Texas Capital Bancshares Inc (TCBIO) 2021 Q3 法說會逐字稿

Ladies and gentlemen, hello, and welcome to the TCBI Q3 2021 Earnings Release Call. My name is Sarah, and I will be coordinating the call today.

(Operator Instructions)

I will now hand over to Jamie Britton, Director of Investor Relations and Corporate Finance, to begin. Jamie, please go ahead when you are ready.

Good afternoon, and thank you for joining us for TCBI's Third Quarter 2021 Earnings Conference Call. I'm Jamie Britton, Director 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, 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. Our speakers for the call today are Rob Holmes, President and CEO; and Julie Anderson, CFO. At the conclusion of our prepared remarks, our operator will facilitate a Q&A session. And now I'll turn the call over to Rob for opening remarks. Rob?

Thank you, Jamie. This is Rob Holmes. Thank you for joining us today to discuss what we believe was an important quarter and the evolution of our firm. With me, as Jamie said, is Julie Anderson. She's going to walk us through the quarter's detailed financial performance. But first, I would like to highlight an important milestone we achieved in the quarter.

On September 1, we shared a transformative vision for our company, one that will allow us to realize the many distinct opportunities before us, deliver a truly differentiated offering for our clients across our expanded platform and build a full-service broad financial services firm that can seamlessly serve our clients through their life cycles and is centered to one of the largest and fastest-growing economies in the country, Texas.

On the call, we provided considerable detail on the strategy while being very transparent about the sustained investment of both time and resources we believe will be required to achieve our long-term goals. Immediately following the call, we started meeting with various constituents to learn each of their specific perspectives. First, we discussed all facets of the plan in detail again at an extended company-wide town hall.

Then we traveled to discuss with various Texas shareholders in person, attended an industry conference, and heard from many more in one-on-one meetings. The duration of the build was met with some frustration, which I certainly understand, but came as no surprise to any of us.

Importantly, the strategy also created excitement. We were greatly encouraged not only by the support to create shareholder value by building something differentiated in the space but also by the recognition that it will take time, talent, investment and fortitude to do so. Time was even encouraged by some, recognizing true long-term value creation is indeed difficult. We invested the better part of 3 weeks to provide clarity, address concerns and importantly, also learn where we could improve the communication of the strategy.

I will not go into all the details of those constructive discussions now, but I would like to address some of the high-level concerns and questions. Do loans really not matter? Of course, they do. But, and I cannot stress this enough, we will no longer let loan growth alone drive our strategy.

We will have a broad offering with greater value add which will allow us to become more relevant to our clients and appeal to more prospects. To achieve our plan, the loan portfolio will absolutely grow. However, it will be an outcome of covering our markets in a smart and disciplined way versus a result of our historical strategy, which was to grow the loan portfolio for growth's sake alone, not adhering to a specific go-to-market strategy by sector.

Next, are you sure now is the right time for an investment bank? Absolutely. Our clients need and use these products and services. They are simply provided by our competitors. Today, we provide a portion of the value stream to them or we leverage the trust we have built to refer them to a partnering firm for execution. We currently incur the cost of client acquisition, and in almost all cases, the investment of capital in the form of loans, precisely for the opportunity to provide these types of value-added solutions.

Going forward, we want to become more relevant to our clients. We would like to control the quality of the execution from end to end, and we want to capture the full value of our relationships. Importantly, the products and services we are going to provide do not move us down the risk continuum. And finally, is this all you can achieve, a 1.1% ROA in 2025?

The answer is, of course not. We believe the platform we are building is capable of much more. And when complete, we'll be able to deliver favorable returns through economic and market cycles. The financial targets set forth for 2025 represent an important milestone in the journey and one we're highly focused on achieving.

We have competitive advantages others do not have. We are in the best markets in the country. We have had a commercial focused background through conception, and we have a seasoned executive leadership team now in place excited to build something that is differentiated.

We are building an operating model aligned to our vision and grounded in our values, which requires organizing around the client journey, capitalizing on adjacencies to offer expanded products and services and establishing a culture of consistent communication, accountability and execution. We have a clear strategic direction to expand our coverage in our core C&I markets, strictly evaluate opportunities for growth and deliver higher quality, more sustainable earnings.

Financial resilience is a core tenet which could be an important strategic advantage, allowing us to serve our clients and our communities through all cycles. This type of model does not deliver average results, which is why we will continue to invest in the capabilities outlined in our strategic update.

The volatility in earnings which our current model produced the past 3 quarters further evidences the need for sustained, disciplined investment. We are committed to earning each of our constituents to us through execution. And I can assure you we will explore every opportunity to responsibly accelerate our delivery and sweep every quarter for opportunities to prudently manage expense and self-fund as many of our investments as possible.

We are building Texas Capital Bank the right way, which leads me to the quarter's results and what I see as encouraging steps in the right direction. The benefits of a better capitalized balance sheet are now in place. There should be no more noise from issuances or redemptions. The loan portfolio continues to perform well, and we are confident our new risk management practices, analytics and adherences will maintain solid credit quality on a relative basis going forward.

