Q2 2024 Texas Capital Bancshares Inc Earnings Call

July 18, 2024

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Brieke: Thank you all for your patience; we'll be starting today's conference in a few moments.?? Good morning, all. I would like to welcome you all to the Texas Capital Bancshares Inc. Q2 2024 Earnings Call. My name is Brieke, and I will be your moderator for today.

Unknown Executive: Thank you all for your patience; we'll be starting today's conference in a few moments' time.

Speaker Change: Thank you all for your patience. We'll be starting today's conference in a few moments time.

Unknown Executive: Good morning all, I would like to welcome you all to the Texas Capital Bancshares Inc Q2-2024 earning school.

Brika: Good morning all. I would like to welcome you all to the Texas Capital Bankshares Inc Q2 2024 Earnings Call. My name is Brika and I will be your moderator for today.

breaker: My name is Breaker, and I will be your moderator for today.

Unknown Executive: All lines are omitted for presentation and portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star, followed by one on your telephone keypad. If you change your mind and would like to remove that request to speak, please press star, then two. And operator assistance at any point, please press star, Zilla. Thank you.

Speaker Change: All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by 1 on your telephone keypad.

Speaker Change: If you change your mind and would like to remove that request to speak, please press star then 2.

Jocelyn Kukulka: I would now not to pass the conference over to your head, Jocelyn Kukulka. At TCBI, to begin, say to us, please go ahead.

Speaker Change: And for operator assistance at any point, please press star zero. Thank you. I would now like to pass the conference over to your host, Jocelyn Kukulka, at TCBI to begin. So, Jocelyn, please go ahead.

Brieke: All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind and would like to remove that request to speak, please press star then 2, and for operator assistance at any point, please press star zero. Thank you. I would now like to pass the conference over to your host, Jocelyn Kukulka, at TCBI to begin, so Jocelyn, please go ahead.

Jocelyn Kukulka: Good morning, and thank you for joining us for TCBI's second quarter 2024 earnings conference call. I'm Jocelyn Kukulka, Head of Investor Relations.

Austin Kukulka: Good morning, and thank you for joining us for TCBI's second quarter 2021 earnings conference call. I'm Dr. Austin Kukulka, 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. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release and our most recent annual report on Form 10-K and subsequent filings with the SEC.

Speaker Change: Good morning, and thank you for joining us for TCBI's second quarter 2024 Earnings Conference Call. I'm Jocelyn Kukulka, 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: 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.

Speaker Change: Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.

Speaker Change: Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.

Speaker Change: 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 TexasCapitalBank.com.

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.

Unknown Executive: 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 TexasCapableBank.com.

Rob Holmes: Our speakers for the call today are Rob Holmes, President and CEO, and Matt Skirlock, CFO.

Speaker Change: 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.

Unknown Executive: At the conclusion of our prepared remarks, our operator will open up a Q&A session.

Rob Holmes: I'll now turn the call over to Rob for opening remarks. Thank you for joining us today. We continue to make material progress translating our now clearly differentiated strategy and operating model into outcomes consistent with our targeted results. The firm's industry-leading liquidity and capital continue to be a competitive advantage, as current and prospective clients seek a financial partner with both a product suite and balance sheet capable of supporting them through market and rate cycle. We finished the quarter with tangible common equity to tangible assets of 9.6%, right first amongst the largest banks in the country. A reserve ratio of 1.84% when excluding mortgage finance loans, which is top defile amongst our peer group and liquid assets of 24%.

Robert C. Holmes: Thank you for joining us today. We continue to make material progress translating our now clearly differentiated strategy and operating model into outcomes consistent with our targeted results. The firm's industry-leading liquidity and capital continue to be a competitive advantage as current and prospective clients seek a financial partner with both a product suite and a balance sheet capable of supporting them through market and rate cycles. We finished the quarter with Tangible Common Equity to Tangible Assets of 9.6%, ranked first amongst the largest banks in the country, a reserve ratio of 1.84%, when excluding mortgage finance, which is a top decile amongst our peer group, and liquid assets of 24%.

Speaker Change: The firm's industry-leading liquidity and capital continue to be a competitive advantage as current and prospective clients seek a financial partner with both a product suite and balance sheet capable of supporting them through market and rate cycles.

Speaker Change: We finished the quarter with Tangible Common Equity to Tangible Assets of 9.6%, ranked first amongst the largest banks in the country.

Speaker Change: A reserve ratio of 1.84% when excluding mortgage finance loans, which is top decile amongst our peer group, and liquid assets of 24%.

Rob Holmes: We continue to experience a stable minimum in our fee income areas of focus, which collectively increase 21% link quarter and 11% year over year. With treasury, wealth, and investment banking, delivering results consistent with expectations. Not interested income comprise 19% of total revenue for the quarter, which is the second consecutive quarter in our target range for fee income as a percentage of total revenue by full year 2025. The investment bank, now just two years from its launch, has an increasingly granular and diverse pipeline, which is contributing to more sustainable fee growth in this developing business. Investment banking and trading income increase 33% quarter of a quarter to a record of 30.7 million dollars.

Robert C. Holmes: We continue to experience sustained momentum in our fee income areas of focus, which collectively increased 21% in the last quarter and 11% year-over-year, with Treasury, Wealth, and Investment Banking delivering results consistent with expectations. Non-interest income comprised 19% of total revenue for the quarter, which is the second consecutive quarter inside our target range for fee income as a percentage of total revenue by full year 2025.

Speaker Change: We continue to experience sustained momentum in our fee-income areas of focus, which collectively increased 21% link quarter and 11% year-over-year, with Treasury, Wealth, and Investment Banking delivering results consistent with expectations.

Speaker Change: Non-interest income COVID-19% of total revenue for the quarter, which is the second consecutive quarter inside our target range for fee income as a percentage of total revenue by full year 2025.

Robert C. Holmes: The investment bank, now just two years from its launch, has an increasingly granular and diverse pipeline, which is contributing to more sustainable fee growth in this developing business. Investment banking and trading income increased 33% quarter over quarter to a record of $30.7 million. syndications, capital markets, and capital solutions all delivered quarter over quarter revenue growth, with Capital Markets delivering records in both fees and transaction volumes. We continue to hit milestones and a still maturing investment banking offering every quarter and are building a base of consistent and repeatable revenues that will be both a differentiator in the marketplace and a meaningful contributor to future earnings.

Speaker Change: The investment bank, now just two years from its launch, has an increasingly granular and diverse pipeline.

Speaker Change: which is contributing to more sustainable fee growth in this developing business.

Speaker Change: Investment banking and trading income increased 33% quarter over quarter to a record of $30.7 million.

Rob Holmes: Cindications capital markets and capital solutions all delivered quarter of a quarter revenue growth. With capital markets delivering records in both fees and transaction volumes. We continue to hit milestones and a still maturing investment banking offering every quarter in our building a base of consistent and repeatable revenues. That will be both a differentiator in the marketplace and a meaningful contributor to future earnings. A treasury solutions platform, after nearly three years of deliberate and material investment, now provides both payment products and services in parity with a major money center banks. And a client onboarding process that is faster and more efficient.

Speaker Change: Syndications, Capital Markets, and Capital Solutions all delivered quarter-over-quarter revenue growth.

Speaker Change: with Capital Markets delivering records in both fees and transaction volumes.

Speaker Change: We continue to hit milestones and a still maturing investment banking offering every quarter, and are building a base of consistent and repeatable revenues that will be both a differentiator in the marketplace and a meaningful contributor to future earnings.

Robert C. Holmes: The Treasury Solutions Platform, after nearly three years of deliberate and material investment, now provides both payment products and services in parity with a major money center bank and a client onboarding process that is faster and more efficient.

Speaker Change: A treasury solutions platform, after nearly three years of deliberate and material investment, now provides both payment products and services in parity with the major money center banks.

Speaker Change: and a client onboarding process that is faster and more efficient.

Robert C. Holmes: Client and product onboarding continues on pace with expectations. As year over year treasury, part of fees increase 14%. Lead by 11% increase in growth's payment revenue year to date. This is now five consecutive quarters with growth three times the industry. As our sustained focus increasingly, or as us, the right to become our clients' primary operating bank.

Robert C. Holmes: Client and product onboarding continues on pace with expectations, as year-over-year Treasury product fees increased 14%, led by an 11% increase in gross payment revenue year-to-date. This is now five consecutive quarters with growth three times the industry average. As our sustained focus increasingly urges us to become our client's primary operating bank, the private wealth business is undergoing a full rebuild, which I have detailed in prior quarters. And we anticipate that it will become complete by year end.

Speaker Change: Client and product onboarding continues on pace with expectations, as year-over-year Treasury product fees increased 14%, led by an 11% increase in gross payment revenue year-to-date.

Speaker Change: This is now five consecutive quarters with growth three times the industry.

Speaker Change: As our sustained focus increasingly earns us the right to become our client's primary operating bank.

Rob Holmes: The private wealth business is undergoing a full rebuild, which I have detailed in prior quarters. And we anticipate that it will become complete by year-end. The expanded products wheat and materially enhanced client journey should enable improved connectivity to the rest of our platform, along for significant future scale. Total AUM was flat quarter of a quarter. However, management assets were up 5%. In early sign of anticipated increase in client adoption and associated revenue growth resulting from initial components of our new offering coming online. Distinctive cash management capabilities enable the firm to retain and grow client funds during 2023.

Speaker Change: The private wealth business is undergoing a full rebuild, which I have detailed in prior quarters.

Robert C. Holmes: The expanded product suite and materially enhanced client journey should enable improved connectivity to the rest of our platform, allowing for significant future scale. Total AUM was flat quarter over quarter, but managed investment assets were up 5%, an early sign of an anticipated increase in client adoption and associated revenue growth resulting from initial components of our new offering coming online. Distinctive cash management capabilities enable the firm to retain and grow client funds during 2023, with those trends continuing through the first half of this year. Non-interest-bearing deposit accounts outside of mortgage finance remained flat at $3.3 billion for the quarter.

Speaker Change: And we anticipate that it will become complete by year end.

Speaker Change: The expanded product suite and materially enhanced client journey should enable improved connectivity to the rest of our platform, allowing for significant future scale.

Speaker Change: Total AUM was flat quarter over quarter, however, managed investment assets were up 5%, an early sign of anticipated increase in client adoption and associated revenue growth resulting from initial components of our new offering coming online.

Speaker Change: Distinctive cash management capabilities enable the firm to retain and grow client funds during 2023, with those trends continuing through the first half of this year.

Robert C. Holmes: With those trends continuing through the first half of this year. We still expect the full-year blended tax rate to name around 25%. A balance sheet metrics continue to be exceptionally strong with period and cash balance as a 10% to total assets and cash insecurities of 24%. Both trending in line with year and targeted ratios. Ending period growth LHI balances increased by approximately 950 million, or 5% linked quarter. Durham predominantly by expected growth in the mortgage finance business of seasonal troughs and modest increases in CNI loans. Total deposits decline 1% during the quarter. As continuing increases in client-inspiring accounts were offset by proactive reductions of our highest cost deposit in the mortgage finance and broker categories.

