Texas Capital Bancshares, Inc. (NASDAQ:TCBI) Q1 2022 Earnings Conference Call April 21, 2022 4:30 PM ET
Company Participants
Jocelyn Kukulka – Head, IR
Rob Holmes – President and CEO
Matt Scurlock – CFO
Conference Call Participants
Brady Gailey – KBW
Brock Vandervliet – UBS
Jennifer Demba – Truist
Michael Rose – Raymond James
Brad Milsaps – Piper Sandler
Operator
Good afternoon. Thank you for attending today’s TCBI Q1 2022 Earnings Call. My name is Hannah and I will be your moderator for today’s call [Operator Instructions].
I would now like to pass the conference over to Jocelyn Kukulka with TCBI. Please go ahead.
Jocelyn Kukulka
Good afternoon, and thank you for joining us for TCBI’s first 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 expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.
Statements made on this call should be considered together with the cautionary statements and other information contained in today’s earnings release, our most recent annual report on Form 10-K and subsequent filings with the SEC. We will refer to slides during today’s presentation, which can be found along with the press release in the investor relations section of our website 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
Good afternoon. This is Rob Holmes. Thank you for joining us today to discuss the first quarter which concludes the first six months in the transformation of our firm.
We noted on the last call that 2022 marks a clear transition from discovery and planning to executing, on what we believe is our distinct opportunity to deliver a differentiated offering to best-in-class clients in our home markets. The strategy outlined on September 1 of last year is resonating with both clients and talent that we want to attract and our resolve has only strengthened as we purposefully and aggressively reallocate both our capital and expense base to take advantage of the market opportunities we are uniquely positioned to serve.
We continue to address the well-noted imbalances in our legacy model by steadily progressing against our defined strategic performance metrics that, when realized, will enable us to generate structurally higher more sustainable earnings through expected interest rate and credit cycles. Observed short-term earnings vulnerability to changes in the long end of the curve further evidences while we are rapidly pivoting our business model by adding the right talent and equipping support model with the products and services necessary to be increasingly relevant to our clients.
Supported by the actions taken last year to improve the balance sheet and reposition our expense base, we are moving quickly to accomplish both objectives. We have now increased front line talent by over 60% [ph]. One notable area of investment includes C&I, where we have more than doubled the number of client-facing bankers, aligning them to specifically newly formed market segments and industry verticals. Our bankers are increasingly enabled by the right, middle and back office support model focused on delivering new product and service capabilities, while modernizing and improving the client experience.
Material progress was evident again this quarter across one, treasury solutions, two, private wealth, and three, investment banking. And we expect to deliver new capabilities in each over the next two quarters that will significantly improve the product offering. Importantly, encouraging results are beginning to materialize, as both the realized client acquisition and product and balance sheet-related pipelines have increased each of the last few quarters.
First, let’s discuss treasury solutions. We have been clear, both in our words and in our material actions that we are focused on becoming more relevant to more clients by serving their needs to become their primary operating bank. We have also been clear about our belief that doing so requires tailoring expertise, products and service to defined market segments, which we simply have not had in the past.
On our January earnings call, we described two new purpose-built product offerings, a digitally enabled healthcare specific revenue cycle management product and new business banking treasury bundles, both of which are in market, producing new revenue, generated by new bankers with new clients.
We also noted, consistent with our September 1 strategy update, that we would be accelerating progress on both our new digital product roadmap and new digital client experience, using the competitive advantage inherent in our branch-light network to focus resources on owning that technology-enabled client experience across products with a focus on simplified intuitive interactions and client enablement. This has allowed us to build for what our customers want, not what they have had.
Unique amongst our competitors, we are not burdened by legacy M&A infrastructure, allowing our greatly improved technology team a simplistic platform on which to build solutions for our clients. This quarter, our technology and operations teams released the first version of our internally developed digital commercial onboarding platform. As with all new technologies, the rollout will be moderated, and the initial version will require relationship managers to assist new clients when onboarding commercial DDA and savings accounts.
We are meeting our original deadlines and on track to deliver full self service capability to our commercial clients by the end of the year. The new platform reduces total onboarding time through an entirely digital experience, lowering risk, limiting internal handoffs and enabling our clients to move at the pace of their business. As a result of this focus, client acquisition and pipelines for future growth have accelerated over the last four quarters in this important category and the rollout of the digital client journey is expected to only accelerate future market penetration.
I’d like to now address private wealth. Last quarter, we announced the final member of our Operating Committee, John Cummings, who assumed, among other responsibilities, our consumer lines of business, consumer banking and private wealth. John and his team have spent the last 90 days conducting a strategic review of the private wealth business and its go-to-market strategy, ultimately confirming the potential to accelerate growth in an already performing but subscale business.
We continue to experience strong organic flows with more than half coming from new clients. Net organic flows over last 12 months were $586 million or 81% of total AUM growth. This is a trend we would expect to accelerate as recently added frontline talent begins maturing on the platform. We will continue to add client-facing advisors to support opportunities distinctive to our markets and business model.
And finally, investment banking. After receiving FINRA approval in the fourth quarter of last year, our investment banking segment build is on schedule. Despite a recent broad market contraction due to geopolitical and economic uncertainty, our capital markets and advisory business continues to be well received and will be a critical part of the broader solutions to benefit our clients.
It is important to remember that we are not building capabilities to chase market trends or generate short-term earnings. We are building capabilities that make our company more relevant and valuable to our clients throughout the corporate lifecycle. We are happy to report that over the course of Q1, we closed our first underwritten capital markets transaction, and our M&A team won multiple new mandates to advise our clients on sell-side transactions.
