Q1 2024 Texas Capital Bancshares Inc Earnings Call
Operator: Thank you for your patience, everyone. The Texas Capital Bancshares Inc. Q1 conference call will begin shortly. During the presentation, you will have the opportunity to ask questions by pressing a star followed by one on your telephone keypad.
Thank you for your patience, everyone, the Texas Capital Bancshares, Inc.
One conference call will begin shortly during the presentation you have the opportunity to ask questions about press star followed by one on your telephone keypad.
Carly: My name is Carly, and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, Jocelyn Kukulka. To begin, Jocelyn, please go ahead.
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Jocelyn Kukulka: Good morning, and thank you for joining us for TCBI's first quarter 2024 earnings conference call. I'm Jocelyn Kukulka, Head of Investor Relations.
Carla: Welcome to the Texas Capital Bancshares, Inc. Q1 Conference call. My name is Carla and I will be coordinating your call today. During the presentation. You can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind. Please press star followed by two I will now hand, you over to your home.
Jocelyn Kukulka: Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed. 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 and our most recent annual report on Form 10-K and subsequent filings with the SEC.
Carla: Josh Linker cocoa to begin Jasmine. Please go ahead.
Josh Linker: Good morning, and thank you for joining us for T. C. B is first quarter 'twenty 'twenty four earnings conference call I'm, dropping <unk> head of Investor Relations before we begin please be aware. This call will include forward looking statements that are based on our current expectations of future results or events.
Jocelyn Kukulka: 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. 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. I'll now turn the call over to Rob for his opening remarks. Thank you for joining us.
Josh Linker: Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.
Josh Linker: 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.
Josh Linker: Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release and 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 Texas Capital Bank Dot Com.
Robert C. Holmes: Thank you for joining us today. Client adoption trends accelerated again this quarter, evidencing our differentiated market position as the preferred Texas-based platform, providing the widest possible range of products and services on parity with the largest money center bank. Our industry-leading liquidity and capital have proven to be a competitive advantage through market and rate cycles. CET1, at 12.4%, ranks third amongst the largest banks of the country.
Josh Linker: 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 I'll now turn the call over to Rob for opening remarks.
Robert C. Holmes: Thank you for joining us today.
Robert C. Holmes: Client adoption trends accelerated again this quarter evidenced our differentiated market position as the preferred Texas based platform, providing the widest possible range of products and services on parity with the largest money center banks.
Robert C. Holmes: Tangible common equity to tangible assets of 9.8% ranks first amongst the largest banks in the country, and liquid assets of 27% allow for a consistent and proactive market-facing posture as we are uniquely capable of supporting the diverse and broad needs of our clients in what continues to be a dynamic and challenging operating environment for many industries. Through cycle prioritization of our ballot sheet is enabling us to increasingly pivot, and observe strategic success in terms of financial outcomes necessary to deliver investor value creation through higher quality earning streams associated with a distinctive set of businesses. Fee income from our areas of focus increased 62% linked quarter and 20% year over year with treasury, wealth, and investment banking all delivering growth consistent with expectations.
Robert C. Holmes: Our industry, leading liquidity and capital have proven to be a competitive advantage through market and rate cycles.
CET one of 12, 4%.
Robert C. Holmes: Ranked third amongst the largest banks in the country.
Robert C. Holmes: Tangible common equity.
Robert C. Holmes: Angel assets of nine 8% ranked first amongst the largest banks in the country.
Robert C. Holmes: And liquid assets of 27% allows for a consistent and proactive market facing posture as we are uniquely capable of supporting the diverse and broad needs of our clients and what continues to be a dynamic and challenging operating environment for many industries.
Robert C. Holmes: Non-interest income comprised over 16 percent of total revenue as we are now sustainably delivering fee income as a percentage of total revenue within our target range for full year 2025. The evolution of our Treasury Solutions Platform is one of the most significant and important improvements that we have delivered for our clients. Our now best-in-class payments offering allows us to successfully compete for, win, and serve as the primary operating relationship for the best clients in our market.
Robert C. Holmes: Through cycle prioritization of our balance sheet is enabling us to increasingly pivot observe strategic success into financial outcomes necessary to deliver investor value creation through higher quality earnings streams associated with a distinctive set of businesses.
Robert C. Holmes: Fee income from our areas of focus increased 62% linked quarter and 20% year over year with treasury wealth and investment banking, all delivering growth consistent with expectations.
Robert C. Holmes: The volumes flowing through our payment systems have increased significantly in the last several years, contributing to a record quarter and treasury product fees of $8.7 million, a 14% improvement in gross payment revenues year over year. Treasury Business Awarded in Prior Quarters continues to ramp at a pace that exceeds industry norms.
Robert C. Holmes: Noninterest income comprised over 16% of total revenue as we are now sustainably delivering fee income as a percentage of total revenue within our target range for full year 2025.
Robert C. Holmes: New business year to date is tracking ahead of internal targets, and pipelines across treasury management products continue to increase. Our firm now provides both payment products and services at parity with the major money center banks and a client onboarding process that is faster and more efficient. The consistent improvement in the client journey is augmented by our high-touch, local service, and decision-making. The full rebuild of the private wealth business that I have detailed on prior calls is nearing completion, resulting in a front, middle, and back office structure built on leading technology geared toward a superior client experience and significant scale. The pace of client acquisition is ahead of internal expectations, as client count has now grown nearly 40% since we began the transformation in early 2021, and AUM has increased nearly 80% over the same time.
Robert C. Holmes: The evolution of our Treasury solutions platform is one of the most significant and important improvements that we have delivered for our clients.
Robert C. Holmes: Are now best in class payments offering allows us to successfully compete for win and serve as the primary operating relationship for the best clients in our markets.
Robert C. Holmes: The volumes flowing through our payment systems have increased significantly in the last several years contributing to our record quarter and treasury product fees of $8 7, million% to 14% improvement in gross payment revenues year over year.
Treasury business awarded in prior quarters continues to ramp at a pace that exceeds industry norms.
New business year to date is tracking ahead of internal targets and pipelines across Treasury management products continued to increase.
Our firm now provides both payment products and services in parity with the major money center banks and a client onboarding process that is faster and more efficient.
Robert C. Holmes: We remain optimistic about the future earnings potential of this business and in our ability to create further connectivity across all our services as the pace of client acquisition accelerates through the year. Our investment bank continues to deliver improving returns as we near the two-year anniversary of its launch. Investment banking and trading income more than doubled quarter over quarter to $23.1 million, an increase of 23% year over year. All the largest product offerings, syndications, capital markets, capital solutions, M&A, and sales and trading deliver quarter over quarter revenue growth.
Robert C. Holmes: Insistent improvement in the client journey is augmented by our high touch local service and Decisioning.
Robert C. Holmes: The full rebuild the private wealth business that I've detailed on prior calls is nearing completion.
Robert C. Holmes: <unk> in a front middle and back office structure built on leading technology geared towards superior client experience and significant scale.
Robert C. Holmes: The pace of client acquisition is ahead of internal expectations as client count has now grown nearly 40% since we began the transformation in early 2021 and has.
Robert C. Holmes: <unk> has increased nearly 80% over the same time.
Robert C. Holmes: We remain optimistic about the future earnings potential of this business.
Robert C. Holmes: Sales and trading revenue doubled in the quarter, and the M&A team closed multiple transactions across different industries sourced from different business segments. We continue to hit milestones in the still-maturing investment banking offering every quarter and are building a base of consistent and repeatable revenues that will be a meaningful contributor to future earnings. After the unprecedented system-wide rate-driven deposit rotation in 2023, non-interest-bearing deposit accounts outside of mortgage finance are stabilizing around 15% of total deposits and indeed grew slightly quarter over quarter.
Robert C. Holmes: And in our ability to create further connectivity across all our services as the pace of client acquisition accelerates through the year.
Robert C. Holmes: Our investment bank continues to deliver improving contributions as we near the two year anniversary of its launch.
Robert C. Holmes: Investment banking and trading income more than doubled quarter over quarter to $23 1 million, an increase of 23% year over year.
Robert C. Holmes: All the largest product offerings syndications capital markets capital solutions, M&A, and sales and trading deliver quarter over quarter revenue growth.
Robert C. Holmes: Sales and trading revenue doubled in the quarter and the M&A team closed multiple transactions across different industries sourced from different business segments.
