Q3 2021 Texas Capital Bancshares Inc Earnings Call
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Ladies and gentlemen, please remain holding the conference call will begin momentarily again, please remain holding the conference call will begin momentarily. Thank you.
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Ladies and gentlemen, Hello, and welcome to the T. C. P. I Q3, 2021 earnings release call. My name is Sarah and I will be coordinating the call today.
If you would like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
I'll now hand over to Jamie Brittain director of Investor.
In corporate finance to begin Jamie. Please go ahead, when you're ready.
Good afternoon, and thank you for joining us for <unk> third quarter 2021 earnings Conference call I'm, Jamie Brittain director of Investor Relations before we begin please be aware. This call will include forward looking statements that are based.
Relation and 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 at the date of this call and we do not assume any obligation to update or revise them.
Statements.
On our first call should be considered together with the 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 release and the Investor Relations section of our website at Texas.
Made uncle date Dot com.
Our speakers for the call today are Rob Holmes, President and CEO and Julie Anderson CFO at.
At the conclusion of our prepared remarks, our operator will facilitate a Q&A session.
Now I will turn the call over to Rob for opening remarks, Rob.
Thank you Jamie this is Rob homes. Thank you for joining.
Scott <unk> to discuss what we believe was an important quarter in the evolution of our firm.
With me as Jamie said as Julie Anderson, she's going to walk us through the quarter's detailed financial performance, but first I would like to highlight an important milestone we achieved in the quarter.
On September one we shared a transformative vision for.
Yesterday Bonnie.
That will allow us to realize the many discrete opportunities before us.
Oliver a truly differentiated offering for our clients across our expanded platform.
And build a full service broad financial services firm that can seamlessly serve our clients through their life cycles and it finished.
For our largest and fastest growing economies in the country, Texas.
On the call we provided considerable detail on the strategy, while being very transparent about the sustained investment of both time and resources, we believe will be required to achieve our long term goals.
Immediately following the call we started meeting with various constituents to learn each of their specific perspectives.
First we discuss all facets of the plan and detail again at an extended company wide town Hall.
We traveled to discuss with various types of shareholders in.
Attended an industry conference and heard from many more than one on one meetings.
The duration of the build was met with some frustration, which I certainly understand where it came as no surprise to any of us.
Importantly, this strategy also created.
Personally.
We were greatly encouraged not only by the support to create shareholder value by building something differentiated in this space, but also by the recognition that it will take time.
<unk> investment and fortitude to do so.
Time was even encouraged by phone.
<unk> recognizing true long term value creation is indeed difficult.
We invest the better part of three weeks to provide clarity address concerns and importantly, also learn where we could improve the communication of our strategy.
I will not go into all the details of those.
Rapid discussions now, but I would like to address some of the high level concerns and questions.
New loans really not matter of course, they do.
And I cannot stress this enough we will no longer let loan growth alone drive our strategy.
We will have a broad offering with greater.
'cause pad, which will allow us to become more relevant to our clients and appeal to more prospects.
To achieve our plan the loan portfolio will absolutely grow.
However, it will be an outcome of covering our markets in a smart and disciplined way versus a result of our historical strategy.
Value.
It was to grow the loan portfolio for growth sake alone not adhering to a specific go to market strategy by sector.
Yeah are you sharing now is the right time for an investment bank.
Absolutely.
Clients need and use these products and services they are simply provided.
<unk> our competitor.
Today, we provided a portion of the value stream to them or we leveraged the trust. We have built can we further partnering firm for execution.
We currently incur the cost of client acquisition.
And in almost all cases, the investment of capital in the form.
The bonds.
Precisely for the opportunity to provide these types of value added solutions.
Going forward.
We want to become more relevant to our clients.
We would like to control the quality of the execution from end to end.
And we want to capture the full value of our relationships.
Importantly, the products and services, we're going to provide do not move us down the risk continuum.
And finally.
Is this all you can achieve a $1 one ROA in 2025.
The answer is of course, not we believe the platform. We're building is.
We'll have much more.
When complete we will be able to deliver favorable returns through economic and market cycles.
The financial targets set forth for 2025 represents an important milestone in the journey and one we're highly focused on achieving.
We are competitive.
Capable of just others do not have.
We are in the best markets in the country, we've had a commercial focused background since inception and.
And we have a seasoned executive leadership team now in place excited to build something that is differentiated.
We are building an operating model aligned to our vision and grounded in our values.
<unk>, which requires organizing around the client journey.
Capitalizing on Adjacencies to offer expanded products and services and establishing a culture of consistent communications accountability and execution.
We have a clear strategic direction to expand our coverage in our core C&I markets.
Strictly evaluate opportunities for growth and deliver higher quality more sustainable earnings.
Financial resilience is a core tenet, which could be an important strategic advantage, allowing us to serve our clients and our communities through all cycles.
This type of model does not deliver average results.
Which is why we will continue to invest in the capabilities outlined in our strategic update.
The.
<unk> earnings, which our current model produced the past three quarters further evidenced as the need for sustained disciplined investment.
We are committed to earning.
Results of our constituents trust through execution and I can assure you we will explore every opportunity to responsibly accelerated on delivery.
Every quarter for opportunities to prudently manage expense and self fund as many of our investments as possible.
We are building, Texas capital Bank.
The right way.
Which leads me to the quarter's results and what I see is encouraging steps in the right direction.
The benefits of a better capitalized balance sheet are now in place there should be no more noise from issuances or redemptions.
The loan portfolio continues to perform well and we are confident our new risks.
Egypt practices analytics and adhere to as well maintained solid credit quality on a relative basis going forward.