With the correspondent lending wind down largely complete, we believe the businesses we either have or are well in the process of building are the right loans with the right risk appetite and when executed the right way, will be very well received by our clients and prospects across our markets.

With the addition of Anna Alvarado, our new Chief Legal Officer and Corporate Secretary, our executive leadership team continues to evolve and improve upon what I believe already favorably compares to that of any of our broader peers. Finally, the quarter underscores the importance of increasing the contribution from higher value, more stable revenue sources, increasing our focus on treasury, wealth management and investment banking will deliver significant value.

The hard work of executing and delivering is still ahead of us. But we have tangible momentum and a solid foundation created over the past 6 months from which to build. I want to thank you for your continued interest in our firm and the feedback you have provided. Acknowledging the importance of providing the proper visibility to our progress, we are acutely focused on determining the right external metrics and guideposts to assess our performance and when to share them.

It is important to note that internally, everything we do is intentional. Our routines, cadences and focus are all done in a deliberate manner to drive specific outcomes. Our efforts and spend across the enterprise are now measured and will be improved upon perpetually. As I've mentioned, credibility is important, so we will be thoughtful in our approach. With that, I'll turn it over to Julie to discuss the quarter's financials.

Thanks, Rob. Our third quarter results further substantiate our strategy is the right one and will improve our quality of earnings in the future. A core theme of our strategy is our ability to be banker-led and technology enabled. So included in noninterest expense for the quarter is a $12 million write-off, and it's a direct outcome of the way we're now approaching technology, rationalizing the existing tech stack, understanding what we have and aligning it to the businesses.

We've reunderwritten all the capitalized amounts and whether or not the asset is going to be used as originally intended for the life cycle that was expected. And some of it was not because of our new approach includes ongoing development and enhancement. It was a comprehensive process between finance, our new CIO and his team, as well as the lines of business.

We feel good that the balance sheet is clean now and don't expect other such write-offs in the future. Moving on, total revenue continued to be pressured and was down from the second quarter with the transition of correspondent lending and a lower level of loan fees. As the noteworthy items for the quarter, I'll highlight. Loan fees, excluding PPP fees, decreased from second quarter levels. And as usual, we've included additional detail which will be helpful in understanding the context and fluctuations in core loan yields as a result of the fee.

Fees will fluctuate from quarter-to-quarter consistent with client and business activity. PPP fees were down in Q3 with slightly less than $5 million fees remaining to be earned. Average liquidity was down over $2.5 billion, reflective of our reduction in index deposits in the first half of the year. A focus on optimizing rates towards appropriate market levels continues but the largest move occurred in the second quarter.

There will be fluctuations in the level of liquidity with growth in core LHI as well as seasonal movement in the mortgage finance portfolio. We remain comfortable with the current investment portfolio level and will continue to focus primarily on replacing runoff to maintain the current balance. No meaningful net increase in those balances is expected.

Moving now to credit on Slide 8. After 2 consecutive quarters of negative provision, we recorded a nominal provision of $5 million in the third quarter. Resulting from our view of the economic outlook remaining consistent with the second quarter, coupled with net growth in LHI, net of mortgage finance.

As a reminder, 3 factors impact provision levels, our economic outlook, loan growth and loan mix. Our allowance for credit losses on loans excluding mortgage finance, is 1.46%, consistent with last quarter. The ACL currently represents 2.5x nonaccrual loans. Overall credit trends continue to be stable and improving with another quarter of nominal net charge-offs and flat nonaccrual levels. Total criticized loans were down this quarter and included payoffs at par and upgrades to pass primarily in CRE, specifically in hotel and senior housing.

We continue to be cautious and conservative in our evaluation of future economic conditions, and we continually refresh that fee. Average LHI, excluding mortgage finance, grew on a linked-quarter basis. After netting out the reduction for PPP forgiveness, we had $210 million in net growth in loans, excluding mortgage finance. Growth in C&I was approximately $600 million, excluding the PPP paydowns and was offset by paydowns in CRE of $400 million, which included about $100 million of criticized.

Our core loan yields dropped a bit during the quarter as pressure continues with our focus on client selection. Loan spreads continue to be fairly stable as compared to spreads last year at this time as we've improved our overall funding costs. Additionally, we saw mortgage finance volumes strengthen at the end of the second quarter, and that continued into the third quarter.

We're focused on relationships and using the levers available to us that we've discussed previously to continue to improve our market share. That can and has translated into lower yields but we believe the pace of the decline is stabilizing at this point. As a reminder, the fourth quarter and first quarter are typically seasonally weaker for warehouse balances.

Moving now to deposits on Slide 10. We experienced some growth in noninterest-bearing deposits and a full quarter benefit of the $4 billion reduction in index deposits. We experienced modest improvement in overall funding costs. Focus on growth in core operating deposits continues and that takes time. Banking the full wallet of the right clients will improve our overall funding profile longer term and is key to our strategy.

