Texas Capital Bancshares Inc
NASDAQ:TCBI
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Texas Capital Bancshares Inc
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Hello and welcome to today's conference call titled Texas Capital Bancshares Q2 2023 Earnings Call. My name is Ellen and I'll be coordinating the call for today. [Operator Instructions]
I will now hand over to Jocelyn Kukulka to begin. Jocelyn, please ahead when you are ready.
Good morning, and thank you for joining us for TCBI's second quarter 2023 earnings conference call. I'm Jocelyn Kukulka, Head of Investor Relations.
Before we begin, please be aware that 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.
Our speakers for the call today are Rob Holmes, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open up a Q&A session.
And now, I'll turn the call over to Rob for opening remarks.
Thank you for joining us today. The firm's sustained progress against our well-documented strategy was evident again this quarter as the people, products, services and infrastructure implemented over the past 2.5 years, delivered another quarter marked by notable improvements in financial performance. I am proud of the foundation we have built and acknowledge the early successes of our strategy are due entirely to the material efforts of the employees across the firm, and the trust placed in us by our clients who believe in what and to how we are building. We are resolute in our mission to realize the unique opportunity to create something differentiated for our clients and steadfast in our commitment to building something of lasting value.
The financial resiliency of this firm continues to be a strategic advantage. A goal since our arrival was to build a firm characterized by the strength of its balance sheet and the breadth of its platform, a firm "that is resilient through market and interest rate cycles." Maintaining sector-leading capital and liquidity continues to enable our bankers to focus on growing the firm by both serving the broader needs of existing clients in confidently engaging identified prospects with an increasingly mature and compelling offering.
The pace of client acquisition over the first two years of the transformation was marked largely by aggressive balance sheet reallocation to focus our capital on defined industry end market segments, where we believe the clients will benefit from the material investments made in our treasury solutions, private wealth and investment banking offerings. Our view was that as the capabilities and culture evolve, we would become more relevant to our clients, and in turn, begin to generate structurally higher returns on that allocated capital. Both this quarter's financial results and client behaviors suggest sustained progress towards this objective.
We continue to add operating accounts at a pace consistent with our long-term plan. Gross payment revenues increased for the second straight quarter and were up 12% year-over-year, as our multiyear focus and material investments in proprietary applications like our commercial onboarding solution Initio are enabling us to win the operating business indicative of becoming our client's primary bank, a designation that not only improves long-term earnings capacity but also advances the already strong quality and associated resiliency of a transforming deposit base.
Over 90% of our commercial client onboardings now occur digitally. And during the second quarter, new business client onboarding increased over 30% compared to the prior quarter. Given the current rate environment, clients with deposits greater than necessary for daily operating needs are utilizing other cash management options on our platform, including interest-bearing deposits or in some instances, short-term liquid investments like treasuries. We are and will remain materially more focused on ensuring client needs can be met with our offerings than on our own near-term financial outcomes.
The full rebuild of the private wealth business that I have detailed in prior calls is nearing completion, resulting in a front, middle and back-office structure built for both superior client experience, and significant scale. The pace of year-over-year client acquisition was 13% this quarter and remained an indication of both future earnings potential and further connectivity across our services.
Clients are increasingly benefiting from our still-emerging investment banking capabilities. Investment banking and trading income had a third consecutive record quarter with revenue up $8.7 million or 47% quarter-over-quarter to $27.5 million, with contributions from all components of our newly built platform. We continue to achieve milestones in our product and services road maps and will focus future investments in an offering capable of delivering at least the 10% of total revenue targeted by 2025. Since its launch in December 2021, our investment banking business has built an impressive array of capabilities to help clients solve a broad set of needs.
Our capital solutions offering enables our clients to manage their interest rate risk via strategies of varying complexities and sophistication, such as swaps, collars, corridors and FX hedging. Our capital markets group has been actively assessing and executing alternative financing strategies for clients, including securitizations, high yield, follow-on, initial public offering in our first convertible bond trade occurring this quarter. Additional trades in the last six quarters have included TBA trades, specified MBS pool trades, corporate bond trades, corporate loan trades and equity trades.
Sales and trading has now completed over $35 billion in notional flat trades since the first trade last May. Our M&A advisory team has assisted clients in realizing the long-term strategic objectives through its first buy-side advisory mandate and the closing of its first sell-side engagement. Finally, our newly created ETF and funds management team successfully launched the Texas Capital Texas Equity ETF, now trading under the ticker TXS on the NYSE. At Texas Capital, we recognize that Texas' diverse, business-friendly climate and vibrant economy are critical to our growth in success.
