Texas Capital Bancshares, Inc. (NASDAQ:TCBI) Q1 2025 Earnings Call Transcript

Texas Capital Bancshares, Inc. (NASDAQ:TCBI) Q1 2025 Earnings Call Transcript April 17, 2025

Texas Capital Bancshares, Inc. misses on earnings expectations. Reported EPS is $0.92 EPS, expectations were $0.99.

Operator: Thank you very much, everyone, for holding. This conference call will begin shortly. Hello, everyone, and welcome to the Texas Capital Bancshares, Inc. Q1 2025 earnings call. My name is Ezra, and I will be your coordinator today. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please I will now hand over to Jocelyn Kukulka, Head of Investor Relations, to begin. Please go ahead.

Jocelyn Kukulka: Good morning, and thank you for joining us for Texas Capital Bancshares, Inc.’s first quarter 2025 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 expectation 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 texascapital.com. Our speakers for the call today are Rob Holmes, Chairman, President, and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open the call for Q&A. Now I’ll turn the call over to Rob for opening remarks.

Rob Holmes: Thank you for joining us today. This quarter’s results continue to evidence our clearly differentiated strategy and operating model. Contributions from across the firm enabled another quarter of strong financial progress, with year-over-year revenue growth of 9%, adjusted pre-provision net revenue growth of 21%, and tangible book value per share growth of 11%, which ended the quarter at a record high for the firm. The company also maintained its peer-leading capital levels with tangible common equity to tangible assets of 10%, while continuing to effectively support clients’ growth objectives during the first quarter of the year. Earning the right to be our client’s primary operating bank remains the foundation of our transformation, with sustained success again displayed by another quarter of peer-leading growth in treasury product fees, which increased 22% year-over-year to a record high for the firm.

Noninterest-bearing deposits, excluding mortgage finance, grew 7%, marking the firm’s largest quarterly increase since 2021, and are up 11% since the first quarter of last year. Consistently increasing client relevance through both breadth and services and quality of advice continues to deliver a longer duration, less rate-sensitive deposit base, further evidenced this quarter by our ability to effectively reprice down our liabilities, supporting a 26 basis point increase in late quarter net interest margin and a 10% increase in year-over-year quarterly net interest income. Looking ahead, we remain confident in our ability to deliver risk-adjusted returns consistent with our published targets. Deliberate actions over the last four years purposefully positioned our firm to operate through any market or rate cycle, with our financially resilient balance sheet, tailored coverage model, and breadth of products and services enabling us to uniquely serve clients as they navigate this period of elevated macroeconomic uncertainty.

Q&A Session

Recent tariff actions and resulting volatility in the financial markets could manifest in changes to client confidence, affecting hiring, capital investment, and M&A. Today, institutional debt markets are still functioning, albeit at higher costs. Banks are still aggressively competing for high-quality credits, and flows on our institutional sales and trading desks continue to grow in a consistent manner. Our perspectives are influenced by unique positioning as the only full-service firm headquartered in Texas, with significant connectivity to small businesses through our top five SBA 7(a) lending program, our loan syndications team, which has reached as high as the number eight lead arranger in league tables for middle market loan transactions in the country, our extensive reach into institutional credit markets, to more than $25 billion of leveraged finance transactions we facilitated last year, and our institutional sales and trading business, which now transacts with over 1,000 active accounts.

You have often heard me say that we regularly prepare for a range of economic or geopolitical outcomes beyond the base case or consensus view. Strategically, that means operating without balance sheet concentrations, deploying products and services that allow us to comprehensively serve clients, and carrying liquidity, capital, and reserve levels that enable confidence and flexibility across a range of economic scenarios. We often refer to that as operating with a balance sheet and business model that is resilient to market and rate cycles. It is because of our deliberate preparation that we are confident about the future and expect to continue to onboard and serve the best clients in our markets. Thank you for your continued interest in and support of our firm.

I’ll turn it over to Matt to discuss the financial results.

Matt Scurlock: Thanks, Rob. Good morning. Starting on slide five, first quarter total revenue increased $24.1 million or 9% relative to Q1 of last year, supported by 10% growth in net interest income and 8% growth in fee-based revenue. Linked quarter total revenue declined by $3.2 million or 1% for the quarter, as a $6.4 million increase in net interest income was offset by a decline in fee revenue as mid to late quarter capital markets uncertainty limited pull-through at a strong and building investment banking pipeline. Total non-interest expense increased $30.9 million quarter over quarter, due to $14 million of expected seasonal payroll and compensation expenses, resetting annual variable compensation accruals, and onboarding a previously discussed talent and fee income areas of focus, particularly investment banking.