With a correspondent lending wind down largely complete we believe the businesses, we either have or the.
The process of building or.
Managing loans with the right risk appetite and when executed the right way will be very well received by our clients and prospects.
Our markets.
With the addition of honor other auto our new Chief legal officer, and corporate Secretary, our executive leadership team continues to.
Are the rod.
And improve upon what I believe already favorably compares to that of any of our broader peers.
Finally, the quarter underscores the importance of increasing the contribution from higher value more stable revenue sources, increasing our focus on treasury wealth management and investment banking.
<unk> will deliver significant value.
The hard work of executing and delivering is still ahead of us, but we have tangible momentum and a solid foundation created over the past six months from which to build.
I want to thank you for your continued interest in <unk>.
And the feedback you provided acknowledging the.
So providing the proper visibility to our progress we are acutely focused on determining the right external metrics and guideposts to assess our performance and when to share them.
It is important to note that internally everything we do is intentional.
Our routines cadences.
Important focus are all done made deliberate manner to drive specific outcomes, our efforts and spend across the enterprise are now measured it will be improved upon perpetually.
As I've mentioned credibility is important so we will be thoughtful in our approach with that I'll turn it over to Julie to discuss the quarter.
<unk> financials, thanks, Rob.
Third quarter results further substantiate our strategy is the right one and we will improve our quality of earnings in the future a core theme of our strategy is our ability to be banker led and technology enabled so included in noninterest expense for the quarter is at 12.
<unk> spent all the write off and it's a direct outcome of the way we're now approaching technology.
Rationalizing the existing tech stack understanding what we have and aligning it to the businesses. We've re underwritten all the capitalized amount and whether or not the asset was going to be used as originally intended.
Million towards a lifecycle that was expected and some of it was not because of our new approach includes ongoing development and enhancement it.
It was a comprehensive process between finance, our new CIO and his team as well as the lines of business. We feel good that the balance sheet is clean now and <unk>.
Other such write off in the future.
Total revenues continued to be pressured and was down from the second quarter with the transition of correspondent lending and a lower level of loan fees.
A few noteworthy items for the quarter I'll highlight loan fees, excluding P. P. P C.
That decrease from second quarter level and as usual we've included additional detail, which will be helpful. In understanding the context and fluctuations in core loan yields as a result of the feet.
These will fluctuate from quarter to quarter, consistent with client and business activity.
P fees were down.
The Q3 with slightly less than 5 million fees on many of these remaining to the arms.
Liquidity was down.
Over two 5 billion reflective of our reduction in indexed deposits in the first half of the year.
This on optimizing rates towards the appropriate market levels.
In continues but the largest move occurred in the second quarter.
There will be fluctuations in the level of liquidity with growth in core la <unk> as well as seasonal movements in the mortgage finance portfolio, we remain comfortable with our current investment portfolio level and we will continue to focus primarily on.
Levels getting run off to maintain the current balance.
No meaningful net increase in those balances is expected.
Moving now to credit on slide eight after two consecutive quarters of negative provision, we recorded a nominal provision of $5 million in the third quarter, resulting from our.
A replay of the economic outlook remaining consistent with the second quarter, coupled with net growth in <unk> net of mortgage finance.
Reminder, three factors impact provision level, our excellent outlook loan growth and loan mix.
Our allowance for credit losses.
<unk> loans, excluding mortgage finance is 146% consistent with last quarter.
The ACL currently represents two and a half times non accrual loans.
Overall credit trends continue to be stable and improving with another quarter of nominal net charge offs and flat non accrual level.
Total criticized loans were down this quarter and included payoff at par and upgrades to past primarily in CRE, specifically in hotel and senior housing.
We continue to be cautious and conservative in our evaluation of future economic conditions and we continue.
Refresh that Pete.
Yeah.
Average Daily chart, excluding mortgage finance grew on a linked quarter basis after netting out the reduction from P. P. P. Forgiveness, we had $210 million and net growth in loans, excluding mortgage finance growth in C&I with approximately six.
<unk>, excluding the PDP Paydown and was offset by Paydowns in CRE of 400 million, which included about $100 million of criticized.
Our core loan yields dropped a bit during the quarter as pressure continues with our focus on client selection.
Low spreads continue to.
Hundred nearly stable as compared to spreads last year at this time as we've improved our overall funding cost.
Additionally, we saw mortgage finance volumes strengthen at the end of the second quarter and that continued into the third quarter.
We're focused on relationships and using the levers available to us.
Fair discussed previously to continue to improve our market share that can and has translated into lower yield, but we believe the pace of the decline is stabilizing at this point as a reminder, the fourth quarter and first quarter are typically seasonally weaker for warehouse balances.
Moving now to deposits on slide 10, we experienced some growth in noninterest bearing deposits and a full quarter benefit of the $4 billion reduction in index deposit.
We experienced modest improvement in overall funding costs focus on growth in core operating deposits continues and that takes time.
The banking the full wallet of the right clients will improve our overall funding profile longer term and is key to our strategy.
Moving now to slide 11 and 12.
Our net interest income was down from the second quarter, primarily related to lower loan fee NIM was up slightly results.
Sing from the deliberate reductions taken in the first half of the year with some of the higher priced index deposit.
We won't focus on trying to predict fluctuations in NIM, but weather, rather remind everyone of the different components.
Warehouse yields have continued to decline as I.
Mentioned, but seem to be stabilizing now.
All pricing decisions take into consideration each relationship for profitability with a focus on maximizing overall returns.
