Texas Capital Bancshares, Inc.

Hello all and welcome to TCBI's third quarter 2023 earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question, you can do so by pressing star followed by the number one on your telephone keypad. It's my pleasure to now hand you over to your host, Jocelyn Kukulka, Head of Investor Relations. Please go ahead when you're ready.

Good morning and thank you for joining us for TCBI's third quarter 2023 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 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 and 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 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 open up a Q&A session. I'll now turn the call over to Rob for opening remarks.

This quarter marks two years since we announced that we would transform Texas Capital into the first full-service financial services firm founded and headquartered in our state. Our work over the last two years has focused on ensuring Texas has a financial partner capable of providing clients the widest possible range of differentiated products and services on parity with those of the largest Wall Street firms with high touch, locally based execution from an experienced team of bankers invested in the success of this state's economy and our clients we are both committed and equipped to serve the best clients in all of our markets throughout the entire country while ensuring our firm is a relevant trusted partner throughout our clients corporate and individual life cycles and we know that the success of our clients will define our firm. With the strategy risk and build risk behind us and all critical roles now filled with top requisite talent, we have a solid and financially resilient foundation from which to execute. Our industry-leading liquidity and capital position afford us a competitive advantage in this unique operating environment. CET1 of 12.7% ranked fourth amongst the largest banks in the country. TCE of 9.4% ranked first among the largest banks in the country. And liquid assets of 28% allows our bankers to be front-footed in our clients' offices as we are well-prepared to support the diverse and broad needs of our clients in what continues to be a challenging operating environment for all industries. We saw the emerging power of the platform on display again this quarter. In the current environment, which is putting material pressure on the industry's ability to grow net interest income, the firm was again able to deliver financial results through resolution of critical client needs with new products and services purpose-built over the last two years. We are no longer a loan-only bank, unable to holistically serve our clients' needs, which, by definition, makes our capital less of a commodity. Our continued successes supporting clients across our platform has solidified our positioning as a full-service financial services firm. This quarter's financial results, but more importantly, market momentum earned through strong execution, suggest continued progress on the core components of long-term value creation. More than three-quarters of clients to whom we have made credit commitments since we launched our strategy have expanded their engagement with our Treasury business or other services. We continue to add clients and operating accounts at a pace consistent with our long-term plan. September was the highest month on record in the last two years for a new Treasury business, including new operating accounts, indicative of becoming our clients' trusted financial partner. The treasury business one today will generate balances, payments, and revenues in the next six to 18 months as the account activity ramps to full potential. Growth segment revenues were up 14% year over year. The highest growth since the first quarter of 2022 and a result of realized treasury business awarded in prior quarters. Additionally, as I've detailed in the past, our client's response to our proprietary onboarding tool, Initio, that provides significantly improved client journeys through faster and automated account opening and onboarding has exceeded expectations. For some specialized client types, we have been able to open several hundred accounts per client per day, including during March, when clients needed expedited onboarding. Our broad platform continues to avail itself to clients in need of alternative cash management solutions. In the current rate environment, clients are actively seeking options for those deposits in excess of their daily operating needs. And we remain active in advising them on how to best position their liquidity given their own unique circumstances. Our platform can now provide alternatives such as interest-bearing deposits, automated insured suite programs, money market options, or in some instances, liquid investments like treasuries. The firm's constant focus on a financially resilient balance sheet is enabling a consistent market facing posture, ensuring we can confidently approach clients and prospects based on their needs, not ours. In my many interactions with current and especially new clients, this is frequently cited as a reason why clients are choosing to do more with us or bank with us for the first time. As we continue to build this franchise, 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. Clients are also increasingly benefiting from our still emerging investment banking capabilities. Investment banking and trading income had a fourth consecutive record quarter with revenue up 6% quarter over quarter to $29.2 million which is comprised of revenue from all areas of the investment bank. Each of the past four quarters had significant contributions from a different part of the platform. This quarter, our capital markets group solved a material financing need outside the bank markets for a marquee client, a need a renowned money center bank attempted to solve, took to market, but failed to complete. We successfully arranged a comprehensive financing solution including serving as sole arranger on the $1.2 billion term loan, which was the largest transaction of its type this year and one of the largest sole managed term loans ever, plus acted as a financial advisor on the $155 million