Taken together, year-over-year pre-provision net revenue increased 21% or $13.5 million on an adjusted basis to $77.5 million, which should, as expected, represent a low point for the year. This quarter’s provision expense of $17 million resulted from $422 million of growth in growth LHI excluding mortgage finance, $10 million of net charge-offs against previously identified problem credits, and our continued view of the uncertain macroeconomic environment, which remains decidedly more conservative than consensus expectations. The firm’s allowance for credit loss increased $7.2 million to $332 million, finishing the quarter at 1.85% of LHI with excluding the impact of mortgage finance allowance and loan balances. Net income at common was $42.7 million, an increase of 44% compared to adjusted net income to common in Q1 of last year.

This continued financial progress coupled with a consistent multiyear buyback approach contributed to a 48% increase in quarterly earnings per share compared to adjusted earnings per share from a year ago. The firm continues to operate from a position of financial strength, with balance sheet metrics remaining exceptionally strong. Ending period cash and securities comprised 27% of total assets, as the firm continues to onboard and expand client deposit relationships while supporting their broad needs, including access to credit. These consistent client acquisition trends are increasingly resulting in risk-appropriate portfolio expansion, with any period gross LHI balances, excluding mortgage finance, growing $422 million or 2% linked quarter.

Average commercial loan balances increased 4% or $401 million during the quarter, with broad contributions across areas of industry and geographic coverage, and ending period balances now up approximately $1 billion or 10% year over year. Real estate loans also increased during the quarter, up $208 million, and were flat to first quarter 2024 levels, as new volume resulting from our consistent market-facing posture outpaced potential payoffs that could result should rates move lower. As anticipated, average mortgage finance loans decreased 27% linked quarter to $4 billion, as quarterly seasonal home buying activity hit its annual low in Q1. Given ongoing rate volatility, remain cautious on our mortgage outlook for the remainder of 2025, with full-year expectations for a 10% increase in average balances predicated on a $1.9 trillion origination market.

Linked quarter deposit growth of $814 million or 3%, driven predominantly by our continued ability to onboard and expand core operating relationships while serving the entirety of our client’s cash management needs. This was the third consecutive quarter of growth in non-interest-bearing deposits excluding mortgage finance, which increased $250 million or 7% linked quarter, to finish at their highest level since Q2 of 2023. Client’s interest-bearing deposit balances also continue to expand and are now up approximately $2.9 billion or 19% year over year. Our sustained success winning high-quality deposit relationships continues to enable maintenance of decade-low levels of broker deposits and a select reduction of higher-cost deposits we are unable to earn an adequate return on the aggregate relationship.

This is in part observed in the ratio of average mortgage finance deposits to average mortgage finance loans, which improved to 113% this quarter, down significantly from 148% in Q1 of last year. We would expect this ratio to trend below 100% as loan volumes grow in a seasonally stronger second and third quarter. Our model’s earnings at risk were relatively flat quarter over quarter, with current and prospective balance sheet positioning continuing to reflect a business model that is intentionally more resilient to changes in interest rates. Improvements in rates fall earning sensitivities were driven by adjustments in down rate deposit betas to better align with recent experience, and the addition of $300 million in forward starting receive fixed swap that will become active in Q3.

Given the volume of maturing swaps, we do anticipate future interest rate derivative or securities actions over the course of 2025, augmenting potential rates fall earning generation at materially better terms than available during our deliberate pause to the mid part of last year. The total allowance for credit loss including off-balance sheet reserves increased $7 million on a linked quarter basis to $332 million, up $28 million year over year. When excluding the impact of mortgage finance allowance and loan balances is 1.85% of total LHI, two basis points below our high since adopting CECL in 2020. Despite a modest increase in late quarter special mention loans, criticized loans decreased $96 million or 11% year over year, supported by stable substandard loan balances and an $8.5 million or 8% decline in year-over-year non-performing assets.

We remain highly focused on proactively managing credit risk across a range of both macroeconomic and portfolio-specific scenarios, including those associated with the recent trade policy-induced market volatility. With our frequently discussed through-cycle approach centered on quality client selection, excess capital liquidity, and consistently applied reserving methodology. Specifically, the firm has been focused on the effects of possible tariffs since late summer 2024, so as the presidential campaigns were moving towards the November election, with initial emphasis on Canada, Mexico, and China. While too early to know the precise impact of the April second trade announcements, we remain confident in our routines to monitor and manage the portfolio while effectively supporting clients as they look to navigate considerable economic uncertainty.