I am excited to announce that last week, we launched the aforementioned Texas Capital Texas Equity Index, exchange traded fund as the first investment offering created by Texas Capital's newly founded ETF and Funds Management business. With this launch, we entered one of the fastest-growing spaces in the asset management industry, further progressing against our objective to be the flagship financial services firm in the State of Texas and marking a significant expansion of our asset management capabilities.
The substantial and transformative investments made over the last two years to deliver a higher quality operating model, supporting a defined set of scalable businesses is resulting in the intended outcomes. The entire platform contributed to our now fourth consecutive quarter of positive operating leverage as year-over-year quarterly PPNR grew 43% in Q2. Noninterest income as a percentage of total revenue increased to 16.6% this quarter. It stands at 15.1% year-to-date, already in line with the bottom end of our full year 2025 goal to generate 15% to 20% of total revenue from fee income sources.
Importantly, these diverse and complementary revenue streams were all built in the last two years. It will take time to deliver both at the magnitude and with the consistency we expect. That said, we are pleased with our progress to date, and have proven that each of our areas of focus will be key contributors to earnings going forward.
Before concluding, a foundational tenet of the financial resiliency we have established and consistently communicated and will preserve its continued focus on tangible book value which finished the quarter up 7% year-over-year, ending at $57.93 per share, a near all-time high for our firm. As you have heard me say in the past, while fully committed to improving financial performance over time, maximizing near-term returns is not the primary goal. We are instead focused on responsibly scaling high-value businesses through increased client adoption, improved client journeys in realized operational efficiencies. Doing so will enable both higher quality earnings and a lower cost of capital which results in attractive through-cycle shareholder returns.
Thank you for your continued interest in and support of our firm. I'll turn it over to Matt to discuss the quarter's results.
Thanks, Rob. Good morning. Strong balance sheet positioning built over the last two years continues to be exemplified by top-tier capital and liquidity levels. At quarter end, on-hand cash liquidity totaled $2.8 billion or 10% of total assets compared to 5% median in our peer group. On insured deposits as a percentage of total deposits further decreased this quarter to 40%, and deposit coverage ratios remained extremely strong, both in absolute and relative terms with cash plus contingent funding to uninsured deposits of 165%.
Capital levels remain at or near the top of the industry. CET1 finished the quarter at 12.2% and tangible common equity to tangible assets finished the quarter at 9.6%, which ranks first relative to first quarter results for all large U.S. banks. Notable progress in our fee-generating businesses continued again this quarter.
As year-to-date noninterest income to total revenue was over 15%, in line with our long-term target of 15% to 20%. This was in part driven by quarterly investment banking and trading income of $27.5 million, which increased nearly 150% from the second quarter of last year and is up 47% linked quarter. Notably, this is our third consecutive record quarter since launching the investment making business last year.
Treasury product fees increased 1% quarter-over-quarter. The pull-through to earnings from sustained momentum in our cash management and payment businesses as at this point in the rate cycle being offset by increased deposit compensation. We are less focused on quarterly fluctuations in revenue from this offering than we are in ensuring we are adding primary banking relationships consistent with our long-term plan.
Wealth management income increased 8% quarter-over-quarter, as assets under management grew 6%, resulting from market changes, net new inflows and some additional rotation from existing commercial and private wealth clients and to manage liquidity options. Managed liquidity now represents approximately 25% of AUM, up from less than 5% a year ago. Taken together, fee income from our areas of focus increased by approximately $16 million or 70% year-over-year, representing the early stages of client adoption across the set of capabilities, unique in our markets and custom built for our clients' evolving needs.
Total revenue increased $5 million linked quarter, as the $3.3 million decline in net interest income was more than offset by improving noninterest revenue. As expected, despite seasonally strong warehouse loan growth, net interest income was pressured by industry-wide increases in overall deposit costs. Total revenue increased $46.2 million or 20% compared to Q2 2022, with year-over-year results benefiting from a 76% increase in noninterest income, coupled with disciplined balance sheet repositioning into higher earning assets.
Total noninterest expenses declined 6.4% linked quarter, as structural efficiencies associated with our go-forward operating model began to flow through the income statement. Taken together, quarterly PPNR increased 43% year-over-year to $96.4 million, the high point since we began this transformation in Q1 of 2021. Net income to common was $64.3 million for the quarter, up $34.5 million year-over-year, while earnings per share increased $0.74. This is the highest level in two years, adjusted for our divestiture.
