Q3 2022 Texas Capital Bancshares Inc Earnings Call
Okay.
[music].
Hello, and welcome to <unk> Q3, 2022 earnings call My.
My name is Elliot there'll be COVID-19 your call today.
You'd like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
I would now like to hand over to Jocelyn <unk> head of Investor Relations. The floor is yours. Please go ahead.
Good morning, and thank you for joining us for <unk> third quarter 2022 earnings Conference call I'm, Jonathan <unk> 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.
Cause actual results to differ materially from these statements are forward looking statements are as of the date of this call and we do not assume any obligation to update or revise them.
<unk> made on this call should be considered together with the cautionary statements and other information contained in today's earnings release.
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 Texas Capital Bank Dot Com.
Our speakers for the call today are Rob Holmes, President and CEO and Matt Scurlock CFO at the conclusion of our prepared remarks, our operator will open up a Q&A session and now I will turn the call over to Rob for opening remarks, Rob.
Thank you for joining us today to discuss our third quarter activities. We have made significant progress against both our near term objectives and longer term goals to build a platform capable of delivering products and services relevant to Texas based businesses and entrepreneurs at every stage of their life cycles.
<unk> been transparent that this transformation will begin with a period of sustained investment to reorganize the operating model around client delivery.
While we realigned our expenses directly against expanded coverage and improved capabilities and refocus our capital base to support businesses, where we can be relevant to clients by offering a full suite of products and services.
We also committed to give you a guidepost to mark our progress along the way and are pleased to achieve an important one this quarter delivering operating leverage or a quarterly year over year growth in pp NR.
Early on I, often said the biggest risk to our strategy was the need to build so much of the platform concurrently.
Which was an acknowledgment of both our opportunity.
And the limited infrastructure in place upon arrival through.
A year of sustained and focused execution by people across the firm.
This risk has slowly dissipated as businesses were built and capabilities landed.
While our long term plan accounts for continued investment much of the initial look to deliver the foundational talent technology products and capabilities has been incurred.
We are increasingly transitioning the firm's focus from a periods concentrated build into a state of execution as we start to mature a uniquely broad and client centric offering currently in its infancy into a robust and scaling platform consistent with our long term objectives.
Our value proposition continues to resonate through sustained market share gains as C&I loans increased again this quarter and are now up 38% year over year.
Likewise year to date, our balance sheet Committee has now seen opportunities in excess of $10 billion of total commitments with the majority of relationships, where we would expect to provide more than just the loan product.
Throughout the client lifecycle.
Mid teens growth in new Treasury solutions clients in the last 12 months is an early indicator that our rapidly expanding product suite is gaining traction with clients.
Treasury product fees are up 27% year over year, which is largely driven by the improvement in deposit service charges as well as growth in recently launched products like our commercial card.
We remain confident that the opportunity for increase client penetration with our full suite of treasury products is significant.
This is in part due to continued progress against our digital product roadmap and digital client experience using the competitive advantage inherent in our branch light network to focus resources on owning the technology enabled client experience across products with a focus on simplified interactions.
And client enablement.
During the third quarter, we rolled out our internally developed digital Onboarding platform and are on track to deliver full service capability to our commercial clients by the end of the year.
As discussed in previous calls this new platform reduces total onboarding time through an entirely digital experience lowering risk <unk>.
<unk> internal handoffs.
And enabling our clients to move at their pace of their business.
We have also been clear in our desire to rebuild and significantly enhance our successful, but subscale private wealth business.
We are currently two quarters into systematically revamping, our offering including updating our go to market strategy, expanding our products improving our back office operations investing in our front end client experience and adding quality talent that foundational build should be largely complete by the <unk>.
<unk> of next year, resulting in best in class offering we continued to experience strong organically flows with about half coming from new clients year to date net organic inflows were over $225 million supporting.
Supporting the change in AUM balances of down 6% compared to an S&P market decline of 25%.
In a period of tremendous market uncertainty, Texas capital Securities.
Yet another way, we can now partner with our commercial clients and a unique and differentiated manner.
While overall market conditions pressured realized investment banking revenue this quarter.
Both the quality and frequency of dialogue is improving reason.
The resulting expanding pipelines across multiple product types.