Robert C. Holmes: Enhanced capabilities in both our treasury solutions and private wealth offering enabled the firm to retain and grow client funds during 2023, with those trends continuing into this year. As I mentioned last quarter, the firm has been and remains committed to banking the mortgage finance industry as it weathers the most challenging operating environment in the last 15 years. Over the last two years, we have refocused client selection and improved the service model as we look not to expand share, but instead deepen a relationship through Improved Relevance with the Right Client.
Robert C. Holmes: We continue to hit milestones and are still maturing investment banking offering every quarter and are building a base of consistent and repeatable revenues there will be a meaningful contributor to future earnings.
Robert C. Holmes: After the unprecedented system wide rate driven deposit rotation in 2023 non interest bearing deposit accounts outside of mortgage finance are stabilizing around 15% of total deposits.
Robert C. Holmes: And indeed grew slightly quarter over quarter.
Robert C. Holmes: Enhanced capabilities in both our Treasury solutions and private wealth offering enabled the firm to retain and grow client funds during 2023 with those trends continuing into this year.
Robert C. Holmes: To achieve this, we have taken steps to better align the mortgage finance products and support teams throughout the firm to serve the holistic needs of these clients with a broad suite of products and services custom designed to support them. While the rate environment continues to disproportionately impact this client set, our commitment to effectively serving these clients will, over time, deliver risk-adjusted returns consistent with firm-wide objectives. The firm remains fully committed to improving financial performance and believes that our position of unprecedented strength is enabling us to serve the best clients in our market.
Robert C. Holmes: As I mentioned last quarter. The firm has been and remains committed to banking the mortgage finance industry as it whether it's the most challenging operating environment in the last 15 years.
Robert C. Holmes: Over the last two years, we have refocused client selection.
Robert C. Holmes: And improve the service model as we look not to expand share.
Robert C. Holmes: But to instead deepening relationships through improved relevance with the right clients.
Robert C. Holmes: To achieve this we have taken steps to better align the mortgage finance products and support teams throughout the firm to serve the holistic me to these clients with a broad suite of products and services custom designed to support them.
Robert C. Holmes: Our focus this year is on scaling our value-added businesses through increased client adoption, improved client journeys, and realized operational efficiency. Intentional decisions made with the support of analytical rigor to fortify the firm over the last several years have positioned us to deliver attractive through-cycle shareholder returns with both higher quality earnings and a lower cost of capital. Lastly, one of the first two calls I made when I agreed to join Texas Capital was to my longtime partner and good friend, Tim Storms.
Robert C. Holmes: While the rate environment continues to disproportionately impact with clients that our commitment to effectively serving these clients will over time deliver risk adjusted returns consistent with firm wide objectives. The firm remains fully committed to improving financial performance and believes that our position of unprecedented.
Robert C. Holmes: <unk> is enabling us to serve the best clients in our markets are.
Robert C. Holmes: Our focus this year is on scaling our value accretive businesses through increased client adoption improved client journeys and realized operational efficiencies and.
Robert C. Holmes: We needed his talent, expertise, experience, and character if we were going to endeavor to create a premier financial institution out of a bank which desperately needed to address many facets after a very proud founding. His many contributions and dedication to our firm these past three years greatly contributed to a new foundation and beginning at Texas Capital. I would like to congratulate him on his career and wish both him and his family a great run in his retirement, something he has now failed at three times. Here is to staying retired, Tim. Thank you. Now I'll turn it over to Matt to discuss the financial aspects.
Robert C. Holmes: Intentional decisions made with the support of analytical rigor to fortify the firm over the last several years have positioned us to deliver attractive through cycle shareholder returns with both higher quality earnings and a lower cost of capital.
Speaker Change: Lastly, one of the two first calls I made when I agreed to join Texas capital was to my long time partner and good friend Tim storms we.
Speaker Change: We needed as talent expertise experience and character, if we're going to endeavor to create a premier financial institution out of the bank, which desperately needed to address many facets after a very proud founding.
Matthew Covington Olney: Thanks, Rob. Good morning.
Speaker Change: His many contributions and dedication to our firm. These past three years greatly contributed to a new foundation and beginning at Texas capital.
Matthew Covington Olney: Starting on slide five, total adjusted revenue increased $10 million, or 4% for the quarter to $256 million. As net interest income was flat, and non-interest revenue resumed quarterly growth off a low experienced in the fourth quarter of last year. Quarterly total adjusted non-interest expense increased 6% in the link quarter due to seasonality and first quarter payroll and compensation expenses, and it's down 1% relative to adjusted first quarter results last year. Taken together, link quarter adjusted PPNR remained relatively flat at $64 million, which should represent the low point of the year.
Speaker Change: I would like to congratulate him on his career and wish both him and his family a great run in his retirement.
Speaker Change: He has now failed at three times here.
Speaker Change: Here's a staying retired Tim. Thank you now I'll turn it over to Matt to discuss the financial results.
Matthew Covington Olney: Thanks, Rob Good morning, starting on slide five total adjusted revenue increased $10 million or 4% for the quarter to $256 million as net interest income was flat and noninterest revenue resumed quarterly growth off a low experienced in the fourth quarter of last year.
Matthew Covington Olney: Quarterly total adjusted noninterest expense increased 6% linked quarter due to seasonality in first quarter payroll and compensation expenses and is down 1% relative to adjusted first quarter results last year.
Matthew Covington Olney: This quarter's provision expense of $19 million resulted primarily from an expected increase in criticized loans driven by identified and well-communicated portions of the portfolio, most impacted by the pace and magnitude of interest rate increases, as well as partial charge-offs on identified problem credit. The net income to common was $21.8 million, an increase of 38% late quarter, while adjusted net income to common was $29.6 million, a decline of 5% late Our balance sheet metrics continue to be exceptionally strong, with ending period cash balances of 11% of total assets and cash insecurities of 26%.
Matthew Covington Olney: Taken together linked quarter adjusted P. PNR remained relatively flat at $64 million, which should represent the low point of the year.
Matthew Covington Olney: This quarter's provision expense of $19 million resulted primarily from an expected increase in criticized loans driven by identified and well communicated portions of the portfolio most impacted by the pace and magnitude of interest rate increases.
Matthew Covington Olney: As well as partial charge offs on identified problem credits.
Matthew Covington Olney: Net income to common was $21 8 million, an increase of 38% linked quarter, while adjusted net income to common was $29 6 million a decline of 5% linked quarter.
Matthew Covington Olney: Our balance sheet metrics continue to be exceptionally strong with ending period cash balances of 11% of total assets in cash and securities of 26%.
Matthew Covington Olney: Total deposits grew 7% during the quarter, with predictable growth in mortgage finance deposits off seasonal lows, as well as continued success adding and expanding client-deposit relationships contributing to the nearly $1.6 billion in income. Ending period LHI balances increased by approximately $488 million, or 2% linked quarter, driven predominantly by growth in mortgage finance business off a seasonal trough and increases in commercial real estate loans as payoff rates remain suppressed. Total gross LHI excluding mortgage finance increased $313 million during the quarter, or nearly 2%.
Matthew Covington Olney: Total deposits grew 7% during the quarter with predictable growth in mortgage finance deposits off seasonal lows as well as continued success, adding and expanding client deposit relationships contributing to the nearly $1 $6 billion increase.
Matthew Covington Olney: Any period NHI balances increased by approximately $488 million or 2% linked quarter driven predominantly by growth in mortgage finance business off the seasonal trough and increases in commercial real estate loans as payoff rates remained suppressed.
Matthew Covington Olney: Total gross <unk>, excluding mortgage finance increased $313 million during the quarter or nearly 2%.
Matthew Covington Olney: We continue to see strong underlying momentum in the commercial business. Commercial loan balances increased $225 million, while end-of-period balances were relatively flat. New relationships onboarded in the first quarter exceeded expectations, equaling nearly 40% of total new relationships added during the entirety of last year, with the portion of new activity that includes deposit or treasury products turning sustainably over 90%.
Matthew Covington Olney: We continue to see strong underlying momentum in the commercial business.
Matthew Covington Olney: Commercial loan balances on average increased $225 million, while end of period balances were relatively flat.
Matthew Covington Olney: New relationships onboard in the first quarter exceeded expectations equally nearly 40% of total new relationships added during the entirety of last year.
