Q1 2022 Texas Capital Bancshares Inc Earnings Call
Excuse me, ladies and gentlemen, the call will begin momentarily again the call will begin momentarily.
[music].
Yeah.
Good afternoon. Thank you for attending today's T. C. P. I Q1, 2022 earnings call. My name is Anna and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity.
For questions and answers I'd be it if you would like to ask a question. Please press star one on your telephone keypad.
I'd now like to pass the conference over to Josh Lincou Coca with T. C. P. I. Please go ahead good afternoon, and thank you for joining us for <unk> first quarter 2022 earnings Conference call I'm, Jonathan Cook, All go head of Investor Relations.
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 date of this call and we do not assume any obligation to update or revise them.
Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release. 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, 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 a 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 first quarter of which concludes the first six months and the transformation of our firm.
We know they're on the last call that 2022 marks a clear transition from discovery and planning to executing on what we believe is a distinct opportunity to deliver a differentiated offering to best in class clients in our home markets.
The strategy outlined last September one of last year is resonating with both clients and talent that we want to attract and our resolve has only strengthened as we purposefully and aggressively reallocate both our capital and expense base to take advantage of the market opportunities.
We are uniquely positioned to serve.
We continue to address the well noted imbalances in our legacy model by steadily progressing against our defined strategic performance metrics that when realized will enable us to generate structurally higher more sustainable earnings through expected interest rate and credit cycles.
Observed short term earnings vulnerability to changes in the long end of the curve. Further evidence is while we are rapidly pivoting our business model.
By adding the right talent and equipping support model with the products and services necessary to be increasingly relevant to our clients.
Supported by the actions taken last year to improve the balance sheet and reposition our expense base. We are moving quickly to accomplish both objectives.
We have now increased frontline talent by over 60%.
One notable area of investment includes C&I, where we have more than doubled the number of <unk>.
Facing bankers aligning them to specifically newly Florida market segments and industry verticals.
Our bankers are increasingly enabled by the right middle and back office support model focused on delivering new product and service capabilities, while modernizing and improving the client experience.
Material progress was evident again this quarter across one treasury solutions to private wealth and three investment banking and we expect to deliver new capabilities in each over the next two quarters that will significantly improve the product offering.
Importantly, encouraging results are beginning to materialize as both a realized client acquisition and product and balance sheet related pipelines have increased each of the last few quarters.
First let's discuss Treasury solutions, we have been clear both in our words and at our material actions that we are focused on becoming more relevant to more clients by serving their needs to become their primary operating bank.
We have also been clear about our belief that doing so requires tailoring expertise products and service to defined market segments, which we simply have not had in the past.
On our January earnings call. We described two new purpose built product offerings.
Digitally enabled healthcare specific revenue cycle management product and new business banking Treasury bundles.
Both of which are end market, producing new revenue generated by new bankers with new clients.
We also noted consistent with our September 1st strategy update that we would be accelerating progress on both our new digital product roadmap and new digital client experience.
Using the competitive advantage inherent in our branch light network to focus resources on owning that technology enabled client experience across products with a focus on simplified intuitive interactions and client enablement.
This has allowed us to build for what our customers want.
What they have had.
Unique amongst our competitors, we are not burdened by a legacy M&A infrastructure, allowing our greatly improved technology team.
<unk> platform on which to build solutions for our clients.
This quarter, our technology and operations teams released the first version of our internally developed digital commercial Onboarding platform.
As with all new technologies, the rollout will be moderated and the initial version will require relationship managers to assist new clients when onboarding commercial DDA and savings accounts.
We are meeting our original deadlines.
And on track to deliver full self service capability to our commercial clients by the end of the year.
The new platform reduces total onboarding time through an entirely digital experience.
Lowering risk <unk>.
<unk> limited internal handoffs and enabling our clients to move at the pace of their business.
As a result of this focus client acquisition and pipelines for future growth have accelerated over the last four quarters and this important category and the rollout of the digital client journey is expected to only accelerate future market penetration.
I'd like to now address private well last quarter, we announced the final member of our operating Committee, John Cummings, who assumed among other responsibilities are consumer lines of business consumer banking and private wealth.
John and his team has spent the last 90 days conducting a strategic review of the private wealth business and its go to market strategy.
Ultimately confirming the potential to accelerate growth in an already performing but sub scale business.
We continue to experience strong organic flows with more than half coming from new clients.
Net organic flows our last 12 months were $586 million or 81% of total.
AUM growth.
This is a trend we would expect to accelerate as recently added frontline talent begins maturing on the platform.
We will continue to add client facing advisers to support opportunities distinctive to our markets and business model.
And finally investment banking after receiving FINRA approval in the fourth quarter of last year, our investment banking segment build is on schedule.
Despite a recent broad market contraction due to geopolitical and economic uncertainty our capital markets and advisory business continues to be well received and will be a critical part of the broader solutions to benefit our clients.
It is important to remember that we are not building capabilities to chase market trends or generate short term earnings.
We are building capabilities that make our company more relevant and valuable to our clients throughout the corporate life cycle.
We are happy to report that over the course of Q1, we closed our first underwritten capital markets transaction and our M&A team won multiple new mandates to advise our clients on sell side transactions.
As expected these advisory assignments, we're organically developed through referring bankers and our C&I and private wealth segments, evidenced strong engagement with our clients and meaningful collaboration with relationship managers across the firm.
