Texas Capital Bancshares, Inc.
Q2 2021 Earnings Call Transcript

Published: 21 Jul 2021

[Operator:]

Good day. And welcome to the Texas Capital Bancshares Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode during this presentation. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jamie Britton, the Director of Investor Relations and Corporate Finance. Please go ahead, sir.

[Jamie Britton:]

Good afternoon. And thank you for joining us for TCBI's second quarter 2021 earnings conference call. I'm Jamie Britton, Director of Investor Relations.

[Rob Holmes:]

Thank you, Jamie. And thanks everyone, for joining us today to discuss what we believe was another solid quarter. Following my remarks, Julie will walk us through the quarter's detailed financial performance. But first, I'd like to talk about the current state of the bank, the journey we are on and our continued areas of focus. We are working intently to build something special in the best market with the team we strongly believe in. Last quarter, we communicated several commitments to you, and I am happy to report that we delivered on all of them. Number one, we announced we began transitioning correspondent lending activities to PHH and divest our MSR portfolio. As you can see, both actions have been taken and those processes are nearing completion. We said, based on our go-forward conservative approach, we will continue to strengthen our capital position. Our sub debt transactions this quarter coupled with our first quarter transactions result in the strongest capital position in the history of the bank. Number three, we promised to slowly and smartly make progress on our excess liquidity and resume our investment portfolio build, which as you can see from the balance sheet, we executed. Number four, we communicated credit would remain benign in the short term. All the metrics continue to improve, and we continue to have confidence in the portfolio's performance overall. Number five, when announcing the mortgage warehouse credit risk transfer transaction, we said we had multiple levers we could utilize in mortgage to better support our current clients and introduce our best-in-class platform to new ones.

[Julie Anderson:]

Thanks, Rob. My comments will address slides five through 12. We're reporting another solid quarter, as we continue to take actions, strengthening our balance sheet to ensure we're well-positioned with appropriate capital levels in line with our go forward expectations. With respect to our operating results, total revenue for the second quarter was $227 million, down slightly from the first quarter, the biggest impact coming from the transition of correspondent lending and associated sale of the MSR portfolio. Net of PPP, we saw growth in the core LHI portfolio and see momentum going into the third quarter. Our non-interest expense was flat linked quarter with a full quarter of expenses related to correspondent lending as we transition the business and close the MSR sales. For a second consecutive quarter, we recorded a negative provision as economic conditions continue to improve and our non-performing, as well as criticized levels came down. While confident about the quality of the portfolio, we continue to be cautious and conservative in our evaluation of future economic conditions. And we continually refresh that view paying particular attention this quarter to specific factors such as the ongoing benefits from stimulus, the Delta variant, inflation and continued supply chain challenges. There were a few noteworthy items for the quarter I want to highlight. Loan fees, excluding PPP fees, increased from first quarter levels, and we've included additional detail, which will be helpful to understand the content and fluctuations in core loan yields as the result of the fee.

[Operator:]

Thank you. And the first question will come from Jennifer Demba with Truist. Please go ahead.

[Jennifer Demba:]

Good afternoon. Could you give us a sense, Rob, you said you've hired a lot of people across the organization since you've joined Texas Capital. Could you give us a sense of how many revenue producers have been hired since you came in?

[Rob Holmes:]

I would say that the mix - I don't have the number exactly of revenue producers. I would say, if you told me the mix, it would be right at half. We are very conscious of this, Jennifer. We've - when I got here, we were - we did not have the right mix of back office and revenue producers, and we're coming at that in two ways. One is having a strategy, a clear strategy that we'll talk about and we're matching those revenue producers to the longer term strategy that we'll talk – that we'll announce September 1st. And then also, it's a failure on our part not to be able to achieve scale with the back office through technology and ops. And so we're going to tap this two ways. And as we grow, change the mix of front office and back office.

[Jennifer Demba:]

Okay. And can you give us a sense of your lending pipeline today versus what it was maybe a few months ago? I'm just trying to get a sense of what kind of momentum we're seeing in terms of loan demand?

