Q4 2021 Texas Capital Bancshares Inc Earnings Call
Hello, and thank you for your patience P. C. P. I earnings release, Q4, 2021 COVID-19 will begin shortly.
[music].
Hello, all and warm welcome G. P. C. P O I's fourth quarter 2021 earnings conference call. My name is Lydia and Don the operator today.
If you'd like to ask a question at the end of the presentation. You may decide a questing style slipped by one on your telephone keypad.
It's my pleasure to now hand, you over to our highest Jamie Burton. Please go ahead, when you're already Jamie.
Good afternoon, and thank you for joining us for T. C. B S fourth 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 on our current expectations of future results or events.
Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.
Our forward looking statements are as of the day of this call and we do not assume any obligation to update or revise them.
Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release.
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 Matt <unk> CFO at the conclusion of our prepared remarks, our operator will facilitate the Q&A session.
And now I'll turn the call over to Rob for opening remarks, Rob.
Good afternoon. This is Rob homes.
Thank you for joining us today to discuss the final quarter of what has been a pivotal year for our firm.
We are convinced that we have a distinct opportunity to serve best in class clients and a strong Texas market with a differentiated offering.
We are building something of value, which takes time talent investment and fortitude, we are fully committed to achieving our vision and making tangible progress executing on the strategic plan I presented in September .
Before we begin I would like to introduce our new Chief Financial Officer, Matt score lock.
And to thank Julie Anderson, one last time for more than two decades of service and steadfast commitment to Texas capital Bank.
I am very excited to have Matt step into his new role.
I fully understand the importance of the appointment of a new Chief financial officer as he will be a critical component in the success of our transformation.
In my long history of working with hundreds of Cfo's as an advisor I found most to be highly competent and at least one of three categories operations accounting or strategy.
During the course of the past year I have indeed challenge Matt in each and he has proven highly confident in all three.
There are many great candidates to choose from for this attractive role at this time in our company and in the market in which we serve.
I am convinced that that is the best person to be our CFO .
I am highly confident that you will find Matt to be credible and that you'll be pleased with his competency and proactive outreach to each of our constituents moving forward.
I would also like to thank the entire team at Texas capital.
Many are new to the firm and are already delivering great value.
But there are also hundreds of talented people who are here before I arrived that have embraced our new expectations and strategy and have contributed greatly this past year.
Together, we are building, Texas capital Bank, the right way rigs.
Regardless of tenure each of you had a lot to be proud of on behalf of the entire operating committee I would like to express our great appreciation for your efforts and dedication during a year with a profound amount of change and complement you on your accomplishments.
As we formally moved from discovery and planning to executing and delivering it is important to note that we benefit from good momentum and a strong foundation created over the past 12 months.
We ended the year with a total capital ratio above 15% up from 12% a year ago.
And ample liquidity to support responsible growth.
Due to the much improved partnership between the businesses and risk our credit quality has improved as.
As we proactively worked through our legacy credit issues. It is important to note that we have realize much more than simply minimizing potential loan losses.
We will also benefit from the reinvesting of that dead capital, which was not generating a return and a new relationships that are profitable.
And with target market clients.
We are still recovering from legacy historical strategy of buying levered assets out of market.
But the portfolio of legacy trapped poorly returning capital will mature and be reinvested consistent with our go forward strategy.
It is very important to us to provide visibility into our progress versus our goals.
To do that at the level, we expect of ourselves we need to enhance our internal reporting and I'm happy to say that Matt and his team have already made significant changes, which will allow us to improve our ability to report progress.
To that end, we are taking a first step of providing more clarity to you this quarter and are committed to refining our detail overtime.
I Hope you saw the press release announcing John Cummings as our Chief administrative officer, John brings a wealth of broad deep experience across all functions and many of our lines of business.
John began his career at Merrill Lynch as an entry level branch trainee and advanced our leadership positions across finance technology banking operations digital platforms and sales segments for 27 years, culminating with a position on the executive Committee reporting to the C E O T.
Left to reengineer Citigroup U S personal wealth management International personal bank and U S City Gold high net worth client banking businesses.
Most recently John served as Citigroup as managing director of wealth Advisory with John's appointment, we now have our complete senior team in place, which was one of my stated primary goals to achieve by the end of my first year, which concludes January 24th.
As we communicated in our go forward strategy on September 1st 2021 we consider 20 twenty-two the true launch point.
However, we made material progress against our priorities and strategic performance drivers as we close the year. We entered this year encouraged by the progress we are already making which will improve client relevance and result in structurally higher balanced earnings.
The expansion of our products and services are on track with our strategic plan. Our investment banking segment build is on schedule and will only accelerate with our recent FINRA approval and a launch of our new investment banking Division, Texas Capital Securities.
The majority of the leadership team of our investment Bank is in place working with our credit and operating risk partners to thoroughly review each of our new products and services, which will culminate in our full suite of offerings being available to our clients in the third quarter of 'twenty to 'twenty two.
As you know there are several capabilities, which will be housed in our investment banking division of which in the baseline core offering is already in place.
We are expanding our existing capital markets products and loan syndications platform.
This investment is directly related to our new clients segmented and industry focus coverage model.
Greater capital markets, and syndications knowledge by industry will be required to work without different industry verticals.
Consistent with both our strategic pivot away from the loan product as our primary client offering you.
You will see we are now reporting investment banking and trading income as a standalone category within non interest income, which is consistent with our peers.
Our investment banking strategy is being very well received as evidenced by multiple mandates and capital markets as well as sell side advisory assignments.
It is important to note that these advisory assignments, we're organically developed through the structure of our platform.
One was referred by a private banker in private wealth and others by bankers and middle market banking.
Investment banking fees contribution to total revenue is trending favorably given us confidence, we will achieve our 10% target contribution levels, even in a more normalized rate environment.