equity follow-on for the same client. This transaction was executed with a global reach and a wide variety of investors, including leading alternative asset managers energy specialists, insurance companies, and family offices, the majority of whom open new institutional accounts with Texas Capital Securities if they didn't already have one. These are the types of transactions that create real market momentum, and the amount of opportunity that is created from that institutional growth is and will be significant. It is important to once again note that this was not syndicated in the traditional bank market. As such, we do not hold any part of this financing transaction on our balance sheet. Since we launched the strategy, we acknowledged that revenues generated by the newly formed investment bank would not be linear and that it would take several years to mature the business with a solid base of consistent revenues. Despite broad-based early success, we expect revenue trends to be inconsistent in the near term. The same is all firms. as we work to translate early momentum into a sustainable contributor to future earnings. The substantial 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 fifth consecutive quarter of positive operating leverage, as year-over-year quarterly adjusted PPNR grew 18% in the third quarter. Non-interest income, as a percentage of total revenue, increased to 16.8% this quarter and stands at 15.7% year-to-date, in line with the bottom end of our full-year 2025 goal to generate 15 to 20% of total revenue from fee income sources. As you know, a foundational tenet of the financial resiliency we have established and will preserve is continued focus on tangible book value, which finished the quarter up 12% year over year, ending at $57.82 per share, which continues to be near an all-time high for our firm. As we enter the fourth quarter from a position of strength and fully committed to improving financial performance over time, we do recognize that we have made strategic capital decisions that suppresses near-term profitability. But as you have heard me say in the past, maximizing near-term returns is not the immediate goal of the transformation. We will drive attractive through-cycle shareholder returns with both higher quality earnings and a lower cost of capital as we scale high-value businesses through increased client adoption, improved client journeys, and realized operational efficiencies all objectives that we made significant headway on this year. 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, and good morning. Starting on slide five, progress against our 2021 strategic performance drivers continued this quarter, with the revenue base increasingly balanced toward non-interest income targets and capital and liquidity in excess of both medium and longer-term guidance. Year-to-date non-interest income to total revenue is 15.7%, in line with our long-term target of 15% to 20%, and reflective of our increased ability to support a broad range of clients' financial needs. Treasury product fees increased 5% quarter-over-quarter as client onboarding continues to accelerate. Near-term pull-through to earnings from sustained momentum in our cash management and payment businesses is being offset by increased deposit compensation at this point in the rate cycle. We remain less focused on current quarterly fluctuations in revenue from this offering than we are ensuring we are adding primary banking relationships consistent with our long-term plan. Wealth management income decreased 3% year-over-year, in large part due to continued client preference for managed liquidity options given market rates. Similar to the Treasury offerings, we are at this point more focused on client growth and platform use than on quarterly changes in revenue contributions. Year-over-year growth in assets under management and total clients of 22% and 16%, respectively, is on pace with plan as connectivity between private wealth and commercial banking continues to mature. Investment banking and trading income of $29.2 million increased 6% late quarter, which is our fourth consecutive record quarter since launching the investment banking business last year. Rob described one marquee transaction that occurred during the quarter. However, we continue to see early success across the breadth of that platform, both in transactions executed year-to-date and in the broad and granular medium-term pipeline. Fee income from our areas of focus more than doubled year-over-year, as each individual offering continues to advance against our expectations and their collective benefit further differentiates our value proposition in the market. Total revenue increase modestly linked quarter to $278.9 million as both net interest income and non-interest revenue improved slightly over previous year-to-date highs experienced last quarter. As expected, further net interest income expansion was pressured by industry-wide trends related to rising deposit costs and slowing credit demand. Total revenue increased $14.5 million, or 5%, when compared to Q3 2022, with year-over-year results benefiting from an 85% increase in non-interest income coupled with disciplined balance sheet repositioning into higher-earning assets associated with our long-term strategy. Total non-interest expenses declined 1% late quarter after a 6.4% reduction during the second quarter, as structural efficiencies associated with our go-forward operating model are improving near-term financial performance while enabling select investments associated with long-term capability build. Taken together, quarterly adjusted PPNR increased 18% year-over-year, to $99.1 million, the high point since we began this transformation in Q1 of 2021. This quarter's provision expense of $18 million resulted primarily from continued resolution of select legacy problem credits and a modest increase in criticized loans. Net income to common was $57.4 million, an increase of 15% from Q3 of last year when adjusted for the divestiture of our insurance premium finance business. Our balance sheet metrics remain exceptionally strong. Cash balances grew $1.3 billion this quarter, as clients' deposit growth broadly outpaced