Earnings Labs

Texas Capital Bancshares, Inc. (TCBI)

Q1 2023 Earnings Call· Thu, Apr 20, 2023

$100.41

+0.09%

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Transcript

Operator

Operator

Hello, everyone, and welcome to Texas Capital Bancshares, Inc. Q1 2023 Earnings Call. My name is Nadia and I'll be coordinating the call today. [Operator Instructions] I would now hand over to your host, Jocelyn Kukulka, Head of Investor Relations to begin. Jocelyn, please go ahead.

Jocelyn Kukulka

Analyst

Good morning and thank you for joining us for TCBI's first quarter 2023 earnings conference call. I'm Jocelyn Kukulka, Head of Investor Relations. Before we begin, please be aware that 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. Our speakers for the call today are Rob Holmes, President and CEO; and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open up a Q&A session. And now I will turn the call over to Rob for opening remarks.

Rob Holmes

Analyst

Thank you for joining us today. The collective actions taken over the last several years enabled the firm to enter 2023 operating from an unprecedented position of strength with sector leading capital and liquidity. Our goal since our arrival was to build a firm characterized by the strength of its balance sheet and the breadth of its platform. A firm, “that is resilient through market and interest rate cycles”. Our closely held belief was that doing so would enable us to confidently engage our clients when they needed us most. Bringing forward a suite of solutions centered on their needs, not ours. Client and prospect engagement, since the events of March 10, have been significantly and constructively heightened with the agenda focused on their needs and what is in their best interest. We believe being in market during times of volatility is paramount. Our ability to be front footed during this period of industry instability is a no small park grounded in the completely rebuilt liquidity risk framework installed during 2022. Our structure includes daily liquidity KRIs monitoring in normal times. Then in times of changing market conditions, relies on a defined and well-rehearsed set of governance and operating procedures to ensure we can react quickly if needed. As events began to unfold on March 9, we were confident that our multi-year operational de-risking would ensure that we have the right data and a full real-time view into our deposit and liquidity positions. By Monday morning, our bankers were also equipped with the information necessary to proactively reach out to clients and prospects with a set of solutions meant to ensure their business operations continued seamlessly despite financial industry turmoil. I'm incredibly proud of the response of our people and of our ability to be there for our clients at…

Matt Scurlock

Analyst

Thanks, Rob, and good morning. Starting on slide 4, as Rob described, we're proud of the deliberate steps taken over the last two years to solidify our competitive positioning. The firm continues to maintain substantially more liquidity and capital than required to sustainably deliver against our strategic objectives. At quarter end, on hand cash liquidity totaled $3.6 billion or 13% of total assets compared to 3% median in our peer group. Total shareholders' equity is 6.7 times that of total unrealized loss compared to 3.6 times for large U.S. financial services firms. Uninsured deposits as a percentage of total deposits decreased to 45% in the quarter. Deposit coverage ratios were strong at quarter end and compared favorably to peers with the ratio of cash and contingent funding to uninsured deposits of a 153% and cash and contingent funding to total deposits of 69%. Moving to slide 5. Capital levels remain near the top of the industry. CET1 finished the year at 12.4% with tangible common equity to tangible assets increasing slightly to 9.72% a record since the year of the firm's founding and reflective of our stated objective to manage the balance sheet in a manner supportive of tangible book value with lower than peer levels of unrealized losses. The allowance for credit losses continues to increase and is now up 55 basis points since day one CECL. This alongside a multiyear transition to a more balanced loan portfolio positions us well as the industry prepares for credit migration. Turning to slide 6. We delivered notable progress in our fee generating businesses in the quarter, which continue to growing contribution as we improve our relevance with a now consistently expanding client base. Quarterly investment banking and trading income was $18.8 million up more than 300% from the first quarter of…

Rob Holmes

Analyst

Thanks, Matt. Operator, lets proceed to questions.

Operator

Operator

[Operator Instructions] And our first question today goes to Michael Rose of Raymond James. Michael, please go ahead, your line is open.

Michael Rose

Analyst

Hi, good morning, guys. Thanks for taking my questions. Just wanted to kind of address, what was kind of out there in the news the other day around some headcount reduction just given that you guys have been pretty aggressive on the hiring front since you came in, Rob. Just wanted to get a sense I assume that plays into the reduction in non-interest expenses, but just wanted to get some color there. Thanks.

