Texas Capital Bancshares, Inc. (TCBI) Earnings Call Transcript & Summary

Good day, and welcome to the Texas Capital Bancshares Inc. Strategic Update Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jamie Britton, Director of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for TCBI's strategic update. I'm Jamie Britton, Director of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the 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 presentation, 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 speaker for the call today is Rob C. Holmes, President and CEO. At the conclusion of his prepared remarks, our operator will facilitate a Q&A session, which will include additional members of the executive leadership team. And now I'll turn the call over to Rob. Rob?

Good afternoon. This is Rob Holmes. When I started at Texas Capital in late January, I knew the strategy we chose to ultimately pursue will contain several foundational tenants such as being conservatively capitalized, hiring and developing top talent, having a greater dependence on core funding, focusing our resources on businesses where we could differentiate and win and improving our client relevance in order to drive a more diversified earnings mix. So when on our first quarter earnings call, we committed to formulating a detailed strategy, which we would broadly communicate in the third quarter, we were already concurrently taking definitive actions, which would be consistent and compatible with the ultimate long-term strategic plan. There has been very good progress on the foundational elements to our plan, and I am now pleased to share with you what we believe this company can become. Joining me today, as on our earnings calls is our CFO, Julie Anderson. This call, however, is very different in both nature and purpose. As such, I have asked several key members of our Operating Committee to participate in the Q&A session. So you can have direct access and get to know each of them as well. With me today are Don Goin, Chief Information Officer; Dan Hoverman, Head of Investment Banking; Nancy McDonnell, Head of Treasury Solutions; Alan Miller, President of Private Wealth Advisors; Madison Simm, Head of Mortgage Finance; and Tim Storms, our Chief Risk Officer. We have a unique opportunity supported by an unmatched collection of talent to invest in building a differentiated offering for our clients and ultimately for you, our shareholders. Creating a full-service, business focused firm that can keep up with one of the largest economies in the world requires focused and sustained investment that will suppress short-term financial performance. However, the value we can collectively create is significant, and I am confident we have a team with the experience, creativity and stamina to deliver a result that resonates in our markets and rewards our shareholders. Today, we will share with you our plans to realize this opportunity, providing detail on our aspiration, our defined challenges to be addressed, our path forward and our deliverables. As I have said before, the executive leadership team and I are not here to run an average bank. We want to build something special in a great market with a team we have very good reason to have great confidence in. Together, we have embarked on a wholesale enterprise-wide transformation. The scope of change is significant. We'll touch every part of our company and will take time, but it is also necessary and appropriate. Over the long term, the transformational actions we are taking will earn us the right to continue serving our current clients, remain a meaningful partner in our communities and capitalize on the many significant opportunities we see, both for our Texas-focused businesses as well as for our successful national offerings. Over these past 2 quarters, we have demonstrated our ability to be decisive and take significant actions. We are keenly aware of the work ahead and committed to building Texas Capital Bancshares the right way over time, remaining steadfast in our aspirations. Early in the transformational process, we felt it was important to establish the foundational principles that will guide our firm as we move forward. Our vision or exactly what we will strive to become our goals, the objectives we need to accomplish to achieve our vision and our values, which describe how we will conduct ourselves and remain accountable along the journey. We are resolute in our agreement that the vision for Texas Capital Bank is to be the flagship financial services firm in Texas, serving the best clients in our markets. This encompasses many different areas, but is best described by our defined goals. Our first goal or objective could be simply stated. We will compete on talent. Candid as always, this is a slight departure for us. Though we have indeed been the beneficiary of great talent, there has not always been the appropriate level of commitment to investing in our people, changes to support the outstanding team across our organization are already underway, being the Employer of Choice means a compensation, benefits and development platform centered on attracting, developing, retaining and engaging the best financial services professionals in the state and incenting them to drive long-term growth and shareholder value. It also means maintaining an intentional focus on diversity and inclusion. Shannon Jurecka has already begun to move us forward and with tangible results. It's also an imperative that we create an expectation of operational excellence. As we broaden our scope to become not just a bank but a financial services firm with myriad products and services, we will need to have sustainable and dependable platforms that are built utilizing the right technology governed by appropriate and thoughtful policies and scalable due to clear and simple procedures. Our products and services must be coordinated so that the experience we deliver not only meets but exceeds our clients' expectations. Our products and services must be delivered by bankers with the expertise needed to ensure fit, must always operate flawlessly and deliver seamless execution within our clients' processes and must always be supported by high-touch service that will continue to define our ability to compete. There are identified initiatives in place, each with accompanying and meaningful investment in infrastructure, products and services to drive us towards these goals. The most important part of any cycle are times of stress, but any attention we receive should not be because of how the stress factors are affecting us. We should receive attention because we are resilient, delivering through all cycles on our brand's promise to perform. Financial resiliency will not be compromised as we construct our balance sheet and business model to serve our clients and our communities. Remaining grounded in this type of approach, one focused on the long term also positions us to take market share through the cycle, including times of stress. We are also committed to an improved risk culture. We will regulate ourselves consistent with our corporate values, which reflect our desire to protect our reputation and deliver sustainable high-quality results. Financial resiliency is a non-negotiable as you saw from our immediate actions taken to improve our capital position. Once they are working in concert, the aforementioned goals will result in Texas Capital being able to achieve first call status with the best clients and prospects in our markets. We endeavor to be relevant to our clients banking them throughout their corporate life cycles. Those that treat us as a simple counterparty will no longer be pursued so we can focus on serving and directing capital to our partners. Transformational change also requires the leadership necessary to reconsider the values we will hold ourselves to daily to empower the change and guide the firm going forward. Each of us at Texas Capital will be measured against these values when evaluating performance. Transparency, candor and discipline, accountability, excellence, trust, collaboration, inclusion and respect. Clear direction has been provided for our teams to uphold these values as we focused on our clients. This will create a highly constructive culture, not only helping to drive operational excellence here, but also creating an ever higher expectation from those who we serve. When consistently achieved, this creates successes for them and importantly for us as well. Let's pivot our focus to why we are excited about the path forward. We do have numerous competitive advantages that other regional banks simply do not have. The vast majority of our employees live and work in the best markets in the country. The Texas markets bode economic growth, which has outperformed that of other states and the acceleration of growth is not predicted to wane in the future. Texas will most likely be the home to more Fortune 500 companies any other state in the coming years. Those that are not headquartered here continue to make large economic investments. All of these companies bring vast vendor support ecosystems, which are important to Texas Capital. Due to the same favorable business climate, business formation is also strong. The population growth is exceeding that of the rest of the country for many reasons, but an important one is the growth in high-value jobs, which in turn, has led to an overperformance in the increase in high net worth households. These dynamics create opportunity for our Business Banking segment, our Middle Market Banking segment, the Corporate Banking segment and Private Wealth, each being supported by the expanded products and services in which we are investing. We have several very successful national businesses, which are and will continue to be very important to us. But we could build a regional bank on the businesses moving to Texas alone. And in an environment where banks are having to pursue costly, time-consuming acquisitions to generate growth, being able to grow for the foreseeable future without asking for anyone's permission is a game changer. We were founded to be a commercial bank, and that will remain our primary focus. Our Commercial and Industrial segment has not grown into its expectations. The clients we do have, however, value the relationship with Texas Capital much more than they do with those with other banks. Our Net Promoter Score and overall client satisfaction score both measured by a third party are the highest in our markets. That is a great endorsement to our brand and a firm foundation on which we will build. Our real estate offerings are very well positioned. Those businesses have some of the best bankers in our markets and our client selection is envied by our peers as is our proven credit culture and performance through cycles. We would be in a very different place given our recent challenges had our real estate businesses not performed as they did. We have a new leader for our Homebuilder & Community Finance business, a segment we are super excited to enhance and grow. There are also many opportunities for improved partnership with the Texas Capital Community Development Corporation. We believe every family should have equal access to opportunities that enable them to thrive and succeed. A person's ZIP code should not determine their future. We recognize the important role we can play in areas impacting the environment and our communities. In line with our broader ESG philosophy, we are committed to ensuring the communities we serve have access to decent affordable housing. Our Mortgage Finance business gets a lot of attention because it is deemed too big as a percentage of our portfolio. We are indeed working to correct that, but not by hindering the growth of a very high-performing profitable business. This business drives elevated risk-adjusted returns by leveraging its multiproduct relationships, provides an important hedge to our naturally asset-sensitive business model and can compete with anyone in the industry, especially once some of our newer offerings reach greater scale. The branch-like model needs to be improved upon, but we are not trapped in legacy inefficient real estate as the world moves to and demands a more digitized experience. We have a proven digital foundation and go-forward investments will center on building the safe, secure and simple solutions that allow our products and services to offer distinctive value to our clients. We have carefully assembled an executive leadership team to supplement the existing skills and talent at Texas Capital. This team has vast experiences, proven track records, specific skill sets to be focused, each having history in much more complex roles at larger institutions. Each person knew exactly what the challenges and opportunities were before they joined. I have had many conversations with the entire executive leadership team. All of them are here for the opportunity to create something special with special people. Character and fund considered in addition to talent. We are a highly motivated team. Before starting this next section, I want to acknowledge several very important points: #1, we are clear-eyed about the challenges we need to overcome; 2, we recognize there are many; 3, we have a realistic plan to address each; and 4, in all cases, we have already taken action. We cannot be relevant to our clients if we do not have many touch points that add value, and we cannot earn our cost of capital through cycles if we look to do it through the loan book alone. We cannot be overdependent on loan growth for earnings, and we cannot sacrifice sustained investment in the franchise to meet interim financial targets. Historically, there was no other way. Going forward, our expanded product set, coupled with investing the right amount of capital with the right clients will make a dramatic difference over time as we look to build a more durable and valued offering. Many, many banks our size have nontraditional funding sources just as we do. Components of