I would also note that in just its second quarter of operation mortgage sales and trading assisted our clients this quarter and navigating a historically complex interest rate environment generating over $1 million in fee based revenue and further substantiating, our ability to deliver considerable value to this important client segment.
As we undertook this transformation we understood the concentration of the loan portfolio I guess the capital base required rationalization.
Early September we announced the strategic divestiture of our insurance premium finance portfolio, which is on track to close in the fourth quarter.
Subject to customary closing conditions. This transaction will further increase our ability to sustainably deliver value accretive growth in our Texas focused offerings.
While the equity return to our balance sheet through this transaction, we will have the immediate effect of increasing our tangible book value.
Per share by approximately six 5%.
Upon close we expect common equity tier one to increase approximately 200 basis points, resulting in regulatory capital ratios and top decile of our peer group and placing us in the most favorable capital position in the history of our firm.
The accretive impacts on our balance sheet. Further include a reduced loan to deposit ratio and an increased highly liquid assets ratio as $3 4 billion of cash proceeds will be held in liquid assets in the near term.
Following the closing of the transaction the loan portfolio composition will also be more representative of our areas of focus, namely core C&I, which will comprise approximately 50% of the total portfolio a significant differentiator from our peers.
We know that delivering shareholder returns is dependent.
Not only higher quality earnings, but on a lower cost of capital earn through financial resiliency.
Compared to our starting point at the end of 2020, we have notably improved our position relative to this objective.
Capital ratios are considerably higher with loss absorption capacity supported by consistently conservative and elevated reserve coverage ratios.
Liquid assets are stable with reduced reliance on higher cost lower quality funding sources.
Our loan portfolio is increasingly representative of our stated focus on banking the best clients in our markets.
We continue to reduce the volatility of future earnings through expanded capabilities and our proactive interest rate risk management program.
A final comment on the operating environment.
Sentiment across all sectors is that inflationary pressures and the ensuing rate environment will create headwinds for our businesses if they have not already begun.
Our strategic planning process acknowledged that we would go through a cycle during our planning horizon.
As such we are prepared and positioned to continue investing against the strategy to make meaningful market share gains.
We continue to proactively monitor for recessionary exposures caused by economic.
And geopolitical uncertainty.
Established credit disciplines include quarterly borrowing specific reviews.
<unk> portfolio reviews, and client specific strategy assessments are now mature.
Elevated awareness continues both in monitoring the existing portfolio and ensuring our desired credit risk appetite is being consistently applied.
Throughout new client acquisition.
We do not manage the bank in a risk on risk off posture, but instead based on the belief that client selection is always paramount.
Including as we enter what we expect to be a challenging operating environment in 2023.
Thank you for your continued interest in and support of our firm.
I'll turn it over to Matt to discuss the quarter's results Matt.
Thanks, Rob and good morning, beginning on slide eight total revenue was up $32 6 million or 14% linked quarter and increased $49 1 million or 23% when compared to the third quarter of 2021.
Quarterly results benefited from a $33 6 million increase in net interest income mainly attributable to realized benefits of our asset sensitive balance sheet and augmented by continued C&I loan growth.
Market driven headwinds led to a linked quarter decline in total non interest income of $1 million.
Primarily driven by a reduction in investment banking and trading income coming off a strong second quarter.
As Rob described we are making progress on the execution of our fee generating businesses, which will over time grow in contribution as we improve our relevance to the now consistently expanding client base.
The pace and complexion of noninterest expense growth continues to evolve consistent with our expectations as we focus investment on pre identified high value initiatives that are the foundational tenant for future scale.
Q3 expenses included $13 7 million in salaries and benefits expense and $3 million in legal and professional expense related to the sale of our insurance premium finance business.
Salaries and benefits excluding transaction related expenses increased this quarter and are now up over 30% year over year, while total noninterest expense excluding transaction related expenses increased 18%, marking continued success in repositioning the expense base towards expanded coverage and broadening capabilities needed to.
Structurally improve earnings generation over time.
Taken together the PNR, excluding transaction expenses increased 25% linked quarter to $84 1 million, marking a milestone in our transformation by achieving year over year quarterly PNR growth one quarter earlier than previously guided.
Net income to common was $37 1 million for the quarter up 24% and $49 6 million, excluding transaction expenses up 66% compared to the second quarter.
Net income improved due in part to a $10 million reduction in quarter over quarter provision expense as we recorded a $12 million provision in the third quarter compared to a $22 million provision in the second.