credit needs. Ending period gross LHI balances declined by approximately $700 million, or 3% linked quarter, driven predominantly by predictable seasonality in the mortgage finance business, whereby average balances grew, but end-of-period balances declined, reflecting the end of the summer home-buying season. Deposit balances increased 2%, or $560 million in the quarter, resulting in period and loan-to-deposit ratio of 86%, down from 91% at the end of the second quarter. Finally, the nearly 50 basis point increase in five-year treasury yields during the quarter resulted in AOCI decline of $66 million, which is nearly offset by net income to common and results in tangible book value per share of $57.82. Total LHI excluding mortgage finance decreased $43 million for the quarter, but remains up $1 billion or 6.5% for the year. During the quarter, we executed a $164 million pooled sale of non-strategic C&I loans sold at par. $36 million was delivered in September, and a related $127 million were moved to help for sale and subsequently sold in early October. Both our market-facing posture and capital priorities remain unchanged. as we continue our multi-year process of recycling capital into a client base that benefits from our broadening platform of available product solutions delivered within an enhanced client journey. Commercial loan balances continue to moderate this quarter, declining $94 million, or about 1%, which, while marginally unfavorable to near-term earnings expansion, obscures continued strong underlying momentum in the commercial business. New relationships onboarded year-to-date are up nearly 10% relative to elevated 2022 levels, with a portion of new activity that includes more than just the loan product remaining over 95% for the first nine months of the year. The noted progress on winning clients' treasury business is highly correlated with the increasing percentage of commercial relationships in which we are the lead bank. For commercial syndicated transactions that meet the definition of a shared national credit, the portion we agent has increased to 30% from 12% at Q3 of last year. For other syndicated loans on our balance sheet, we now act as agent on over two-thirds of existing credit facilities, which is consistent with our desired value proposition and stated balance sheet priorities. This manifests in the fee income trends Rob noted in his commentary, as we are increasingly the primary operating bank providing value in multiple ways for those clients for whom we choose to extend balance sheets. Period-end real estate balances increased 50 million or 1% in the quarter. We continue to experience the expected but still material slowdown in payoff rates off recent record highs. Despite a modest increase in the third quarter, we are positioned for continuation of year-to-date payoff trends in the medium term. Our client's new origination volume also remains suppressed, with new credit extension largely focused on multifamily, reflecting both our deep experience in the space and observed performance through credit and interest rate cycles. Approximately 36% of the real estate portfolio has a maturity date in 2023 or 2024, while over 64% of the portfolio matures in 2025 or later. Our office exposure is $459 million, or approximately 9% of the total commercial real estate book. The office portfolio has solid underwriting, with a current average LTV of 57% and 90% recourse. as well as strong market characteristics is over 73% is Class A properties and over 71% located in Texas. Average mortgage finance loans increased 321 million or 7% in the quarter as the seasonality associated with summer 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 to 1.5 trillion and trailing 12-month originations. Overall market and volume estimates from professional forecasters suggest total originations to decrease approximately 20% in the fourth quarter, with full-year expectations showing a decline of nearly 35% in total origination volume. As you know, Q4 and Q1 are the seasonally weakest origination quarters from a home buying perspective. and we expect the next six months to be amongst the toughest the industry has seen in the last 15 years. Total ending period deposits increased 2% quarter-over-quarter, with changes in the underlying mix reflected in both the continued funding transition and a tightening rate environment, coupled with predictable seasonality and a sustained focus on leveraging our cash management platform into deeper client relationships. Total non-inspiring deposits remained stable quarter-over-quarter, with the portion to total of deposits decreasing modestly to 39% from 42% at year-end. Mortgage finance non-inspiring deposit balances increased $363 million, or 7% quarter-over-quarter, as we remain focused on holistic relationships with top-tier clients in the industry. Average mortgage finance deposits were 128% of average mortgage finance loans, at the high end of our guidance and up from 108% last year, due to both continued success in capturing more of our clients' treasury business and the impacts of system-wide contraction in mortgage origination volume on their short-term credit needs. As a reminder, Q4 is a seasonally weak quarter for mortgage finance deposits, as escrow balances related to tax payments are remitted beginning in late November and run through January. However, given the previously mentioned client-level trends, we expect the ratio of average mortgage finance deposits to average mortgage finance loans to increase in the fourth quarter, further pressuring the firm's net interest margin. As expected, other non-interest-bearing deposits declined 440 million or 11% this quarter. As previously described, trends whereby select clients shifted excess balances to interest-bearing deposits or to other cash management options on our platform have slowed. Noninterest-bearing deposits excluding mortgage finance is now 15% of total deposits, down from 18% last quarter and 26% in Q3 of last year. Our expectation remains that the portion of our total deposits comprised of noninterest-bearing excluding mortgage finance will continue to decline, but at a decelerating pace in the near term. Our repositioning