Moving now to Slides 11 and 12. Our net interest income was down from the second quarter, primarily related to lower loan fees. NIM was up slightly resulting from the deliberate reductions taken in the first half of the year with some of the higher-priced index deposits. We won't focus on trying to predict fluctuations in NIM but rather remind everyone of the different components. Warehouse yields have continued to decline, as I mentioned, but seem to be stabilized now. All pricing decisions take into consideration each relationship full profitability with a focus on maximizing overall returns.

Core LHI yields, net of fee fluctuations, have been fairly stable but will continue to see pressure as the mix changes. Banking the right clients with improved products and services will positively impact overall profitability and returns as it translates into an improved funding mix, but that does take time.

The third quarter noninterest income decrease was consistent with the transition of correspondent lending. While certainly not significant yet, we continue to see positive trends in treasury-related fees and wealth management fees. Top lines in those are encouraging as we continue to see success in our more disciplined calling efforts and continue to add talent in both areas.

Net of the $12 million tech charge, noninterest expense was down $9 million from the second quarter and is reflective of the reduction in correspondent lending expenses. In the fourth quarter, we would expect $1 million to $1.5 million in remaining CL expenses and basically no CL experiences -- expenses going into 2022.

We continue to have success in hiring bankers as well as other targeted hires. As we disclosed on September 1, the pace of those investments will not be linear. And while we're focused on self-funding a portion of it with a reduction in CL as well as overall corporate initiatives focused on ensuring the right allocation of resources we won't be shortsighted in our decisions about spending.

Everything that we're doing is aligned to our strategy, and we'll continue to communicate the results of our efforts including more detail as we move further into the time horizon of our longer-term plan. Now we'll turn it over to the operator for Q&A.

(Operator Instructions)

Our first question will come from the line of Brady Gailey with KBW.

My first question, I wanted to start just on the capital base. If you look at common equity Tier 1, that ratio was up again this quarter by about 20 basis points. It's now 10.7%. And if you look at the balance sheet, kind of a snapshot as of today, it looks like you do have a lot of excess capital and the buyback would potentially make sense. But I know you guys have a big plan in front of you and maybe looking forward, you may think you don't have excess capital. Maybe just comment on your capital base, not necessarily how it looks today, but do you think you have excess capital now? Or do you think the capital base is adequate for the plan that you guys rolled out on September 1?

Brady, I would just point you to the long-term goals of what -- our tolerances of what we said. We keep CET1 at on the September 1 call of 10% or greater. And if we do what we say we're going to do, I said at the outset of this call that it will require loan growth to be successful. And we need this capital to execute our strategic plan, and we're not interested in the short-term returns of a buyback because we'll have greater returns by achieving the plan in which we'll need the capital.

All right. And then moving on to the warehouse. It's nice to see continued strength there and the warehouse is up a little bit linked quarter. Rob, longer term, how do you think about the size of that mortgage warehouse business? I think as of the third quarter, it's about 22% of average earning assets. Is that kind of where you'd like to see it longer term? Or what's your thoughts on that, longer term?

So what I would say is just -- let me just touch on the short term real quick. We talked about the 6 levers, I think, at the end of the first quarter that we had to pull. We've done a combination of those to where we actually were losing share kind of at the beginning of the second quarter. At the end of the second quarter, we started gaining share, and we've continued to gain share since then. So our strategies to battle that have actually worked and come to fruition.

So I'm really excited about the warehouse itself and moving forward and our ability to execute. And as Julie said, I think the compression in yields is about done. So I foresee a really constructive path forward there. As it relates to the overall portfolio and the warehouse as a percentage of earnings or balance sheet or assets or whatever, I'm not going to project the future.

I would like it to be less than it is today, obviously. But I just want to state clearly that we're bullish on that business. So should it be a smaller part of assets or composition of earnings? Absolutely. We said that. That's our goal. That's what the strategy does but not at the expense of the warehouse itself.

All right. And then lastly for me, I was a little surprised that the reserve ratio stayed flat linked quarter at 1.6%. I mean, it seems like elevated level. I mean, if you look at criticized assets, they fell almost 20% linked quarter. So -- and now you're back with a positive provisions. Maybe just talk about the reserve, the likelihood of that releasing lower over time? And do you think you could still see a negative provision? Or is the provision normalizing higher from here?

I would say that we have a pretty conservative outlook going forward, and that's the reflection here. I think I've told you before others on these calls, Tim and I are -- start from a pretty conservative position and go from there. So I don't know what our view of the future is compared to peers and others. But I would say that's a conservative view, and it's reflected in the level of reserves.

The next question comes from the line of Brett Rabatin with Hovde Group.

I wanted to, I guess, first start with the expense base and just talk maybe about the third quarter. And I know, Julie, that it's going to be lumpy in terms of what you invest in and how that shows up quarterly. But could you maybe just talk about the strategic plan relative to the third quarter and the double-digit expense growth that you kind of laid out when you did that strategic plan. Does that still seem the case in terms of the expense growth? And maybe can you give us any color on if that's going to be more in people from here? Or if you think that's going to be more in systems and infrastructure? Any help on that would be appreciated.

So Brett, can I take that real quick, and I'll turn it over to Julie?

Sure.