Preparation for an evitable normalization and asset quality began in 2022, as we steadily built the reserve necessary to both address known legacy concerns and align balance sheet metrics with our foundational objective of financial resilience. We recognized $8.3 million in net charge-offs during the quarter, reducing nonaccrual loans to 28 basis points of total assets. This quarter's provision expense of $7 million accounts for the modest increase in criticized loans, as well as quarterly loan growth predominantly related to mortgage finance, which garners proportionately lower reserve rates.
Quarterly performance metrics continued their steady progression towards target financial outcomes with quarterly return on assets, and return on tangible common equity of 0.95% and 9.17%, respectively, both more than double levels observed in the second quarter of last year. Our balance sheet metrics remain strong, with the end-of-period profile reflective of continued execution on our set of core objectives.
Gross LHI balances increased by $1.3 billion or 6% linked quarter, driven by predictable seasonality in the mortgage finance business and modest increases in commercial real estate, which is experiencing lower levels of prepayment activity. Deposit balances increased 5% or $1.1 billion in the quarter. Consistent with previous guidance, the deposit and loan growth were likely to more closely mirror each other in the near term after significant loan growth in Q1. As a result, the period-end loan-to-deposit ratio remained flat linked quarter at 91%, and down from 95% in the second quarter of last year.
Cash balances moderated to 10% of total assets as outstanding FHLB borrowings declined by $750 million, and are now below our historically observed levels representing one component of our ample contingent liquidity. As we detailed on the January earnings call, we have rebuilt nearly every process and procedure across the firm. As a result, in the second quarter, changes were made to certain estimates used in the Company's CECL model.
The most significant of which are more granular estimate of historical loss rates to incorporate probability of default, loss severities and allocations of expected losses to outstanding loan balances and off-balance sheet financial instruments. These changes resulted in adjustments to the Company's portfolio segments, including introduction of the consumer category. And in a reallocation of the allowance for credit losses between loan portfolio segments and the allowance balances allocated to off-balance sheet financial instruments.
The changes made to estimates used in the Company's CECL model results in a higher allocation of losses to off-balance sheet financial instruments as is reflected in the $24 million decline in the ACL loans. On a combined basis, however, total ACL inclusive of off-balance sheet reserves remained relatively flat as compared to the prior quarter.
Finally, the increase in interest rates resulted in an AOCI decline of $65 million, which is nearly offset by net income to common and result in tangible book value share of $57.93. Total LHI, excluding mortgage finance increased $213 million or 1.43% for the quarter and is now up $1 billion or 6.8% for the year. After expanding 8% in Q1, commercial loan growth moderated this quarter, declining $126 million or 1%, as both clients and the industry reset expectations for capital costs and its impact on credit demand.
Commercial loan growth over the past four quarters has added $1.4 billion of client balances consistent with our strategy, an increase of $0.15 when adjusted for divested loans. This capital previously attributed to loan-only relationships and the insurance brand finance business continues to be recycled into a client base that benefits from a broadening platform of available product solutions delivered within an enhanced client journey. Overall, request for capital extensions continue to come primarily from new and expanded relationships, as utilization rates were constant quarter-over-quarter at 51%.
Our balance sheet committee trends indicate that while volume has declined from the year ago period. The proportion of new activity that includes more than just the out has increased substantially over the last two years to over 95% for the first six months of the year. This is further evidence of our ability to bring increasingly comprehensive solutions to our clients in any economic environment, entirety of their corporate life cycle.
Period-end real estate balances increased $358 million or 7% in the quarter. We continue to experience the expected but still material slowdown in payoff rates off recent record highs. Our clients' new origination volume also slowed in recent quarters but remains focused on multifamily, reflecting both our deep experience in the space and observed performance through credit and interest rate cycles. Only 12% of the real estate portfolio had a maturity date in 2023, while over 58% of the portfolio matures in '25 or later.
Our exposure to at-risk asset classes is limited with office exposure of $460 million, approximately 9% of the total commercial real estate portfolio. The office book has solid underwriting with a current average LTV of 57% and 89% recourse, as well as strong market characteristics is over 75% is Class A properties and over 71% is located in Texas.
Average mortgage finance loans increased $1.1 billion or 33% in the quarter, as the seasonality associated with spring home buying partially offset rate-driven pressures that continue to drive down estimates of next 12- to 24-month activity. Year-over-year, the industry has contracted from $3.4 trillion to $1.6 trillion in trailing 12-month originations. Overall, market and volume estimates from professional forecasters suggest total market originations to decrease modestly in the third quarter, with full year expectations still showing a decline of more than 30% in origination volume.