Matthew Covington Olney: With a portion of new activity that includes deposit or treasury products training sustainably over 90%.
Matthew Covington Olney: After repositioning approximately $1 billion of funded credit over the last five quarters, our multi-year process of recycling capital into a client base that benefits from our broadening platform of available product solutions has slowed significantly. We continue to expect the sustained pace of new client acquisition to result in modest balance sheet and loan growth this year. Commercial real estate period imbalances increased $322 million, or 6% in the quarter, as payoff rates continue trending near observed lows.
Matthew Covington Olney: After repositioning approximately 1 billion of funded credit over the last five quarters, our multiyear process of recycling capital into a client base that benefits from our broadening platform of available product solutions has slowed significantly.
Matthew Covington Olney: We continue to expect the sustained pace of new client acquisition to result in modest balance sheet and loan growth this year.
Matthew Covington Olney: Commercial real estate period end balances increased $322 million or 6% in the quarter as payoff rates continue trending near observed lows as discussed last quarter, given sustained low industry volumes payoff rates will be the primary driver of near term balance fluctuations in the category.
Matthew Covington Olney: As discussed last quarter, given sustained low industry volumes, payoff rates will be the primary driver of near-term balance fluctuations in the category. The portfolio remains weighted to multi-families, which comprise $2.4 billion or 41% of outstanding balances, reflecting both our deep experience in the space and observed performance through credit and interest rate cycles. Average mortgage financials declined $429 million, or 11% in the quarter, to $3.5 billion as the seasonality associated with home buying hit its annual low in Q1 and rising rates dampened earlier industry optimism for improved volume.
Matthew Covington Olney: The portfolio remains weighted to multifamily.
Matthew Covington Olney: Which comprises $2 4 billion or 41% of outstanding balances, reflecting both our deep experience in the space and observed performance due credit and interest rate cycles.
Matthew Covington Olney: Average mortgage finance loans declined $429 million or 11% in the quarter to $3 5 billion and the seasonality associated with home buying his annual low in Q1, and rising rates dampened earlier industry optimism for improved volumes.
Matthew Covington Olney: After a difficult fourth and first quarter for the mortgage space, where seasonal weakness was exacerbated by persistent rate pressure, our expectation remains that the industry will be historically challenged in the near term. Ambiguity on the forward rate outlook is causing a dispersion in origination volume estimates from professional forecasters, with some reputable sources still calling for a 15 to 20% increase in annual origination volume.
Matthew Covington Olney: After a difficult fourth and first quarter for the mortgage space, where seasonal weakness was exacerbated by persistent rate pressure our expectation remains that the industry will be historically challenged in the near term MP.
Ambiguity on the forward rate outlook is causing a dispersion in origination volume estimates from professional forecasters with some reputable sources still calling for 15% to 20% increase in annual origination volume.
Matthew Covington Olney: Given ongoing rate volatility, we remain more cautious and are reducing our expectation for full year increases in average warehouse volumes from 15 to 10%. Ending period deposit balance has increased 7% quarter over quarter. A sustained focus on leveraging our cash management platform into deeper client relationships continues to drive out performance relative to the industry.
Matthew Covington Olney: Given ongoing rate volatility, we remain more cautious and are reducing our expectation for full year increases in average warehouse volumes from 15% to 10% ending period deposit balances increased 7% quarter over quarter, a sustained focus on leveraging our cash management platform into deeper client relationships continues to drive outperformance relative to the industry when.
Matthew Covington Olney: When excluding predictable fluctuations in mortgage finance deposits and a now 10-plus year low in broker-deposit balances, quarterly-over-quarter growth of 4% reemphasizes our success in attracting quality funding associated with core offerings in a challenging environment. As expected, period-end mortgage finance and non-interest-bearing deposit balances increased $1.1 billion quarter over quarter, as volumes began to predictably rebuild over the course of the year off Average mortgage finance deposits were 148% of average mortgage finance loans, higher than our previous guidance as the mortgage expected rate outlook did not materialize, and the system-wide contraction and mortgage origination volume continues to weigh on clients' short-term credit needs.
Matthew Covington Olney: When excluding predictable fluctuations in mortgage finance deposits and they now 10, plus year low in broker deposit balances quarter over quarter growth of 4% reemphasize is our success in attracting quality funding associated with core offerings in a challenging environment.
Matthew Covington Olney: As expected period end mortgage finance noninterest bearing deposit balances increased to $1 1 billion quarter over quarter as volumes begin to predictably rebuild over the course of the year off seasonal lows in December and January.
Matthew Covington Olney: Average mortgage finance deposits were 148% of average mortgage finance loans.
Matthew Covington Olney: Higher than our previous guidance as the mortgage expected rate outlook did not materialize.
Matthew Covington Olney: And our system wide contraction in mortgage origination volume continues to weigh on clients' short term credit needs.
Matthew Covington Olney: We expect the ratio of average mortgage finance deposits to average mortgage finance loans to drift lower in the second quarter to approximately 130 percent. Driven both by seasonal improvements in warehouse volumes and select reductions in our highest cost deposit relationships, we are unable to earn additional business necessary to generate an appropriate return on capital.
Matthew Covington Olney: We expect the ratio of average mortgage finance deposits to average mortgage finance loans to drift lower in the second quarter to approximately 130%.
Matthew Covington Olney: Driven both by seasonal improvements in warehouse volumes and select reductions in our highest cost deposit relationships, where we are unable to earn additional business necessary to generate an appropriate return on capital.
Matthew Covington Olney: In the first quarter of 2024, enhancements were made to our methodology for applying relationship pricing credits for our mortgage clients to both their mortgage finance and commercial loans, based on each loan type's contribution to interest income. To conform to the current period presentation, certain prior period interest income amounts have been reclassified, and related yields have been adjusted. Attribution of interest credits should follow a similar distribution over the remainder of the year, with approximately 60 percent associated with mortgage finance and 40 percent aligned to commercial loans to mortgage finance clients.
Matthew Covington Olney: In the first quarter of 2024 enhancements were made to our methodology for applying relationship pricing credits for our mortgage clients to both their mortgage finance and commercial loans based on each loan types contribution to interest income.
Matthew Covington Olney: To conform to the current period presentation certain prior period interest income amounts have been reclassified and related yields had been adjusted attribution of interest credits should follow a similar distribution over the remainder of the year with approximately 60% associated with mortgage finance and 40% aligned to commercial loans to mortgage finance clients any period noninterest.
Matthew Covington Olney: Any period non-interest-bearing deposits excluding mortgage finance grew slightly to $3.3 billion in the quarter, marking the first time in six quarters that select clients shifting excess balances to interest-bearing deposits or to other cash management options on our platform did not result in a quarterly reduction. Ending period non-interest bearing deposits, excluding mortgage finance, are 14% of total deposits, and our expectation is that this percentage remains relatively stable in the near term. Broker deposits declined $315 million during the quarter, as growth and client-focused deposits consistent with our long-term strategy remain sufficient to satisfy desired near-term balance sheet demand.
Matthew Covington Olney: Deposits, excluding mortgage finance grew slightly to $3 3 billion in the quarter, marking the first time in six quarters that select clients shifting excess balances to interest bearing deposits will do other cash management options on a platform did not result in a quarterly reduction ending period noninterest bearing deposits, excluding mortgage finance are 14% of total deposit.
Matthew Covington Olney: And our expectation is that this percentage remains relatively stable in the near term.
Matthew Covington Olney: Broker deposits declined $315 million during the quarter as growth in client focused deposits consistent with our long term strategy remains sufficient to satisfy desired near term balance sheet demands.
Matthew Covington Olney: Over the second quarter, $329 million will mature with an average rate of 5.3%, and we do anticipate replacing a portion of these deposits. As expected, our modeled earning at risk was consistently positive as proactive measures taken over the last 18 months to achieve a more neutral position at this stage of the rate cycle have produced the intended outcome. It is important to note these are measures of net interest income sensitivity and do not include inevitable rate-driven changes in loan volumes or fee-based income.
Matthew Covington Olney: Over the second quarter $329 million in mature with an average rate of five 3% and we do anticipate replacing a portion of these deposits.
Matthew Covington Olney: As expected our model, earning at risk was consistently quarter as proactive measures taken over the last 18 months to achieve a more neutral position at this stage of the rate cycle have produced the intended outcome.