Consistent with prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remained exceptionally strong relative to both peer group our internally assessors profile. CT One finished the quarter at 11.63%, a 25 basis point increase from prior quarter, supported by continued strong capital generation coupled with effective implementation of the enhanced credit structures discussed last quarter for 15% our mortgage finance loan portfolio. Our continued client dialogue suggests at least 30% Q2 any mortgage finance balances will qualify for the improved structure associated reduction in risk-weighted assets. We continue to deploy the capital base in a disciplined and analytically rigorous manner focused on driving long-term shareholder value.

During the first quarter, we repurchased approximately 396,000 shares or 0.86% of prior quarter’s share outstanding, for a total of $31 million at a weighted average price of $78.25 per share, or 117% of prior month tangible book value per share. Turning to our full-year outlook, despite observed macroeconomic uncertainty, we are raising our revenue guidance to low double digits percent growth. The higher end of our previously disclosed range is our ability to effectively serve clients across an increasingly broad platform should continue to differentiate in the market while providing revenue resilience across a wide range of potential scenarios. We’re maintaining our non-interest expense guidance of high single-digit percent growth, which includes resume progress associated with fee-based initiatives in the second half of the year.

The full-year provision expense outlook remains 30 to 35 basis points of loans held for investment, excluding mortgage finance, which should enable the preservation of industry-leading coverage levels while effectively supporting our clients’ growth needs. Taken together, this outlook suggests continued earnings momentum and achievement of quarterly 1.1 ROAA, in the second half of the year. Operator, we now like to open up the call for questions. Thank you.

Operator: Thank you very much. If you would like Please ensure your device is unmuted locally. And if you change your mind or your question has already been answered, please press star followed by two. Our first Your line is now open. Please go ahead.

Woody Lay: Hey. Good morning, guys. Good morning. Hey, Woody. Wanted to start on the revenue guide and just wanted to better understand the motivation to the to the now targeting the the higher end of the range. Is that is that really being driven by NII? I mean, it was a nice NIM increase in the quarter, solid growth. Is that what is driving the the high revenue guide? Yeah. You got it, Woody. So we noted on the first quarter call that we can move to the higher end of the revenue guide if we saw a strain deposit datas get to sixty prior to the mid part of the year. Ultimately go higher than sixty, If we saw LHA, excluding mortgage finance, deliver comparable loan growth to last year and if we were suspected that average mortgage finance volumes could be up ten percent for the full year.

So those were the general components that we outlined that would move us to the higher end. Those are obviously all things that have either already transpired or that the current outlook suggests will. There there is no question that that earned net net interest income improvement that you cited could potentially be partially offset by decreases in fees, but as noted in both my comments as well as Rob’s, the majority of the transactions in our investment in pipeline haven’t been canceled. They’ve just been delayed. So if we get to the second half of the year and those transactions do start to fall away or push into twenty twenty five, you’ll see us start to adjust down the expense outlook to reflect lower fee based incentives. At this point, feel pretty confident in the ability to deliver double digit growth and revenue across pretty wide range of economic and interest rate outlooks.

Rob Holmes: Got it. That yeah. That’s great to hear.

Woody Lay: Maybe shifting over to loan growth in the pipeline, you know, it was a really strong growth quarter. In the first quarter. How’s the pipeline shaping up into the second quarter? And are you seeing the the macro uncertainty you know, impact client’s demand for for loans at this point? Yeah. We I’d note that along with the consistently growing and improving deposit franchise we do continue to fill clients’ capital needs through a variety of channels, which includes access to bank debt, what are now pretty sustained client acquisition trends coupled with multiple quarters of slowing capital recycling That’s what supported the four hundred twenty two million dollars or ten percent annualized increase in LHI this quarter.

There are there are some risk to that pace continuing, notably some of the previously discussed potential for accelerated payoffs in CRE. Which should move slightly higher in q two, but the outlook for onboarding new c and I relationships at this point is still quite strong. Got it. And then last for me, I I wanted to on the buyback. It was great to see y’all active again in the first quarter. You know, obviously, with the market pullback that stops the stock is a little bit cheaper today. So how how are you thinking about forward buybacks from here? Yeah. Say that we’re pretty boring on this topic. There’s no change in capital priorities, and we rely on the exact same highly disciplined approach to allocation that you’ve seen us employed since Rob arrived.

With times like this precisely why we choose to carry excess capital, To your point, the stock’s clearly trading below levels where we previously been comfortable buying back shares and alongside opportunities for new client acquisition Like, we’ve got multiple compelling options for near term capital deployment. I’d I’d call out that further supporting the optionality is a success that we’ve had implementing the enhanced credit structures for the mortgage finance product. Of mortgage finance. Clients. So we noted in the prepared remarks that as of three thirty one, we had seven hundred fifteen million or fifteen percent of clients that have moved into that structure. Which reduced their risk weighting from a hundred percent to twenty six percent resulting in a twenty one basis point increase in regulatory capital.