The last 90 days were marked by continued progress advancing both the operational infrastructure and functional expertise necessary to deliver our first set of sales and trading base capabilities and to the market this quarter.
When discussing the strategic rationale for the investment bank as a component of our full service offering we often point to two things the quality of our current and prospective commercial banking relationships.
And the eminence of our mortgage finance business, the latter of which is an early focus of these product capabilities.
As a result, we expect to launch two new offerings. This quarter, specifically, helping our clients manage pipeline and interest rate risk and gestation finance and TBA or to be announced MBS markets.
Consistent with our strategy. These services allow us to deepen our relationships with existing clients and offer a more complete solution to our prospects as we provide a one stop shop solution for the mortgage finance needs.
As a result, even though the mortgage market overall has contracted due to the recent rate environment. We do expect our expanded products and services will allow us to capture market share and enhance our profitability this year.
This quarter, we also expect to launch trading in corporate debt securities and corporate loans.
Which will complement our existing syndicated finance business and offer our corporate and middle market clients to access institutional capital markets from our Dallas based trading floor.
We expect to continue making investments over the balance of this quarter and next enabling trading and mortgage whole loans and corporate equity securities.
We now know the progress we've achieved to date, coupled with the sheer opportunity created an ability to attract market leading talent to Texas capital.
We are happy that the opportunity to build a sales and trading platform in Texas has provided a sense of partnership and ownership that resonate with known experienced.
In your market leaders, which moved to Dallas from leading desks and New York.
We continue to expand our existing capital markets products rates and loan syndications platform to complement our new client segmented and industry focused coverage model as.
As a result of market conditions in Q1, we are primarily seeing the benefit of these changes and mandated and qualified late stage pipelines. We expect to make continued investments in talent to further build product and industry expertise dedicated to our covered markets and verticals.
Our capital markets and loan syndication businesses will also benefit from the distribution capabilities coming online this quarter.
And Lee less capabilities, we expect to deliver later this year.
The platform. We are building will be a critical complement to our core banking franchise and over time served to further diversify current sensitivities and our revenue base.
Although investment banking fees were down linked quarter, we remain confident we will achieve our 10% target contribution levels.
Even in a more normalized rate environment Matt.
Matt will provide more detail on the trends and associated drivers of noninterest income as a percentage of total revenue in the first quarter.
But I am confident we are building the capabilities required to achieve our stated 15% to 20% target.
After completing our comprehensive internal reorganization last year, we continue to build our C&I business across client segmentation and industry specialization.
While not exclusive to C&I.
Core disciplines, such as our balance sheet committee are proving effective as socializing the required focus on one client selection to capital allocation and three partnership across the firm. These.
These routines connect our strategy directly to our actions and ensure a banker led client teams can proceed confidently with their clients and prospects.
Business banking leadership is now in place across our five primary Texas markets and we continue to add both client facing and credit talent to support robust early client demand.
Our tailored treasury solutions as well as a differentiated cost efficient credit model are performing as expected.
And we see both realized revenue and pipeline growing across product types each week.
Formerly created in September of last year. This entirely new segment will continue to produce new revenue with new clients using newly developed products and a new service model.
I have been particularly pleased with a marked improvement in the middle market banking segment across geographies.
We said in our last earnings call that after a couple of years of inward focus we were now intensely externally focused a fact that I continue to observe up close this quarter, while spending nearly a third of my time in our markets with our bankers directly engage with our clients and prospects.
We are fortunate to have a foundation of well respected bankers that were here before I arrived there are currently banking some of the best clients in our markets their collective commitment to the firms go forward client centric vision was a core part of the foundation for us to rapidly expand to other segments within their geographic areas of focus and as.
I noted reason for our early success.
The corporate banking leadership team is complete with each industry vertical lead now in place.
<unk> is a another newly formed segment with new leaders, new bankers, new clients with new products, Realizing new revenue in fact, nearly 50% of the group's revenue producers joined at Texas capital and the last seven months.
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.
Given the firm's current unacceptable market share we believe our opportunity is outsized and as an early indicator of our ability to grow market share and expand our client base.
<unk> loans grew again this quarter and are up 23% year over year.
Much of this growth is accompanied by high quality relationship based commercial deposits, which were up 14% over the same period and supported by a solid pipeline.
Each of the strategic priorities discussed treasury wealth investment banking and our expanded core commercial C&I coverage models are critical to our success to building the only full service financial services firm headquartered in the state.
We remain committed to reinvesting in organic growth in order to achieve our vision, which will create a more valuable for them for our shareholders.
Our ability to confidently reinvest is contingent on our balance sheet appropriately position to deliver returns through cycle.
Given the rapidly evolving rate environment, we continue to evaluate options to accelerate the balance sheet transformation insulating the bank strategy from changing market conditions. This discipline on risk strategy has been missing in the past.
Given the size of the opportunity before us our preferred use of capital remains supporting the capability build and anticipated organic growth outlined in our strategic plan.
However, the operating environment has changed significantly since our last earnings call and the impact of declining mortgage finance volumes, coupled with the potential for significant rate increases could create opportunities for excess capital deployment.
Put simply capital levels are poised to benefit from reduced balance sheet usage and increased earnings potential.