What I would say is as it relates to the third quarter, just remember, we came out with our strategic plan in the September 1, so mid-quarter, if you will. And we've done a lot to improve the firm. You saw the capital raise in the first quarter. The talent hires, we put in management routines and cadences. But launching our strategy in executing the specific strategy really is happening right now. So you don't see a lot of that expense build as it relates to strategy in the third quarter. That's to come.

I think there was some confusion, and I'll take blame for it, I guess, for not being as clear as we should have been on the strategy call that we are going to be able to front-load all this expense and get it behind us. And that's just not the case. And that's why we're saying it's going to be lumpy, not linear.

There's -- here's a great example. I can't hire a lot of the talent that I want to in the fourth quarter. That will probably be the first quarter, right? We'll hire more people in the first quarter than the fourth quarter, even though we're hiring people now, but for comp reasons and those dynamics, it will be first quarter.

We've got a lot of tech spend that we need to do but it's not going to be linear quarter-over-quarter and then go away. We'll do something and then maybe a quarter that goes by, and we'll do something again as we develop our book of work and further address that. So I would just say think of the strategic launch at September 1. Clean balance sheet with provision, clean balance sheet with the tech write-off. We have a basis -- by the way, a clean balance sheet with -- that -- having the capital where we want it as well, and the ability to affect the strategy.

So we have a base now, it's clean, it's super solid. And the expense and stuff as it relates to strategy, we'll probably be going forward outside of some talent that we've hired to date.

And Brett, the only thing that I would add is -- to what Rob said, there's no change from what we talked about on September 1. So for the base, that base of 600, that still stands. As you look at our -- what we said about low double-digit growth in 2022, so that's -- nothing has changed from what we said in September hers, if that's helpful.

Okay. Yes, that helps, Julie. I appreciate it. And then the other question, just around the same topic, Rob, in your prepared comments, early on, you talked about some of the concerns that you would address with investors post the big strategic update. I guess one of the things that I've heard is Rob seems like he's really going to work hard to fix the company, but he's also from a bigger -- much bigger bank. And so there's some concern perhaps that maybe the JPMorgan/large bank expense base just some degree could get recreated at Texas Capital, which obviously wouldn't be able to have the same kind of expense base. Can you maybe just address that topic, big bank expense and your background versus what you're trying to do at Texas Capital?

Yes. I respectfully don't understand that. JPMorgan and Texas Capital are 2 completely different firms. I've run a big business before within JPMorgan. We know -- I know how to deal with expenses. We are -- I would love for you to talk to people here that work with us every day in our SBMs that we talked about in our QBRs and otherwise, we're doing things very, very differently here. We have initiated several expense programs year-to-date since I got here that we did not happier, a number of different disciplines that we're doing now that we weren't doing before. And I would say that we are way more acutely focused on expenses today than we were on January 24 of this year.

And I don't mean that to offend anybody, I think, Julie, would applaud that and agreed. So there is no comparison between my previous employers expense base and this and we are acutely focused on it. And we have the disciplined routines to deal with it.

The only thing that I might add to that is, I think, there's always a lot of focus and talk about the expense side, and maybe people aren't as focused on the revenue side and the potential there. And so I think that what you're going to see is that the investments that we're making and the expenses as everyone wants to characterize them, they are going to more directly translate into improved revenue streams, and you're going to see that over time.

And -- sorry, Brett, I'm going to keep going a little bit. I've got a little mind stream here. Remember we said we're going to add the tangible book every single year. So what we're saying is there's going to be a slight negative operating leverage possibly if we're successful at executing the plan by investing in the right technology, product, services and talent. So the expense growth is a net positive as long as we do it smart, which I'm highly confident that we will and that we are. But we're not going crazy on the expense side. We're adding a tangible common book.

Yes, absolutely.

The next question will come from the line of Brock Vandervliet.

I wanted to follow up, maybe it was Brady's question on the warehouse. I would say, Rob, the question that I get the most is whether you use MBA or some other forecast, the outlook for mortgage is down by a material amount next year through your success, through your aid material. You have a very material line of business with warehouse, which is large enough that may kind of reflect the market. And that's coming with the expense pressures that you've outlined as you're hiring elsewhere. What do you have in place that could kind of immunize, I guess, the warehouse business from some of the pressure that may be building next year?

Well, I'll just refer you back to some of the levers we talked about before. We can bring participations back on balance sheet. We're banking larger clients by using syndication to put participations off balance sheet, some are coming off, some are going on. It depends on which client and the need to do which one of those alternatives.

We have a pipeline of new prospects that are -- we are onboarding literally today several this quarter. We have additional products and services that we suspended during COVID that we're offering again without increasing risk in the warehouse. We have some funding incentives, which is working fine. And we're -- importantly, something that we're doing today is very, very different than we did in the past, frankly, is we're banking those same companies holistically. So we're going to do treasury services with them. We'll do investment banking with them. We'll do other things than just lending. So I think all those things will help. And we look to turn the mortgage warehouse into a huge positive by doing more and expanding the walk with those clients than we have in the past when we were on 1 product shop.