our existing approach are perfectly fine, but not optimal. Moving towards optimal means expanding and improving our core treasury offering, allowing for a lower cost, more stable funding base built on operating deposits. It also means consolidating disparate verticals into offerings consistent with the model focused on granularity and scale. Looking at historical information, one can only conclude that low capital levels vis-a-vis our peers was a part of the bank's strategy. That is what the model could support, and that is all in the past. We took swift action on numerous capital raises to improve our total regulatory capital by 260 basis points in a very short amount of time. We are in a good place today and we'll be adding capital through earnings to support continued growth. In addition to the challenges related to growth, spending on technology or other investments was not directly tied back to the business nor was it tracked and budgeted by time, minimum viable product and expected return. The business was not driving investment and adoption was not managed. This siloed strategy by business versus a macro strategy led to a series of hobbies rather than the enterprise improvements needed to sustainably meet increasing market expectations. We are re-underwriting all our expenses and repositioning our cost base to support steady advancements in the businesses where we know we can compete and win. As I mentioned before, historically, to earn our cost of capital, we took outsized risk, which led to cyclical portfolio concentrations that ended badly. The new balance sheet committee will actively direct the right amount of capital to the right clients. The new strengthened credit risk management processes and adherence to appropriate concentration and hold limits will ensure these mistakes are not replicated. And finally, the historical organizational structure of the bank managed with a siloed mindset did not allow for the ability to scale. Moving forward, we are creating scale, centered on a new technology target operating model based on an organizational structure aligned to business segments. Product delivery teams formed around more horizontal customer experiences rather than functional silos. Strategic imperatives tied together across all businesses, driving out common uses of technologies for efficiency and scale. Governance and controls enhanced to ensure we are leveraging common services, increasing speed to market, a connected operating model for flow of work from inception to market launch and strategy and road maps linked to delivery teams, where forward planning around quarterly cycles will allow for adjustments in capacity and to scale teams. We have accomplished much in the past 6 months, and I am encouraged by what we have been able to improve in such little time. I recognize we have a long way to go and more challenges to overcome, but I am confident in this team and excited for what the future holds. Now let's discuss our path forward. The bank will be organized around the client with a desire to ever improve the model. We will be banker led and technology enabled. The TAM, or total addressable market, is significant, and we will be growing the front line over time to address the market needs. As you know, we are pursuing one of the most aggressive hiring plans in our history. Competition is fiercer than ever and we will not compromise on talent, but we believe we can more than double the number of client-facing professionals we have across the state by 2025. This is a significant level of growth in so little time. We are making the investments needed to ensure they will hit the ground running and be ready to partner with our skilled professional product partners to deliver the entire firm from day 1. Importantly, we will also invest in the appropriate loading and gearing to allow each banker to succeed. The more time our bankers can spend with clients, the less time they spend on back office or administrative work, the better. They're better for them and absolutely they're better for our clients. We will indeed invest in client relationships over time as the best clients take time to earn their trust with sound advice and execution. The client coverage model will be constructed of bankers and industry expertise when warranted as this is not only what certain clients deserve, but what they have grown to expect. Over time, approximately 40% of potential C&I clients in our core markets will be covered within an industry vertical. Unburdened by multiple systems and redundant spend to operate aggregated tech assets acquired through M&A, we are focused on allocating tech dollars directly against our forward-looking goals, simultaneously building scale while reinforcing the peer-leading client experience that will distinguish us from competitors. Simplifying and differentiating our client interactions across all products and channels is a key focus of the coverage model aimed at supporting the financial life cycles of our clients. We will continue to differentiate our business through relationships while supporting and scaling interactions with digital capabilities. To achieve this, we are focused on bolstering our digital experiences, modernizing our core infrastructure, uplifting and shifting our technology talent and unlocking the potential of our data. Our core banking platforms are capable and scalable, but the client experience is not unified across all products and channels. We are investing in cloud native technologies that will bring together new capabilities and features across all products and channels in a secure and scalable manner. Application programming interfaces are a key component of the modernization, allowing our clients to leverage platform banking services within their own ecosystems. Our cloud and data modernization strategies are central to achieving simplified and differentiated experiences with better time to market and more flexibility to ever-changing market conditions. As we work to become a full-service financial services firm, we will be focused on the quality and scope of our financial products platforms, which are today in different stages of development. I now want to expand on the status and plans for each. As we seek to be relevant to our clients each day, assisting them and addressing their day-to-day working capital needs in an efficient and secure manner, we are investing significantly in our treasury and payments platforms. Starting with the fundamentals, we are focusing first on our core payments platform and have selected an industry-leading partner to upgrade our capabilities to provide a payment hub that will work across our client segments. This new platform will be paired with an integration layer, allowing the firm to communicate with our clients in the traditional point-to-point manner as well as via APIs. It will also allow Texas Capital to provide the most appropriate payment type for our clients based on their specific needs. From the traditional chat, to participating in the real-time payments and Zelle networks. As our clients move into the cloud for banking services, we will publish the APIs that will provide the data needed to make real-time decisions. We are preparing to be an active participant in the soon to be 24/7 world of payments and information, designing our processes and solutions to be safe, secure and elegant will deliver distinctive value to our clients. Finally, we are aligning our coverage model to give our client segments best practice information and ideas based on their specific industry needs and requirements. Texas Capital is uniquely positioned to be large enough to invest in both the technology and the highly skilled treasury officers our chosen client segments require, but also nimble enough to execute with a high level of service that is the hallmark of Texas Capital. Next is an area where we have already made considerable investment, private wealth. After a complete rebuild and fitting a top a platform that can support a business multiples its current size, the team has grown its business at a swift pace and is now one of the fastest organically growing bank-owned RIAs in the country. This is a direct reflection of our full suite of private bank product offerings, talented and committed team and increasing partnership with frontline bankers to deliver the entire firm to our many business clients. We are working hard and having success attracting talented private client advisers to our distinctive platform in each of our markets. And as the Texas RIA market begins to consolidate, we will carefully consider acquisition as a way to build scale and an offering where we have proven we can differentiate and that has increasing significance to our target client set. An area we are uniquely positioned to go after and offering we are especially excited to build is investment banking. As many of you know, Tim Storms and I grew up in the investment bank at our predecessor firm ultimately holding senior positions in banking and risk, respectively. We, along with the rest of the Operating Committee, believe there is a significant opportunity for a Texas-based firm to deliver a high-quality full service offering centered on the company's active in our markets and the private wealth relationships we are building today. This greatly improves our ability to provide advice to our clients when it counts, elevating our relevance and enhancing our ability to deliver earnings with less reliance on sustained balance sheet use. The competitive landscape is highly fragmented, with our competition largely based outside our core markets and many offering a subset of products that meet our clients' needs. As we grow this business, we plan to differentiate based on talent, coverage and the quality and relevance of our products and services. In short, if you do business in Texas or you are thinking of relocating here, we want Texas Capital to be the most obvious firm to contact, and we want the quality, breadth and reputation of our products and services to make it the first call you make. Our ability to attract new bankers, particularly in the recently formed corporate bank has been influenced by this fundamental shift to a more advisory-focused solution. Many of our new hires have corporate and/or investment banking experience, and we're thrilled to come here in part for the opportunity to partner with Dan as we collectively build this offering. We currently expect to secure our broker-dealer approval by year-end 2021 and initially to build our investment bank by expanding our current fee-generating businesses in loan syndications, rates, foreign exchange and underwriting by adding additional products and services that complement and enhance our core bank products in corporate, mortgage finance and private wealth. For the next 12 to 18 months, our efforts will be focused on building corporate advisory and agency-focused sales and trading functionality. We are actively recruiting today across each of our planned offerings in anticipation of a midyear 2022 launch. Finally, it is our adherence to proven routines that will enable us to execute these operating model changes at a pace and quality that matches the opportunity before us. Beginning with the Monday morning Operating Committee meeting, executive leaderships weekly, monthly, quarterly and ultimately, annual calendars are structured to support the allocation of the firm's resources against defined strategic objectives, identify resolve issues impeding the realization and instill a sense of ownership and accountability throughout the organization. For example, the quarterly business reviews and subsequent internal forecasting exercise engage the entire operating committee and the heads of each of the businesses, at least quarterly to ensure resources continue to be allocated effectively, and we no longer get trapped in a loop of long-term project spend and too little return. These routines have a vehicle to carry our culture and values across the firm, and I have to say our people have really embraced them. A common understanding and sense of purpose are causing silos to come down. And employees at all levels are watching our senior leaders, myself included, grind through details on how to improve our operations, products and clients' experiences creates a shared accountability and the inspiration That comes from trying to build something meaningful together. Collectively, these items mark our transition from a bank limited in its ability to increase client relevance in an industry that demands it to a financial services firm, equipped to partner with our clients as they take advantage of the dynamic markets we are privileged to serve. Let me describe this transformation in more detail beginning on the next slide. Our planned capability build is just one component of our aspiration to reorient the firm around the client, delivering the service, talent and products that they need at each step of their journey. In this next section, we will describe how we are expanding to serve this full client life cycle, our preference for capital use in support of this capability build and how delivering on these objectives create a franchise that is more relevant to our clients and certainly more valuable for our shareholders. Historically, in C&I, we have had undefined segmentation and less clear strategic direction. We have important clients who fit the profile of the Business Banking segment. We also have important clients whose profiles fit in the Corporate Banking segment. However, we really did not have clear segmentation by banker skill set, focus and product expertise, differentiated products or a differentiated approach to the market. With the expansion of our C&I focus, Rick Rodman was recently announced to lead Business Banking. Texas Capital veteran John Sarvadi will lead Middle Market Banking, and Julia Harman, who arrived in April, will lead Corporate Banking. As we described with our competitive advantages, these are the segments the bank was