Consistent with historical performance, we would expect to maintain our outperformance margin of about 25% as we remain confident in our ability to successfully serve this industry. In line with expectations communicated last quarter, total ending period deposits increased 5% quarter-over-quarter, with changes in the underlying mix reflective of both a continued funding transition and a tightening rate environment, coupled with market-driven trends and predictable seasonality.
Total noninterest-bearing deposits remained stable quarter-over-quarter, with the proportion of total deposits decreasing modestly to 40% from 42% at year-end. The underlying composition, however, does continue to shift. As expected, mortgage finance noninterest-bearing deposits increased $884 million or 20% quarter-over-quarter, alongside higher loan balances as we remain focused on holistic relationships with top-tier clients in the industry. Average mortgage finance deposits were 120% of average mortgage financial loans at the high end of our guidance of between 100% and 120% due to the impacts of decreased mortgage originations.
Other noninterest-bearing deposits declined $955 million or 19%, in part due to previously described trends whereby select clients shifted excess operating account balances to interest-bearing deposits, including insured cash sweep or to other cash management options on our platform.
While the pace of rotation is slowing, we do expect a portion of our total deposits comprised of noninterest-bearing excluding mortgage finance, to continue to decline in the near term. These behaviors, coupled with continued realization of additional interest-bearing deposits through business channels aligned with our strategy, resulted in a 10% linked quarter increase in total interest-bearing deposits.
The pace of our proactive repositioning away from index deposit sources has slowed as balances are now aligned to clients consistent with our strategy and at 6% of total deposits well inside our published 2025 threshold of 15%. Including the $195 million reduction experienced this quarter these balances are now down over $8.5 billion since year-end 2020.
During the quarter, we did begin prefunding a portion of the $499 million of brokerage CDs maturing during the third quarter. We maintain ample broker capacity and while always evaluating future liquidity composition consistent with established balance sheet management priorities, we do anticipate that brokerage CDs will remain relatively flat during the third quarter.
Our expectation remains that we will be able to grow client deposits by a continued elevated marginal cost, given the material change in market conditions experienced over the last four months. As expected, our earnings at risk decreased this quarter to 2.6% or $26 million and a plus 100 basis point shock scenario, and minus 3.8% or $39 million and a down 100 basis point shock scenario, as a result of both increased funding costs and proactive measures taken earlier in the year to achieve a more neutral posture at this stage of the rate cycle.
There were no new security purchases in the quarter, as we continue to believe holding levels equivalent to 15% of total assets, an efficient and prudent portion of our liquidity asset composition at this time. The core component of our naturally asset-sensitive profile remains the large portion of our earning asset mix that reprices with changes in short-term rates. 93% of the total LHI portfolio, excluding MFLs is variable rate, with 91% of these loans tied to either prime or one-month index.
Net interest margin decreased by 4 basis points this quarter and net interest income declined $3.3 million, predominantly as a function of a decline in interest-earning assets and higher quarter-over-quarter deposit costs, partially offset by increased average loan balances and improved loan yields.
Our multi-quarter business model transformation and associated platform build is directly intended to lessen our dependence on these inevitable fluctuations in rate-driven earnings. Sustained execution on noninterest income initiatives will enable revenue stability even should near-term net interest income expansion moderate.
Further, the systemic realignment of our expense base with strategic priorities is beginning to deliver the expected associated with a rebuilt and more scalable operating model. We expect to see continued contraction in quarterly noninterest expense over the remainder of the year, which when coupled with revenue stability resulting from strong execution on behalf of our clients will enable core earnings expansion despite the market backdrop.
Criticized loans increased $58.2 million or 10% in the quarter to $619.3 million or 2.9% of total LHI, as increases in special mention real estate loans offset a $22 million reduction in criticized commercial loan credits. The composition of criticized loans continues to be weighted toward commercial clients reliant specifically on consumer discretionary income plus a handful of well structured commercial real estate loans supported by strong Texas-based sponsors.
We've previously communicated that we anticipated manageable real estate migration beginning in the middle of this year. And based on our economic outlook, believe our client selection and underwriting guidelines provide adequate protection against realized loss.