Rob Holmes

Analyst

Yes, thanks for the question. Look, we were led by disciplined process reengineering and review powered by investments over the past two years and dramatically improved operating data and the ultimate impact was an outcome, not a predetermined reduction target. This part transformation is meaningfully complete now, and we have a permanently improved operating discipline. I think it's really important to point out that when we started this journey, we said that by 2025, we'd have 2.3 times front line client facing professionals than what we -- in 2025, and today, it's at 2 times. So the strategies in cap, we'll front foot it, we're with clients, we're in market, and this has to do with becoming more efficient and breaking the cost curve. It'll make us a more structurally profitable firm going forward. And we don't capture -- you mentioned that perhaps that's understandable based on rumor and assumptions, but we don't talk about it in terms of percent reduction in headcount, because that implies a one-time save and our transformation is permanent improvement in the operating efficiency. We're really excited to break down guidance on expense. And one more thing really --

Michael Rose

Analyst

Okay.

Rob Holmes

Analyst

I'm sorry. Really -- I think one more thing that's important is that it makes the firm safer or more automated and it improves the client journey, so anyway, sorry.

Michael Rose

Analyst

No. Not, not a problem. Appreciate it. May maybe just going through this quarter's loan growth and I hopped down a little bit late. So sorry if I missed it, but look to be again, kind of very strong ex-warehouse that's held for sale. Can you just give us an update on pipelines and migration trends just given the lenders that you've hired. And, if you have a semblance for what the puts or takes could be to growth outlook for the rest of the year. Thanks.

Rob Holmes

Analyst

Sure. Look, I think it's Matt, mentioned it in his comments. I think it's important to point out that we expect loan or deposit activity to mirror more consistently one another in the future. I think this is it -- our pipelines are really, really strong with new client onboarding. We on boarded new clients, more new clients in the first quarter than in history of the firm. We more new clients in March than any other month, but I think it's also really important to note that we have not deviated from loan growth not being a goal. It is not our goal. Our goal is client acquisition and to bank the best clients in our market. And if you look at what's come through balance sheet committee, which is remember we have two approvals to extend credit. One is risk and the other is the use of capital. Balance committee approves the use of capital after the risk has been approved. And 95% of the submissions by our bankers in balance sheet committee has been more than loan only. So our clients are taking advantage of the broader platform which is imperative for us to earn more than our cost of capital.

Michael Rose

Analyst

Helpful. Appreciate the color. Maybe just one final one for me. So, the interest bearing deposit cost can continue to kind of move higher. Do you think that we're getting to a point though where we're going start to see that peak off and sorry if I missed any sort of commentary, but any sense for kind of what you'd expect for updated betas as we move through the rest of the year assuming the forward curve. Thanks.

Rob Holmes

Analyst

Yes. Michael, I think terminal beta implies where the Fed is going to stop, and at this point, I don't think that we do. I think the broad deposit shift certainly in our base half occurred, we wouldn't expect a continuation of that trend. But I would expect interest bearing deposits to generally stay on the same trajectory in terms of beta until the Fed -- until the Fed will particularly slows their trajectory.

Michael Rose

Analyst

Great. Thanks for taking my questions.

Rob Holmes

Analyst

You bet.

Operator

Operator

Thank you. The next question goes to Brett Rabatin of Hovde Group. Brett, please go ahead your line is open.

Brett Rabatin

Analyst

Hi, good morning, guys. Thanks for the questions. Wanted to just start off on just provisioning and looking at the commercial criticized change, it didn't seem like you had significant changes in your criticized assets. I was a little surprised at the provisioning level. Was there any change in terms of what you're waiting maybe on the CECL mood's model? Or can you walk us through a little bit more the changes and dynamic of the model for the provision. Thanks.

Matt Scurlock

Analyst

Hey, Brett. This is Matt. We continue to experience pretty substantial new client acquisition that's showing up as loan growth. And I've been committed since Rob's arrival, our words to be aggressively conservative and establishing reserve. So, over the last four quarters, we've increased our ACL by $56 million or 36 bps. So the aggregated level as a percentage of total loans leveled off quarter. And I think at this point, we're pretty comfortable with positioning. There was a modest increase in NPAs that's worth describing. It's -- the incremental NPA this quarter is really just concentrated in a small number of lower LGD credits, that at this point we think we're pretty well reserved for.