Core <unk> yield net of the fluctuations have been fairly stable, but we'll continue to see pressure as the mix change.
We're still thinking the right clients with improved products and services will positively impact overall profitability and return as it translates into an improved funding mix, but that does take time.
The third quarter noninterest income decrease was consistent with the transition of correspondent lending.
While certainly not significant yet we continue to see positive trends and treasury related fees and wealth management fees.
Topline. Thank those orange are encouraging as we continue to see success in our more disciplined calling effort and continue to add talent in both areas.
Net of the $12 million Tech charge noninterest expense was down $9 million from the second quarter and is reflective of the reduction in correspondent lending expensive.
In the fourth quarter, we would expect a million to a million and half in remaining CL experience expenses and basically.
LCL experiences expenses going into 2022, we continue to have success in hiring bankers as well as other targeted hires as we disclosed on September 1st the pace of those investments will not be linear and while we're focused on self funding a portion of it with a reduction in C. L.
As well as overall corporate initiatives focused on ensuring the right allocation of resources, we won't be shortsighted in our decisions about spending everything that we're doing is aligned to our strategy and we'll continue to communicate the results of our efforts, including more detail as we move further into.
Sickly NIM horizon of our longer term plans now.
Now I will turn it over to the operator for Q&A.
Absolutely.
We will now begin Q&A.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
At the time, if you do change your mind. Please press star followed by two one.
When preparing to ask a question. Please ensure your line is muted.
Our first question will come from the line of Brady Gailey with <unk> you May proceed.
Hey, Thanks, good afternoon guys.
No.
Hi, Brady.
My first question I wanted to start just on the capital base.
If you look at common equity tier one that ratio was up again this quarter.
By about 20 basis points, it's fell 10, 7%.
You look at the balance sheet kind of a snapshot as of today.
It looks like you do have a lot of excess capital.
And the buyback would potentially make sense, but I know you guys have a good plan in front of you and you know maybe looking forward. You May think you don't have excess capital, but maybe just comment on your capital base not necessarily how.
Today, but do you think you have excess capital now or do you think the capital base is adequate for the plan that you guys rolled out in September the first.
But I would just point you to the long term goals of our tolerances are what we said, we'd keep CET one out on the.
It works for first call.
Of 10 or greater.
And if we do what we say we're going to do I said at the outset of this call that it will require a loan growth to be successful and we need this capital to execute our strategic plan and we're not interested in the short term returns of a buyback because.
September will have greater returns by achieving the plan in which we will need the capital.
Alright, and then move it onto the warehouse it was nice to see continued strength, there and where else was up a little bit.
Quarter, Rob longer term, how do you think about all of you on.
The size.
Because of that mortgage warehouse business I think as of the third quarter, it's about 22% of average, earning assets and was that kind of.
Where you'd like to see it longer term or what what's your thoughts on that longer term.
So what I would say is just let me just touch on the short term real quick because.
As we talked about the six levers I think at the end of the first quarter that we had to pull we've done a combination of those two where we actually were losing share kind of at the beginning of the second quarter at the end of the second quarter, we started gaining share and we've continued to gain share since then so.
Strategies to.
To battle that.
I've actually worked and come to fruition. So I'm really excited about the about the warehouse itself.
Going forward and our ability to execute.
And as Julie said I think that the compression in yields is about you know about.
So our son so.
<unk>.
Foresee a really constructive path forward there as it relates to the overall portfolio and the warehouse as a percentage of earnings or balance sheet or assets or whatever.
I'm not going to project in the future I would like it to.
B.
And it is today, obviously, but I wouldn't I just want to state clearly that we are bullish on that business. So it shouldn't be a smaller part of assets or composition of earnings absolutely. We've said that that's our goal that's what the strategy does but not at the expense of the warehouses.
He left.
Alright, and then lastly for me I was a little surprised that the reserve ratios stayed flat linked quarter at one 6% and it seems like.
Elevated level, if you look at criticized assets they fell almost 20% linked quarter.
And you know now.
Yourself with a positive provision estimate maybe just talk about that.
Or the likelihood of that releasing lower over time and yes.
Do you think you could still see a negative provision or.
Or is the provision normalizing higher from here.
I would say that.
We.
We have a pretty.
Conservative outlook going forward and that's the reflection here.
I think of the.
You before others.
On these calls Tim and I are.
Start from a pretty conservative position and go from there so I don't.
We what our view of the future is compared to peers and others, but I would say that that's a conservative view and it's reflected in the in the.
Level of reserves.
Got it thanks for the color Rob.
Thank you Mr.
No.
The next question comes from the line of Brett <unk> with hub Group you May proceed.
Hey, good afternoon, everyone.
Wanted to I guess first starting with the expense base and just talk maybe about the third quarter and I know Julien, it's going to be lumpy in terms.
Gary.
Once you invest in and how that shows up quarterly but.
Could you maybe just talk about the strategic plan you know.
Relative to the third quarter and the double digit expense growth that you kind of laid out.
When you did the strategic plan does that still seem the case in terms of.
The expense growth.
And maybe can you give us any color on if that's going to be more people from here or if you think that's going to be more in systems and infrastructure you know any help on that would be appreciated.
So hey, Greg Capex that real quick I'll turn it over to Julie sure.
What I would say is.
As it relates to the third.
And just remember we we came out with.
Our strategic plan.
In the September one so mid quarter, if you will.
And.
We've done a lot to improve the firm you saw the capital raised in the first quarter.
Quarter the talent hires.
Put in management routines and cases, but launching our strategy and executing the specific strategy really is happening right. Now so you don't see a lot of.