founded to serve and our brand and bankers resonate in pockets across these markets, due largely to our employees' marked resolve rather than a supportive infrastructure and aligned model. Going forward, our ability to scale, that is continuing to grow the client base while meeting a broader range of client needs, will be supported by both channel alignment and programmatic investment agenda against what are clearly compelling market opportunities. Beginning with Business Banking, small to medium-sized businesses are forming in Texas significantly faster than the national average. Our ability to successfully serve them is increasingly dependent on simple and scalable treasury and credit solutions for clients who regularly merge their business endeavors and personal lives. Digital will be important and treasury an absolute focus. Since joining in July, Rick has been leading the effort to establish appropriate gearing ratios for bankers and treasury partners while actively recruiting across the platform. The most mature of our core C&I segments is Middle Market Banking. Well-established teams have been serving our Texas markets for a long time. And with an expanded product set and improving organizational support, I am confident John and his team will compete well for the best relationships in a large and growing space. Finally, Corporate Banking. Relevance in this segment means bringing ideas, content and differentiated solutions, which is why serving these larger clients often requires an industry-specific approach. Virtually all of our C&I specialized verticals will be housed in this segment. For those corporate clients who fall outside of a defined industry coverage area, our recently established diversified group is comprised of an extremely strong team of bankers, many who recently joined from much larger institutions and have deep capital markets experience. Moving to a highly differentiated coverage model in each of the 3 C&I segments better aligns banker, product and service expertise with those utilized by specific client types. Smaller middle market clients that prefer and need local coverage daily will also benefit from this expertise when needed. And when combined with expanded treasury solutions, a holistic private wealth offering and unique investment banking capabilities, this construct allows us to serve clients through the entirety of their life cycle with a delivery model and solution set tailored to support them at each step of their journey. The right bankers equipped to serve the right clients in the best markets in the country. Now that is very exciting. This clear strategic direction provides the lens for evaluating how to use our capital in pursuit of these defined objectives. After many years spent in investment banking, advising clients on how to position for growth, I am highly committed to operating with a well-informed regularly reviewed an exceedingly disciplined approach to capital allocation. We will do what creates long-term value for our shareholders. Looking forward, we believe our opportunity to generate high-quality organic growth is significant and differentiated. Over the short to medium term, we see reinvesting internally generating capital to earn additional market share or to expand our capabilities as by far the best use of our shareholders' capital. We will consider targeted acquisitions of products and services if the transaction terms are favorable, integration risk is well contained and the acquisition provides an attractive return compared to time and expenditure required to grow organically. We do not see whole bank M&A as the right driver of shareholder return for us at this time. Building a valuable franchise means developing a portfolio of differentiated businesses with a balance sheet composition weighted towards those generating higher returns on allocated capital. Our strategic priorities and corresponding investment agenda are squarely focused on that objective. The journey we are on will result in a firm that generates structurally higher and more predictable earnings. Partnerships between our local talent and the specialized industry teams will vastly increase the number of clients we can serve. When combined with the new expanded coverage model, we will cover 85% of the market. The potential is tremendous, which is why we're confident in our decisions to significantly expand both our segments and coverage, make such meaningful investments in our treasury platform, built out our new investment banking business, substantially improve our technology platforms so that we can meet clients regardless of where they are on their technology journeys and more than double our client-facing talent. Once mature, our model will result in a more financially resilient firm with a full suite of capabilities required to bank the best clients in our markets through their entire life cycle. Improving client relevance through broader coverage with more targeted solutions will enable us to grow noninterest income at an accelerated rate, ultimately contributing 15% to 20% of total revenue by 2025. Even when considering the strong growth we expect in C&I and the potential for a modest increase in rates over the coming years, we believe this is very achievable. As we migrate to a more balanced earnings composition, we are equally mindful about finding the right time in the interest rate cycle to be more active in lessening our historically outsized interest rate exposure. Though our business model will likely always require holding higher concentrations in the floating rate loans of our clients require to better manage their businesses and returns, we will more thoughtfully manage our interest rate profile and be increasingly proactive in reducing volatility through cycle in ours. Supporting this objective is a continued replacement of noncore funding sources with operating balances tied to segments where we are strategically focused. This is the foundation on which we are building the bank and when successful will lead to an increasingly efficient and stable balance sheet. In addition to creating value for our shareholders, generating through-cycle earnings is a symbol of financial resilience. A core tenet of our vision to be the flagship financial services firm in Texas, financial resilience means we serve our clients, access markets and support our communities through cycle full stop. This is marked today by the most favorable capital position in the history of our firm, well in excess of our internally observed risk profile, but consistent with our long-term philosophy and necessary as we earn the trust of each of our important stakeholders. There will be points over the next several years where our remaining steadfast may mean slightly lower financial performance, but we are thinking long term, and therefore, recognize our resiliency will be a strategic advantage. As our competitors are shrinking away from their clients during times of stress, Texas Capital will have a balance sheet available to support them. We will manage all risks in a proactive and consistent manner that mirrors our conservative tolerances. Risks are dynamic and our control environment will be as well. We are committed to reinforcing and operating with a strong 3 lines of defense. As I said on our earnings call, the credit team did a very good job prior to my arrival to mitigate the risk in the portfolio by well-executed restructurings and absolute exits. Our issues were not broad-based and instead isolated to a series of poorly conceived transactions in the energy and sponsor-backed leverage lending portfolios. Today, under current executive leadership, we are emphasizing a values-driven credit culture, which will shift focus from sector-based loan growth targets to a holistic focus on relationships. Risk will consistently be owned by all parties, including relationship managers and their partners. Growth then shifts from a deal to holistic client relationships with a collaborative mindset on prudent and quality growth across the enterprise. It entails consistency, minimal policy exceptions, excellent communication and true banker and risk alignment for the benefit of our clients and the firm. Our more granular credit risk rating system, improved credit risk analytics, enhanced credit coverage model and reinforce risk tolerances will support this important step towards financial resilience. Enterprise risk management has been under perpetual review since Tim Storms' arrival. Based on his previous experience, he knows what good looks like, and he has a very good team now in place. Under his leadership, the enterprise risk management program will continue to implement core standards and principles parallel to our well-managed best-in-class organization. This program will proactively address emerging risk in the face of a dynamic landscape, leveraging a streamlined operating model to ensure early engagement with key stakeholders when new products and services are implemented. Enterprise risk management will also strengthen its effective challenge and oversight of a new product and business development, focusing on continuous improvement by embedding our desired risk culture throughout the firm. The firm will also continue to invest in the technology and talent necessary to progress risk analytics. Incorporating these advancements and the framework will further enhance the firm's ability to identify, measure and quantify risk in a proactive, timely manner. Aligning risk appetite with strategic objectives and desired financial performance is paramount to achieving our goals, and I am highly confident in our ability to deliver. In conjunction with the efforts and risk, we are also driving significant balance sheet improvement. The capital actions taken in the first half of the year and the more focused management of the liquidity position pursuit for second quarter exemplify the new culture we are promoting. Our capital position and composition have both improved significantly since the end of 2020. The disciplined routine I described earlier will guide future capital allocation decisions. A stronger earnings profile benefiting from more stable credit and more meaningful contributions from non-balance sheet driven earnings sources will ensure we maintain the strong capital position we need to serve our clients through cycle. On the liquidity side, prudently managing to a more efficient balance sheet will improve capital consumption while a more active focus on balancing excess cash with a thoughtfully structured investment portfolio will strengthen and stabilize earnings through the entire rate cycle. As we noted before, we are maintaining some of our asset sensitivity today, but we will be monitoring market opportunities as rates normalize to lengthen duration and position the balance sheet more in line with peer. As with capital, the stability this will provide will allow us to better support our clients and communities at any point in the cycle, and especially when they need us most. We have given you a lot to think about today, and I hope it is clear we are building something special at Texas Capital. The Employer of Choice here in Texas, a team focused on operational excellence and industry expertise, which will earn us the right to provide advice when it counts, a financial resilient institution that is easy to do business with, and it's always there for its employees, clients and communities and a firm that fosters the trusted relationships that will lead to our being the first call from our clients and prospects. To achieve these goals, you will see us continue to invest aggressively to capitalize on the opportunities we see before us and that we are uniquely positioned to serve. You can expect accelerated investment upfront, but I can assure you we will continue to invest in the capabilities and expertise needed to serve our clients. They deserve our best and we will deliver. The trajectory will be uneven, but we expect low double-digit expense growth during 2022. Our investments will drive significant top line revenue growth as our core C&I markets begin to excel along with our already successful national businesses in mortgage finance, real estate and insurance premium finance. We are taking the steps needed to make sure our new bankers hit the ground running and we expect revenue growth to accelerate over the next 3 years. Due in part to our having transferred the corresponding lending business, we expect low to mid-single-digit growth during 2022. As I noted before, we will continue to evaluate all opportunities for reinvesting our capital but we have a strong preference for internal investment into greater capabilities that improve our services and differentiate the experience we offer to our clients. I'm sure it is evident by now, but we see retaining our earnings to build the value of our franchise while reinvesting to grow higher-value businesses and diversify our revenue streams as the surest path to achieving our vision and creating a more valuable firm for our shareholders. We are committed to transparency and as such, will provide regular updates to this direction. We have a significant opportunity before us marked by much needed investment and talent across the enterprise. Expansion of our segment coverage alongside enhanced products and services and a commitment to operate in a safe and sound manner as we work to meaningfully improve the value of our firm. Accomplishing our goals by maintaining this type of discipline along the way will make us the flagship financial services firm in Texas and allow us to achieve the long-term financial performance we know Texas Capital is capable of. This is the firm our shareholders expect and what we aspire to become. I hope you will join us on this journey, and I look forward to sharing more with you along the way. Thank you for your interest in our firm, and thank you for joining us today. With that, I'll turn it over to the operator so we can answer any questions that you may have. Operator?