As expected, these advisory assignments were organically developed through referring bankers and our C&I and private wealth segments, evidencing strong engagement with our clients and meaningful collaboration with relationship managers across the firm. The last 90 days were marked by continued progress advancing, both the operational infrastructure and functional expertise necessary to deliver our first set of sales and trading-based capabilities into the market this quarter.
When discussing the strategic rationale for an investment bank as a component of our full-service offering, we often point to two things, the quality of our current and prospective commercial banking relationships and the eminence of our mortgage-finance business, the latter of which is an early focus of these product capabilities. As a result, we expect to launch two new offerings this quarter, specifically helping our clients manage pipeline and interest rate risk and gestation finance and TBA or to be announced MBS markets.
Consistent with our strategy, these services allow us to deepen relationships with existing clients and offer a more complete solution to our prospects as we provide a one-stop shop solution for their mortgage finance needs. As a result, even though the mortgage market overall has contracted due to the recent rate environment, we do expect our expanded products and services will allow us to capture market share and enhance our profitability this year.
This quarter, we also expect to launch trading and corporate debt securities and corporate loans, which will complement our existing syndicated finance business and offer our corporate and middle market clients to access institutional capital markets from our Dallas-based trading floor. We expect to continue making investments over the balance of this quarter and next, enabling trading and mortgage whole loans and corporate equity securities.
We now know the progress we’ve achieved to date, coupled with the sheer opportunity created an ability to attract market leading talent to Texas Capital. We are happy that the opportunity to build a sales and trading platform in Texas has provided a sense of partnership and ownership that resonate with known, experienced, senior market leaders, which moved to Dallas from leading desks in New York.
We continue to expand our existing capital markets products, rates and loan syndications platform to complement our new client segmented and industry focused coverage model. As a result of market conditions in Q1, we have primarily seen the benefit of these changes and mandated and qualified late stage pipelines. We expect to make continued investments in talent to further build product and industry expertise dedicated to our covered markets and verticals.
Our capital markets and loan syndication businesses will also benefit from the distribution capabilities coming online this quarter and lead to [ph] capabilities we expect to deliver later this year. The platform we are building will be a critical complement to our core banking franchise and over time serve to further diversify current sensitivities and our revenue base. Although investment banking fees were down linked quarter, we remain confident we will achieve our 10% target contribution levels even in a more normalized rate environment.
Matt will provide more detail on the trends and associated drivers of noninterest income as a percentage of total revenue in the first quarter, but I am confident we are building the capabilities required to achieve our stated 15% to 20% target.
After completing our comprehensive internal reorganization last year, we continue to build our C&I business across client segmentation and industry specialization. While not exclusive to C&I, core disciplines such as our Balance Sheet Committee are proving effective as socializing the required focus on one, client selection, two, capital allocation, and three, partnership across the firm. These routines connect our strategy directly to our actions and ensure banker-led client teams can proceed confidently with their clients and prospects.
Business banking leadership is now in place across our five primary Texas markets, and we continue to add both client-facing and credit talent to support robust early client demand. Our tailored treasury solutions as well as a differentiated cost efficient credit model are performing as expected. And we see both realized revenue and pipeline growing across product types each week.
Formally created in September of last year, this entirely new segment will continue to produce new revenue with new clients, using newly developed products and a new service model. I have been particularly pleased with a marked improvement in the middle market banking segment across geographies. We said in our last earnings call that after a couple of years of inward focus, we were now intensely externally focused, a fact that I continue to observe up close this quarter, while spending nearly a third of my time in our markets with our bankers, directly engaged with our clients and prospects.
We are fortunate to have a foundation of well-respected bankers that were here before I arrived. They are currently banking some of the best clients in our markets. Their collective commitment to the firm’s go-forward client-centric vision was a core part of the foundation for us to rapidly expand to other segments within their geographic areas of focus, and is a noted reason for our early success.
The corporate banking leadership team is complete with each industry vertical lead now in place. Here’s another newly formed segment with new leaders, new bankers, new clients, with new products, realizing new revenue. In fact, nearly 50% of the group’s revenue producers joined Texas Capital in the last seven months. 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.
Given the firm’s current unacceptable market share, we believe our opportunity is outsized and as an early indicator of our ability to grow market share and expand our client base, C&I loans grew again this quarter and are up 23% year-over-year. Much of this growth is accompanied by high quality, relationship-based commercial deposits, which were up 14% over the same period and supported by a solid pipeline.
Each of the strategic priorities discussed treasury, wealth, investment banking and our expanded core commercial C&I coverage models are critical to our success to building the only full service financial services firm headquartered in the State. We remain committed to reinvesting in organic growth in order to achieve our vision, which will create a more valuable firm for our shareholders. Our ability to confidently reinvest is contingent on the balance sheet appropriately position to deliver returns through cycles.
Given the rapidly evolving rate environment, we continue to evaluate options to accelerate the balance sheet transformation, insulating the bank strategy from changing market conditions. This discipline and risk strategy has been missing in the past. Given the size of the opportunity before us, our preferred use of capital remains supporting the capability build and anticipated organic growth outlined in the strategic plan.
However, the operating environment has changed significantly since our last earnings call. And the impact of declining mortgage finance volumes coupled with the potential for significant rate increases could create opportunities for excess capital deployment. Put simply, capital levels are poised to benefit from reduced balance sheet usage and increased earnings potential. Our current CET1 ratio of 11.46% positions us strongly against peers and coupled with the current valuation, the Board of Directors has authorized a $150 million share repurchase program, representing approximately 5% of the outstanding shares.