Speaker Change: Non-interest bearing deposit accounts outside of mortgage finance remain flat at $3.3 billion for the quarter.

Robert C. Holmes: While non-brokered interest-bearing deposits grew again this quarter, they are now up 23% or $2.9 billion year over year. A foundational tenet of the financial resiliency we have established and will preserve is our continued focus on tangible book value, which is up over 7% year over year, ending at $62.23 per share. This is an all-time high for our firm. While we continue to bias capital towards supporting franchise accretive client segments, where we are delivering our entire platform, we do recognize that at times of market dislocation, it can be prudent to utilize share repurchases as a tool for creating longer-term shareholder value.

Speaker Change: While non-brokered interest bearing deposits grew again this quarter, it are now up 23% or $2.9 billion year-over-year.

Speaker Change: A foundational tenet of the financial resiliency we have established and will preserve is continued focus on tangible book value, which is up over 7% year over year, ending at $62.23 per share.

Speaker Change: This is an all-time high for our firm.

Speaker Change: While we continue to bias capital towards supporting franchise accretive client segments where we are delivering our entire platform, we do recognize that at times of market dislocation, it can be prudent to utilize share repurchases as a tool for creating longer-term shareholder value.

Robert C. Holmes: During the quarter, we repurchased $50 million, or 1.8% of total shares outstanding, at a weighted average price equal to 95% of the prior month's tangible book value and 84% of tangible book value when adjusting for AOCI impact. 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. We will drive attractive through-cycle shareholder returns with both higher quality earnings and a lower cost of capital as we scale high-value businesses through increased client adoption, improved client journeys, and realized operational efficiency, all objectives that we made significant headway on here today. Now I'll turn it over to Matt to discuss the details of the financial results.

Speaker Change: During the quarter, we repurchased $50 million or 1.8% of total shares outstanding at a weighted average price equal to 95% of the prior month tangible book value and 84% of tangible book value when adjusting for AOCI impacts.

Speaker Change: 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 markets.

Speaker Change: We will drive attractive through-cycle shareholder returns with both higher quality earnings and a lower cost of capital as we scale high-value businesses through increased client adoption, improved client journeys, and realized operational efficiencies.

Speaker Change: All objectives that we made significant headway on year-to-date.

Matthew Covington Olney: Thanks, Rob. Good morning.

Speaker Change: Now I'll turn it over to Matt.

Matthew Covington Olney: to discuss the details of the financial results.

Matthew Covington Olney: Thanks, Rob. Good morning. Starting on slide 5, total revenue increased $11 million, or 4% for the quarter, to $267 million, as a $1.6 million increase in net interest income was augmented by a $9 million, or 22% linked quarter increase in non-interest revenue.

Matthew Covington Olney: Starting on slide 5, total revenue increased $11 million, or 4% for the quarter, to $267 million, as a $1.6 million increase in net interest income was augmented by a $9 million, or 22%, linked quarter increase in non-interest revenue. The $50.4 million of fee income delivered this quarter is the high watermark since we began the transformation in January of 2021. And our year-to-date non-interest revenue of $92 million is 30% higher than full-year 2020 when normalizing warehouse-related fees and adjusting for businesses we've sold or wound down.

Matthew Covington Olney: The $50.4 million of fee income delivered this quarter is the high-water mark since we began the transformation in January of 2021. In our year-to-date, non-interest revenue of $92 million is 30% higher than full-year 2020, when normalizing warehouse-related fees and adjusting for businesses we've sold or wound down.

Matthew Covington Olney: Quarterly total adjusted non-interest expense decreased 2% in the late quarter, coming off seasonally higher first quarter salaries and benefits related to annual payroll and compensation expenses. Taken together, link quarter adjusted PPNR increased 24% to $79 million, covering off seasonally lower first quarter results and generally in line with internal expectations.

Matthew Covington Olney: Quarterly total adjusted non-interest expense decreased 2% in late quarter, coming off seasonally higher first quarter salaries and benefits related to annual payroll and compensation expenses.

Matthew Covington Olney: Taken together, link quarter adjusted PPNR increased 24% to 79 million, recovering off seasonally lower first quarter results and generally in line with internal expectations.

Matthew Covington Olney: This quarter's provision expense of $20 million resulted from charge-offs associated with previously identified problem credits and a sustained conservative posture related to our economic outlook. Year-to-date provision expense as a percentage of LHI excluding mortgage finance is consistent with expectations at 47 basis points annualized. Net income to common was $37.4 million, an increase of 71% compared to the linked quarter, while adjusted net income to common was $37.7 million, up 27% compared to the linked quarter. The tax rate for the quarter increased 3.7%, resulting in a $2.2 million reduction in net income to common, primarily due to the timing of booking certain discrete items this quarter.

Matthew Covington Olney: Year-to-date provision expense is a percentage of LHI excluding mortgage finance is consistent with expectations at 47 basis points annualized.

Matthew Covington Olney: That income to common was $37.4 million, an increase of 71% link quarter, while adjusted at income to common was $37.7 million, up 27% link quarter.

Matthew Covington Olney: The tax rate for the quarter increased 3.7%, resulting in a $2.2 million reduction in net income to common, primarily due to the timing of booking certain discrete items this quarter. We still expect the full-year blended tax rate to remain around 25%.

Matthew Covington Olney: We still expect the full-year blended tax rate to remain around 25%. Our balance sheet metrics continue to be exceptionally strong, with period-end cash balances of 10% to total assets and cash insecurities of 24%, both trending in line with year and targeted ratios. Ending period gross LHI balances increased by approximately $950 million or 5% in the fourth quarter, driven predominantly by expected growth in the mortgage finance business off seasonal troughs and modest increases in C&I loans.

Matthew Covington Olney: Our balance sheet metrics continue to be exceptionally strong, with period and cash balances of 10% to total assets, and cash insecurities of 24%.

Matthew Covington Olney: Both trending in line with year and targeted ratios.

Matthew Covington Olney: Ending period gross LHI balances increased by approximately $950 million or 5% linked quarter driven predominantly by expected growth in the mortgage finance business of seasonal troughs and modest increases in C&I loans.

Matthew Covington Olney: Total deposits declined 1% during the quarter, as continued increases in client interest-bearing accounts were offset by proactive reductions of our highest cost deposits in the mortgage finance and brokered category. Total gross LHI excluding mortgage finance was relatively flat late in the quarter, higher interest rates and lingering economic concerns suppress previously anticipated client and prospect needs for bank credit. After repositioning over $1 billion of funded loans during the last six 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, although we do continue to identify select opportunities each quarter as legacy positions reach maturity. Additionally, our platform breadth is enabling new client acquisition at a pace consistent with internal expectation. With year-to-date new relationships onboarded, now over 65% of new relationships will be onboarded for full year 2023.

Matthew Covington Olney: Total deposits declined 1% during the quarter, as continued increases in client interest bearing accounts were offset by proactive reductions of our highest cost deposits in the mortgage finance and brokered categories.

Rob Holmes: Total growth LHI excluding mortgage finance was relatively flat linked quarter. As higher interest rates and lingering economic concerns suppressed previously anticipated client and prospect needs for bank credit. After repositioning over 1 billion of funded loans during the last six quarters, a multi-year process of recycling capital into a client-based benefits from our broadening platform of available product solutions has flow significantly. Although we do continue to identify select opportunities each quarter, as well as any positions reach maturity. While our platform Breath is enabling new client acquisition at a pace consistent with internal expectations. With here-to-date new relationships onboarded, now over 65% new relationships onboarded for full year 2023.

Matthew Covington Olney: Total Gross LHI excluding mortgage finance was relatively flat late quarter.

Matthew Covington Olney: as higher interest rates and lingering economic concerns suppress previously anticipated client and prospect needs for bank credit.

Matthew Covington Olney: After repositioning over $1 billion of funded loans during the last six quarters, our multi-year process of recycling capital into a client-based benefit from our broadening platform of available product solutions has slowed significantly.

Matthew Covington Olney: Although we do continue to identify select opportunities each quarter, as legacy positions reach maturity. While our platform breadth is enabling new client acquisition at a pace consistent with internal expectations.

Matthew Covington Olney: With year-to-date new relationships on-boarded, now over 65% new relationships on-boarded for full year 2023. Lower near-term system-wide demand for bank credit is limiting immediate earning asset expansion.

Matthew Covington Olney: Lower near-term system-wide demand for bank credit is limiting immediate earning asset expansion. However, we do still expect the sustained pace of new client acquisition to result in modest balance sheet and loan growth this year, although at a potentially slower pace than contemplated in our original guidance. Commercial real estate period imbalances decreased $133 million, or 2% in the quarter, as payoff rates increased from the depressed levels in the prior period. The portfolio remains weighted to multifamily, which comprises 2.4 billion, 42% of outstanding balances, reflecting both our deep experience in the space and observed performance through the credit and interest rate cycle.

Rob Holmes: Lower near-term system-wide demand for bank credit is limiting immediate earning asset expansion. We do still expect the sustained pace of new client acquisition to result in modest balance sheet and loan growth this year. Although it potentially slower pace than contemplated in our original guidance. Commercial real-state period in balances decreased 133 million or 2% in the quarter as pay off rates increased from the depressed levels in the prior period. The portfolio remains a weighted and multi-family, which comprises 2.4 billion, 42% about standing balances. Reflecting both our deep experience in the space and observe performance to credit and interest rate cycles.

Matthew Covington Olney: We do still expect the sustained pace of new client acquisition to result in modest balance sheet and loan growth this year, although at a potentially slower pace than contemplated in our original guidance.

Matthew Covington Olney: Commercial real estate period imbalances decreased 133 million or 2% in the quarter. Its payoff rates increased from the depressed levels in the prior period.

Matthew Covington Olney: The portfolio remains weighted to multifamily, which comprises $2.4 billion, 42% of outstanding balances, reflecting both our deep experience in the space and observed performance through credit and interest rate cycles.

Matthew Covington Olney: After a difficult fourth and first quarter for the mortgage space, where seasonal weakness was exacerbated by persistent rate pressure. Average mortgage finance loans increased $840 million, or 24% in the quarter, to $4.4 billion, reflective of increased home buying in the spring and summer months. However, our expectation remains that the industry will remain historically challenged in the near term.

Rob Holmes: After a difficult fourth and first quarter for the mortgage space, where seasonal weakness was exacerbated by persistent rate pressure. Average mortgage finance loans increased 840 million or 24% in the quarter to 4.4 billion, reflective of increased home buying in the spring and summer months. Our expectation remains that the industry will remain historically challenged in the near term. And the beauty on the forward rate outlook is causing a dispersion in the regeneration volume estimates from professional forecasters. With some reputable sources still calling for an up to 15% increase in annual origination volume. Given ongoing rate volatility, we may be more cautious.