Our investment in Treasury solutions expertise products services and technology resulted in early positive trends as.
As you know these can and will fluctuate through cycle as we manage earnings credit rates, but we are pitching treasury solutions from a position of strength and proficiency, resulting a new treasury relationships at an accelerating pace.
P Times V revenue run rate accelerated at year end in line with expectations.
A large percentage of Treasury P times V comes with a high percentage of operating deposits, which is critical during the course of the year operating deposits had double digit percentage growth.
As we become more relevant to more clients, becoming their primary operating bank, our reliance on higher cost index deposits with 100% beta will decrease improving our funding cost and incrementally, making us less asset sensitive over time.
As planned in the fourth quarter, we landed numerous product offerings on our treasury platform focused on both client segments and industry specialization in.
In our new health care vertical we have many new clients benefiting from our revenue cycle management offering.
We created treasury bundles for our business banking clients and importantly have already improved upon them, adding more functionality for the benefit of our business banking clients. We are excited about the pipeline of the products and services planned for a treasury business. During the course of this year one.
One of the things. We're most excited about is our digital product roadmap, which we'll talk about more in the coming quarters.
We are confident heading into 2022 that were meaningfully closer to our treasury solutions fee target of 5% of total revenue by 2025.
Private wealth continues to drive steady growth in both assets under management, which grew almost 50% and in fees, which grew more than 40% debt.
P J b, a team added almost $900 million and assets under management.
Over 25% of which was from new clients, many of whom were referred from our expanded banking teams.
In our most aggressive year of talent acquisition and private wealth, we increased our client facing advisers by a large percentage as noted on September 1st PWA offers a relatively mature product suite that will benefit from scale.
John Cummings will quickly commenced a strategic review of the business and its go to market strategy. We are confident of very good business on an already built very good platform can be even better Matt will provide more detail on the trends and associated drivers of noninterest income as a percentage of total revenue in the fourth quarter.
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I am confident we are on track to achieve our stated 15% to 20% target.
We completed our planned internal reorganization, which resulted in new client segmentation and industry specialization.
Four out of our five primary business banking markets has leadership in place and bankers engaging with clients.
We develop tailored treasury solutions as well as a differentiated cost efficient credit model to address this market segment.
It is important to realize this is a new segment with a new leader with new bankers with new clients with new products producing new revenue today.
The middle market banking segment has been our primary focus since our founding as.
As expected it letting client acquisition and adding new bankers onto our platform.
The talent pipeline remained strong business activity is good and after a couple of years of inward focus we are now intensely externally focused highly talented legacy bankers, coupled with our new bankers, who have very quickly contributed to new client acquisition resulted in well over 100 new.
Ships this year and an increase pace in the back half.
The creation of corporate banking is complete with the leadership of each industry vertical as well as diversified in place.
Each of these leaders came from larger more complex institutions with significant and relevant experience and covering clients with a full suite of sophisticated products and services.
Importantly, here's another newly formed segment.
With new bankers, a new leader and new clients with new products, realizing new revenue.
The corporate banking and middle market banking segments are highly engaged with their partners and the investment bank to create a pipeline of opportunities to provide high value solutions for our clients moving forward I'm excited to be personally engaged in this efforts spending as much time in the market that opportunity allows.
We all noted a very competitive environment for talent and we are unwilling to compromise. However to date. We've enjoyed a marked success in attracting client facing professionals with no regrettable losses and talent.
The number of frontline client facing professionals, we have serving our markets increased 40% since the end of 2020, and we saw a 70% increase in the business banking middle market and corporate C&I segments.
We have proven to attract great interest and talented professionals, who want to build not preside create and be a part of a highly constructive culture.
As shown in our accompanying slides C&I loans grew 17% year over year, excluding P. P. P. The majority of which has come in the past two quarters as a byproduct of the progress I just described.
And importantly, the growth is accompanied by high quality relationship deposits, which are up 35% over the same period.
Each of these strategic priorities Treasury wealth investment banking and our expanded C&I coverage models are critical to our success and we will continue to provide updates on our progress accomplishments and near term milestones each quarter going forward.
As I have said to many of you self funding of our material investments is a very high priority.
We will make progress on our investments and reallocation of expenses, a priority and a regular reporting updates Matt will share more detail on our progress today.
We will use us more traditional guidance to supplement these detail where appropriate but for the elements of the bank most central to our transformation. We believe committee kitting the improvements in each of these areas and describing how they translate into our financials provides a clearer picture and more of our progress as we execute our strategic.
As noted financial results will lag before they begin to ramp.
Thank you for your continued interest in our firm we are very excited about our accomplishments to date and a year ahead now I'll turn it over to our new CFO , Matt score a lot to discuss this quarter's results Matt.
Thanks, Rob and good afternoon.
I'm thrilled to serve in this new capacity and look forward to continued partnership with colleagues across the bank as we collectively work to deliver a differentiated offering for our clients our communities and ultimately for you our shareholders.
Given the company's ongoing transition, we're focusing more traditional guidance on the income statement trajectories communicated previously.
Total revenue and noninterest expense.
And the portions of the balance sheet not directly impacted by our transformation, namely our mortgage finance loan portfolio.
As Rob described the metrics he discussed earlier, a critical guideposts necessary to measure progress until more traditional <unk>.
<unk> wide financial operating metrics increase in relevance as we exit the year.
I sure robs commitment to clarity and assure you we will continue to refine the level of detail we communicate overtime.
That said with the impact of P. P P lessening and onetime write ups behind us this quarter marks a clean jumping off point to begin evaluating the magnitude and timing of our investments relative to their ability to deliver the more sustainable higher value revenues. We know the franchise is capable of.
Let's begin on slide nine.
Our fourth quarter results signify continued progress as we invest in the talent and capabilities necessary to fulfill our strategic agenda.