Okay. Okay. Fair enough. And similarly, I think one thing we all really grapple with is much of the guidance is around total earnings, and total earnings is related to the size of the balance sheet. Is there anything more you could share in terms of how we should think about balance sheet sizing over the course of this process?

Well, the only thing I would say is if you look at our plan that we gave September 1, which I thought was -- I really do think we gave more than most other -- any financial institutions given strategies, we can't execute that without the balance sheet growing from here going forward. So we recognize that and we acknowledge that.

But I don't want to give predictions on balance sheet growth. It truly depends on what the portfolio of our client makeup and in what sectors and what industry over what period of time. Because as you know, some industries are heavy borrowers, others aren't. And the success of our coverage -- of our segments -- the success of our coverage in our different segments will determine the growth of our balance sheet because different borrowers have different borrowing characteristics.

For instance, tech, they don't borrow a lot, but they do a lot of treasury management. E&P, a lot of borrowing. So when I know how successful we'll be by segment, I can tell you the size of our balance sheet. So that's not to say -- sorry, but that's not to say, let me complete this -- the model we have is a bottoms up, okay? We have a loading gearing, by segment, by TAM bottoms-up model that drove the plan. But it's just really hard for me to predict growth of balance sheet over what period of time.

The next question will come from the line of Michael Rose with Raymond James.

I thought I'd take a stab at just loan growth. I know it's a byproduct, but if we look ex PPP, it was up about 5.5% annualized this quarter. We've heard a bunch of banks, including another large Texas Bank this morning talk more about green shoots and companies starting to borrow a little bit here. Just given the number of producers that you're going to hire, is there any reason to think that loan growth wouldn't continue to accelerate from here just conceptually? Would just love kind of the puts and takes, broad strokes.

Great question, Michael. Thanks. So remember, there's a lot of ins and outs that make up the whole portfolio. So PPP is paid down. We had a lot of paydowns in real estate, which by the way, it's how it's supposed to work. We make construction loans, is a 2.5-year period. It's a project. It's real high end. It's in the right asset classes with the right client selection. You lend the money over a 2-year period, 2.5-year period, they pay it back, they term it out. And then you make another one, and the cycle repeats itself. So those paydowns are actually very good, and we're excited about it.

We also had paydowns in [C&C] real estate portfolio, which are really, really good. So further helping our balance sheet and the position that we're in. So we are really happy about loan pay downs when it happens and mortgages out like we talked about. But having said that, our loans grew well and as we go through our strategy, I would expect continued loan growth.

And we had a little bit pickup in utilization but not much, very modest. We're still below like '19 levels. but we're up from COVID levels. But the loan growth -- so that means the loan growth that you're seeing is from new clients. So I do perceive that to continue.

Maybe asked another way, what were the commitments up this quarter? Like, how much do you -- did you add in commitments as well? Because obviously, line utilization is still weak.

I don't think we've given commitments before, have we?

No. They'll be in the 10-Q that gets filed in a couple of days. And I do think that they (inaudible).

Do we break that out by segment?

Not by segment (inaudible)

Okay, I don't think you'll see it by segment...

Yes, the total -- so yes, [because it'll be that] but that's in theory.

Great. And maybe just as a follow-up question, it looks like the asset sensitivity nearly doubled this quarter. You're now looking at a 6% increase or so per 100 basis points. Would you expect that to increase over time just given the actions that you're taking? And as it relates to the strategic plan, if we were to get a couple of rate hikes, which I assume, I believe they're not included in the time line.

But if we were to get a couple of rate hikes, I assume that would accelerate it. So just any sort of commentary or color would be helpful.

So Michael, I think that we are positioned well if rates move up. I think you saw us reduce earlier in the year, the end of last year, earlier this year, reduce some of the sensitivity with the actions that we took with we have more floors in place. We also increased the securities book. That has stopped. And then I think you did see, like you said, you saw sensitivity pick up some this quarter. And that's really, if you look at what we've done with the deposits, we've remixed our deposits.

So some of the higher beta deposits are much smaller percentage. So that increased our sensitivity. So we would benefit -- the first 100 basis points, we don't benefit as much as we would the second 100 basis points. Simply because we do have floors in place on a lot of the loans. And so they've certainly served their purpose and helped us. But that will dampen the first 100 basis points a little bit. But yes, they -- we're poised well for that. And actually, in the September 1 numbers that we gave, we used the forward curve at the time.

Okay. So maybe just asked another way, is there more remixing to do on the deposit side that would drive that percentage higher in coming quarters?

I think that the -- and I think I said in the commentary, but the bulk of that remixing has been done with the actions that we took in the second quarter. Certainly, we are working overall to optimize, and the focus is on treasury operating deposits, which, over time, will meaningfully remix that, but that does take time.

The next question comes from the line of Brad Milsaps with Piper Sandler.

Julie, just to follow up on Michael's question, I'd be curious what deposit betas you're assuming in your most updated interest rate sensitivity analysis that you disclosed in the deck.

So I think that we gave -- nothing is -- we haven't -- we haven't given any updated beta information other than what we gave in the September 1 -- the September 1 deck. So I think it was 6 -- yes, about 60%.

