our commitment to execution and accountability in everything we do.
And now we will turn it over to the operator for Q&A.
Thank you to ask a question. Please press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the Keith withdraw. Your question. Please press Star then 2 and at this time, we will pause momentarily to assemble our roster.
And the first question will come from Jennifer <unk> with Truest. Please go ahead.
Good afternoon.
And could you give us a sense, Rob you said, you've hired a lot of people across the organization to achieve tooling, Texas capital.
Could you give us a sense of how many revenue producers have been hired.
When she came in.
So I would say that the mix I don't have the number exactly.
Of revenue producers.
I would say if you if you'd told me that index it would be.
Right at half.
We are very conscious of this Jennifer.
We.
When I got here, we were we did not have the right mix of back office and revenue producers and we're coming up at it 2 ways..1 is having a strategy and a clear strategy that we'll talk about it we're matching those revenue producers to the longer term strategy.
That will that will now September 1.
And then also it's a failure on our part not to be able to achieve scale.
With the back office through technology, and ops and so we're going to attack this 2 ways.
And as we grow share.
Change the mix of fun office on back office.
Okay.
And can you give us a sense of your lending pipeline today versus what it was maybe a few months ago. We're just trying to get a sense of.
What kind of momentum we're seeing in terms of loan demand.
I would say that we.
As Julie said.
Excluding PPP.
Our loan volumes went up just barely slightly basically stable.
But think about in the context of the greater environment when a loan growth has been slow across the industry and we've deliberately.
We've deliberately exit certain names and reduced exposures over the last say 24 months due to the problems that we had so I'd say too on the loan growth for actually pretty good but remember we're really focused on relationships.
Best in class management teams and companies and not loan growth and so over time, you'll see that be a focus will talk more about that.
Okay..1 more question you said that.
Most of the expenses from correspondent.
Lending and the MSR portfolio would come out in the third quarter or do you like can you give us a sense of what that <unk>.
Fence rate might look like run rate might look like in third quarter versus second.
Yeah, and Sina for I mean, I think it's they're still just then some leftover expenses as we transfer the servicing fees I mean, I think probably I don't know.
For for 4 or 5 million.
<unk> expenses in the third quarter as opposed to the fourth quarter I mean second quarter. When we had a full quarter of every day.
It won't be it will be nominal there'll be nominal income impact and nominal expense impact in the third quarter.
Okay, but you think expenses will be down for a $5 million sequentially.
I think I think in the third quarter I think the expenses related to correspond to know probably $5 million.
Okay.
Okay. Thank you.
Okay.
The next question will come from Peter Winter with Wedbush. Please go ahead.
Hi.
I was wondering Julie for.
If you could just talk about net interest income.
It came in lower than I was expecting for this quarter.
Could could you just give some guidance that maybe the second quarter is the bottom.
For.
For net interest income.
Yeah.
Looking out a little bit directionally in the third quarter.
So Peter I would tell you I would tell you know we always spoken for always focused on net interest income, but it gets predicting net interest income in the third and the fourth quarter is really not its really not the focus the focus is you know everything.
Everything that we're doing is to position us for sustainable and more predictable earnings going forward. So there can you know there can be some fluctuations when you have seasonality with mortgage finance.
I think in the core book, obviously like what I've said in the commentary on Rob mentioned, you know, we're getting traction there is pipeline activity.
Mortgage finance in the second quarter as refinance volume came down we saw some are our numbers come down at the beginning of the quarter, but they came up in the later in the quarter I think third quarter will have a good mortgage finance quarter and fourth quarter will we see some seasonality.
<unk>, maybe so you know I think that net interest income for the long term is what we're focused on and so there can still be a few fluctuations in the next couple of quarters is that fair.
Okay.
Thanks, and then Rob a question for you I wanted to ask.
You had put in an application to convert.
Texas State chartered bank.
Wondering what what's the rationale for doing that and some of the advantages for doing that.
So.
We were actually an outlier it seems I guess on the surface that are being the size that we are if you're not if you're not familiar with with this discussion.
This may be a interesting move but the fact of the matter is we were the largest stake.
In Texas that wasn't a state chartered bank. So if you go look at the largest banks in Texas, we're the only 1 that wasn't so.
It's consistent with what others do and the state charter does.
Hinder us anyway to do any type of business or product in any other state.
