Texas Capital Bancshares, Inc.

Hello everyone and welcome to the TCBI Q4 2022 earnings call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Jocelyn Kukulka, Head of Investor Relations to begin. Jocelyn, please go ahead.

Good morning and thank you for joining us for TCBI's fourth quarter 2022 earnings conference call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectation of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today's presentation, which can be found along with a 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. This month marks my two-year anniversary at Texas Capitol and the fifth completed quarter since we announced our new strategy on September 1st, 2021. Upon arrival to the firm and through the first several quarters of learning the company, we systematically identified the previously unacknowledged depth of issues in each client-facing department and operational function, which were significant. We were quick to return to the office Memorial Day of 2021 and immediately began facing reality and addressing problems. As we dissected the company's early days, it became quickly apparent that 2021 would be spent defining, communicating, and mobilizing to enable the strategy and that we would need all of 2022 to deliver the wholesale transformation required before we could begin to make meaningful progress towards acceptable financial outcomes. The many identified challenges of the prior operating model and outlines for their planned remediation were described in detail in the strategic plan presented on September 1st of 21. Consistent with our multi-year roadmaps, we acted to address each item in a rigorous and methodical manner. And I would like to spend the first portion of this call detailing the pace and magnitude of these actions to both provide context for where we are on the journey and share perspective on the opportunity that is in front of us. As of today, we have addressed every single rebuild, reorganization, and restructuring that we said we would do at the outset of our plan plus much, much more. When I arrived, fee income was limited and loan growth unfocused and represented an uncoordinated series of transactions without a comprehensive strategy as the only products available to serve our clients were basic credit solutions and very simplistic payment rails. Achieving client relevance and earning our cost of capital was impossible under the prior model, and our inability to serve clients in multiple ways led to an overemphasis of the loan product, rather than active consideration of the solution best fit for the client's current or prospective need. In contrast, today, we have the tools and resources. We have a more durable and valued offering for our clients with over 20 new investment banking, treasury management, and private wealth related services supporting our stated focus of being relevant to our clients throughout their life cycles. Fees across these areas of focus are up $32 million or 68% since full year 2020. And loan portfolio concentrations have been right sized through proactive risk reduction and focused calling efforts on the best in class Texas based clients. In early 2021, we made the first of many difficult decisions. We exited correspondent lending and sacrificed revenue to de-risk the balance sheet. Then in 22, we sold a disconnected national insurance premium finance business, sacrificing loan growth in order to refocus our business. In aggregate, these two portfolio dispositions represented 10% of our starting loan portfolio composition. DNI loans now comprise 52% of the total portfolio, an increase of 3.3 billion or 48% since year end 2020. The implementation of the balance sheet committee into our routines has been an instrumental tool to ensure our capital is increasingly allocated to our target clients. 75% of commitments reviewed by the balance sheet committee during the last three quarters included treasury, or ancillary product opportunities in addition to credit extension, evidencing our desire to strategy is becoming increasingly ingrained in our daily client-facing interactions. We said we would fix revenue contributions and build a client-focused payments bank, and we did. Sustainably earning a return greater than your cost of capital requires a stable and reliable funding base tied to the core clients that the firm exists to serve. However, the legacy funding strategy was also broken and characterized by an over-reliance on disconnected, high-cost, high-beta national deposit verticals that created headwinds to earnings growth and volatility as interest rates change. We knew at the outset that transitioning our funding base would be hard and take time, but that sustained emphasis on earning the right to be our client's primary treasury bank would ultimately be a foundational element of our future success. Repositioning the deposit base consistent with our long-term strategy began in early 21, and the many subsequent actions have been directly aligned with this effort. Our first step was to rationalize a series of national deposit verticals, resulting in a $15 million reduction to annualized non-interest expense, which was reinvested in our focus strategy of supporting core Texas-based clients. The proceeds contributed to doubling the number of client facing treasury management professionals and a wholesale tech enabled improvement in the treasury products platform. Overall in 22, a significant portion of total technology projects spend was allocated to an improved treasury solutions platform. Projects both delivered and currently in flight are on time, on budget, and meeting the expectations originally established. To further enhance the funding structure of the firm, the highest cost, highest beta, and shortest duration institutional index deposits were deliberately reduced from 32% to 13% of total deposits from year end 2020 to year end 22. Coupled with the 15% growth of full year average operating deposits in 22, This is a critical input into our stated plans to transition the model to one with structurally less rate sensitivity and improved balance sheet efficiency, both of which are required to deliver against our desired return