Overall credit quality remains strong criticized loans decreased $120 million quarter over quarter to 245% of la.
Primarily as a result of the resolution of the one mortgage finance credit that was downgraded in Q2.
Nonperforming loans contracted again to now just one 8% of loans held for investment.
This quarter's provision expense was impacted by our increasingly conservative views on the downside risk to the economic forecast.
Partially offset by the positive observed portfolio trends mentioned previously.
Finally, the continued rapid rise in interest rates over the quarter resulted in a further decline in OCI of $163 $2 million.
Folio sensitivity is primarily driven by changes along the two through 10 year points on the curve and less by changes in short term rates.
Turning to slide nine ending period C&I loans increased again, this quarter up $569 million or 6% signifying focused execution on our defined strategy.
<unk> loan growth over the past several quarters has driven C&I balances, excluding PPP and insurance premium finance loans, $2 7 billion or 38% higher year over year.
Consistently delivering our improving value proposition to core Texas based businesses is resulting in a balance sheet increasingly comprised of our client base, who benefit from our broadening platform and available product solutions.
Growth continues to come primarily from new and expanded relationships as utilization rates moved only slightly higher in the quarter to 52% and remained in line with our pre Covid average of low <unk>.
The announced divestiture of bank capital Finance in September resulted in the transfer of the associated C&I loan portfolio into loans held for sale.
On a linked quarter basis balances in this portfolio were flat at $3 1 billion.
Moving to real estate as expected period end real estate balances declined by $100 million or 2% in the quarter as payoffs remained elevated in the pace of new origination moderated.
As a reminder, this is a through cycle business for us focus squarely on client selection and manage with established and well tested concentration limits.
Consistent with our longstanding strategy in previous disclosure new origination volume is focused on multifamily.
Talking about our deep experience in the space and preference for this property type given observed performance through credit and interest rate cycles.
Average mortgage finance loans declined by 10% in the quarter comparing favorably to estimated levels of broader industry contraction as the breadth of our segment specific offerings prove increasingly compelling and what is and is likely to continue to be a historically challenged market environment.
Year over year industry originations contracted over 55% this quarter compared to the 42% decline in ending balances we experienced and.
And we would expect traditional fourth and first quarter seasonal declines to be exacerbated by the tightening rate environment.
Current near term pipelines are reflective of a more cautious client sentiment.
As we've said before our strategy is focused on client selection not tightening cycles, and we would expect future loan growth to simply be an output of our stated strategy.
Moving to slide 10, we have consistently communicated that transitioning the funding base to our target state both difficult and take time.
Through a series of actions most recently the announced sale of bank direct capital Finance, we have increasingly shifted our balance sheet away from our model reliant on a collection of separate funding sources and credit distribution channels and instead to businesses, where we believe multiple client touch points will over time result in a higher quality funding base increasingly comprised.
Of our clients' core operating deposits.
Performance through the third quarter affirms the outlook shared on the last call.
We are not at target state. The early improvements made to the balance sheet and business model are yielding positive results, thus far relative to the last tightening cycle.
Ever we are still in the early stages, and we do anticipate deposit costs, increasing as market pricing responds to the rapid pace of fed increases.
Total ending period deposits declined 4% quarter over quarter with changes in the underlying mix reflective of the continued funding transition and a tightening rate environment noninterest.
Bearing deposits represented 47% of total deposits at period end and were down 8% linked quarter as mortgage finance deposits continue to be pressured by the sustained contraction in industry wide liquidity.
Commercial deposit accounts on analysis have now increased 18% year over year, reflecting our focused strategy to generate and sustain core operating account growth.
The increase in short term rates experienced over the last 90 days also drove additional repositioning within our interest bearing deposit base, resulting in continued de emphasis of our highest cost most rate sensitive deposit sources in favor of more granular and modestly less rate sensitive options, including bass.
Any period balances and high beta index deposits contracted $700 million and now represent 15% of total deposits consistent with our previously disclosed target level.
During the quarter of $610 million of brokerage Cds matured at a rate of 70 basis points, and we purchased $730 million of new brokered Cds with a weighted average duration of 11 months and a coupon of 274%.