Net income to common was 60.8 million for the quarter of 21.7 million quarter over quarter, driven by expanding revenue and more focused expense base.
And continued improvement in the credit portfolio.
As a reminder, last quarter's result included a 12 million dollar write off which also contributes to the quarterly change.
Total revenues grew by $10.2 million in the quarter positively impacted by a $3.5 million increase in net interest income, resulting from modest overall growth in yields.
And further supported by a 5.9 million dollar one time gain on the sale of a foreclosed asset recognized in non interest income.
Underlying credit trends continue to evolve favorably with criticized loans declining 20% quarter over quarter.
These factors resulted in a negative provision of $10 million in the quarter versus a $5 million provision in the third.
Coupled with a significantly improved capital position the progress in our credit portfolio positions us well for a year of sustained investment loan growth and continued suppressed profitability near term.
We are aggressively reallocating the expense base towards our areas of strategic focus and are meeting our plans to add frontline talent build and deploy technology enabled products and capabilities and ensure appropriate and middle office and back office support through defined loading in gearing.
These are foundational tenets of future scale and the path to reestablishing sustained operating leverage in late 2022 or early 'twenty 'twenty three.
Noninterest expense, including the third quarter software write offs grew by 5.6 million quarter over quarter and remained relatively flat year over year, despite winding down the correspondent lending business.
Salaries and benefits are up 2% quarter over quarter, reflecting a seasonal slowdown in hiring but have increased almost 15% year over year as intended.
A direct result of our shifting the expense base to match higher value revenue generating initiatives.
Moving to slide 10, as Rob noted in connection with the formation and licensing of TCP I Securities. We have established a concise policy regarding the accounting for loan syndication fees and have reclassified prior periods financials to conform to this policy.
Changing the classification of loan syndication fees from interest income and noninterest income was about creating clarity for investors and aligning published financials with our internal strategy.
We also believe this will create better comparability between Texas Capital's results and those of other financial institutions.
Additional information has been provided in the appendix of the presentation to show the immaterial impact of the reclassification.
Moving briefly to P. P. P balances declined 124.9 million from 207.3 million to $82.4 million, leaving slightly less than 2.1 million in fees to be earned.
As we have said the timing of P. P. P forgiveness and the associated fee recognition is unpredictable, but we expect our quarterly contribution to significantly decline in 2022 .
Turning to slide 11.
We have been clear that we are not focused internally nor do we plan to provide externally metrics on our desired target levels of loan growth.
We have also been clear that our focus is on banking best in class clients across our defined areas of industry and geographic coverage and that a byproduct of our strategy when mature should be through cycle core growth in excess of both GDP and peers.
As expected favorable trends from the last two quarters are continuing.
Ending period C&I loans, excluding P. P P grew $669 million or 27% annualized in the quarter and.
Another data point signifying the clients, we want to serve in our defined markets are indeed, responding to our offering.
Growth was broad based with middle market and our corporate diversified group contributing strongly to the increase.
This observed acceleration of loan growth over the past several quarters has driven C&I balances excluding P. P. P 1.5 billion or 17% higher year over year.
Utilization rates improved slightly in the quarter from 48% and 30 Q to 49% in <unk>.
But are still below our pre COVID-19 average of low fifty's.
Client activity remained strong across all areas of industry and geographic focus and our internal pipelines continued to expand as new bankers begin to ramp prospect and client calling disciplines improve and we gained momentum buy programmatically executing our defined strategy.
As Rob described expanded products and services. We are building are making us more relevant in our markets and the synergies are strengthening all facets of the platform concurrently are driving the expected benefits.
Moving to real estate outstanding commercial real estate loan balances continue to pay off at historically rapid pace, reflecting our longstanding and deliberate waiting towards high quality multifamily construction. This.
This is the property type currently most favored by investors in the project quality and reputation of our client base is resulting in more frequent and earlier project take outs than historically experienced 2021 commercial real estate payoffs totaled nearly $2 billion or 49% of the total commercial real estate portfolio as of year end 2020.
Approximately 53% of the 2 billion in run off occurred in multifamily.
A portion of the remaining runoff in that portfolio was a result of strategic exits. The 34 names targeted here constituted $367 million a year end 'twenty 'twenty balances with the vast majority approximately 75% coming from the hotel and senior housing portfolios.
While we expect the pace of loan payoffs remain elevated the decrease in outstanding balances should begin to stabilize by midyear as commitments and originated in 2020 , one start to fund and modestly increasing levels of term that serve to counterbalance the decline in the portfolio.
Because of the actions taken to support volumes average mortgage finance loans declined only 1% quarter over quarter heading into the seasonally lower first quarter amidst the current environments, increasing tenure and corresponding slowing market volumes.
Primary lead driven by mortgage finance loan activities broker loan fees also declined modestly quarter over quarter, and we would expect further declines here in the first quarter.
As you know mortgage finance is an increasingly broad and important business for us. It has and will continue to become less dependent on the mortgage warehouse alone to drive revenues as we focus on expanding our relationship into other loan treasury and capital markets products.
That said mortgage finance is not immune to the impact of declining industry ordinations expected. So.
So we would expect portfolio balances to decline in 2022.
Recent mortgage banker association forecasts indicate total one to four family mortgage originations to be down 34% from 2021 and only modestly ahead of levels last experienced in 2019.
We entered this period of expected market contraction well positioned as deliberate actions beginning in early 2021 to enhance our mix in favor of purchase volume elevated this portion of the portfolio to 58% of our fourth quarter volume versus 47% for the industry.
Because of this we are not as sensitive to declines in refi volume and would expect the portfolio to outperform market in 2022.
We are planning for full year average mortgage finance loan balances to decline in the high teens percentage range and for yields to faced modest pressure as well.
Moving to slide 12.
Consistent with our strategy quarterly average noninterest bearing deposits grew by nearly 20% from the fourth quarter of last year.
