Texas Capital Bancshares Inc

NASDAQ:TCBI

Earnings Call Transcript 2021-Q4

[Operator]

Hello all, and a warm welcome to TCBI's Fourth Quarter 2021 Earnings Conference Call. My name is Lydia and I'm your operator today. [Operator Instructions] It's my pleasure to now hand you over to our host, Jamie Britton. Please go ahead when you're ready, Jamie.

[Jamie Britton, Investor Relations]

Good afternoon. And thank you for joining us for TCBI's Fourth Quarter 2021 Earnings Conference Call. I'm Jamie Britton, Director of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the day 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 precautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapitalbank.com. Our speakers for the call today are Rob Holmes, President and CEO, and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our Operator will facilitate a Q&A session. And now I'll turn the call over to Rob for opening remarks, Rob?

[Rob Holmes, President and CEO]

Good afternoon. This is Rob Holmes. Thank you for joining us today to discuss the final quarter of what has been a pivotal year for our firm. We are convinced that we have a distinct opportunity to serve best-in-class clients in a strong Texas market with a differentiated offering. We are building something of value which takes time, talent, investment, and fortitude. We are fully committed to achieving our vision and making tangible progress, executing on the strategic plan I presented in September. Before we begin, I would like to introduce our new Chief Financial Officer, Matt Scurlock, and to thank Julie Anderson one last time for more than 2 decades of service and steadfast commitment to Texas Capital Bank. I'm very excited to have Matt step into his new role. I fully understand the importance of the appointment of the new Chief Financial Officer, as he will be a critical component in the success of our transformation. In my long history of working with hundreds of CFOs as an advisor, I have found most to be highly competent in at least 1 of 3 categories.

Operations, Accounting, or Strategy. During the course of the past year, I have indeed challenged Matt in each and he has proven highly competent in all 3. There are many great candidates to choose from for this attractive role. At this time in our company, and in the market in which we serve, I am convinced that Matt is the best person to be our CFO. I am highly confident that you will find Matt to be credible and that you'll be pleased with his competency and proactive outreach to each of our constituents. moving forward. I would also like to thank the entire team at Texas Capital. Many are new to the firm and are already delivering great value. But there are also hundreds of talented people who were here before I arrived that have embraced our new expectations and strategy and have contributed greatly this past year. Together, we are building Texas Capital Bank the right way. Regardless of tenure, each of you had a lot to be proud of. On behalf of the entire operating committee, I would like to express our great appreciation for your efforts and dedication during a year with a profound amount of change and compliment you on your accomplishments. As we formally move from discovery and planning, to executing and delivering, it is important to note that we benefit from good momentum and a strong foundation created over the past 12 months. We ended the year with a total capital ratio above 15%, up from 12% a year ago. And ample liquidity to support responsible growth. Due to the much improved partnership between the businesses and risk, our credit quality has improved. As we proactively work through our legacy credit issues, it is important to note that we have realized much more than simply minimizing potential loan losses. We will also benefit from the reinvesting of that dead capital, which was not generating a return into new relationships that are profitable and with target market clients. We are still recovering from legacy, historical strategy of buying levered assets out of market. But the portfolio of legacy trapped poorly returning capital will mature and be reinvested consistent with our go-forward strategy. It is very important to us to provide visibility and to our progress versus our goals. To do that at the level we expect of ourselves, we need to enhance our internal reporting. And I'm happy to say that Matt and his team, have already made significant changes which will allow us to improve our ability to report progress. To that end, we are taking a first step of providing more clarity to you this quarter, and are committed to refining our detail over time.

I hope you saw the press release announcing John Cummings as our Chief Administrative Officer. John brings a wealth of broad, deep experience across all functions in many of our lines of business. John began his career at Merrill Lynch as an entry-level branch trainee and advanced to a leadership positions across finance, technology, banking, operations, digital platforms, and sales segments for 27 years, culminating with a position on the Executive Committee reporting to the CEO. He left to re-engineer Citigroup's U.S. Personal Wealth Management, International Personal Bank, and U.S. Citigold High Net-Worth Client Banking businesses. Most recently, John served as Citigroup's Managing Director of wealth advisory. With John's appointment, we now have our complete senior team in place, which was one of my stated primary goals to achieve by the end of my first year, which concludes January 24th. As we communicated in our go-forward strategy on September 1, 2021, we consider 2022 the true launch point. However, we made material progress against our priorities and strategic performance drivers as we closed the year. We enter this year encouraged by the progress we are already making, which will improve client relevance, and result in structurally higher balanced earnings. The expansion of our products and services are on track with our strategic plan. Our investment banking segment build is on schedule, and will only accelerate with our recent FINRA approval and the launch of our new investment banking division, Texas Capital Securities. The majority leadership team of our investment bank is in place, working with our credit and operating risk partners to thoroughly review each of our new products and services, which will culminate in our full suite of offerings being available to our clients in the third quarter of 2022. As you know, there are several capabilities which will be housed in our investment banking division of which the baseline core offering is already in place.

We are expanding our existing capital markets, products, and loan syndication platform. This investment is directly related to our new client segmented and industry-focused coverage model. Greater capital markets and syndications knowledge by industry will be required to work with our different industry verticals. Consistent with both our strategic pivot away from the loan product as our primary client offering, you will see we are now reporting investment banking and trading income as a standalone category, within non-interest income, which is consistent with our peers. Our investment banking strategy, is being very well received as evidenced by multiple mandate and capital markets, as well as sell-side advisory assignments. It is important to note that these advisory assignments were organically developed to the structure of our platform. One was referred by a private banker and private wealth and others by bankers and middle market banking. Investment banking fees contribution to total revenue is trending favorably, giving us confidence we will achieve our 10% target contribution levels even in a more normalized rate environment. Our investment in Treasury Solutions expertise, Products, Services, and Technology resulted in early positive trends. As you know, fees can and will fluctuate through cycle, as we manage earnings credit rates. But we are pitching treasury solutions, from a position of strength and proficiency, resulting in new treasury relationships at an accelerating pace. P times the revenue run rate accelerated at year-end in line with expectations. A large percentage of treasury P times V comes with a high percentage of operating deposits, which is critical. During the course of the year, operating deposits had double-digit percentage growth. As we become more relevant to more clients, becoming their primary operating bank, our reliance on higher cost index deposits with a 100% data will decrease, improving our funding costs and incrementally making us less assets sensitive over time. As planned in the fourth quarter, we landed numerous product offerings on our treasury platform focused on both client segments and industry specialization.