away from reliance on index deposit sources is complete. as balances are now aligned to clients consistent with our strategy and paired with bankers equipped to effectively serve their specific needs. At 7% of total deposits, well inside our published 2025 threshold of 15%, we now consider these relationships as part of the target client base, and we'll report them as interest-bearing deposits moving forward. Brokered deposits declined $86 million during the quarter. As growth in client-focused deposits consistent with our long-term strategy remains sufficient to satisfy desired near-term balance sheet positioning. We maintain ample brokered capacity and while always evaluating future liquidity composition consistent with established balance sheet management priorities, do anticipate that brokered CDs will decline during the fourth quarter as $124 million will mature without replacements. As expected, our modeled earnings at risk was relatively flat quarter over quarter at 3% or 29 million in a plus 100 base point shock scenario and negative 4.3% or 42 million in a down 100 basis point shock scenario. Proactive measures taken earlier in the year to achieve a more neutral posture at this stage of the rate cycle, coupled with an increase in quarterly cash balances, have produced the intended outcome. There were no new securities purchases in the quarter, and we continue to believe current levels to be an efficient and prudent portion of our liquid 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 approximately 90% of these loans tied to either prime or a one-month index. Net interest margin decreased 16 basis points this quarter, and net interest income was flat at $232.1 million, predominantly as a function of the deposit mix shift into interest-bearing deposits and higher quarter-over-quarter deposit costs, partially offset by improved loan yields and increased cash balances. Our multi-year 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 non-interest income initiatives will, over time, enable revenue stability even as near-term net interest income expansion moderates. Further, the systematic realignment of our expense base with strategic priorities continues to deliver the expected efficiencies associated with a rebuilt and more scalable operating model. We expect to see another contraction in quarterly year-over-year non-interest expense, which, when coupled with maturing revenue generation capabilities, enables a foundation for future earnings expansion despite the market backdrop. Criticized loans increased 58.1 million or 9% in the quarter to 677.4 million or 3.3% of total LHI, as increases in special mention of both commercial loans and real estate loans were only partially offset by 17.9 million reduction in non-accrual loans as a result of both realized net charge-offs of 8.9 million and selected payoffs and upgrades. Non-performing assets are at 0.21% of total assets, which continues to be near all-time industry lows. As in prior quarters, the composition of criticized loans has weighted towards commercial clients with dependencies on consumer discretionary income, plus a handful of well-structured commercial real estate loans supported by strong sponsors. We continue to believe our client selection and underwriting guidelines provide adequate protection against realized loss. Preparation for an inevitable normalization in asset quality began early in 2022, as we steadily built the reserve necessary to both address known legacy concerns and align balance sheet metrics with that foundational objective of financial resilience. Total allowance for credit loss, including off-balance sheet reserves, increased $9 million on a linked quarter basis to $291 million, or 1.41% of total LHI at quarter end. up nearly $35 million or 11 basis points year-over-year, in anticipation of a more challenging economic environment, while our ACL to non-accrual loans improved to 4.6 times. We have previously commented on the portion of legacy loans still on the balance sheet inconsistent with current client selection or underwriting principles that would be resolved through maturities, workouts, or select charge-offs. During the quarter, we recognized gross charge-offs of $7.5 million against this identified portfolio, And exposure to this client set is now approximately $60 million a book balance. As Rob described in his commentary, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to the peer group and our internally assessed risk profile. CT1 finished the quarter at 12.7%, a 50 basis point increase from prior quarter. And tangible common equity to tangible assets finished the quarter at 9.4%, which ranks first relative to second quarter results for all large U.S. banks and in the top quartile of the peer group. We remain focused on managing the hard-earned capital base in a disciplined and analytically rigorous manner, focused on driving long-term shareholder value. Our guidance accounts for the market-based forward rate curve, which assumes Fed funds of 550 through the remainder of the year. The recognition of system-wide funding cost increases has resulted in net interest income pressure as we anticipated earlier this year. Our outlook for low double-digit percent full-year revenue growth remains unchanged, as recognized fee income year-to-date has partially offset net interest income pressure associated both with market events and chosen balance sheet positioning. As detailed above, the significant investments made over the last two years are yielding expected operating and financial efficiencies. that will continue contributing to profitability of the firm. Our non-interest expense guidance remains unchanged, and we believe that current consensus expense estimates are achievable with flat total non-interest expense in Q4 before accounting for an FDIC special assessment. The same commitment to our long-term strategy, coupled with a historically challenging environment for our mortgage clients, results in us lowering PPNR expectations in Q4 to below Q4 2022 levels. Finally, we remain 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 CET1 ratio of greater than 12%. And now I'll turn the call back over to Rob for closing remarks.

