Hello, and welcome to today's TCBI Announces the Sale of Its Insurance Premium Finance Business. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Jocelyn Kukulka, Head of Investor Relations. The floor is yours. Please go ahead.
Good morning. I'm Jocelyn Kukulka, Head of Investor Relations and Corporate Development. Thank you for joining our call regarding the divestiture of our insurance premium finance business, BankDirect Capital Finance. Our call today will be hosted by Rob Holmes, CEO and President of Texas Capital Bancshares, and Matt Scurlock, our CFO. After prepared remarks, we will have a question and answer session. 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 8-K, our most recent annual report on Form 10-K, and subsequent filings with the SEC. We will refer to slides during today's call, which can also be found along with the press release in the investor relations section of our website at texascapitalbank.com. Now I'll turn the call over to Rob.
On the week of the one-year anniversary of our strategic plan rollout call on September 1st, 2021, I am pleased to announce another very important step in our journey to build a flagship full-service financial services firm in Texas. We have entered into a definitive agreement with Truist Financial Corporation to sell our insurance premium finance subsidiary, BankDirect Capital Finance, for total consideration of approximately $3.4 billion. The transaction is not subject to any financing contingency but is subject to regulatory review. We expect to close the divestiture in the fourth quarter of 2022. The sale consists of all business operations, including an associated loan portfolio of approximately $3.1 billion as of June 30th, 2022. The purchase price represents a premium of 8.5% on the divested loan portfolio.
BankDirect Capital Finance has been an important contributor to Texas Capital since it was acquired in 2005. The team has built a well-run and valuable national franchise that has continually generated strong through- cycle loan growth with superior asset quality. I want to thank them for their partnership and their commitment in supporting this important transaction. To describe our strategic rationale for divesting the business, I would like to refer to some of the remarks I made last September. We detailed that our strategy centers on building a full- service financial services firm to bank the best clients in our markets, focused on businesses where we can be relevant through a broad relationship grounded in banker expertise and a full suite of competitive products.
We have also said we would do so while being conservatively capitalized and that over time, as we earn the right to become our clients preferred operating bank, we would improve our core funding and diversify our earnings mix. This transaction enables strategic reallocation of expenses, liquidity, funding, and capital directly in support of our stated strategy, further increasing our ability to sustainably deliver value accretive growth in our Texas- focused offering. Furthermore, we believe it maximizes shareholder value while balancing timing, certainty of execution, and our demonstrated ability to redeploy resources against our defined strategic objectives. This, coupled with our emerging platform capabilities, are driving progress toward a target balance sheet composition that will generate sustainably higher returns on allocated capital.
When I joined the bank in January 2021, 28% of the loan portfolio, excluding premium finance, was C&I loans comprised of client types which the bank was founded to serve. Over the last year and a half, we have demonstrated disciplined reallocation of capital from standalone national business lines to focus on these core commercial customers. Year to date, as of June 30th, C&I loans, excluding premium finance, grew $1.5 billion or approximately 20%. Giving effect to this divestiture, our pro forma loan portfolio will be predominantly C&I loans, approximately 44% of total loans, significantly more than the peer group, providing greater balance with our strong mortgage finance and real estate franchises.
The equity return to our balance sheet through this transaction will have the immediate effect of bolstering both our tangible common and risk-based capital ratios and increasing our tangible book value per share by approximately 6.5%. The accretive impacts on our balance sheet include a reduced loan- to- deposit ratio as no deposits will be transferred to the buyer and an increased highly liquid assets ratio as cash proceeds will be held in liquid assets in the near term.
Looking forward, we believe our opportunity to generate high- quality organic growth is significant and differentiated. Importantly, investments made to expand our product set, including the launch of our investment bank, ensure that going forward, we have an offering necessary to be relevant to each client on our platform. Our disciplined approach to capital allocation will inform our deployment strategy into earning assets in the coming quarters. Our intent remains the same. We want to bank the best clients in our markets and remain firmly dedicated to this effort as the best way to create long-term value for our shareholders. A core tenet of our vision to be the flagship financial services firm in Texas. Financial resiliency means we serve our clients, access markets, and support our communities through cycle, full stop.
We are now in the most favorable capital position in the history of our firm, well in excess of our internally observed risk profile. We stand ready to be a resilient financial partner to our clients, consistent with our long-term philosophy and a necessary component of earning the trust of each of our important stakeholders. Nearly one year after our September first strategy update, our belief in our strategy is exceeded only by our resolve to see it through. This transaction marks another meaningful step toward building the bank we told you we would. With the enhanced capital flexibility created from this transaction, we have the capacity to continue the transformation of Texas Capital into the flagship full- service financial services firm headquartered in Texas. Thank you for your interest in the firm. We'll now open the lines to questions. Operator?
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Michael Rose from Raymond James. Your line is open. Please go ahead.
Hey, good morning, thanks for taking my questions. Just wanted to get some thought process around the timing of the transaction. Why now? Were there other interested parties? Maybe if you can kind of discuss how quickly you expect to deploy the excess capital into your various initiatives, that'd be helpful. Thanks.