Okay. Great. And Rob, I know that you guys have hired a lot of people on the treasury side. Just kind of curious, when you look at Texas Capital's existing $15 billion of DDA sort of relative to the $18 million in fees they generate annually. Knowing that TCBI doesn't have a lot of consumer business, does that feel like the right number? Or can you talk about opportunities there to increase some of the revenue you're getting from maybe the existing deposit base? Or is it a sense that some of those funds are -- you can't generate these and it's going to be incumbent upon the treasury folks to bring in new relationships to improve kind of the fee structure at Texas Capital?

I think we can dramatically improve our wallet share with our current clients with the TS offering that we are building and the talent that we are hiring and the new strategy. So we do not have to -- so we do not need to add new clients to do that. However, we're going to do both. You've heard me say we need to be more relevant with our clients today as well as with more clients.

So I would say just -- just as excited about both opportunities, but we have a small wallet share of treasury with our current client base. That was part of the problem and what we're focused on fixing.

And just a final one on deposits. Julie, I mean presumably, is there any room at all to bring the rates down. I mean I noticed a couple of the categories are actually up a little bit linked quarter. At this point, contractually, are those just all locked in? Or is there any reason to expect any sort of step down over the next quarter or so?

So again, I think that the big shift we've already seen happen over time as we improve the overall mix with more operating deposits you will see that come down. But again, it's over a longer period of time. The most meaningful shift happened in second quarter and the third quarter.

What I will say, though, is to give you a little color is I would suggest that today, there is more frequent visible rigor around deposit pricing on a proactive basis by client, by segment, by appropriateness with oversight from treasury services and treasury of the bank than ever before. So I think there's a new umbrella of discipline that will reflect much better performance for deposit pricing.

The next question will come from the line of Jennifer Demba with Truist Securities.

First question is on the technology systems review you did. Can you just talk about the takeaway from that process?

I think the takeaways were just that we did a deep dive, right? It was a comprehensive review of all the tech assets that were capitalized on the balance sheet. And again, it was an effort with the finance team, Don and his team, and then the lines of business, as we look at as how those assets are tied to the lines of business. So a big factor that weighs in is how we're approaching technology now and some of the development that's going to go on.

I think we talked quite a bit about that -- Rob did on the September 1 call. We actually hired developers, and we're doing some of that work in-house with developers, and it's an ongoing improvement as opposed to in the past where virtually everything was based on a longer-term project that then when it ended you amortized over several years.

Now it's more real time and constant improvement, most -- especially on the client-facing piece. So that was exactly what happened. We had assets that were expected. Their useful life would have been longer, but the way we're now approaching it and the work that's being done just don't substantiate that.

And the mix shift from us doing us only a client experience on a go-forward basis, not the back half of the house, but the front facing client-facing half or portion.

Okay. My second question is on loan growth, Rob, so I know this question may frustrate you a bit. But another common question we get is, can this company grow faster than its Texas peers. And can it grow faster than national peers, given that it's in such a great market in Texas. Can you talk about that? What are your thoughts on loan growth, and do it in the context of doing it very conservatively and prudently?

Yes. It's done [-- frustrating and all], Jennifer. I appreciate you saying that. I understand everybody wants numbers and concrete numbers. But like I just found out this week about some competitors, they are doing loan teasers, teaser rates, teaser structures and then they convert them into a term loan over time later, like I have no interest in that, for loan growth, for loan growth sake.

We could do stuff like that. I could add billions of dollars to this balance sheet in minutes. But it's just, that's so far behind us. Like, it's going to take us a while to put on -- we are focused on the right clients, real high-quality growth, very good earning assets with good companies that we want to bank forever. They start in business banking, they go to middle market. They improve the corporate banking, and we maintain the relationship.

I'm not looking for loan teasers to accelerate loan growth. But having said that, we fully anticipate that when we're built out, the franchise will attract high-quality Texas clients at a rate faster than our peers. That's what we're doing.

The next question comes from the line of Bill Dezellem with Tieton Capital.

A couple of questions. First of all, I want to circle back to the capitalized software that was written off and just a little bit more clarity. So are you saying that, that software will continue to be in use and it's just your expensing method is now different, so you're expensing rather than capitalizing?

Or is there an insightful perspective on the no longer going down a certain path with the software that -- because you're going to a different direction that would help us all understand more about the strategy?

So what I would say -- I'm jumping in front of Julie, so excuse me, Julie. What I would say is we have developed an entire book of work for our tech spend. And that book of work captures every dollar spend that we have on tech. And there's a lot of companies that think they know they're spending that they've done, frankly. We know we are tied from the LOB leader, through tech to the user and track adoption, everything about it.

There has been a rationalization of the tech stack as we've reunderwritten every dollar of tech spend. And I don't know how to explain it about that. We've gotten a lot smarter about technology, and what we're going to continue to spend on and invest in and what we're not. And we've also moved from more of a project management style, a tech shop to actual coders and technicians and engineers. So the fundamental bank tech stack, how we run the place.