[Operator Instructions] And the first question today comes from Brady Gailey with KBW.

So there was a lot to take in. Maybe we can just start with the investment on the personnel side. I mean you're growing the client-facing professionals by 2.3x by 2025. How do you think about the growth profile of the company over that period? I guess and with that investment, and bringing on new revenue producers, we could see notable revenue growth? And then how do you think that translates into kind of the loan growth outlook going forward?

So the truth is the mix of our client-facing employee composition today is not appropriate. So part of that is fixing the current mix that we have and becoming more efficient in our processes with new -- processes and technology and other things and redistributing the allocation to client-facing employees. It's also just looking at the TAM in the markets. Remember, we're entering Business Banking, we're entering Corporate Banking, we have the Middle Market Banking, but we did not have the proper products, banker skill set, go-to-market strategy for each of those segments. We have one for all. We'll have a lot more bankers in Business Banking because there's more clients and prospects there that need our products and services. And then I'm sure less in Middle Market, even less in Corporate, right? So it'll be against the TAM, against the opportunity and against the wallet. It will also include -- the investment banking that we're entering into, remember, we are already in a lot of those businesses, Brady. We do loan syndications, we do FX, we do a lot of activity today, but the breadth and depth and what we've invested in just isn't appropriate. So we need to build those capabilities out and give our partners the opportunity to be more successful in the go-to-market strategy. So we're not going to rush to hire. We're not looking at hiring metrics. We're not compromising on talent. So that shouldn't scare you. It should excite you. I've built sales forces all over the world, I ran a North American wide business and a global business. We went into 22 different countries under my watch, but we did it prudently and appropriately. We'll do the same thing here, but the market opportunity is fast and we think we can support that and make it happen.