[Rob Holmes:]

I would say that we - as Julie said, excluding PPP, our loan volumes went up just fairly slightly, basically stable. But think about in the context of the greater environment, when loan growth has been slow across the industry, and we've deliberately - we've deliberately exit certain names and reduced exposures over the last, say, 24 months due to the problems that we had. So I'd say the loan growth is actually pretty good. But remember, we're really focused on relationships, best in class management teams and companies and not loan growth. And so over time, you'll see that be a focus. We'll talk more about that.

[Jennifer Demba:]

Okay. One more question. You said that most of the expenses from correspondent lending and the MSR portfolio would come out in the third quarter. Julie, can you give us a sense of what that expense rate might look like, run rate might look like in third quarter versus second?

[Julie Anderson:]

Yeah. Jennifer, I mean, I think there's still just some leftover expenses as we transfer the servicing and - I mean, I think, probably, I don't know, $4 million or $5 million in expenses in the third quarter, as opposed to the fourth quarter. I mean, second quarter, when we had a full quarter of everything. It will be nominal. There will be nominal income impact and nominal expense impact in the third quarter.

[Jennifer Demba:]

Okay. But you think expenses will be down $4 million or $5 million sequentially?

[Julie Anderson:]

I think in the third quarter, I think, the expenses related to corresponding are probably $5 million.

[Jennifer Demba:]

Okay. Thank you.

[Operator:]

The next question will come from Peter Winter with Wedbush. Please go ahead.

[Peter Winter:]

Hi. I was wondering, Julie, if you could just talk about net interest income, it came in lower than I was expecting for this quarter. Could you just give some guidance that maybe the second quarter is the bottom for net interest income. Just looking out a little bit directionally in the third quarter.

[Julie Anderson:]

So Peter, I would tell you, we always - we're always focused on net interest income, but I guess predicting net interest income in the third and the fourth quarter is really not the focus. The focus is everything that we're doing is to position us for sustainable, more predictable earnings going forward. So there can be some fluctuations when you have seasonality with mortgage finance. I think, in the core book, obviously, like what I said in the commentary and Rob mentioned, we're getting traction. There's pipeline activity. Mortgage finance in the second quarter as refinance volumes came down. We saw some - our numbers come down at the beginning of the quarter, but they came up later in the quarter. I think third quarter, we'll have a good mortgage finance quarter. In fourth quarter, while we see some seasonality, maybe. So I think that net interest income for the long term is what we're focused on. And so there could still be a few fluctuations in the next couple of quarters, if that's fair.

[Peter Winter:]

Okay. Thanks. And then, Rob, a question for you. I wanted to ask, you had put in an application to convert to a Texas State Chartered Bank. I was just wondering, what's the rationale for doing that and some of the advantages for doing that?

[Rob Holmes:]

So we were actually an outlier. It seems odd, I guess, on the surface that being the size that we are, if you're not familiar with this discussion, that this may be an interesting move. But the fact of the matter is we were the largest bank in Texas that wasn't a state chartered bank. So if you go look at the largest banks in Texas, we're the only one that wasn't. So it's consistent with what others do and the state charter does not hinder us in any way to do any type of business or product in any other state. And it's consistent with our desire to become more relevant with our vendors. We're more relevant with our regulators. And we believe having our primary Texas focus in doing business in this market, it was the appropriate thing to do.

[Peter Winter:]

Got it. Thanks for taking my questions.

[Operator:]

The next question will come from Brett Rabatin with Hovde Group. Please go ahead.

[Brett Rabatin:]

Hey, good afternoon. I was hoping maybe, Julie, to come at the NII question in a different way, just thinking about all of the moves in the quarter in terms of management of the balance sheet liquidity. Can you maybe give us an idea of, from a basis point perspective, what you think the margin could trend towards with the actions you took in 2Q? All else equal, I know PPP is going to have an impact with lower fees, but it would seem like your margin could move up over the next quarter, at least anyway. Maybe some comments on margin, if you might.

[Julie Anderson:]

Sure. You know, Brett, I don't like to talk about NIM, but I'll focus on the difference income. But again, because we can have some variations. But again, if you look at the different pieces, so we did - there was about $4 billion of deposits that were run off and that was back end loaded. Most of that happened at the end of the second quarter. So it wasn't reflected in liquidity. You can see our ending liquidity which was $4 billion lower. So we'll have - that's definitely going to be beneficial. Those deposits were - were at a negative spread. So you'll see the full quarter of that in the third quarter. So that's certainly something that's positive. Again, on the core loan side, our yields and our spreads are holding up very well. There could be - there could still - there could be some compression on the mortgage finance side. But I think you'll see the volume hold in there and maybe even be a little bit higher in the third quarter. So that's the different part. I think that the fact that NIM was flat to up a little bit from Q1 to Q2, I think that's probably a positive indicator. But those are the different parts that would factor into that.