In our new healthcare verticals. We have many new clients benefiting from our revenue cycle management offerings. We created treasury bundles for our business banking clients, and importantly, have already improved upon them, adding more functionality for the benefit of our business banking clients. We are excited about the pipeline of the products and services plan for a treasury business during the course of this year. One of the things we are most excited about is our digital product roadmap, which we'll talk about more in the coming quarters. We are confident heading into 2022 that we are meaningfully closer to our treasury solutions fee target of 5% of total revenue by 2025. Private wealth continues to drive steady growth in both assets under management, which grew almost 50%, and in fees, which grew more than 40%. The PWA team added almost $900 million in assets under management, over 25% of which was from new clients, many of whom were referred from our expanded banking teams. In our most aggressive year of talent acquisition and private wealth, we increased our client-facing advisors by a large percentage. As noted on September 1st, PWA offers a relatively mature products suite that will benefit from scale. John Cummings will quickly commence a strategic review of the business and its go-to-market strategy. We are confident a very good business on an already built, very good platform can be even better. Matt will provide more detail on the trends and associated drivers of non-interest income as a percentage of total revenue in the fourth-quarter. I am confident we are on track to achieve our stated 15-20% target. We completed our planned internal reorganization, which resulted in new client segmentation and industry specialization. 4 out of our 5 primary business banking markets has leadership in place and bankers engaging with clients. We develop tailored Treasury Solutions as well as a differentiated, cost efficient credit model to address this market segment. It is important to realize this is a new segment, with a new leader, with new bankers, with new clients, with new products, producing new revenue today. The middle market banking segment has been our primary focus since our founding. As expected, it led in client acquisition and adding new bankers onto our platform. The talent pipeline remains strong, business activity is good, and after a couple of years of inward focus, we are now intensely externally focused. Highly talented legacy bankers, coupled with the new bankers who have very quickly contributed to new client acquisition, resulted in well over 100 new relationships this year, and an increased pace in the back half. The creation of corporate banking is complete with the leadership of each industry vertical, as well as diversified in place. Each of these leaders came from larger, more complex institutions with significant and relevant experience and covering clients with a full suite of sophisticated products and services. Importantly, here's another newly formed segment with new bankers, a new leader, and new clients with new products, realizing new revenue. The corporate banking and middle market banking segments are highly engaged with their partners and the investment bank to create a pipeline of opportunities to provide high-value solutions for our clients. Moving forward, I'm excited to be personally engaged in this effort, spending as much time in the market that opportunity allows. We all noted the very competitive environment for talent. And we are unwilling to compromise.

However, to date we have enjoyed a marked success in attracting client-facing professionals with no regrettable losses and talent. The number of front line client-facing professionals we have serving our markets increased 40% since the end of 2020. And we saw a 70% increase in the business banking, middle market, and corporate C&I segments. We have proven to attract great interest and talented professionals who want to build, not preside, create, and be a part of a highly constructive culture. As shown in our accompanying slides, C & I loans grew 17% year-over-year, excluding PPP, the majority of which has come in the past two quarters as a byproduct of the progress I just described. And importantly, the growth is accompanied by high-quality relationship deposits, which are up 35% over the same period. Each of these strategic priorities, treasury, wealth, investment banking, and our expanded C&I coverage models are critical to our success and we will continue to provide updates on our progress, accomplishments, and near-term milestones each quarter going forward. As I have said to many of you, self-funding of our material investments is a very high priority. We will make progress on our investments and reallocation of expenses a priority in our regular reporting updates. Matt will share more detail on our progress to date. We will use this more traditional guidance to supplement this detail, where appropriate. But for the elements of the bank, most central to our transformation, we believe communicating the improvements in each of these areas and describing how they translate into our financials provides a clear picture, and more of our progress as we execute our strategic objectives. Noting financial results will lag before they begin to ramp. Thank you for your continued interest in our firm. We are very excited about our accomplishments to-date and the year ahead. Now, I'll turn it over to our new CFO, Matt Scurlock, to discuss this quarter's results. Matt.

[Matt Scurlock, CFO]

Thanks Rob, and good afternoon. I'm thrilled to serve in this new capacity, and look forward to continued partnership with colleagues across the bank, as we collectively work to deliver a differentiated offering for our clients, our communities, and ultimately for you, our shareholders. Given the company's ongoing transition, we're focusing more traditional guidance on 1. the income statement trajectories communicated previously, 2. total revenue and non-interest expense, and 3. the portions of the balance sheet not directly impacted by our transformation, namely our mortgage finance loan portfolio. As Rob described, the metrics he discussed earlier, are critical guideposts necessary to measure progress until more traditional, bank wide financial operating metrics increase in relevance as we exit the year.

I share Rob's commitment to clarity and assure you we will continue to refine the level of detail we communicate over time. That said, with the impact of PPP lessening and onetime ride ups behind us, this quarter marks a clean jumping off-point to begin evaluating the magnitude and timing of our investments relative to their ability to deliver the more sustainable, higher-value revenues, we know the franchise is capable of. Let's begin on Slide 9. Our fourth-quarter results signify continued progress as we invest in the talent and capabilities necessary to fulfill our strategic agenda. Net income to common was $60.8 million for the quarter up $21.7 million quarter-over-quarter, driven by expanding revenue, a more focused expense base and continued improvement in the credit portfolio. As a reminder, last quarter's results included a $12 million dollars write-off, which also contributes to the quarterly change.