Okay. And then, I mean, with the hiring of that size, I mean do you think that once you get a couple of years out, I mean, do you think the loan growth profile of Texas Capital could be somewhere in the high single digit, low double-digit area, just considering all the new revenue producers you'll be bringing on?

So as I said before, and I think in our first call, loans are going to be an output. They're not going to be a goal. Those days of loans being the goal, and we focus on loan growth to grow this bank are just totally gone. We don't even talk that way anymore. We don't talk about deposits either we talk about operating accounts. We talk about serving a client, client journey on the client life cycle. And so if we're banking a great client and they need a loan, we'll certainly support them with a loan. But with investment banking products and these other products, we can also provide them with other structures, a syndicated bank deal or something else, a bond deal in the future where they don't need to rely on our balance sheet alone. We couldn't do that before. So we go serve the client and with mono products basically and [ we ended up ] with loan growth, we saw where that's gotten us. So we will be supportive of our clients with loans and the balance sheet that will be disciplined through our balance sheet committee, through client selection, through rigorous processes, and we'll get a good return on those loans. But the hope is we will minimize our loan exposure to the extent we can fill up the client need through syndications and other capital markets. So we have an efficient relationship and efficient use of our balance sheet to mandate -- to achieve our mandate of growing our wallet share with each client, if that makes sense.

Got it. Then just one last one for me. Rob, you didn't mention share buybacks at all. I know your targeted common equity Tier 1 range is 9% to 10%. You're at 10.5% now. I think if you look at the consensus model out there, it has common equity Tier 1 ratio kind of continue growing from here. For the stocks, you have [ 1 2 ] of tangible, which is pretty inexpensive. How do you think about share buybacks and how that plays into this go-forward strategy?

Yes. Look, I hope we get to the point while I'm here to where distribution policy is a real argument, but we just spent a lot of time, money, effort, repairing our balance sheet. You saw that we said we're going to go above our internal tolerances. We're at 10% to ET1. We feel very comfortable there for the time frame -- I mean, for a short time frame which is, now through '25, we can earn these returns with that amount of capital. We don't have to go down to earn it. So we're good with that. We can drive more shareholder value through reinvestment in the products and services, expanding the segments and becoming more relevant with our clients which is what we really need to do. The relevance of our client relationships is low. The clients we do have, like we said, they love us, right? So our client satisfaction scores are very good. Our Net Promoter Scores are very good. That's not us doing those surveys. That's third parties doing those surveys. So we can become more relevant with the clients that we're already serving, they're happy with us. They plan to expand their wallet to us by becoming more relevant. That's a much greater use of our capital than share buybacks one and done for the current shareholders versus a long-term shareholder we want to reward.

The next question comes from Brett Rabatin with Hovde Group.

Wanted to, I guess, first talk about looking at the operating income versus the expenses. I'm just struggling a little bit with the expense build versus the negative operating leverage in near term versus that starting to change late in the year next year. Rob, can you maybe go through a little bit on how fast the expense space builds in the next few quarters? I guess I'm just trying to struggle with -- I'm a little bit struggling with the trajectory of expenses versus income as we get into the latter part of '22.

Yes, I'll take that, and then I'll flip it over to Julie, so she can comment on it, too. As I said in my remarks, the trajectory is not going to be linear, right, will go up and down a little bit. We have a new CIO in place, who's taken full inventory of everything we need to do. We have new leaders, several LOBs, where we need to reposition and develop products and services. We're building investment banking capabilities. And so we are focused on doing all of those in concert by priority through a very disciplined routine with a feedback loop driven by the business to make sure we're getting the return and a quick no if we're not, right? And so -- but those expense and those investments, while disciplined and big will vary in terms of time of when we will do things. And then at the same time, we still have some legacy expense through depreciation and stuff and technology from the past years. So I just think you're going to see -- and by the way, we've become more efficient in that, too, that when we shut some [ there ] down, it takes a couple of a while to go away. So anyway, I don't see it as linear. I don't think it will be irresponsible at all, the stuff we should think about, we'll be adding tangible common book value every single year, which I think is really, really important, we'll be keeping a high level of capital while we do the investment. But to project precisely over the near term would be irresponsible of us given all the factors at play. Julie, do you want to add something?

Yes. I think, Rob, I think you've covered it. Brett, I mean, it's not something that we're focused on managing quarter-by-quarter. I mean that's why we've given you the guidance that we have for 2022. I think it's really important that we are deliberate and we're not going to compromise on those investments that we need to make in talent, tech and risk to service the clients through the [ life line ]. So we're committed to that. And those investments are directly tied to the revenues that are going to come. It's just a timing issue, right? The investments are going to be at the beginning. And I think you should remember, we took some deliberate actions earlier in the year and we were already talking about repositioning that expense base, right? We transitioned out of correspondent lending and -- so that we could reposition those expenses. And those expenses, we want to reposition those because we're focused on driving this higher-value earnings stream. And so we want to make sure that the expenses are aligned to those revenues that we're trying to drive.

Okay. Fair enough. And then, Rob, I wanted to ask, you talked a lot about operational excellence and building a best-in-class operation. But when I look at the goals for 2025, I don't know if it -- the commoditized nature of banking is somewhat of being played out here. But when I look at the ROA target of 110 and the net charge-offs 25 to 50 basis points through cycle. I guess I'm a little surprised that those targets are not more aggressive. Can you talk maybe about some of the other things that might be going into those targets? Are you assuming that rates stay low through that -- through 2025? And then -- but on the charge-offs, why 25 to 50, why wouldn't that improve relative to 2019?

I'm going to take part of that, and I'm going to flip it over to Tim because he's here and the Chief Risk Officer, and he can talk about net charge-offs. But the model assumes the forward curve, I'll leave at that. So it's not too dependent on rates whatsoever. Tim, do you want to talk about net charge-offs out there?

Sure. This is Tim Storms, and I'm the Chief Risk Officer. And just by way and thank you for asking that risk by the way. And just by way of background, as I introduce myself, what I want to start with is just you all knowing that I've worked with Rob Holmes for a very long time. I know him very well. And throughout this presentation, which is a strategic presentation, I think you would pick up on the fact that risk is an integral part of our strategy here. I know it's playbook. I know the execution phase we're about to go into and I'm just very confident in terms of our ability to deliver this. Having a focus and building a culture of accountability where leaders are expected to own their businesses from end to end and our bankers, the frontline, if you will, are responsible for client selection, that is the best friend of any risk organization, and that's the culture we're building here. When you refer to 25 to 50 basis points as being disappointing or something along those lines, I've been through a lot of cycles. And in my view, 25 to 50 basis points is what one would expect from a mix of C&I and CRE businesses such as we have today. And to state the obvious, but I'm going to state it, through the cycle is an indication of an average where one would expect peaks and valleys, where the peaks are well above that and the valleys are below that number. A peak, for example, would have been 2020 year type of capital where it was more like 130 basis points, which I would view as unacceptable. Our average, which we put in the slide over the last 5 years was 55 basis points. That's not even through a cycle, and I would also view that as something that we will improve upon. To speak directly to how I think about that, our objective needs to be to shave the peaks. One needs to do better than the $200 million of charge-offs, net charge-offs that Texas Capital experienced last year. As Rob has highlighted, we benefited directly from the derisking that took place in 2020. There are lessons learned in terms of the way energy exposures were underwritten. And with regard to serving the leverage finance activity, the Texas Capital underwrote sloppily in the past, but those have been cleaned up here. We have the benefit of a very clean book in my opinion, as of the end of the year, and that trend just continues year-to-date. Also, in addition to the cleaner portfolio, there's a real sense of institutional sense of lessons learned that I don't believe will be repeated. So if all we do is avoid those losses, we will achieve the 25 to 50, and we would be on the lower end of that range. Now that said, and you may disagree with this based on the tone of your question, but one does not know how deep a recession will be, where it's going to come from, when it's going to hit. So a bank needs to manage itself in anticipation of stress, frankly, at all times. That's how we will be there for our clients through the cycle, through those economic troughs. One of the things I'm most impressed by since I've joined Texas Capital is, okay, I know the energy derisking story. I know the highly leveraged derisking story. I really had my eye on commercial real estate, as you might imagine. And as I've gone through those portfolios, and I think this has been disclosed along the way, if you look at the way the hotel portfolio and lodging portfolio has performed, for example, you saw a great deal of [ CNCs ] that would be one expected for the hotel business in a COVID environment. But what we're seeing is payoffs, upgrades, improvements as we start to get toward, hopefully, the other side of the COVID cycle for a bit here. That portfolio has performed well from a net charge-off perspective because it was well underwritten from the get go. Client selection, good equity accounts, i.e., appropriate loan to cost, loan to value enables one to support a client when the property is not over leveraged through downturns like we've had over the last 18 months vis-a-vis that sector. So I for one feel 25 to 50 basis points is a to-be-expected goal based on better underwriting, better discipline, better risk management, better client selection. You might feel we should beat that, and that's great. But I for one would prefer to not overpromise and to, frankly, hopefully, over deliver.