Matthew Covington Olney: It is important to note. These are measures of net interest income sensitivity and do not include inevitable rate driven changes in loan volumes or fee based income.
Matthew Covington Olney: Consistent with previously communicated intent to resume cash flow investments during 2024, we purchased nearly $600 million in agency-backed securities during the quarter with an average coupon of 6%. We do anticipate reinvesting $60 to $80 million of quarterly cash flows over the duration of the year, which will improve security yields while maintaining target rate positioning. The net interest margin increased by 10 basis points this quarter, and net interest income increased modestly to $215 million.
Matthew Covington Olney: Consistent with previously communicated an intent to resume cash flow investments. During 2024, we purchased nearly $600 million in agency backed securities during the quarter with an average coupon of 6% we.
Matthew Covington Olney: We do anticipate reinvesting $60 million to $80 million of quarterly cash flows over the duration of the year, which will improve securities yield while maintaining target rate positioning.
Matthew Covington Olney: Net interest margin increased by 10 basis points this quarter and net interest income increased modestly to $215 million the.
Matthew Covington Olney: The impact of balance sheet repositioning into higher earning assets associated with our long-term strategy, coupled with continued momentum Rob described in our fee-generating businesses, should continue over the next few quarters as we look to resume year over year quarterly PPNR growth in the second half of the year. Year-over-year quarterly adjusted non-interest expense declined $1.6 million, a direct result of the systematic realignment of our expense base with strategic priorities, which is delivering efficiencies associated with a more scalable operating model. Total adjusted non-interest expenses increased 6% in the quarter, as Q1 salaries and benefits expense reflected increases of approximately $10.7 million in seasonal payroll and compensation-related expenses that peak in the quarter.
Matthew Covington Olney: The impacts of balance sheet repositioning into higher any assets associated with our long term strategy coupled with continued momentum Rob described in our fee generating businesses should continue over the next few quarters as we look to resume year over year quarterly P. PNR growth in the second half of the year.
Matthew Covington Olney: Year over year quarterly adjusted noninterest expense declined $1 6 million a direct result of the systematic realignment of our expense base with strategic priorities, which is delivering efficiencies associated with a more scalable operating model.
Matthew Covington Olney: Total adjusted noninterest expenses increased 6% linked quarter as Q1 salaries and benefits expense reflected increases of approximately $10 7 million and seasonal payroll and compensation related expenses that peak in the quarter.
Matthew Covington Olney: The realization of structural efficiencies associated with our go forward operating model is improving near-term financial performance, while also enabling continued specific investments to drive long-term capabilities. As industry-wide asset quality normalization continues, we continue our now multi-year posture of prudently building the reserve to both address known legacy concerns and in anticipation of the inevitable credit impact of the elevated rate environment. The total allowance for credit loss, including off-balance sheet reserves, increased $8 million on a linked quarter basis to $305 million, up $21 million year-over-year.
Matthew Covington Olney: The realization of structural efficiencies associated with our go forward operating model are improving near term financial performance. While also enabling continued specific investments to drive long term capabilities as industry wide asset quality normalization continues we continue our now multiyear posture of prudently building the reserve to both address known legacy concerns.
Matthew Covington Olney: And in anticipation of inevitable credit impact of the elevated rate environment.
Matthew Covington Olney: Total allowance for credit loss, including off balance sheet reserves increased $8 million on a linked quarter basis to $305 million up $21 million year over year.
Matthew Covington Olney: The total allowance for credit loss to total LHI remained at 1.46% quarter over quarter. Criticized loans increased $121 million, or 16% in the quarter, to $860 million, 4.1% of total LHI, as increases in both special mention and substandard of predominantly commercial real estate loans were only partially offset by payoffs and upgrades. The composition of criticized loans is weighted towards well-structured commercial real estate loans supported by strong sponsors, plus commercial clients with dependencies on consumer discretionary income.
Matthew Covington Olney: The total allowance for credit losses remained at 146% quarter over quarter.
Matthew Covington Olney: Criticized loans increased to $121 million or 16% in the quarter to 860 million four 1% of total HIV as increases in both special mention and substandard are predominantly commercial real estate loans were only partially offset by payoffs and upgrades the.
Matthew Covington Olney: The composition of criticized loans is weighted towards well structured commercial real estate loans supported by strong sponsors.
Matthew Covington Olney: Commercial clients with dependencies on consumer discretionary income is.
Matthew Covington Olney: As consistently noted on prior calls, commercial real estate credit migration is something we both expect and are prepared for through strict adherence to disciplined client selection and concentration management. During the quarter, we recognized net charge-offs of $10.8 million, or 22% of average LHI, predominantly related to partial charge-offs on three relationships, two of which were originated prior to 2018. The charge-offs are comprised of two commercial credits dependent on consumer discretionary income and a previously charged-down hospitality loan, which was unable to fully recover post-pandemic.
Matthew Covington Olney: As consistently noted on prior calls commercial real estate credit migration is something we both expect and are prepared for.
Matthew Covington Olney: Through strict adherence to disciplined client selection and concentration management.
Matthew Covington Olney: During the quarter, we recognized net charge offs of $10 8 million or 22% of average IHI predominantly related to partial charge offs on three relationships two of which were originated prior to 2018.
Matthew Covington Olney: The charge offs are comprised of two commercial credits dependent on consumer discretionary income and a previously charged down hospitality loan, which was unable to fully recover post the pandemic.
Matthew Covington Olney: Consistent with prior quarters, capital levels remain at or near the top of the industry and continue to be near all-time highs for Texas capital. Total regulatory capital remains exceptionally strong relative to the peer group and our internally assessed risk profile.
Matthew Covington Olney: Consistent with prior quarters capital levels remain at or near the top of the industry and continue to be near all time highs for Texas capital.
Matthew Covington Olney: Total regulatory capital remains exceptionally strong relative to the peer group and our internally assess risk profile <unk>.
Matthew Covington Olney: CET1 finished the quarter at 12.38%, a 27 basis point decrease from the prior quarter, and Tangible Common Equity to Tangible Assets finished at 9.83%. As we enter the second quarter, the outstanding debt associated with the 2021 credit link note related to the mortgage warehouse loan portfolio is expected to be fully repaid in June. The current quarter CET1 pro forma impact for this repayment is an approximate 40 basis point decline.
Matthew Covington Olney: <unk> finished the quarter at 12, 38%, a 27 basis point decrease from prior quarter.
Matthew Covington Olney: Tangible common equity to tangible assets finished at $9 eight 3%.
Matthew Covington Olney: As we enter the second quarter the outstanding debt associated with the 2021 credit linked note related to the mortgage warehouse loan portfolio is expected to be fully repaid in June.
Matthew Covington Olney: Current quarter CET, one pro forma impact for this repayment as an approximate 40 basis point decline.
Matthew Covington Olney: With the seasonal increase in mortgage finance balances in the second and third quarters, we expect ending period ratios to move closer toward our published 2024 CET1 floor of 11%. We continue to deploy the capital base in a disciplined and analytically rigorous manner focused on driving long-term shareholder value. During the first quarter, we purchased approximately 529,000 shares, or 1.1% of shares outstanding at year-end 2023, for a total of $32 million at a weighted average price below tangible book value per share. Subsequently, in April, we purchased an additional 341,000 shares for a total of $20 million at a weighted average price of approximately 96 percent of prior month tangible book value per share.
Matthew Covington Olney: With the seasonal increase in mortgage finance balances in the second and third quarter, we expect any period ratios to move closer toward our published 2020 for CET one floor of 11%.
Matthew Covington Olney: We continue to deploy the capital base, and a disciplined and analytically rigorous manner focused on driving long term shareholder value.
Matthew Covington Olney: During the first quarter, we repurchased approximately 529000 shares or one 1% of shares outstanding at year end 2023.
Matthew Covington Olney: For a total of $32 million at a weighted average price below tangible book value per share.
Matthew Covington Olney: Subsequently in April we repurchased an additional 341000 shares for a total of $20 million and a weighted average price of approximately 96% of prior month tangible book value per share.
Matthew Covington Olney: Our guidance accounts for the market-based forward rate curve, which now assumes Fed funds of 5% exiting the year. Despite the material change in Raid Outlook, our guidance remains unchanged from our last earnings call in January. For the full year, we anticipate mid-single-digit growth in revenue supported by continued execution across fee-income areas of focus and the tapering of capital recycling efforts, which should translate sustained momentum in new client acquisition into modest risk-appropriate loan growth.