Based on current client interaction, we suspect we can get that number to thirty percent of ending period q two warehouse balances. In the structure. So if near ten percent tangible common equity, a lot of new client acquisition, and building regulatory capital, we’ve got a lot of options in terms capital deployment. Yep. Alright. Thanks for taking my questions. You bet.

Operator: Thank you. Our next question comes from Ben Gerlinger with Citi. Ben, your line is now open. Please go ahead.

Ben Gerlinger: Good morning. Can you guys I think you said the commentary for clients, especially the investment banking, isn’t that things are canceled, that they’ve been pushed? Is there something that they’re looking for either economically or political clarity that they’re citing loans? I’m just trying to think, like, how the rate of change. It seems like every bank has said client activity slowed a little bit since liberation day. But all is equal, still a healthy economy. I’m just kinda curious. Any is there any sticking point specifically because you do come at kinda newer budding investment banks that seem success? I’m just kinda trying to look

Rob Holmes: what are they looking for? They’re just looking for certainty. They’re they’re it’s very, very hard to project financial forecasts in in a world of as great uncertainties we have today. Uncertainty is the great killer of all deals. You have like we said, the debt markets are functioning, but you know, if you don’t have to go in periods such as this, then you don’t go. A lot of people go in are people that have to. And they’ll do it at at wider spreads than than maybe necessary or or previously they could have achieved before what you called liberation day. So I think the uncertainty index that people keep referring to is is very, very real. We had low single digit millions of investment banking fees fall away that won’t come back.

But the rest of the pipeline that that suggested what was pushed out. It’s really hard for a CEO or a board to do something strategic in environment such as this. It’s also not a great time to to refinance or plan capital investment or build your inventories until you know what the economic environment’s gonna be going forward. Gotcha. That’s helpful. So long And then Yeah. Long way of saying it’s a lot of factors. Sorry.

Ben Gerlinger: Right. No. No. I understand. I just I just more so think and you entered it well, Rob. Appreciate that. It was just more so thing you just kind of anything specific, but it’s it’s a tough environment for certain too. So Yep. Not not lost on me. So when you look at what yield and securities yields, they’re up linked quarter. I mean, is this trend continue? I just

Matt Scurlock: just wanted to double check on everything that you guys have done. There anything you could use in credit that within those this core would have inflated it more than normal? You had the full quarter impact then of the mortgage finance deposit repricing. That occurred in the back end of last year. So there’s a couple of months delay before that ultimately shows up in loan yields. Those costs are split about sixty percent attributed to the mortgage warehouse and about forty to commercial loans to mortgage companies. But aggregate yields as well as spread on new origination are roughly the same. On the securities portfolio, we’ve got around a hundred and twenty million dollars a quarter of cash flows. We’re reinvesting somewhere around five point three percent. That obviously changes every single day. You can expect to see us continue to do that.

Ben Gerlinger: Gotcha. Okay. That’s helpful, Carl. I appreciate it, guys. You bet? You bet. And maybe the one other thing I would say

Matt Scurlock: then is clearly the the guide relies on and platforms for send cuts, which at the time of compilation, included two cuts in the year, one in June, one in October. So anticipated NII is also impacted by that.

Operator: Our next question comes from Brett Rabatin with Hovde Group. Brett, your line is now open. Please go ahead.

Brett Rabatin: Hey. Good morning. Wanted to ask about mortgage finance and

Matt Scurlock: know, the mortgage finance business is is obviously competitive, but you know, it seems like you guys might have taken some share. This quarter. Any thoughts on market share gains this quarter and just

Rob Holmes: where where you’re trying to get with that business relative to the

Matt Scurlock: maybe the top five in the space? Thanks, Brett. We we landed full year I’m sorry. Full quarter average balance is right on top of the guide. So we got it to four billion. We landed right on four billion. We were higher on ending period balances, which was the impact of rates moving down and call it mid February. There’s a forty day or so lag before you see the reduction in mortgage rates ultimately show up as warehouse balances. We still sit around five percent total market share, which is where we anticipate

Matt Scurlock: staying. The the guide suggests the one point nine trillion dollar origination market, which is predicated on thirty year fixed rate mortgages between six, eight, and seven percent. If we see that, then we expect about a ten per ten percent increase in full year average balances. Thinking about q two, we expect around five point two billion of average balances, and then we noted in the commentary continued reduction in mortgage finance deposits, which is quite deliberate. So you should see that self funding ratio move from a hundred and thirteen percent to somewhere closer to ninety five percent. In the second quarter.