Looking to the quarter had mortgage finance deposits will be impacted by seasonal factors as property tax distributions are made from escrow accounts in December and January before starting to rebuild and net Q1, turning to NII sensitivity on page 11.
Shown in the middle on the slide as a result of our asset sensitivity modeling, which declined this quarter to seven 3% or $77 million and a plus 100 basis points shock scenario on a static balance sheet. During the quarter. We continued to prudently reduce the amount of future earnings exposed to changes in forward interest rate beyond those already contemplated in the curve.
By adding $2 billion to $5 billion in received fixed interest rate swaps largely tied to one month. So for an average receive rate of three 1%.
The core component of our asset sensitivity profile is the large portion of our earning asset mix that re prices with changes in short term rates after moving loans associated with the insurance premium finance business to held for sale, 92% of the total <unk> portfolio. Excluding <unk> is now variable rate with.
With 87% of these loans tied to either prime or one month index.
Assuming proceeds from the pending divestiture of our insurance premium finance business are reinvested in cash adjusted net interest income sensitivity and a plus 100 basis point shock scenario increases by an estimated one 7% over disclosed <unk> levels.
The net interest income generated by our mortgage finance business will not be as sensitive as the rest of the portfolio to changes in index rates due to the pricing dynamic of the associated deposits held in noninterest bearing accounts, which in some cases receive interest credit.
As in previous quarters, the total asset sensitivity figures depicted on the slide account for this dynamic.
We continue to have a variety of tools to prudently manage our balance sheet positioning.
Including expanding use of fixed rate loans, managing duration of the investment portfolio and the use of derivatives. If the current outlook remains intact of the quarter. We will continue to proactively use the levers at our disposal.
Moving to slide 12, net interest margin increased by 37 basis points. This quarter, while net interest income rose $33 6 million predominantly as a function of elevated loan balances repricing at higher yields partially offset by an expected increase in funding costs.
Similar to last quarter, the timing associated with the late quarter fed moves coupled with the observed spot rates at September month end suggests the full impact of the <unk> rate moves will be more fully realized in the fourth quarter.
The investment portfolio declined slightly during the quarter with cash flows slowing from approximately $90 million last quarter to roughly $80 million this quarter.
We purchased $28 million in three year treasuries this quarter, which are coming on the books at.
At a four 2% yield versus those rolling off at around one 5%.
And we'll look to match purchase volume with cash flows based on market opportunities to redeploy at higher yields.
Turning to page 13.
<unk> trends established over the last year remain intact, and we continue the disciplined process systematically aligning our expense base with our published strategic priorities.
We continue to note that our primary objective is not absolute size, but instead productivity.
And we remain focused on investing against what we believe is a significant and unique market opportunity.
Consistent with our guidance total noninterest expense, when including transaction expenses increased $16 million or 10% quarter over quarter.
$27 3 million from the third quarter of last year.
As previously mentioned the cadence of expense redeployment will not be linear.
And given the noted pace of capability build we're moving the full year expense guidance to the mid teens, which is the high end of our previously disclosed range.
Moving to capital, we remain committed to managing the capital base and a discipline and analytically rigorous manner focused on driving long term shareholder value.
CET, one and total risk based capital finished the quarter at 11, 8% and $15 two 5% respectively and.
In the top 20% of peer medians and well ahead of stated medium term internal CET, one target of 10%.
Of note tangible common equity to tangible assets finished the quarter at eight 5%.
An important characteristic of our financially resilient business model and a key metric as we manage the balance sheet to the next phases of the cycle.
We expect the capital generation from the pending sale of our insurance premium finance portfolio to generate approximately 200 basis points of CET one.
Putting the firm in the top decile of the peer group.
Consistent with our previously disclosed framework, our preference remains reinvesting capital into the value accretive growth of our Texas based franchise and we are pleased to be operating with a strong hand heading into a potentially more challenged operating environment.
Regarding asset quality criticized loans declined this quarter as it previously downgraded mortgage finance credit was resolved.
As we anticipated our proven structures response time and firm wide expertise resulted in a no loss event for both the firm and the credit risk transfer noteholders.
Reserve levels, which are an important piece of our conservative capital structure are strong at $1 five 1% of loans held for investment excluding MFS and.
At six five times nonaccrual loans.
<unk> also positioned favorably relative to historical performance and our peers.
Yes.