Brett Rabatin

Analyst

Okay. That's helpful. And then the strength of the investment banking this quarter, do you think that's sustainable or is that a couple of transactions that maybe won't be quite as meaningful going forward as you see the pipeline?

Rob Holmes

Analyst

No. That it -- really that's highly sustainable. In my comment, I think I mentioned that it was broad based. So, there’s multiple products and services that our clients are using. Some new for the first time, others much improved. And so you have capital solutions, which is rates, you've got syndications. You have M&A. You've got sales and trading, capital markets and there is a broad acceptance in the market across the entirety of the platform that frankly I'm surprised has matured as quick as it has. And so, we're probably -- we're highly confident in -- the other thing is really encouraging is the model itself is working the way it should. So a lot of these referrals -- remember we didn't build the investment bank for a different set of clients. We built the investment bank for our current clients and new clients in our target markets. So it's not a disparate line of business. It's wholly one. And they are being referred to the investment bank through private wealth advisors, through middle market bankers, through corporate bankers, if the model is working, and the platform is working as intended.

Matt Scurlock

Analyst

Which, Brett, as you know --

Brett Rabatin

Analyst

Okay.

Matt Scurlock

Analyst

Exactly how we believe you're going to start to see expansion and returns over time. I mean, that’s $3 billion of C&I loan growth over the last year to Rob's point. That balance sheet that we're giving to clients who are going to benefit from the rest of the platform.

Brett Rabatin

Analyst

Okay. That's helpful. And if I could sneak one last one in on follow-up on the expense guidance, is the pivot to lower expense guide, is that do you think totally a function of just a lower revenue environment? Can you talk maybe about there could be a thesis of, hey, you take market share more proactively while others pull back from a credit availability.

Rob Holmes

Analyst

I'll comment then I'll let Matt to fill in with --

Brett Rabatin

Analyst

Okay, Rob.

Rob Holmes

Analyst

I'll comment let Matt fill in with numbers. This is the expense guidance is due to a structurally improved operating platform, which has been not only processes being reengineered in automation, but the entirety of the platform working together, it is totally rebuilt and fit for purpose. And so the guidance is not like a one-time save. We think our efficiencies will scale as revenue grows.

Matt Scurlock

Analyst

Brett, the only thing I would add to that is that, these are enhancements that we've been working on for a long time. Rob, spent a good portion of the fourth quarter call discussing that discipline and pretty significant reengineering. So as those enhancements mature, we were able to actually get the efficiency at the end of this quarter. An important point of Rob's earlier comments is that, these are largely operational reductions. So, frontline employees are still up two times since after arrival first quarter of 2021. So we're proactively in market this quarter, on March 13, Monday after the SVB issues, proactively calling on clients availing to them the entirety of our platform and trying to go bank the best clients in our markets.

Rob Holmes

Analyst

Just one more comment --

Brett Rabatin

Analyst

Okay.

Rob Holmes

Analyst

Just not pile on, but in the proxy, you may have seen the CEO goals. Last year, one of them was -- it seems kind of trite for a lot of companies, but for us, it wasn't. One of my goals that we had as a firm was cost allocation and to understand that much better through the entirety of the platform, and that was leading to our ability to be able to have the structural operating and tech improvements. So it's all tied together.

Brett Rabatin

Analyst

Okay. That's really helpful. Thanks so much for the color.

Operator

Operator

Thank you. The next question goes to Brody Preston of UBS. Brody, please go ahead your line is open.

Brody Preston

Analyst

Hi, good morning, everyone. Thanks for taking all my questions. I wanted just to -- I guess maybe put a finer point on the expense front, here everything you're saying from an operational perspective, but maybe, Matt, if I could try to dive into the numbers, right, the -- I guess, the mid-single digits, kind of assuming 5% assumes that like the average quarterly run rate for the remainder of the year would step down like by about $20 million or so. I guess, could you -- I guess maybe could you help us think about the glide path of how the quarterly run rate is going to look throughout the remainder of the year?