Detailed credit reviews, a credit risk practice implemented during the pandemic continued to occur quarterly, whereby the line of business leads and their credit partners conduct a series of reviews on a name-by-name basis. Additionally, during the second quarter, executive management hosted enhanced credit review sessions in middle market and corporate, resulting in a review of over 50% of the commitments in these verticals.
Since late March, specific reviews have also been conducted on asset classes or industries, including office, multifamily, homebuilder, contractors, beverage distributors and Software as a Service. The results of these reviews are represented in the migration trends, both inflows and outflows, and special mention and substandard loans this quarter.
We have previously commented on the portion of legacy loans still on the balance sheet in consistent with current client selection and our underwriting principles that will be resolved through maturities, workouts or select charge-offs. During the quarter, we recognized net charge-offs of $8.2 million against this identity portfolio and have now reduced total exposures by over 55% to approximately $100 million of book balances since early 2022.
These actions, coupled with negligible new inflows into the category, supported a $12.9 million reduction in nonperforming assets during the quarter and an improvement in our ACL coverage to 3.5 times. Total allowance for credit loss, including off-balance sheet reserves was relatively flat on a linked-quarter basis at $282 million or 1.32% of total LHI at quarter end, up over $35 million or 29 basis points year-over-year in anticipation of a more challenging economic environment.
Total regulatory capital remains exceptionally strong relative to the peer group and in our internally assessed risk profile. During the quarter, $75 million of the original $275 million mortgage warehouse related credit-linked notes were partially paid down. As mortgage industry volumes and related credit protection eligible balances have declined significantly since the note was issued in early 2021.
This reduction in note balance was neutral to CET1. And at current interest rate levels, saved the firm $0.02 of interest expense in the second quarter or $7.9 million on an annualized basis. We remain focused on managing the hard-earned capital base in a disciplined and analytical manner focused on driving long-term shareholder value.
Our guidance accounts for the market-based forward rate curve, which now assumes Fed fund reaches 5.5% this quarter and remains there through year-end. Changes in anticipated system-wide funding costs and slower net interest income expansion was specifically cited in our revenue guidance update last quarter. Our outlook for low double-digit percent full year revenue growth remains unchanged.
As evidenced by this quarter's results, the significant investments made over the last two years are yielding expected operating and financial efficiencies that will continue contributing to profitability in the second half of the year. Our noninterest expense guidance also remains unchanged, and we believe the current consensus expense estimates are achievable. Together, these expectations should result in the maintenance of operating leverage, as defined as year-over-year quarterly PPNR growth.
Finally, we are committed to maintaining our strong liquidity and capital positions, and our intent remains to hold greater than 20% of our total assets in cash and securities and to exit the year with a CET1 ratio of at least 12%.
I'll hand the call back over to Rob for closing remarks.
Thank you, Matt. Operator, we're available for any questions.
[Operator Instructions] Our first question comes from Michael Rose from Raymond James. Michael, please go ahead. Your line is now open.
Maybe we can just start on expenses -- you just mentioned it, Matt. I know there's been some kind of moving pieces with headcount and things like that. But can you just give us an update on kind of where your staffing expectations are and where you still would like to kind of opportunistically add? I know some of that's in the slide deck, but just wanted to get some kind of overarching comments there.
Yes. You bet, Michael. So the quarter-over-quarter noninterest expense was down 6% after you normalize for the $7.5 million in seasonal expenses in the first quarter that moves to about a 3% linked quarter decline. You'll recall that the structural efficiencies that we announced on the April call had been enacted in the weeks just prior. So we made certain to note that it would take into the third quarter for us to see the full run rate reductions flow through salaries and benefits.
The only items that I would flag that could potentially increase salaries and benefits of that run rate would be remaining items on our near-term investment banking road map, which now that we have infrastructure built out, should deliver revenue in excess of any marginal cost inside of about 12 months. And then for all other noninterest expense, our expectation is still that, that remains between $65 million and $70 million. The higher end of that range continues to be potentially driven by increased spend associated with deposit gathering, which we would more than offset with higher revenues.
Now we just add, Michael, a subjective comment actually a factual comment that what I'm most excited about maybe more anything else at this point of the build is that we have high-quality people in [indiscernible] everything is built. We have stability. For the first time, we have the entire team on the field. We may add, like Matt said, one or two different capabilities, which require more, but the build is complete, the seats are filled, and we're really, really happy with who's here.