And update the full year 2022 guidance is contained on page 14, consistent with the methodologies disclosed last quarter to both account for the velocity of change in the interest rate environment and to better highlight the impact on our potential financial performance our guidance accounts for the forward rate curve and assumed a terminal 2022 fed funds rate of four 5%.
Last quarter mortgage industry market expectations for the year indicated a 40% decline in the total origination market.
With the advancement of rates those expectations have now risen to 50% year to date, we've outperformed the mortgage market.
Based on our experience to date and the additional products. We can now offer a mortgage finance clients through the investment bank, we expect to maintain outperformance with mortgage finance loans declining mid 30% for the year.
Due to the current and expected rate environment and the movement of loan rates off floors, coupled with multi quarter core loan build.
We expect total revenue to increase year over year in the mid to high single digit percent range.
As I indicated earlier in addition to already in flight investments, we're pulling forward expenses related to plant infrastructure build and expect full year noninterest expense growth of mid teens.
Together these expectations result in the maintenance of operating leverage as defined as year over year quarterly PPR growth with that I'll hand, the call back over to Rob.
Thanks for that operator open up for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you changed your mind. Please press star followed by two one.
<unk> asked a question. Please ensure your devices on mute locally.
Our first question today comes from Michael Rose from Raymond James Your line is open. Please go ahead.
Hey, good morning, Thanks for thanks for taking my questions.
Just wanted to start on deposits, obviously, the cost increase pretty big <unk> haven't historically higher beta than peer, but I look at your noninterest bearing composition and I'm just trying to understand how much of it was kind of push and pull between.
Client growth and trying to secure.
Maybe if your rate a little bit.
<unk>.
Just just capturing more deposits versus what the market is giving you in terms of data just trying to get a sense for how much flexibility as we move forward and rates move higher but you have to maybe work.
Deposits, but actually run off because of cost because you do have such a low loan to deposit ratio.
Premium finance, though.
Hey, Michael This is Matt I appreciate the question.
Maybe just a couple of comments on beta in general.
Rates paid data both for us and the industry as a whole is just going to be a function of the need to raise or retain marginal dollar deposits required to support any sort of incremental asset growth.
And we've said really since the first quarter that we would be willing to use higher cost deposit channels as required onboard, but we think with the right C&I relationships that over time, they're going to bring with them the operating deposits.
But those relationships may begin with credit and the process of on boarding those clients over time, earning the right to either operating data is what ultimately is going to transition our funding base from current and target State and then we would measure success this quarter I'm, sorry, the cycle not solely by plus or minus or beta relative to the last cycle, but by our ability to really.
Drive those cooperating deposits.
Both Rob and Ive said it in our comments that we are pleased with the growth in the commercial bank.
Bearing deposits C&I are up 18% year over year. So the majority of the decline in published noninterest bearing is coming from the mortgage finance.
<unk>, which are down as you would expect as liquidity exits that exit the system.
Very helpful. I appreciate.
Our next question comes from Jennifer timber from Trust. Your line is open. Please go ahead.
Alright, Thank you for taking my question.
My question is also on deposits just wondering when you think do you have any sense of when you think.
Thats may stabilize.
So Texas capital.
Okay.
Is that a mid 2022.
Seem to have an idea.
Yeah.
I think the deliberate actions Jennifer to remix the deposit base, namely the deliberate reduction in institutional index.
<unk> complete so we had an externally published targets, we wanted to get that inside of 15%. We achieved that this quarter. As you know those are 100% beta should improve our go forward pricing dynamics I think a function of absolute deposit levels is going to be really contingent on our success continuing to drive the core operating dipped.
That's that we're after.
Plenty of options.
On the.
Additional onboarding of the C&I clients. So I think a material decline that you've seen across the board in the last 12 months is likely to begin abating as we move into 2023.
I would just add Jamie.
In addition to the deposit actions not talked about.
The business activity.
Driving the majority of balance sheet.
Discussions.
Coinciding with treasury opportunities.
This is a very good indicator.
This is to come.
And then also our new digital Onboarding capabilities.
Which are improving.
Each week and.
Quarter, it will be substantially complete.
And at the end of the first quarter.
Well speed.
Pace of deposit on boarding.
While reducing cost which is very helpful. Because as you know.
When you do an operating client.
You win the business.
Then you have to onboard.
Yes.