Our current CET, one ratio of 11, 46% positions us strongly against peers and coupled with the current valuation the board of directors has authorized a $150 million share repurchase program.
Representing approximately 5% of the outstanding shares.
Consistent with our experienced and disciplined capital management and sound corporate governance standards, a share repurchase program creates optionality and will allow for opportunistic repurchases. When we believe that the valuation is dislocated from the long term value generated by high quality organic growth.
We will continue to provide updates on our progress accomplishments and near term milestones each quarter going forward. Thank you for your continued interest and support in our firm. We are excited about our accomplishments to date and the year ahead now.
Now I'll turn it over to Matt to discuss the quarter's results in detail Matt.
Thanks, Rob and good afternoon, let's begin on slide nine first quarter results depict an expense and capital base increasingly focused on supporting our five strategic objectives.
So highlighting the known sensitivities of our current balance sheet to timing differences associated with changes in the interest rate environment.
Net income to common was $35 3 million for the quarter down $25 5 million quarter over quarter.
Driven primarily by the 27% decline in average mortgage finance loans as the sharp rise in mortgage rates accelerated the industry's anticipated full year market contraction into Q1.
Total revenue was down $21 7 million in the quarter of $15 $8 million in removing the $5 9 million onetime gain that occurred in the fourth quarter of last year.
Results were negatively impacted by $14 $5 million decrease in interest income associated with the decline in mortgage finance loans.
Which was partially offset by continued redeployment of excess cash into higher earning assets.
Benefits to earnings associated with our deliberate multi quarter increase and asset sensitivity at this point await further realization of the forward curve.
Noninterest expense continues to grow as expected and I'm pleased with our progress redeploying savings realized last year and a higher value initiatives that will create future scale.
Salaries and benefits increased by 14% year over year, while total noninterest expense increased only 2%.
Reflecting our success in self funding the noted growth in talent and technology enabled capabilities necessary to deliver the critical early stages of our transformation.
Multi quarter credit trends remained favorable with criticized loans declining 18% quarter over quarter, and 50% year over year, driving a negative provision of $2 million in the quarter compared to a negative 10 million provision in the fourth quarter of last year.
As part of the bank's proactive interest rate risk management strategy $1 billion of longer duration securities were transferred into held to maturity from available for sale at the beginning of March.
Even with the transfer of the steady rise in the long end of the treasury yield curve throughout the quarter resulted in a linked quarter increased negative OCI position of $158 million.
Moving to slide 10.
Periods C&I loans, excluding PPP increased again, this quarter up $414 million or 16% annualized.
Signify early benefits of expanded coverage improving colleague disciplined and focused execution on our defined strategy.
This observe continuation of loan growth over the past several quarters has driven C&I balances, excluding PPP 2 billion or 23% higher year over year.
Notably the number of businesses and bankers coming online continues to expand supported by maturing front middle and back office alignment on client selection go to market strategy and available product solutions.
Growth continues to come primarily from new relationships as utilization rates moved only slightly higher in the quarter to 50% still below our pre COVID-19 average of low fifty's.
PPP payoffs continue with a total remaining balance of $22 7 million, leaving approximately 300000 of fees to be earned which we expect to realize this quarter.
Moving to real estate, we noted on the fourth quarter call that while we expected the pace of loan payoff to remain elevated we anticipated they would retreat from record levels at a minimum allowing originations to keep pace of payoffs by mid year.
Consistent with our expectations period end real estate balances grew by $166 million or 14% annualized in the quarter, reflecting modestly increasing production levels as payoffs reverted down to a 36% annualized rate versus the 49% experienced in 2021.
Consistent with our longstanding strategy the majority of new origination volume was a multifamily reflecting both our deep experience in the space and preference for this property type given observed performance through credit and interest rate cycles.
The balance sheet and earnings momentum created over the last four quarters has better positioned us for what we knew would be a pullback from record high mortgage volumes experienced over the prior two years.
Average mortgage finance loans declined by 27% in the quarter on par with the contraction experienced by the broader industry, but in excess of market based expectations shared on our January call.
During the quarter, the 10 year Treasury rate increased 80 basis points, which eliminated the economic incentive to refinance for many remaining homeowners.
Primarily driven by mortgage finance loan activity brokered loan fees also declined $1 7 million quarter over quarter and will likely remain near these levels in the second quarter.
As we said on our last call mortgage finance is an increasingly broad and important business for us.
Rob noted in his comments that we are progressing on our plans to become less dependent on the mortgage warehouse alone to drive revenues launching our first set of mortgage finance related capital markets products This quarter.
Moving to slide 11 quarterly noninterest bearing deposits were down reflecting predictable seasonal movements. Despite the quarterly fluctuation underlying core trends remained strong with corporate and middle market noninterest bearing up 48% and 13% respectively year over year and real estate up 20% year over year.
<unk>.
Focussed reductions in quarterly average interest bearing deposits of nearly 5 billion from fourth quarter 2020 levels included the run off of $1 1 billion in high priced brokered Cds and the intentional actions taken to reduce $3 9 billion and higher cost rates sensitive index deposits.
<unk>. These actions improved our ratio of quarterly average noninterest bearing deposits to total deposits to 51% at <unk> 2022.
<unk> from 43% at <unk> 2021.