[Brett Rabatin:]

Okay. Yeah, I figured you wouldn't want to give me the answer I was looking for. So I guess the other question is just around that. Are you done with the balance sheet changes or will you continue to do things to the balance sheet to manage equity lower in the near term? Or is that going to be more of a natural progression as you grow the loan portfolio?

[Julie Anderson:]

Yeah. So we'll talk more holistically about that on September the 1st, but I can tell you that there - I think, the securities portfolio, we're comfortable with the level where that is right now based on current rates. So I don't think you'll see us move that much if rates stay consistent with where they are. Is there a little bit more room for some runoff of some of the higher cost deposits? Probably. I think the bulk of that happened in the second quarter, but there's probably a little bit more room there. But I think that you'll see the full quarter and third quarter of the second quarter actions. And then we'll talk again more holistically on September the 1st of kind of what you could expect balance sheet composition, liquidity and securities to look like going forward.

[Rob Holmes:]

The only thing I would add is we would - the only thing I would add is I think we'd look to re-close the securities portfolio with anything that paid off.

[Julie Anderson:]

Correct. Yes. To maintain the current level, yes.

[Brett Rabatin:]

Okay. Fair enough. And then maybe one last one, if I could, just around hires. Rob, are you done with the senior hires in terms of lines of business or should we expect to see additional ones here in the near term?

[Rob Holmes:]

No, I think you'll - I think, in the next month, you'll have two very significant hires for the firm, both with the operating committee level, and look forward to sharing that with you in part of the strategy as well.

[Brett Rabatin:]

Okay. Thanks. Appreciate the color.

[Operator:]

The next question will come from Brady Gailey with KBW. Please go ahead.

[Brady Gailey:]

Thanks. Good afternoon, guys. I wanted to start on the deposit side. If you look at period end deposits, they were down about $4.5 billion. I know you guys mentioned strategically shrinking some of those higher cost index deposits. But I was just wondering, I mean, the down $4.5 billion, how much of that was what you call strategic shrinkage in deposits?

[Julie Anderson:]

What you saw in interest bearing, that's strategic. I think it's roughly $4 billion. That's the strategic repositioning. Non-interest deposits for you, remember, we can have some fluctuations in that with quarter end and average. So non-interest deposits average is a better indicator. But as far as the interest bearing, the ending is - reflects the strategic run-off that we did.

[Brady Gailey:]

Okay. And then Julie, I've noticed over the years that the asset sensitivity of Texas Capital has been coming down, it came down a little bit more this quarter. But can you just talk about the components as far as why Texas Capital is losing some of its asset sensitivity here?

[Julie Anderson:]

Sure. We think that all of that is good, and we wanted that a little bit less asset sensitivity kind of longer term, not just linked quarter, but year-over-year, we have more floors in play, which are serving us well. And then obviously, having a securities portfolio where in the past, we really haven't had any securities to speak of. That's going to - that's reduced our asset sensitivity a little. On a quarter-over-quarter basis, we had the HLA, the highly liquid assets, the cash that ran off, that's a 100% beta. Some of the deposits, the index deposits that we ran off, while we - while I would talk about them as 100%, we model it at 85%. So there was a little bit of difference there. But it's what that action is so positive for net interest income. So we think the little bit of asset sensitivity that we're giving up, it's going to be very reflective in net interest income. And again, in September 1st, we'll talk a little bit more on how we plan to manage interest rate risk going forward. But hopefully, that helps answer your short term question.

[Brady Gailey:]

Yeah. No, that's great. And then finally for me, Rob, you've done a great job of working on the capital side of Texas Capital. I mean, as more capital now than I think I've ever seen, as you had talked about. If you look at the stock, especially after the recent sell-off, I mean, the stock is 113% of tangible book value, you have plenty of capital. Why not get started on a share repurchase program at this time?