Consistent with our experience and disciplined capital management and sound corporate governance standards, a share repurchase program creates optionality and will allow for opportunistic repurchases when we believe that the valuation is dislocated from the long-term value generated by high quality organic growth. We will continue to provide updates on our progress, accomplishments and near term milestones each quarter going forward.
Thank you for your continued interest and support in our firm. We are excited about our accomplishments to-date and the year ahead. Now I’ll turn it over to Matt to discuss the quarter’s results in detail. Matt?
Matt Scurlock
Thanks, Rob, and good afternoon. Let’s begin on slide 9. First quarter results depict an expense and capital base increasingly focused on supporting our defined strategic objectives, while also highlighting the known sensitivities of our current balance sheet to timing differences associated with changes in the interest rate environment. Net income to common was $35.3 million for the quarter, down $25.5 million quarter-over-quarter, driven primarily by the 27% decline in average mortgage-financed loans as the sharp rise in mortgage rates accelerated the industry’s anticipated full year market contraction into Q1.
Total revenue was down $21.7 million in the quarter, $15.8 million when removing the $5.9 million one-time gain that occurred in the fourth quarter of last year. Results were negatively impacted by a $14.5 million decrease in interest income associated with the decline in mortgage financed loans, which is partially offset by continued redeployment of excess cash and the higher earning assets.
Benefits to earnings associated with our deliberate multi-quarter increase in asset sensitivity at this point await further realization of the forward curve. Noninterest expense continues to grow as expected, and I’m pleased with our progress redeploying savings realized last year and the higher value initiatives that will create future scale. Salaries and benefits increased by 14% year-over-year, while total noninterest expense increased only 2%, reflecting our success in self-funding the noted growth in talent and technology enabled capabilities necessary to deliver the critical early stages of our transformation.
Multi-quarter credit trends remain favorable with criticized loans declining 18% quarter-over-quarter and 50% year-over-year, driving a negative provision of $2 million in the quarter compared to a negative $10 million provision in the fourth quarter of last year. As part of the bank’s proactive interest rate risk management strategy, $1 billion of longer duration securities were transferred into held to maturity from available for sale at the beginning of March. Even with the transfer, the steady rise in the long end of the treasury yield curve throughout the quarter resulted in a linked quarter increased negative AOCI position of $158 million.
Moving to slide 10, ending period C&I loans excluding PPP increased again this quarter, up $414 million or 16% annualized signifying early benefits of expanded coverage, improving calling disciplines and focused execution on our defined strategy. This observed continuation of loan growth over the past several quarters has driven C&I balances excluding PPP, $2 billion or 23% higher year-over-year.
Notably, the number of businesses and bankers coming online continues to expand, supported by maturing front, middle and back office alignment on client selection, go-to-market strategy and available product solutions. Growth continues to come primarily from new relationships as utilization rates moved only slightly higher in the quarter to 50%, still below our pre-COVID average of low-50s. PPP pay-offs continue with the total remaining balance of $22.7 million, leaving approximately $300,000 in fees to be earned, which we expect to realize this quarter.
Moving to Real Estate, we noted on the fourth quarter call that while we expected the pace of loan payoff to remain elevated, we anticipated they would retreat from record levels at a minimum, allowing originations to keep pace of pay-offs by mid-year. Consistent with our expectations, period end real estate balances grew by $166 million or 14% annualized in the quarter, reflecting modestly increasing production levels as payoffs reverted down to a 36% annualized rate versus the 49% experienced in 2021.
Consistent with our long-standing strategy, the majority of new origination volume was in multifamily, reflecting both our deep experience in this space and preference for this property type given observed performance through credit and interest rate cycles. The balance sheet and earnings momentum created over the last four quarters have better positioned us for what we knew would be a pullback from record high mortgage volumes experienced over the prior two years. Average mortgage finance loans declined by 27% in the quarter, on par with the contraction experienced by the broader industry, but in excess of market-based expectations shared on our January call.
During the quarter, the 10-year treasury rate increased 80 basis points, which eliminated the economic incentive to refinance for many remaining homeowners. Primarily driven by mortgage finance loan activity, brokered loan fees also declined $1.7 million quarter-over-quarter and will likely remain near these levels in the second quarter.
As we said on our last call, mortgage finance is an increasingly broad and important business for us. Rob noted in his comments that we are progressing on our plans to become less dependent on the mortgage warehouse loan to drive revenues, launching our first set of mortgage financed related capital markets products this quarter.
Moving to Slide 11, quarterly noninterest bearing deposits were down, reflecting predictable seasonal movements. Despite the quarterly fluctuation, underlying core trends remained strong, with corporate and middle market noninterest bearing up 48% and 13%, respectively, year-over-year and real estate up 20% year-over-year. Focused reductions in quarterly average interest-bearing deposits of nearly $5 billion from fourth quarter 2020 levels included the run-off of $1.1 billion in high price brokered CDs and the intentional actions taken to reduce $3.9 billion in higher cost rate sensitive index deposits.
Collectively, these actions improved our ratio of quarterly average noninterest bearing deposits to total deposits to 51% at 1Q 2022, up from 43% at 1Q 2021. At the outset of potentially rising rates both the changes to our business model and the ongoing refocusing of our balance sheet leaves us with an improved funding position relative to the same point in the last tightening cycle.