Rob, are you going to ask questions?

Yes, absolutely. If you'd like to ask the team a question, please press star followed by the number one on your telephone keypad. When it's your turn to speak, please ensure your device is unmuted locally. Our first question today comes from Michael Rose of Raymond James. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. Maybe we could just start on just the increase in CET1 levels in your guidance in the intermediate term. I think the question that I think we've gotten now for the past year, perhaps longer, is, you know, how do you meet, you know, the targets in 2025, particularly when it seems like there's going to be some further pressure on margin, and especially in the warehouse, just given a kind of a challenge outlook. Matt, just heard your commentary on PPNR levels being a little bit lower year on year in the fourth quarter. Yeah, I think that's a big question everyone's trying to get at. You continue to reiterate these targets, but, you know, consensus continues to reflect, you know, something in some cases much lower than that. So if you could just try to help us bridge the gap now that we're, you know, a couple quarters closer than – another quarter closer than where we were. Thanks.

Rejected question, Michael. GAPRO priorities remain the same. right now. Rob mentioned in his comments that our market-facing posture remains the exact same, which is having clear benefit in terms of new client acquisition. I mentioned in my comments that we've onboarded 10% more new C&I relationships than new C&I relationships last year, and those are coming with materially more new business. Those are, in our view, the things that drive long-term value. We're going to continue to bias the capital base in that direction.