Matthew Covington Olney: After a difficult fourth and first quarter for the mortgage space, where seasonal weakness was exacerbated by persistent rate pressure, average mortgage finance loans increased $840 million, or 24% in the quarter, to $4.4 billion, reflective of increased home buying in the spring and summer months.

Matthew Covington Olney: Ambiguity on the forward rate outlook is causing a dispersion in origination volume estimates from professional forecasters, with some reputable sources still calling for an up to 15% increase in annual origination volume. Given ongoing rate volatility, we remain more cautious, and reaffirm reduced full-year expectations shared on the Q1 call for full-year increases in average warehouse volumes of 10%, down from 15% at the beginning of the year. Ending period deposit balances decreased to 1% quarter over quarter as sustained success and attracting quality funding associated with our core offerings enabled the firm to proactively manage down select higher cost funding sources, both in mortgage finance and in broker deposits, which are now at a 10 year low.

Matthew Covington Olney: Our expectation remains that the industry will remain 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 an up to 15% increase in annual origination volume.

Rob Holmes: And reaffirm reduced full year expectations shared on the key one call for a full year increase as an average warehouse volume to 10% down from 15% at the beginning of the year. In the period of positive balances decreased to 1% quarter over quarter at sustained success and attracting quality funding associated with our core offerings. Enable the firm to correctly manage down select higher cost funding sources, but the mortgage finance and in broken deposits, which are now to 10 year low. Peered in mortgage finance on interest paying deposit balances decreased 473 million in quarter over quarter.

Matthew Covington Olney: Given ongoing rate volatility, remain more cautious.

Matthew Covington Olney: and reaffirm reduced full-year expectations shared on the Q1 call for full-year increases in average warehouse volumes of 10%, down from 15% at the beginning of the year.

Matthew Covington Olney: Ending period deposit balances decreased to 1% quarter over quarter. A sustained success in attracting quality funding associated with our core offerings enabled the firm to proactively manage down select higher cost funding sources both in mortgage finance and in broker deposits, which are now at a 10 year low.

Matthew Covington Olney: Mortgage finance on interest-bearing deposit balances decreased $473 million quarter over quarter, predominantly driven by the selective reduction of over $500 million of the highest cost deposits, where we were unable to earn additional business necessary to generate an appropriate return on capital. Average mortgage finance deposits were 120% of average mortgage finance loans, a decline quarter over quarter but in line with our guidance, as the deposit reduction now more appropriately matches funding levels to reduced mortgage client credit needs resulting from the system-wide contraction in mortgage origination volume.

Matthew Covington Olney: Peer-to-end mortgage finance on interest-bearing deposit balances decreased $473 million quarter-over-quarter, predominantly driven by the selective reduction of over $500 million of the highest-cost deposits, where we were unable to earn additional business necessary to generate an appropriate return on capital.

Rob Holmes: We're down, really driven by the selected reduction of over 500 million at the highest cost deposits. We are unable to earn additional business necessary to generate an appropriate return on cap. Average Mortgage Finance Deposits were 120% of average Mortgage Finance Loans. A decline quarter of a quarter, but in line with our guidance. As the deposit reduction now more appropriately matches funding levels to reduce mortgage client credit needs, resulting from the system-wide contraction and mortgage origination volumes. We expect the ratio of average mortgage finance deposits to average mortgage finance loans to remain relatively flat in the third quarter.

Matthew Covington Olney: Average mortgage finance deposits were 120% of average mortgage finance loans. A decline quarter over quarter, but in line with our guidance.

Matthew Covington Olney: as the deposit reduction now more appropriately matches funding levels to reduced mortgage client credit needs resulting from the system-wide contraction in mortgage origination volumes.

Matthew Covington Olney: We expect the ratio of average mortgage finance deposits to average mortgage finance loans to remain relatively flat in the third quarter, as predictable growth and client deposits should match that of anticipated warehouse funding. As detailed in previous calls, select mortgage finance deposits feature relationship pricing credits which are applied to both clients' mortgage finance and commercial loans based on each loan type's contribution to interest income during the quarter. Attribution of interest credits is expected to follow a similar distribution for the duration of the year, with approximately 60% associated with mortgage finance and 40% aligned to commercial loans to mortgage finance clients.

Matthew Covington Olney: We expect the ratio of average mortgage finance deposits to average mortgage finance loans to remain relatively flat in the third quarter, as the predictable growth in client deposits should match that of anticipated warehouse fundings.

Rob Holmes: As a predictable growth and client deposits should match that and anticipate a warehouse funding. As detailed and previous calls, select Mortgage Finance Deposits feature relationship price and credit, which are applied to both clients mortgage finance and commercial loans, based on each loan type's contribution to interest income during the quarter. Attribution of interest credits are expected to follow a similar distribution for the duration of the year, but approximately 60% associated with mortgage finance and 40% aligned to commercial loans to mortgage finance clients. Ending in average period, non-insured spending deposits excluding mortgage finance stay flat in the quarter.

Matthew Covington Olney: As detailed in previous calls, Select Mortgage Finance Deposits feature relationship pricing credits which are applied to both clients' mortgage finance and commercial loans, based on each loan type's contribution to interest income during the quarter.

Matthew Covington Olney: Attribution of interest credits are expected to follow a similar distribution for the duration of the year with approximately 60% associated mortgage finance and 40% aligned to commercial loans to mortgage finance clients.

Matthew Covington Olney: Ending average period non-interest bearing deposits, excluding mortgage finance, stayed flat in the quarter as the pace of clients shifting excess balances to interest-bearing deposits or to other cash management options on our platform slowed significantly. Ending period non-interfering deposits excluding mortgage finance remain 14% of total deposits, and our expectation is that this percentage remains relatively stable in the near term. Broker deposits declined $78 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 demand.

Matthew Covington Olney: Ending an average period non-interest bearing deposits excluding mortgage finance stayed flat in the quarter. As the pace of clients shifting excess balances to interest bearing deposits or to other cash management options on our platform has slowed significantly.

Rob Holmes: As a pace of client shifting excess balances to interspering deposits or to other cash management options on our platform has slowed significantly. Ending period, non-insured spending deposits excluding mortgage finance remain 14% of total deposits. And our expectation is that the percentage remains relatively stable in the near term. Profit deposits declined 78 million during the quarter, as growth and client focused deposits consistent with our long-term strategy remains sufficient to satisfy desired near-term balance sheet demands. Over the third quarter, $330 million will mature with an average rate of 5.3%. And we do anticipate replacing a portion of these deposits.

Matthew Covington Olney: Ending period non-interest bearing deposits, excluding mortgage finance, remain 14% of total deposits. And our expectation is that this percentage remains relatively stable in the near term.

Matthew Covington Olney: Broker deposits declined $78 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 third quarter, $330 million will mature with an average rate of 5.3%, and we do anticipate replacing a portion of these deposits. Our modeled earnings at risk was relatively consistent due to proactive measures taken over the last two years, which are resulting in a more neutral posture at this stage of the rate cycle. 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 third quarter, $330 million will mature with an average rate of 5.3%, and we do anticipate replacing a portion of these deposits.

Rob Holmes: Our model earnings at risk was relatively consistently quarter due to proactive measures taken over the last two years, which are resulting in a more neutral posture at this stage of the rate cycle. 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. We continue to reinvest cash flows into this curious portfolio and purchase nearly 100 million in agency back securities during the quarter, but an average coupon of 6%. We do anticipate continued reinvestment over the duration of the year, which will improve securities yield while maintaining rate positioning.

Matthew Covington Olney: Our modeled earnings at risk was relatively consistently quartered due to proactive measures taken over the last two years which are resulting in a more neutral posture at this stage of the rate cycle.

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: We continue to reinvest cash flows into the securities portfolio and purchase nearly $100 million in agency-backed securities during the quarter with an average coupon of 6%. We do anticipate continued reinvestment over the duration of the year, which will improve securities yield while maintaining rate positioning. Net interest margin declined two basis points this quarter, and net interest income increased modestly to $216.6 million. The impacts 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 fourth quarter of this year. Total adjusted non-interest expenses decreased 2% last quarter, as Q2 salaries and benefits expenses decreased $9.9 million from a seasonally higher first quarter.

Matthew Covington Olney: We do anticipate continued reinvestment over the duration of the year, which will improve securities yield while maintaining rate positioning.

Rob Holmes: That interest margin declined two basis points to this quarter, and that interest income increased modestly to 216.6 million. The impacts about sheet repositioning and the higher running assets associated with our long-term strategy. A couple of continuum minimum robbed described in our fees and our rating businesses should continue over the next few quarters. As we look to resume, year over year, quarterly peep in our growth in the fourth quarter of this year. Total adjusted non-interest expenses decreased 2% link quarter is Q2. Stars and benefits expense decrease 9.9 million from season only higher first quarter. The realization structural efficiencies associated with our GoFboard operating model are improving near-term financial performance while also enabling continued specific investments to drive long-term capabilities.

Matthew Covington Olney: Net interest margin declined two basis points this quarter, and net interest income increased modestly to $216.6 million.

Matthew Covington Olney: The impacts of balance sheet repositioning into higher-earning assets associated with our long-term strategy, coupled with continued momentum Rob described in our fees-generating businesses, should continue over the next few quarters, as we look to resume year-over-year quarterly PPNR growth in the fourth quarter of this year.

Matthew Covington Olney: Total adjusted non-interest expenses decreased 2% last quarter, as Q2 salaries and benefits expenses decreased $9.9 million from a seasonally higher first 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 capability. As industry-wide asset quality normalization continues, so does our multi-year posture of prudently building a reserve to effectively address communicated legacy credits and buffer against the potential impact of an uncertain economic outlook. The total allowance for credit loss, including off-balance sheet reserves, increased $8 million on a linked quarter basis to $313 million of $31 million year-over-year, which when excluding mortgage finance is 1.84% of total LHI, a high since the adoption of CECL in 2020.

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.

Rob Holmes: As an issue wide asset quality normalization continues, so does our multi-year posture a prudently building a reserve to effectively address communicated legacy credits and buffering its potential impact of an uncertain economic outlook. The total allowance for credit loss, including off-balance sheet reserves, increased 8 million on a link quarter basis to 313 million, or 31 million year over year, which, when excluding mortgage finance, is 1.84% of total LHI. A high since the adoption of season in 2020. Criticized loans stayed flat at 860 million and declined to 3.9% of total LHI. As modest increases in special mention were offset by resolutions and substandard, including of non-accrual loans.

Matthew Covington Olney: As industry-wide asset quality normalization continues, so does our multi-year posture of prudently building a reserve to effectively address communicated legacy credits and buffer against potential impact of an uncertain economic outlook.

Matthew Covington Olney: The total allowance for credit loss, including off-balance sheet reserves, increased $8 million on a link quarter basis to $313 million, up $31 million year-over-year, which when excluding mortgage finance, is 1.84% of total LHI, a high since the adoption of CECL in 2020.