Ending period indexed deposits are now 23% of total deposits versus 32% at the end of 2015. We also have a higher mix of noninterest bearing deposits at 53% now versus the 42% at the end of 2015. And most importantly, we have a focused strategy to generate and sustain core operating account growth across the platform. The improvement in core funding signifies an increasingly valuable franchise, and when coupled with robust liquidity levels at this point in the rate cycle and enhanced ability to reliably realize the benefits of our asset sensitivity profile.
Turning to NII sensitivity on page 12, as you may recall, our multi-quarter build and disclosed asset sensitivity is a result of deliberate actions to reposition the balance sheet. In addition to the programmatic exit of high cost, high beta indexed deposits over the last five quarters, we moderated our bond buying program in Q3 of last year, choosing to simply reinvest cash flows as opposed to locking up excess liquidity ahead of a potentially tightening rate environment and improved loan demand.
Asset sensitivity was also enhanced last quarter as a portion of floored loans rose off their floors after the FOMC actions in March.
Shown to the left side on Slide 12 is the results for our asset sensitivity modeling, which increased again this quarter to 9.5% or $71 million in a plus 100 basis point shock scenario. The modeled results are valuable risk management tool and helpful on horizontal comparisons across the peer set. It is important to keep in mind key high level assumptions such as the use of a static non-growth balance sheet.
The core component of our asset sensitivity profile is the 82% of the total LHI portfolio, excluding NFLs that is variable rate. 69% of these loans are tied to either prime or one month LIBOR. Today, 70% of variable-rate loans with floors are still at their floors. However, with a 50 basis point rise in rates, 55% of floored loans will rise off their floors, meaning $1.9 billion of loans acting as fixed rate today will return to variable rate.
While we are pleased with our current positioning, as mentioned before, we will look to neutralize our asymmetric interest rate exposure over time, insulating our strategy from unanticipated changes in market conditions and enabling sustained investment and performance through cycle. The accelerated moves in the rate curve have potentially pulled forward this opportunity, and we are thoroughly evaluating how to best position our balance sheet going forward.
We have a variety of tools to prudently achieve this goal, including expanding the use of fixed rate loans, managing duration in the investment portfolio and the use of derivatives.
Moving to slide 13, net interest margin increased by 11 basis points this quarter, while net interest income declined $10.5 million predominantly as a function of decreased mortgage financed loan volumes partially offset by increased yields in the investment portfolio. During the quarter increasing rates caused actual and expected prepayments on the securities portfolio to decrease, substantially reducing the amount of amortization expense required.
Cash flows remained approximately $100 million a quarter with securities coming off the books at a roughly 1.2% book yield versus new securities, which are primarily five year treasuries coming on close to 2.65%. It is important to note that while variable rate asset yields have now reset to higher levels, timing associated with the 20 basis point increase in one month LIBOR that occurred in March had little impact on loan yield or interest income this quarter.
Turning to page 14, as I mentioned, we are systematically aligning our expense base behind our strategic priorities and continue to reallocate the $130 million of run rate saves generated last year into an ultimately larger and significantly more productive expense base. While total noninterest expense has increased by only $2.8 million year-over-year, salaries and benefits are up $12.6 million and now comprise 65% of total noninterest expense, up from 58% in Q1 of last year.
Our expense growth guidance is unchanged as we remain confident in the cadence of expense save redeployment and investment in the bank. We continue to build on the foundational actions taken last year and are progressing meaningfully toward our defined strategic goal of financial resilience. Despite observable credit metrics improving again this quarter, we are proactively monitoring for potential recessionary exposures caused by economic and geopolitical uncertainty.
Credit disciplines established at the beginning of COVID, including quarterly borrower specific reviews, quarterly portfolio reviews and client-specific strategy assessments remain in place. We have recently enhanced the scope of this process to include the current geopolitical and macroeconomic environment and are prioritizing risk assessments based on industries and clients who may have heightened interest rate, commodity price or supply chains pressures.
In addition to the described improvements in the quality of on-hand and contingent liquidity, regulatory capital levels continue to build above already record highs with CET1 and total risk-based capital reaching 11.46% and 15.68% respectively this quarter, comparing favorably to peers in an excess of internal targets.
As I described on our last 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. I also noted in January that given the combination of depressed short-term earnings and anticipated balance sheet growth associated with our strategy, it would be prudent to preserve excess capital. To reiterate, the benefits of the strategy are appearing at the pace and magnitude we anticipated. Expected growth is materializing and our belief we can achieve the plan remains unchanged.
What has changed, however, is the economic backdrop, which has already lowered balance sheet capacity needed for mortgage finance and the potential for rate increases, which could lead to earnings generation above our near-term capital demands. As Rob mentioned, the unique intersection of interest rate dynamics, the bank’s expected earnings profile generated through organic growth and the current market valuation has created the potential opportunity for the company to accelerate capital return to shareholders through a tangible book value accretive share repurchase program.
An update of full year guidance is contained on Page 15. Our methodology remains consistent and the impact of forward interest rates is isolated to mortgage finance volumes. Mortgage finance loan yields have improved modestly with refresh expectations and current market conditions. With no changes to 3/31 interest rates, the impact of lower mortgage finance balances will result in full year revenue contracting low single digits.
As mentioned, our expense guidance remains unchanged. And importantly, our published target to achieve quarterly operating leverage is also unchanged.
With that, I will hand the call back over to Rob.
Rob Holmes
Thank you, Matt. Operator, we’re available to take questions.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions] The first question is from the line of Brady Gailey with KBW. You may proceed.
Brady Gailey
Hey, thanks. Good afternoon, guys.