Yeah, I would just add, Michael, let me give you an example of that. I kind of feel like we all feel like that capital is really equity for us as it relates to the client acquisition and maintaining clients. So quick story, there was a new client we onboarded kind of February of last year. They came on the platform. which is a pretty cool story. We do not lend to this client. It's a great company, great people. When fully ramped, a substantial amount of payments will run through this bank, like over a billion dollars in a year. And so it's a great client. I went to see the CEO and his team last month. And after I got back, the CFO wrote me a note and said, hey, I didn't tell you this at the meeting, but you need to understand exactly how all this happened and the difference between Texas Capital and our incumbent bank, which was a super regional. They said, we did all our diligence on your capital structure and your financial resiliency before we came to your platform. But for your banker to come out the day after the events of March and then your CFO get on a call with us after that and explain to us your capital position. There's just no comparison in your technology, your service, and this show, but your capital and financial stability gives us the comfort to stay with you. So, you know, it has a huge benefit to attract and maintain clients, and these are great clients running. That client will have us and do, like I said, approaching $2 billion in payments through our system.

That's pretty valuable.

Okay. But I guess the latter part of my question is just can you help us try and bridge the gap to kind of get to some of the targets now that the capital levels are continuing to climb higher? I think that's the real question. know just to follow up as my follow-up you know the investment bank and trading line you know continue to move higher again this quarter um obviously really hard to predict but it seems like you know we're getting a greater confidence in the durability of the business model here so maybe you know if you can kind of encapsulate that all which i think is the question that most investors are asking thanks what's up michael so ppr average out there

their infancy they're brand new so for example we've got a pretty robust at this point m a offering the m&a bankers landed in the second quarter so they had over 80 conversations with clients this quarter so any conversations the last 90 days about prospective m a transactions over the next two years but those are brand new businesses so if we were to look into the crystal ball and most capital from low-return relationships into those where we can be more relevant, drive higher risk-adjusted return on that allocated capital, start to reduce some of the excess liquidity as the deposit base continues to improve. That provides, as I said, $6-7 million for the P&R right there. And then the expense outlook

risk and increasing efficiency.

That's really helpful. Thanks for that, Matt. Thanks for taking my questions, guys. Appreciate it.

See you, Michael.

Our next question today comes from Matt Olney of Stevens. Matt, your line is open.

Hey, thanks. Good morning, everybody. On the mortgage finance Great to see those balances of loans and deposits outperform in a difficult backdrop in the third quarter. Any more colors on that outperformance that we just saw? And then, Matt, you mentioned industry expectations for originations down 20% in the fourth quarter. Can you just talk about the ability or potential to outperform that? Thanks.

Yeah. I mean, just yesterday saw home affordability at a 25 year low. percent for the year. So look for a full year average balance somewhere in the low fours off of a 5.3 full year average balance. Last year, we continued successfully executing In a seasonally and certainly cyclically slower fourth quarter, we think that ratio could go up to about 150 percent, Matt, which has some near-term negative impact on NII and margin. We've got a material set of new capabilities that are coming online

Okay. That's great, Matt. Thanks for the color around that. And then just as a follow-up on the positive operating leverage in the near term, I appreciate the updated guidance around the challenges of achieving kind of your goals in the fourth quarter. Can you speak just more broadly about operating leverage in 2024? What are just the puts and takes around

the challenge of achieving the operating leverage in 24 versus 23. thanks yeah matt the updates of the guide um certainly incorporate seasonality associated with that mortgage business in the fourth and the first quarter i'd say the the other item that was included in our comments it's important to call out is that we're we continue to be quite aggressive on capital recycling which is obviously got here. So between the noted loan sale at Park, which was a set of consumer-facing C&I credits that were loan-only, about $160 million reduction in balances, and then exceeding expectations on our ability to reduce capital committed to relationships where we don't see a path to being relevant. And we pulled down about $300 million of C&I loan balances this quarter and then parked it in cash. in preparation for the ability to be able to redeploy at much higher risk-adjusted returns moving into 2024. So we're obviously extraordinarily committed to delivering on the 2025 targets. We see all sorts of leverage to get there, which again would include continued maintenance of non-interest expense delivering on the C-income targets. And then a lot of opportunity to reposition within the asset base. I certainly appreciate the question. We're not going to give the detailed guidance on 24 yet, but that's how I would think about, or that's how we are thinking about balance sheet positioning as we get closer to achieving those 25 targets.