Growth was broad based with corporate and middle market up, 48% and 31% respectively.
Reductions in quarterly average interest bearing deposits of nearly 4.9 billion from four Q 'twenty 'twenty levels included a run off of 799 million in higher priced brokered Cds and the intentional actions taken to reduce 4 billion and higher cost rates sensitive index deposits.
Collectively these actions improved our ratio of quarterly average noninterest bearing deposits to total deposits to 52% at fourth quarter 2021 .
Up from 40% at for Q 'twenty 'twenty.
These favorable underlying trends sustained through the end of the year with period imbalances influenced by the predictable month and outflow in mortgage finance is principal and interest balances and by mortgage finances seasonal outflows and tax and insurance deposits, which occurs every year in the fourth quarter.
As a reminder, the TNI balances begin to build again in the first quarter and will continue to grow through the year.
As we enter the year the potential for an increase in short term rates is met with improved funding position relative to the same point in the last cycle.
Index deposits are now 24% of total deposits remaining near historic lows versus over 30% at the end of 2015 prior to the last tightening cycle.
We have a higher mix of noninterest bearing deposits and most importantly, we have a focused strategy to generate and sustain core operating account growth across the platform.
This signifies an increasingly valuable franchise and when coupled with liquidity levels in excess of long term targets at this point in the rate cycle and improved ability to more reliably realize the benefits of our asset sensitivity profile.
Turning to slide 13 margin remained relatively flat quarter over quarter due to a modest improvement in traditional LH yields an improved balance sheet mix and stable interest bearing liability costs as.
As you May recall, we moderated our bond buying program in the third quarter choosing to simply reinvest cash flows as opposed to locking up excess liquidity ahead of a potential tightening environment and improved loan demand.
We plan to maintain this posture near term and believe we are well positioned for the quarters ahead.
Shown to the right on slide 13, as a result of our asset sensitivity modeling, which increased again this quarter.
Higher average DDA levels, and a modest mix to lower beta deposits and the interest bearing portfolio were the primary drivers of the increase.
But we also saw the percentage of floored loans decline, which means more of our loan portfolio will be sensitive to the initial move up in rates, though model results are a valuable risk management tool and helpful. In horizontal comparisons across the peer set is important to keep in mind high level assumptions such as the use of a static non growth balance sheet.
Also the results shown do not reflect forecast sensitivities to ramping rates nor did it contemplate a mix shift we expect to occur with growth. It is also important to note our balance sheet positioning, especially when compared to our performance through the previous tightening cycle, which started in December of 2015.
We have 5.9 billion of quarterly average liquidity above our 20% target.
Versus 361 million below in the fourth quarter of 2015.
Our deposit mix today versus six years ago has materially improved with a meaningful reduction in index deposits and we have a model better positioned to drive high quality low cost funding the pair against expected growth.
We were deliberate in preparing for this occurrence.
And while we will look to neutralize our asymmetric interest rate exposure over time, we are pleased with current positioning Rob and I. Both discussed our noninterest income performance at length, but I would like to take a moment to note that the full year revenue growth guidance. We provided on September 1st did not reflect today's more hawkish rate environment, where.
Were we to see rate increases consistent with today's market expectations in 'twenty 'twenty. Two we may see revenue growth above the communicated low to mid single digit target.
Turning to page 14, as I mentioned, we are confidently moving forward with our plans to systematically align our expense base behind our strategic priorities.
Adjusted for correspondent lending related expenses in the third quarter write off we saw an increase in expense this quarter and we are pleased to see more of our expense base attributable to salaries and benefits. This is a trend I fully expect to continue near term as we build out our coverage model products and services and the infrastructure needed to support them.
We continue to make meaningful progress toward our defined goal of financial resilience.
The Spider modest reserve release, we remain aggressively conservative in our approach to managing the portfolio observable credit metrics improved again this quarter and we remain confident that legacy loans associated with the prior strategy are identified and reserved for.
Regulatory capital levels ended the year at the highest level in 20 years and in excess above peer median and internal targets.
Affect some may point to is reason to engage in share buybacks.
As laid out on our September 1st strategy call, we adhere to a disciplined and analytically rigorous approach to managing our capital base in a way that we believe will drive long term shareholder value.
There could be times, where that includes repatriation, but now is not that time.
The reason for our current transformation is it Texas Capital's legacy business model does not generate returns capable of earning its cost of capital through all cycles.
Investing in the new products and capabilities, we have identified will allow us to generate structurally higher more sustainable earnings.
Coupled with an accompanying reduction in our cost of capital given our significantly improved balance sheet positioning we fully expect these investments will drive expansion and incremental shareholder returns overtime.
As I mentioned earlier the investments, we're making will also lead to broader client relationships and growth in the balance sheet.
Benefits are already appearing in the expected growth is materializing.
The capital levels are marginally higher than we would ideally like today and while they could go higher with the seasonal decline in mortgage finance this quarter.
We believe based on our regularly evaluated internal models, we are better stewards of our shareholders' capital if we invest in our future.
Finally, turning to page 15 actions taken to reposition the expense base began in early 2021 with the decision to wind down correspondent lending and sell our 121 million dollar mortgage servicing rights portfolio.
The decision was dilutive to 2021 earnings, but it also unlocked approximately $70 million or more than 10% of their run rate expense base that was previously supporting one of our most volatile earnings sources and a business that was disconnected from our go forward strategy.
As you can see in the appendix on slide 19, actual correspondent lending related noninterest expense for the year was slightly above $41 million, but describing the benefits of these types of decisions on a run rate basis more clearly represents the magnitude of our repositioning towards higher quality more sustainable sources of value.
It provides a more direct tie to the benefits and impacts you can expect on current and future profitability.