Rob Holmes
Hey Brady.
Matt Scurlock
Hi Brady.
Brady Gailey
So I just wanted to start with the mortgage warehouse. I know historically Texas Capital has had one off-balance sheet program where you farm some of those balances out to other banks. Is that an opportunity to bring back on balance sheet to help kind of buffer this downturn we’re seeing and volumes?
Rob Holmes
I would say, for the most part, on the volumes for mortgage finance, the six tools we talked about using in the past, we’ve used all. So we’ve used the tools — the things that we have done to really help with mortgage finance is over the past year, for the first quarter of 2021 to March of ’22 as we repositioned the mix of mortgages that we finance with our clients, based on our client base to a much higher percentage of purchase from refinance. We’ve also made a very deliberate move in terms of client selection, and we had a purposeful rotation and remix of the client base and where we focus over the last 12 months to a better capitalized stronger client base.
So we feel really, really good about the credit of our clients. We feel good about the mix of their business. And we feel good about the other opportunities that we’re introducing such as gestation and TBA with the client base that we have.
Matt Scurlock
Hey Brady, this is Matt. The only thing I would add to that is the original guidance considered Mortgage Bankers Association Forecast where the note rate on a 30 year fixed-rate mortgage exited the year at about 4.50%. As you know, we were at 5% exiting the first quarter. So the environment has dramatically changed there, hence the change in guide. We won’t be immune to broader market pressures.
But as we said, both in this commentary as well as on the last call, that’s a really important business for us and one that we want to be increasingly relevant to our clients and hence the products that we’re rolling out this quarter in investment bank.
Brady Gailey
Yeah. And Matt, just to clarify, on the full year 2022 guidance that the mortgage warehouse yield of 3%, that does not include any sort of rate hikes. I know the warehouse is — I think floats maybe daily. But with the rate hikes that we’re expecting to see, I mean that yield could be a lot higher than 3% realistically right?
Matt Scurlock
Yeah. Brady, that’s a bit of a unique component of this as you know. So that the move to 3% guidance, certainly reflects the move up in rates experienced in the first quarter as well as the anticipation that it’s going to remain a very competitive environment. And then I would point you to the increased disclosure we gave around overall asset sensitivity.
You can think about the mortgage finance business as absolutely encapsulated in the 9.5%, up 100 and the 20% up 200 view. But all of the guidance, which is how we will do it for a while is exclusive any additional rate moves. The volumes of course for mortgage warehouse the forward curve is implied. So that’s the only piece of the guidance that is subject to rate moves.
Brady Gailey
Okay, all right. And then finally for me, it’s great to see the $150 million buyback especially with the capital build this quarter and the stock trading basically at tangible book value. That buyback authorization, is that just a tool that’s out there, maybe you use it, maybe you don’t use it? Or do you guys plan on really getting aggressive and using that amount this year?
Rob Holmes
Yeah. Brady, I would say that we have a number of new financial disciplines in place that we’ve locked in the past frankly. There is more of a new normal now with finance of Texas Capital. So we have a distribution policy governance and tools in place and obviously part of this, we didn’t have a shelf always in place before. You’ll never see us without a shelf. And then you also have a much greater talent pool tools and governance to proactively and perpetually manage the interest rate risk of the balance sheet going forward. So it’s just a broader extension of the tools and disciplines, talent governance that we have at the firm.
Matt, do you want to add anything?
Matt Scurlock
Yeah. I’d just say that, Brady, we’re not ready to disclose any parameters or pace, but as you would expect, the factors that we would consider are the stability of our credit profile, which as you noticed in the metrics continues to improve and the decreased need to support cyclically high levels of mortgage warehouse assets so implied in the guidance is about $1.5 billion decrease in average balance. If you imagine a whole 10% capital against that $1.5 billion that’s roughly $150 million buyback capacity. And then something different now from the last quarter is if yield potential for improvement in earnings from realized rate increases.
So those are the factors we’ll evaluate. And then importantly, we also see real momentum in the core business, which gives us confidence to manage our capital in a broader set ways.
Rob Holmes
And I’ll just say, it’s a very benign portfolio in risk and credit as well.
Matt Scurlock
Brady, you know the background. I mean, you know my background, I advise a lot of Boards on distribution policy and this is not, I just emphatically state, this is not inconsistent with our strategy. This is a sidecar to our strategy and a good corporate finance discipline.
Brady Gailey
Yeah, that makes sense. Thanks, guys.
Operator
Thank you, Mr. Gailey. The next question is from the line of Brad Milsaps with Piper Sandler. Please proceed.
Matt Scurlock
Hi Brad.
Operator
Mr. Milsaps your line is open.
Rob Holmes
We may have lost Brad.
Operator
Thank you. The next question is from the line of Brock Vandervliet with UBS. Please proceed.
Rob Holmes
Hey Brock.
Brock Vandervliet
Hey, good afternoon, guys. Just going back to mortgage warehouse a bit by our kind of back of the envelope, if we just keep the balances kind of flat for the rest of the year, I’m getting to 27% drop in average balances full year over full year ’22 over ’21’s implying that there’s not much left to go to meet that 30% guide. Am I my kind of on track there?
Rob Holmes
Yeah. We don’t — I mean at this point, Brock, we don’t see the typical resurgence in mortgage warehouse volume occurring in the Q2 and Q3 periods. So it’s at the pool of eligible refis is essentially gone at this point. Affordability is still an issue. So we’re comfortable with the mix, and I think you’re on the right track related to the guidance.