Okay. That's helpful, guys. Thank you. You bet.

As a reminder, if you'd like to ask a question today, please press star followed by the number one on your telephone keypad. Our next question comes from Zachary Westerlund of UBS. Please go ahead.

Morning. It's Zach on for Brody. Just had a couple quick ones. On the consumer-dependent commercial loans that move to Criticized and Classified, are those oriented towards subprime consumers or just any color you can provide on what's driving the move into Criticized, Classified for those?

Yeah, they're not. we expected to see some downgrades across certainly CNI, but CRE as well as it moved into the middle part of this year. Those have materialized largely as expected. There's nothing that's unique enough about these consumer-dependent CNI credits to go into a whole lot of detail around them. There's some franchise finance that sits in there, but there's nothing that we call out as sort of systemic across the portfolio or that needs additional color beyond what we've provided. I would note just Generally on credit, we're quite pleased with the progression this quarter. So we've been pretty public. When Rob started, we had about $200 million of what we identified as legacy problem credits that we needed to work down. That's now down to $60 million. So we reduced that by $40 million this quarter. About $20 million of that was through sales or payoffs. sitting down at $63 million of not cool off of highs of mid-90s earlier this year. I feel like we're making material progress on the credits that were most concerning for us.

Understood. Appreciate that. And then just on the shared national credits, apologies if I missed this, what percentage of the loan portfolio are SNICs? And then of that, what amount are you guys the lead underwriter on?

Yep, great question. 23% of total loans. We lead 30% of that, Zach. It's not all syndicated credits are SNICs. So there's certain criteria that classify syndicated credit as SNIC, north of $100 million, three or more banks. We lead a large portion of syndicated credit. So we noted in the comments that across syndications that are not SNCCs, we're the lead on north of two-thirds of those relationships, which is a critical part of our strategy and a key driver of why we're driving increased fee income, which obviously improves return on equity or return on allocated balance sheet.

Got it. Thanks for that. That's very helpful.

one more quick comment i think is helpful and we've we've said since since rob got here that our approach to any sort of participation in a credit facility whether it was a snick or otherwise was based on the same client selection underwriting principles that we use when it's a bilat or we leave and that oftentimes the desire to move left or desire to capture more of the wallet. You're now seeing us, going back to Matt's question, you're now seeing us start to rotate out of some of those relationships when we don't see a path to being more relevant to that client. So just I think it's important to note this is all entirely consistent with the messages that we've been trying to communicate for the last couple years.

Got it. Appreciate that. And then if I could just sneak one more quick one in. The office portfolio, are you able to share what the reserve is on that?

No, we generally don't disclose that. I mean, we have $460 million of office and we've got $4.2 million of cash, 2% of total loans. So generally don't describe the asset class or property type specific reserve.

Understood. Thanks for taking my questions.

You got it.

And our next question is from Brady Gailey of KBW. Please go ahead.

Thanks. Good morning, guys. Good morning. I think one of the most difficult things to forecast is just this investment banking line. I mean, it's been so strong recently. I mean, $29 million this quarter. That's up from only $8 million a year ago. And I know it's volatile. I know it's tough to forecast. But I mean, over time, should the trend even off this 3Q base still be to drift higher? Or do you think you're at a level like I think you guys targeted, you know, about 10% of revenue, which I think you're almost there? Is this kind of the level that we should think of as a kind of good run rate for the next couple years from here?