Total revenues grew by $10.2 million in the quarter, positively impacted by a $3.5 million increase in net interest income resulting from modest overall growth and yields. And further supported by a $5.9 million one-time gain on the sale of a foreclosed asset recognized in non-interest income. Underlying credit trends continue to evolve favorably, with criticized loans declining 20% quarter-over-quarter. These factors resulted in a negative provision of $10 million in the quarter versus the $5 million provision in the third. Coupled with a significantly improved capital position, the progress in our credit portfolio positioned us well for a year of sustained investment, loan growths, and continued suppressed profitability near-term. We are aggressively reallocating the expense base towards our areas of strategic focus, and are meeting our plans to add front line talent, build and deploy technology enabled products and capabilities, and ensure appropriate middle office, and back-office support through defined loading, and gearing. These are foundational tenants of future scale and the path to reestablishing sustained operating leverage in late 2022 or early 2023.

Non-interest expense, including the third quarter software write-offs grew by $5.6 million quarter-to-quarter and remained relatively flat year-over-year, despite winding down the correspondent lending business. Salaries and benefits are up 2% quarter-to-quarter, reflecting a seasonal slowdown in hiring. But have increased almost 15% year-over-year as intended. A direct result of our shifting the expense based to match higher-value revenue-generating initiatives. Moving to Slide 10. As Rob noted, in connection with the formation and licensing of TCBI Securities, we have established a concise policy regarding the accounting for loan syndication fees and have re-classified prior period's financials to conform to this policy. Changing the classification of loan syndication fees from interest income to non-interest income was about creating clarity for investors and aligning published financials with our internal strategy. We also believe this will create better comparability between Texas Capital's results and those of other financial institutions. Additional information has been provided in the appendix of the presentation to show the immaterial impact of the reclassification. Moving briefly to PPP, balances declined $124.9 million from $207.3 million to $82.4 million dollars, leaving slightly less than $2.1 million in fees to be earned.

As we have said, the timing of PPP forgiveness and the associated fee recognition is unpredictable. But we expect their quarterly contribution to significantly decline in 2022. Turning to Slide 11, we have been clear that we are not focused internally nor do we plan to provide externally metrics on our desired target levels of loan growth. We have also been clear that our focus is on banking best-in-class clients across our defined areas of industry and geographic coverage. And then a byproduct of our strategy when mature, should be through cycle, core growth, in excess above GDP and peers. As expected, favorable trends from the last two quarters are continuing. Ending period's C&I loans, excluding PPP, grew $669 million or 27% annualized in the quarter. Another data point signifying the clients we want to serve in our defined markets are indeed responding to our offering. Growth was broad-based with middle-market and our corporate diversified group contributing strongly to the increase. This observed acceleration on loan growth over the past several quarters has driven C&I balances, excluding PPP, $1.5 billion or 17% higher year-over-year. Utilization rates improved slightly in the quarter, from 48% in 3Q to 49% in 4Q, but are still below our pre -COVID average of low 50s. Client activity remained strong across all areas of industry and geographic focus and our internal pipelines continue to expand as new bankers begin to ramp prospect and client-calling disciplines improve, and we gain momentum by programmatically executing our defined strategy. As Rob described, the expanded products and services we are building are making us more relevant in our markets. And the synergies of strengthening all facets of the platform concurrently are driving the expected benefits. Moving to real estate, outstanding commercial real estate loan balances continue to pay off it historically, rapid pace, reflecting our long-standing and deliberate weighting towards high quality multi-family construction. This is the property type currently most favored by investors and the project quality and reputation of our client base is resulting in more frequent and earlier project takeouts than historically experienced. 2021 commercial real estate payoffs totaled nearly $2 billion or 49% of the total commercial real estate portfolio as of year-end 2020. Approximately 53% of the $2 billion in runoff occurred in multi-family. A portion of the remaining run-off in that portfolio was a result of strategic exits. The 34 names targeted here, constituted $367 million of year-end 2020 balances, with the vast majority, approximately 75%, coming from the hotel and senior housing portfolios.

While we expect the pace of loan payoffs to remain elevated, the decrease in outstanding balances should begin to stabilize by mid-year, as commitments originated in 2021 start to fund and modestly increasing levels of term debt serve to counterbalance the decline in the portfolio. Because of the actions taken to support volumes, average mortgage finance loans declined only 1% quarter-to-quarter heading into the seasonally lower first quarter. And midst the current environments increasing tenure, and corresponding slowing market volumes. Primarily driven by mortgage finance loan activities, broker loan fees also declined modestly quarter over quarter. And we would expect further declines here in the first quarter. As you know, mortgage finances are an increasingly broad, an important business for us. It has and will continue to become less dependent on the mortgage warehouse alone to drive revenues.

As we focus on expanding our relationship and other loan, treasury and capital markets products. That said mortgage finance is not immune to the impact of declining industry or origination expected. So we would expect portfolio balances to decline in 2022.

Recent Mortgage Banker Association forecasts indicate total 1 to 4 family mortgage originations to be down 34% from 2021 and only modestly ahead of levels last experienced in 2019. We entered this period of expected market contraction well-positioned, as deliberate actions beginning in early 2021 to enhance our mix in favor of purchase volume, elevated this portion of portfolio to 58% of our fourth quarter volume versus 47% for the industry. Because of this, we are not as sensitive to declines and refi volume, and would expect the portfolio to outperform market in 2022. We are planning for full-year, average mortgage finance loan balances to decline in the high teens percentage range and for yields to faced modest pressure as well.

Moving to Slide 12. Consistent with our strategy, quarterly average non-interest bearing deposits grew by nearly 20% from the fourth quarter of last year. Growth was broad-based with corporate and middle market up 48% and 31% respectively. Reductions in quarterly average interest-bearing deposits of nearly $4.9 billion from 4Q 2020 levels included the runoff of $799 million in higher-price brokerage CDs, and the intentional actions taken to reduce $4 billion in higher-cost, rate-sensitive index deposits. Collectively, these actions improved our ratio of quarterly average non-interest-bearing deposits to total deposits to 52% at fourth quarter 2021, up from 40% at 4Q 2020. These favorable underlying trends sustained through the end of the year with period imbalances influenced by the predictable month end outflow in mortgage finances, principal and interest balances. And by mortgage finance's, seasonal outflows, and tax and insurance deposits, which occurs every year in the fourth quarter.