In addition to the correspondent lending saves, while initiating our plan to exit a portion of our higher cost index deposit portfolio.
We decided to more tightly integrate several deposit focused verticals to serve our corporate banking clients.
The moves generate a run rate savings of approximately $10 million to $15 million per year. While also ensuring we began viewing these valuable long standing relationships through a lens more in line with our overall strategy.
Other saves were identified over the course of the year as well for instance, streamlining processes to minimize costly repetition and eliminate duplicative systems in select businesses was meaningful.
As well as proactively managing our vendor relationships from a firm wide vantage point and consolidating our negotiating power.
As Rob has mentioned we are sweeping every corner of our business and we'll continue to do so so.
So far we identified over 130 million of run rate savings that has allowed us to fund over 100 million of new investment.
The most important of which are investment expanded coverage and new products and services, Rob outlined earlier we.
We are confident in our ability to continue self funding investment and we are committed to doing so.
At this point the low double digit expense guidance given during our September 1st call remains intact.
Were we to come in below that number it would be the result of a self funding more than what is needed for our planned investments not us backing away from our ambition.
As I've shared with many on this call improving our ability to match expense directly with necessary capability and coverage to deliver scale across our business is amongst my highest priorities.
As our transparency and credibility so we fully intend to provide more both on our progress over the coming quarters.
With that I'll hand, the call back over to Rob.
Thank you Matt.
Why don't we operator open it for about 30 minutes of questions.
Thank you.
You'd like to ask a question. Please press star followed by one on your telephone keypad now.
Have you changed your mind at stuff and if I can't.
And then per Pang to ask your questions. Please ensure your device is on me.
Okay.
Our first question today comes from Brock Vandervliet of UBS your.
Your line is open.
Oh good afternoon, thanks for the extra question.
I guess, starting with the with the.
Slide four and our return targets rather than mass.
Do you.
Do you expect to narrow those.
Over time or or flush them out further.
Some point, perhaps later in the later in the year.
Hey, Brock, Matt happy to take that I appreciate the question.
Very deliberate and setting up those return targets that we outlined for you on September one.
And as Rob and I, both mentioned in our opening comments.
More important today than traditional financial metrics are the guideposts to help you see us progress against the strategy.
As we execute on plant build both in terms of capability and coverage, we will start to transition to more traditional metrics again.
Zero or adjust the range of what we think the bank can become but at this point.
Only four months after disclosing those as our target returns, we feel pretty comfortable that that is what the bank through cycle.
But brock yes, okay, okay, and just to sure.
Okay.
And I'm going to slide 15, I think that's a very interesting one.
What would you say the just trying to add a few numbers to those those blocks of course.
What would you say it's their 2021.
Expense run rate is.
Yes. So we took the expenses down to 600 at the end of the year as anticipated.
It tended to be.
GAAP walk, but instead show you the amount of underlying transition as I mentioned in my comments, a great way to look at it is with the $70 million of CL wind down. So we've taken out a $40 million of expense that hit the P&L in 2021, but on a run rate basis at $70 million through the year.
We've been below the surface actively repositioning the expense base, you've seen that start to come through on the reinvestment side in terms of the product capabilities that Rob mentioned, many of which are already producing revenue as well as the build out in frontline coverage.
I think about the expense guidance for the year.
A situation, where we tried to give you a range.
We're worried about potentially going over it which is not the case and instead, we want to redeploy the savings as quickly as we can and I think that there our results. This quarter further affirmation for us that the strategy is working and we're going to aggressively invest in it throughout the year.
To the extent that we can self fund more we're absolutely willing to.
Willing and open and quite eager to do that and that's how I think about page 16.
Got it thank you.
Thank you.
Thank you. Our next question today comes from Brady Gailey of <unk>. Your line is open vital.
Okay.
Yeah.
Hey, Thanks, good afternoon guys.
Hey, Brian So cash remain cash remains fairly elevated I mean, it's 27% of average earning assets in the fourth quarter.
Overtime.
Thank you reduce that is that more investing that cash into the loan book and the boardwalk or is it more there you still have a fairly elevated level of index deposits I know, it's come down a lot but.
Is it more Steve some of those deposits go and use the cash just to kind of push out of the more hot money.
Hey, Brady, Matt happy to take that as well.
So we disclosed on September one that our target long term mix target long term composition between cash securities. The total assets about 20%.
So to use a $35 billion balance sheet roughly $7 billion today, we're at $13 billion between cash and assets of about 36%. So if you wanted to target a 50 50, even split between cash and securities.
Nine 5 billion, we have in cash would come down about $6 billion over time match that $3 5 billion in securities.
Just by point of comparison at this point in the last cycle, we only had about 10% of the balance sheet and cash.
As rates started to move we had to raise incremental funding to match loan demand, which was obviously detrimental to the margin.
So as we think about our options with excess liquidity, we're doing exactly as you described so on the liability side, we are evaluating customer deposits based on alignment with strategic plan the type of deposit duration to cough and if it's a meaningful relationship for us and on the asset side are they going to of course, the steepness of the curve monitoring and the <unk>.
And these to remix of Securities portfolio at this point, we're not particularly interested in adding to it or extending duration.
It wasn't really no rush to deploy given that we've now had a couple of quarters in a row of pretty meaningful C&I loan growth as Rob mentioned the pipelines. There also look good. So we have ample liquidity on the balance sheet that we're going to look on both sides to rationalize they ultimately want to maintain and support of executing our strategy.
Alright, great and then it's good to see.
Quality continue to improve here.
I'm, just wondering I mean as credit quality continues to get better.
I'm wondering where the reserve last year, if you back out PPP in mortgage warehouse loans Youre still at about a one 5% reserve.
Which was all up there I'm just wondering how much capital could be freed up as that reserve continues to come down.
As credit gets better where do you think that reserve Lance.
Yeah Brady it's al.