targets. By addressing the loan concentrations and the funding base, we're building a balanced company while establishing and now reinforcing cultural expectations that our success will not be marked by balance sheet growth, but instead, by the relevance of our offerings and the quality of our advice. We said we'd fix the funding base, and as people in financial services well know, this is not easy. However, the foundation is established and the transformation is well underway. To round out the balance sheet challenges, capital levels were also lower than peers, which both negatively impacted market perception and raised concerns with regulators and rating agencies. anathema to this team's foundational commitment to financial resilience. This excess leverage also created an inability to proactively manage capital, to take advantage of market opportunities in a manner consistent with long-term value creation. During my first 15 weeks as CEO, we secured an improved outlook from one of our two rating agencies, then recapitalized the firm, another decisive action. The recapitalization added approximately 250 basis points of total risk-based capital through a $300 million preferred offering, $375 million of subordinated debt, and a first-of-its-kind mortgage warehouse credit risk transfer. This demonstrated clear action against our stated commitment to building a business model not reliant on excess leverage for short-term returns, but instead operates from a through-cycle position of strength. a core component of how we believe you create sustained long-term value. Building upon these actions, during 2022, the firm developed, implemented, and began executing within a fully rebuilt internal capital planning and allocation framework. Delivering this analytic framework required addressing weaknesses in the cumbersome and outdated legacy data infrastructure. that impacted everything from cost centers to expense allocations, limiting the usefulness of legacy modeling tools. These are now rebuilt. As a result of this disciplined approach and the resulting capital framework, further proactive measures during the year led to a higher and increasingly more focused capital position, well in excess of both our internally assessed risk profile and our externally communicated medium-term targets. Our capital considerations extend beyond our regulatory ratios. And as we stated, are also focused on higher quality, tangible book value growth through cycle. In Q1 22, we took another crucial action. We transferred $1 billion of our lowest coupon, longest duration securities to held to maturity. To appropriately hedge the balance sheet should rates rise. As of year end, this reclassification allowed us to avoid additional unrealized loss positions by approximately $120 million, or 4% of TCE, contributing to our success in improving TCE ratios and supporting tangible book value during this volatile market period. Tangible book value per share has grown over 5% since year-end 2020, compared to a decline of nearly 8% amongst the peer set. This outperformance further confirms our commitment to steadily improving the value of the franchise, even during a two-year period where our focus was weighted more heavily towards building a bank than optimizing for short-term financial returns. In addition to increasing both our absolute and relative capital levels, the firm both implemented and acted upon a wider range of previously unavailable tools to proactively manage the capital base. In Q2 of this year, we put in place our first-ever share repurchase program and over the course of the year executed $115.3 million of repurchases, reducing total shares by 4% at a weighted average price equal to approximately 100% of the prior month's tangible book value. As of today, we have nearly completed the program and repurchased 5% of the shares since it began in Q2. Finally, in November, we closed the well-received and highly financially accretive divestiture of our national insurance premium finance business, Bank Direct Capital. The 8% asset premium pulled forward four years of earnings for this business, generated approximately $165 million of capital, reduced 100% risk weighted assets by over $3 billion, which resulted in approximately 220 basis points of CET1. And importantly, it was accretive to earnings day one. We have worked tirelessly to be in this position of strength with solid conservative capital ratios, two investment grade ratings, the first time since 2015, and a balanced business model. We have proven we prioritize a disciplined and professional approach to managing the firm's capital. During 23, we expect to hold north of 12% CET1, with amounts in excess continue to be dynamically reallocated consistent with our well-defined strategy and observed risk appetite. We said we would fix the capital base, and we did. Before the transformation, high leverage was paired with a misallocated expense base not tied to a strategy or long-term scale. The legacy investment agenda lacked a sustained focus, prioritized incompatible infrastructure, and expensive build-outs for non-core businesses. Now, we successfully re-underwrote all of our expenses, and over the last year, steadily repositioned the cost base to support consistent advancements in the businesses where we know we can compete and win. During 2021, we undertook a series of actions to release unproductive expense to invest against the strategy stated. The corresponding lending business was wound down and MSR portfolios sold in the second quarter to both improve through cycle earnings variability and to unlock $70 million of expenses that were directly reinvested into the strategy. Underused, inefficient, and redundant software technology assets were written off for a total of $12 million in the third quarter, coupled with additional $15 million of deposit vertical rationalization and $40 million of other realized internal opportunities. In the first year, we repositioned approximately $140 million of run rate expenses, enabling the transformational activities delivered in 2022. Additional savings through the divestiture of Bank Direct in late 2022 allows for $36 million of annual expense to directly