That expense build as it relates to the strategy and the third quarter.
<unk>.
That's to come but I think there was some confusion and you know I'll take blame for it I guess, we're not being as clear as we should've been.
The strategy called it we're gonna be able to.
Frontload all this expense and get it behind us and that's that's just not the case.
While we are saying is going to be lumpy not linear there is here's a great example, I cant hire along with talent that I'll walk through the fourth quarter.
That'll probably be the first quarter right, we will hire more people in the first quarter and the fourth quarter, even though we're hiring people now but for cost reasons and those dynamics it'll be first quarter, we've got a lot.
Of tech spend that we need to do but it's not going to be linear quarter over quarter and then go away. We will we'll do something in there where there may be a quarter that goes by that we will do something again as we develop our book of work and further address that.
I would just say think of the strategic launch.
As a timber one clean balance sheet with provision clean balance sheet with a tech write off you know we have a a basis.
And Oh by the way a clean balance sheet with the having the capital where we wanted as well and the ability to effect. The strategy. So we have a base now.
Clean it's super solid.
And and expense and stuff as it relates to strategy, we'll probably be going forward outside of some talent that we've hired to date to date.
Hey, Brett the only thing that I would add is you know.
To what Rob said Theres.
At Haynes from what we talked about on September one so for the base that base of 600. That's that's still stands you know as you look at our what we've said about low double digit growth in 'twenty 'twenty. Two so that's that nothing has changed from from what we said on September 1st if that's.
No.
Okay, Yeah, no that helps Julie I appreciate it.
And then the other question just around the same topic Ravi you in your prepared comments.
Early early on you talked about some of the concerns that you would've dropped with investors you know post.
Post the big strategic update.
One of the things that I.
This is Rob seems like he is really going to.
We work hard to fix the company, but he's also from a bigger much bigger bank.
So there is some concern perhaps in it.
Maybe.
<unk> J P. Morgan slashing, a large bank expense base to some degree it could get recreated.
I've heard you know at Texas capital, which obviously wouldn't be able to have the same kind of expense base can you maybe just address that topic Big bank expense in your background versus what you were trying to do at Texas capital.
Yeah.
Respectfully don't understand that JP Morgan in Texas.
<unk> two completely different firms.
Run a big business before with J P. Morgan, we know I know how to deal with expenses. We are I would love for you to talk to.
Uh huh.
People here that worked with US every day in our S. P. M that we've talked about in our <unk>.
And otherwise.
We're doing things very very differently here, we have initiated several expense programs here today since I got here that we did not happier a number of different disciplines that we're doing now that we werent doing before and and I would say that we are way more acutely.
Or is this an explicit today than we were a January 24th of this year and I don't mean to offend anybody I think Julie would applaud that and agree. So there is no comparison between my.
My previous employers expense base and us and we are acutely focused on it and we have the disciplines routines to deal with it.
The only thing that.
Add to that is I think there's always a lot of those goods and talk about the expense side and maybe people are as focused on the revenue side and the potential there and so I think that what you're going to see is that the investments that we're making in the expenses as everyone wants to characterize.
They're going to more directly translate into improved revenue streams, and you're you're going to see that over time.
Sorry, Brett I'm going to keep going a little bit.
I got a little main stream here remember, we said, we're going to add to tangible book every single year.
So what we're saying is there's going to be a slight negative operating leverage possibly.
If we're successful in executing the plan by investing in the right technology products services and talent.
The expense growth is a net positive as long as we do it smart way.
Highly confident that we will and that we are.
But we're not going crazy.
We're adding the tangible common book Yeah, absolutely.
Okay great.
Great. That's good clarification and I appreciate all the color.
Thanks.
Okay.
Thank you Mr.
Thompson.
The next question will come from the line of Brock Vandervliet you May proceed.
Thank you.
And.
I wanted to do a follow up maybe it was brady's question on on the warehouse.
I would say around the question.
Robot I get the most is.
Whether you use MBA or some other forecast.
Outlook for mortgages is down by a material amount next year.
Through your through your success, you're a material.
You know you have a very material lineup.
<unk> business with with warehouse, which is large enough that you know.
Kind of reflect the market.
And you know that's coming with the.
Experience expense pressures that you've you've outlined as you're as you're hiring elsewhere.
What.
What do you have in place.
Line of business that could kind of.
Immunized.
The warehouse business from.
Some of the pressure that that.
Maybe building next year.
Well I'll just refer you back to some of the levers we've talked about before we.
We can bring participations back on balance sheet.
Placing larger clients by using syndication to put participations off balance sheet, so someone coming off somewhat going on it depends on which client and the need to do to do which one of those alternatives.
We have a pipeline of new prospects that are we are onboarding literally today several this quarter.
Hum.
We have additional products and services that we suspended during COVID-19 that we're we're offering it offering again without increasing the risk in the warehouse we have.
So funding incentives, which is working fine and importantly.
Importantly, somebody that.
<unk> did a very very different than we did in the past frankly is we're banking those same companies Holistically. So you know we're gonna do Treasury services with US, we'll do investment banking with a will do other things than just lending. So I think all of those things will.
We're doing it and we look to turn.
The mortgage warehouse into a huge positive by doing more in expanding the work with those clients that we have in the past when we were a one product shop.
Okay, Okay fair enough.
And similarly.
Help me think one thing, we all really grapple with it.
Is you know much of the guidance is around total earnings in total earnings is related to the size of the balance sheet.
Is there anything more.
You could share in terms of how we should think about them in our balance.
Balance sheet.
<unk>.
Over the over the course of this process.