Matthew Covington Olney: Our guidance accounts for the market base forward rate curve.
Matthew Covington Olney: Which now assumes fed funds of 5% exiting the year.
Matthew Covington Olney: Despite the material change in rate outlook, our guidance remains unchanged from our last earnings call in January.
Matthew Covington Olney: For the full year, we anticipate mid single digit growth in revenue supported by continued execution across fee income areas of focus and the tapering of capital recycling efforts, which should translate sustained momentum in new client acquisition to modest risk appropriate loan growth.
Matthew Covington Olney: This is in part supported by a well signaled an intent to move towards 11% CET, one ratio, which given our risk weighted asset heavy commercial orientation should still result in sector, leading tangible common equity levels. We.
Matthew Covington Olney: This is in part supported by a well-signaled intent to move towards a 11% C21 ratio, which given our risk-weighted asset heavy commercial orientation should still result in a sector-leading tangible common equity level. We expect multi-year investments in infrastructure, data, and process improvements to continue yielding expected operating and financial efficiencies, which should enable targeted additional investment in talent and capabilities while limiting full-year non-interest expense growth to low single We expect resumption of quarterly increases in year-over-year PNR growth to begin in the second half of the year, accelerating as we enter 2025. Finally, we maintain our conservative outlook and reiterate our annual provision expense guidance as 50 basis points of LHI excluding mortgage finance. Operator, we'd now like to open the call up for questions. Thank you.
Matthew Covington Olney: We expect multiyear investments in infrastructure data and process improvements to continue yielding expected operating and financial efficiencies, which should enable targeted additional investment in talent and capabilities, while limiting full year noninterest expense growth to low single digits, we expect resumption.
Matthew Covington Olney: Resumption of quarterly increases in year over year PPR growth to begin in the second half of the year accelerating as we enter 2025.
Matthew Covington Olney: Finally, we maintain a conservative outlook and reiterate our annual provision expense guidance is 50 basis points of <unk>, excluding mortgage finance.
Speaker Change: Operator, we'd now like to open the call up for questions. Thank you.
Speaker Change: Thank you, Matt if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
Speaker Change: You change your mind, Please press star followed by Q3.
Speaker Change: Your question. Please ensure your line is on mute locally.
Speaker Change: Our first question comes from Brett Robert Robert Chime from Hovde Group.
Operator: Thank you, Matt. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Brett Rabatin from Hoft Group.
Brett D. Rabatin: Hey, good morning, guys wanted to start with asset quality and Matt you noted the anticipated increase in criticized assets given interest rates and other topics can you maybe talk about the lumpiness of that 120 $21 million incur.
Brett D. Rabatin: Hey, good morning guys. Matt, you noted the anticipated increase in criticized assets given interest rates and other topics. Can you maybe talk about the lumpiness of that $121 million increase? And then does the recent term structure change with the higher end being higher? Does that impact how you think about future criticized assets?
Brett D. Rabatin: And then does the recent term structure change, but the higher end being higher does that impact how you think about future criticized levels. Thanks.
Matthew Covington Olney: Yeah, Thanks, Brett Robinson for the question.
Matthew Covington Olney: The risk I look for us on credit Hasnt changed at all so portfolio migration was up a bit in the sub standard this quarter, but it's entirely consistent with the expectations that we began communicating.
Matthew Covington Olney: Yeah, thanks, Brett Rabatin, for the question. So simply, the risk outlook for us on credit hasn't changed at all. So portfolio migration was up a bit into substandard this quarter, but it's entirely consistent with the expectations that we began communicating, really, in the middle of 2022, when the Fed began to tighten in earnest. That's in part why we had a provision guide last year, 45 basis points of loans excluding mortgage finance, and why we pushed it up to 50 basis points for this year.
Matthew Covington Olney: In the middle of 2022, when the fed begin to tighten in earnest.
Matthew Covington Olney: The part where we had a provision.
Matthew Covington Olney: Provision guide last year of 45 basis points of loans, excluding mortgage finance and why we pushed it up to 50 basis points for this year.
Matthew Covington Olney: Two thirds of that increase in criticized us in the real estate special mentioned category, which was driven by a few multifamily loans and then one office.
Matthew Covington Olney: Our view is the breadth of it.
Matthew Covington Olney: Downgrades have and will likely continue to be driven by impact of higher rates on valuations. Some increased expenses associated with labor and insurance and then some training lower rental rates. So over time do you expect that the quality of the sponsors projects and then what is ample of cash equity in these transactions, we will limit any realize.
Matthew Covington Olney: Two-thirds of that increased and criticized is in the real estate special mention category, which was driven by a few multifamily loans and then one office. Our view would be, Brad, that the downgrades have and will likely continue to be driven by the impact of higher rates on valuations, some increased expenses associated with labor and insurance, and then some trending lower rental rates. So we, over time, do expect that the quality of the sponsors' projects and then what is ample cash equity in these transactions will limit any realized loss given default, but we would in no way be surprised by continued migration.
Matthew Covington Olney: Is the loss given default.
Speaker Change: No I'd be surprised by continued migration.
Speaker Change: Okay. That's helpful. And then just thinking about the funding cost from here.
Speaker Change: It would seem like you've kind of topped out here depending on the.
Speaker Change: Core funding mix.
Speaker Change: Mortgage banking or the mortgage warehouse deposit balances can you guys talk about when you talked about some of the repricing that you have would it be fair to assume that the cost of interest bearing funds is as topped out here and you guys see levers absent rates to maybe improve the cost structure of deposits.
Brett D. Rabatin: Okay, that's helpful. And then just thinking about the funding costs from here, it would seem like you've kind of topped out here, depending on the core funding mix and the Mortgage Banking or the Mortgage Warehouse Deposit Balances. Can you guys maybe talk about, and you talked about some of the repricing that you have. Would it be fair to assume that the cost of interest-bearing funds is topped out here, and you guys see levers absent rates to maybe improve the cost structure of deposits? Yeah, so on interest bearing, we noted on the last call that
Speaker Change: Yeah. So on interest today, and we noted on the last call that September cost of interest bearing was $4 55 in that December cost went to $4 62, and that we thought cost would generally drift higher at a similar rate.
Speaker Change: Until the fed ultimately acted on any sort of.
Reduction in interest rates.
Speaker Change: Q1 behaved exactly as anticipated so the margin just bearing deposit costs were $4 69 up seven basis points from December to March.
Matthew Covington Olney: Yeah, so on interest bearing deposits, we noted on the last call that September's cost of interest bearing deposits was $4.55, and that December's cost went to $4.62. And that we thought costs would generally drift higher at a similar rate, up till the Fed ultimately acted on any sort of reduction in interest rates and Q1 behaved exactly as anticipated. So the March interest-bearing deposit costs were $4.69.
Speaker Change: So we would expect a similar move in Q2 absent any changes in the rate outlook.
Speaker Change: Nothing that suggest us that clients are less interested in earning an appropriate rate on their deposits than they were 90 days ago.
Speaker Change: I would also just call out for the first time.
Speaker Change: Quite some time.
Speaker Change: It seems stabilization in commercial noninterest bearing we actually had $1 million of growth $3 4 million average balances relative to ending of $3 34, which suggests that balances are really stable throughout the quarter daily fluctuations were largely just a result of clients transacting again, so not ready to call a turning point on that.
Matthew Covington Olney: So up seven basis points from December to March. To be honest with you, we would expect a similar move in Q2, due to the absentee changes in the rate outlook. There's nothing that suggests to us that clients are less interested in earning an appropriate rate on their deposits than they were 90 days ago. I would also just call out that, for the first time in quite some time, we did see stabilization in commercial non-interest-bearing deposits.
Speaker Change: But the guidance does account for all of this new Treasury business that we've won over the last few years is beginning to gradually push noninterest bearing deposits higher than move into the back end of 'twenty four.
Matthew Covington Olney: We actually had a million dollars of growth, 3.4 million average balances relative to the ending of 3.34, which suggests that balances were really stable throughout the quarter, and daily fluctuations were largely just a result of clients transacting again. So not ready to call a turning point on that, but the guidance does account for all of this new treasury business that we've won over the last few years beginning to gradually push non-interest bearing deposit tires and move into the back end of 24.
