Q2 2022 Texas Capital Bancshares Inc Earnings Call

Speaker 1: The stru it what?

Speaker 2: Hello and welcome to today's TCBI Q2 2022 Earnings Conference call. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two.

Speaker 3: I would like to hand it all over to Justin and Colcooka, Head of Investor Relations. The floor is yours, please go ahead. Good morning and thank you for joining us for TCBI's second quarter, 2022 earnings conference call. I'm Josh and Colcooka, Head of Investor Relations. Before we begin, please be aware that this call will include forward-looking statements that are based on our current expectation 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.

Speaker 3: 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 in the investor relations section of our website at texascapitalbank.com.

Speaker 3: Our speakers for the call today are Rob Holmes, President and CEO , and Matt Skrilak, CFO . At the conclusion of our prepared remarks, our operator will open up a Q&A session. Now I'll turn the call over to Rob for opening remarks.

Speaker 4: Thank you for joining us today to discuss our second quarter results which represent another important step in the transformation of our firm. It has now been nearly 11 months since we announced our strategy on September 1st of last year and we are taking deliberate, meaningful steps towards fulfilling our commitment to build a Texas-based, full-service financial services firm that can seamlessly serve the best clients in our markets through the entirety of their life cycles.

Speaker 4: We told you that delivering against the subjective would require us to reorganize the front and back of our operating model around client delivery, and emphasizing client experience.

Speaker 4: Aggressively realign our expenses to invest directly in expanded coverage and improved capabilities.

Speaker 4: and reposition our capital base in support of businesses where we can be relevant to clients by offering broader product and services, not just a loan commodity.

Speaker 4: We also told you doing so would be hard, because building something of value is. But when we deliver on our strategy, we will have a business model that generates structurally higher, more sustainable earnings, and a financially resilient balance sheet geared to supporting our clients through market, as well as rate driven cycles.

Speaker 4: to monitor our progress and hold ourselves accountable to these commitments.

Speaker 4: Purpose driven routines were established and are maintained in every area of the firm.

Speaker 4: This focused approach continues to yield early results as we add people, products, and increasingly new clients at a pace consistent with our plan.

Speaker 4: Over the last year, we established foundational principles to cover markets in a smart and disciplined way, resulting in improved client engagement and sustained market share gains, which again, this quarter showed up in the form of a loan growth, with CNI loans increasing 34% year over year.

Speaker 4: Of all client relationships that were presented at balance sheet committee meetings during the second quarter, we expect over 70 percent.

Speaker 4: to do identified incremental business with us across our platform. with us across our platform.

Speaker 4: As we continue to grow market share, improving platform maturity will enable us to better serve the breadth of client needs while further balancing our revenue sources.

Speaker 4: Our bi-weekly balance sheet committee meetings are proving effective at connecting our strategy directly to our actions.

Speaker 4: Banker-led client teams are now appropriately involving leadership across the entire firm when looking to deliver the outcomes our clients deserve. We're looking to deliver the outcomes our clients deserve.

Speaker 4: While undoubtedly starting from a small base, this is evidence in part by the 35% year-over-year growth in fee income from our three areas of focus. For reaching a finer local level, this implies emerging growth, reaching a Nursing ????ne which is raising pray to the winds and the winds and the winds and the winds and the winds in fee income from our three areas of focus. you

Speaker 4: Treasury Solutions, Private Wealth, and Investment Banking.

Speaker 4: This quarter also represents the first increase in quarterly year over year total revenue since the exit of the correspondent lending of business in the second quarter of 2021. Floating of Business in the second quarter of 2021.

Speaker 4: Growth and investment banking revenue this quarter was driven primarily by swap fees and loan syndications as late stage pipelines referenced on our last call materialized through the quarter.

Speaker 4: Pipelines remain strong, and our capital markets and loan syndication businesses should continue to gain traction and benefit from the distribution capabilities coming online this quarter.

Speaker 4: and the LEED left capabilities we expect to deliver later this year.

Speaker 4: Also, consistent with the timing described on the last call, we opened our sales and trading floor in May. Our trading activity for the quarter was realized in mortgage security, sales, and trading, helping our clients manage pipeline and interest rate risk through TBA hedging and facilitating liquidity in specified pools.

Speaker 4: Professionals leading our mortgage hold-own and corporate loan trading deaths are now on platform and we remain on track to be active in these markets this year.

Speaker 4: Excitingly, we have already seen excellent collaboration between our mortgage finance and mortgage sales and trading businesses.

Speaker 4: and we expect our corporate loan team will similarly complement our existing syndicated finance business.

Speaker 4: offering our corporate and middle market clients access to institutional capital markets from our Dallas-based trading floor.

Speaker 4: I'd like to note that the successful launch of our training floor has not impacted our overall appetite for risk exposure.

Speaker 4: Our sales and trading activities to date have centered on facilitating transactions for our clients as a riskless principal Or as agent meaning the broker dealer has operated with zero market risk at all times during the quarter.

Speaker 4: As we mature the business, we will remain focused on facilitating market access for our clients in managing our risk exposure within the overall tolerance of the firm.

Speaker 4: We expect to consider thoughtful and appropriate exposure to risk, enabling our clients' success, such as in connection with a best efforts underwriting or facilitating our clients' hedging needs.

Speaker 4: We will be thoughtful and prudent about risk providing these services to our clients. The

Speaker 4: Importantly, we are still in the early stages of a multi-year journey with a platform that is just now coming together, but are encouraged by growing top-line revenue resulting from emerging returns on our significant investment on expanded banking capabilities for best-in-class clients in our Texas and national markets.