At the outset of potentially rising rates, both the changes to our business model and the ongoing refocusing of our balance sheet leaves us with an improved funding position relative to the same point in the last tightening cycle.
Ending period index deposits are now 23% of total deposits versus 32% at the end of 2015.
We also have a higher mix of noninterest bearing deposits, 53% now versus the 42% at the end of 2015.
And most importantly, we have a focused strategy to generate and sustain core operating account growth across the platform.
The improvement in core funding signifies an increasingly valuable franchise and when coupled with robust liquidity levels at this point in the rate cycle and enhanced ability to reliably realize the benefits of our asset sensitivity profile.
Turning to NII sensitivity on page 12, as you may recall, our multi quarter build and disclosed asset sensitivity as a result of deliberate actions to reposition the balance sheet.
In addition to the programmatic exit of high cost high Beta index deposits over the last five quarters, we moderated our bond buying program in Q3 of last year choosing to simply reinvest cash flows as opposed to locking up excess liquidity ahead of a potentially tightening rate environment and improved loan demand.
Asset sensitivity was also enhanced last quarter as a portion of floored loans rose off their floors. After the <unk> actions in March.
Shown to the left side on slide 12, as a result of our asset sensitivity modeling, which increased again this quarter to nine 5% or $71 million and a plus 100 basis point shock scenario.
The modeled results are valuable risk management tool and helpful. In horizontal comparisons across the peer set it is important to keep in mind key high level assumptions, such as the use of a static non growth balance sheet.
The core component of our asset sensitivity profile is the 82% of the total lagi portfolio, excluding <unk> that is variable rate.
69% of these loans are tied to either prime or one month LIBOR.
Today, 70% of variable rate loans with floors are still at their floors. However, with a 50 basis point rise in rate, 55% of floored loans will rise off their floors, meaning $1 9 billion of loans acting as fixed rate today will return to variable rate.
While we are pleased with our current positioning as mentioned before we will look to neutralize our asymmetric interest rate exposure over time.
Insulating our strategy from unanticipated changes in market conditions, and enabling sustained investment in performance through cycle.
The accelerated moves in the rate curve have potentially pulled forward this opportunity and we are thoroughly evaluating how to best position our balance sheet going forward.
Have a variety of tools to prudently achieved this goal, including expanding the use of fixed rate loans managing duration in the investment portfolio and the use of derivatives.
Moving to slide 13, net interest margin increased by 11 basis points. This quarter, while net interest income declined $10 5 million predominantly as a function of decreased mortgage finance loan volumes, partially offset by increased yields in the investment portfolio during.
During the quarter, increasing rates cause actual and expected prepayments on the securities portfolio to decrease substantially reducing the amount of amortization expense required cash flows remain approximately $100 million a quarter with securities coming off the books at a roughly one 2% book yield.
New Securities, which are primarily five year treasuries coming on closer to six 5%.
It is important to note that while variable rate asset yields have now reset to higher levels timing associated with the 20 basis point increase in one month LIBOR that occurred in March had little impact on loan yields or interest income this quarter.
Turning to page 14, as I mentioned, we are systematically aligning our expense base behind our strategic priorities and continue to reallocate the $130 million of run rate saves generated last year and to and ultimately larger are significantly more productive expense base.
While total noninterest expense has increased by only $2 $8 million year over year salaries and benefits are up $12 6 million and now comprise 65% of total noninterest expense up from 58% in Q1 of last year.
Our expense growth guidance is unchanged as we remain confident in the cadence of expense save redeployment and investment in the bank.
We continue to build on the foundational actions taken last year and are progressing meaningfully toward our defined strategic goal of financial resilience. Despite observable credit metrics improving again this quarter, we are proactively monitoring for potential recessionary exposures caused by economic and geopolitical uncertainty.
Credit disciplines established at the beginning of Covid, including quarterly borrow specific reviews quarterly portfolio reviews and client specific strategy assessments remain in place.
We have recently enhanced the scope of this process to include the current geopolitical and macroeconomic environment and are prioritizing risk assessments based on industries and clients, who may have heightened interest rate commodity price or supply chain pressures.
In addition to the described improvements in the quality of on hand, and contingent liquidity regulatory capital levels continue to build above already record highs with CET, one and total risk based capital, reaching 11, 46% and 15, six 8% respectively. This quarter comparing.
Favorably to peers and in excess of internal targets.
As I described on our last 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.
I also noted in January that given the combination of suppress short term earnings and anticipated balance sheet growth associated with our strategy. It.
It would be prudent to preserve excess capital.
To reiterate the benefits of this strategy are appearing at the pace and magnitude we anticipated.
Expected growth is materializing.
And our belief we can achieve the plan remains unchanged.
Has changed however is the economic backdrop, which has already lower balance sheet capacity needed for mortgage finance and the potential for rate increases, which could lead to earnings generation above our near term capital demands.
As Rob mentioned the unique intersection of interest rate dynamics, the banks expected earnings profile generated through organic growth and the current market valuation has created the potential opportunity for the company to accelerate capital return to shareholders to a tangible book value accretive share repurchase program.
And update our full year guidance is contained on page 15, our methodology remains consistent and the impact of foreign insurer of interest rates is isolated to mortgage finance volumes.
Our methodology remains consistent and the impact of forward interest rates is isolated to mortgage finance volumes.
Mortgage finance loan yields have improved modestly with refreshed expectations and current market conditions.