Brett, I would just -- just real quick, I would just add real quick before we could go to the next question. Look at the presentation where I stated we were clear eyed about the things that we needed to do. Those are big tasks. And we are clear out that we can do them. These models are totally achievable, and we plan to achieve them. But that isn't the end of the journey, what we aspire to be, right? That's where we can credibly get to over this period of time. And we could dial back the capital, like I said, 10 to 9, to improve returns. But our focus is on sustainable, higher-valued earnings through cycle, not this year or next year's, return. So this is a model where we can overcome all things that I admitted we had to do and still achieve that. So if you look at the adjusted risk return with that much capital and stuff and so if I just focused on return, I think that should bring you some comfort. And that's the first stop in our journey.

The next question comes from Michael Rose with Raymond James.

Just wanted to get some color on the revenue growth expectations for next year. Do you have a rough split for what you think the contribution would be from fees and then NII? Obviously, there's a lot of retooling going on here and some of these businesses are being built out, but just wanted to see what the expectation would roughly be.

Yes. Mike, we gave you some targets for later in the period, I think for what could go through to 2025. We really haven't given any guidance yet on 2022, a lot of those things are in process. Some of the investment banking capabilities we already have, some of those are going to be built out after the approval. So no. I mean, you'll -- I think you'll start to see -- and it's going to be incumbent upon us to give the right kind of guidance as we move through this next couple of years, so that you can track our progress. I mean we're going to hold ourselves accountable for those revenue targets that we've given you, the noninterest expense target and how we're tracking with our plan. And so we'll talk more about that as we move through. But as of January, maybe we have a little bit more color on some of that. But I think the goal, we've given you the goals where we think over the next couple of years that noninterest income would be 15% to 20%. And that's off a total revenue base that is increasing. So I think that's a marked difference from what we've had historically and where we are today. And that's one of the things that we talk about where what we're building is just a higher-value earnings stream, and that's obviously going to be a big part of it.

Okay. Great. And then just as a follow-up question, just thinking more holistically it seems to me from the outside looking in, you guys have completely reevaluated the entire business structure, and this is a tear down and rebuild, which is clearly going to take time. I appreciate the longer-term targets. But for an investor's time horizon, it is quite a bit of time. Just from your view from the outside looking in, what should we be measuring you on in terms of incremental progress, so that investors can get comfortable that you will not only meet but hopefully exceed those targets that you've laid out and what the interim period could look like?

So Michael, I think that's my question, too. So what we wanted to do -- that's going to really be one of those kind of guidance and quarterly earnings call questions and one of the things that we'll address then. What we really wanted to do today was lay out a more holistic strategy. Hopefully, everyone -- and yes, the presentation was long, and there's a lot to digest. As we move into later in the year and into January, we will more deliberately lay out the thing that how we're going to measure ourselves, how we're going to hold ourselves accountable, we'll start giving guidance again, it will look different than it has historically, but it will be intuitive, and it will help you understand our progress. I mean our commitment is to be transparent. We understand that this is a longer-term journey but we're going to be as transparent as possible so that you can track our progress just as we're tracking it.

Okay. And then maybe finally, 2025 is longer than your contract, Rob. So I'd be remiss if I didn't ask, would you expect to re-up if the progress or just in general beyond the contract period? I know it's hard to say, but it's definitely a lingering question that I think is out there.

We may also notice the contracts probably got an ROE component too that I'm ignoring as well. So I'm not really concerned about the contract or my comp or the time of it. We're focused on this, the journey, what we're doing. I'm all in here. I've been here 7 days a week since the day I started, unfortunately for everybody at the table. Actually, we've had a great time, and it's been fun. But I'm here, I'm going to be here. The Board is committed. I'm committed. This operating committee, importantly, is committed. And so yes, I'm not [indiscernible] of the contract, but thanks for asking.

The next question comes from Jennifer Demba with Truist Securities.

You laid out 110 -- you laid out 110 basis points or better ROA target by '25. Under what scenario do you think that Texas Capital could be more -- that's relatively in line or maybe even a little bit below the peers. Under what scenario do you think the company could be more profitable than peers?

Well, we plan to be much more profitable -- well, we want to be a best-in-class against any peer set that you may choose, right? So the strategy is pretty elegantly simple. Our clients currently use every product and service that we have outlined. We're structuring the bank by client and client journey. We already have the expertise of what we're doing in most of these areas. They just lack historical investment. We have a disciplined routine. This operating committee is implemented. We could afford to do what we're doing. We can do afford to do without taking outsized risk. So this is imminently doable. We plan on doing it. But Jennifer it is a heavy lift. It's a big balance sheet. We have a lot of history. And that I would look at that target as the first stop, like I did with the ROE target and something that we hope to be, but something that's very realistic based on the models that we have. That's not -- I don't want anybody to look at that like that's our aspiration. That's what we're looking to do during 2025. And as you're moving really our revenue mix and earnings stream materially different, away from interest income so that you do that and have those higher-quality earnings, I think what I would hope everybody focus on is the mix of earnings going to much more high-quality earnings than the earnings themselves during this transition period. So that might be one of the things that I'm sure Julie and I will have a lot of conversations with you and others on non-deal road shows and the like of maybe something that you could hold us accountable to during the journey.

One follow-up. On the decision to form a broker-dealer and to enter the investment banking landscape. Can you just talk about what kind of competitive advantages you could see Texas Capital having in that area? In my experience, it's been challenging for banks of Texas Capital's size or near your size to compete in that area and get scale.

Sure. Let me start with that, and then we'll -- I'm going to turn it over to Dan, who I'm super excited for everybody to get to know. But remember, a lot of what we're doing in the investment bank, we're already doing. So loan syndications, FX and the like. What we're adding first is M&A, namely private company M&A right now and then later on something else. And then the agency business. I was at the forefront when JPMorgan Chase created a regional investment bank. And we did that when nobody else did it. We're the first one to do it, and it's grown into a very formidable competitor. I understand the challenges here. I know it needs to be done. And the real question is you can't -- the real multipliers, you can't put a lesser banker on a smaller deal. It has to have talent. And I've recruited that talent before to smaller markets where they excel and we can do that. We're local. I've tested this with many CEOs who I know if we have the same world-class products and services delivered locally with local decision-making without somebody flying in from a different state, do they meet on a deal, would you hire them, and the answer has been resoundingly yes. So -- and I've done it before and I've seen it work. The other thing the investor bank does for us is it raises our relevance with every one of our clients. You literally go from this mono line firm to our bankers have more credibility when they walk in. And when you're adding advice to the client -- you may have an investment banker talking to them about something and then reward you with treasury business. I've seen it happen over and over and over again. So the opportunity is for the incremental relevance with our clients but also uplifting the entire platform in the eyes of our clients. Dan, do you want to add anything?