Matt Scurlock

Analyst

Yes, happy to start on all expenses, not called salaries and benefits. So, coming off the fourth quarter call where we had the non-recurring items. You said, when that [$81 million] (ph) down to about $65 million to $70 million a quarter through 2023. Brody, I think that's still the right assumption. If it moves towards $70 million, that's an indication that rates are elevated if that blends down to $65 million it's that the forward curve has been realized and the status stopped tightening. So, then on the $128.7 million, which is salaries and benefits expense for the first quarter. As I mentioned in my comments, about $7.5 million of that is seasonal, which takes you at $121 million and then about $12 million of that $121 million is that annual reset on healthcare and incentive accrual. So, $121 million is the right starting number as you look out for the duration of the year. And then we would expect the majority of the reduction in non-interest expense guide to occur from previously implemented actions to reduce salaries and benefits. And you see it start to show up this quarter.

Brody Preston

Analyst

Got it. So seems like it's a little bit more immediate then is how I should interpret that.

Matt Scurlock

Analyst

Yes. We took the actions, Brody.

Brody Preston

Analyst

Got it. Okay. And then on the mortgage warehouse, front. I think it seems like at least from my perspective that was an area of strength for you all this quarter with the balances being relatively flat, and we should have seasonally stronger warehouse going forward. And so could you talk maybe about how you're expecting warehouse balances to flow in the second quarter? And then importantly, how that positively impact deposit flows particularly NIB here in the short-term?

Rob Holmes

Analyst

I'll comment and Matt can, answer your question. I would say that the strong performance in mortgage is the continuation of our ability to do more business with the best clients in that space, as a direct result of having created a very broad product offering with really good operating capabilities and great professionals. So, we see us rotating to do more business with the best clients with deeper relationships, which sends when it -- and as such, they send more deposits and loan balances to us. Matt, do you have anything else?

Matt Scurlock

Analyst

Yes. I'd say the ending period balances, Brody, were 24% higher than average, which does indicate strong momentum going into Q2. Ending balances were about 2% higher than average in the first quarter of last year. We still believe that warehouse balances are likely to be about -- the reduction of warehouse balances through the year likely to be about 75% of aggregate 1 to 4 family mortgage originations, which Moody's is now forecasting that to be down by about 30%. And then the previously established guidance on deposit -- average deposits relative to mortgage financed loan balances is 100% to 120%, I think we're likely to land toward the higher end of that range. As to Rob's point, we're able to do more with the clients that we have on platform.

Brody Preston

Analyst

Got it. That's helpful. And then if I could just switch over to credit, I guess on the on off charge off that you called out, could you give us a sense for what industry that was in? And then I think you'd previously mentioned last quarter that there was some of the charge offs from last quarter related to some older vintages. Does this kind of fall into that same category?

Rob Holmes

Analyst

So, I'll comment then let Matt. Look, this is a -- I think Matt said in his comment the C&I client, Texas public company, a lot of high quality banks were in this credit. And it's stemmed from a seemingly unforeseeable risk, there was a consumer awards matrix this business, which had a large exposure to Eastern Europe. And the war in Ukraine actually really negatively impacted the consumer behavior and confidence and it led over to the Americas businesses. So, I would say it was a unique credit because we don't have a lot with international exposure like that. We did like this management team, the company was strong and had a great bank following, but that risk is hard to foresee. And it migrated very, very fast obviously. But, no, that is -- that was a new vintage non-legacy risk exposure that was highly correlating consistent with our strategy, unfortunately. Matt, do you have anything else to note?

Matt Scurlock

Analyst

Nothing from me.

Rob Holmes

Analyst

Did that answer your question?

Brody Preston

Analyst

Yes. That's very helpful. And then just lastly, on the non-accrual balances, I noticed that the non-accruals, it's off a very low level obviously, but I noticed the non-accruals ticked up from $48 million to looks like about $94 million. So, wanted to get a sense for what drove that. If it was related to this credit that you charged off or if it was more related to some of the other credits that you talked about with the criticized and classified moving higher?

Matt Scurlock

Analyst

Yeah. Brody, not related to the credit that was charged off. It's concentrated to a small number of lower LGD credits that we at this point believe are appropriately reserved for.

Brody Preston

Analyst

Got it. Okay. And then just one last one on that. That’s the C&I credit that you did charge off. Did you charge off the bulk of that loan? Or just wanted to get a sense for if the charge offs would be fully behind you there?