contribute to improved profitability. The go-forward run rate is a clean expense base directly matched to our strategic goals as we move to a period of more normal investment and improving performance. Expense alignment is a foundational tenet of future scale, and we expect the proportion of non-interest expense directly attributable to our people technology and operational infrastructure to remain a priority. We said we would fix the expense space and we did. Since the previous operating model offered limited or a poorly functioning product suite and relied on excess leverage to deliver returns, the historical loan portfolio concentrations were cyclical and overweight. This outsized risk profile coupled with poor client selection and energy and leverage lending led to substantial charge-offs, $273 million during 2019 and 2020, while large holds led to overexposure in the wrong sectors and suboptimal risk-adjusted returns. We are now providing capital discipline via the balance sheet committee, coupled with a new CEO-led enterprise risk culture, ensures resources are more prudently directed towards achieving our goal of earning deep, long-term relationships. Our entire credit risk management team and platform is rebuilt, aligning sector-specific credit expertise with a new set of business leaders focused on client selection and adherence to appropriately establish concentration and hold limits. Loan portfolio diversification has materially improved as a balance sheet is now a vehicle to support our clients' broad financial needs, rather than an overemphasized internal growth metric providing a false sense or short-lived success. New credit disciplines are supported by a complete overhaul of our underlying processes, systems, and technologies. After $7 million of legacy spend associated with unsuccessful attempts to implement a credit onboarding process, the firm, on the other hand, delivered its first integrated loan management system named Alloscape, a significant contributor to reducing operational risk. This loan management system enables one-time data capture standardized workflows for more efficient processing, and improved client and stakeholder visibility, including foundational capabilities for future automation. Finally, we continue to thoughtfully resolve legacy credit issues while building a reserve consistent with our objective of being appropriately conservative. Current reserve levels are now 49 basis points greater than CECL day one. in the top 20% of peers as a percent of total loans and over 5.2 times non-performing loans. We have said before that being appropriately reserved is both a metric and a mindset, and we coupled with our strong capital position, a competitive advantage heading into this year. We said we would fix loan concentrations and focus on client selection, and we did. Finally, the historical organizational structure of the bank managed with a siloed mindset did not allow for the ability to scale or provide adequate transparency. During my first year at the firm, we established organizational routines to ensure resources are effectively allocated against strategic priorities and that decision making and execution is not hindered by inefficient processes with limited information. All necessary parties are at the table to achieve our goals. Executive leadership also implemented an expectation of clear communication, execution, transparency, and accountability throughout the enterprise. This was further emphasized firm-wide as functions were centralized and the operating committee restructured to directly align accountability against strategic and financial initiatives. During 2022, we further reorganized our operating model around client delivery to emphasize client experience. Firm-wide, every process flow across credit delivery, onboarding, treasury services, and deposits and payments was reconstructed to meet this objective and is now further grounded in solidified risk controls through our risk control self-assessments. Detailed procedures are also now in place, serving to automate manual and error-prone processes while operational reporting dashboards now systematically measure and highlight opportunities, driving continuous improvement and reduced operational risk. The organization is now structured within a more efficient, higher quality operating model, driving both client and employee satisfaction while supporting future scale. We said we would reimagine the client journey by improving the organization structure and operational infrastructure, and we did. By addressing the legacy challenges of the previous operating model, we built the coverage, product, and technology required to serve our target clients and are now poised to deliver the next phase of our multi-year transformation. Our business banking, middle market, and corporate coverage areas are well established and match each client set with the talent, products, and offerings they need to succeed. Since I arrived, we have grown the number of client-facing professionals by 1.9 times across our defined industry and geographic coverage. By combining this coverage model with expanded treasury solutions, a holistic private wealth offering, and unique investment banking capabilities, this construct allows us to serve clients through the entirety of their lifecycle with a delivery model and solution set tailored to support them at each step of their journey. As we seek to be relevant to our clients each day, assisting them in addressing their day-to-day working capital needs in an efficient and secure manner, we meaningfully improved our treasury and payments platforms, completely transforming operations, technology, and product to build a real payments bank. In 2022, the Treasury Solutions Group implemented a new enterprise payments platform and launched API connectivity, significantly improving the quality and ease of digital banking for our clients. Said simply, our cash management offering from basic wires on an antiquated platform to a best-in-class treasury solutions platform. Our investment banking division, Texas Capital Securities, is a Texas-based institution offering a full suite of investment banking products and services