Always difficult to forecast provision, particularly with diesel so instead I'll point you back to the range. We gave on September one.
We would expect in 2025, and 50 basis points of the through cycle charge offs.
Current economic condition persists, you can likely anchor to the lower point of that range.
Another variable there certainly the loan growth so we're going to be reserving as we continue to nicks cash into loans.
That could be a factor as well.
Alright, great. Thanks, guys.
Thank you. Our next question today comes from Michael Rose of Raymond James Michael. Your line is open. Please proceed with your question.
Hey, good afternoon. Thanks for taking my questions. So just on slide 13 on the on the revenue guide.
For the year can you just help us appreciate it.
What the breakout would be roughly between NII and fees and then obviously cognizant of that.
Some of the efforts.
You have on the on the fee side are going to start to or continue to ramp.
Through the year, but.
Greater breakdown or some color would be would be helpful. Thanks.
Yes happy to take a shot at that so if you go to the right upper right hand side of that page.
We tried to give you a bit more detail. This time on the underlying asset sensitivity, both as modeled and then potentially as realized so bear with me for a second I'll walk you through some of the underlying assumptions that could help you potentially think about margin.
So.
We got about $4 $9 billion of the loan portfolio is variable, 74% that's tied to LIBOR about $7 6 billion of that is one month with 473 tied to three months.
They've got about another one 4 billion the premium finance portfolio tied to 12 month that actually re prices annually pretty even reprice schedule through the year pretty even schedule.
You have about 25% tied to prime so of that $4 9 billion in variable, 37% $4 8 billion of that is floored at 382.
So that core portfolio.
Would see a fairly significant bump in yield after about 50 basis points of that move which of course in the guidance, we're not incorporating any sort of pick up in rate.
And that move would accelerate to about a 100 point to about 100 basis points.
At which point, 85% would come off the floor. So between 50 and 100 basis points of Bad News you get to about 85% of the book that comes off of those floors.
Thank you.
Decent way for you to think through the existing asset sensitivity than if I try to break things out between them and noninterest income were.
We're not really looking to maximize NIM or net interest income we're trying to position the balance sheet in a way that supports the strategy.
A core component of the business as Rob has described is our ability to distribute multiple products and services at the same set of clients ultimately becoming less dependent on the loan product and net interest income to drive growth.
I think about areas, we're focused on capabilities that drive operating deposits and noninterest income and then I think you have the components that can help you think through how the margin will behave.
So I'll just add a little bit if that's okay on.
The ramping of the.
Noninterest income that you asked about during the course of the year with number again.
I'm, saying this is a possible because we're seeing results.
We have new CSO and product specialists with new expertise by vertical and our treasury business that simply weren't here four months ago.
Theyre just onboarding.
Meeting clients, just partnering with bankers coming up with solutions.
We launched an industry specific product revenue cycle management.
Isn't here three months ago.
New expertise in the health care vertical to do that we launched a specific product, which is the bundle the treasury bundle for business banking that I mentioned in my comments, we scaled the commercial card, which we had before but we didnt use or apply appropriately across the market.
Place with our clients and now we have a very tangible real road map of products and services you will see come on board and at first second third and fourth quarter of this year towards the back half of the year will be.
I would say above parity as far as I'm concerned.
And Treasury suite for for banking. So we're really really excited about that but as you know ironically as treasury sales cycle is more complex than even the law. So.
You make an acquired Seo.
And then you have to onboard that client and then if you say youre going to sell a dollar you only realized 80% of ramp in that.
That ramp can take anywhere from 18 months for a sophisticated.
Natural client, which we don't have a whole lot of so that would be the outside down too.
Several weeks or month for a simple client to maybe a week for a business banking client. So you've got you got lag time in the sale.
And then the ramp.
As we as we onboard as so many with so many new products.
The run rate acceleration of that seems very very encouraging.
In investment banking.
We've got FINRA approval.
We are online in line with our plans calendar plans too.
To implement a construct that business with vendors and partners and hiring and expertise onto the platform.
We've already been mandated on multiple advisory assignments.
Rick.
Written letters and then verbally more than that and we're also been mandated on our.
Our first several.
Debt capital market underwrites so.
Really really good.
Momentum and trajectory and all the private wealth side you saw you saw our hiring plan that we did.
Hi, <unk>.
Double.
Digits.
Really high quality and then <unk>.
John is going to do a deep dive with with Alan Miller, who runs that business and look at the entire strategy.
Because we do feel like we have a differentiated platform and we're really excited about that I don't think we need to change that you could see us change.
Some other things so I think you'll see that to continue to improve during the course of the year. So we actually feel very good about the ramp of the trajectory given that.
A lot of time that we've been making the effort.
Okay. That's great color I appreciate it maybe just as one follow up when I look at slide four it looks like the client facing.
Talent additions are up obviously, youre, one forex versus the $2 three goal, but then I look at slide seven it looks like Youre a little bit further ahead on the business middle market efforts. So where are you behind in as we think about future talented additions as we move forward, whereas the catch up to that.
So here's the great News I think we're ahead of our.
No.
Way ahead of my expectations and ahead of plan. So this is a very competitive environment at the higher end.
Couldn't be more proud of.
The fact that this strategy is resonating with bankers and talent.
Across the country. We had we've had bankers moved from California. We've had moved from New York, We've had moved from competitors in market.
And so we're really excited about that we are ahead in middle market like you mentioned.
We are.
Our core we've been here the longest and we have the most exposure there and so that's just natural but we're ahead of plan in business banking corporate or ahead of plan, we have each vertical had hired.
Avalon corporate banking teams globally I've run by industry.
Put this corporate banking team that gifts 81.
Made it before so we're not just filling the seat these are real people with real experience deep in the industries in which they come from so we're super happy about that so we're not behind in any further ahead in song.
This is Matt.