As a reminder, the T&I balance begin to build again in the first quarter and will continue to grow through the year. As we enter the year, the potential for an increase in short-term rates is now with improved funding position relative to the same point in the last cycle. Index deposits are now 24% of total deposits remaining near historic low versus over 30% at the end of 2015 prior to the last tightening cycle. We have a higher mix of non-interest-bearing deposits. And most importantly, we have a focused strategy to generate and sustain core operating account growth across the platform. This signifies an increasingly valuable franchise, and when coupled with liquidity levels in excess of long-term targets at this point in the rate cycle and improved ability to more reliably realize the benefits of our asset sensitivity profile.

Turning to Slide 13, margin remained relatively flat quarter-to-quarter due to a modest improvement in traditional LHI yields and improved balance sheet mix and stable interest-bearing liability costs. As you may recall, we moderated our bond buying program in the third quarter, choosing to simply reinvest cash flows as opposed to locking up excess liquidity ahead of a potential tightening environment, and improve loan demand. We plan to maintain this posture near-term, and believe we are well-positioned for the quarters ahead. Shown to the right on Slide 13 is a result of our asset sensitivity modeling, which increased again this quarter. Higher average DDA levels and a modest mix to lower beta deposits in the interest-bearing portfolio were the primary drivers of the increase. But we also saw the percentage of floored loans decline, which means more of the loan portfolio will be sensitive to the initial move up in rates. Though model results are a valuable risk management tool, and helpful in horizontal comparisons across the peer set, it is important to keep in mind high-level assumptions, such as the use of a static non-growth balance sheet. Also, the results shown do not reflect forecast sensitivities to ramping rates, nor do they contemplate a mix shift we expect to occur with growth. It is also important to note our balance sheet positioning, especially when compared to our performance through the previous tightening cycle, which started in December of 2015. We have $5.9 billion of quarterly average liquidity above our 20% target versus $361 million below in the fourth quarter of 2015. Our deposit mix today versus 6 years ago, has materially improved, with a meaningful reduction in index deposits. And we have a model better positioned to drive high-quality, low-cost funding, to pair against expected growth. We were deliberate in preparing for this occurrence. And while we will look to neutralize our asymmetric interest rate exposure over time, we are pleased with current positioning. Rob and I both discussed our non-interest income performance at length. But, I would like to take a moment to note that the full-year revenue growth guidance we provided on September 1st did not reflect today's more hawkish rate environment.

Where we see rate increase is consistent with today's market expectations in 2022, we may see revenue growth above the communicated low-to-mid single-digit target. Turning to page 14, as I mentioned, we are confidently moving forward with our plans to systematically align our expense base behind our strategic priorities. Adjusted for correspondent lending related expenses in the third quarter write-off, we saw an increase in expense this quarter, and we're pleased to see more of our expense base attributable to salaries and benefits. This is a trend I fully expect to continue near term as we build out our coverage model, products and services, and the infrastructure needed to support them. We continue to make meaningful progress toward our defined goal of financial resilience. Despite our modest reserve release, we remain aggressively conservative in our approach to managing the portfolio. Observable credit metrics improved again this quarter, and we remain confident that legacy loans associated with the prior strategy are identified and reserved for. Regulatory capital levels ended the year at the highest level in 20 years, and an excess of both peer median and internal targets, a fact some may point to as reason to engage in share buybacks. As laid out on our September first strategy call, we adhere to a disciplined and analytically rigorous approach to managing our capital base in a way that we believe will drive long-term shareholder value.

There could be times or that includes repatriation. But now is not that time. The reason for our current transformation is at Texas Capital legacy business model does not generate returns capable of earning its cost of capital through all cycles. Investing in the new products and capabilities we have identified will allow us to generate structurally higher, more's sustainable earnings. Coupled with an accompanying reduction in our cost of capital, given our significantly improved balance sheet positioning, we fully expect these investments will drive expansion in incremental shareholder returns over time. As I mentioned earlier, the investments we are making will also lead to broader client relationships and growth in the balance sheet. Benefits are already appearing, and the expected growth is materializing. Though capital levels are marginally higher than we would ideally like today, and while they could go higher with the seasonal decline in mortgage finance this quarter, we believe based on our regularly evaluated internal models, we are better stewards of our shareholders ' capital, if we invest in our future. Finally, turning to Page 15, actions taken to reposition the expense base began in early 2021, with a decision to wind down correspondent lending and sell our $121 million mortgage servicing rights portfolio. The decision was dilutive to 2021 Earnings, but it also unlocked approximately $70 million or more than 10% of their run rate expense base that was previously supporting one of our most volatile earnings sources and a business that was disconnected from our go-forward strategy. As you can see in the appendix on Slide 19, actual correspondent lending related in non-interest expense for the year was slightly above $41 million. But describing the benefits of these types of decisions on a run-rate basis more clearly represents the magnitude of our repositioning towards higher quality, more sustainable sources of value and provides a more direct tied to the benefits and impacts you can expect on current and future profitability. And addition to the correspondent lending saves while initiating our plan to exit a portion of our higher-cost index deposit portfolio. We decided to more tightly integrate several deposit focus verticals to serve our corporate banking clients. The moves generate a run rate savings of approximately $10-15 million dollars per year, while also ensuring we begin viewing these valuable, longstanding relationships through a lens more in line with our overall strategy. Other saves were identified over the course of the year as well. For instance, streamlining processes to minimize costly repetition and eliminate duplicative systems in select businesses was meaningful, as well as proactively managing our vendor relationships from a firm-wide vantage point, and consolidating our negotiating power. As Rob has mentioned, we're sweeping every corner of our business and will continue to do so. So far we identified over $130 million of run-rate savings, that has allowed us to fund over $100 million of new investments, the most important of which are investment expanded coverage in new products and services, Rob outlined earlier. We are confident in our ability to continue self-funding investment, and we are committed to doing so. At this point, the low double-digit expense guidance given during our September 1st call remains intact. Were we to come in below that number, it would be the result of a self-funding more than what it needed for our planned investments, not us backing away from our ambition. As I've shared with many on this call, improving our ability to match expense directly with necessary capability and coverage to deliver scale across our business is amongst my highest priorities. As our transparency and credibility, so we fully intend to provide more both on our progress over the coming quarters. With that, I'll hand the call back over to Rob.