focused on delivering exceptional outcomes for our clients, launched in mid-2022, well ahead of schedule. We are now leveraging our deep knowledge of industry dynamics complemented by our extensive network of capital sources to deliver results that are aligned to our client's definition of success. The sales and trading group now offers significant experience in mortgage securities and corporate fixed income convertible and equity markets. Leveraging our considerable network of domestic and international institutional relationships, our team is now providing clients with actionable insights and access to global markets. In the year since we received FINRA approval, Texas Capital Securities has delivered the following firsts. Our first swap trade, first FX spot trade, first TVA trade, first specified MBS pool trade, first whole loan trade, first corporate bond trade, first corporate loan trade, first equity trade, first buy-side advisory mandate, and closed its first sell-side advisory success fee. We onboarded 150 new clients and traded over $9 billion of mortgage and corporate debt in equity securities. And finally, Texas Capital Securities' partnership with Mortgage Finance has been critical in evolving the business from a warehouse-only platform into a differentiated industry vertical, characterized by multiple new products and services to meet clients' needs in real time, resulting in incremental treasury and deposit relationships with top-tier national mortgage lenders. The full lifecycle of a client extends beyond their corporate profile and includes their personal financial well-being. We are rebuilding and significantly enhancing our successful but subscale private wealth business and are halfway through our project plan, which includes updating our go-to-market strategy, expanding our products, improving our back office operations, investing in our front end client experience, and adding additional quality talent. Completion of this wholesale improvement is targeted by the middle of this year. In total, we have launched over 20 new products and services in the last two years and have detailed and achievable roadmaps to deliver the over 25 new offerings targeted by 2025. The improvements of our technology and operating platform are also significant. We are beginning to see our investments generate efficiencies and operations while uplifting the client experience through vastly improved onboarding times, straight through processing, and reduced mean time to resolve client issues and incidents. We internally developed and delivered a market-leading cloud-native software named Initio, our proprietary account opening and onboarding solution, which has received praise from our beta clients. and we expect that over 50% of all Treasury onboarding requests will be completed digitally by March. This means that existing and new commercial clients will be able to self-serve account opening. Products and services will be attached automatically, and they can use the account same day. This puts us at or above parity when compared to the most digitally-afforded banks in the country. Other transformational technology infrastructure builds include Cortex, our completely modern API-driven services platform, C360, our cross-LOB operations management system, and a completely modernized cloud-based data platform. Underneath these new platforms and applications, we increase transparency and efficiency of operations from front-end to back-office through a CRM overhaul. Another legacy challenge relating to $20 million of legacy expense spit on something that simply did not work when I arrived. The implementation of corporate management information system for cascading metrics, automation of infrastructure, network improvements, deployment of new hardware, and the implementation of a new cloud-based call center platform. I have often said the biggest risk to our strategy was a need to build each pillar of the platform simultaneously, which was an acknowledgement of both our opportunity and of the limited infrastructure in place. Through five quarters of dedication and focused execution, by people across the firm, this execution risk has been further mitigated as the businesses were built and the needed capabilities landed on a more scalable platform. The accomplishments of the last two years result in a firm that is poised to begin delivering structurally higher and more stable financial returns for our shareholders over time. We are heading into 2023 operating from a position of strength. The expense and capital base are aligned directly to our strategic priorities. We are recycling capital into new and profitable relationships and improving relevance with both existing and new clients. Our balance sheet is the best since the bank's founding. Portfolio concentrations increasingly match our desired composition. Liquidity and funding are higher quality and Our institutional financial reliance is a true strategic advantage positioning us well for the potentially challenging operating environment ahead. The significant investments and efforts to rebuild the firm are largely in the ground, and we are transitioning our focus towards leveraging the full breadth of the new platform to achieving first-call status with the best clients and prospects in our markets. This thoughtfully and deliberately rebuilt client-focused business model is designed to earn above our cost of capital through cycle and drive structurally higher, more sustainable earnings. It is very important to appreciate that this transformation is the result of the tireless work of each of our 2,200 people across the entirety of the firm who truly bought into the strategy, accepted that the rebuild is harder than status quo, but believed it was worth it as we work together to build a new company. Collectively, we make up the new Texas Capitol. I'd like to express my sincere appreciation for the continued efforts and dedications to our strategy, vision, goals, and our core values. We have so much to look forward to in 2023 as we execute upon what we have established this year. I'll now turn the call over to Matt, who will provide the financial details for the fourth quarter.