Matt Scurlock: Then the last the last comment I’d make on that is

Matt Scurlock: although it’s steady market share, we continue to do more with those clients. So our ability to effectively help them hedge their portfolios, help them securitize, help provide leverage for other portions of their wallet are are things we’ve worked quite hard on over the last few years. So it’s not solely a warehouse offering. It’s a holistic offering to mortgage finance clients that generates much higher return on equity than we’ve had historically.

Rob Holmes: I would just emphasize the last part of

Rob Holmes: Matt’s comments. We are not we are not focused at all on market share in mortgage warehouse. The mortgage warehouse balances are a result of our clients’ needs that we were focused on in that space, and so we’re focused on the very best clients in the mortgage origination

Matt Scurlock: space. If that’s their need, that’s the result in the warehouse.

Rob Holmes: I think you could further probably project that

Matt Scurlock: or assume

Rob Holmes: that there’ll be a time that

Matt Scurlock: if you don’t convert

Rob Holmes: to the SPE structure in the warehouse that you may not be a client of the firm? Because that’s where we’re going because of the better capital treatment. And all the different things that we do with those clients. It’s more of a vertical than a warehouse.

Matt Scurlock: Okay. That’s great color on that.

Rob Holmes: You know, and then you obviously changed the the revenue guidance to be more optimistic on

Matt Scurlock: NII, and you you took away the the fee income guidance of two hundred and seventy million. For the year.

Rob Holmes: You know, if if you were to

Matt Scurlock: think about the pipeline for investment banking from here

Rob Holmes: is it changed relative to previously, or is it just the uncertainty that’s kind of driving the

Matt Scurlock: near term quarter lower. Go ahead. Yeah. Ralph. I would I would just say it it it it’s growing,

Rob Holmes: It’s granular. It’s it it’s been pushed back. So it’s changing in a constructive way, not a different way. But to the to the question earlier, just the uncertainty, it’s really, really hard to transact at this moment.

Matt Scurlock: The only thing I’d add, Brett, just to emphasize

Matt Scurlock: the notion that it’s what much more heavily weighted now to the back half of the year. It’s our outlook for q two is twenty five, thirty million of investment banking fees. So the the number of transactions and the pipelines are out point continues to increase. The delay is largely associated with awarded mandates and m and a and cap markets. That folks have just put on pause. So there’s very slight reduction in the overall fee outlook for the year, but it is more heavily weighted now to the to the third and fourth quarter.

Rob Holmes: Which is no different than than the other banks reporting so far?

Matt Scurlock: Yep. Okay. Appreciate all the color, guys. You bet.

Operator: Our next question comes from Michael Rose with Raymond James. Michael, your line is now open. Please go ahead.

Michael Rose: Hey. Good morning, guys. Thanks for taking my questions.

Matt Scurlock: Just wondering to see if I could get a little color on the the increase in in special mention loans this quarter. And then, you know, to the extent that you can, what what are what are some of the the the industry sectors that you’d you’d be more worried about in your markets as it relates to tariffs? Thanks. Happy happy to address that, Michael. So, Rob, reemphasized in his opening remarks that we regularly prepare for a range of economic or geopolitical outcomes that are considerably more stressful than a consensus view. And as you know, those those scenarios are directly connected to current and prospective balance sheet positioning. We also noted that it would we entered the period, in our view, well equipped to serve clients.

Across a range of potential economic outcomes. And then we began specific preparations for changes in globe poll global trade policy late in the summer. With a particular focus on implications for changes in policy with Mexico, China, and and Canada. Say that the current assessment indicates areas worthy of heightened monetary our infrastructure transportation, logistics, as well as just general manufacturing within C and I. We also remain focused on commercial clients that serve the low end of the consumer markets where you could see increases in prices put additional stress on those consumers I’d say importantly, none of none of those segments on their own comprise more than one to two percent of the overall loan portfolio. And then the last point I’d I’d make on credit

Matt Scurlock: is that our multiyear reserve

Matt Scurlock: build has relied on a set of economic assumptions materially more conservative than a consensus outlook. Which alongside our observed performance in the portfolio suggests the fuller outlook still is thirty to thirty five basis points of provision relative to LHI excluding mortgage finance. Very helpful. I appreciate the the color. Just switching gears to to fees. Just on the treasury solutions you know, you noted that, you know, kind of a record quarter for the third quarter in a row. Can you just give some some color on the on the outlook there and and why the growth has been so strong? And then

Rob Holmes: just separately on on private wealth, it does say in the slide deck that you have anticipate improved kind of penetration as the year

Matt Scurlock: goes on. So just some color in those two areas would be helpful. Thanks.