With no changes to $3 31 interest rates the impact of lower mortgage finance balances will result in full year revenue contracting low single digits.
As mentioned our expense guidance remains unchanged and importantly, our published target to achieve quarterly operating leverage is also unchanged.
With that I will hand, the call back over to Rob.
Thank you Matt operator.
Again, we will take questions.
Lee if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question.
One as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question. We will pause here briefly ask questions I registered.
So first question is from the line of Brady Gailey with <unk> you May proceed.
Hey, Thanks, good afternoon guys.
Okay great.
So I just wanted to start with the mortgage warehouse I know historically, Texas capital has had the off balance sheet program, where you formed some of those balances out to other banks.
Had an opportunity to.
To bring back on balance sheet to help kind of buffer.
Downturn with sand volumes.
I would say for the most part on the volumes for mortgage finance the six tools, we talked about using in the past we've used all of them. So we've used the tools the things that we have done to really help with mortgage finance.
Over the past year for the first quarter of 2021, So March of 'twenty, two as we positioned the mix.
Mortgages that we finance with our clients based on our client base.
To a much higher percentage of purchase.
From refinance we've also.
Made a very deliberate move in terms of.
Client selection and we had a purposeful rotation and remix of the client base and where we focus over the last 12 months.
Two a better capitalized stronger.
Our client base. So we feel really really good about the credit of our clients. We feel good about the mix of their business and we feel good about the other opportunities that we're introducing such as gestation of TBA with client base that we have.
Hey, Barry this is not the only thing I would add I would add to that is the original guidance considered the mortgage bankers Association forecast, where the note rate on a 30 year fixed rate mortgage exited the year at about 450.
As you know we were at 5% exiting the first quarter.
So the environment has dramatically changed there hence the change in guide, we won't be immune to broader market pressures, but as we said both in this commentary as well as on the last call.
So really important business for us and one that we want to be increasingly relevant to our clients and hence the products that we're rolling out this quarter in the investment bank.
Yes.
Matt just to clarify on the.
Full year 2022 guidance that the mortgage warehouse yield of 3% that does not include any sort of rate hikes I know the warehouses.
I think floats, maybe daily, but with the rate hikes that we're expecting to see that yield could be a lot higher than 3%, but realistically right.
Yes Brady.
It's a bit of a unique component.
So as you know so the move to 3% guidance certainly reflects.
Move up in rates experienced in the first quarter as well as anticipation that it's going to remain a very competitive environment.
And then I would point you to the increased disclosure we gave around overall asset sensitivity you can think about the mortgage finance business is absolutely encapsulated in the nine 5% up 100, and the 20% up 200 view.
But all of the guidance, which is how we how we will do it for a while.
Exclusive any additional rate moves the volumes of course for mortgage warehouse.
Forward curve is implied so thats the only piece of the guidance.
Is subject to two rate moves.
That's correct.
And then finally for me it.
It's great to see the $150 million buyback, especially with the capital build this quarter and the stock trading basically opinions will book value.
Buyback authorization is that.
Just a tool that's out there maybe you use it maybe if you don't use it or do you guys plan on.
Really getting aggressive in using that amount this year.
Yes, Brady I would.
Say that we have a number of new financial disciplines.
Place that we've lacked in the past frankly.
There is more of a new normal now with the naphtha, Texas capital.
So we have a distribution policy governance and tools in place and obviously.
We didn't have a shelf always in place before you'll never see us without a shelf and then you also have a much greater talent pool tools and governance to proactively and perpetually manage the interest rate risk of the balance sheet going forward. So it's just a broader extension of the tools of disciplines tally Gov.
<unk> that we have at the firm.
Yes, I would just say that Brady, we're not we're not ready to disclose any parameters or pace, but as you would expect maybe the factors that we would consider are the stability of our credit profile, which as you noticed in the metrics continues to improve at the decreased need to support cyclically high levels and mortgage warehouse assets.
So implied in the guidance is about $1 billion decrease in average balance if you imagine you hold 10% capital against that $1 billion, that's roughly $150 million buyback capacity and then something different now from the last quarter has real potential for improvement and earnings from realized rate increases.
Those are the factors, we'll evaluate and then importantly, we also see real momentum in the core business, which gives us confidence to manage our capital in a broader set of ways.
And I would just say, it's a very benign portfolio.
Risk in credit as well.
Brady.
Background, you know my background and advise a lot of words on distribution policy and this is not.
Statically state if not inconsistent with our strategy. This is a.
Aside part to our strategy and a good corporate finance disciplines.
Yes that makes sense thanks, guys.
Thank you Mr Daly.
The next question is from the line of Brad Milsap with Piper Sandler. Please proceed.
Hi, Brett.
Mr. <unk> your line is open.
Okay.
They lost Brad.
Thank you.
The next question is from the line of Brock Vandervliet with UBS. Please proceed.
Hey, Brock.
Hey, good afternoon guys.
Just going back to mortgage warehouse a bit by our kind of back of the envelope.
If we just keep the balances kind of flat so the rest of the year I'm getting to <unk>.
27% drop in.
And average balances full year over full year 'twenty, two 'twenty one's implying that.
There's not much left to go.
To meet that 30% guide and Mike and Mike kind of on track there.
Yes, we do.