That's very helpful. And then maybe just step -- yes. Maybe just stepping back, Rob, I think -- I know this is going back a couple of years when you laid out the initial targets. But given the progress that you're making, it seems like maybe there's a little bit more confidence around meeting and potentially exceeding those targets. Can you just give us -- given that the world's changed a little bit here, you have some different businesses that you're not in than you were when you kind of laid out those targets. Just holistically are those targets still hold and is the time line still in line with original expectations?
I would say that it's been a long time since we laid out those targets. More importantly, the world has changed dramatically, as we all know. And we're more convinced than what we started that this is the right strategy for the current world or any market or rate environment. And we stand by the targets that we set out, and we're confident that we'll hit them.
Great. Maybe just finally for me. It doesn't look like you guys repurchased any shares this quarter. I know the focus is organic growth, obviously, but just given that the stock is kind of trading around tangible book at this point, just any updated expectations or thoughts on usage of the buyback?
Yes. Look, the answer is the same. We have a very, very complex decision tree on which we determine distribution policy. Right now, a dollar investment business generates a much greater return then a -- then buying back shares even at book value for future benefit of our shareholders. If that changes, we have plenty of capital liquidity to where we could buy back. But right now, we're just so pleased with the plan and our progress that that's the best use of capital.
Thank you. Our next question comes from Brett Rabatin from Hovde Group. Brett, your line is now open. Please go ahead.
Appreciate the questions. I wanted to first talk about Investment Banking. And last quarter was obviously a good quarter for investment banking, and this quarter was even better. So I was just wanted to hear what the pipeline looks like from an investment banking perspective. And then, if you expect continued momentum in the back half of the year related to that line item?
Yes, Brett, thanks for the question. Look, we're really excited about the platform that we built. The flywheel is just starting to take hold. The investment bank and the connectivity with the rest of the platform has been -- it continues to be exceptional. The cross coordination and with clients, both in private wealth, commercial banking, corporate banking, commercial banking, our mortgage business and real estate business. It's just -- we're further along in our maturity than I would -- could have hoped for.
The pipeline is broad, it's diverse. It's granular. It's literally coming from all components of the investment bank, whether it's sales and trading, M&A advisory, capital markets, capital solutions. It's just the entirety of the platform that's really performing. And so, we're very encouraged and look forward to continued solid performance in the third and fourth quarter.
Go ahead, Matt, I'm sorry.
Brett, the only thing I'd add to Rob's comment in his script, which I think are worth reviewing in detail, the capabilities on that platform are enabling us to solve different problems for our clients at a different point in market rate cycle. So in Q1, the 18.8 was largely driven by syndication revenue as we were helping clients' access markets via running their credit facilities. Or with the severely inverted curve in the second quarter, a lot of that revenue shifts to more capital solutions as we help clients hedge their own rate risk and deliver advisory services. So, I think the contributors to that income to Rob's point, on the pipeline are very much going to change from quarter-to-quarter, but it enabled us to deliver exceptional outcomes for our clients, regardless of what the need is.
Okay. That's really helpful. And then I want to just talk about funding for a second. And I think one of the challenges the banks base had is just declining DDA as clients move funds to interest-bearing sources. You could make a case that maybe your DDA is finally bottoming here with operational accounts. Would that be a fair assessment, do you think? Or maybe there's some additional migration in that bucket?
Brett, let me just -- let me make one quick comment that I think it's really important, and I'll let Matt answer your question specifically. We are totally agnostic to where the client is on our balance sheet, whether they're in DDA account or they move to AUM to manage liquidity because that they may be rolling out of the DDA, but they're staying on our platform. They're not leaving the firm. And so, we're here to solve client needs and over time will benefit and the client will do. But I think it's really, really important to point out that nobody is leaving the firm. They're just locating to different products and services. Sorry, Matt, go ahead.
No. Thanks for calling that out. Mean we're obviously quite pleased to have a suite of cash management products and infrastructure to support that client rotation at this point. Our view embedded in the guidance is that the rotation does start to slow.
We're modeling commercial noninterest-bearing to end just south of 15% as we exit the year. We, of course, think it's extremely important to balance any sort of near-term impact on financial performance that -- we're in the middle of a -- in fact, we're in the middle of a multiyear transformation of the deposit base.
So things that we go into a pretty extreme links every quarter to call out for you guys, like 12% growth in year-over-year, gross payment revenue or the fact that our treasury pipelines in the third quarter, up 50% relative to the second quarter. Those are specifically to give you an indication. Brett, how today's activities are going to drive financial outcomes in '24 and '25.
Thank you. We'll now take our next question from Stephen Scouten from Piper Sandler. Stephen, your line is now open. Please go ahead.