So conceptually speaking the fact.
Got it sorry go ahead go ahead.
Go ahead.
I was just I was going to say conceptually the fact that you're ahead in.
Some of these areas.
Not going to talk about loan growth, but conceptually given the quality of the people would be higher everything that you just mentioned.
Is it fair to assume that we should expect core <unk> growth to accelerate through the year. Thanks.
Okay.
Yes, yes.
Yes, I'd say, that's a night thank you.
That's a natural outcome.
Just.
I don't want to pay us off.
It's just not a primary driver it is part of the overall solution that our clients expect but as I've said before like in our real estate business.
If we can be more of a lithium company than a warehouse, we do better for our clients to provide solutions. The more we increase fee income we distribute we distribute risk.
We're not just building.
It was on the books for a long sake, you have to be the right client the right use the right risk profile, we're not stretching.
Just never that's why always has stopped let's say what we saw.
I appreciate all the color. Thank you.
The next question today comes from Matt Olney of Stephens.
Your line is open.
Thanks for taking the question.
You mentioned, the strong C&I growth, especially in the back half of the year I am curious about loan syndications and the tolerance to growth Syndications I think it was around 15% of the non mortgage finance portfolio with loan syndications in the third quarter.
How high can this go and as you kind of implement your plan and do you have the the fourth quarter number in front of you you can disclose.
So we talked about investment and lots of indications. So we are.
We are looking to supplement an already strong syndication desk repairs. Good in certain industries, we can be better than others, obviously, we need to build out capabilities.
Debt capital markets, Besides just loan syndications.
Which we're doing as well these bankers that have joined us on the corporate team both diversified and by industry have a lot of history with the product. They understand it we are pitching lead what we will continue to do so.
Most indications.
We do it very very well, we just didn't have the footprint at scale that we should have happened so as we build the footprint that scale.
The syndication fees and opportunities will do nothing but grow so we're really excited about that business the ability to ramp and what I've said.
Back half of the year remember that that's more of a hey.
Texas capital.
In a market where onboarding these bankers and we started this strategy.
Yes.
Midyear right, we came up with it then we announced it so it was fully banked invented understood before we started executing it.
Really haven't been Atlas for very long time.
No.
Back half of the year is really for all of our businesses.
<unk> and gmos in product people joined the platform.
Got it Okay, and then Rob what about the pace of investments in 2022 will those also be.
Voted in the front half.
<unk> and <unk>.
If we if we're good and we'd do it optimally that's what we hope to do last year, we had to invest in.
Full year compensation, because we're bringing people back.
Back half of the year for some not all but for some of the people that we hire.
And we did not get.
Effort from him so best practice would be to Frontload. It.
And we were having a lot of dialogues across the platform, but we will do what we needed to execute the plan.
Thank you.
You bet.
Thank you. Our next question today comes from Brad Millsaps of Piper Sandler Your line is open.
Hey, good afternoon.
Hi, Brian .
Alright, thanks for thanks for taking my question.
Just wanted to follow up maybe on the deposit side of the equation would there be anything on the way up.
Assuming rates do go up that prevents you from exiting.
Some of those remaining index relationships, just kind of curious if there any longer term contracts there that.
Good.
Prevent youre getting out as you add more core type treasury.
You said that your intent.
No.
Okay, and then okay, and so those would be negative.
The bulk of that.
Uh huh.
Thanks.
There was a behave just until you just run them out of the bank are able to replace them.
Okay.
Yeah, absolutely so you've heard us say multi.
Multiple times on this call and multiple times on previous calls.
Core operating deposits as the cornerstone of our strategy.
And it's a cornerstone of the strategy for how we manage the balance sheet, how we invest on the asset side and how we ultimately grow stable fee income.
There is a place today on and the funding mix for those deposits.
But we're going to as fast as we can grow the operating departments and lessen the influence of those there are 100% beta.
And not core to the additional parts of the platform.
Okay, Great and then just as a follow up Matt I appreciate the additional color on.
Some of the asset sensitivity as it relates to the loan book was just curious.
In terms of the held for sale.
Finance book would.
Would you expect those to behave like LIBOR based loans on the way up or do you think com.
Competition is as such it will make it difficult to.
To see a lift in those rates as well.
No I appreciate the comment or the question on that so we can try to carve that out for you in guidance on the bottom left a lot of bright rather a page 11, we're sitting at 290 right now in that book.
Absent any move in rates, we think that there will be some pressure.
Horses.
LIBOR. So there is some modest pickup when you start to see rates move, but it won't be as dramatic certainly as it will be on that.
The 11th Daily Tech portfolio.
Okay, great. Thank you guys.
Thank you.
Thank you. The next question today comes from Brett We're backing of Great. Your line is open.
Okay.
Hey, guys good afternoon.
Good morning.
Asking about the expense guidance.
I wanted to ask about the expense guidance and just get an idea of what's your feeling in terms of the inflationary pressures you mentioned that it was obviously a very competitive market.
Was curious how the inflationary pressures are impacting impacting that and then secondly, it sounded like at the end of the prepared comments that maybe the way to think about the expense guidance was that.
The low double digit is sort of an all in encapsulating thing and if anything it could be below that.
Depending on how things play out so I just wanted to make sure I was reading the tea leaves on that comment correctly and then it gets it.
Color on the inflationary pressures.
Well why don't I start and then Matt Thank you Ken.
He can finish so I would just say on the on the inflation side.
Macro with our clients, we talk about every day.
It is a real threat to the economy, we're very cognizant of it.
Sure.
We're planning for it we haven't seen it as much.
Then space.
I would've thought for sure on talent.
We're cognizant of it outside of that it looks like we're doing pretty well again.
Most of which were comment to what Youre seeing is more a result of past practices at Texas capital versus today. So the expense savings that we're getting is from renewed rigor analytics cadence routines and processes that were implemented.