Well the only thing I would say is if you.
If you look at our plan that we gave September 1st.
Which I thought was.
I really do think we gave more than most other.
So any financial institutions, they get everything given strategies.
We can't execute that without the balance sheet growing from here going forward. So we recognize that and we acknowledge that but I don't want to give predictions on balance sheet growth it truly.
It depends on.
What is the portfolio of our client makeup and.
And in what sectors and what industry over what period of time, because as you know some industries are heavy borrowers others arent.
Hum.
The success of our coverage of our segments are different.
Truly access of our coverage and our different segments will determine the growth of our balance sheet because different borrowers have different borrowing characteristics for instance, tec.
Borrow a lot, but they do a lot of Treasury management.
E&P a lot of borrowing so.
We're.
So how successful we'll be by segment I can tell you the size of our balance sheet.
Yeah.
Okay.
Okay.
But that's not to say it might be really fit the model. We have is a bottoms up okay. We have a loading gearing by segment by Tam bottoms up model.
When I did it drove the plan.
But it's just really hard for me to predict growth our balance sheet over what period of time.
Okay. Thank you.
Thank you Mr Van der <unk>.
The next question will come from the line of Michael Rose with Raymond James.
Model you May proceed.
Hey, good afternoon, and thanks for taking my questions I thought I'd take a stab at just loan growth I know, it's a byproduct, but if we look ex PPP was up about five 5% annualized this quarter, we've heard a bunch of banks, including another large Texas banks. This morning.
Ill talk more about the green.
Green shoots in.
Companies starting to borrow a little bit here, just just given the number of producers that youre going to higher is.
Is there any reason to think that loan growth continue to accelerate from here just just conceptually would just loves kind of.
Puts and takes.
James broad strokes. Thanks.
Yeah, Great question Michael.
Remember, we have there's a lot of ins and outs that make up the whole portfolio. So P. P. P is paid down we had a lot of pay downs and real estate, which by the way it's supposed to work when they are construction loans is it two and a half year period.
Project, it's real high and it was the right asset classes with the right client selection you Linda money over two year payer period, two and a half year period. They pay it back we term it out and then you can make another one in the cycle repeats itself. So those pay downs were actually very good and we're excited about it we also had paydowns.
It's about <unk>, our real estate portfolio, which are really really good. So if further helping our balance sheet in the position that we're in so we are really happy about loan pay downs when it happens and mortgages down like we talked about but having said that our loans grew well and as.
As we.
Go through our strategy I would expect continued loan growth and we had a little bit pickup in utilization, but not much very modest we're still below like 19 levels.
But we're up from COVID-19 levels, but the loan growth. So yeah. So that means the loan growth that youre seeing is from new.
Yes.
So I do foresee that to continue.
Maybe asked another way what were the commitments up this quarter like how much did you did you added commitments as well because obviously wind utilization is still weak.
I don't think we've given commitments before heaven know they'll be in the 10-Q.
Client gets filed in a in a couple of days.
And I do think that they think okay.
Do we pick it up.
Okay.
I don't think you'll see it and maybe just.
Yes, the total so yeah, because that'll be netted off I've got.
Theory.
Great. Thanks.
And maybe just as a follow up question it looks like the asset sensitivity nearly doubled this quarter, you're now looking at a 6% increase or so per 100 basis points would you expect that to increase over time, just given the actions that you're taking in.
As it relates to the strategic plan, if we were to get a couple of rate hikes.
<unk>.
Assume I believe they're not included in the timeline, but if we were to get a couple of rate hikes I assume that would have accelerated so just any sort of commentary or color would be helpful. Thanks.
So Michael I think that we're positioned well at.
If rates move up I think you saw us reduce earlier into here into.
Last year earlier this year reduce some of the sensitivity with the actions that we took with them we have more floors in place. We also increase the securities book that has stopped them and then I think you did see like you said you saw sensitivity tick up some this quarter and that's really if you look.
So what we've done with our with the deposit we've remixed our deposit so some of the higher beta deposits.
On a much smaller.
The percentage so that that increase our sensitivity. So we would benefit the first hundred basis points, we don't benefit as much as we would the second hundred.
Basis.
Simply because we do have floors in place on a lot of the loans and so they are certainly served their purpose and helped us but that will that will dampen the first hundred basis points, a little bit but yeah.
They we're poised well for that and actually in the September <unk> numbers that we gave.
We used the forward curve at the time.
Okay. So maybe just asked another way is there more remixing to do on the deposit side that would drive that percentage higher in coming quarters.
I think that the that the you know and I think I said in the commentary that the bulk of that Remixing has been done with.
The actions that we took in the second quarter certainly certainly we are working overall to optimize and the focus is on treasury operating deposits, which over time will will meaningfully remix that but that does take time.
Okay. Thanks for taking my questions.
Thank you Michael.
Thank you Mr. Rose. The next question comes from the line of Brad Millsaps with Piper Sandler You May proceed.
Hey, good afternoon.
Hey, Brian.
Hey, how are you.
Julie just to follow up on Michael's question I'd be curious what deposit betas, you're assuming in your most updated.
Interest rate sensitivity analysis that you disclosed in the deck.
So I think that we gave but nothing is we haven't changed.
We haven't given any updated data information other than what we gave in the September 1st the September 1st day. So it was I think six feet, yes, it about 60%.
Okay great.
Rob I know you guys have.
Hired a law.
Lot of people.
On the Treasury side.
Just kind of curious you know when you look at you know, Texas Capital's existing 15 billion.
<unk> sort of relative to the $18 million in fees they generate annually.