Let me just comment on the business, then Matt can comment on guidance, if that's okay, Brady. I think it's a great question and obviously a very fair question. As you know, I think we've had this conversation before when Matt and I were coming up with a strategy. I told Matt, when we say we're going to start an investment bank, everybody's going to think we're crazy. Then we're going to do it, we're going to be successful, we're going to have great revenues and a great practice, and then everybody's going to complain about the ability to model go-forward earnings. And I said, that'll be a great problem to have. So first of all, I'm glad we're having a conversation. And I'm proud of the business and the team and the broader business. Because remember, we're not doing investment banking business with other clients. They're clients of our commercial bank and corporate bank and real estate banking franchise. So it's one firm, which I think is really, really important to note The big transaction this week that we talked about, this quarter, is a great example of how the platform works. So we went in, committed like 3% of a credit facility to a big public company and started hammering them with advice. And we lost, they went with another money center bank to address 24 maturities that they had to address is a strategic imperative. And they took it to market. They failed to get it done. They called us back, asked us if we could get it done still, our strategy. We said yes. Remember, the bank market is substantially closed. Not everybody has our capital or liquidity error calls on their clients right now like we are. So we went to a market that was non-bank. Like I said in my remarks, it was a global investor base, energy specialists, alternative asset managers, insurance companies, family offices, et cetera. When you do that and you get a transaction that's the largest soulmate transaction in the country year to date, then everybody in that industry and, frankly, other industries want to talk to you about the market and market receptivity. And so that opens doors and credibility for new business. The principal of the company is part of the private wealth business. And then when you distribute the allocations to these different investors, we had over 30, I forget the exact number, but well over 30 investors that opened accounts with our sales and trading floor that we weren't doing business with before. So that helps sales and trading, helps private wealth, It helps further dialogue with other clients. And then when you allocate the right amount of demand to that investor, it creates an unwritten IOU with that investor. And so that's another way of generating more business. And then when somebody wants to trade the debt, they come to us because they know we know where the debt is. So then you have secondary trading. So it's very granular and broad, like Matt talked about, the go-forward pipeline in investment banking. And I just want you to kind of know how it works. A lot of people that follow us haven't followed investment banks in the past. And so I thought that was an important note. But Matt, why don't you talk about guidance?

Yes. we're going to be below. Our current outlook would suggest we'll be below a four-quarter trailing average in the fourth quarter. If we think about the long-term prospects for that business, we need to sustainably hit 10% of total revenue, which is the guide, until we alter that guide. I think that

five okay and sorry if i missed it but did you guys quantify the fee from that marquee big transaction no no but the quarter would have been i'll just say the corner would have been uh good without it but it was it was a good solid one all right and then my last my last question i mean if you look at Texas capital today versus, you know, pre Rob, I mean, the capital is a lot higher. The liquidity is a lot greater. The credit is a lot cleaner. It's just a much stronger institution. But you still have a stock that trades at like one times tangible book value. I know you guys have done buybacks in the past, but I know there's a lot of uncertainty in today's backdrop. So when do you, It seems like you're a perfect candidate for the share buyback, but when do you more seriously consider getting more involved there?

We seriously consider getting involved there every day. And as you know, we have a very disciplined capital allocation framework. We've proven in the past that we can repurchase shares responsibly and very efficiently most recently. We do believe, I appreciate your words, those were imperatives for us and our commitment to you and all of our constituents that we would do that. We still believe that we're in the build mode. We are onboarding clients at a pace that we are all very happy with. The pipelines continue to be strong receptivity, the strategy by the client base is good. A lot of banks right now, frankly, are out of business. So to invest in the organic growth is a much higher return for this franchise over the longer term. However, having said that, you're right, we will need to consider buybacks, and we do, and we will, but it's not our first preference.

Understood. Thanks, Rob.

Thank you, Ray.

We have no further questions at this time, so I'll turn the call back over to Rob for any closing remarks.

Just thanks for everybody for their interest in the firm, and I look forward to talking to you next quarter.

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