And with digital Onboarding break that business for so we're absolutely focused on it from a variety of different perspectives.
Alright.
Our next question comes from Brad Millsaps from Piper Sandler. Your line is open. Please go ahead.
Hey, good morning, guys.
Hey, Brad.
Thanks for taking my question, Matt I wanted to start on slide 11.
Net interest income sensitivity.
The base scenario that you guys outlined is up about $125 million over the second quarter to up to a $1 45.
I wanted to walk through that make sure I understand correctly that assumes kind of we're all balances where period end and in the forward curve correct and I was curious.
Has that been adjusted for the.
Premium finance loan sale, just wanted to kind of understand if you could give us some more color on the on the moving parts.
Behind that number.
Yes, Brad I think you described it accurately so we snap the line at the end of the quarter and the cash flows are reinvested that does include the impact of the pending Bcf transaction assumes that the proceeds are simply part of that cash.
Got it so any any loan growth will be additive on top of that is that correct.
You got it.
Okay, and then I was curious just in that same vein would you happen to have I know the average balance sheets, a little corky EBIT quarter with with some of those loans are moving.
To held for sale for a month, but I was curious do you have a clean sort of loan yield held for investment yields worth X. The premium finance loans had they've been out of the balance the entire quarter.
Yes, Brad you could add about 10 basis points.
Disclosed yield.
Okay. Okay. Okay.
Okay, Great and then maybe finally just on an unexpected I know you guys are investing heavily and you get data into here on sort of multiples of.
Frontline talent I was curious if you could maybe put some numbers maybe behind some of those multiples how many lenders you have now versus.
When you started just kind of want to get a sense of.
Capacity kind of numbers in terms of people that you brought on maybe just to get a little more color behind.
Some of those multiples.
We're reluctant to give the absolute number Brad, but maybe just talk more broadly about noninterest expense base important component of the quarter. So when we started this year to your point, we had guidance of low double digit percent increase in total non <unk> expense of $600 million base and we said.
We would look for opportunities.
And thats more aggressively or really pull forward our transformation agenda.
Internal capacity of revenue allowed because for us, perhaps a bit different than other banks, but we thought our path to operating leverage looked like was one where we built capabilities and coverage necessary to grow revenue.
Not one where we look to reduce expenses. So we feel like we've been able to execute well against that pulling forward by one quarter or PPA in our target that we disclosed.
Last year, and that's really been driven by revenue growth of 14% in each of the last two quarters.
If you look at just the total expense base you move the transaction related expense were up $16 million or nine 8%.
Order over quarter, 11, and a half of that salaries and benefits about 3 million is tech related expense that primarily focuses on better equipping the frontline as well as moving.
Some of our storage to the cloud and away from on Prem.
So at this point sorry to benefits for US are now 65% of total noninterest expense was noted target for us up from 57% last year and as you note. It was definitely a strong quarter for hiring.
So the total employee base was up 8% that was focused primarily on increases in private wealth and investment banking.
And we have now increased frontline talent by one eight X since the end of 2020 and two five times on frontline as it relates to C&I.
So we're really pleased with our progress to date and matching that expense base directly against the priorities that we've laid out.
Great. Thank you.
Our next question comes from Brady Gailey from <unk>. Your line is open.
Hey, Thanks, good morning, guys.
So I wanted to stick with the expense topic.
15% growth in mid teens growth. This year is a big number but I know you guys are investing a lot.
Internally, which makes sense, but as you look to next year do you think it will require a similar amount of internal investment I'm just wondering.
Sensors were up 15% this year should we expect the pace to slow at all next year.
Yeah, Gary it's Matt.
The period of the transformation where were incurring significant costs without the corresponding revenue is largely behind us.
And we do anticipate continued build out but not without revenue to support it.
So on the on the guide I mean, we started the year as I mentioned with a low double digit youre not moving to mid teens.
We started to migrate that up as we add success actually deploying those investment dollars against the stated but stated objectives.
It did so because we felt confident in being able to pull forward FTE PNR target.
Youll notice in the guide as well on the quarterly operating loss of leverage we have it set is maintained.
<unk> indicates to you that we believe quarter over quarter, I'm, sorry year over year in each quarter. So <unk>. This year relative to <unk> last year <unk> next year relative to <unk> last year. It will continue to maintain operating leverage and ultimately expand it.