I guess one of the things I wanted to dig into was the new customer growth. I think you said it was maybe up 30% quarter-over-quarter, which is impressive. Can you give us a feel for where the customers are coming from? And maybe what segment of the bank more so is driving that customer growth if you had to point somewhere?
Yes. A lot of that is the treasury onboarding and 90% of that is done now digitally through our new Initio platform, which I take is market receptor leading, which is super simplistic way to onboard a commercial client. And the client journey is much improved and much more efficient. Really excited to have that up and running. That's both for new and -- new clients and also clients expand their relationships with us on the platform, which -- that's new to this quarter as well.
I think it's broad-based. It's -- we have new clients on the platform in capital markets, which has become increasingly busy. Capital solutions, treasury, private credit through our syndications desk. So, I think it's very, very broad. But the predominant amount of the new clients is on to the treasury platform. Where they're coming from, it depends on the segment in which we're discussing. The business banking client is generally coming from a different firm than the middle market or corporate client, so -- or even sales and trading or our mortgage clients. But it's very broad. It's not in one segment or one product.
Okay. Great. Very helpful. And then I appreciate the commentary about being somewhat agnostic about where the customer sits on the balance sheet. But obviously, that does present a pretty significant near-term profitability headwinds. So, I'm kind of curious, the 110 ROA target, in particular, is pretty -- I don't know if it directed the right word, but it's going to take a lot of heavy lifting. So how do you get there near term in light of that specific headwind and that impacted profitability?
We're at a little bit of a hard time here, Stephen. So if I answered the wrong question, ask the right question, I'll try to answer that. So, we think about with a normalized through-cycle provision of, call it, 40 basis points of loans, excluding mortgage finance. We need to push PPNR to average assets from the $133 million we delivered this quarter to closer to $165 million to $170 million, which is another $20 million or so of PPNR each quarter on the same size balance sheet to start to bring that 1/1 into site.
To Ron's earlier comments, we think the breadth of our platform gives us a variety of paths to get there, which would include continued expansion of fee income, continued realization of the structural efficiencies enacted in April of this year. I think as we move into next year, we'll get more specific on the relevant components that should come together to drive that outcome in '25. I think that's what drives our confidence is that there are a wide range of options supported by sector-leading capital and liquidity that continue the targeting.
Okay. Great. That's really helpful. And maybe just last thing for me. Any update on -- I think it was around $130 million in legacy loans, maybe that we're still hanging around that -- maybe weren't as high quality as what you put on over the last few years. And did that drive any of the increase in the criticized assets?
Yes, great question. So when we started the journey, the number was just north of $200 million. It's now down to $100 million. About $30 million of that has been driven through charge-offs, including the charge of line this quarter. The remainder has been driven by maturity restructure refinance out of here. That did not drive the pickup in special mention credits this quarter. That was largely driven by C&I commercial real estate clients that are consistent with the go-forward strategy.
And as we mentioned in our commentary, it was likely the third quarter of last year that we started to indicate we expected early stage migration in commercial real estate to begin in the middle of this year. So, we're not surprised to see that, and we are quite confident both in our client selection as well as the underwriting characteristics that support those credits.
Thank you. We'll now take our next question from Brady Gailey from KBW. Brady, your line is now open. Please go ahead.
Good morning, guys. I wanted to ask again about investment banking and trading. As I look at that line item and the growth has just been incredible over the last, it went from 8 million to 12 million to 19 million now over 27 million in the second quarter. Maybe when you take a step back and look at that business, what do you think is the right goal when it comes to annualized revenue? I mean, if you annualized 2Q, you did over a 100 million of revenue there, what's the potential for that business over time?
Yes, look, I think the guidance was 10%. We'll stick with that guidance for now, but just kind of talk a little bit about that. Brady, I just want to expand just real briefly on why we're so confident in that business. First, this quarter is another great quarter at first for the investment bank. We are our first IPO, our first convertible bond trade. We closed our first sell-side M&A advisory fee. We launched TS and the funds management vertical. We were originating our first warehouse to securitization facility. We onboarded our first gestation balances, and we settled the first pool trade.
So, there's just -- there continues to be a lot of firsts coming out of the ground for a platform that we've already incurred the expense on. And this is kind of how it works. So, a couple years ago, we had a small TF client, and we weren't the primary bank. And then we won the primary banking relationship through a loan from a lending centered bank. And then that middle market banker referred that principle to the private wealth business in six months later or sometime later, the private wealth banker refer them to our M&A team, and that was the first M&A sell-side that we just did.