Brock Vandervliet
Yeah. I think the flip side of that is the pain is visible now as opposed to a lot of it dribbling out later in the year. Okay good.
Just in terms of another guidance question, I noticed operating leverage, that’s unchanged, revenue guide is down. Does that — what does that imply for the inflection in operating leverage? Does that make it weaker when it occurs? Or is that just kind of change of the timing of some of the pressure that you may see? How should we think about that?
Matt Scurlock
Yeah. I’ll start on that Brock, and then Rob will jump in. So I think at this point in the transformation, Brock, we’re right on track. So the only thing for us that’s really changed in the outlook is lower mortgage warehouse volumes. So we’re adding the talent, we’re lending the capabilities, we’re beginning to realize the balance sheet growth and anticipated revenue pickup. So the only thing that’s moved is the warehouse, hence the move down on the revenue guide, and we still feel comfortable with back end of this year, early next year to grow year-over-year quarterly PPNR.
Rob Holmes
Yeah, I would just say that same. So a new business banking vertical, new products and services, pipelines are good, activity is good. Middle market is very robust. The TS products did well. We see loan growth is good as you saw, a lot of broad loan growth across all middle market which is the first product, usually in a relationship. And then all the industry verticals in place, all the levers in place, most all of the bankers now in place.
Pipelines are very good, but you got to also remember immature at this firm by these verticals. But we were confident by the activity of the client receptivity, the investment banking products and services, all on time. So in the first quarter of this year — I guess are the second quarter this year will have gestation in TBA corporate debt securities, et cetera, tech, on time. So to Matt’s point, the strategy, everything that we had to land technology, products, services, talent and the reorg is in place and we’re encouraged by the pipeline build today. So there’s no other message there.
Matt Scurlock
I guess the only other thing to mention, Brock, is the full year view on the guide and it took us about two quarters to pull out all of the revenue related to correspondent lending last year. So we started to dismantle some components of the business that were no longer relevant to, I guess, core strategy, but they were accretive to revenue, sort of troughed in the middle of the year. So that’s another component as you think about full year to full year.
Brock Vandervliet
Got it. Okay. I appreciate the color.
Rob Holmes
You bet.
Operator
Thank you, Mr. Vandervliet. The next question is from the line of Jennifer Demba with Truist. You may proceed.
Rob Holmes
Jennifer?
Operator
One moment. Ms. Demba, you may proceed.
Jennifer Demba
Can you hear me now?
Rob Holmes
Yes, go ahead.
Jennifer Demba
Hello?
Matt Scurlock
Hi Jennifer.
Jennifer Demba
Sorry. Your credit profile looks really good right now. But as you said, the economic backdrop and amount of uncertainty going forward has changed. How do you look at your credit cost in the next few quarters and your reserve, and what you’re expecting for loan losses? And also what do you feel are the most vulnerable portfolios or buckets in a rapidly rising environment — rising rate environment?
Rob Holmes
I’m sorry, I didn’t write down all those questions. Let me just take it to high level and then Matt can follow up. And then you can ask again if I didn’t answer your question. What I would say is, we’re really pleased with the asset quality that we have in the portfolio. We said in the past we do have some legacy issues, I would say, in the C&C category in the portfolio that we’re still working through in a very measured and intent way.
But nonetheless, overall, one of the things that give us the confidence to do share buyback was our asset quality. The new disciplines that we have in place to actually onboard new clients in this environment, and I have a bearish view as most people to inflation and geopolitical and supply chain and talent shortages and everything else, we are very mindful of those. But we have a lot of really good processes in place to make sure we’re onboarding the right clients. We’re just as much focused on the right client as the right structure.
And the good news about environment such as this and going into higher-risk environment is banks become more rational. So we will actually be able to do deals today with clients we wouldn’t do in the past because of the rationalization of the banking industry. So it can be a positive. And then the pockets of the portfolio that we would worry about, the exact same ones that you would worry about, which would be ones that are susceptible to inflationary issues like commodities or had exposure to Europe, which is in a recession, if not formally soon to be, it is my view.
So there is a lot of things that we’re looking at. We’re very measured, but it’s all about client selection. And then the last one real estate, we talk about that a lot. We feel great about our client selection there. We’re with 15 of the largest 25 developers in the country, we have a very large exposure to multifamily versus other classes. That’s intentional. And as I’ve said if that business hadn’t been proven successful through COVID as it has done, and we hadn’t said it so well, if they didn’t perform as well as they did, our strategy would have been delayed. And so we feel really good about the real estate exposure as well.
We’re not immune to it, and we’re very aware of the rising rate environment and issues that presents to the people in real estate industry of our underwriting for that and using those sensitivities and our underwriting standards.
You want to add anything, Matt?
Matt Scurlock
The only thing I’d quickly add just to get to your question on the numbers, Jennifer, is we’ve been pretty consistent over the last year and our internally described posture of being aggressively conservative. So our total [ph] loans is still sitting right at about 100 basis points so well above day 1. So the coverage ratios look really good, but we are cautious on the outlook.
So if you try to translate that into a provision forecast it’s pretty tough. We said in the first call that we’ve disclosed through cycle net charge off range 25 basis points to be in the low end. I think that’s probably still a good assumption. But we are cautious.
Jennifer Demba
Okay. Thank you.
Operator
Thank you, Ms. Demba. The next question is from the line of Michael Rose with Raymond James. Please proceed.