Speaker Change: Okay, Yeah, that's fair to see a stabilization thanks guys.
Speaker Change: Got it.
Speaker Change: Our next question comes from Ben <unk> from Citi.
Ben: Hi, good morning.
Ben: Hey, Ben.
Ben: Just kind of curious.
Ben: Strips.
Ben: Got it a little bit I guess up mortgages.
Ben: It's called a wild card or a question Mark at this point, let's say where it doesn't.
Ben: Better than kind of where we're at right now there is kind of a no cut scenario mortgage rates are still 7%.
unknown: Okay, yeah, that's great to see the stabilization. Thanks, guys. You got it.
Ben: Yes.
Ben: Operational and you would think people would be more apt to move just because they're not going to get a better rate, but if mortgage kind of stays where we currently are.
Benjamin Tyson Gerlinger: Our next question comes from Ben Gurligan from Connecticut.
Benjamin Tyson Gerlinger: Hi, good morning. Hey, Ben. I was kind of curious if you could kind of stress test the guys a little bit. I understand that mortgages are called a wild card or a question mark at this point. Let's say Morgan doesn't get any, https://www.texas.gov.au. Given that it's a bigger component of your overall balance sheet relative to peers, but would the total revenue still be in that mid-single digit if the mortgage... Loan balances don't really surge up here in the seasonality change.
Ben: Given that it is a bigger component of your overall balance sheet relative to peers, but like what the total revenue still be in that mid single digit.
Ben: Mortgage loan balances don't really inflect up here the seasonality change.
Ben: So the mortgage balances will inflect up for seasonality, but we're not counting on a.
Ben: A reduction in the 10 year driving volumes associated with warehouse.
Ben: Our guidance unchanged with now two rate cuts essentially one and a half today relative to the five almost seven rate cuts that were contemplated in the original guidance.
Matthew Covington Olney: So the mortgage balances will inflect up for seasonality, but we're not counting on a reduction in the 10-year driving volumes associated with warehouse. So the guidance is unchanged with now two rate cuts, essentially one and a half today, relative to the five, almost seven rate cuts that were contemplated in the original guidance.
Ben: Suggests we can generate returns that are probably pretty resilient in a wide range of rate environments. So if you have rates stay higher were essentially neutral.
Ben: On an NII up 100 down 100, and then have ample capital and liquidity to support continued use of our balance sheet and driving new client acquisition. So one of the things that we noted in the commentary that.
Matthew Covington Olney: We suggest we can generate returns that are pretty resilient in a wide range of rate environments. So if rates stay higher, we're essentially neutral on an NII up 100, down 100 and then have ample capital and liquidity to support. In the first quarter, we added 40% of total relationships out over the last year. So we're onboarding an enormous amount of new commercial clients.
Ben: In the first quarter, we added 40% of total relationships out over the last year. So we're onboarding a enormous amount of new commercial clients and balance sheet Committee Notching 20 volumes up 26% year over year and 46% linked quarter. So if those trends continue we will be able to appropriately in the term, we used last quarter and re leverage the balance sheet and.
Matthew Covington Olney: And balance sheet committee balance sheet committee volumes were up 26% year over year and 46% in the lean quarter. So if those trends continue, we'll be able to appropriately, the term we used last quarter, re-leverage the balance sheet in support of clients consistent with our strategy, which enables you to drive pretty material NII improvement agnostic to rate. If you do see rates come down, which we comment on a bit in mortgage finance, the reliability or lack thereof of professional forecasters, who are still calling for up to 20% increase in one to four family origination volume.
Ben: To support our clients consistent with our strategy, which enables you to drive pretty materially and I am permit agnostic to rates.
Ben: New rates come down, which we comment a bit on the mortgage finance that the reliability or lack thereof of professional forecasters, which are still calling for up to 20% increase in one to four family origination volume.
Ben: They're about 70 basis points of light in our view on actual 10 year and mortgage rates, which is why we're really only looking at about a 10% full year average increase in warehouse for the year. So much less of a driver of earnings performance in this rate environment than it was expected.
Matthew Covington Olney: They're about 70 basis points light, in our view, on actual 10-year and or mortgage rates, which is why we're really only looking at about a 10% full-year average increase in warehouse for the year, so much less of a driver of earnings performance in this rate environment than it was expected, you know, 90 days ago. I just made the last thing I'd mention on that, like, that that's clearly the result of a very deliberate strategy, balance sheet repositioning, and business model build over the last three years. The bank had 50% of total assets sitting in a mortgage warehouse when Rob
Ben: 90 days ago.
Ben: Just maybe the last thing I had mentioned on that.
Ben: Clearly the.
Ben: As a result of very deliberate strategy.
Ben: Alex sheet repositioning and business model built over the last three years, the bank had 50% of total assets sitting in mortgage warehouse when Rob got here. So to now put that we have have sitting in C&I and then the appropriate concentration levels around mortgage just gives us confidence to deliver those returns.
Benjamin Tyson Gerlinger: Yeah, no, that's a great color. I appreciate it. And then coming up on Brett's question about credit, and then you guys talk through this credit migration is what you guys were previously expecting and guiding towards. If it really is following that path, where do you think it will go? Based on what you guys were previously expecting, we would see special mention go like, where would it kind of top out at in terms of a credit trend? Because it seems like it's following your plan. Where does your plan or guidance really anticipate those marks going? Yeah, I think I think it's difficult to call out a peak in
Speaker Change: Yes, no that's great color I appreciate it.
Speaker Change: Following up on Bretts question.
Speaker Change: Credit.
Speaker Change: You guys talked through.
Speaker Change: This credit migration and what you guys were previously expecting in guidance towards.
Speaker Change: Is it really just following that path, where do you think based on what you guys were previously expecting we would see special mentioned go like where would a kind of top out at in terms of our credit track because it seems like it's following you guys a plan where does your plan or guidance really anticipated those mark go ahead.
Speaker Change: Yes.
Speaker Change: Yes, I think it's difficult to call out a peak in special mention.
Matthew Covington Olney: Yeah, I think I think it's difficult to call out a peak and make special mention. I think that the macro backdrop, particularly around rates, I don't really see any indication that you would see it slowing down. I mean, it was a bit faster this quarter, 16% relative to 10%, which has been our average over the last four or five, but that was largely driven by just a smaller number of credits moving back to watch, not as much by an increase in credits moving from watch to special mention.
Speaker Change: I think that the.
Speaker Change: The macro backdrop, particularly around rates I don't really see any indication that you would see it slowing down I mean, it was a bit faster this quarter, 16% relative to 10% than our average over the last four or five.
Speaker Change: But that was largely driven by just a smaller number of credits moving back to watch not as much by our increase in credits moving from watch to special mention.
Speaker Change: We would expect continued move up which is why we have the 50 basis points provision guide for the year.
Matthew Covington Olney: We'd expect a continued move up, which is why we have the 50 basis points provision guide for the year. And to be candid, it's also why we managed to achieve pretty specific concentration levels on commercial real estate. So we've got 30% of our total loan portfolio that resides in commercial real estate. I think that's probably peer-leading, depending on the group that you look at, and why we carry around a bunch of capital and liquidity. So we're as prepared as we possibly could be for the uncertain credit environment.
Speaker Change: In Canada. It is also why we managed it pretty specific concentration levels on commercial real estate. So we've got 30% of our total loan portfolio.
Speaker Change: At different times of the personal real estate, we think that's probably peer leading depending on the group that you look at and why we carry around a bunch of capital and liquidity. So we are as prepared as we possibly could be for the uncertain credit environment.
Speaker Change: Yeah. That's helpful. Thank you.
Speaker Change: Our next question comes from Matt Olney.
Matthew Covington Olney: <unk> from Stifel.
Matthew Covington Olney: Hey, Thanks, Good morning wanted to ask about loan yields ex mortgage finance I think they increased about 12 bps during the quarter little surprised that we saw that given the changes so far during the quarter any any color on that change sequential.
unknown: Be careful. Thank you for that.
Matthew Covington Olney: Our next question comes from Matt Olney of Stephen.
Matthew Covington Olney: Hey, thanks. Good morning.
Matthew Covington Olney: I wanted to ask about loan yields, ex-mortgage finance. I think they increased about 12 BIPs during the quarter. I'm a little surprised that we saw that given the changes so far during the quarter. Any color on that change, Sequential? Thanks.