And it's.
It's consistent with our desire to become more relevant with our vendors, we're more relevant with our regulators and we believe having a primary Texas focus and doing business in this market. It was the appropriate thing to do.
Got it.
Thanks for taking my questions.
The next question will come from Brett Rabat and with hub Day Group. Please go ahead.
Hey, good afternoon.
I was hoping maybe Julie to come on the NII question, a different way just thinking about all of the moves in the quarter in terms of management on the balance sheet liquidity can you maybe give us an idea of.
From a basis point perspective, what you think the margin could trend towards with the actions you took in <unk>.
All else equal on a PPP is going to have an impact on slower fees, but it would seem like your margin could move up.
Over the next quarter at least anyway, maybe some comments on margin if you mind.
Sure you know.
I don't like that I don't like to talk about NIM, but our focus on net.
And then come back again and again, because we can have we can have some variations, but again if you look at the different pieces. So we did.
There was about 4 billion of.
Deposits is that were debt were run off and that was back end loaded most of that happened at the end of the second quarter. So it wasn't reflected in liquidity you can see our ending liquidity, which was 4 billion lower so we'll have debt that's definitely going to be beneficial does deposits, we're adding we're at a negative spread so you'll see.
The full quarter of that in the third quarter. So that's certainly something that's positive.
Again on the core alongside our yields are our yields and our spreads are holding up very well there could be there could still there could be some compression on the mortgage finance side, but I think you'll see the volume told in there and maybe even be a little bit higher in the third quarter.
So that's.
That's for different parts.
I think that the fact that debt NIM was flat to up a little bit from Q1 to Q2, I think that's probably a positive indicator, but those are the different the different parts that would factor into that.
Okay, Yeah, I figure for you wouldn't want to give me.
The answer I was looking for.
So I guess the other question is just around that are you done with the balance sheet changes or will you continue to do things for the balance sheet demand for liquidity lower in the near term or is that going to be more for natural progression as you grow the loan portfolio.
Yeah. So we'll we'll talk more holistically about that on September the first but I can tell you that there you know I think the securities portfolio were comfortable with the level that where that is right now based on current rate. So I don't think you'll see us move news that much if if rate stay stay consistent.
With where they are and is there a little bit more reinforced from run off of some other higher cost deposits, probably I think the bulk of that happened in the second quarter, but theres, probably a little bit more room, there, but I think that you know that you'll see the full quarter and third quarter of the second quarter actions and then we'll talk.
Again more holistically on September 1st of kind of what you could expect balance sheet composition liquidity and securities to look like going forward.
Only thing I would add on.
The other thing I would add is I think we'd look to.
2 we've close the securities portfolio with anything that paid off correct, yeah to maintain the current level yes.
Okay.
Fair enough and then maybe 1 last 1 if I could just around hires Robert are you done with the senior hires in terms of lines of business or should we expect to see additional ones here in the near term.
No I think you'll.
Hi.
I think in the next month, you'll have 2 very significant.
Hires for the firm.
The operating committee level and look forward to share that with you and it's part of the strategy as well.
Okay. Thanks appreciate the color.
The next question will come from Brady Gailey with <unk>. Please go ahead.
Hey, Thanks, Good afternoon, guys I wanted to start on the on the deposit side. If you look at period end deposits. They were down about 4.5 billion I know you guys mentioned strips.
Strategically strategically shrinking some of those higher cost index deposits.
But I was just wondering I mean, the down for $5 billion, how much of that was what you call strategic shrinkage in deposits.
Debt.
What you saw on interest bearing that's strategic for us.
I think its roughly $4 million, that's the strategic repositioning.
Non interest non interest and debt.
Deposits Brady Youll remember, we can have some fluctuations in that.
With quarter end and average sales app on non interest non interest deposits average is a better indicator, but as far as the interest bearing debt. The ending is is reflects the strategic runoff.
Ralph debt we did.
Okay, and then Julie I've noticed over the years that the asset sensitivity.
Texas capital has been coming down on it.
Came down a little bit more this quarter, but can you just talk about the components as far as why Texas capital is losing some of its asset sensitivity here.
Sure.
Thank you know the debt all of that is good and.
And we wanted that debt little.