Matthew Covington Olney: Criticized loans stayed flat at $860 million and declined to 3.9% of total LHI, as modest increases in special mention were offset by resolutions and substandard loans, including non-accrual loans. The composition of criticized loans remains weighted towards well-structured commercial real estate loans supported by strong sponsors, plus commercial clients with dependencies on consumer discretionary income. During the quarter, we recognized net charge-offs of $12 million, or 0.23% of average LHI. The charge-offs were comprised of a small number of commercial credits and the resolution of a single hospitality loan.

Robert C. Holmes: The composition of criticized loans are names weighted toward dual structure commercial real estate loans, supported by strong sponsors, plus commercial clients with dependencies on consumer discretionary income. During the quarter, recognized net charge costs of 12 million or 0.23% of average LHI. The charge costs were comprised of a small number of commercial credits and the resolution of a single hospitality loan. Identified legacy problem credits have never been reduced to approximately $40 million, down from $200 million at the end of 2020. Consisting on prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to both a peer group and our internally assessed risk profile.

Matthew Covington Olney: The composition of criticized loans remains weighted towards well-structured commercial real estate loans supported by strong sponsors, plus commercial clients with dependencies on consumer discretionary income.

Matthew Covington Olney: During the quarter, we recognized net charge-offs of $12 million, or 0.23% of average LHI. The charge-offs were comprised of a small number of commercial credits and the resolution of a single hospitality loan.

Matthew Covington Olney: Our identified legacy problem credits have now been reduced to approximately $40 million, down from $200 million at the end of 2020. Consistent with prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile. CET1 finished the quarter at 11.62%, a 76 basis point decrease from the prior quarter related to the maturity of the credit link note, which had a 46 basis point impact, quarterly loan growth, and execution under the share repurchase authorization.

Matthew Covington Olney: Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile.

Rob Holmes: CT1 finished the quarter at 11.62%. A 76 basis point decrease from prior quarter related to the maturity of the credit link note, which had a 46 basis point impact. Quarterly loan growth, an execution under the shared repurchase authorization, tangible common equity potential assets finished at 9.63%, which ranks first amongst the largest banks in the country. We continue to deploy to capital base in a disciplined and analytically rigorous manner focused on driving long-term shareholder value. During the second quarter, repurchase to approximate 852,000 shares are 1.8% a prior quarter of shares outstanding. For a total of $50 million at a weighted average price, $58.14 per share, or 95% a prior month tangible book value per share.

Matthew Covington Olney: CET1 finished the quarter at 11.62%, a 76 basis point decrease from prior quarter related to the maturity of the credit link note, which had a 46 basis point impact, quarterly loan growth and execution under the share repurchase authorization.

Matthew Covington Olney: Tangible common equity tangible assets finished at 9.63%, which ranks first amongst the largest banks in the country. We continue to deploy the capital base in a disciplined and analytically rigorous manner focused on driving long-term shareholder value. During the second quarter, we purchased approximately 852,000 shares, or 1.8% of the prior quarter shares outstanding, for a total of $50 million at a weighted average price of $58.14 per share, or 95% of the prior month's tangible book value per share.

Matthew Covington Olney: Tangible Common Equity and Tangible Assets finished at 9.63% which ranks first amongst the largest banks in the country.

Matthew Covington Olney: We continue to deploy the capital base in a disciplined and analytically rigorous manner focused on driving long-term shareholder value. During the second quarter, we purchased approximately 852,000 shares, or 1.8% of prior quarter shares outstanding.

Matthew Covington Olney: for a total of $50 million at a weighted average price of $58.14 per share, or 95% of prior month tangible book value per share. Our guidance accounts for the market-based forward rate curve, which now assumes Fed funds of 5.25% exiting the year.

Rob Holmes: Our guidance accounts for the market-based forward-rate curve, which now assumes said funds of 5.25% exiting the year. For the full year, we are mostly reducing our revenue guidance and now anticipate low to mid-single-digit growth. As moderate expectations for current year-boundary expansion is only partially offset by continuum momentum and our fee and come areas of focus. Despite the near-term impacts, slowing capital recycling efforts through the year, a couple of sustained new client acquisition will result in a resumption of risk-appropriate loan growth when clients' appetite for bank credit improves. Our intent to move towards an 11% CET-1.8 year-end remains intact, with our consistent capital priorities focused on growing the core business, improving future and regeneration, and increasing tangible book value per share.

Matthew Covington Olney: Our guidance accounts for the market-based forward rate curve, which now assumes Fed funds of 5.25% exiting the year. For the full year, we are modestly reducing our revenue guidance and now anticipate low- to mid-single-digit growth, as moderated expectations for current-year balance sheet expansion are only partially offset by continuing momentum in our fee-income areas of focus. Despite the near-term impacts, slowing capital recycling efforts through the year, coupled with sustained new client acquisition, will result in resumption of risk-appropriate loan growth when clients' appetite for bank credit improves.

Matthew Covington Olney: For the full year, we are modestly reducing our revenue guidance and now anticipate low to mid-single-digit growth as moderated expectations for current year balance sheet expansion is only partially offset by continued momentum in our fee income areas of focus.

Matthew Covington Olney: Despite the near-term impacts, slowing capital recycling efforts through the year, coupled with sustained new client acquisition, will result in resumption of risk-appropriate loan growth when clients' appetite for bank credit improves.

Matthew Covington Olney: Our intent to move towards an 11% CET1 at year-end remains intact, with our consistent capital priorities focused on growing the core business, improving future earnings generation, and increasing tangible book value per share. Given our risk-weighted asset heavy commercial orientation, effectively deploying excess regulatory capital should still result in a sector leading tangible common equity level. Multi-year investment in infrastructure, data, and process improvement continues to yield expected operating and financial efficiencies, enabling targeted additional investment in talent and capabilities while limiting structural increases in non-interest expense.

Rob Holmes: Given our risk-rated asset-heavy commercial orientation, effectively deploying excess regulatory capital should still result in sector-leading tangible common equity levels. Multi-year investment and infrastructure data and process improvement continue yielding expected operating and financial efficiencies, enabling targeted additional investment and talent and capabilities while limiting structural increases in non-interest expense. The increase in guidance to low to mid-single-digits contemplates elevator levels of revenue generation from higher efficiency ratio sources, alongside continued spend associated resolution of select existing problem credits. We expect resumption of quarterly increases in year-over-year peat-in-year growth to begin in Q4 2024, accelerating as we enter 2025. Finally, we maintain a concerto outlook in reiterator annual provision expense guidance at 50-based points of LHI, excluding mortgage finance.

Matthew Covington Olney: Given our risk-weighted asset-heavy commercial orientation, effectively deploying excess regulatory capital should still result in sector-leading tangible common equity levels.

Matthew Covington Olney: Multi-year investments in infrastructure, data, and process improvement continue yielding expected operating and financial efficiencies, enabling targeted additional investment in talent and capabilities, while limiting structural increases in non-interest expense.

Matthew Covington Olney: The increase in guidance to low to mid-single digits contemplates elevated levels of revenue generation from higher efficiency ratio sources, alongside continued spend associated with resolution of select existing problem credits. We expect resumption of quarterly increases in year-over-year PPNR growth to begin in Q4 2024, accelerating as we enter 2025. Finally, we maintain a conservative outlook and reiterate our annual provision expense guidance at 50 basis points of LHI, excluding mortgages.

Matthew Covington Olney: We expect resumption of quarterly increases in year-over-year PNR growth to begin in Q4 2024, accelerating as we enter 2025. Finally, we maintain a conservative outlook and reiterate our annual provision expense guidance at 50 basis points of LHI, excluding mortgage finance.

Operator: Operator, we'd now like to open up the call for questions. Thank you. Thank you. We will now begin

Unknown Executive: Operator, we now like to open up the call for questions. Thank you.

Speaker Change: Operator, we'd now like to open up the call for questions. Thank you.

Matthew Covington Olney: Thank you, Matt.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star float by one on your telephone keypad. If you change your mind for any reason and would like to remove that request, please press star then two to remove your question from the queue. Again, to ask a question, please press star followed by one. We will pause here briefly whilst questions are registered. We have the first question on the phone lines from Ben Gerlinger with Citi. You may proceed.

Unknown Executive: We will now begin the question in our session. If you would like to ask questions, please press staff vote by one on your telephone keypad.

Mark: Thank you, Mark.

Speaker Change: We will now begin the question and answer session. If you would like to ask a question, please press star float by one on your telephone keypad.

Unknown Executive: If you change your mind, any reason, I would like to remove that request. Please press a staff and two to remove your questions from the key. Again, to ask questions, please press staff vote by one. We will pause every three while of questions are registered.

Speaker Change: If you change your mind for any reason and would like to remove that request, please press star then 2 to remove your question from the queue. Again, to ask a question, please press star followed by 1.

Mark: We will pause here briefly whilst questions are registered.

Benjamin Tyson Gerlinger: We have the first question on the phone line from Ben Garlinger with the City. You may have gave the guidance, just a second and go here. The balance sheet sensitivity obviously moves quarter to quarter. You're looking at just strictly on a static face. It's largely due to the morning where I was different, but the market was kind of a cut a quarter. It's like three, two, four, few, and then one, two, early next year.

Speaker Change: We have the first question on the phone lines from Ben Gerlinger with City. You may proceed.

Benjamin Tyson Gerlinger: I know you guys gave the guidance just a second ago here, and the balance sheet sensitivity obviously moves quarter to quarter. You're looking at just strictly on a static basis, larger due to the mortgage warehouse differential, but the market orders kind of see a cut a quarter. It's like 3Q, 4Q, and then 1, 2 early next year. I know it's not official guidance, but can you just talk about maybe the potential impact that you would see on either the left and right sides of the balance sheet, considering you guys cut out some of the higher cost deposits? I'm just trying to think about repricing across both sides.

Benjamin Tyson Gerlinger: Good morning, everyone.

Speaker Change: More unemployment?

Benjamin Tyson Gerlinger: I know you gave the guidance just a second ago here, and the balance sheet sensitivity obviously moves quarter to quarter.

Benjamin Tyson Gerlinger: You're looking at just strictly on a static basis, largely due to the mortgage warehouse differential. But the market orders kind of see a cut a quarter, like 3Q, 4Q, and then 1, 2 early next year. I know it's not an official guide, but can you just talk about maybe the potential impact that you would see?

Ben Garlinger: I know it's not an official guide. Please talk about maybe the potential impact that you would see. Either you're laughing and writing into the balance sheet, considering you've got to cut out some of the higher-cost deposits. Just trying to think about replacing across both sides.

Speaker Change: On either left and right side of the balance sheet, considering you got to cut out some of the higher cost deposits, I'm just trying to think about repricing across both sides.