Speaker 4: During the quarter, the overall mortgage market experience continued rate volatility, resulting in compressed profit margins, and reduced cash flow for our mortgage finance clients who are transitioning to a lower market volume. We are transitioning to a lower market volume.

Speaker 4: As a result of this expected challenging operating environment, one of the firm's mortgage warehouse clients filed for bankruptcy at quarter-end.

Speaker 4: which trigger the default.

Speaker 4: The immediate downgrade to substandard for the outstanding balance of 144.6 million dollars

Speaker 4: and the implementation of the CRT First Laws Protection.

Speaker 4: We have always viewed Morgan's Warehouse as a low credit risk offering with a very low realized loss given default due to the strong collateral values and inability to liquidate promptly along with the strong protections we have in place from an underwriting perspective.

Speaker 4: This fact pattern has been proven out in the bankruptcy process as our exposure has been fully de-rest.

Speaker 4: We received multiple bids for these granular, well underwritten mortgages, several of which were accepted to take the market risk of opposition off the table.

Speaker 4: As of today, the majority of the exposure has been liquidated and we expect the remaining trades to close in the near term with no loss to the firm or CRT investors.

Speaker 4: our ability to act quickly through a pre-established process to remediate the credit exposure and less than 45 days was consistent with our expectations. and less than 45 days was consistent with our expectations.

Speaker 4: We remain committed to recycling capital and expenses by reinvesting an organic growth to achieve our vision, creating a more valuable firm for our shareholders. We are now in the process of creating a more valuable firm for our shareholders.

Speaker 4: As we identified last year, concentrations in the loan portfolio and it gives the capital base required racialization.

Speaker 4: The Balanced Sheet Transformation has been in progress for 18 months as investments to support the development of a core CNI offering have begun to right size the business mix.

Speaker 4: The ballot sheet transformation date is following the strategy laid out last year and as a financial result this quarter indicate early successes are taking root. The ballot sheet transformation date is following the strategy laid out last year and as a financial the ballot sheet transformation date is following the strategy laid out last year and as a financial

Speaker 4: We know that delivering shareholder returns is dependent on not only higher quality earnings, but on a lower cost of capital earned through financial resiliency.

Speaker 4: Given the rapidly evolving rate environment and the economic outlook,

Speaker 4: We continue to evaluate options to accelerate the balance sheet transformation and to insulate the firm from changing market conditions.

Speaker 4: Matt will walk you through the actions we have taken this quarter, including the firm's first interest rate cash flow hedge, which efficiently reduced asset sensitivity.

Speaker 4: Thank you for your continued interest and support in our firm. We are excited about our accomplishments today and the year ahead.

Speaker 4: Now I'll turn it over to Matt to discuss this quarter of the results. Matt.

Speaker 5: Thanks Rob and good morning. Let's begin on slide 8.

Speaker 5: Second quarter results depict an emerging realization of the longer term financial outcomes associated with the significant and continued shift and allocated expense in capital to support or to find strategic objectives.

Speaker 5: Total revenue was up $27.9 million or 14% linked quarter and increased $4.7 million when compared to Q2 2021, marking the first year-over-year quarterly improvement in the last year.

Speaker 5: Results were positively impacted by a $22 million increase in that interest income associated with continued core loan growth and realized benefits of our deliberate increase in asset sensitivity heading into the tightening cycle.

Speaker 5: As Rob described, we are also pleased with early contributions from our fee-generating businesses. We should, over time, grow and scale as we improve our relevance with a now consistently expanding client base.

Speaker 5: Non-interest expense continues to increase quarterly. As savings realized last year are redeployed into higher value initiatives that have the foundational tenants for future scale.

Speaker 5: Salaries and benefits increased again this quarter and are now at 20% year over year. While total non-interest expense increased only 10%.

Speaker 5: Marking continued success in self-funding town acquisition and deploying technology enabled capabilities necessary to deliver the critical early stages of our transformation. Marking continued success in self-funding town acquisition

Speaker 5: The velocity of change in the interest rate environment is causing tactical repositioning.

Speaker 5: and we will look to pull forward portions of the transformation that are rate dependent or make sense given the accelerator pace of new client acquisition.

Speaker 5: Taken together, PP&R increased 33 percent link quarter to 67.5 million, reflecting notable progress relative to our previously published guidance of achieving year-over-year quarterly PP&R growth by late this year or early next.

Net income to common was $29.8 million for the quarter, down $5.5 million quarter over quarter, driven primarily by increased provision expense of $22 million compared to a $2 million negative provision in Q1.

The provision was predominantly related to 2.4 billion in quarterly loan growth. The provision was also related to 2.4 billion in quarterly loan growth.

Credit trends remained stable and excluding the one mortgage finance credit Rob mentioned that was downgraded at quarter-end. Criticized loans decreased 17.1 million quarter-requarter to 1.91% of LHI.

The rapid rise in interest rates over the quarter resulted in a decline in AOCI of 66.8 billion.

Further declines would be primarily driven by changes across the yield curve, mainly two-year through ten-year, and less by changes in short-term rates.

Finally, during the quarter we repurchased 50 million of shares at a weighted average price of $53.11 per share, a discount to both Q1 and Q2 tangible book value per share. A discount to both Q1 and Q2 tangible book value per share.

Turning to slide nine, ending period CNI loans increased again this quarter of 1.5 billion or 14%. of 1.5 billion or 14%.