At this point, we don't see the typical resurgence.
Mortgage warehouse volume occurring in.
Q2, and Q3 periods.
So it's at the top.
Full of eligible Refis is essentially gone at this point I'm affordability is still an issue.
We're comfortable with the mix and I think youre on the right track related to the guidance.
Yeah, I think the.
The flip side of that is the pain is.
This is visible now as opposed to.
A lot of it dribbling out later in the year.
Okay. Good.
Okay.
Yes.
In terms of another guidance question I noticed the operating leverage that's unchanged revenue guide is down.
Does that.
What does that imply for the inflection in operating leverage as that make it work.
Weaker when it occurs or.
Is that just kind of.
Change the timing of.
Some of the pressure that that you may see how should we think about that.
Yes, I'll start on that rock and then Rob I think at this point in the transformation.
We're right on track.
So the only thing for us that's really changed in the outlook is lower mortgage warehouse volumes.
So we're adding the talent and the capabilities, we're beginning to realize the balance sheet growth and anticipated revenue pick up to be.
Only thing that's moved into the warehouse move down on the revenue yet and we still feel comfortable with back end of this year early next year to grow.
Every year quarterly PNR.
Yes.
Yes.
The same so.
Our new business banking vertical new products and services pipelines are good activity is good.
Middle market is very robust.
TFS products have been well received.
Loan growth is good as you saw.
Broad loan growth across all middle market.
Which is.
The first product usually in a in a relationship and then and then all the industry verticals in place all the leaves in place.
All of the bankers now in place pipelines are very good but you got to also remember immature at this firm.
Bobby's verticals, but we're confident by the activity of the client receptivity.
The investment banking products and services.
Paul.
On time.
In the first quarter of this year sorry in the second quarter. This year, we will have gestation and TBA corporate debt securities et cetera.
Tax on time, so to Matt's point this strategy.
We had two Lan technology products services.
Talent and the re org.
In place and we're encouraged by.
The pipeline builds per day. So there is no other no other message there.
I guess, the only the only other thing too.
Mentioned rockets, it's a full year view on the guide.
It took us about two quarters to pull out all of the revenue related to correspondent lending last year.
Started to dismantle some components of the business that were no longer relevant for the go forward strategy, but that were accretive to revenue sort of dropped in the middle of the year. So that's another component as you think about full year to full year.
Yeah.
Got it okay I appreciate the color.
You bet.
Such expenses.
Thank you Mr Vandervliet.
The next question is from the line of Jennifer Denver with true.
Prestige.
Jeff.
One moment.
MS. Sternberg you May proceed.
Can you hear me now.
Yes, yes, yes Hello.
Hi, Jennifer sorry.
Your credit.
Sorry, your credit profile looks really good right now but.
But as you said, the economic backdrop and amount of uncertainty going forward as it has changed.
How do you look at.
Your credit cost in the next few quarters.
Your reserve in and what you're expecting for loan losses and also what do you feel are the most vulnerable portfolios or buckets.
In a rapidly rising environment.
Right right right.
I'm, sorry, I didn't write down all of those questions, but let me just take it high level and then backing.
I can follow up and then you can ask again, if I didn't answer your question what I would say is.
We're really pleased with the asset quality that we have in the portfolio. We've said in the past we do have some legacy.
Issues I would say in the CNC category in the portfolio that we're still working through in a very measured.
Wei.
But nonetheless overall.
One of the things that gives us the confidence of the share buyback was our our asset quality.
New disciplines that we have in place to actually onboard new clients in this environment when I have a bearish view.
As most people too.
To inflation and geopolitical supply chain and talent shortages and everything else. We are very mindful of those but we have a lot of really good processes in place to make sure. We're onboarding the right clients.
We're just as much focus on the right clients is the right structure and the good news about the environment such as this are going into.
Higher risk environment as banks become more rational so we will actually be able to do deals today with clients, we wouldn't do in the past.
The rationalization of the banking industry. So it can be a positive.
Yes.
The pockets of the portfolio that we would worry about the exact same ones you would worry about which would be.
Why is that.
That are susceptible to.
Inflationary issues like commodities or had exposure.
Two.
Europe .
Is it.
Research and formally.
Soon to be as my view, so theres a lot of things that we're looking at we're very measured but it's all about client selection and then last one real estate, we talk about that a lot we feel great about our client selection, there or with 15 of the largest 25 developers in the country, we have a very.
Three large exposure to multifamily versus other classes, that's intentional and as I've said, if that if that business hasn't been proven.
Successful through Covid as it has done and we hadn't started it so well they didn't perform as well as they did our strategy would have been delayed and so we feel really good about the real estate exposure as well, we're not immune to it and we're very aware of the rising rate environment and the issues that.
That presents to the people in real estate industry.
We're underwriting for that and using those sensitivities and our underwriting standards.
You want to add to that.
I quickly add just to get to your question on the numbers Jennifer as we've been pretty consistent over the last year and our internally described posture of being aggressively conservative.
So our <unk> to total loans is still sitting right at about 100 basis points, so well above <unk> solar coverage ratios look really good.
But we are cautious on the outlook. So if you try to translate that into a provision forecast is pretty tough we said in the first call that we've disclosed through cycle net charge off range 25 basis points being the low end I think thats, probably still a good assumption, but we are we are cautious.
Okay. Thank you.