Michael Rose
Hey, good afternoon. Thanks for taking my questions. So it looks like you’re about halfway through or close to halfway through of the hiring expectations to get to 2.3x client facing from the base. Just given the lower revenue expectations, is there any thought process given to maybe slowing down the pace of hiring and maybe like some of the revenues begin to catch up or is it just kind of full steam ahead build out the teams and then the revenue will come later? Just trying to balance kind of the near-term with the intermediate term. Thanks.
Rob Holmes
Yeah. I think that’s a great question. We’re not close to the end. The 2.1 is C&I, the 60% more is front line facing bankers across the platform, the 2.3 was for overall front line facing. So we got a ways to go. I will say, we’re really pleased with the people that we have in place and with the people that have said yes, but not on the platform to date. I would say that everywhere we’ve added people from business banking, the middle market banking to real estate to corporate, every, if you will, industry vertical where we’ve added talent we see new pipelines that’s tangible and qualified that is coming, but for time.
So we’re not slowing down a bit. We’re really excited about it. And we’ve also been able to not — I want to talk about this a little bit, I’m surprised, if you haven’t asked about it, for us to be up on noninterest expense where we are versus as a whole, we’ve been able to self-fund a great deal of this through savings and tech, through savings and vendors, savings and different processes and really just stopping stupid things.
So the ability to self-fund is greater than we had hoped. We hope to have more to go there on a go-forward basis, and we’re going to invest in this strategy and where we have invested, we see very good returns.
Matt Scurlock
Yes. To add to that, Michael, Rob did still make a major soundbite of the entire call. So we’re incredibly pleased with our ability to remix the noninterest expense base. I mean we’ve said directly that we want to make it a more productive expense base. It’s focused directly on strategic objectives and if you would have told me last year that the increased expense by 2% or $3 million and that would equate to doubling C&I bankers, adding 60% of frontline, onboarding the technology talent necessary to develop internally a new commercial onboarding platform $2 billion of C&I loans in the rearview, I would take that trade all day.
So we’re very pleased with returns on the investment to date. We had no additional big expense moves this quarter, so no additional big realized savings. But I’d just say we’re in the early innings still of really establishing the right process hierarchies and operational design to drive long-term efficiencies. We’re just getting going on that.
Rob Holmes
Yeah. I’d add one thing if that’s okay. Like just on the — as an example, technology, we haven’t seen the benefits of this yet, but last June, we were on-prem and with third-party service providers, and today we’re primarily on cloud platforms, which allow for less CapEx. There’ll be faster time to market, we can move faster, give us some variable cost structure, which will be very helpful to earnings going forward.
And then to Matt’s point about the digital onboarding, we now have engineering proficiency at Texas Capital Bank, which allows for a much more cost effective time to develop and as such, I mean, we’re on track with many more products. So we have consumer onboarding, commercial onboarding, guided this quarter. We’ll do commercial onboarding soft service in the fourth quarter. That’s actually working though right now as a pilot as guided. Our pilot for sales enablement is working and will be rolled out this quarter. The interest rate product up, earning close to $1 billion of deposits.
So we’re consumer onboarding has delivered this quarter, and we’re on track for the MVP of instantaneous payments. So we’re doing a lot. We paid for, self-funded and none of this has showed up in revenue to date for the expense that we have against it.
And then lastly, this is just not excuse at all. But I hope everybody remembers. We’re talking about of the revenue concern. The revenue generated this quarter was determined literally several years ago with the investment and structure and products and services at one place. These bankers — we came out of the strategy September 1, as you know. We didn’t get our FINRA license until I think December 18. Most of the bankers landed in the back half of the fourth quarter, and we’re already seeing pipeline builds. So we’re actually really encouraged about revenue.
Michael Rose
Okay, that’s great color. Thanks. Maybe just one follow-up question. So if I exclude PPP, it looks like total loans, HFI were about 15% annualized higher. So obviously good growth, yet utilization was down. Can you just give, maybe, some color there and maybe outside of C&I, which looks to be the bulk of the growth, there’s probably some CRE paydowns, but would you expect those to slow and maybe get some tailwinds, just given the relative strength of the Texas economy and the impact of higher rates as we move forward? Thanks.
Matt Scurlock
Yes. Happy to take that. So we’re pleased with another quarter of continued C&I loan growth. So I think we described in our very early call that we would anticipate an outcome of us executing the strategies that we grow loans in excess of Texas GDP and likely in excess of peers. So we continue to see that come through with really flat utilization. So utilization has been sitting high 40s or around 50s for the last three quarters, which may have developed entirely new client acquisition, which is core to the strategy.
So we think we’ve got really deep markets, where we can invest pretty aggressively against that opportunity, delivering really strong talent, with a bunch of new products and services, to bunch of new clients. So those are metrics that while they are not going to determine loan growth, in particular is not going to be our guiding light to determine if we’re successful or not, it is a really good early indicator at this point of us taking the market share that we want.
And on the real estate side, we mentioned last year, we have 50% of the book pay off, that ticked down to 36% this quarter. So we have been really steady on our origination volume, we’ve got great bankers, which as Rob mentioned, matched up against really good clients, the strategy has worked for us for a long time. So the pace of origination has been about the same over the last, call it 18, 24 months to pick up in balances, this quarter, 14% annualized was largely a result of those payoffs ticking down.
Some of that, to be honest, is just to return to seasonal norms. So we’ll see if that sustains over the next couple of quarters, but that will be the driver of C&I loan growth, is those will be the payoffs.
Michael Rose
Helpful color. Thanks for taking my questions.
Matt Scurlock
Yeah.
Operator
Thank you, Mr. Rose. The next question is from the line of Brad Milsaps with Piper Sandler. Please proceed.