Obviously, we're going to keep that in place. Middle, a lot of business stack, we'll keep that in place. Client-facing user interface, we want to own that experience and be a client journey instead of in silos like we've been in the past. We want to be intuitive. We want to be elegant. We want to be simple. And we also want to be cost effective and quick. So that's the journey we're on, and that's a big pivot from where we've been in the past and a lot of value that Don has brought with him.

It's a transformation of some of the -- of the existing platform.

So you were moving to platforms to accomplish the same thing simply better?

For the most part, yes.

So think about some of the tech assets. We had too many tech assets. We're stopping them. It's over. We're retiring them. Some were using differently, and that's the result of the write-off.

Yes. A tool that we didn't plan to upgrade or change for the next couple of years, and now we're transforming it now. So we didn't have the 3-year -- what we have done previously does no longer has another 3 years. It's being transformed today to deliver a better experience for our employees as well as the client facing.

That is helpful. And then one additional question. Are you sensing at this point, that your net interest income has now reached bottom?

So there are puts and takes on that, right? So one of the things that you have to remember, and we mentioned this in the commentary, is the seasonality with mortgage finance, right? So fourth quarter and first quarter are typically seasonally a little weaker in that space. As Rob already mentioned, we continue to take market share there, but there is some seasonal impact that you would have to think about for the next couple of quarters.

So you are expecting the normal seasonality in mortgage warehouse. And for that reason, you have -- you may still see a little slippage of the net interest income, but if we were to exclude that seasonality, are you feeling like you are kind of at that bottom point?

Yes. I think that's fair. Again, I think you saw from the third quarter, there's definitely some ins and outs on the core side. Where we continue, which is exactly what we expect to have a high level of paydowns in the CRE space, but there is good traction on the C&I space.

The next question will come from the line of Matt Olney with Stephens.

Going back to the mix of earning assets, we are seeing a little firmness in the yield curve. I'm curious what the appetite is to add to the investment securities portfolio at this point.

I think right now, what we're doing is we're adding to maturities to keep the same amount invested but we're not racing to increase the amount whatsoever. We're on the sidelines at this point. That's something that we talked about literally every week, if not day. We have a very, very disciplined approach as to when and what we will move into and what percentage and in what period of time. So there's nothing being done happenstance. I don't think it sounds flippant whatsoever, but we are just replacing maturities at this point.

Okay. That's helpful. And then on the September 1 update call, you discussed achieving, I think, with positive operating leverage late in 2022. I just want to make sure this is still within your expectations.

That's the goal. There's no reason to think that we won't -- we are on track with the plan to date. Again, we just started. But we made a lot of changes that gave us a great foundation for these past 6 months. And I know our hiring pipeline, I know our tech pipeline. I know our products and service pipeline and the road maps. And we're not there, but we're well on the way.

So I hope that's the case. But we're not going to -- remember anybody can hire people and fill seats. We are going to be very discerning. And there is a period of time that we have to wait to do certain things. We get our broker-dealer license, what we hope in December. So we're not hiring people for that business in September of this year. So there's a certain order and discipline that we'll maintain, but the view right now is to return to a normalization in that period that you discussed.

Okay. Perfect. And then, I guess, maybe more in the short term, Julie, we've talked about a number of things. The operating expense guidance you provided, you mentioned the correspondent, some of the remaining headwinds there that should be flushed out. You mentioned the seasonality of the warehouse that we should be thinking about. Anything else more near term we should be thinking about as we build out our forecast over the next few quarters?

No, I don't think so. I think that -- I think you've covered it all.

Okay. And then the last thing was mortgage warehouse yields, I think you said those came down in the third quarter, but it sounds like there were some signals that was firming up maybe at the end of the quarter or in recent weeks. And I've been assuming that an asset class would experience incremental pressure on yields the next few quarters. What else can you share that will provide us some more confidence that yields are starting to firm in that asset class?

Well, we just saw slower -- we saw the compression slow over time.

Yes. I think the pace of the decline is stabilizing. So could we see it drop a little bit in the fourth quarter? Yes, maybe. But I think the pace of the decline that you've seen in the last couple of quarters, you should not see going through.

Got it. Okay.

And remember that some of that is done by design, too, right? We haven't seen a program. So some of that is us.

Yes, right.

The next question will come from the line of Jon Arfstrom with RBC.

Just a few quick ones. Rob, how does the interest in joining Texas Capital compared to what it was pre-September disclosure of your updated strategic plan. And what kind of objections or pushback do you get from people that are looking to join the company?

That's a great question. So I would just say a couple of things. I don't know if it's different or changed dramatically. So what happened, Jon, when we first got here is I joined and humbly, I got some phone calls, hey, can I come with you? I brought Tim and Nancy day 1. And then they join, they know people, they hire people Don came, others came and then the -- they have people that they want to bring with them, great talent. So you get this cascading of leadership, bringing in their own talent, which goes down through the organization. And then we started a junior program. So now we're coming up to the organization.