[Rob Holmes, President and CEO]

Thank you, Matt. Why don't we -- Operator open it for about 30 minutes of questions.

[Operator]

Thank you. [Operator Instructions] And when preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Brock Vandervliet of UBS. Brock, your line is open.

[Brock Vandervliet, UBS]

Good afternoon. Thanks for the question. Starting with the Slide 4 and the return targets, Rob, and Matt. Do you expect to narrow those over time or flush them out further at some point, perhaps later in the year?

[Matt Scurlock, CFO]

Hey Brock, it's Matt. Happy to take that, appreciate the question. We're very deliberate in setting up those return targets that we outlined for you on September 1st. And as Rob and I both mentioned in our opening comments, I think more important today than traditional financial metrics are the guideposts to help you see us progress against the strategy. So as we execute on planned build, both in terms of capability and coverage, we will start to transition to more traditional metrics, begin to narrow or adjust the range of what we think that they can become. But at this point, only four months after disposing those as our target returns. We feel pretty comfortable that is what the make can be through cycle.

[Rob Holmes, President and CEO]

[Indiscernible]

[Brock Vandervliet, UBS]

Sure. Okay. And going to Slide 15, I think that's a very interesting one. What would you say the -- just trying to add a few numbers to those blocks, of course? What would you say a fair 2021 expense run rate is?

[Matt Scurlock, CFO]

Yes. So we took the expenses down to $600 at the end of the year as anticipated. This is an intended to be a GAAP walk, but instead show you the amount of underlying transitions. So I mentioned in my comments, a great way to look at it is with the $70 million of CL wind down. So we've taken actually $40 million in expense that hit the P&L in 2021. But on a run-rate basis, that's $70 million through the year. So we've been below the surface, actively repositioning the expense base. You've seen that start to come through on the reinvestment side in terms of the product capabilities that Rob mentioned, many of which are already producing revenue, as well as the build-out and frontline coverage. And if I think about the expense guidance for the year, this isn't a situation where we try to give you a range and we're worried about potentially going over it, which is not the case. In instead, we want to redeploy the savings as quickly as we can. I think that there are results this quarter are further affirmation for us that the strategy is working. And we're going to aggressively invest in it throughout the year to the extent that we can self-fund more, we're absolutely willing and open and quite eager to do that. And that's how I think about Page 15.

[Brock Vandervliet, UBS]

Got it. Thank you.

[Matt Scurlock, CFO]

Thank you.

[Operator]

Thank you. Our next question today comes from Brady Gailey of KBW. Your line is open, Brady.

[Brady Gailey, KBW]

Thanks. Good afternoon, guys. Cash remains fairly elevated, it's 27% of average earning assets in the fourth quarter. Over time, how do you think you reduce that? Is that more investing that cash into the loan book and the bond book? Or is it more you still have a fairly elevated level of index deposits? I know it's come down a lot, but is it more seeing some of those deposits go and you use the cash just to push out the more hot money?

[Matt Scurlock, CFO]

Hey, Brady, Matt, happy to take that as well. We disclosed on September 1st, that our target long-term composition between cash securities and total assets is about 20%. So to use a $35 billion balance sheet, it's roughly $7 billion today or at $13 billion between cash and AFS, so about 36%. So if you want to just target a 50-50 even split between cash and securities, the $9.5 billion we have in cash will come down about $6 billion over time. And that's that $ 3.5 billion in securities. So just by point of comparison, point in the last cycle, we only had about 10% of the balance sheet in cash. So as rates started to move, we had to raise incremental funding to match loan demand, which was obviously detrimental to the margins. So as we think about our options with excess liquidity, we're doing exactly as you described. So on the liability side, we're evaluating customer deposit based on aligning with strategic plan, the type of deposit, the duration, the cost, and if it's a meaningful relationship for us. And on the asset sidebar, we're digging through, of course, the steepness of the curve, monitoring any opportunities to remixing securities portfolio. At this point we're not particularly interested in adding to it or extending duration. And we're really in no rush to deploy given that we've now had a couple of quarters in a row of pretty meaningful C&I loan growth. As Rob mentioned, the pipelines there also look good. So we have ample liquidity on the balance sheet that we're going to look to on both sides to rationalized, but ultimately we want to maintain the support of executing the strategy.

[Brady Gailey, KBW]

Great. It's good to see credit quality continue to improve here. I'm just wondering, I mean, as credit quality continues to get better, I'm wondering. Where the reserved lands and if you backed out PPP and mortgage warehouse loans, you're still at about 1.5% reserve, which is all up there. I'm just wondering how much capital could be freed up as that reserve continues to come down. As credit gets better, where do you think that reserve lands?

[Matt Scurlock, CFO]

Yeah. Brady, it's always difficult to forecast provision, particularly with CSL. Instead I'll point you back to that range we gave on September 1st that we would expect between 25 and 50 basis points that's grew cycle charge-off to get current economic conditions persists, you can likely anchor to the lower point of that range. Another variable there will certainly be loan growth. We're going to be reserving as we continue to mix cash into loans, so that can be a factor as well.

[Brady Gailey, KBW]

All right, great. Thanks, guys.

[Operator]

Thank you. Our next question today comes from Michael Rose of Raymond James. Michael, your line's open. Please proceed with your question.

[Michael Rose, Raymond James]

Hey, good afternoon. Thanks for taking my questions. So just on Slide 13 on the revenue guide for the year, can you help us appreciate what the breakout would be roughly between NII and fees. And then obviously cognizant that some of the efforts that you have on the fee side are going to start to or continue to ramp through the year. But a greater breakdown or some color would be would be helpful. Thanks.