Rob Holmes: Yeah, Michael. What I what I would say about treasury and if this is redundant, I apologize. So it’s twenty twenty two percent year over year. That’s all products and services. Cash pay cash payments is up eleven percent. That does include FX, or merchant or corporate card.

Matt Scurlock: It’s just the

Rob Holmes: payments and receivables of our clients, if you will. That is that is really, really strong. That that business grows you know, GDP or less for most banks, and this is eight straight quarters of three times market rate of growth. There is continued momentum, and it’s very simple. It’s in our DNA now. Our bankers don’t talk about deposits. They don’t talk about they don’t go talk to their clients about, can we make you a loan, or can you give us a deposit? Go talk to our clients about solutions. And it could be any come in any form of debt.

Matt Scurlock: Private credit,

Rob Holmes: bank debt, institutional debt, what have you, equity or the like, Converge, etcetera. So when you go talk to your clients about solutions, you add more value You’re more likely to become their primary bank. That comes with operating accounts. And so you see the cash fees go up like they did.

Matt Scurlock: I I I would

Rob Holmes: venture to say that we have the only institutional sales and trading floor in America that sells treasury services. We all know that’s the health of the bank. We’re we’re we are astute on the products and services in that space. We add value to our clients reducing working capital. And improving their operations and also making it safer and derisking. And that and it’s easier. We we developed through our own technology platform and onboarding platform called Indiscio that we talked about in the past, It was easier to onboard operate accounts here when clients onboard an incremental account, they choose us other than a secondary or third bank. Because it’s more simple. And then when if you go talk to our clients, our they feel very safe and sound with our capital and our equity to give us all their primary operating business. So I would say it’s because it’s in our DNA, I hope I I hope I explained that correctly. On the treasury side and on the

Matt Scurlock: on the wealth side, we’re behind in wealth.

Rob Holmes: Okay? And it we’re we we kinda we kind of it’s hard it was hard for us to go all in on wealth, We we got a lot better. We have really good people. We have really good investors. We have a great go to market strategy. We have great clients. But they were burdened with a with a lesser platform. That platform was put in place fourth quarter of last year. For new clients, kind of the first quarter of this year for current clients. That migration will go through you know, the back half of this year. Migrating our our our legacy clients onto the new platform. And what I mean by that is it’s the digital journey of our wealth clients. So now they have a digital journey of their everyday operating accounts, if you will, with their investments, and with their money transfer, etcetera.

That that that you’ll see at a Money Center Bank. It’s not an inferior client journey anymore. So now that we have an on par better client journey than most banks, with really good investors and really good performance and talented advisers we expect to make real progress in the wealth business moving forward. And we can get totally behind it.

Michael Rose: Thanks, guys. I appreciate the color and candor. I’ll step back.

Matt Scurlock: Thanks, bud.

Operator: Our next question comes from Anthony Elian with JPMorgan. Anthony, your line is now open.

Anthony Elian: Hi, everyone. Matt, you mentioned in the prepared remarks the anticipated future rate derivative or securities actions you plan to make sometime this year to potentially offset falling rates. Can you just provide

Matt Scurlock: a bit more color on on this and the timing of it?

Anthony Elian: If it’s included in your revenue outlook as well.

Matt Scurlock: It is included in the revenue outlook. Tony, we added three hundred million of two year forward starting receipt fixed swaps this quarter. That obviously impacts the twelve months. IRR sensitivities, but what also impacts is sensitivity is being more effective in repricing down our liabilities. So sensitivities are previously modeled at a sixty percent strain deposit beta. We move that up seventy percent, which we expect to hit in the mid part of the year. We’ve got about five hundred million of prime swaps that mature in q two and then a billion and a half of so far swaps that mature in the third quarter. So we do in the outlook, expect to try to manage our balance sheet duration to a similar position to where we are today.

You also see a selective, as I mentioned earlier, added to the securities portfolio, we pushed about two hundred million dollars this quarter around five three or five four. We expect to continue to to manage that portfolio in a similar way.

Anthony Elian: Thank you. And then on the the enhanced credit structures you first online last quarter, and the benefits to RWA. So you’ve implemented, I think you said, fifteen percent on the mortgage finance loan portfolio. And then that could be at least thirty percent. Is the timing of that in the second quarter or is that more of a second half of your event when you’d expect to be implemented on the thirty percent? Thank you.

Matt Scurlock: We think

Matt Scurlock: yeah, we would expect that thirty percent of ending period balances in the q two are in in q two are in the structure. And just to reiterate it, the risk waiting for those clients move from a hundred to twenty six percent. So the fifteen percent already in has created twenty one basis points of regulatory capital.