But I think broadly, in the middle, at the senior banker level they came and joined pre the strategy based on the people and the credibility that we're already here in terms of payment for that year and credibility for go forward, if you will. I do think we're attracting a different type of person. So if you want to go preside over a portfolio or not really build anything, this isn't the place to be. The people that we're attracting are high energy, they're very commercial, they're team oriented. They want to do this with a group that they like. They're [savvy] part of building a bank with a focused, stated strategy with an operating committee that has clarity and confidence.

And there's not a lot of others out there. But I would say that we were behind in our hiring plans before the strategy was announced. So there's no real pickup. I will say we're being discerning and we're making better progress in some areas than other. But that's kind of our own doing.

Okay. Yes. And your end comment makes a lot of sense as well. Everybody in this call lives in that world, so that makes sense as well in terms of hiring. Just quickly on energy, what are your thoughts on energy lending and exposure going forward for the company?

Yes. So we have strict adherences to the amount of energy exposure that we'll have at any one time. And those are stated in the deck, I believe, and we will abide by those. But we have a very prudent box applied to a very discerning client selection process that goes through balance sheet committee. And there's -- remember -- we have -- in our energy segment, I was responsible for all the non-investment-grade in E&P, et cetera, at JPMorgan. I know the industry. Tim certainly understands it. Curtis Anderson, our Chief Credit Officer here, what is new to that role since we had our problems. Our new head of banking is. Our credit officer that covers that segment is new. We have pretty much an entirely new lineup versus the team that was faced off against that segment when we had our problems.

And as Tim Storms is known for saying, I don't mind making a mistake, but what I don't want to be little. So we are very focused on exposure adherences and client selection and total exposure to clients and thresholds. So I feel really, really good about where we are with that book, and we're excited to bank those companies. And we are focused on ESG. We do have a process for onboarding companies and they have to have a program and be following them, And we do explore that [in diligence better].

Okay. That's it for me. I'll just say on growth. I know you don't like the question, but my sense is it should be Texas economic growth plus some healthy market share gains and that will be how you're judged. Hopefully, you think that's fair. But my sense is that's where it's going to shake out. But that's just my commentary.

Yes. No, I appreciate the input, the insight. And I totally respect your view.

The next question comes from the line of Anthony Elian with JPMorgan.

I want to dig deeper into loan growth. Julie, you mentioned in the prepared remarks, you saw about $600 million of sequential growth in C&I ex-PPP. Just from a percentage growth point of view, this looks like one of the strongest core C&I growth rates among banks that have reported thus far. Any particular subsegments within C&I that drove this or anything different you're doing on pricing or structure?

No, that was broad-based growth across several areas. So no particular areas to highlight.

Okay. And then my follow-up, you mentioned in the slides that you've had success in onboarding client-facing professionals. Rob, maybe for you. I know it's very early, but can you comment on just what you're seeing so far from the people that you have hired and have been onboarded?

Yes, sure. So I would say a couple of things. To Julie's answer, I would just add that a significant portion of the loan growth is from new clients. So I want to say that, one. Two, as a new hire on what we're seeing. I am treating the people that were here before I got here as new hires. We are recruiting them as much as we're recruiting the new bankers. And so I just want to say that it's really, really important that people understand that. There was good talent here that we have kept and that we're excited about keeping.

The new hires, however, like anybody that comes to a new firm, have been enthusiastic, energetic, client obsessed, client focused. And I would just say what I said earlier, what they tell us is they like the fact that there's clarity in the strategy and confidence in the strategy and that we all say the same things with the same words from the leadership team, the operating committee down. And so we see a lot of activity. The activity has picked up a lot in the last, I would say, 6 months in terms of -- I don't know if it's the virus, if it's the culture or what have you, but we are much more active today than we were a number of months ago.

Okay. And then my follow-up, Rob, on the comment you had earlier on seeing new loan growth from new clients, are these clients -- are they coming to you? Or are you actively reaching out to them? Are they coming from other regionals or the money centers?

I would say it's broad based. I would humbly say, no, they're not calling us. This is the -- the best clients in the market are highly competed for, and we are winning out our share and I would say that, that's super exciting to me because you know as well as I know this -- the life cycle of new client acquisition is long.

Even if they want to make a move, they have to have a reason to move. Is the revolver maturing? Are they doing an acquisition? Is there a new CFO, on-boarding treasury service? You got to identify the wallet, acquire the wallet, onboard it. That happens over a period of time, and then you only ramp like 80% of what you thought you were going to get. So all this stuff takes time. So the new client acquisition happening when it is and at the pace that it did, it is very encouraging.

Yes, sir, you may proceed. This concludes our question-and-answer session. So I'll pass it back to the President and CEO, Rob Holmes, for the closing remarks.

Just want to thank everybody again. I appreciate the questions. Julie does, too. We like talking about it. We're excited about it. We want to be transparent. By the way, I like loan growth. I just want it to be the right loan growth with the right clients. I just want to make sure everybody understands that. I do want to do it in a very disciplined, smart way like you'd want us to do it. So thank you all very much. Look forward to talking again soon.

Thank you for your participation in TCBI's Q3 2021 Earnings Conference Call. Please direct requests for follow-up questions to Jamie Britton at jamie.britton@texascapitalbank.com. You may now disconnect.