Matthew Covington Olney: EFN, this is Matt. Happy to take that question. We've been pretty deliberate in getting to a position of relative neutrality in this shock scenario, as rates are starting to flatten out, at least on the short side. So we think that the business model and balance sheet transformation over the last few years give us the ability to drive improved revenue across different rate environments. So a main difference, obviously, in this quarter's guidance, relative to guidance at the beginning of the year, has been the reduction in anticipated rate cuts, which for us has mostly shown up in a reduction in needs for clients to put on bank debt.

Rob Holmes: Yeah, Ben, this is not happy to take that question. We've been pretty deliberate in getting to a position of relative neutrality in the shocks scenario as rates are starting to flatten out, at least on the short side. We think that the business model and balance sheet transformation over the last few years gives us the ability to drive improved revenue really across different rate environments. So, you know, the main difference obviously in this quarter's guidance relative to guidance to be getting in the year has been the reduction in anticipated rate cuts, which for us is mostly shown up in reduction in these for clients to put on big debt.

Matthew Covington Olney: Yeah, Ben, this is Matt, happy to take that question. We've been pretty deliberate in getting to a position of relative neutrality in this shock scenario as rates are starting to flatten out, at least on the short side.

Speaker Change: So we think that the business model and balance sheet transformation over the last few years gives us the ability to drive improved revenue really across different rate environments.

Speaker Change: So, the main difference, obviously, in this quarter's guidance relative to guidance at the beginning of the year has been the reduction in anticipated rate cuts.

Speaker Change: which for us has mostly shown up in reduction and

Matthew Covington Olney: So we've got 25 basis points sitting over the remainder of the year. If you see that accelerate a bit, we've got a hedge profile that picks up about $7.5 million of NII for every 25 basis points it cuts. That's actually essentially winding down over the duration of next year. You'll see about 500 million come off over the first half of the year, then about another billion and a half in the third and fourth quarters.

Rob Holmes: So, we got 25 basis points in over the revenue of the year. If you see that accelerated bit, we've got a hedge profile that picks up about seven and a half million dollars of the NII for every 25 basis point cuts. That's actually essentially winding down over the duration of next year. You'll see about 500 million come off over the first half of the year and about another billion and a half in the third and fourth quarter. So, you do see some level of some removal of the downside rate protection. But, you know, so for forage about 90 basis points in excess of receipt sex.

Speaker Change: and Needs for Clients to Put on Bank Debt. So we've got 25 basis points sitting over the remainder of the year.

Speaker Change: If you see that accelerate a bit, we've got a hedge profile that picks up about $7.5 million of NII for every 25 basis points of cuts.

Speaker Change: That's actually essentially winding down over the duration of next year. You'll see about $500 million come off over the first half of the year, then about another $1.5 billion.

Matthew Covington Olney: So you do see some level of some removal of the downside rate protection. But, you know, for Forge, you're about 90 basis points in excess of receipt six. And then obviously the mortgage finance portfolio, quite sensitive to reductions in interest rates. We anticipate that you'll see that flex up to about $4.8 billion on average in the third and fourth quarters, which gets you to about a 10% increase full year. And then there are associated fees that would come from both warehouse volume, primarily in sales and trading, as well as the expansion of capital markets income if you see a declining rate environment.

Speaker Change: In the third and fourth quarter. So you do see some level of some removal of the downside rate protection But you know, so for forge or about 90 basis points in excess of receive six

Rob Holmes: So, and then obviously the mortgage finance portfolio quite sensitive to reductions in interest rates. We anticipate that you'll see that flux up about 4.8 billion on average in the third and fourth quarter, which gets you to about a 10 percent increase per year.

Speaker Change: And then obviously the mortgage finance portfolio quite sensitive to reductions in interest rates.

Speaker Change: We anticipate that you'll see that flex up to about $4.8 billion on average in the third and fourth quarter, which gets you to about a 10% increase.

Rob Holmes: And then they're just associated to these that would come from both warehouse volume, primarily in sales and trading, as well as the expansion of capital markets and what you see at a tiny rate environment.

Speaker Change: Full Year, and then there's associated fees that would come from both warehouse volume primarily in sales and trading, as well as the expansion of capital markets income if you see a declining rate environment.

Unknown Speaker: Okay, that's helpful. I know you guys, from a capital perspective, like to have excess capital. I mean, it makes a lot of sense for new client wins, especially with an investment banking business. But now with shares notably above tangible, you guys are reading the rally that the rest of the bank space has seen. Is it fair to assume that share purchases are pretty limited here considering they're both tangible? Or can we think of the same pace, given the lack of growth as of late? Yeah,

Ben Garlinger: Okay, that's helpful. I know you guys are from a capital perspective like to have access capital. I mean, it makes a lot of sense for a new client wind, especially the investing thing in business, but now with shares notably above tangible, and you rate the rally that the rest of the bank space has seen.

Speaker Change: Okay, that's helpful. And I know you guys, from a capital perspective, like to have excess capital. I mean, it makes a lot of sense for new client wins, especially with an investment banking business. But now with

Speaker Change: shares notably above tangible you guys read the rally that the rest of the bank space has seen.

Rob Holmes: He's a part of the assume that the share of purposes are pretty limited here considering our bulk tangible or do we think of the same pace given the lack of global growth as it relates. Yeah, I think the framework that we used to evaluate marginal capital deployment has been pretty well described at this point, and you're exactly right. Here today, capital in excess of your term balance sheet has been deployed into about $80 million to buybacks, which, you know, the past couple years has been a pretty important ingredient for us to drive a book value in ways other than just do they income statement.

Speaker Change: Is it fair to assume that the share of purchases are pretty limited here considering they are both tangible or can we think of the same pace given the lack of growth as of late?

Unknown Speaker: Yeah, I think the framework that we use to evaluate marginal capital deployment has been pretty well described at this point. And you're exactly right, year-to-date capital in excess of your term balance sheet has been deployed into about $80 million of buybacks, which, you know, the past couple years have been a pretty important ingredient for us to drive book value in ways other than just through the income statement. You're exactly right that the current stock price makes that a less appealing option, which means a move to other options on our capital menu. One example of that this quarter, Ben, was the expiration of the CRT, where we just simply didn't need additional risk-weighted asset benefits and instead are prioritizing improved earnings and associated tangible capital generation.

Speaker Change: Yeah, I think the framework that we use to evaluate marginal capital deployment has been pretty well described at this point. And you're exactly right, year-to-date capital in excess of your term balance sheet has been deployed into about $80 million of buybacks.

Speaker Change: which over the past couple years has been a pretty important ingredient for us to drive book value in ways other than just do the income statement.

Rob Holmes: Your example, right, that the current stock price makes that a less appealing option, which means to move to other options on our capital menu. One example of that, this quarter ban was expiration of the CRT, where we just simply didn't need additional risk-witted asset benefit, and instead of prioritizing true earnings and associated tangible capital generation. That move is pretty consistent with our continued message around emphasizing tangible common equity over regulatory capital. And then you're also right on potential future loan growth, and the platform is built to serve all the financial needs of our clients, so that repeatedly, it's not one set of clients for treasury and one set of clients for the investment bank and another set of clients for the commercial bank.

Speaker Change: You're exactly right that the current stock price makes that a less appealing option.

Speaker Change: which means we moved to other options on our capital menu. One example of that this quarter, Ben, was expiration of the CRT, where we just simply didn't need additional risk-weighted asset benefit and instead are prioritizing improved earnings and associated tangible capital generation.

Unknown Speaker: That move is pretty consistent with our continued message around emphasizing tangible common equity over regulatory capital. You're also right about the potential for future loan growth. The platform is built to serve all the financial needs of our clients. We've said repeatedly that it's not one set of clients for Treasury and one set of clients for the investment bank and another set of clients for the commercial bank. We generally compete and win because once the client comes here, they never have to leave. Eventually, that does mean that clients are going to need the balance sheet at levels that are greater than today, and we want to make sure that we have that capital available for them.

Speaker Change: That move is pretty consistent with our continued message around emphasizing tangible common equity over regulatory capital.

Speaker Change: And then you're also right on potential for future loan growth. I mean, the platform is built to serve all the financial needs of our clients. We've said repeatedly that it's not one set of clients for Treasury and one set of clients for the investment bank and another set of clients for the commercial bank.

Rob Holmes: We generally compete in when, because once the client comes here, they never have to leave.

Speaker Change: We generally compete and win because once the client comes here, they never have to leave. And eventually that does mean that clients are going to need the balance sheet at levels that are greater than today, and we want to make sure that we have that capital available for them.

Ben Garlinger: And eventually that does mean that clients are going to need the balance sheet and levels that are greater than today, and we want to make sure that we have that capital available for them. Okay, that's all for appreciation. Thank you.

Unknown Speaker: Okay, that's helpful. I appreciate it. Thank you.

Speaker Change: Okay, that's helpful. I appreciate it. Thank you.

Unknown Executive: The next question comes from. Excuse me. Excuse me, as part of the calendar. You may proceed.

Stephen Kendall Scouten: Your next question comes from Stephen Scouten with Piper Sandler.

Speaker Change: Thank you.

Speaker Change: Your next question comes from Stephen Scouten with Piper Sandler. You may proceed.

Stephen Kendall Scouten: Yeah, good morning. I appreciate it.

Unknown Executive: Yeah, good morning. Appreciate it. So investment banking remains extremely strong and growing. I know it's kind of to the 10% contribution rate that you guys have laid out at one point in time. And indeed, you think we go appreciably through that contribution rate now that we're already to the 10.3% level year to date. We're kind of how should we think about investment banking contribution as we continue with course.

Stephen Kendall Scouten: So investment banking remains extremely strong and growing. I know it's kind of to the 10% contribution rate that you guys had laid out at one point in time. And do you think we will go appreciably through that contribution rate now that we're already at this 10.3% level year to date? Or kind of how should we think about investment banking contribution as we continue?

Stephen Kendall Scouten: Good morning. Appreciate it. So investment banking remains extremely strong and growing. I know it's kind of to the 10 percent.

Stephen Kendall Scouten: contribution rate that you guys had laid out at one point in time. I mean, do you think we go appreciably through that contribution rate now that we're already to the 10.3 percent level year to date? Or kind of how should we think about investment banking contribution as we continue to move forward?

Unknown Speaker: Yeah, pleased to call out another record quarter in investment banking. I'd note that Rob mentioned this in his opening comments, the fee contribution was significantly more granular and broad than other record quarters, namely the second and third quarter of last year. Capital Markets was the main contributor this quarter, a record level of fees, and a record level of transactions. We continue to compete and win against both Money Center and PurePlay Investment Bank.

Unknown Executive: Yeah, it was pleased to call out another record quarter and invest in banking. I'd note that the raw mention this in his opening comments; the fee contribution was significantly more granular and broad than other record quarters, namely the second third quarter of last year. Capital markets was the main contributor this quarter: record level of fees, record level of transactions. We continue to compete and win against both money center and peer play, and that's a mix. Despite 85% of industry volumes in capital markets being re-fi, which is going to disproportionately favor the incumbent. I'd say that the pipeline right now is elevated, including those transactions that are mandated.