[Rob Holmes:]

We think we can do much better investing in organic growth. We have a lot of opportunities. I'm excited for you to listen to the story, September 1st. There is a lot of banks out there doing the return to capital playbook. There is so many opportunities with new products and services and businesses in the markets that we're in, we can get a much greater return than repurchasing our stock. I agree that it's - well, I'll leave it at that.

[Brady Gailey:]

All right, great. Thanks for the color, guys.

[Operator:]

The next question will come from Brad Milsaps with PSC. Please go ahead.

[Brad Milsaps:]

Hey, good afternoon.

[Julie Anderson:]

Hey, Brad.

[Brad Milsaps:]

Hi, Julie. Rob, I was just curious, I know you didn't have the number at hand or the number of relationship managers that you've brought in since you started. But just did you have a sense for maybe the amount of loans that they managed at their previous stops? Or I just kind of wanted to get a sense of kind of what the potential is there with the RMs that you have brought in?

[Rob Holmes:]

Yeah. I would say that I would hope going forward, you'll focus. I know that this bank used to talk a lot about new bankers, new assets. The new bankers and the current bankers that are here are the bankers that understand the whole myriad of corporate finance, if you will. And there's going to be a lot of other things to do with these clients than just loans. And so loans is an outcome, if you will, of banking a great client over the life cycle of that client, and it will go up and it will go down, so we are not targeting loans. We're targeting relationships with a broad full myriad of products, providing solutions to management teams.

[Brad Milsaps:]

Okay. And I guess in that same vein, do you - and I know a lot of this is in motion before you got there, but do you feel like you've sort of right-sized the loan portfolio to a steady state to where you can - you know, it's at a point where you like what's in there. There's nothing else that - in a major way that you feel you need to run off or turn over at this point?

[Rob Holmes:]

No. I think that - look, you're right. When there's a new team here, Tim and me both, you don't know what you have until you go deep. But I think what you see happening - well, first of all, being provisioned correctly, is part of good capital management, right, so let me say that first. So we're really focused on having the right amount of provision. And then when you do a real deep dive in the loan book, the reason I think we're in good shape is if you look at this quarter, CFCs dropped, we have lower NPAs, we had a tremendous amount of charge-offs and our watch list is trending down. And then the NPAs that we do have, there was good value, meaning equity in deals, call it, real estate deals, and good structure. These are not enterprise loans like we used to have in the portfolio that we exited or high commodity related issues. So I feel really good about where the portfolio is and very fortunate that, that's what we found on a deep dive.

[Brad Milsaps:]

Great. And then just one kind of final housekeeping question. Julie, I saw there was maybe $2 million of charges in other expense related to the sub debt redemption. Anything going on in other fee income. I noticed it was up maybe $5 million sequentially. Just kind of curious, is that run rate or is there anything in there that you might say was sort of one-time or elevated in nature?

[Julie Anderson:]

Yeah. No, I don't think so. I don't think there was any one thing that drove that. So that's probably an okay run rate for going forward.

[Brad Milsaps:]

Okay, great. Thank you.

[Rob Holmes:]

Thank you.

[Julie Anderson:]

Thanks.

[Operator:]

The next question will come from Bill Dezellem with Tieton Capital Management. Please go ahead.

[Bill Dezellem:]

Thank you. I was hoping that you would dive into more detail behind your reference to the second half of the quarter, saw business strength building. And as part of your answer, is this a function of your internal initiatives that are gaining traction or would you say it's more a function of just the economic - general economic strength that is in your market?

[Rob Holmes:]

Let's say, the business initiatives that we're employing are going to take a long time to take effect. We're very happy with progress. So remember, we haven't even rolled out our strategy and announced the rest of our leadership team. Now we've added a lot of frontline people. They're just getting here, as you know. So all of those efforts are going to take a little bit to come to fruition. I think what we talked about and improving in the back half of the quarter was specific to mortgage warehouse. And then we also talked about that we have a number of levers in the last call, I think, I talked about having a number of levers in mortgage warehouse that we can utilize to affect volumes, price and otherwise. And when we realized that we were decisive in taking action to mitigate, I mean, refi volumes have come down to kind of a normalized level, I guess, by June of '16 to '19. And they weren't quite there yet in the second quarter, they started going there. So that trend line continued. And now we're at a normalized level in the sector for refi business. So when those volumes went down by that much, we did take action, and we saw new clients. We saw increased volume with old clients, and we did other things that really helped fund the warehouse, and that's what we meant about back half performance in the quarter.