Okay, Alright, and then your common equity tier one move to up to 11% this quarter.
We look at it with the sale of the premium finance business Youre, all else equal that will tick up 13%, so even up even a higher level I noticed you guys. It doesn't appear you repurchased any stock in the quarter.
But your share prices $1 15 of tangible.
Capital basis growing your stock is still cheap on tangible but no buybacks. So how should we think about that going forward.
Thanks, Brady I'll take its Rob.
Look I think we've talked about this before we have a clear understanding of corporate finance and value creation and capital actions.
As you know this management team put in place the first.
Buyback program in the company's history.
We had 150 million on the program. We use 50, we bought it back at an average price of 97%.
Book, So it was highly successful having said that there's a couple of things happening.
I think any bank.
Economic environment with this economic.
Outlook citizen that needs to be highly cautious before buyback shares irrespective of their.
Irrespective of.
Capital position.
Our liquidity and we're really really happy.
<unk> has more capital, but a communist history.
We have ample liquidity.
Both will just improve but having said that we're highly cautious on the go forward.
Outlook.
We will consider buybacks for sure.
But we have unlike most banks.
A.
A plan to create value through organic investment and growth. Unlike no other.
Economic state in the country. So we're going to continue to focus on the strategic plan.
If a buyback becomes opportunistic where we need to do it because it for our shareholders, we will but if not the number one lever to financially.
Grow earnings versus organically grow.
Okay, Alright that makes sense and then finally for me.
As the premium finance sale mirrors closing you're going to have so much excess funding generated from that.
Matt say right now you are planning to just leave it in cash but longer term yes.
Do you do with that do you use it.
<expletive> loan growth do you think about increasing the bond book do you go to the other side to get rid of some high cost funding.
The opportunity there with that liquidity, what do you do with the longer term.
Yes, Brady I think.
Sure.
This transaction is.
It's a great transaction for trust and what it does for them. It's also a great transaction for us.
As you as you saw as Matt mentioned.
Totally repositioned our balance sheet since I got here C&I loans, 50%.
Mortgage warehouse right sized.
And more profitable.
We're really really pleased with the.
Reallocation of the balance sheet.
Hi.
And what we're generating.
And being more in state.
And being way more relevant to our clients. Unlike ACF laws.
We are going to go really slow with the deployment of that capital and obviously be incredibly thoughtful.
There is a.
There's a number of things that we can do with it.
We're going to take the next three months to do a strategic review of <unk>.
How to fix.
Fix the balance sheet and financial condition of the company.
Lastly go forward strategy.
Okay, Alright, thank you guys.
As a reminder to ask any further questions. Please press star followed by one on your telephone keypad now.
Our next question comes from Matt Olney from Stephens. Your line is open.
Hey, good morning, just a few follow ups on the insurance premium sale.
Any more color on the timing of the deal closing and then what does the updated guidance assume on the timing of the closing.
And then lastly, just remind us on the amount of expense levels that should fall out following the sale closing thanks.
Yes so.
The guidance on the timing of the closing is fourth quarter of this year no further update is subject to customary closing conditions.
And.
We fully expect it to close in the fourth quarter.
Thats the update on timing I think it's your second question.
Is it around the operating expense Matt.
The operating expenses associated with that was around the operating expense that falls out.
Yes, 30 $36 million full year.
Sure.
Okay.
And just clarify any impact on the updated guidance from the from the sale.
No.
Okay. Thanks.
And then shifting gears on the mortgage warehouse I think you mentioned it outperform the industry. So far this year I think the results definitely.
That out.
The updated guidance implies that warehouses down pretty considerably in the fourth quarter I think even more than some of the industry forecast I've seen so far for <unk>.
What are you seeing and what would your volumes that make you more cautious in <unk> than lots of the industry forecast out there.
Well I'll take it or not can comment so.
Really.
Last couple of calls I believe.
If not a shadow.
As a vertical now not a warehouse so we do many things. These clients. We don't have many many banks our size smaller even bigger have a mortgage warehouse and thats.
We have a robust treasury treasury management relationship with these companies, we have robust risk management relationship and capital solutions.
We have robust sales and trading TBA gestation.
And others.
We even have private wealth and corporate advisory.
And the efficacy of some relationships. So we look at it as a vertical. We also said we also we also understand and deliberately located.