Anthony Elian: Great. Thank you.

Matt Scurlock: You bet.

Operator: Our next question comes from Jon Arfstrom with RBC. Jon, your line is now open. Please go ahead.

Jon Arfstrom: Thank you. Good morning. Couple questions for you. Just on uncapped markets, is there a way to size the pipeline? Relative to where it’s been historically?

Matt Scurlock: We we entered the year with two x the m and a pipe that we had entering the previous year. That’s up fifty percent. The cap market’s pipe is larger at this point. Than at this point in twenty twenty five than it was at this point in twenty twenty four. We’ve onboarded a large quantity of new investment banking talent starting in the back end of q four through q one. We talked about that a lot on the last call. That our increase in full year non interest expense guide was primarily related to adding new talent and fee area to focus, which is heavily includes treasury, but it’s heavily weighted toward investment banking. So, Jon, I think I think all those factors suggest a really healthy business. And although the timing is somewhat difficult, to predict, a lot of momentum as you move into the second half of the year.

Jon Arfstrom: Mhmm. Okay. This is an annoying an annoying question for you guys, I know. But who this the one one ROA level. I’m not too hung up over it. I think it’s, you know, time rather than timing, but what what’s different in the p and l later in the year to get there? Is it just is it just your last answer? Is it the the the banking and treasury fees and maybe a little bit of noninterest bearing? Is that it? Or is there

Matt Scurlock: something else we’re missing?

Matt Scurlock: I think there’s a lot of balance sheet momentum as well Jon, and and increasingly so the balance sheet’s growing, and it’s increasingly productive. We’ve said for a long time that we’re generally product agnostic. We wanna show up and serve clients in a way that best fulfills their needs, not ours. And that the p and l geography was not our primary concern. It was more onboarding the right relationships and serving them for the entire of their life cycle. The the current outlook suggests a lot of momentum and balance sheet and a lot of associated momentum in NII. So PPNR this quarter is obviously gonna be distorted by day count. So that’s roughly five million dollars of pretax income. As well as the seasonal comp and benefits expense, which this quarter was fourteen million bucks.

So that’s another twenty million dollars of PPNR on a seasonally slower quarter for us. That you should think about as you look towards the back half of the year and achievement of the one one.

Jon Arfstrom: Yep. Okay. Good. Got it. I

Rob Holmes: Rob, I wanna say

Jon Arfstrom: yeah. Go ahead. No. I was just gonna add look, I think it’s

Rob Holmes: Matt said it well for modeling purposes. But what I would just say is it’s the improvement of the entirety of the balance sheet and income statement We’re we are now viewed very differently in the marketplace as a firm than we were before. Three years ago, four years ago, and certainly before I got here. We did not have the right client selection. We those clients bank with us because of rate. Not because of value that we brought to them. That is no longer the case. We can’t compete on them now. We expect to compete on them now and our best clients appreciate We may show up with an investment banker on a deal, that the deal was pushed because the uncertainty we talked about, But because you bring that advice and you’re there frequently, and you’re highly valued,

Matt Scurlock: they don’t

Rob Holmes: they don’t care about rate nearly as much. And so you don’t I don’t see any stop to that improvement over time.

Matt Scurlock: And then you have

Rob Holmes: fee growth on the other parts of the of the firm.

Matt Scurlock: And you have

Rob Holmes: credit that looks that looks really, really good. You know, we’re we’ve got pure leading and industry leading provisions from since I got here, and criticized loans are down eleven percent year over year, and and we feel really, really good. And that’s primarily driven primarily driven by client selection. So I think it’s a combination of the entirety of balance sheet income statement, client selection, an improvement of our ability to operate and gain efficiencies.

Jon Arfstrom: K. Got it. And then

Matt Scurlock: wanted to say this last quarter, but congratulate you on the chairman title

Jon Arfstrom: And

Matt Scurlock: just curious if anything changes from your point of view with you adding that incremental responsibility.

Rob Holmes: Thank you, Jon. I think a lot changes. It comes to a lot of response

Matt Scurlock: but it also

Rob Holmes: nothing changes. So Bob Stallings went from chairman to

Matt Scurlock: lead director.

Rob Holmes: The lead director is very important here like any public company.

Matt Scurlock: And so it it’s it’s

Rob Holmes: kind of a title, but it’s not. What it’ll do is look. I gotta shake the board. I gotta leave the board. I’ll have much more of a say in who’s on the board what the board focuses on, etcetera. But I’m really excited about Stalling staying as a lead director, and I have a lot of immense amount of and appreciation for him doing so.

Jon Arfstrom: Okay.