Knowing that you know T C. B I you know it doesn't have a lot of consumer business does that feel like the right number.
Or can you talk about opportunities there too.
To increase some of the revenue you're getting from maybe the existing deposit base or is it a sense that.
Some of those funds are.
You can't generate fees and it's going to be incumbent upon.
The treasury folks to bring a new relationships to improve them.
You know kind of kind of the fee structure at Texas capital.
I think we can dramatically improve our wallet share with our current clients with a T. S offering that we are building and the talent that we are hiring and the new strategy. So we do.
Not have to.
We did not to add new clients to do that however, we're going to do both.
We said, we need to be more relevant with our clients today as well as with more clients. So.
I would say just as it.
Just as excited about both opportunities but.
But we have a small wallet share of treasury with our current client base that was part of the problem and what we're focused on fixing.
And just a final one on deposits Julie I mean, presumably is there any room at all to bring the rates down I mean, I noticed a couple of the categories were actually up a little.
Bit linked quarter, you know at this point, you know contractually or that was just all locked in or.
Is there any reason to expect any any sort of step down over the next quarter or so.
So again I think that the big shift we've already seen happened overtime.
Con Ed we as we improve the overall mix with more operating deposits you will see that come down but again, it's it's it's over a longer period of time.
The most meaningful shifts happened in second quarter and third what I will say, though is to give you a little color.
Is I would suggest that today there is more frequent visible rigor around deposit pricing.
On a proactive basis by client by segment by appropriate newness with oversight from Treasury services and treasury of the bank than ever.
Before so I think there's a new umbrella of discipline there.
We'll reflect much better performance for deposit pricing.
Great. Thank you guys.
Thank you Mr Mills shops.
The next question will come from the line of Jennifer Dunbar was true Securities you May proceed.
Thank you good afternoon.
Hey, Jennifer first question.
My first question is on the technology and systems, where he did can you just talk about the takeaways.
That class.
Yes.
[noise] kind of I think the takeaway for just that we did a deep dive Friday with a comprehensive review of all the tech assets that were capitalized on the balance sheet and again it was a it was an effort with the finance team.
<unk>.
John and his team and then and then to the lines of business as we look at at how those assets are tied to the lines of business. So again, a big a big factor that weighs in it is how we're approaching technology now and some of the development that's going to go on and I think we talked quite a bit about that Rob said.
September 1st of all we're actually hydropower developers and we're doing some of that work in house with developers and its ongoing improvements as opposed to in the past where virtually everything was based on a longer term project that then when it ended being amortized over several years now.
It's it's more real time and constant improvement.
Especially on the client facing piece.
So that that was that was exactly what happened we had assets that were that were expected their useful life would've been longer but the way we're now approaching it and the work that's being done just been substantiate that.
And the mix shift from.
US doing us only decline experience on a go forward basis right not the back half of the house with the front facing client facing time.
Or a portion.
Okay.
And my second question is on loan growth.
Rob So I know this question May frustrate, you a bit but.
Another common question we get.
Is can this company grows faster than its Texas peers.
And can it grow faster than our national peers given.
Even that.
It's been such a great market in Texas.
Can you talk about that.
What are your thoughts on loan growth and do it.
In the context of doing it.
Very conservative.
Yeah.
Yeah, it's it's done for us.
Frustrate me at all Juniper.
Appreciate you, saying that.
I understand everybody wants numbers any concrete numbers, but like.
I just found out this week about some competitors theyre doing low teasers teaser rates teaser structures and then they.
Convert them into a term loan over time later like I have no interest in that for the for loan growth for loan growth like we could do stuff like that I could add I don't think I could add billions of dollars. This balance sheet in minutes, but it's just that so far behind us like it's going to take us a while to put on.
We are focused on the right clients.
Real high quality growth very good earning assets with good companies that we want to thank for F.
They start in business banking, there go to the middle market. They they improved our corporate banking and we maintain the relationship.
Sure I'm not looking for loan teasers to accelerate loan growth.
But having said that we.
We fully anticipate that when were built out the franchise will attract high quality, Texas clients.
A rate faster than our peers.
That's what.
Yeah.
Okay.
Thanks, so much.
Yeah.
Thank you Mr. Timber. The next question comes from the line of Bill deals home with Teton Capital You May proceed.
Thank you a couple of questions first of all I wanted to circle back to the.
The capitalized software that was written off in and just a little bit more clarity. So are you, saying that that software will continue to be in use and and it's just you're expensing method is now different so you're expensing rather than capitalizing or are is there an insightful perspective on.
The.
No longer going down a certain path with the software that because youre going to different direction that would help us all understand more about the strategy.
So what I would say I'm jumping in front of jewelry, So excuse me Julian.
I would say is.
We have developed an entire book of war.
For our tech spend.
And that book of War.
Captures every dollar spend that we have a long time.
And there's a lot of companies I think they know what theyre spending today.
Frankly, we know we are tied from.
L L Bean leader.
Through chat to the user.
And track adoption everything about it there has been a.
Rationalization of the Tech stack.
And as we've re underwritten every dollar of tech spend.
And I don't know how to explain about that.
We've gotten a lot smarter about technology and what we're going to continue to spend on and invest in and what we're not and we've also.
Move from.
More of our project management.
Style of tech shop to actual coders and technicians and engineers so.
At a fundamental.
Bank Tech stack, how we run the place obviously, we're going to keep that in place middle of line of business that will keep that in place client facing user interface, we want to own that experience.
N V a client journey instead of in silos like we've been in.
<unk>.