So that's the power of this platform. TF, full wallet, commercial bank, middle market banking client, which is wonderful then private well then we sell the business, and now the proceeds are back into the private well. And so it's just -- that's the power of it, why we're so confident in it and why we know we'll hit our target and maintain it.
We'll now move on to our next question from Matt Olney from Stephens. Matt, your line is now open. Please go ahead.
Just want to stick with that same discussion on the investment banking line. I'm trying to appreciate just how lumpy this item can be in the future. Any color on the granularity within this line for some specific events? Just trying to appreciate potential for volatility in that line as you continue to ramp this up?
I really appreciate the question because we -- Matt and I were alone in this board room talking about the strategy. I told Matt that when we say we're going to start investment banks, people are going to think we're crazy. They're not going to work, then it's going to work, and then they're going to complain about the inconsistent earnings of it, and here we are. So the answer -- the real answer in the constructive answer is it's granular. It's all components of the investment bank.
To Matt's point, the mix will shift quarter-to-quarter based on the economic environment. But remember, we're outperforming and doing really, really well right now with very little issuance by any corporate company. So, it's great that the platform is so broad that the mix can shift, and we can solve all client needs. So, the client never has to leave us to go to another firm to get something done.
So it helps those things, too. I mean, the sophistication of the advice that we're able to give clients demand that premium for other products and services. So, if we go out and talk to a client about a swap or a sell-side or something else, and they don't do that. That's great. They generally will reward us over time with treasury for another type of business.
And so, it's not even just the fee that the investment bank earns. It's the vertex, vertex between the rest of the firm and the investment bank. And by the way, it goes the other way, too. The Investment Bank is getting business because our commercial bankers have credibility with their clients. They've been in market with those clients for a long time. So, it works both ways, period.
Okay. I appreciate that, Rob. And then I guess changing gears, thinking about the DDAs. Matt, within the mortgage finance, I think you mentioned we're at the high end of that 100% -- 120% of the mortgage finance loans. Where do you see that moving in the back half of the year?
Yes. I'd see the high end of that range, largely staying intact, Matt. I mean, as you know, we really like the industry. We've invested in expanded product offerings. We feel as though we're banking top-tier clients in the space, and they want a place to move their treasury and they want a spot to move their deposits, and we're happy to avail them of that.
So I'd look to the high end, I think, on actual warehouse part of that by actual warehouse balances. So we're still looking at a 30% industry-wide decline in one to four family originations for the year will be about 75% of that decline or as we said in the script, a 25% outperformance margin. So, if we were $5.3 million last year on full year average warehouse balances, you can look for that somewhere in the low 4s.
So, I think you're going to see that phenomenon play out through the back end of the year. There are a component of those balances, as you know, Matt, that are compensated the mortgage warehouse yield. So as the loan volumes decrease, the yield will also decrease as deposits remain flat or grow. So that's something to consider we're modeling it out.
We'll now take our final question from Zach Westerlind from UBS. Zach, your line is now open. Please go ahead.
It's Zach on for Brady. I just wanted to get your outlook for loan growth, if that's possible? And what some of the key drivers are?
I'm sorry, operator. We can barely hear for some reason. Would you mind repeating?
Loan growth, so look, I'll touch on it, and it's not the right question, I apologize. Loan growth was materially less this quarter, as Matt said. As I've always said, as we've always said since we started the journey two-plus years ago, this is not a loan growth story. Remember, a primary focus of ours is recycling capital, and we're solving complex solutions or needs for our clients.
Even though we had low loan growth, remember a 30% increase of new clients. So, we're doing a lot of different things, they ingest loans. That is not an indication of the activity of the platform whatsoever. And I'm perfectly content whether we bank the best clients in our markets via a loan or treasury or capital solution or a private wealth of mortgage finance or wherever they may end up on our platform.
I do think loan growth across the entirety of the economy is out a lot now it is. We're no different. And people are a little bit more bearish today than they were in the past. And I think the spend on CapEx and other things as has slowed based on cost and confidence, which makes the power of our platform even more important.
Thank you. Unfortunately, we have lost that questioner. I'll now hand back to Rob Holmes, CEO, for any closing comments.
Great. Operator, thank you very much to everybody for dialing in and your continued interest in Texas Capital and our transformation story. We look forward to talking to you next quarter.
This concludes the conference call. Thank you very much for joining. You may now disconnect your lines. Have a lovely rest of your day.