Brad Milsaps
Hi, good afternoon.
Rob Holmes
Hey Brad.
Matt Scurlock
Hey Brad.
Brad Milsaps
Am I coming through?
Rob Holmes
Yes.
Matt Scurlock
Yes.
Brad Milsaps
Okay, great. Rob, I know there’s a lot of good things. Okay, great. I know there are a lot of good things going on with the deposit base with you moving out indexed money and higher cost money and bringing in more core accounts. Just kind of curious, do you think you’ve reached kind of a stabilization in deposits? I know there’s some seasonality in 1Q as well. Or do you plan to kind of continue to chip away at that indexed money to where we could see deposits continue to come down? Just want to get a sense of kind of how to think about the remaining cash you have on the balance sheet?
Matt Scurlock
Hey Brad, it’s Matt. Happy to answer that. We are largely done at this point on the large proactive reductions in institutional indexed money. So we’ve got published target, we want to be less than 15% of the total deposit base that will be achieved through growth in the rest of the deposit base. So I think you’re likely seeing a floor at this point to start to see things build again starting this quarter, and we don’t have any other than an item or two here and there, we don’t have any in-place plans to push out any more of the high cost, high beta deposits.
Rob Holmes
I think also, this is where —
Brad Milsaps
Okay, great and then —
Rob Holmes
This is where — this is the reason, Brad that we built the digital onboarding consumer commercial and the different industry verticals, revenue cycle management, the unique products for different industries. So we’ll see the P time [ph] fee grow as our pipelines mature.
Brad Milsaps
Understood. And just as a follow-up, kind of a bigger picture question you guys alluded to it several times, maybe managing your interest rate risk position, particularly as rates rise. There’s probably several ways you can do that, some more quickly, some more slowly. Is there a level of fed funds that you would maybe become more aggressive in doing that? I’m just curious if there is in your mind, Rob, an optimum margin that you have in mind for the bank that you kind of feel like you can generate the returns that you want to generate year in, year out? I’m sure, higher is the right answer, but just kind of curious if there is like an optimum number you have in mind?
Rob Holmes
I’m going to take that, but I’ll let Matt follow up. What I would say is this bank has been way too asset sensitive for a very long time. We’re uniquely positioned to take advantage of this current rate environment, given where we are and our over-reliance on asset sensitivity. However, we do not want to be overly reliant and subject to rate cycles.
So I think you’ll see a very disciplined measured approach here going forward indifferent of the rate cycle to have the right assets and liability sensitivity so that you can judge us by the execution of our strategy and not market cycles. You want to add anything?
Matt Scurlock
That was pretty good.
Rob Holmes
Thanks.
Matt Scurlock
If I may, I would add just a couple of additional points of color for you, Brad. I mean, we said really directly that we have a strategic goal to be financial resilient. And to Rob’s comments earlier in the discussion, that really means insulating the bank strategy from changes in the economy or rate environment. And our strategy in general, is just a set of financial returns. It’s really to serve clients with the offering and capability that we’ve described, which we believe we do that well. IT’s going to generate some pretty impressive turns and pretty impressive returns.
So the complexion of the business model today in the midst of the transition, we’re still working through it, is that the strategy is it more risk in a rates fall scenario than in a scenario when rates rise. So we don’t think it makes a ton of sense to increasingly tie a larger part of our future earnings to realizing potential rate increases.
So we’ve talked a bit before that. The warehouse is a great earnings hedge, as rates fall and it certainly is. But when warehouse volumes flex up, the rest of the portfolio prices down and that dramatically increases the amount of capital that we need to generate the same amount of earnings.
So you get a ton of stress on the balance sheet, which is really less than our ability to invest in the rest of the business. So we learned that lesson the hard way during the last rate cycle, the portion of securities that we moved to HTM this quarter it was largely purchased at the lows in the summer of 2020 because the bank’s historical strategy was to maximize asset sensitivity at all times. There was almost a 15-year gap between bond purchases.
So when rates fell in early ’20, there’s a lot of excess liquidity strength capital. So you redeploy to try to generate some earnings that you’re pretty limited our strategic options. And I’d just say very simply, we’re just not going to let that happen again.
So today very deliberately, we’re in a position of strength. We’ve got ample capital and much better funding base, stable credit, a couple of billion dollars of C&I loan growth in our rearview mirror. And I think we’re in a really good position to start taking actions. And our preference to do so would be properly price fixed-rate loan capacity, managing duration in the investment book and then select use of derivatives.
So we’re not ready yet to disclose the target positioning to you guys yet. We’ll certainly share some more details as our outgo aligns on the timing and magnitude of the actions. And then of course we’ll tackle your position over time, which we just did in fact saw in purchases in the bond portfolio and pushing out of the high cost deposits. But I just want to be really clear, in general, we want to move away from asymmetric bets on the direction of rates, sectors or markets.
It’s our view that we’re not going to achieve this strategy by taking outsized exposures. We’re going to achieve the strategy by trying to avoid them.
Rob Holmes
And taking care of our clients.
Brad Milsaps
Very helpful. Thank you, guys.
Operator
Thank you, Mr. Milsaps. That concludes the question-and-answer session. I will now hand the call over to Rob Holmes for closing remarks.
Rob Holmes
I would like to thank everybody for your interest in the firm. We’re really excited about our conference attendance today. The people on this journey with us and where we’re headed. Look forward to talking about it in the future. And sorry, we didn’t get to all the people in the question queue. Thank you. Have a good day.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect your lines.
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