Matthew Covington Olney: Yes, Matt So we called out in the comments and I mentioned, a bit I think last quarter that over the last five quarters and recycled about $1 billion of capital into higher returning relationships and you continue to we continue to see pretty advantageous spreads over.
Matthew Covington Olney: Yeah, Matt. So we called out in the comments, and they mentioned a bit, I think, last quarter that over the last five quarters, we've cycled about a billion dollars of capital into higher-returning relationships. And we continue to see pretty advantageous spreads over the index on newly originated credit. Over the last five quarters, I think the headline balance sheet and headline loan growth numbers have been perhaps a bit misleading in terms of just all the new business that we've been adding. And those trends really continued in the first quarter, which was supportive of yield.
Matthew Covington Olney: The index on newly originated credit so.
Matthew Covington Olney: Over the last five quarters, I think the headline balance sheet and headline loan growth numbers have been perhaps a bit misleading in terms of just all the new business that we've been adding and those trends really continued in the first quarter, which was supported by the yield.
Okay I appreciate that and then.
Matthew Covington Olney: On the credit linked note that was mentioned in prepared remarks.
Matthew Covington Olney: Remind us of the savings on that and the timing of when we will see the savings.
Matthew Covington Olney: Okay, appreciate that. And then on the credit link note that was mentioned in prepared remarks, remind us of the savings on that and the timing of when we'll see the savings. Yeah, you'll
Matthew Covington Olney: Yes.
Speaker Change: See about $2 $5 million of quarterly saves that will show up beginning in the third and fourth quarter, that's already embedded in our outlook.
Matthew Covington Olney: Yeah, you'll see about two and a half million dollars of quarterly saves that will show up beginning in the third and fourth quarters that are already embedded in our outlook. So the reduction in CET1 will be at the end of the second period, and then you'll have the pickup in NII that begins in the third quarter.
Speaker Change: The reduction in CET, one wont be at the end of the second period, and then you'll have the pickup in NII that begins in the third quarter.
Speaker Change: Okay.
Speaker Change: Got it thanks for that and then on the securities repurchases during the quarter you mentioned, the 6% coupon any any color on.
Matthew Covington Olney: Got it. Thanks for that. And then on the security repurchases during the quarter, you mentioned the 6% coupon, any color on when those purchases were made, and then kind of what's the appetite for additional kind of consideration of a
Speaker Change: When those purchases were made and then kind of what's the appetite for.
Speaker Change: Additional kind of consideration of a higher security purchases.
unknown: Higher security purchases
Matthew Covington Olney: Yeah, so we had about $250 million mature at the end of January that had a coupon around 1%, which takes you back a bit as you think about how fast yields have moved higher. And then I'd say the average settlement date was kind of mid to late February. We definitely have an appetite to reinvest cash flows based on what we see elsewhere on the balance sheet, and we would expect new securities to come on at similar yields.
Speaker Change: Yes, so we had about $250 million mature at the end of January that had a coupon around 1%, which takes it back a bit as you think about how faster yields have moved higher.
Speaker Change: And then I'd say the average settlement date was kind of mid to late February.
Speaker Change: We definitely have appetite to reinvest cash flows based on what we see elsewhere on the balance sheet and we would expect new securities come on at similar yields.
Matthew Covington Olney: And just following up on that Matt, it sounds like the cash flows you expect for the remainder of the year, I think you mentioned 60 to $80 million per quarter. Is that the next few quarters, I would assume? Yeah, you got it, Matt. Okay, perfect. Thank you, guys.
Speaker Change: And just following up on there Matt it sounds like that the cash flows you expect for the remainder of the year I think you mentioned $60 million to $80 million per quarter or is that is that the next few quarters I would assume.
Speaker Change: Yes, you got it Matt.
Speaker Change: Okay perfect. Thank you guys.
Speaker Change: Our next question comes from Woody lay from K B W.
Woody Lay: Our next question comes from Woody Lay from KBW.
Woody Lay: Hey, good morning, guys.
Woody Lay: I wanted to start on the investment banking trading fees. You know, last year, we saw a pretty nice ramp up in the second and third quarter. Should we expect something similar in 2024? And can you just talk about how your pipelines are responding in the current macro environment?
Woody Lay: Okay.
Woody Lay: I wanted to.
Woody Lay: Dart on the investment banking trading fees.
Last year, we saw a pretty nice ramp up in the second and third quarter.
Woody Lay: Should we expect something similar in 2024 and can you just talk about how your pipelines are responding in the in the current macro environment.
Robert C. Holmes: Yeah, I'm just saying, Woody, that all five major components of the investment bank, as Matt said in his comments, revenue increased quarter over quarter. So syndications, capital markets, Capital Solutions, M&A, and sales and trading all delivered revenue growth.
Speaker Change: Yes, I would just say.
Speaker Change: What is that all five major components of the investment Bank I think Matt said this in his comments.
Speaker Change: Revenue increased quarter over quarter, so syndications capital markets.
Speaker Change: Little solutions, M&A and sales and trading all delivered revenue growth I would say going into the second quarter and today.
Robert C. Holmes: I would say going into the second quarter and today, the pipelines are much healthier, and what I mean by that is more granular across the entirety of the platform as you have more bankers, bringing out more product partners on a more regular basis, and client receptivity to the investment bank is proving to be very, very strong. So it's good to see the overall platform maturing, which is increasingly helping the health of the pipeline. So I feel good about it going into the second quarter. It's probably the healthiest pipeline we've had.
Speaker Change: Yeah.
Pipelines are much healthier and what I mean by that is.
Speaker Change: More granular across the entirety of the platform as you have more bankers.
Speaker Change: Bringing out more product partners on a more regular basis and the client receptivity to the investment bank proving to be very very strong so.
Speaker Change: It's good to see.
Speaker Change: Overall platform maturing.
Speaker Change: Is increasing.
Speaker Change: Uh huh.
Speaker Change: Helping the health of the pipeline so feel good about it going into the second quarter.
Speaker Change: It's probably the healthiest pipeline we've had.
Woody Lay: Good to hear. And then I wanted to shift over to multifamily real fast.
Speaker Change: That's good to hear.
Speaker Change: And then wanted to shift over to multifamily real fast.
Robert C. Holmes: I see that 55% of your portfolio is in Texas. Is that primarily in Dallas, or is it pretty broad-based among all of the Texas markets?
Speaker Change: I see that 55% of your portfolio is in Texas.
Speaker Change: Is that primarily in Dallas or is it pretty broad based among all of the Texas markets.
Robert C. Holmes: I would say it's broad-based and also note that the loan devalues in the mid-50s as well. So in the sponsors and clients selection or really great, so we feel really, really good about that. All right.
Speaker Change: I would say it's broad based.
Speaker Change: Also note that the loan to values mid fifties as well, so and the sponsors and client selection are.
Speaker Change: Really great. So we feel really really good about that.
Speaker Change: Alright, Thats all for me thanks for taking my questions.
Woody Lay: Alright, that's all from me. Thanks for taking my questions.
Speaker Change: You bet. Thanks.
John G. Arfstrom: As a reminder, to ask a question, please press star followed by 1 on your telephone keypad. The next question comes from John G. Arfstrom from RBC.
Speaker Change: As a reminder to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: Our next question comes from John <unk>, our fish Trump from RBC.
Speaker Change: Okay.
John G. Arfstrom: You hear me? Okay, good. Matt, you alluded to the non-interest-bearing balances, excluding mortgages. Seems like the remixing is burning out, and you alluded to the Treasury wins. What's possible over time in terms of? non-mortgage, non-interest-bearing deposit growth.
Thanks, Good morning.
John: Hey, John.
John: Can you hear me okay. Good.
John: Matt you alluded to the noninterest bearing balances excluding mortgage.
John: It seems like the Remixing that is burning out and you alluded to the treasury wins, what's possible there overtime in terms of.
John: Non mortgage noninterest bearing deposit growth.
Matthew Covington Olney: I think some of it's going to be dependent on the rate environment, John, but the momentum, to Rob's point, in the treasury business is as strong as it's ever been. I mean, year-to-date new treasury clients are up, you know, 105% of internal expectations. So that talks a lot in previous quarters about the lag from when you win the business, ramp up the business, and then it starts to show up either as a non-expiring deposit or in fees.