Little bit less asset sensitivity kind of longer term not just linked quarter, but year over year, we have more floors in place, which are serving us well and then obviously that having having a security for early on where in the past we really haven't had any securities just speak up that's going on that's reduced our asset sensitivity a little on a quarter over quarter.
Order basis, we had the HLA the highly liquid assets.
Cash that ran on that's 100% beta some of the deposits. The index deposits that we ran off while we Malawi talk about them as 100% we model. It at 85%. So there was a there was a little bit a little bit of difference there, but it's well that action is so positive for net interest.
So we think that the little bit of asset sensitivity that we're giving up its going to be very reflective and interest in.
Net interest income and again in September 1st of all talk a little bit more on how we plan to manage interest rate.
Risks going forward.
But hopefully that helps answer your short term question.
Yeah, No. That's that's great and then finally for me.
Rob you've done a great job of.
We're working on the capital side of Texas capital on it I was more capital now other than I think I've ever seen as you had talked about if you look at the stock, especially after the recent sell off in the stock is 113% of tangible book value you have plenty of capital.
Why not get started on the share repurchase program at this time.
We thank them for you did much better investing in organic growth, we have a lot of opportunities I'm excited for you to listen to the story September 1st there's there's a lot of banks out there too on the return on capital play book.
There are so many opportunities with new products and services.
As businesses and the markets for where we.
We can get a much greater return on repurchasing our stock I agree that it's it's well I'll leave it at that.
Alright, great. Thanks for the color guys.
The next question will come from Brad Millsaps with PSC. Please go ahead.
Hey, good afternoon.
Hey, Brian.
Hi, Julie.
Rob I was just curious I know you didn't have the number at hand at the number of relationship managers that you brought in since you started but just did you have a sense for maybe.
The amount of loans that they manage that their previous stops or you know just kind of wanted to get a sense of you know kind of what the potential is there with with the RM debt you have brought in.
Yeah, I would say that.
Okay.
Hope going forward, you'll focus on.
<unk>.
I know that this bank used to talk a lot about new fakers new assets.
The new bankers and the current bank or is that or they're here.
Are the bankers that understand.
The whole.
Areas of corporate finance, if you will and theres going to be a lot of other things to do with these clients and just loans and so loans is an outcome. If you will of.
Banking, a great client over the lifecycle of that client and it will go up and they'll go down, but we are not targeting loans, we're targeting relationships with a broad for myriad of products, providing solutions to management teams.
Okay.
And I guess on that same vein do you spend on new a lot of this is in motion before you got there, but do you feel like you've sort of rightsize the loan portfolio to a steady state.
You can.
It's at a point, where you're like what's in there there's nothing else that in a major way that you feel you need to run off on turnover at this point.
No I think that.
Look you're right when it was windows for new team here, Tim tended to make both.
You don't know what you have until you until you go deep, but I think.
What you see happening well first of all being provision correctly, it's part of good capital management right. So let me say that for so we're really focused on having the right amount of provision and then when you do a real deep dive on the loan book the reason I think for and we're in good shape. If you look at this quarter.
Steve fees dropped we have lower N P. As we had a day minutes about charge offs and our watch list is trending down and then the MBA MTA said, we do have.
There was good value, meaning equity in deals call. It real estate deals and good structure. These are not enterprise loans like we used to have on the portfolio that we exited.
Or or high commodity related issue, so I feel really good about where the portfolio is.
And very fortunate.
That's what we found on the other deep dark.
Great and then just 1 kind of final housekeeping question. Julia I saw there was maybe 2 million of charges and other expenses related to the sub debt redemption is anything going on in other fee income and obviously it was up maybe $5 million.
Sequentially, just kind of curious is that run rate or anything in there that you might say it was sort of 1 time or elevated in nature.
Yeah, I don't I don't think so I don't think there was any any 1 thing that drove that so that's probably an okay run rate for going for them.
Okay, great. Thank you thank.
Thank you.
The next question will come from Bill the Zelem with Titan Capital Management. Please go ahead.
Thank you I was hoping that you would dive into more detail behind your reference to the second half for the quarter saw business strength building and and then as part of your answer is this a function of your internal initiatives that are gaining traction.
Or would you say, it's more a function of just the economic general economic strength that is in your market.
Let's say that business for initiatives that we're employing are going to take a long time to take effect.
Very Uh huh.