Rob Holmes

Analyst

Yeah. It's behind and its strong.

Brody Preston

Analyst

Thank you very much for taking my questions, everyone.

Rob Holmes

Analyst

Of course. Thank you.

Brody Preston

Analyst

Awesome. Thank you very much.

Operator

Operator

Thank you. And the next question goes to Matt Olney of Stephens. Matt, please go ahead. Your line is open.

Matthew Olney

Analyst

Hey, thanks. Good morning everybody. Wanted to dig into the revenue guidance that you guys provided. I'm trying to separate the fees from the NII. Any color you can provide us as far as what that implies, the NII growth in 2023? Thanks.

Matt Scurlock

Analyst

Yes, Matt. I'm happy to take that. I think Rob articulated really well in his comments that we are focused exclusively on banking really strong clients with a solution set that we believe increasingly enables them to address their needs, while over time enables us to earn the right return on allocated capital. And this is the exact same playbook that we've been operating from since we rolled out the strategy in September of 2021. But while that playbook hasn't changed the marginal – the math on the marginal transaction has changed a little bit as the cost of capital and liquidity has increased for everybody in the industry including us. So our views as to guidance is that is going to slow -- result in slower than previously expected loan growth and likely result in higher funding costs, which is going to drag on industry and NII. So adjusting to that reality is what's caused the move down from mid double digits year-over-year to low double digits. And then I'd also point out that in our guidance, we, of course, assume not the PCBI curve, but the market curve. And that market curve has moved down 25 to 50 basis points relative to when we announced full year guidance on our last call. And that certainly has an impact on the NII outlook.

Matthew Olney

Analyst

So it sounds like incrementally, Matt, from, I guess, the guidance down from last quarter, it's going to be substantially all on NII relative and not as much on fees. Is that fair?

Matt Scurlock

Analyst

Exactly. Structural changes across the industry as well as reduction in forward rate outlook.

Matthew Olney

Analyst

Got it. Okay. That's helpful. And then I guess on the interest rate sensitivity discussion, Sounds like you guys made some good progress moving that a little bit lower this quarter with the securities purchases and some more swaps. Are we now where the bank wants to be or is there still more work to be done here in the future?

Matt Scurlock

Analyst

Yes. As of now we're where we want to be Matt. So we've laid out a target to get to mid-single digits by the middle of the year. The market backdrop was conducive for us to move there a bit quicker. As an example, we have received 6 swaps we put on this quarter had a receive rate of 4.4, same swap as of yesterday would have a receive rate of 3.89. So we took advantage we thought was a pretty good market opportunity and are comfortable with where we reside now in terms of earning the risk both in a up and down scenario.

Matthew Olney

Analyst

Okay. Thanks for taking my questions.

Matt Scurlock

Analyst

You bet.

Operator

Operator

Thank you. The next question goes to Brad Milsaps of Piper Sandler. Brad, please go ahead. Your line is open.

Brad Milsaps

Analyst

Hey, good morning.

Rob Holmes

Analyst

Hey, Brad.

Brad Milsaps

Analyst

Thanks for taking my questions. Matt, I was curious if you could offer maybe a little color on the decline in the yield on mortgage warehouse loans this quarter. I apologize if you addressed it earlier. I joined a little late, but I know that can bounce around based on, you know, the deposit relationship as well, but it looked like it was down a little more than 50 basis points linked quarter. So just curious if you got any additional color there on maybe the reasons and maybe the trajectory going forward?

Matt Scurlock

Analyst

No, yeah. I appreciate the question, Brad. So as you know, the mortgage loans do you have similar repricing and data characteristics to the rest of the LHI portfolio. But there is a relatively static portion of the mortgage finance deposits that receive payment through yield. So as the warehouse balances come down and the deposit level sty stagnant, you'll see a compression on the printed mortgage warehouse yields. As you move into the second quarter and those loan balances expand seasonally, you'll see some of that pressure abate would be a more logical representation for you.