We want to be intuitive, we wanna be elegant we wanna be simple and we also want to be cost effective and quick. So that's that's the journey, we're on and that's a big pivot.
From where we've been in the past and a lot of value to dawn's brought with them.
Yes.
Pass Arena, our nation, it's a transformation of some of the existing platform.
So you were you were moving to platforms.
To accomplish the same thing simply better.
For.
Yeah. So.
About some of them some of them.
Some of the tax asset we had too many tech assets we're stopping.
It's over we're retiring them.
Some are using differently.
And that that's the reason that's a result of the write off.
Yeah.
Tool that.
That we didn't plan to upgrade or change for the next couple of years and now we're transforming it now so it didn't have the three year.
What we had done previously does no no longer has another three years its being transformed today to deliver a better.
And for our IND for our employees as well as the client facing.
Thank you both that is helpful. And then one additional question are you sensing at this point.
Is that your net interest income has now reached bottom.
So there are there are puts and takes on that right. So one of the things that you have to remember in ads and we mentioned this in the commentary is the seasonality with mortgage finance.
Right, So fourth quarter and first quarter are typically seasonally a little weaker in that space.
As already mentioned, we continue to take market share there, but there is some seasonal impact that you would have to think about for the next couple of quarters.
So you are expecting the normal seasonality in mortgage warehouse and for that reason.
You have you May you may still see a little slippage of the net interest.
Crist income, but if we were to exclude that seasonality or you are are you feeling like you are kind of at that bottom point.
Yeah, I think that's I think that's fair again, I think you saw from the third quarter, there's definitely some ins and outs on the core side, where you know we continue which is exactly.
Exactly what we'd expect to have high level of Paydowns in the CRE space, but there is good traction on the C&I side.
Great. Thank you both for taking the questions.
You bet.
Thank you Mr deal film.
The next question will come from the line of.
As Matt Olney with Stephens you May proceed.
Yeah, Thanks, guys going back to the mix of earning assets, we are seeing a little firmness in the yield curve.
I'm curious what the appetite is to add to the investment securities portfolio at this point.
I think right now what we're doing is we're we're adding to.
Maturities to keep the same amount.
Invested but we're not racing to.
The increase to be about whatsoever, we're on the sidelines at this point, but it's something that we talked about.
I'll literally every week if not day, we have a very very disciplined approach as to when and what we will move into and what percentage and and in what period of time, So there's nothing being done happens stance.
Make it sound flip it whatsoever.
However, but we are just replacing maturities at this point.
Okay. That's helpful and then on the September 1st update call you discussed achieving.
I think with positive operating leverage late in 2022, I just want make sure. This is still within.
Your your expectations.
Yeah.
That's that's the goal there is no reason to think that we will we are on track with the plan to date again, we just started but we've made we've made a lot of changes as it gave us a great Foundation.
These past six months.
And.
No our hiring pipeline I know our tech pipeline I know, our products and service pipeline and the Roadmaps.
We're not there but were well on the way so I hope that's the case, but we're not gonna remember anybody can hire people and fill seats, we are going to.
To be very discerning and there is a period of time that we have to wait to do certain things to get our broker dealer license.
No we hope in December so we're not hiring people for that business in September of this year. So is there a certain order and discipline that we'll maintain.
But the view right now is to return.
Return to normalization.
Uh huh.
In that period that you discussed.
Okay, Perfect and then I guess, maybe more in the short term Julie.
We've talked about a number of things.
On the operating expense guidance you provided you mentioned the correspondent.
Some of the remaining headwinds there that should be flushed out you mentioned the seasonality of the warehouse that we should be thinking about.
Anything else more more near term, we should be thinking.
We've built out our forecast over the next few quarters.
No I don't I don't think so.
I think that I think you've covered it all.
And then the last thing was mortgage warehouse yields I think you said those came down in the third quarter, but it sounds like there were some signals this was for.
What about it maybe at the end of the quarter or in recent weeks.
I've just been assuming that that asset class would experience incremental pressure on yields. The next few quarters. What else can you share that would provide us some more confidence that yields are starting to firm and that asset class.
Yeah.
Pardon me I saw slower we saw the compression slow over time.
Yeah.
Yeah, I think the pace of the decline is stabilizing so could we see it drop a little bit in the fourth quarter, yes.
Well, we do but I think that the pace of the decline that you've seen the last couple of quarters, you you should not see going through it yourself.
Got it yeah okay.
Thanks.
Yeah, I remember, there's some of that is done.
<unk> designed to right we haven't seen it programs.
Maybe somebody that has us yeah right.
Got it thank you guys.
Thank you Mr. Omi. The next question will come from the line of John Armstrong with RBC you May proceed.
Hey, Thanks for letting me in late June.
A few quick ones.
Rob how.
Interest in joining Texas capital.
Compare to to what it was pre September disclosure of your updated strategic plan.
What kind of objections or pushback do you get from people that are looking to join the company.
That's great.
What is the question.
So I would just say a couple of things I don't know if it's if it's different.
Or changed dramatically so what's happened with <unk>.
John when we first got here is you.
I joined and humble.
Humbly I got some phone calls he cannot come.
Great.
I brought him in Nancy day one.
And then you know they joined they know people they hire people.
Don Kayne, others came and then they are they have people that they want to bring with them you know great talent. So you get this cascading of leadership.
With bringing on their own talent, which goes down through the organization and and then we start a junior program. So now we're coming up the organization, but I think broadly in the middle at the senior banker level. They they came and joined pre the strategy.
Strategy based on the people and the credibility that were already here in terms of.
Payment for that year and credibility for go forward. If you will I do think we're attracting a different type of person.