Matt Scurlock: You, guys. Thank you very much.

Jon Arfstrom: Thanks. Thank you.

Operator: Our next question comes from Matt O’Neil with Stephens Matt, your line is now open. Please go ahead.

Matt O’Neil: Hey. Thanks, Guy. Just wanna follow-up on the mortgage finance, sell funding ratio think Matt said ninety five percent in the second quarter. Just remind us of the driver of that, and could we see further improvement throughout the year, or did you just make some adjustments in the first quarter we’ll see the full impact

Matt Scurlock: in two q?

Matt Scurlock: Yeah. We think five point two billion of average warehouse loan balances, four point nine billion of average mortgage finance deposits, So now we we talked a bit earlier about the expansion of products and services that we can offer those clients.

Matt Scurlock: As well as the

Matt Scurlock: pretty significant growth in deposits outside of that area.

Matt Scurlock: So we talked I think Rob

Matt Scurlock: articulated the growth in commercial noninterest bearing up seven percent linked quarter. Eleven percent year over year. But we also have material growth in interest bearing deposits with our core commercial clients. And we’re up three point four billion or twenty six percent year over year in interest bearing deposits, excluding brokered, and excluding institutional index. That’s while pushing the deposit date. Interest rate deposit date is up to sixty seven percent. So as we look across the franchise, at relationships where we’re unable to earn an acceptable return on the aggregate relationship. There’s ample of those that resided in the mortgage finance business where we are paying outsized rate for deposits.

And over the last year or so, we’ve been selecting reducing those selectively reducing those where couldn’t earn the right to do more business with those clients. So you’ll you should see us move below the hundred percent self funding ratio in the second and third quarter. As warehouse balances move higher. And then likely stay a hair below that even in the fourth quarter. So it’s just reflects it’s just a reflection of growth elsewhere on the platform.

Matt O’Neil: Okay. Thanks for that, Matt. And then

Matt O’Neil: one more question. The the hedge impact in the quarter we just saw in one q, didn’t see a disclosure. Didn’t know if you saw what the hedge impact was to the NII in the first quarter.

Matt Scurlock: It it’s coming down materially

Matt Scurlock: Matt. I mean, you you’re gonna see the remainder of the hedges generally roll off by the end of the year with the big slug, like I said, coming off in q three.

Matt O’Neil: Yeah. Okay. Thank you. You bet.

Operator: Our next question comes from Jared Shaw of Barclays. Jared, your line is now open. Please go ahead.

Jared Shaw: Hey, guys. Good morning. Thanks.

Rob Holmes: How should we think about, sir, the the the pace of timing of getting to

Matt Scurlock: the the eleven percent CET one? Is that you know, just sort of consistently through the year, or do you feel that there’s an opportunity to maybe accelerate that earlier? Yeah. Jared, the the eleven percent isn’t meant to suggest that we would push it all the way down to eleven percent. More you should more think about that as a floor. So we’ve we’ve talked, I think, quite frequently about we believe is a real competitive advantage of operating with the most capital. In particular, the most PCE. So I don’t know that I would look for us to push it all the way down to eleven. That’s just more indicative the amount of flexibility

Matt Scurlock: that we have near term.

Matt Scurlock: If you look at all the metrics that we put out on September first twenty twenty one, and the only metric that we backed away from is is the c two one guide. So we originally had that going down to nine to ten percent. And just feel like it’s prudent to now operate with materially higher levels of regulatory cap capital and, again, focus on real loss absorbing capital and TC

Jared Shaw: Okay.

Rob Holmes: Alright. Got that. Thanks. And then just

Jared Shaw: little bit of follow-up on on Matt’s question from before. I guess the the hedge costs were, what, twelve and a half million in fourth quarter. Do you have the actual number for first quarter? It should be around eight million. Okay. Alright. Thanks. And then just finally, when we look at the one one ROA target or goal, is that before after dividends?

Matt Scurlock: That that’s all in one one ROA

Matt Scurlock: as as reported. There’s no no gimmicks no gimmicks associated with it. Had to follow-up. Alright. So that’s that’s

Jared Shaw: that’s that’s after paying the preferred dividends.

Matt Scurlock: It it’s

Matt Scurlock: it’s before paying the preferred dividends. It’s the same way we report it every single time. Okay. Alright. Thanks a lot.

Operator: Thank you very much. We currently have no further questions. So I will hand back to Rob Holmes for any closing remarks.

Rob Holmes: Just grateful for everybody’s interest in the firm and look forward to the next couple of quarters. Thank you.

Operator: Thank you very much, everyone, for joining. That concludes today’s conference call. You may now disconnect your lines.