Brad Milsaps

Analyst

Okay. Great. That's helpful. And then just maybe a bigger picture question to follow-up on Matt's question. You know, you guys have made a lot of moves to reduce your asset sensitivity, Texas Capital's history is unfortunately account having a bit of a volatile margin. You'll never sort of get rid of all of your asset sensitivity. But just curious if the Fed does stop and does at some point begin to go the other way, do you feel like you're better locked into a certain margin floor or number that you'd be willing to share that would stabilize maybe earning power a little bit more. Just kind of curious kind of how you think about that bigger picture just given the past and kind of the steps that you've made to kind of remove maybe some of that downside going forward?

Rob Holmes

Analyst

Yeah, Brad. I think we often talk about that both in terms of structural changes to the business model and the balance sheet. So the business model itself is less interest rate sensitive, meaning these fee generation, categories continue to receive real receptivity from the client base. And expectation is that those will continue to increase in contribution to overall revenue as well as present different opportunities for client facing bankers provide value to their clients in a rates fall scenario, and then just structurally on the balance sheet the down 100 scenario is now inside of 5%. Obviously, that's a shock scenario with a lot of assumptions. That excludes any of the real benefit that we would realize through expansion across the mortgage finance businesses should rates fall to a point sufficient to generate new refi volume. So we we're really proud to be honest that the progress made to generate an offering that's going to sustain a bit more stable revenue and earnings generation regardless of what rate environment we're in.

Brad Milsaps

Analyst

So the 5% doesn't include a big pickup in mortgage warehouse volume?

Rob Holmes

Analyst

Zero. The loan balances are static in that view.

Brad Milsaps

Analyst

Okay. Great. Alright. Thank you guys very much. I appreciate it.

Operator

Operator

Thank you. The next question goes to Brady Gailey of KBW. Brady, please go ahead. Your line is open.

Brady Gailey

Analyst

Yes. Thank you. Good morning, guys.

Rob Holmes

Analyst

Hey, Brady.

Brady Gailey

Analyst

I wanted to start on the mid-single digit expense growth items. For this year, that feels like a level that could be kind of the longer term expense growth trajectory. So I know your guidance is only for this year, but beyond this year, does it feel like you're kind of settling in to see expenses grow at a mid-single digit pace?

Matt Scurlock

Analyst

I think Brady, it's too early to talk about 24, but I mean, I would reemphasize all of Rob's comments. We've spent a significant amount of time, energy and resource, getting a better understanding for the very granular cost structure of this firm and have taken material steps to implement permanent solutions to ensure we can scale this for a long time. So I don't anticipate similar to what we said in the third, fourth quarter of last year. And once we crossed this PP&R Rubicon, we would never go back, we're never going to see expense grow faster than revenue. We're going to expand operating leverage defined as quarterly year-over-year PP&R for a long time. And this is an important step in realizing a lot of tech enabled process re-engineering benefit that we think is key to that long-term growth trajectory.

Rob Holmes

Analyst

Yeah, Brady. I would just say that this was holistic, and it took, there may have been frustration for the time that took to do. But for two years, we've been really, really focused on cost allocation, data, process, tech, the entirety of the infrastructure of the firm. And we're just getting to a place where we feel really, really good about it and we're excited about to go forward. This was not changes on the margin. These are our deep structural changes.

Brady Gailey

Analyst

Yep. Understood. And then, you know, I know you guys are sticking with the 1.1 ROA guidance for 2025. You know, that's a long way from here. You did 50 basis points last year. You're roughly at 50 basis points in the first quarter, I mean, is it just as simple as you expect revenue growth to be off the chart, and it's just the revenue growth that allows you to hit the 1.1 ROA?

Matt Scurlock

Analyst

55% increase in quarterly year-over-year PP&R, Brady, is our path to the ROA target. I mean, you're not going to see 55% every single quarter, but as you know, Q1 is seasonally the lowest quarter for us in terms of earnings performance. So the structural expense infrastructure that we just described coupled with now a very defined set of businesses where we're able to deliver the entire platform to a single client. I mean, I think we've described it in the past as those are in our view sort of foundational tenants for future scale and we'd expect start to see that materialize this year.

Brady Gailey

Analyst

Alright. And then finally for me, just bigger picture on credit quality. You know, it's the second quarter that we've seen NPA's increased. I know other they're still at a relatively low level. In the second quarter that net charge offs have been a little higher. We just hired a new Chief Credit Officer, should we -- are these just two quarters that are kind of off, or should we expect to continue to see a little bit of, credit noise this year?