Speaker Change: Yeah, pleased to call out another record quarter in investment banking. I'd note that Rob mentioned this in his opening comments, the fee contribution was significantly more granular and broad than other record quarters, namely the second, third quarter of last year.

Speaker Change: Capital Markets was the main contributor this quarter, record level of fees, record level of transactions.

Speaker Change: We continue to compete and win against both Money Center and Pure Play Investment Banks. Despite 85% of industry volumes in capital markets being refi, which is going to disproportionately favor the incumbent.

Unknown Speaker: Despite 85% of industry volumes in capital markets being refi, which is going to disproportionately favor the incumbent. I'd say that the pipeline right now, Steve, is elevated, including those transactions that are mandated, and while that does continue to expand, and certainly our expectations for long-term performance for the business probably also continue to increase, we'd still suggest modeling next quarter's fees rather than using a trailing four-quarter average. I mean, it's still a brand-new business, only two years in.

Speaker Change: I'd say the pipeline right now, Steve, is elevated, including those transactions that are mandated.

Unknown Executive: And while that does continue to expand and certainly our expectations for long-term performance for the business, probably also continue to increase. We'd still suggest modeling this is next. I'm modeling next quarter's fees rather than using a trailing four-quarter average. And they had to still brand new business only two years then.

Speaker Change: While that does continue to expand, and certainly our expectations for long-term performance for the business probably also continue to increase, we'd still suggest modeling next quarter's fees using a trailing four-quarter average. I mean, it's still a brand new business only two years in.

Unknown Executive: Well, I think at this point, unquestionably the trend is going to be an increasing contributor to Texas Capital Bancs. For now, I try to temper expectations and plug in somewhere in the mid 20s for the next couple quarters. Got it.

Unknown Speaker: Well, I think at this point, unquestionably, the trend is going to be for it to be an increasing contributor to Texas Capital Bank. For now, I try to temper expectations and plug in somewhere in the mid-20s for the next couple quarters.

Speaker Change: Well, I think at this point, unquestionably, the trend is going to be for it to be an increasing contributor to Texas Capital Bank. For now, I try to temper expectations and plug in somewhere in the mid-20s for the next couple quarters.

Unknown Speaker: Got it. And just as I think about the 2025 targets, obviously, still a pretty big gap between year to date and that, you know, kind of 110 ROA. It feels, for me, like the difficulty is the delta between what we can see in the financial results to date versus the sentiment of progress that y'all communicate. So where's the lever there that maybe we can't see yet that would create this large magnitude shift in terms of financial results? Yes, or do we have to read about those targets at this point?

Unknown Executive: And just as I think about the 2025 targets, obviously still a pretty big gap between year to date and that, you know, kind of 110 ROI. And it feels like for me, like the difficulty is the delta between what we can see in the financial result today versus the sentiment of progress that you all communicate. So, where is the lever there that maybe we can't see yet that we create this large magnitude shift in terms of financial results?

Speaker Change: Got it. And just as I think about the 2025 targets, obviously still a pretty big gap between year to date and that, you know, kind of 110 ROA. It feels like for me, like the difficulty is

Speaker Change: the delta between what we can see in the financial results to date versus the sentiment of progress that y'all communicate. So where's the lever there that maybe we can't see yet that would create this large magnitude shift in terms of financial results?

Unknown Executive: Yes, sir, I'm going to call it there. Or do we have to read about those targets at this point on this? Now, we'll answer the first questions that no need to read just the targets at this point. So, you see, right? We see a ton of underlying momentum in the business. And the elements required for improved returns are the same elements that we call about 2021. So, we are continuing to gain relevance with clients and prospects at a pace necessary to deliver against our fee and come targets. We think that at this point we've proven clearability to leverage tech investments and process improvements to drive real structural efficiency, which is foundational for future scale.

Speaker Change: Yes, or do we have to read about those targets at this point? I don't know.

Unknown Speaker: Now we'll answer the first question. There is no need to readjust the targets at this point. So you're right, we see a ton of underlying momentum in the business. And the elements required for improved returns are the same elements that we called out in 2021. So we are continuing to gain relevance with clients and prospects at a pace necessary to deliver against our fee income targets. We think that at this point, we've proven a clear ability to leverage tech investments and process improvements to drive real structural efficiency, which is foundational for future scale.

Speaker Change: No, we'll answer the first questions, no need to readjust the targets at this point. So you're right, we see a ton of underlying momentum in the business, and the elements required for improved returns are the same elements that we called out in 2021.

Speaker Change: So we are continuing to gain relevance with clients and prospects at a pace necessary to deliver against our fee income targets.

Speaker Change: We think that at this point we've proven clear ability to leverage tech investments and process improvements to drive real structural efficiency, which is foundational for future scale. And then we're highly consistent with market-facing posture and do so with a pretty differentiated platform.

Unknown Speaker: And then we're highly consistent with our market-facing posture and do so with a pretty differentiated platform. So over time, that's going to result in balance sheet growth when people again start to look to bank credit as a vehicle to expand their business. We still think you get to the back end of the year, and there will be some balance sheet expansion, particularly supported by a decrease in interest rates, which then sets you up for a pretty nice trajectory heading into 2025, and that's generally why we think those results are still achievable, even in what is certainly a challenging operating environment.

Unknown Executive: And then we're highly consistent with marketing posture and do so with a pretty different differentiated platform. So, over time, that's going to result in balance sheet growth when folks again start to look to bankrupt it as a vehicle to expand their business. We still think you get to the back end of the year and there would be some balance sheet expansion, particularly supported by a decrease in interest rates, which then sets you up for a pretty nice trajectory heading into 2025. And that's, you know, why we think those results are still attainable, even in what is certainly a challenging operating environment.

Speaker Change: So over time that's going to result in balance sheet growth when folks again start to look to bank credit as a vehicle to expand their business.

Speaker Change: We still think you get to the back end of the year, and there would be some balance sheet expansion, particularly supported by a decrease in interest rates.

Speaker Change: which then sets you up for a pretty nice trajectory heading into 2025. And that's generally why we think those results are still attainable even in what is certainly a challenging operating environment.

Unknown Speaker: Got it. So, kind of, I guess it continues to just be execution on what you've built and just a little bit of time for that to play out.

Unknown Executive: So, kind of, I guess the continues is just the execution on what you built in just a little bit of time for that to play off. Yeah, I think the biggest difference, you know, halfway through the year relative to our expectations, fee was really just been clients' appetite for bankrupt it. So, you know, average loan balances for out excluding more finance, they're up to $600 million here today, or about 8% annualized. But clients' appetite is much less than assumed in the January call, again, like we do to elevated interest rates. So, you continue to think we're going to get take up in the third and fourth quarter.

Speaker Change: Got it. So kind of, I guess it continues to just be execution on what you've built and just a little bit of time for that to play out.

Unknown Speaker: Yeah, I think the biggest difference, you know, halfway through the year relative to our expectations, Steve has really just been the client's appetite for bank credit. So average loan balances for us, excluding mortgage finance, they're up $600 million here today, or about 8% annualized. But client's appetite is much less than assumed in the January call, again, likely due to elevated interest rates. So we continue to think we're gonna get pickup in the third and fourth quarter.

Speaker Change: Yeah, I think the biggest difference, you know, halfway through the year relative to our expectations, Steve, has really just been clients' appetite for bank credit.

Steve: So average loan balances for us, excluding mortgage finance, they're up 600 million dollars year-to-date, or about 8% annualized.

Steve: But client's appetite is much less than assumed in the January call, again likely due to elevated interest rates.

Unknown Executive: But today, you know, clients onboarding have showed up elsewhere in the financials, which is making us, making longer than excess of the 8% that we achieved last year a bit more challenging. That's really been the main difference if we think about guidance laid out to be getting a year relative to current state. So, if you see that pick up back into the year of the trajectory is potentially not as steep but still quite steep as you move into an important 2025.

Unknown Speaker: But to date, client onboarding has shown up elsewhere in the financials, which is making loan growth in excess of the 8% that we achieved last year a bit more challenging. That's really been the main difference if we think about guidance laid out at the beginning of the year relative to the current state. So if we see that pick up back into the year, the trajectory is potentially not as steep but still quite steep as you move into the important 2025.

Steve: So, we continue to think we're going to get pick up in the third and fourth quarter, but to date, you know, clients onboarding have showed up elsewhere in the financials, which is making us, making loan growth in excess of the 8% that we achieved last year a bit more challenging.

Steve: That's really been the main difference if we think about guidance laid out at the beginning of the year relative to current state. So if we see that pick up back into the year, the trajectory is potentially not as steep, but still quite steep as you move into an important 2025.

Unknown Executive: Great, really helpful. Thanks for all the co.

Unknown Speaker: Great, really helpful. Thanks for all the code.

Speaker Change: Great, really helpful. Thanks for all the code.

Unknown Speaker: Thank you, Stephen. You now have Matt Olney with you. The line is open.

Unknown Executive: Thank you, Steven.

Unknown Executive: You know, how's math? Well, in the last few days, Steven. Well, I'm excited. Hey, thanks. Good morning.

Speaker Change: I'll give you a break.

Matthew Covington Olney: Thank you Stephen. You now have Matt Olney with Stephen. The line is open.

Matthew Covington Olney: Hey, thanks. Good morning. I want to ask about operating expenses, and it sounds like the 2Q expense level was in line with the internal expectations, but you did increase the outlook for expenses for the full year. Any more color on kind of what the driver of the updated outlook there? Yeah, you got it.

Unknown Executive: I want to ask about operating expenses, and it sounds like the two cue expense level was in line with the internal expectations.

Matthew Covington Olney: Hey, thanks. Good morning. I want to ask about operating expenses and it sounds like the 2Q expense level.

Unknown Executive: But you didn't increase the alloc for expenses for the full year.

Matthew Covington Olney: was in line with the internal expectations, but you did increase the ALEC for expenses for the full year.

Unknown Executive: Any more color on kind of what the driver of the updated outlook there? to our external calls, which are enabling us to go win more business.

Unknown Speaker: Yeah, you got it, Matt. The expense priorities are essentially unchanged. So the slight move higher in guidance from low single digits to mid-single digits is really the result of potentially higher salary and benefits expense that is associated with onboarding new talent, primarily in the broker-dealer, and then improved anticipated revenue from fee-based sources, which, as you know, generally are going to have a slightly higher efficiency ratio. So, overall, salaries and benefits should still be in that mid-single-digit range, but they do have the potential to move to the higher end.

Speaker Change: Any more color on kind of what the driver of the updated outlook there?

Steve: Yeah, you got it, Matt. The expense priorities are essentially unchanged.

Speaker Change: So the slide moved higher in guidance from low single digits to mid single digits.