[Matt Scurlock, CFO]

Yeah. Happy to take a shot at that too. If you go to the upper right-hand side of that page, we try to give you a bit more detail this time on the underlying asset sensitivity, both as models and then potentially as realized. So, bear with me for a second, I'll walk you through some of the underlying assumptions that could help you potentially think about margin. So we got about $4.9 billion of the loan portfolio is variable, 74% of that's tied to labor, about $7.6 billion of that is one month with 473 tied to three months. They got about another $1.4 billion in the premium finance portfolio is tied to 12 months that actually reprises annually, pretty even reprised scheduled through the year, pretty even schedule. And they ended up 28% tied to prime, of that $12.9 billion in variable, 37% or $4.8 billion of that is floored at 3.82. That core portfolio would see a fairly significant bump in yield after about 50 basis points of that move, which of course in the guidance we're not incorporating any sort of pick up in rates. And that move would accelerate to about 100 basis points, at which point 85% would come off the floor. Between 50 and 100 basis points of [Indiscernible], it's about 85% of the book that comes off of the floors. I think that's a decent way for you to think through the existing asset sensitivity. Then if I try to break things out between them and non-interest income, we're not really looking to maximize NIM or net interest income. We're trying to position the balance sheet in a way that supports the strategy and the core component of the business as Rob has described, is our ability to distribute multiple products and services into the same set of clients, ultimately becoming less dependent on the loan products and net interest income to drive growth. I think about areas we're focused on, capabilities to drive operating deposits and non-interest income, and that I think you have the components that can help you think through how the margin will behave.

[Rob Holmes, President and CEO]

So I will just add a little bit, if that's okay on the ramping of the non-interest income that you asked about during the course of the year. Remember, again I'm saying this as a positive, because we're seeing results. But we have new TSOs and product specialists with new expertise by vertical and our Treasury business that simply weren't here 4 months ago. So they're just onboarding, just meeting clients, just partnering with bankers, coming up with solutions. We launched an industry-specific product, Revenue Cycle Management, wasn't here 3 months ago. New expertise in the Healthcare vertical to do that, we launched a business-specific product, which is the Treasury Bundle for business banking that I mentioned in my comments. We scaled the commercial card, which we had before, but we didn't use or apply appropriately across the marketplace with our clients. And now we have a very tangible real road map of products and services that you'll see come on board. And at first, second, third, fourth quarter of this year, toward the back half of the year will be, I would say above parity as far as I'm concerned in treasury suite for banking. We're really really excited about that, but as you know, ironically this treasury sales cycle is more complex, when even alone. You make an acquired sale and then you have to onboard that client and then if you say you're going to sell a dollar, you only realize 80% of ramp and that ramp can take anywhere for 18 months for a sophisticated international client, which we don't have a whole lot of, so that'll be the outside, down to several weeks or a month for a simple client to maybe a week for a business banking client. So you got you got lag time in the sale and then the ramp. But as we as we on boarded so many, with so many new products, the run rate acceleration of that seems very, very encouraging. On investment banking, we've got FINRA approval, where we are online, in line with our plans -- calendar plans, to implement and construct that business with vendors and partners in hiring and expertise onto the platform. We've already been mandated on multiple advisory assignments, and written letters, and then verbally more than that. And we're also been mandated on our first several debt capital market underwrites. So you see really, really good momentum in trajectory and on the private wealth side, you saw the hiring plan that we did, high double digits, really high-quality. And then John is going to do a deep dive with Alan Miller who runs that business and look at the entire strategy. Because we do feel like we have a differentiated platform and we're really excited about that. I don't think we need to change that, but you could see us change some other things. So I think you'll see that to continue to improve during the course of the year. So we actually feel very good about the ramp and the trajectory, given that amount of time that we've been making the effort.

[Michael Rose, Raymond James]

Okay. That's great color. I appreciate it. Maybe just this one follow-up, when I look at Slide 4, it looks like the client-facing talent additions are up obviously you at 1.4x versus the 2.3 goal, but then I look at Slide 7, it looks like you're a little bit further ahead on the business middle market effort. Where are you behind as we think about future talent additions, as we move forward, where is the catch after that, as we move forward. Thanks.

[Rob Holmes, President and CEO]

Here is the great news. I think we're ahead of our -- way ahead of my expectations and ahead of plan. This is a very competitive environment to hire. And I couldn't be more proud of the fact that this strategy is resonating with bankers and talent literally across the country. We had -- we've had bankers move from California, we've had move from New York, we've had move from competitors in market, and so we're really excited about that. We are ahead in middle market, like you mentioned, that's our core. We've been hearing a longest and we have the most exposure there and so that's just natural. We're ahead of client business banking. Corporate we're ahead of plan, we have each vertical head hired. I've run corporate banking teams globally. I've run them by industry. I'll put this corporate banking team against anyone I've managed before. So we're not just filling these seats, these are real people with real experience deep in the industries in which they come from. So we're super hopper about that. So we're not behind in any, where you're further ahead in some.

[Michael Rose, Raymond James]

And so, conceptually speaking --

[Matt Scurlock, CFO]

May I add one comment to that.

[Rob Holmes, President and CEO]

Go ahead, go ahead.

[Michael Rose, Raymond James]

I was just going to say conceptually the fact that you are ahead in some of these areas and you're not going to talk about loan growth for conceptually given the quality that people you hire, everything that you just mentioned. Is it fair to assume that we should expect core LHI growth to accelerate through the year? Thanks.

[Rob Holmes, President and CEO]

Okay. Yes. That's a natural outcome. I just -- I don't want to repeat ourselves. It's just not our primary driver, it is part of the overall solution that our clients expect. But as I've said before, like in our real estate business, if we can be more of a movie company than a warehouse, we do better for our clients, we can find solutions to more, we increase fee income, we distribute risk. So we're not just building loans on the book for loan's sake. Got to be the right client, the right use, the right risk profile, we're not stretching, so I just never -- that's why always has stuck with saying what we said.

[Michael Rose, Raymond James]

Appreciate all the color. Thank you.

[Operator]

The next question today comes from Matt Olney of Stephens. Matt, your line is open.