Happy to, Rob. So this is Dan Hoverman. As was announced this afternoon, in addition to the strategy press release, I just joined a couple of weeks ago and have been enjoying getting up to speed and really digging in. As Rob mentioned, I want to have a quick note that we have applied to register our broker-dealer with FINRA. That application hasn't yet been approved. So our discussion of investment banking products and services is exactly in the context of a strategic discussion and not a solicitation of security-based business. With that being said, there's a couple of things that I think are maybe underappreciated. The Texas market is very significant in the overall scheme of the United States market. If you look at just the capital markets activity, in 2020, there is about $290 billion of debt capital markets issuance. And also in 2020, there is just over $37 billion of equity capital markets issuance. So unlike a lot of other places in the United States, just banking the companies that are here, all of whom are receptive to the idea of local decision-making, local coverage, local contact and in doing business with a firm that reinvests in their community directly has real resonance. And on top of that, I'd also note quickly that our broker-dealer strategy also is tied into our mortgage finance business. And transaction volumes in mortgage finance are significantly greater than the corporate capital market volumes. And so we do expect to have products and services that are relevant to supporting our mortgage finance business. And we think that gives us additional tailwind behind the strategy. And then the last point, just to echo Rob's comments on talent. We think that the strategy and the opportunity that we provide for folks that are looking to join our effort inside investment banking is differentiated even in the few weeks that I've been here and the phone calls that I've had. The vision, the energy, the determination that this operating committee has been able to orient behind our strategic direction really resonates. And we're getting great interest in having great dialogue with folks that are looking to be part of actually building something bigger rather than just having a job. And so it's -- we're looking forward to delivering on the strategy over the next couple of years as we make it through the application process with FINRA and then go through the appropriate risk operation and legal infrastructure support to adequately support the business.

Jennifer, let me just add one thing. Thanks, Dan. Remember, these returns are at these NCO rates and at these capital levels in a low rate environment. So that's pretty -- it's a challenge, right? And we still get these returns. But we think there will be periods we'll absolutely drive these returns at a higher level than our peers, and we can do it safely and while growing in relevance with our clients. So we have some pretty muted assumptions.

Your next question comes from Matt Olney with Stephens.

Just one remaining question, and please pardon the short-term question on long-term strategy update call, but the consensus forecast, I think, is assuming a decline of operating expenses in the third quarter due to the repositioning of the MCA correspondent business that we discussed previously. I'm just trying to appreciate that '22 expense commentary of the low double digit also assumes a step down in the second half of the year and lower run rate. Or should we not assume that due to all the new hires and new investments that perhaps we'll see in the back half of the year?

So Matt, the 2022 guidance, I mean, that's based on our internal forecast, not a sell-side consensus. And I think that there are some puts and takes in that, but I think that kind of the first half or some puts and takes in the second half of 2021, but I think the first half kind of an annualized view of the first half is probably directionally correct. There could be some puts and takes between revenue and expense. But I think, again, right, we transition correspondent lending, but we are starting to make all those new investments. So I think that's a reasonable base for you to be.

The next question comes from Brad Milsaps with PSC.

Just to follow up on Matt's question. Rob, could you maybe -- just maybe level set for us the number of producers that you currently have, maybe in absolute numbers. Based on my math, it looked like you guys had hired a number of people to start the year that would sort of already be in run rate in terms of the expense line. So really just trying to appreciate how many more hires may be coming. I know it's a 2025 goal number in terms of number of hires. But it sounds like a lot of these expenses are coming in the next 18 months. So I'm just trying to marry those 2 together, particularly with those MCA expenses, which I think were $70 million annually coming out of the run rate as well.

Brad, yes, I appreciate the question, and I'm going to frustrate you. One of the things I noticed historically with this firm, it was like we hired 13 bankers this quarter, and that was like a strategy. And so that's just not the strategy here. What we're doing is we're lining up resources against opportunities when that talent matches. And so to give you like a goal of how many bankers we got or how many bankers we have here, I just don't want to get in that historical dialogue. Remember, we're not hiring bankers for their book anymore. That's just -- that's all gone. We started a junior program. We hired a lot of juniors. We're going to grow the culture and the resources and also allocate the right expenses against the right activities, which will make this place more efficient. But it's no longer about hiring a banker and his or her book. It's about building a sustainable business with high-quality earnings. So I know that's hard because it's hard to build models and stuff, but I just don't think we're going to give banker count out.

Okay. Well, is it fair to say -- maybe you could allocate for me the additional $70 million of spend that the guidance would imply, kind of what does that encompass?

Are you talking about from the correspondent lending business?

Yes. That and, I guess, your guidance would imply about another $70 million of growth in 2022 based on double-digit expense guidance.

So again, Brad, I think the 2022 guidance is based on a comparison of 2021, right, as a base. 2021 -- kind of the base for full year 2021. I think there are some puts and takes, as I said earlier. But I think just kind of annualizing the first half of 2021 to get a kind of base 2021 is probably a fair assumption. And again, we're going to be transparent. We're going to review this guidance in January, and we want to -- we'll be more transparent about those things from year to year.

But Brad, if you think about it, just what I've just said to Jennifer, I'm sorry about all we're doing, what it's going towards is technology, products, services, people, all the things to amplify private wealth, treasury management, investment banking, client journey, digital, consumer. We've expanded segments, business banking, middle market, corporate. So -- and we've got some national businesses that, frankly, aren't perfect for -- mortgage business is great. I'm looking at Madison. He's here. So we're adding 3 or 4 key products from investment bank to that. Nancy, do you want to talk about what we do on treasury?

Yes, absolutely. So thanks. This is Nancy McDonnell. I'm on the Treasury Services Group here at Texas Capital. So I, like several other here, spent career in banking and for the last half of it certainly engaged in treasury and technology at my prior firm. And we already offer a substantial and fulsome suite of treasury products. What we're really doing is helping that strategy and taking advantage of the very unique time frame that we're in, to take the ability we have to drive technology with my partner, Don Goin, and take what's available to us through the fintech market and bring it to the existing clients we have and totally focus on this strategy of being a fulsome relevant bank. I think Rob said that time after time, that we want to be relevant to our clients every day. So that's managing their cash every day, helping them, giving them good advice. I think we're all very aware of the cyber issues that have come up and have been very relevant to that client day in and day out on the treasury front. Using our full suite of products, enhancing them with all the opportunities that we see across that with technology, which I'm sure Don will speak to in a moment. So the strategy is really more intelligent offering, better advised more consistently on how to run the short end of your balance sheet if you're one of our corporate clients from middle market all the way through corporate and have segmentation. If you're in a specialized industry, we're going to speak your language. We're going to understand your revenue cycle. We're going to understand the unique payment needs, whether you're a B2B, a B2C, however you operate, that opportunity is today and now for us, and we have the ability working across the bank that we already have in place with the suite we have enhanced for the technology to really drive some significant operating balances here that could be very, very relevant, as Rob said on multiple times during the presentation, about why Texas Capital at this point. So Don, I don't know if you want to speak to the technology and what we're doing with API that Rob mentioned.

Also, just -- really, I think Brad's concern is like you're going to -- you have a large spend, are you going to use it wisely with technology?