Speaker Change: is really the result of potentially higher in salary benefit expense that is associated with onboarded talent, primarily in the broker-dealer, and then improved anticipated revenue from fee-based sources, which, as you know, generally are going to have a slightly higher efficiency ratio.

Speaker Change: So, overall salaries and benefits should still be in that mid-single-digit range, but does have potential to move to the higher end.

Unknown Speaker: All other expenses, as you know, Matt, we generally tag in previous calls about $70 million a quarter, are mostly evolving as anticipated. So the heaviest area growth is in tech and communications expense, which reflects the previously discussed ramp of our project portfolio to target persistent funding levels this year. But the one area that's not coming down quite as fast as anticipated is legal, where ongoing resolution of a few legacy credits should keep the spend around current levels for the next few quarters. So I think about for the remainder of the year, Matt, total expenses not associated with salaries and benefits potentially coming in right above that $70 million that we gave you in January and April.

Speaker Change: All other expenses, which as you know, Matt, we've generally tagged in previous calls as about $70 million a quarter, are mostly evolving as anticipated, so the heaviest area of growth is tech and communications expense.

Matthew Covington Olney: which reflects the previously discussed ramp of our project portfolio to target persistent funding levels this year.

Speaker Change: But the one area that's not coming down quite as fast as anticipated is legal, where ongoing resolution of a few legacy credits should keep the spend around current levels for the next few quarters.

Matthew Covington Olney: So I think about for the remainder of the year, Matt, the total expense is not associated with salaries and benefits, potentially coming in right above that $70 million that we gave you in January and in April .

Unknown Speaker: Okay, that's helpful, Matt. Appreciate the commentary there. And then, I guess, switching gears on the deposit side, I think you mentioned you took some steps to exit higher-cost deposits late in the quarter. Just curious, is this a function of just needing less funding given the slower loan growth, or is there something else beyond that? Thanks. Yeah, we.

Matt: Okay, that's helpful, Matt. Appreciate the commentary there. And then, I guess, switching gears on the deposit side, I think you mentioned you took some steps to exit higher-cost deposits late in the quarter. Just curious, is this a function of just needing less funding given the slower loan growth, or is there something other drivers beyond that? Thanks.

Unknown Speaker: Yeah, we talked a bit about that on the last call, Matt. So I'd say multi-quarter themes really continued in the deposit base this period. Rob mentioned in the opening comments, and we once again saw material increases in clients' interest-bearing deposit balances. The non-broker was up $415 million in the quarter, 2% in the lead quarter, that's $2.9 billion, 23% year over year.

Matt: Yeah, we talked a bit about that on the last call, Matt. So, I'd say multi-core themes really continued in the deposit basis period.

Matt: Rob mentioned in the opening comments that we once again saw material increases in clients' interest-bearing deposit balances.

Speaker Change: It's a non-broker, up $415 million in the quarter, 2% link quarter, that's $2.9 billion, 23% year-over-year. So the growth in client deposits is driving a reduction in broker deposits, now down to historically low levels.

Unknown Speaker: So the growth in client deposits is driving a reduction in broker deposits now down to historically low levels. And then we've got a lot of stability in commercial non-interest-bearing deposits, which have sat around this $3.4 billion average for the last few quarters. So you're right that we did begin this quarter to selectively reduce some of our very highest cost deposits, which happen to reside in mortgage finance, where we were unable to gain sufficient relevancy with that client to earn an adequate return.

Speaker Change: And then we've got a lot of stability in commercial non-interest bearing deposits, which have sat around this $3.4 billion average the last few quarters.

Speaker Change: So you're right that we did begin this quarter to selectively reduce some of our very highest cost deposits, which happen to reside in mortgage finance, where we were unable to gain sufficient relevancy with that client to earn an adequate return.

Unknown Speaker: That said, Matt, and you know this from having covered us for a long time, you will, this year, just like every year, start to see those mortgage finance deposits move seasonally higher in the third and fourth quarter. Our anticipated quarterly averages are around $5.8 billion. And that's primarily just related to industry volume increases and then increases and then, of course, accounts building prior to late year tax remittances. So, you know, the deposit flows in the business are actually a bit more predictable than the loan balances.

Matt: That said Matt, and you know this having covered us for a long time, you will this year, just like every year, start to see those mortgage finance deposits move seasonally higher in the third and fourth quarter.

Speaker Change: Our anticipated quarterly averages are around $5.8 billion, and that's primarily just related to industry volumes increases and then, of course, accounts building prior to late year tax remittances.

Speaker Change: So, you know, the deposit flows in the business are actually a bit more predictable than the loan balances.

Unknown Speaker: So rate-driven loan growth in a warehouse is really going to be the key in the back end of the year to maintaining this 120% or so self-funding ratio that we referenced in our remarks, which obviously has an impact on the margin.

Speaker Change: So, rate-driven loan growth in a warehouse is really going to be the key in the back end of the year to maintaining this 120% or so self-funding ratio that we referenced in our remarks, which obviously has an impact on the margin.

Unknown Speaker: Okay, that makes sense. Thank you.

Speaker Change: Okay. Makes sense. Thank you.

Wood Neblett Lay: Thank you, Matt. We now have Woody Lay with KB.com.

Speaker Change: You bet.

Speaker Change: Thank you, Matt. We now have Woody Lay with KBW.

Wood Neblett Lay: I wanted to start on the 2024 revenue guide. So the updated range implies a pretty large range over the back half of the year. Could you just go through the puts and the takes behind coming in at the high end of the range versus the low end? It sounds like it comes down to loan growth in the back half of the year.

Wood Neblett Lay: Hey, good morning, guys.

Wood Neblett Lay: I wanted to wanted to start on the 2024 revenue guide. So the updated range applies a pretty large range over the back half of the year. Could you just go through the the puts and the takes behind coming in at the high end of the range versus the low end? It sounds like it comes down to loan growth in the back half of the year.

Unknown Speaker: I think that's a fair assessment. We have a lot of confidence in the growth in the fee income base. So we've got a multi-quarter tracker at this point. I think it's fair to assume a similar growth rate for the duration of the year on treasury product fees. We're pleased with the results and momentum in the investment bank. So I think the revenue guide does hinge a bit on clients' appetite for bank credit.

Speaker Change: I think that's a fair assessment. We have a lot of confidence in the growth in the fee income base.

Speaker Change: So we've got a multi-quarter tracker at this point. I think it's fair to assume a similar growth rate for the duration of the year on Treasury product fees. We're pleased with, obviously, results and momentum in the investment bank.

Speaker Change: So I think the revenue guide does hinge a bit on client's appetite for bank credit.

Unknown Speaker: I mean, that is obviously a near-term guide important. 2024 results are important, Woody, but the reality of whether Texas Capital can, over time, deliver returns in excess of our cost is much more dependent on us just onboarding clients at a pace consistent with our plan. We mentioned in the comments that we're onboarding clients at a record pace right now, and just the products and services that they're using do not require a balance sheet, which is why we've been as aggressive as we have been on the buyback, trying to build tangible book value in ways other than just simply through that interest income. But pulling it back to 2024, I really do. I think it's back into the year of loan growth that'll be the driver of where we come in within the revenue range.

Speaker Change: I mean, that is obviously a near-term guide is important. 2024 results are important, Woody, but the reality of whether Texas Capital can, over time, deliver returns in excess of our cost is much more dependent on us just onboarding clients at a pace consistent with plan.

Wood Neblett Lay: reference in the comments that were

Speaker Change: I'm awarding clients at a record pace right now.

Speaker Change: just the products and services that they're using.

Speaker Change: to not require the balance sheet, which is why we've been as aggressive as we have been on the buyback, trying to build tangible book value in ways other than just simply through that interest income. But pulling it back to 2024, I really do, I think it's back into the year loan growth that'll be the driver of where we come in within the revenue range.

Robert C. Holmes: I just wanted to point out, I think it's important, that in 21, we said that loan growth was going to be a byproduct or an outcome. We weren't going to target loan growth. We're targeting onboarding the right clients and the allocation of capital being very disciplined. And so we could get loan growth if we want to borrow for loan growth. That's not consistent with the strategy, and that's what we said since day one. So we're onboarding great clients in every one of our markets and segments, and it'll

Speaker Change: I just wanted to point out, I think it's important.

Speaker Change: In 21, we said that loan growth was going to be a byproduct or an outcome. We weren't going to target loan growth. We're targeting onboarding the right clients.

Speaker Change: and the allocation of capital being...

Speaker Change: very disciplined. And so we could get loan growth if we want to loan growth for loan growth. That's not consistent with the strategy. And that's what we said since day one. So we're onboarding great clients and every one of our markets and segments, and it'll be up to them on whether or not or when we have a loan growth.

Unknown Speaker: You know, Woody, we noted in the comments as well that the pace of capital recycling has slowed, and we still exited close to $250 million of mid single-digit return this quarter, including a $50 million sale of a portion of a loan portfolio at part. So we are still seeing some opportunities to pull capital out of low-return relationships where we just haven't been able to earn the necessary portions of the wallet to deem it a relevant and worthwhile use of capital and either return it to shareholders via immediately accretive buybacks or use it to build investment class tangible common equity ratios, which will, over time, be deployed to the capital needs that clients on the balance sheet are going to have.

Speaker Change: You know, Woody, we noted in the comments as well that the pace of capital recycling has slowed and we still exited close to $250 million of

Wood Neblett Lay: Mid-single-digit return.

Wood Neblett Lay: This quarter, including a $50 million sale of a portion of a loan portfolio at part.

Speaker Change: So, we are still seeing some opportunities to pull capital out of lower return relationships where we just haven't been able to earn the necessary portions of the wallet to deem it a relevant and worthwhile use of capital and either return it to shareholders via immediately accretive buybacks and or...

Wood Neblett Lay: All right, that's that's a really helpful color there. Thanks.

Speaker Change: All right, that's that's really helpful color there. Thanks. Um, maybe lastly, shifting to credit. I mean, it was really good to see criticize loans flat quarter over quarter. Were there any material inflows and outflows there? Or, you know, were the ratings pretty consistent on a link order basis?

Unknown Speaker: Yeah, we did observe stability both in the number of downgrades to special mention and the move of credits from special mention into substandard. We also saw a pickup in velocity, both of paid out upgrades, and then certainly a payoff, including through the sale of certain non-accrual loans, which was also down nicely late in the quarter and is relatively flat year over year. I think another important thing to call out is just our approach to commercial real estate underwriting and monitoring, which relies really heavily on the more punitive current or stress sub-market level information to assess current cash flow and the ability of that cash flow to effectively meet debt service coverage thresholds.

Unknown Speaker: Um, maybe lastly, shifting to credit. I mean, it was really good to see criticized loans flat quarter over quarter. Were there any material inflows and outflows there? Or, you know, were the ratings pretty consistent on a link order basis? Yeah.

Speaker Change: Yeah, we did observe stability both in the number of downgrades to special mention and the move of credits from special mention into substandard.