With the progress, but remember we haven't even rolled out our strategy and announced the rest of R. R.
Our leadership team.
Now we've added.
We've added a lot of frontline people, who are just they're just getting here as you know so all of those efforts are going to take a little bit to come to fruition I think what what.
What we talked about.
Improving in the back half for the quarter was specific to mortgage warehouse and then we also talked about.
Debt, we have a number of levers in the in the last call I think I've talked about them, having a number of levers and mortgage warehouse.
That we can utilize to affect volume price and otherwise and.
When we realize that.
We were decisive in taking action to mitigate I mean refi volumes have come down to kind of a normalized level I guess by June of 16 to 19 and they weren't quite there yet in the second quarter. They started going there is that trend like continued and now we're at a normalized level.
<unk> in the sector for refi business. So when those volumes went down by that much. We did take action and we saw new clients. We saw increased volume with all clients and we did we did other things.
That really helped on the warehouse and that's why we've done it about back half performance in the quarter.
Thank you Rob.
You bet.
The next question will come from Anthony Elian with J P. Morgan. Please go ahead.
Hi, everyone, Rob I want to start on the new revenue producers are there you talked about can you give us more detail on how you recruit. These professionals you know today do you find do you or do you reach out to them and do you think you can keep up the strong pace of hiring from here.
So.
Yeah. It's a great question. So it's it's really great to see so when you hire somebody on.
On the leadership team, that's new or a level or 2 down and they're really good they usually bring talent with him. So people are coming with the new people that we hire we actually had 1 banker drive up here for all the market last week literally asked for a job.
Part of this team of people you've hired and.
We had extensive conversations over the weekend it guess what he accepted today. So we're seeing a really good momentum in the market or being very discerning that the people that we brought on are attracting other people, which is making it easier than I would've thought it started slow.
But as other people and talent K. It we've gotten a lot of momentum so I'm not naive I think it'll be very hard we're competing against the best financial institutions out there.
We have people coming from other states moving to Texas Bank somebody that went to a Texas University and graduated what somewhere else to work, we've seen that dynamic come to play.
But there is a war for talent that is brutal, but we're having success.
Thank you and Julie you mentioned that line utilization on the L. H I book remains low, but you're seeing positive momentum here do you think this could translate into actual loan growth in the back half of this year.
Maybe I mean again I think that's that's a longer term debt.
The momentum is positive we just haven't seen any meaningful change in the utilization, yes, so more to come more to come on that.
Okay and then finally for me you know I know, we're still about a month away from your strategic update in September, but I'm curious if you're planning on providing any long term financial targets or an outlook. Just so we can quantify the impact of all the investments and hires you're making.
Or if it'll primarily be a quantitative update thank you.
I'd say I think that we will it will be longer term and so there'll be you know, it's just going to be.
We want it to be credible and accurate when we for we do provide for that so I think you'll see it you know several periods out.
We provide that will tell you what we're going to do and you can you know keep us on capital by certain actions and things that we talk about and the bid periods.
We'll definitely have some financial goals and metrics longer term.
Great. Thank you.
The next question will come from Matt Olney with Stephens. Please go ahead.
Yes. Thanks for taking the question wanted to circle back on the warehouse and I'm looking for a little clarification did you call any participations back on the balance sheet in the second quarter and if so how much and then whats the remaining balance of participations off balance sheet as of June 30th.
Matt Go ahead, we did we did and that'll be in the 10-Q, which you'll get all on the next couple of days and I think it was about.
400, 400 million or so debt.
You will see a reduction in actual funded participations from the end of Q1 to the end of Q2.
Okay. Thanks for that and Julie in terms of the timing of that it sounds like based off the previous commentary.
May be called in towards the back of the quarter and then secondly.
What's the appetite to bring on to bring back the remaining around what a $1 billion participations back on balance sheet, what's the appetite for that.
I think what you'll see it's not as simple as as for any participations back on or not I mean, there are certain.
Comfort levels with certain clients.
Certain exposures that we may have participations so it's.
It's not like you've lined up for this patient back on or off it's how youre strategically managing the portfolio with exposure to certain clients, where our participation may be prudent for the right answer and by doing that you maximize your exposure to the right clients over a portfolio for you. So it's not just like bringing it back at it.
It's strategic.