[Bill Dezellem:]

Thanks, Rob.

[Rob Holmes:]

You bet.

[Operator:]

The next question will come from Anthony Elian with JPMorgan. Please go ahead.

[Anthony Elian:]

Hi, everyone. Rob, I want to start on the new revenue producers that you talked about. Can you give us more detail on how you recruit these professionals? Did they find you or do you reach out to them? And do you think you can keep up the strong pace of hiring from here?

[Rob Holmes:]

So - yeah, it's a great question. So it's really great to see. So when you hire somebody on a leadership team that's new or a level or two down and they're really good, they usually bring talent with them. So people are coming with the new people that we hire. We actually had one banker drive up here from a market last week, literally asked for a job. I want to be a part of this team. I've seen who you've hired. And we had extensive conversations over the weekend and guess what, he accepted today. So we're seeing a really good momentum in the market. We're being very discerning that the people that we brought in are attracting other people, which is making it easier than I would have thought. It started slow. But as other people and talent came, we've gotten a lot of momentum. So I'm not naive. I think it will be very hard. We're competing against the best financial institutions out there. We have people coming from other states moving to Texas. Think somebody that went to a Texas University and graduated and went somewhere else to work, we've seen that dynamic come to play. But there is a war for talent that is brutal, but we're having success.

[Anthony Elian:]

Thank you. And Julie, you mentioned that line utilization on the LHI book remains low, but you're seeing positive momentum here. Do you think this could translate into actual loan growth in the back half of this year?

[Julie Anderson:]

Maybe. I mean, again, I think, that's longer term, but the momentum is positive. We just haven't seen any meaningful change in the utilizations yet. So more to come on that.

[Anthony Elian:]

Okay. And then finally for me, I know we're still about a month away from your strategic update in September, but I'm curious if you're planning on providing any long-term financial targets or an outlook just so we can quantify the impact of all the investments and hires you're making or if it will primarily be a qualitative update? Thank you.

[Rob Holmes:]

I think that we will, it will be longer term. And so there will be - you know, it's just going to be - we want to be credible and accurate where we do provide that. So I think you'll see it several periods out, we provide that. So we'll tell you what we're going to do, and you can keep us a cattle like certain actions and things that we talk about in the mid-periods, but we'll definitely have some financial goals and metrics longer term.

[Anthony Elian:]

Great. Thank you.

[Operator:]

The next question will come from Matt Olney with Stephens. Please go ahead.

[Matt Olney:]

Yeah. Thanks for taking the question. I want to circle back on the warehouse, and I'm looking for a little clarification. Did you call any participations back on the balance sheet in the second quarter, and if so, how much? And then what's the remaining balance of participations off balance sheet as of June 30th? Thanks.

[Julie Anderson:]

Matt, we've - we did, and that will be in the 10-Q, which will get followed in the next couple of days, and I think it was about, I don't know, 400, $400 million or so that you will see a reduction in actual funded participations from the end of Q1 to the end of Q2.

[Matt Olney:]

Thanks for that. And Julie, in terms of the timing of that, it sounds like based off the previous commentary, those were maybe called in towards the back of the quarter. And then secondly, what's the appetite to bring on - to bring back the remaining around, what, $1 billion participation back on balance sheet? What's the appetite for that?

[Rob Holmes:]

I think what you'll see, it's not as simple as bringing participations back on or not. I mean there are certain comfort levels of certain clients at certain exposures that we may have participations. So it's not like you bring a participation back on or off. It's how you're strategically managing the portfolio with exposure to certain clients where participation may be prudent or the right answer. And by doing that, you maximize your exposure to the right clients over a portfolio view. So it's not just like bringing them back. It's strategic - the participations we brought back and then put back on, we're probably with different clients, if that makes sense.

[Julie Anderson:]

Yeah. I mean bottom line, Matt, we've always said that we're always going to maintain some level of participations because that's how we manage individual client concentrations. But certainly, in times of increased refinance volumes, you can see those overall participations be higher than in a more normalized environment.