Speaker Change: We also saw a pickup in velocity, both of, you know, paid-outs, upgrades, and then certainly a payoff, including through the sale of certain non-accrual loans, which was also down nicely late quarter and is relatively flat year over year.

Speaker Change: I think another important thing to call out is just our approach to commercial real estate underwriting and monitoring.

Speaker Change: which relies really heavily on the more punitive of current or stressed sub-market level information.

Unknown Speaker: We believe that's driven the appropriate grade migration cycle today. The other thing we've called out before was commercial loans that are dependent on consumer discretionary income. It's an area that we are focused on. We did see some structural stabilization in that business across those credits this quarter as operators are starting to make some tactical adjustments to deliver improvements in their models and improvements in margin, but it's definitely going to be an area that we continue to watch.

Speaker Change: to assess current cash flow and the ability of that cash flow to effectively meet debt service coverage thresholds. We believe that's driven the appropriate grade migration cycle to date.

Speaker Change: The other thing we've called out before has been commercial loans that are dependent on consumer discretionary income is an area that we are focused on.

Speaker Change: We did see some structural stabilization in that business across those credits this quarter as operators are starting to make some tactical adjustments to deliver improvements in their models and improvements in margin, but it's definitely going to be an area that we continue to watch.

Unknown Speaker: The last thing that I'd point out on credit is that we've been, our term would be, aggressively conservative since Rob got here, and to date, we've generally expressed that philosophy through timely changes in the risk ratings and then appropriately weighting, in our view, downside scenarios both in underwriting and in the reserve calculation. So we said on that last call that our risk outlook hadn't changed, and although we're certainly happy with the credit trends, I think that sentiment still holds. We need additional clarity on either the forward economic outlook or a sustained reduction in criticized loans for us to adjust our full-year look at provision as a percentage of total LHI.

Speaker Change: I'd say the last thing that I'd point out on credit is we've been, our term would be aggressively conservative since Rob got here, and to date we've generally expressed that philosophy.

Speaker Change: So we said on that last call that our risk outlook hadn't changed and although we're certainly happy with the credit trims

Speaker Change: I think that sentiment still holds. We need additional clarity on either the forward economic outlook or a sustained reduction in criticized loans for us to adjust our full-year look on provision as a percentage of total LHI.

Wood Neblett Lay: Yeah, got it. All right. Thanks for taking my question.

Speaker Change: Yeah, got it. All right. Thanks for taking my questions.

Operator: Thank you, Woody. As a reminder, if you would like to ask any further questions, please press star followed by 1 on your telephone keypads now. And we have the next question now. Jon Arfstrom with RBC, your line is open.

Speaker Change: You bet.

Speaker Change: Thank you Woody. As a reminder, if you would like to ask any further questions, please press star followed by 1 on your telephone keypads now.

Speaker Change: and we have the next questioner.

Jon Glenn Arfstrom: Jon Arfstrom with RBC. Your line is open.

Jon Glenn Arfstrom: Um, can you guys talk a little bit? Hey, good morning.

Jon Glenn Arfstrom: Hey, thanks. Good morning.

Jon Glenn Arfstrom: Can you guys talk a little bit, hey, good morning, can you talk a little bit more about some of the new client onboarding numbers, you know, a little bit in the, you know, kind of core banking relationships and treasury? Can you just help us understand the momentum a little bit more?

Jon Glenn Arfstrom: Uh, can you talk a little bit more about some of the New Client Onboarding numbers, you know, a little bit about the, you know, kind of core banking relationships in Treasury? Can you just help us understand the momentum a little bit more? Sure.

Robert C. Holmes: So, look, we had a record year in 22. We then had another record year in 23, and for the first half of this year, we're on pace to beat internal expectations and stack a third record year of client onboarding. I think more importantly that it's broad across the entirety of the platform, so it's business banking, it's middle market banking, it's corporate banking, it's every sub-segment within the corporate bank, so all the businesses are maturing well across the platform in C&I and even private wealth.

Speaker Change: Sure.

Speaker Change: So, look, we had a record year in 22.

Speaker Change: We then had another record year in 23.

Speaker Change: And for the first half of this year, we're on page two.

Speaker Change: The internal expectations and stack a third record year of client onboarding.

Speaker Change: I think more importantly, it's broad across the entirety of the platform. So it's business banking, it's middle market banking, it's corporate banking, it's every sub-segment within the corporate bank.

Speaker Change: So, all the businesses are maturing well across the platform in CNI and even private wealth.

Robert C. Holmes: And I think that obviously manifests itself in the clients doing a lot of things with us through the increase in the record-quarter investment banking fees, very diverse, granular, broad fees compared to other really high quarters. Pipeline's really strong, of high quality, with high quality clients, and treasury management outperforming the industry on a consistent basis. Pipeline's very strong, and momentum heading into the back half of the year. I think half of that growth is coming from expansion of business with clients on the platform, and half of that growth is coming through a ramp with new clients coming to the platform, which, as you know, can take anywhere from a year to a year and a half to fully ramp a really good, high quality, large treasury client. So, the receptivity of the strategy. We're really encouraged by the receptivity. Momentum is building, and I think it's manifested itself in the numbers.

Speaker Change: And I think that that obviously manifests itself in, you know, the clients doing a lot of things with us through the increase in the record quarter investment banking fees, very diverse, granular, you know, broad fees compared to other really high quarters.

Speaker Change: Pipeline's really strong, of high quality, with high quality clients.

Speaker Change: Treasury management outperforming the industry on a consistent basis.

Speaker Change: Pilot line is very strong, momentum heading into the back half of the year.

Speaker Change: I think half of that gross is coming from...

Speaker Change: expansion of business with clients on the platform. And half of that growth is coming through a ramp with new clients coming to the platform, which as you know, can take anywhere from a year to year and a half to fully ramp a really good, high quality, large treasury client.

Speaker Change: So, um...

Speaker Change: The receptivity of the strategy.

Speaker Change: is really strong. And I just got to say it again, that the way to tangibly lever the excess capital on the balance sheet is in conversations with CEOs and boards of companies.

Speaker Change: that want a solution like ours that needed to be safe and with a high quality financial institution. So we're really encouraged by the receptivity. It's momentum is building and I think it's manifested itself in the numbers.

Robert C. Holmes: So we're seeing it in your investment banking, we're seeing it in some of the treasury business, but not yet in loan demand. And I understand your point of view on that, Rob, but Matt, you mentioned rape is maybe a sticking point. What are some of the other sticking points you hear from potential borrowers and could a couple of rate cuts to spur a little bit better core loan demand for you.

Speaker Change: So we're seeing it in your investment banking, we're seeing it in some of the treasury business, but not yet in loan demand.

Speaker Change: And I understand your point of view on that, Rob, but Matt, you mentioned rates.

Robert C. Holmes: is maybe a sticking point. What are the some of the other sticking points you hear from potential borrowers and could a couple of rate cuts?

Robert C. Holmes: Can I, let me just grab that just real quick, then Matt can answer it however he wants, but I think it's more, you know, being a CEO myself, I think it's more sentiment than rate. I think rate certainly goes into it, because the return has to be higher, obviously. But you know, the marginal investment is probably deferred.

Matt: Spur a little bit better core loan demand for you.

Robert C. Holmes: Can I, let me just grab that just real quick then Matt can answer it however he wants, but I think it's more, you know.

Rob Holmes: being a

Matt: CEO myself, I think it's more sentiment than rate.

Matt: I think rate certainly goes into it because the return has to be higher, obviously.

Robert C. Holmes: We're in an election year, there's a lot going on, the economy is uncertain. I just think it's more sentiment. We can argue that. I'm not, we'll see who's right, but I think it's more sentiment than right because if there's a good marginal product, you know, it would hurdle. So I don't know. I think it's more sentiment. And so that'll come with the times as the economy starts to recover. Do you have a different view?

Matt: But, you know, the marginal investment is probably deferred. We're in an election year. There's a lot going on. The economy is uncertain. I just think it's more sentiment. We can argue that.

Matt: I'm not, we'll see who's right, but I think it's more sentiment than right because if there's a, if there's a good marginal product, you know, it would hurdle. So I don't know. I think it's more sentiment. And so that'll come with the, as the economy starts to recover.

Matt: Matt, do you have a different view?

Jon Glenn Arfstrom: Um, Matt, just one quick, quick one on capital markets. Do you feel like there's a lower band on your Capital Markets revenues? I'm looking at the fourth quarter 23 that number compared to what you've done recently. I know your business has changed a lot in the last two quarters. But is there a new floor, a new lower band, in your mind?

Matt: No, okay.

Matt: Matt, just one quick one on capital markets. Do you feel like there's a lower band on your...

Speaker Change: Capital Markets Revenues. I'm looking at the fourth quarter of 23, that number, compared to what you've done recently. I know your business has changed a lot in the last two quarters, but is there a new floor, a new lower band in your mind? Thanks.

Unknown Speaker: We really like the trillion four quarter for now, Jon. I mean, it's a two year old business. So you see material improvements every single quarter. And just the confidence and go-to-market, our ability to successfully execute our external calls, which are enabling us to win more business. So it's just building, it's such a rapid clip, but it's so new that I think trailing four quarters is the right way to go for now.

Speaker Change: We really like the trailing four quarter for now Jon. I mean it's a two year old business.

Speaker Change: So you see material improvements every single quarter in just the confidence and go-to-market, our ability to successfully execute.

Unknown Executive: So it's just building; it's such a rapid clip, but it's so new that I think trailing four quarters is the right way to go for now. Okay, thank you. Thank you.

Speaker Change: Our external calls, which are enabling us to go win more business. So it's just building, it's such a rapid clip, but is so new that I think trailing four quarters is the right way to go for now.

Speaker Change: Okay, thank you.

Robert C. Holmes: Thank you. We currently have no questions registered, so I would like to hand it back to Rob Holmes for some closing remarks. Thank you.

Speaker Change: Thank you. We currently have no questions registered, so I would like to hand it back to Rob Holmes for some closing remarks.

Unknown Executive: We currently have three quarters.

Robert C. Holmes: Thanks for your interest in the firm. Have a great quarter!

Unknown Executive: Thanks for your interest in the firm. Have a great quarter. Thank you all for joining.

Robert C. Holmes: Thanks for your interest in the firm. Have a great quarter.

Operator: Thank you all for joining us. That does conclude the Texas Capital Bankshares Inc. Q2 2024 earnings call. You may now disconnect your line and please enjoy the rest of your day.

Unknown Executive: That does conclude the Texas Capital Bancshares Inc to 2020 for earnings call.

Robert C. Holmes: Thank you all for joining. That does conclude the Texas Capital Bancshares Inc Q2 2024 earnings call. You may now disconnect your line and please enjoy the rest of your day.

Unknown Executive: You may now disconnect your line, and please enjoy the rest of your day.

Q2 2024 Texas Capital Bancshares Inc Earnings Call

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