Thank you Ms timber.
The next question is from the line of Michael Rose with Raymond James. Please proceed.
Hey, good afternoon. Thanks for taking my questions. So it looks like you're about halfway through a close to halfway through.
The hiring expectations to get to $2 three ex client facing.
From the base.
Just given the lower revenue expectations is there any thought process given to maybe slowing it's slowing down the pace of hiring and maybe what some of the revenues begin to catch up or is it just kind of full steam ahead build up the teams and then the revenue will come later, just just trying to balance kind of the near term with the with the intermediate term.
Thanks.
Yes, no I think Thats great question, we're not close to the end of the.
Two one is C&I, the 60% more as frontline facing bankers across the platform to two three was for overall frontline facing so we got a ways to go I will say, we're really pleased with.
The people that we have in place.
And with the people that are have said, yes, but not on the platform to date I would say that ever where we've added people from business banking and middle market banking to real estate two corporate every single industry vertical where we've added talent, we see new pipelines, it's tangible and qualify that is coming.
At four times, so we're not slowing down a bit we're really excited about it.
We've also been able to Matt may want to talk about this a little bit I'm surprised most people haven't asked about it for us to be up on non interest expense, where we are versus.
As a whole we've been able to self fund a great deal of this.
Through savings and tax savings and vendors savings and different processes and really just stopping stupid things. So the ability to self fund is greater than we than we had hoped.
We hope to have more to go there on a go forward basis, and we're going to invest in the strategy and where we have invested very good return.
Yes.
Add to that Michael.
Rob did steal my major soundbite for the entire call.
Just kidding.
We're incredibly pleased with our ability to remix the noninterest expense base I mean, we've said directly that we wanted to make it more productive expense base its focus directly on our strategic objectives.
If you would've told me last year that increased expense by 2% or 3 million Bucks without equate doubling C&I bankers, adding 60% of frontline onboarding the technology talent necessary to develop internally, our new commercial onboarding platform too.
$2 billion of C&I loans in the rearview I would I would take that trade all day. So we're very pleased with returns on the investment to date, we've had no additional big expense moves this quarter. So no additional big realized savings, but I'd just say we're in the early innings still I've really established.
Getting the right process higher process hierarchies and operational designed to drive long term efficiencies.
Just getting going on that yet.
And that one thing thats, Okay. Just on the as an example technology we haven't seen the benefits of this yet but last June we were on Prem and with third party service providers and today, we're primarily on cloud platforms, which allows for less capex there'll be faster time to market.
We can move faster and it will give us a variable cost structure, which will be very helpful to earnings going forward and then to Matt's point about the digital Onboarding. We now have engineering proficiency at Texas Capital Bank, which allows for a much more cost effective time to adapt to develop.
And as such I mean, we're on track with <unk>.
Many more products. So we have consumer onboarding commercial onboarding guided this quarter, we'll do commercial Onboarding Salt service in the fourth quarter, that's actually working though right now is a pilot and guided.
Our pilot for sales enablement is working and will be rolled out this quarter.
The interest rate products up running close to $1 billion of deposits.
So were consumer Onboarding is delivered this quarter and we're on track for the MVP instantaneous payments.
We're doing a lot.
Paid for self funded and none of this has showed up in revenue.
To date.
The expense that we have against it and then lastly.
We're just not.
Excuse at all but I hope everybody remembers they're talking about the revenue concern.
The revenue generated this quarter was determined literally several years ago with the investment in structure and products and services that one place.
These bankers, we came out with a strategy September 1st as you know we didn't get a FINRA license till I think December December 18, most of these bankers landed in the back half of the fourth quarter and we're already seeing pipeline builds so we're actually really encouraged about revenue.
Okay. That's great color. Thanks, maybe just one follow up question. So if I.
<unk> it looks like total loans.
We're about 15% annualized higher so obviously.
Good growth utilization was down can you just give us.
Maybe some color there and maybe outside of C&I, which looks to be the bulk of the growth.
There's probably some CRE paydowns, but would you expect those to slow and maybe get some tailwind just given the relative strength of the Texas economy and the.
The impact of higher rates as we move forward. Thanks.
Okay.
Yes happy to take that so we're pleased with another quarter of continued C&I loan growth. So I think we described in a very early call that we would anticipate an outcome of executing the strategies that we grow loans and excess of Texas GDP it might be an excess appear so we continue to see that.
Come through with really flat utilization, so utilization has been sitting high forty's around 50 for the last three quarters, which may develop entirely new client acquisition, which is core to the strategy to where we think.
<unk> got really deep markets, where we can invest pretty aggressively against that opportunity delivering really strong talent puts us a bunch of new products and services to a bunch of new clients. So those are metrics that well, they're not going to determine loan growth in particular is not going to be our guiding light to determine if we're successful or not it is a really good early.
Indicator at this point of us taking the market share that we won on the real estate side. We mentioned last year that was 50% of the book pay off.
That ticked down to 36% this quarter. So it doesn't really steady on our origination volume we've got great bankers as Rob mentioned match up against really good clients strategy has worked for us for a long time. So the pace of origination has been about the same over the last call. It 18 to 24 months to pick up in balances this quarter, 14%.
Annualized was largely a result of those payoffs taking down some of that to be honest. There's just a return to seasonal norms. So we'll see if that sustains over the next couple of quarters, but that will be the driver of C&I loan growth is motivated payoffs.