Participations, we brought back and then put back on we'll probably with different clients. If that makes sense. Yeah. I mean bottom line that we've always said that we're always going to maintain some level of participation because that's how we manage individual client concentration.
But certainly in time zone.
Increased refinance volumes, you'll you can see the overall participations be higher than in a more normalized environment.
Okay. Thank you and then.
Rob I think you mentioned the mix shift of the warehouse volumes in recent months between refi and purchase any color on what that mix looks like a more recently thanks.
Yeah.
I would say it's.
Think about the high 30% refi currently.
For the last numbers I saw.
Okay. Thank you.
The next question will come from Jon <unk> with RBC capital markets. Please go ahead.
Hey, Thanks, good afternoon.
Good afternoon.
Okay.
A question for you in some of your commentary on the slide deck, you talk about re underwriting the expense base.
And curious what you're learning from that and also you talk about reallocating some of the expenses from correspondent lending and the hires and new products and services you touch on some of the key areas you feel on missing from your product offering that you need for longer term success.
So the reallocation first I guess, we can talk about so we hired Don go on.
He's CIO.
And before he got here, we're looking at all the investments like technology and it takes them to re underwrite them, we'll break it out forward with dawn under his leadership I think we said it before we won't be technology enabled and banker dependent.
I think John will tell you the focal point is a client experience and.
Software based on digital every day, we're moving on that direction that is a greater focus point today than it was historically at this firm. So we are allocating dollars differently and technology. That's 1.2 we had a large amount of expenses associated with the correspondent lending that we're taking out of that business, which.
As you saw can be volatile.
More risky business.
Yeah, and and and and and attract more capital and for all the reasons, we got out of it and we're plowing that into C&I and other investments.
Frontline and then.
We have a whole lot of.
Uh huh.
We're not with the correspondent lending.
Do you think about it there's a lot of people that left with that business, which we're very fortunate.
And 1 other reasons, we take PHH was we could find a home for those people.
But that that head count's going back down to flat line of C&I and other products and services and we'll talk more about the products and services September 1.
Okay.
Second question here on guessing hiring some of these people that you've talked about these new leaders for.
Frees up a bit more of your time.
Im curious how youre spending time today versus when you started are you would you call yourself on your funds for it in your client calling in recruiting new bankers are you still spending a lot of time internally.
I'm spending a lot of time and all of those areas.
Aye.
I'm not doing a very good job taking much time off so I would say that the first.
You know several months was really understanding diligence understand the loan book understanding the products the services the talent the processes of policies for systems that technology.
When we were on the regulatory environment and with all the different constituents on how they felt about us so that we could get a good base to move forward and then I've spent a lot of time attracting talent.
Talking of talent at all levels on the organization as you know for we're supplementing the organization from the top down and the bottom up we're starting a new junior program next week work with 60, new analysts we've never had a wholesome junior program before.
So we're really really excited about that and you know frankly, I've spent time retaining talent as well we've got a lot of talent here that you know I needed to go and sit down with and describe the vision and asked them be a part of it and really really happy with the talent that debt is here as well.
I, just don't want to Miss that key component, it's not all new people. There's a lot of people here that we're focused on and I'll continue to do that and.
But 1 thing that did change is probably about a month ago, you know or maybe 8 weeks ago I hit the road and I bet on all of our markets numerous times, probably more times than that.
The people that work there wouldn't be want me to come.
We've been we've been in the market's a lot and it's been very very.
Revealing and we've taken market conversations and feedback.
From both our clients' prospects, but also our employees and we're we're we're listening and we're making changes to get better so and where I'm getting to be more proactive in the markets.
And.
Really excited about that so I guess I would say if there was any change at all it would be more in the market for visible.
There's also the September 1st deadlines that we're focused on and making sure we have clarity for each of you.
Okay. Good. Thank you for the help and I look forward to that.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to President and CEO, Rob Holmes for any closing remarks.
Well I think it's like that.
Thank everybody for your interest in Texas capital.
We're very appreciative of your time.
We're really excited about seeing your September 1 and stay safe.
Thank you for your participation in <unk> second quarter 2021 earnings Conference call. Please direct requests for follow up questions to Jamie Brittain at Jamie Dot for in at Texas Capital Bank Dot Com. Thank you for your participation again, you may now disconnect.
Okay.
Okay.
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