Matt: I think so it's going to be dependent on the rate environment, John but the momentum to Rob's point in the Treasury business is as strong as it's ever been I mean year to date, new treasury clients are up 105% of internal expectations.
Matt: <unk> talked a lot in previous quarters about.
Matt: The lag from when you win the business ramp the business and then it starts to show up either as a non interest bearing deposit or in season, and a big tick up this quarter at 619% year over year growth.
Matthew Covington Olney: And the big pickup this quarter in fees, 19% year-over-year growth. The results of all the business that we won last year. So it's just now ramping up and showing up in that feline item. Rob will often say that that's a horizon that you're always chasing.
Matt: The result of all the business that we won last year. So it is just now ramping and showing up in that line item.
Matt: Rob will often say that that's a horizon that you're always chasing and I think at this point, we have sort of Max resource allocation up against that.
Robert C. Holmes: And I think at this point we have sort of a max resource allocation up against that, triple the number of frontline TS officers, a third of our tech project spend is on new products and services in the cash management suite, and then over 90% of transactions that come through the balance sheet are going to have a treasury or deposit relationship attached to them. So said differently, nine out of every 10 times we're extending capital, you're going to have the operating deposits that come along with it.
Matt: The number of frontline TFS officers, a third of our Tech project spend is on new products and services and the cash management suite and over 90% of transactions that come through balance sheet youre going to have a treasury or deposit relationship attached to it. So said differently nine out of every 10 times, we're extending capital youre going to.
Matt: Have the operating deposits that come along with it.
Robert C. Holmes: So I think just given our commercial orientation, we're driving as meaningful a growth in that business as probably anyone that we know. I mean, the treasury product fees line item for the industry is growing about 4% GDP business, gross P times V by 14% this quarter. So Rabin, I think you said it perfectly well.
Matt: I think just given our commercial orientation, we're driving as a meaningful growth in that business as probably anyone that we know.
Matt: The treasury product fees line item for the industry is growing about 4% GDP business and can we grew <unk> by 14% this quarter Robin I would add to that.
Robin: Got it.
Robin: I think you said it perfectly well I do think it's.
Robert C. Holmes: I do think it's evidence of other investments that we've made in the platform maturing. One has to remember is that we have a new payments platform, purchase card, merchant, lockbox, and all of them are state of the art as it relates to technology because they're all brand new. And the ease of use with our initial onboarding and client journey has proven to be a big advantage of the market. And I don't I don't see the focus on Treasury doing anything but improving, if that's possible. It's a part of our culture now.
Robin: Evidence of other investments that we've made in the platform maturity.
Robin: What.
Robin: One has to remember is we have a new payments platform purchase card merchant lockbox and all of them are state of the art as it relates to technology, because they're all brand new.
Robin: The ease of use with our initio.
Robin: On boarding and client journey has proven to be take advantage of the market.
Speaker Change: And I don't.
Speaker Change: I don't see.
Speaker Change: The focus on Treasury.
Speaker Change: Doing anything but.
Speaker Change: Improving if that's possible.
Speaker Change: Part of our culture know bankers understand treasury, they understand P times the <unk>.
Robert C. Holmes: Bankers understand Treasury. They understand P times V. They understand the importance of the platform. It's not Treasury in a line of business on their own trying to achieve certain goals for the bank. It's a holistic effort by the entirety of the culture. I don't know of another sales and trading platform on Wall Street that actually engages with Treasury products. So we're really excited about the platform, the professionals in it, but also the adoption by the entirety of the bank and focus on it.
Speaker Change: And the ZIP platform, it's not treasury and a line of business on their own trying to achieve.
Speaker Change: Certain goals for the bank, it's a holistic effort by the entirety of the culture I don't know of another sales and trading platform on wall Street that actually.
Speaker Change: Engages about treasury products.
Speaker Change: So we're really excited about the platform the professionals, but also the adoption by the entirety of the bank and.
Speaker Change: And focus on it.
Robert C. Holmes: We're trying to do it, Ron. It's not easy, but we're trying.
Speaker Change: Okay.
Speaker Change: We're trying to do it wrong.
Speaker Change: We're trying to do it.
Speaker Change: B.
John G. Arfstrom: On credit, you mentioned the pre-2018 loan book having two of the three issues. What's the significance of that, maybe the size of pre-2018, or doesn't it matter? Just curious, you know, kind of why you flagged it and, you know, what you meant by that. Yeah, we've called out before this legacy loan portfolio that
Speaker Change: On credit you mentioned, the pre 2018 loan book, having two of the three issues, what's the significance of that maybe the size of the pre <unk>.
Speaker Change: 2018 or doesn't.
Speaker Change: Doesn't that matter I'm, just curious kind of.
Speaker Change: Why you flagged it.
Speaker Change: What you meant by that.
Speaker Change: Yes.
Speaker Change: Called out before this legacy loan portfolio that.
Speaker Change: It was on the books on Rob got here that we're continuing to try to work down its $200 million and Rob got here at 60 million a day $30 million of that resides in non accrual.
Matthew Covington Olney: was on the books when Rob got here that we're continuing to try to work down. It was $200 million when Rob got here; it's $60 million today, and $30 million of that resides in non-accrual.
Speaker Change: So perhaps in different credit Decisioning in the current management team would have pursued so thats the rationale for calling it out and we're going to continue to work through some of those legacy credit items.
Speaker Change: Okay.
John G. Arfstrom: And then, on slide four for you, Rob, I'm sure you think about this a lot, but on return targets. In your view, what needs to happen to get closer to those return targets, you know, the ROA and the ROTCE targets? What needs to happen to get closer to those?
And then.
Speaker Change: Last one.
Speaker Change: Good for.
Speaker Change: For you Rob I'm sure you're thinking about this a lot but on the return targets.
Speaker Change: In your view what needs to happen to get closer to those return targets.
Speaker Change: And the <unk> targets, what needs to happen to get closer to those.
Robert C. Holmes: Just the scaling and maturation of the platform. There's a lot of embedded earnings power in the platform we talked about. The $8.7 million in Treasury fees is an all-time record. We're winning business in Treasury. We won a million-dollar-a-year fee business in Treasury last week and beat two money center banks doing so. You know, that's not in that number.
Speaker Change: Just the scale and the maturation of the platform. There's a lot of embedded earnings power of the platform, we've talked about the $8 $7 million and treasury fees is all time record.
Speaker Change: We're winning business in Treasury, we want to.
Speaker Change: Million dollar a year fee business in Treasury last week, and B to money center banks doing so.
Speaker Change: That's not in that number.
Robert C. Holmes: Like Matt said, 90 percent of the loans that we commit to come with Treasury business. All five components of the investment bank are growing. In the fourth quarter of this year, the private wealth platform modernization would have been fully implemented, and we feel great about that. I think the number of clients in AUM has more than doubled since we started the journey. So, it's just the maturation of the investments that we put into the platform and the stability of the bankers and product partners on the platform doing business with the clients and pursuing their pipelines. But we've got to, you know, couple that with some efficiency opportunities that Matt talked about in the operating model, and we stand by the guidance and the goals.
Speaker Change: That said, 90% of the loans that we commit to come with Treasury business. All five components of the investment bank are growing in the fourth quarter of this year. The private wealth platform modernization would have would have been fully implemented and we feel great about that.
Speaker Change: I think number of clients and AUM of.
Speaker Change: More than doubled since we started the journey. So it's just a maturation of the investments that we put into the platform.
Speaker Change: And the stability of the bankers and product partners on the platform.
Those are the clients in pursuit of the pipelines, but we've got a.
Speaker Change: Couple that with.
Some efficiency opportunities that Matt talked about and.
Speaker Change: And the operating model.
Speaker Change:
Speaker Change: We stand by the guidance and the goals.
Speaker Change: Okay, Alright, thank you guys very much.
John G. Arfstrom: All right, very much. Thank you guys very much.
Robert C. Holmes: We currently have no further questions. I will hand the microphone back over to Rob Holmes to conclude.
Speaker Change: Thanks Scott.
Speaker Change: We currently have no further questions I will hand back over to Rob homes to complete.
Robert C. Holmes: Thanks everybody for the interest in Texas Capital Bank and have a great week.
Robert C. Holmes: Thanks, everybody for the interest in Texas Capital Bank and have a great week.
Operator: This concludes today's call. You may now disconnect your line.
Speaker Change: This concludes today's call you may now disconnect your lines.