In the second quarter of this year.
Every single new contracting expense goes through silicon proven <unk>.
Yes.
Extensible, what the processes are onboard.
Our vendor.
Who.
Focused on strategic vendor relationships rationalizing the vendor base.
Third party risk management, so it's more of a comment around us more than the market environment, Unfortunately, still or fortunately, depending upon your perspective.
Yes, I'd just say in general on the low double digit guidance Brett.
It's really important to know and understand that we're not just simply adding bankers on the preexisting platform better here solely to grow asset. So we're building a very defined businesses that require front office Middle office back office, and then very defined products and services fit either the.
Industry or segment that we're trying to serve.
Historically, the banks have been unable to achieve scale because it hasn't committed fully developing need sustainable businesses and that's what we're doing that takes investment and.
The results for us to date again or just further encourage that that value proposition is resonating with the clients that we ultimately want to serve.
So should we come in under that guidance it would be the outcome of our self funding more than we currently think we can and as I mentioned, we're certainly looking to do that but we're not.
We're not focused on trying to drive expenses lower for the sake of meeting 2021 or 'twenty 'twenty. Two earnings were really focused on allocating as much of that expense base as we possibly can against the go forward strategy.
Okay. That's.
That's great color and then.
Rob I'm curious I think I believe I saw in local media here in the past quarter that you've been talking about maybe it's a quarter that you might achieve.
Positive operating leverage and.
I didn't know if you wanted to give.
Give us some thoughts on that and if that might be possible later this year.
Yes.
Well I'll take the plant has always said that we think first quarter of next year.
You'll see it.
Again, Matt, but I think in his remarks.
The negative leverage may be lessened with.
With piping.
So the guidance, maybe a little different because we did not include that in September 1st guidance for expense or revenues, but I think the first quarter of next year is my expectation.
To see the shift.
Which is consistent with our plan great purchase consistent with plan.
Okay.
Great that color.
You bet.
Thank you and our final question today comes from Adam of Titan Capital Management. Your line is open.
Okay. Thank you.
I'd like to talk about criticized loans for a moment. If we could you had a nice decline sequentially, but I believe in your opening remarks, you made reference to moving away from.
Intentionally moving away from loans, if we have certain hotels in senior living facilities.
Would you. Please tie those two together if they're related in and help us understand what's happening underneath the surface here with criticized loans.
Okay.
Okay.
Yes, no happy to happy to take a shot at that so we continue to see a resolution across the portfolio working out primarily the commercial real estate loans in senior housing and hotel you mentioned in the prepared remarks are about at about $367 million.
Over the course of the year, notably, we havent seen any new problems arise feel quite confident with the reserve level against both nonperforming as well as the criticized classified book at this point.
Thank you.
Is that declining.
Is that decline in criticized loans, then primarily a function of.
Working out those hotel and senior living facilities.
Primarily.
I think yes, I think thats all right.
Phases.
Yeah.
Go ahead, Rob I think Theres a lag so my apologies for cutting you off.
I was just going to yes.
Yes, I think there's three kind of phases of improvement of reserves. One is special mentioned improved out expected first.
And.
If we started to pay off in CRE sub standards and then we will have the stubborn.
<unk> left that are fully reserved, but we havent seen move yet.
Great. Thank you.
And then longer term have you given.
And if not can you give some perspective on where you'd like the efficiency ratio to fall relative to that 65% that you were out here into Q4.
No Bill we haven't given guidance on efficiency ratio and it's likely premature to do so so to reiterate the opening comments. We are really focused on describing to you the fundamental components necessary for us to once again give guidance around return on tangible EPS.
<unk> ratio, we're trying to build a business that delivers.
Strong results across those more traditional metrics, but that's not going to be a 2022 activity.
If that is going to be a next year activity.
Great. Thank you I thought I'd give you the opportunity anyhow I appreciate the color.
Operator.
I have two more questions I feel like it would be rude not to take them, So where did go past.
<unk> stated time it will last.
For the last two.
Absolutely.
The next question comes from Brandon <unk> of Bank of America. Please go ahead Brandon.
Hi, good afternoon, and thank you for taking my question.
I just wanted to understand the sensitivity with respect to the disclosed NII sensitivity on slide 13, you assume a deposit beta of 55%.
Yeah.
What are the changes to the disclose sensitivity if you were to reduce that by let's say, 10%. So the 45%.
I'm not sure you're going to do mental math around the Elan ALLL modeling on the on the call. We tried to break out specifically what in the set of assumptions for you in the table.
We would anticipate some level of lag in reality of course on repricing for the first 100 basis points. During the last move <unk> in general moved about 64%. The non index Pizza moved about 10% you can see that detail on the on the previous stage and then we began broken out the different components.
For you to understand the sensitivities that are embedded in the model.
Understood. Thank you.
Yes.
Thank you and our final question today comes from Anthony <unk>.
<unk> of J P. Morgan. Please go ahead.
Hi, Thanks for taking the questions just two quick follow ups in.
In the press release I know you called out in other fee income there was a small one time gain from a foreclosed asset sale give the dollar amount of this item.
$5 9 million.
Five nine great and then my follow up looking at Slide 11. So it was another strong quarter for core C&I loan growth of about $600 million this quarter.
Any specific areas that drove this or was it broad based within C&I.
I would say it was very broad based it was granular it was all diversified industries of C&I.
Very pleased about.
Legacy and new bankers on the platform.
Okay.
Thank you.
Okay.
Thank you we have no further questions in the queue. So I'll hand back to Rob Clements for closing remarks.
Just.
Once again to each of you for investing the time to be with us today.
Matt and Jamie are available for further questions.
Appropriate.
Have a great evening.
Yeah.
This concludes today's call. Thank you for joining you may now disconnect your line.
Yeah.
Yes.
Hi.
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