Sure. I think as Rob stated in his prior remarks, historically, the company has not directly aligned the technology investments to the business strategy. So that's changing as we go forward. We also talked about how we're going to build our client experience and getting an end-to-end common-looking field across all the products that we're building. In order to facilitate that, you're going to see changes that we're making. So one is we're getting a mix shift in our talent as you'll see more engineers coming on staff. We're also doing a shift -- more a shift into cloud-native technologies. From expense structure, when you look at all of the things we're doing, including API and data modernization and data-related products, we expect to get more efficiency out of the business. I think back in prior years, we were going to go after growth in the business. We would buy a lot of infrastructure and we would buy that infrastructure to the peak that we expected in the business. And what that would do to the economics, it would cause us to strand our capacity and to strand the cost inside of those peaks when we don't use them. The cloud-native technologies allow us to pay for what we use when we use it. And so the more we move towards that when we sign up clients and those clients grow and they consume APIs and that infrastructure grows, the expenses are more directly aligned with the business that's incoming. So overall, we feel like we're in a much better position going forward for efficiency and scale in the way we're approaching it. And we're tackling some of the expense geography that was kind of bumpy from the historical spend.

Brad, just one last thing. I mean we're talking a lot about the expense. And so the expense, the expense investments that we're going to have for the rest of 2021 and first part of 2022, I mean, we feel really good about positive operating leverage returning in the second half of 2022. And then it just begins a constant trajectory after that. So this is just a timing thing and it's short term. So just want to make sure everyone is focused on that. The operating -- positive operating leverage will be back pretty quickly.

Got it. And if I could just add one follow-up. Just want to make sure I understand. The 1.1% ROA goal is based on the forward curve in terms of interest rates. By far, the biggest question in my inbox tonight from folks is, can you give us any sense of what size balance sheet you might be assuming in 2025? I understand and completely clear on you expect the mix of revenue to be better, but I think that's certainly a big question that's out there.

Yes. I would say it's totally dependent upon -- so now we're going to be banking on -- we're going to be banking virtually every segment of the wholesale commercial corporate space, and we're targeting the best clients in those segments. And I guess it will depend upon the client activity and client use. Has the client acquired somebody? Is the client on growth loan? Is -- so the hope is -- to say something, we're not -- I'm not interested on growth. We certainly said it 100x. But the hope is it's a lot bigger because we are going to have to use capital to that client. But it's not going to be the strategy for the goal to be the outcome of the relationships and client relevance. So my guess is if it's not materially bigger, my contract won't matter. Or I guess it will matter because we would not have achieved our goal as well in those. But I don't know how to tell you how much bigger.

The next question comes from Bill Dezellem with Tieton Capital Management.

A couple of questions. First of all, will your client-facing hires, are you anticipating that they will ramp to productivity -- high productivity levels faster than normal due to the quality of the talent that you're hiring and potentially secondarily because Texas Capital, you're still better in terms of the product and service offerings that you're offering clients?

Well, I don't know what barometer. The answer is yes in terms of factor. I would think based on the bankers that we've hired, that their share of wallet will be faster than other bankers in my past experience. I also think we have a lot of bankers already here that haven't had these products and services to become relevant to their clients. So I think their ramp can go faster as well, which I think is really important so...

Rob, if I might just add on this. This Is Nancy McDonnell again. I thought I'd just add on. The level of training that we're bringing in addition to the product, I think, gives us the opportunity to have those bankers in front of more clients with more discussion point, which I think yields. I'm not sure what you call ramp, but it's certainly more touch points, discussing broader product suite with significantly more training. And as Rob mentioned, we have a significant junior program already in place.

Appreciate that. The next question is for you, Dan. Relative to investment banking shift, were your customers asking for these services? Or is the investment banking business being built really for that future client of Texas Capital?

Do you want me to -- I'll try to comment on the current. Let me comment first just because Dan got here 2 weeks ago. So he knows the answer, but I've lived it for the last several months. The clients that we currently have consume investment banking products. In fact, we refer our clients to third parties who transact the specific products and services we plan on building. And we know we have credibility with those clients today even without them because they transact that business with who we refer it to. So that's pretty compelling. It's not new clients. Our current clients use these products and services. Then the new client, I'll let Dan speak to because he's doing all that work, but it's a large footprint. Dan?

Yes. So for our -- as Rob mentioned, all of this is really a logical extension of our existing platform. It's businesses -- it's services and products that our current clients are already using. And a reasonably large number of circumstances that current clients that we have an opportunity to compete for and certain other areas like in mortgage finance, it is products and services that we absolutely know are used -- often used daily, where we have the ability to put our foot forward just to take part in those activities. And historically, we haven't done it. I think when you think about the effectiveness of our relationship managers and the folks on the front line, it really gets back to Rob's comment about having the holistic approach to the relationship, which means that you have a holistic understanding of the client need. And it's approaching them with the ability and the confidence to know that if they have any financial service needs, that we have the ability to deliver it. The one other area that I've had a lot of pleasure discussing with Tim Storms and look forward to our partnership together, that having these products actually gives us greater visibility and better ability to manage and control risk because the broader portfolio of products that we have assists our clients in accessing markets that gives them better ability to syndicate credit, reducing our specific exposure, which strengthens our partnerships with capital providers. On the advisory side as well as the capital market side, it also drives greater visibility into our client strategy. It helps us anticipate what their needs are, whether those needs are positive or not. And it helps us predict changes in risk profile so that we become better able to anticipate appropriate management of both our capital as well as the clients' needs and makes us more valuable to them at the end of the day, which we think is ultimately what's going to drive the success of our investment banking franchise.

Hey, Madison, can you just give an example of a couple of products that make your business better with the clients you already have?

Sure, Rob. So it's Madison Simm with Mortgage Finance. We have a depth of market share in the mortgage space where our clients are actively hedging their interest rate lock commitments. They are actively gestating and bond delivery on government-insured product today with clients that we refer them to -- I'm sorry, third parties that we refer them to across all of our clients. So as Dan described, from a mortgage finance perspective, a strong opportunity. It is material. And our clients are talking with us daily, weekly, monthly around where we see opportunities for them from an advisory perspective as we support them holistically. In addition to that, we have an opportunity to add very strong value to those clients as we think about leveraging Dan Hoverman's expertise in helping them hedge their interest rate lock commitment through our capital markets relationships, where our clients are looking to us for their capital liquidity strategies long term and we can deliver that solution. And then further our penetration into that market, having a support infrastructure to help them place trades on their loan inventory and strategic partners. So if you think in terms of the breadth of the value we can bring to those clients where we already have a strong foothold, it is material.

That's quite helpful. Dan, I'm going to get you with one more quick simple question. You're going to have the broker-dealer headquartered in Texas, it sounds like. How do you address the people who want to stay in New York? Is there -- how do you deal with that?

I'm going to address this in the context that I spent about 20 years of my life living either in New York City or in New Jersey despite having been born in Houston and going to high school in Austin. There's no reason that you should stay in New York. More seriously, though, I think the opportunity that we have is truly unique. Putting aside the personal reasons why living in New York might be difficult and the tax burden as well, I really -- the comments that I mentioned earlier around our opportunity resonating with people that are on the platform, we do believe that we are growing a unique culture and having people in the office is critical to helping to grow that culture. And so we're looking to build our investment bank in Texas and will focus on that in the near term.

This concludes our question-and-answer session. I would like to turn the conference back over to Rob Holmes for any closing remarks.

I would just like to sincerely thank each of you for investing the time to hear our aspirations, vision, strategy, deliverables, things we need to overcome. We commit to being transparent along the way. There may be some frustration without specific guidance on what we look for. We look to agree on those metrics with you as we go forward. So we're super excited about this journey. We're super excited about the team we have throughout the entire organization here in the markets in which we serve. We look forward to talking with you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.