So if you want to go preside over a port.
Folio for not really build anything this isn't the place to be the people that we're attracting are high energy theyre very commercial their team oriented.
They want to do this you know.
With a group that they with a lie.
They're they're excited.
Part of building a bank with a.
Focused stated strategy.
With operating committee that has clarity and confidence.
Theres not a lot of others out there.
But I would say.
I would say that.
We were we were behind it.
And our Hearts players before the strategy was announced.
So there was no real pickup I will say, we're being discerning and were making better progress on some area or another but that's kind of our own doing.
Okay.
Yes.
It makes a lot of sense.
<unk> as well.
Everybody in this call live in that world, So that makes sense as well in terms of hiring.
Just quickly on energy what are what are your thoughts on energy lending exposure going forward for the company.
Yes, so we have historic adherence is to.
<unk> of energy.
Exposure that we.
We'll have at any one time and those are stated in the deck I believe and we will abide by those but we we have a very prudent box.
<unk> to pay a very discerning client selection process that goes through.
<unk> balance sheet Committee.
And remember.
We have in our energy segment.
I was responsible for all the non investment grade energy E&P etcetera at J P. Morgan I know the industry.
Certainly understands it.
Curtis Anderson, our Chief Credit Officer here, what is new to that role since we had our problems our new head of banking is R. R.
Our credit officer that covers that segment is new we havent pretty much an entirely new lineup versus the team.
<unk> that was faced off against that segment, when we had our problems and as Jim storms.
Known for saying I.
I don't mind, making a mistake, but what I don't want to be little. So we are very we are very focused on you know exposure adherence is a client.
Selection.
Our total exposure to client and thresholds.
So I feel really really good about where we are with that book and we're excited to bank those companies.
And we are.
We are focused on ESG, we do have a process for onboarding companies.
And they have to have a program and be following them and we do explore that and do it yourself.
Okay.
That's it for me I'll, just say on growth I know you do.
Don't like the question, but my sense is it should be.
Texas economic growth.
Plus some healthy market share gains and that'll be how youre judged hopefully you think that's fair, but my sense is that's where it's going to that's where it's going to shake out, but that's just my commentary yes.
I appreciate your input and insight.
Total respect with you.
Alright, thank you.
Yeah.
Thank you Mr. Armstrong. The next question comes from the line of Anthony Elian with J P. Morgan you May proceed.
Hi, good afternoon, I wanted to dig deeper into loan growth. Julie you mentioned in the prepared remarks, you saw about $600 million of sequential growth.
And C&I X P. P P J.
Just from a percentage growth point of view this looks like one of the strongest core C&I growth rates among banks that have reported thus far any particular sub segments within C&I that drove this or anything different you're doing on pricing or structure.
No that was broad based.
Growth across that across several areas. So no particular area to highlight.
Okay.
And then my follow up you mentioned in the slides.
<unk> success in Onboarding client facing professionals.
Rob maybe for you I know it's very early.
And your comment on just what you're seeing so far from the people that you have hired and had been on boarded.
Yeah sure. So I would say a couple of things go to Julien.
The answer I would just add that.
A significant portion of the loan growth is from new clients. So I just wanted to say that.
One two.
Two.
New hired what we're seeing.
I am treating the people that were here before I got here as new hires. We are we are recruiting though as much as we're recruiting the new bankers and so I just want to say that it's really really.
Important people understand that there was good talent here that that we are capped and that we're excited about keeping the new hires however, like anybody that comes to a new firm.
Have been enthusiastic energetic client is a client focused and I would just say what I.
I said earlier, what they tell us is they like the fact that there's clarity clarity of the strategy.
And confidence in this strategy and we all say the same things with the same words from the leadership team's operating committee down and so we see a lot of activity. The activity has picked up a lot.
And the last I would say six months in terms of I don't know if it's the virus if it's the culture or what have you, but we are much more active today than we were a number of months ago.
Okay, and then my follow up Rob on the comment you had earlier on.
On the new loan growth from new clients or are these clients.
Are they coming to you are you actively reaching out to them or are they coming from other regionals or the money centers. Thank you.
Yeah.
I would say it's broad based.
I would humbly say no, they're not calling us everywhere.
<unk>.
Okay.
That client in the market.
Our highly competed for and we are winning our fair share and I would say that that's super exciting to me because you know as well as I know this the lifecycle of new client acquisition is long.
Even if they wanted to make a move they have to have a reason to move is a revolver maturing.
Are they doing an acquisition.
New CFO on.
Onboarding Treasury service you know you got to identify the wallet acquire the wallet onboard it that happens over a period of time.
When you only ramp like 80% of what you thought youre going to get so all of this stuff takes time for new client acquisition happening when it is.
And at the pace that it did is very encouraging.
Thank you.
Thank you.
Thank you Mr. Robert.
Yeah.
Oh, Yes, yes, Sir you May proceed. This concludes our question and answer session. So I'll pass it back to the President and CEO, Rob homes for the closing remarks.
Just wanted to thank everybody again I appreciate the questions Julien does too.
We.
We like talking about it we're excited about it we want to be.
Transparent by the way I like loan growth I, just want to be for REIT loan growth with the right clients.
To make sure everybody understands that.
I didn't want to do it in a very disciplined smart way like you'd want us to do it. So thank you all very much look forward to talking.
Talking again soon.
Thank you for your participation in <unk> Q3, 2021 earnings Conference call. Please direct requests for follow up questions to Jamie Brittain at Jamie Dot Britain at Texas Capital Bank Dot Com you may now disconnect.
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