Helpful color, Thanks for taking my questions.
Yes.
Thank you Mr Rose.
The next question is from the line of Brad Milsap with Piper Sandler. Please proceed.
Hey, good afternoon.
Okay great.
Am I coming through.
Yes, yes, yes.
Okay, great Great Brian .
Rob I know, there's a lot of good things okay great.
I know, there's a lot of good things going on with the deposit base with you moving out index money in higher cost money and bringing in more core accounts just kind of curious do you think you've reached.
Kind of a stabilization in deposits I know theres, some seasonality in <unk> as well.
Do you plan to kind of continue to chip away at that index money to where we could see deposits continue to come down.
Wanted to get a sense of kind of how to think about the remaining cash you have on the balance sheet.
Hey, Brad happy to answer that.
We're largely done at this point on the large proactive reductions in institutional index money. So we've got a published target that we want to be less than 15% of the total deposit base that will be achieved through growth in the rest of the deposit base.
So I think you are likely seeing.
Sure at this point to start to see things build again, starting this quarter and we don't have any.
Other than <unk>.
And item or two here and there we don't have any in place plans to push out any more of the high cost high beta deposits.
I think also this is Warner Okay, great and then.
This is where this is the reason Brad.
We've built the digital Onboarding consumer commercial and the different industry verticals revenue cycle management unique products for different industries. So.
We will see the peak times V grow as our pipelines are mature.
Understood and just as a follow up.
Kind of a bigger picture question you guys.
Alluded to it several times maybe managing.
Your interest rate risk position, particularly as rates rise, there's probably several ways you can do that some more quickly some more slowly is there.
The level of fed funds.
You would maybe become more aggressive in doing that I'm. Just curious if there is in your mind Robin.
<unk> optimum margin that you have in mind for the bank that you kind of feel like you can generate the returns that you want to generate.
Year end year out I'm sure higher is the right answer, but just kind of curious if there's like an optimum number.
You have in mind.
I'm going to I'm going to take that but I'll, let Matt follow up what I would say is this bank has been way too asset sensitive for a very long time.
We're uniquely.
Positioned to take advantage of this current rate environment, given where we are and our over reliance on asset sensitivity. However, we do not want to be over reliant and subject to rate cycles. So I think you'll see a very disciplined and measured approach.
Here going forward.
In different of the rate cycle to have the right assets and liabilities sensitivity. So that you can judge us by the execution of our strategy and not market cycles.
One how do you think that was that was pretty good.
Yeah, if I if I may.
I would add just a couple of additional points of color for you Brad I mean, we said really directly that we have a strategic goal to be financial resilient and to Rob's comments.
Earlier in the discussion.
That really means insulating the bank strategy from changes in the economy or rate environment.
Our strategy in general is it just a set of financial returns, it's really to serve clients with the offering and capability that we've described which we believe we do that well is going to generate some pretty impressive turns pretty impressive returns.
So the complexion of the business model today in the midst of the transition we are still working through it is that the strategy is it more risk in our rates fall scenario than in a scenario when rates rise.
So we don't think it makes a ton of sense to increasingly tie a larger part of our future earnings.
Realizing potential rate increases.
We've talked a bit before that the warehouse.
Great earnings hedge as rates fall and it certainly is but when warehouse volumes flex up the rest of the portfolio prices down and that dramatically increases the amount of capital that we need to generate the same amount earnings. So you get a ton of stress on the balance sheet, which would really lessen our ability to invest in the rest of the business. So.
We learned that lesson the hard way during the last rate cycle.
Portion of Securities that we moved to HTM. This quarter. It was largely purchase at the lows in the summer of 2020.
The bank's historical strategy was to maximize asset sensitivity at all times, there was almost a 15 year gap between bond purchases.
So when rates fell in early 'twenty, there's a lot of excess liquidity strength capital. So you redeploy to try to generate some earnings because you are pretty limited on strategic options.
And I would just say very simply we're just not going to let that happen again.
So today very deliberately we're in a position of strength, we got ample capital much better funding base stable credit a couple of billion dollars of C&I loan growth in our rearview mirror.
And I think we're in a really good position to start taking actions and our preference to do so would be properly priced fixed rate loan capacity.
Managing duration in the investment book and then select use of derivatives. So we're not ready yet to disclose the target positioning do you guys, yet I will certainly share some more details or alcohol lines on the timing and magnitude of the actions.
And then of course, we'll tactically reposition over time, but.
But which we just did in fact slow and purchases in the bond portfolio and pushing out of the high cost deposits, but just wanted to be really clear in general we want to move away from asymmetric backs on the direction of rates sectors or markets.
Our view that we're not going to achieve this strategy by taking outsized exposures, we're going to achieve this strategy by trying to avoid them.
And taking care of our clients.
Very helpful. Thank you guys.
Yes.
Thank you Mr Mills that.
That concludes the question and answer session I will now hand, the call over to Rob Holmes for closing remarks.
I would like to thank everybody for your interest in the firm we're really excited about.
Our conference to date.
The people on this journey with us and where we're headed and look forward to talk to you about it in the future and sorry, we didn't get to all the people in the question queue. Thank you every day.
That concludes today's conference call. Thank you for your participation you may now disconnect your lines.