[Matt Olney, Stephens]

Thanks for taking the question. You mentioned the strong C&I growth especially in the back half of the year. I'm curious about loan syndication's and its tolerance to grow syndication's. I think it was around 15% of the non-mortgage finance portfolio was loan syndication's in the third quarter, how high could this go and as you can implement your plan and do you have the fourth-quarter number in front you can disclose? Thanks.

[Matt Scurlock, CFO]

So we talked about investment in loan syndications. So we are looking to supplement an already strong syndication desk. We're very good in certain industries. We can be better in others. Obviously we need to build a lot of capabilities in capital markets besides just loan syndications, which we're doing as well. These bankers that have joined us on the corporate team, both diversified and by industry, have a lot of history with the product. They understand it. We are pitching, lead the loft, we'll continue to do so in loan indications. We actually do it very, very

[Rob Holmes, President and CEO]

well. We just didn't have the footprint at scale that we should have had. So as we build a footprint of that scale, the syndication fees and opportunities will do nothing but growth. So we're really excited about that business and the ability to ramp. And when I said -- we back half of the year, remember that's more of a Texas Capital comment than a market common. We are onboarding these bankers, and we started to strategy mid-year, we came up with it then we announced it. It was fully bagged and vetted and understood before we started executing it. So we've really haven't been at this for a very long time. So back half of the year is really for all of our businesses, as bankers and TMOs and product people join the platform.

[Matt Olney, Stephens]

Got it, okay. And then Rob, what about the pace of investments in 2022? Will those also be voted in the front half of the year at 1Q and 2Q?

[Rob Holmes, President and CEO]

If we're good and we do it optimally, that's what we hope to do. Last year we had to invest in full-year compensation because we're bringing people back half of the year for some, not all but for some of the people that we hired. And we did not get a year’s effort from them. So best practice would be to front-load it. And we're having a lot of dialogues across the platform. But we will do what we need to do to execute the plan.

[Matt Olney, Stephens]

Thank you.

[Operator]

Thank you. And next question today comes from Brad Milsaps of Piper Sandler. Your line is open Brad.

[Brad Milsaps, Piper Sandler]

Hey, good afternoon.

[Rob Holmes, President and CEO]

Hi Brad.

[Brad Milsaps, Piper Sandler]

Thanks for taking my question. I just wanted to follow up maybe on the deposit side of the equation. Would there be anything on the way up? It's -- assuming rates do go up that prevents you from exiting some of those remaining index relationships. Just curious if there are any longer-term contracts there that would prevent you getting out as you add more core type treasury relationship that you intend?

[Matt Scurlock, CFO]

No.

[Brad Milsaps, Piper Sandler]

Okay. And then -- okay. So those are behaved --

[Matt Scurlock, CFO]

You gotta follow up.

[Brad Milsaps, Piper Sandler]

Thanks. So for those are behaved just until you just run them out of the bank, or are able to replace them?

[Matt Scurlock, CFO]

Yeah, absolutely. So that -- I mean, you've heard us say it multiple times on this call and multiple times on previous calls. Growing core operating deposits is a cornerstone of the strategy. And it's a cornerstone of the strategy for how we manage the balance sheet, how we invest on the asset side, and how we ultimately grow a stable fee income. So there is a place today on in the funding mix for those deposits. But we're going as fast as we can, grow the operating deposits being less than the influence of those that are a 100% beta and not core to the additional parts of the platform.

[Brad Milsaps, Piper Sandler]

Okay, great. And then just as a follow-up, Matt., I appreciate the additional color on some of the assets sensitivities as it relates to the loan book. We're just curious, in terms of the held-for-sale, that the mortgage finance book, would you expect those to behave like LIBOR -based loans on the way up, or do you think competition is such, it'll make it difficult to see a lift in those rates as well.

[Matt Scurlock, CFO]

I appreciate the comment to the question on that. So we try to carve that out for you in guidance on the bottom left or the bottom-right rather, page 11. So it's at 2.90% right now on that book. Absent any moving rates, we think that there will be some pressure. That of course is, we tie to labor, so there is some modest pickup to start to see rates move, but it won't be as dramatic, certainly as it will be on the LHI portfolio.

[Brad Milsaps, Piper Sandler]

Okay, great, thank you guys.

[Matt Scurlock, CFO]

Thank you.

[Operator]

Thank you, the next question today comes from Brett Rabatin of Hovde Group. Your line is open.

[Brett Rabatin, Hovde Group]

Hey guys, good afternoon. I wanted to ask about the expense guidance. and just get an idea of what you're feeling in terms of the inflationary pressures? You mentioned that it was obviously a very competitive market. Was curious how the inflationary pressures are impacting that? And then secondly, it sounded like at the end of the prepared comments that maybe the way to think about the expense guidance was that the low double-digit is sort of an all and encapsulating thing, and if anything it could be below that depending on how things play out. I just wanted to make sure I was reading the tea leaves on that comment correctly and then get some color on the inflationary pressures.

[Rob Holmes, President and CEO]

Why don't I start and then Matt as I think he can finish, so I would just say on the inflation side, macro with our clients, we talked about every day. We think it's a real threat to the economy. We're very cognizant of it. We're planning for it. We haven't seen it as much in our expense base as I would've thought, for sure on talent we're cognizant of it, but outside of that, it looks like we're doing pretty well. Again, most of this of which were coming to it, and what you're seeing is more results of past practices at Texas Capital versus today. So the expense savings that we're getting is from renewed rigor analytics, cadence routines, processes that were implemented kind of in the second quarter of this year, that every single new contract and expense goes through who can approve an expense. What's expansible, what's the processes onboard a vendor? Who focused on strategic vendor relationships, rationalizing the vendor base third-party risk management. It's more of a comment around us more than the market environment unfortunately, Phil, or fortunately, depending upon your perspective. You want to add anything more than that?