[Matt Olney:]

Okay. Thank you. And then, Rob, I think, you mentioned the mix shift of the warehouse volumes in recent months between refi and purchase. Any color on what that mix looks like more recently? Thanks.

[Rob Holmes:]

Yes. I would say it's - think about the high 30% of refi currently, was the last numbers I saw.

[Matt Olney:]

Okay. Thank you.

[Operator:]

The next question will come from Jon Arfstrom with RBC Capital Markets. Please go ahead.

[Jon Arfstrom:]

Thanks. Good afternoon.

[Julie Anderson:]

Hey, Jon.

[Rob Holmes:]

Good afternoon.

[Jon Arfstrom:]

Hi. Question for you in some of your commentary in the slide deck, you talked about re-underwriting the expense base, and curious what you're learning from that. And also, you talk about reallocating some of the expenses from correspondent lending into hires and new products and services. Can you touched on some of the key areas you feel are missing from your product offering that you need for longer term success?

[Rob Holmes:]

So the reallocation, first, I guess, we can talk about. So we hired Don Goin. He is CIO. And before he got here, we were looking at all the investments in technology and attempt then to re-underwrite them. We're bringing that forward with Don under his leadership. I think we said it before, we want to be technology enabled and banker dependent. I think Don will tell you the focal point is a client experience and software based and digital every day. We're moving in that direction. That is a greater focus point today than it was historically at this firm. So we are allocating dollars differently in technology, that's one. Two, we have the large amount of expenses associated with correspondent lending that we're taking out of that business, which, as you saw, can be volatile on a more risky business and attract more capital and for all the reasons we got out of it, and we're plowing that into C&I and other investments in frontline. And then we have a whole lot of - we're not - with the correspondent lending, if you think about it, there's a lot of people that left with that business, which we're very fortunate. And one of the reasons we take PHH was we could find a home for those people. But that headcount is going back into front line of C&I and other products and services, and we'll talk more about the products and services September 1st.

[Jon Arfstrom:]

Okay. Second question here, I'm guessing hiring some of these people that you've talked about these new leaders frees up a bit more of your time. And curious how you're spending time today versus when you started. Are you - would you call yourself on your front foot and your client calling and recruiting new bankers or are you still spending a lot of time internally?

[Rob Holmes:]

I'm spending a lot of time in all of those areas. I'm not doing a very good job taking much time off. So I would say that the first several months was really understanding diligence, understanding the loan book, understanding the products, the services, the talent the processes, the policies, the systems, the technology, where we were in the regulatory environment and with all the different constituents and how they felt about us so that we could get a good base to move forward. And then we've spent a lot of time attracting talent, talking to talent at all levels of the organization. As you know, we're supplementing the organization from the top down and the bottom up. We're starting a new junior program next week with 60 new analysts. We never had a wholesome junior program before. So we're really, really excited about that. And frankly, I've spent time retaining talent as well. We had a lot of talent here that I needed to go and sit down with and describe the vision and estimate a part of it and really, really happy with the talent that is here as well. And that - I just don't want to miss that key component. It's not all new people. There is a lot of people here that we're focused on, and I'll continue to do that. And then the one thing that did change is probably about a month ago or maybe eight weeks ago, I hit the road. And I've been in all of our markets, numerous times, probably more times than the people that work there with me want me to come. But we've been in the markets a lot, and it's been very, very revealing and we've taken market conversations and feedback from both our client's prospects but also our employees, and we're listening and we're making changes to get better. So - and we're getting to be more proactive in the markets and really excited about that. So I guess I would say if there is any change at all, it would be more in the market than visible. But there's also the September 1st deadline that we're focused on and making sure we have clarity for each of you.

[Jon Arfstrom:]

Okay, good. Thank you for the help. And I look forward to that.

[Rob Holmes:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Rob Holmes, for any closing remarks.

[Rob Holmes:]

So I would get slight thank everybody for your interest in Texas Capital. We're very appreciative of your time. We're really excited about seeing you September 1st, and stay safe.

[Operator:]

Thank you for your participation in TCBI's second quarter 2021 earnings conference call. Please direct requests for follow-up questions to Jamie Britton at [e-mail]. Thank you for your participation, again. You may now disconnect.