Rob Holmes

Analyst

I would say we affirm our guidance on credit cost through cycle and we feel really, really good about the portfolio from real estate all the way through C&I. Matt, you have anything else?

Matt Scurlock

Analyst

No. I think it’s a fair way. Think about it, Brady, we've talked before that good range for 2023 provision expense is likely 45 to 50 basis points of average LHI. I think that's still a good way to view it. I think importantly, we've not been chasing loan growth to expand the balance sheet. We've been a recipient of high quality Texas based loan growth primarily because we have a lot of highly qualified bankers presenting a great platform that we think is differentiated into the market. So new client acquisition for us has been on target and we expect it to match up with our long term views on credit performance.

Rob Holmes

Analyst

And lastly, there is one dynamic that is at work. Remember, we had a premium finance business with very, very, very little loss history. And as you rotate and recycle all of that capital into C&I, which is much better, higher returning, structurally, better business. You're going to have increased provision. That doesn't mean losses, but you are going to have provision increase.

Brady Gailey

Analyst

Yeah. That that's a good point. Great. Thanks, guys.

Operator

Operator

Thank you. And our final question today goes to Brandon King of Truist Securities. Brandon, please go ahead. Your line is open.

Brandon King

Analyst

Hey, guys. Good morning.

Rob Holmes

Analyst

Good morning.

Matt Scurlock

Analyst

Hi, Brandon.

Brandon King

Analyst

So, I just had a question on the non-mortgage DDAs and understand that the client was, you know, clients still mix shifting into higher interest bearing accounts. But I'm curious kind of what's your outlook there, do you think we see more stabilization going forward in those balances?

Matt Scurlock

Analyst

Yes. I think that the operating deposits held up pretty well. So there was select instances of access non-interest bearing not being used to meet seasonal payments, moving elsewhere on the platform, which is fine. I think Rob described in his commentary that we approached the market with a set of solutions. It's there for them, not based on a list of requests based on our own priority. So we're happy to avail our clients of different solutions on the platform. I think that the move that we're going to be made in Q1, if any that resulted from just banking industry turmoil have likely occurred. And as Rob mentioned in his comments, we added a record number of new clients on the Treasury platform in March and our near term pipelines are up. So feel good about the prospects there longer term, Brandon.

Brandon King

Analyst

Okay. And just intra quarter, as far as outflows, were they a mix shift was it consistent through the quarter or did it accelerate towards the end of the quarter given all the turmoil?

Matt Scurlock

Analyst

We saw no acceleration. The behavior was generally consistent with our expectation. So I think you're aware that our liquidity framework is pretty similar to what you find at a money center bank, as you think about process, modeling or procedures. So we described deposit values based on stress 30 day or 12 month outflow rates similar to what you would find in LCR like framework and then we manage the balance sheet every day in compliance with those thresholds to the fact that we left the brokered CDs rolled off, we maintain normal levels of wholesale borrowing, which I want to come back to in a second. And then perhaps most importantly, we're actively calling on clients and prospects, I think, helps reinforce the view that things behaved as anticipated. FHOB is important constituent for us. We have a long history of having outstanding FHLB or short term borrowing levels equal to about a third of end of period warehouse balances. This quarter, we added $750 million in the last few days of the quarter. We had no idea about the health of other banks and wanted to ensure that we had adequate on hand liquidity to meet what could have been exceptionally high levels of mortgage finance period and mortgage finance inflows. We had a bit of a pickup. Certainly wasn't as large as it could have been. And that $750 million was out the door by Monday. So you can see that in our average short-term borrowing levels in the earnings release. There's really no movement. It's just that period in at about $750 million to absorb potential pickup in warehouse volumes.

Brandon King

Analyst

Got it. Thanks for all the color. Thanks for taking my questions.

Matt Scurlock

Analyst

Yes. You bet.

Operator

Operator

Thank you. That's all the questions we have time for today. I'll now hand back to Rob for any closing comments.

Rob Holmes

Analyst

Thanks everybody for your interest in the firm and the thoughtful questions. We're really, really excited about the platform that we've built, and the process going forward and look forward to continued conversations. Thank you for your time.

Operator

Operator

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