Market during.
During the course of this year for a couple of reasons those happened to coincide with the companies that were more position for purchase that a re fi is there and their sales pipelines.
Areas of focus.
They happen to be safer and sounder, while we take this as LGD zero business, we don't need to spend time with ADHD credit issues like we did earlier. This year. So we are doing what we said with client selection, we have exited relationships so you've seen us.
We wake up relinquished market share on Corpus and then gain market share on purpose. The absence of mortgage warehouse, which is mortgage finance now have been extremely deliberate.
So I wouldn't look at the.
I wouldn't look at the Outstandings on our warehouse.
Totally.
Market volume driven as you would have two years ago.
Our next question comes from John Armstrong from RBC capital markets. Your line is open.
Hey, Thanks, good morning, everyone.
Good morning, John .
Rob I just wanted to get away from the numbers for a second.
Ask about a comment you made during the prepared comments and you've kind of alluded to it a couple of times you mentioned the phrase challenging operating environment in 'twenty three.
Kind of curious what what youre expecting on that and what you think that means.
Potential for your for your credit outlook for the industry as credit outlook.
Yes, so first of all.
We do quarterly segment level, a borrower specific reviews every quarter with focus on the macroeconomic environment.
Risk based approach.
Prioritizes reviews, including large exposures to high risk industries overall exposures, we are extremely diligent I'm highly confident in our in our processes and cadences as around risk Youll see that were more.
We are well provisioned.
That is that's a direct result.
The management team.
With a conservative posture, which is today and always even in the best economic environments.
So I feel really really good about our.
Our loan book and where we are.
I'd say that.
Just factually, even though we talked about being in Texas and what a great.
This is climate it has on a relative basis.
Even good economic news is moving in the wrong direction, such as employment growth in Texas, So, Texas produced more jobs between February 2020 in August 2022.
Other state, but it did slow in the third quarter. So while job growth is slowing home sales a decline in inventories have risen.
Even though inventories are low so even the good news is getting worse and on top of that there's a lot of that is the strong dollar does hurt Texas companies.
Inflationary pressure does hurt consumer facing companies no longer available to pass along cost you can see an inventory glut at Nike in the third quarter, you saw GM had lore.
Cars in inventory in the third quarter than three.
Three times the number they did before so you see a broad slowdown we feel.
But I think we're well positioned for it I actually think.
Ironically, it's an opportunity for us there are still irrational base in the marketplace.
PD on price and structure.
Want to compete on value of relationship.
Banker and platform.
We are still.
As early as this morning and balance sheet Committee.
We said no to opportunities with irrational banking behavior and market. We think we are poised to benefit from the economic downturn, given our market share and our credit discipline that we have today going forward.
Yes that makes sense you kind of you kind of hit my follow up but.
It sounds like Youre, saying, a challenging operating environment, probably helps your ability to take share and hire the right people or is that totally.
Totally.
I'm glad you picked up on this.
So even though Matt talked about the hiring of our success in hiring we did delay a couple of spots.
And loan syndications M&A some other some other roles.
Cause of the economic environment, we didn't say just strategy, we just delay but.
But youll see that talent coming onboard now to take advantage of the market environment, but it wasn't there this past year. So we're managing the business, we're aware of the market environment.
This for the long term.
The word rolling recession is something that people are saying a lot more which I didn't really hear until this cycle of my career, but I think it's probably a good a good target I mean, we have some industries in Texas are doing much better than others. We have some regions of the country are doing better than others in some regions of the globe feels better than others, but I will say I don't.
Understand.
I didn't understand what you use the word transitory inflation.
But that now as we know also that understand the current definition of recession, because the first two quarters of the U S contract.
Europe , and a hard recession, so it might be mild.
Economy has contracted quite a bit longer to two quarters. So I think that irrational behavior by some banks is unwarranted and we'll remain cautious.
Okay. Okay, alright, thanks for the help.
But we will be on offense.
Right.
Sure.
This concludes our Q&A.
And over to Rob <unk> CEO for final remarks.
We continue to be grateful for everybody's interest as a firm.
Excited about.
The transaction that we announced it will close this quarter.
We're very pleased with where we are in the field and the continuation of the strategic plan.
And we look forward to continue.
Communicating as we move forward.
Thank you.
Today's call is now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
Yes.