[Matt Scurlock, CFO]

Just say in general on low double-digit guidance, Brett. So it's really important to know and understand that we're not just simply adding bankers on the pre -existing platform, that are here solely to grow assets. So we're building the very defined businesses that require front office, middle office, back office, and then very defined products and services to fit either the industry or segment that we're trying to serve. So historically, the banks have been unable to achieve scale because it hasn't committed fully developing these sustainable businesses. That's what we're doing, that takes investment, and the results for us today, again are just further encouragement that value proposition is resonating with the clients that we ultimately want to serve. So should we come in under that guidance, it would be the outcome of us self-funding more than we currently think we can. And as I mentioned, we're certainly looking to do that, but we're not focused on trying to drive expenses lower for the sake of meeting 2022 earnings. We're really focused on allocating as much of that expense base as we possibly can against the go-forward strategy.

[Brett Rabatin, Hovde Group]

Okay, that's great color. And then Rob, I'm curious. I believe I saw in local media here in the past quarter that you've been talking about, maybe the quarter that you might achieve positive operating leverage and didn't know if you wanted to give some thoughts on that, and if that might be possible later this year.

[Rob Holmes, President and CEO]

Yes. I think the plan is always that we think first quarter of next year, you'll see it. Again, Matt said I think in his remarks that the negative leverage may be lessened with tightening so the guidance maybe a little different because we did not include that in September 1st guidance for expense or revenues, but I think it's the first quarter of next year is my expectation to see the shift.

[Brett Rabatin, Hovde Group]

Okay.

[Rob Holmes, President and CEO]

Which is consistent with plan.

[Brett Rabatin, Hovde Group]

Okay. Appreciate the color.

[Rob Holmes, President and CEO]

You bet.

[Operator]

Thank you. And our final question today comes from Bill Dezellem of Tieton Capital Management. Your line is open, Bill.

[Bill Dezellem, Tieton Capital]

Thank you. I would like to talk about criticized loans for a moment, if we could. You had a nice decline sequentially, but I believe in your opening remarks, you made reference to moving away from -- intentionally moving away from loans with certain hotels and senior living facilities. Would you please tie those two together, if they're related and help us understand what's happening underneath the surface here with criticized loans?

[Matt Scurlock, CFO]

Yeah, Bill, happy to take a shot at that too. We continue to see resolution across the portfolio working out primarily the commercial real estate loans and senior housing and hotels mentioned in the prepared remarks are about $367 million over the course of the year. Notably, we haven't seen any new problems arise. Feel quite confident with the reserve level against both non-performing as well as criticized classified book at this point.

[Bill Dezellem, Tieton Capital]

Is that declining criticized loans then primarily a function of working out those hotel and senior living facilities?

[Matt Scurlock, CFO]

Primarily.

[Rob Holmes, President and CEO]

I think.

[Bill Dezellem, Tieton Capital]

That's helpful.

[Rob Holmes, President and CEO]

Okay.

[Bill Dezellem, Tieton Capital]

No go ahead Rob. I think there is a lag, so my apologies for cutting you off.

[Rob Holmes, President and CEO]

I was just going to -- I think there's three kind of phases of improvement of reserves. One is special mentioned, improved as expected first, and then we get pay off and CRE sub-standards, and then we will have the stubborn credits left that are fully reserved, but we haven't seen move yet.

[Bill Dezellem, Tieton Capital]

Great, thank you. And -- then longer term, have you given guidance and if not, can you give some perspective on where you'd like the efficiency ratio to fall relative to that 65% that you were at here in the Q4?

[Matt Scurlock, CFO]

No Bill. We haven't given guidance on efficiency ratio and it's likely premature to do so. To reiterate the opening comments, we are really focused on describing to you fundamental components necessary for us to once again give guidance around return on tangible EPS efficiency ratio. We're trying to build a business that delivers strong results across those more traditional metrics. But that's not going to be a 2022 activity that -- and that is going to be a next year activity.

[Bill Dezellem, Tieton Capital]

Great. Thank you. I thought I'd give you the opportunity, anyhow. Appreciate the color.

[Rob Holmes, President and CEO]

Operator, since we only have 2 more questions, I feel like it would be rude not to take them, so we're going to go past the stated time and we'll last into the last 2.

[Operator]

Absolutely. The next question comes from Brandon Berman of Bank of America. Please go ahead, Brandon.

[Brandon Berman]

Hi. Good afternoon and thank you for taking my question. I just wanted to understand the sensitivity with respect to the disclosed NII sensitivity. On Slide 13, you assume a deposit data of 55%, what are the changes to the disclosed sensitivity if you were to reduce that by let's say 10%, so to 45%?

[Matt Scurlock, CFO]

Fair, unless you're going to do mental math around the ALM modeling on the call. We try to break out specifically what in the set of assumptions for you in the table. We would anticipate some level of lag in reality, of course, on re-pricing. For the first 100 basis points during the last move, TCBI in general, moved about 64%, the non-index feeds moved about 10%. You can see that detail on the previous states. And then we began -- broken out the different components for you to understand the sensitivities that are embedded in the model.

[Brandon Berman]

Understood. Thank you.

[Operator]

And our final question today comes from Anthony Elian of JP Morgan. Please go ahead.

[Anthony Elian, JPMorgan]

Hi, thanks for taking the questions. Just two quick follow-ups. In the press release on that, you called out in other fee income, there was a small one-time gain from a foreclosed asset sale. Give the dollar amount of this item?

[Matt Scurlock, CFO]

$5.9 million

[Anthony Elian, JPMorgan]

$5.9, great. And then my follow-up, looking at Slide 11. So it was another strong quarter for core C&I loan growth of about $600 million this quarter. Any specific areas that drove this or was it broad-based within C&I thanks.

[Rob Holmes, President and CEO]

I would say it was very broad-based. It was granular. It was all diversified industries of C&I, very pleased about legacy and new bankers on the platform.

[Anthony Elian, JPMorgan]

Thank you.

[Operator]

Thank you. We have no further questions in the queue, so I'll hand back to Rob Holmes for closing remarks.

[Rob Holmes, President and CEO]

Just thanks once again to each of you for investing the time to be with us today. Matt and Jamie are available for further questions as appropriate and have a great evening.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.