Sure. Thanks, Michael. The timing was just a logical linear thought process. When I started, we looked at the company as a whole and decided upon a strategic plan. You've got to understand the business before you can make a decision on it. This business was not self-funding. It was broad across America. It wasn't our target clients. It wasn't clients we could have relevant relationship with through a number of products through cycle. It was a transaction business, if you will. It was really good, granular, safe loans, but that's not consistent with the strategy. It's not a loan-only strategy anymore. Once we came up to that conclusion, then it was obvious that we needed to divest the business. As you know, these processes take a long time.
It was a linear thought process, not a moment in time of why we did it. We've been working on it for some time, as you know, in processes like this. The redeployment of the capital will be the same. It'll be done with discernment over time as soon as we can onboard good clients. There's not a rush to redeploy the capital. It'll be part of the strategy. Remember, on the last earnings call, we talked about recycling capital. We have a lot of capital that we need to redeploy, that is already on our balance sheet now that'll be coming due from clients that we won't bank any longer. We have capital there before we even need to deploy this.
We're not in a rush to redeploy it, but we know we will have opportunity to, given the response to our strategy by our clients across our markets.
Okay [crosstalk]
Maybe just as a follow-up.
Yes, we ran a full process and there was a number of parties in it.
Great. Thank you for answering that. Just one follow-up question. As you look at the business as a whole, and Rob, you've been there, you know, it's hard to believe we're coming up on two years, but it'll be here before we know it. Are there any other business lines, you know, that you could potentially look at to, you know, maybe reallocate, you know, those capital dollars? Thanks.
I wanna make sure your question was specific. We're reallocating dollars every day across the business lines. There's not a wholly owned sub that we could divest like this. It'll be a little harder. But as you know, I mean, I think it's great that the core C&I focus of the density of the balance sheet is greater, and the mortgage warehouse is down a little bit. But as you know, we view the mortgage warehouse as an industry vertical, not a mortgage warehouse because we have a number of products and value- add transactions that we do with those clients now. Two years ago, it was a mortgage warehouse. Today we have three, four, five relevant touch points with those clients.
I think it's just a great industry vertical with a safe loan, kind of like a corporate revolver. Anyway, we do want that to be small as a percentage. Smaller as a percentage of our earnings and capital, but that's the goal for the bank, not the shrinking of that business. We think that's a very valuable business. We think that the geography of the balance sheet may change over time, but not through a divestiture or sale of the business. As you know, we have tolerances on real estate.
Okay.
In terms of exposure, et cetera. We'll adhere to those tolerances.
Great. Just one final quick one. Any updates at this point to either the longer- term targets or the timing of achievement of those targets with this transaction? Thanks.
No, we're sticking with original guidance.
Great. Thanks for taking my questions.
That was a good one q uestion, Michael.
Our next question comes from Jennifer Demba from Truist. Your line is open. Please go ahead.
Hi, Jennifer.
Good morning. Hi. Just wondering if you have any associated loan loss reserve for these loans that are being sold?
Yes, Jennifer, this is Matt. There's about $3.5 million of reserves allocated portfolio. As Rob mentioned in his opening comments, extraordinarily low credit risk portfolio that's proven to have very low charge-offs over the duration of our ownership.
Great. Okay. All right. Rob, this is on a different topic, I guess, but, how are you feeling about business momentum right now, as Fed funds continues to go up? Are you still seeing a lot of opportunities in lending, or are you sensing any slowdown in the economy yet at this point?
I think we want to keep the questions of this call related to the transaction and provide quarterly updates commensurate with the earnings, et cetera. I would say that, Jennifer, it's a long conversation. It depends on the industry, it depends on the asset type of real estate, a number of different things, but we have not seen a slowdown.
Okay. Thank you.
Our next question comes from Brandon Berman from Bank of America. Your line is open.
Hi. Thank you for taking my questions. Good morning. Rob, in your prepared remarks, you mentioned upon allocating this capital to seeing higher return. Based on my rough estimate, it seems like the business you're selling is about 20% ROE. Can you just quickly talk through, you know, what businesses you expect to reallocate some of this capital in and, you know, where you expect to see the higher returns? Thank you.
Hey, Matt, why don't you talk on that.
Yeah, Brandon, this is Matt. I think it'd be helpful just to ground in the overall financial impact of the transaction, which is likely best represented on page four of the presentation. As of June 30, we have $3.1 billion in loans, generated $53 million in interest income year- to- date. As we said in the opening comments, there are no deposits associated with this business. If you use our observed year- to- date cost of funds, which is 38 basis points, annualizing that interest income on the business is about $96 million bucks. If you then subtract the $36 million of disclosed full- year direct operating expense, which is shown on page four, that gets you about $59 million in run- rate full- year PPNR, or $44 million when tax affected.
We noted in the comments that the purchase price of $266 million, once that is adjusted for transaction- related expenses and tax- affected, your pro forma increase in common equity is $160 million or 3.51 cents a share. I'm sorry, $3.51 a share. Which is more than 3.5 times the annual net income of the business. You'll also note on that slide that 61% of the portfolio is fixed with terms generally inside of one year, and then you've got about 39% that's variable inside the 12-month LIBOR. That results in an asset beta for the business that is less than the remaining C&I businesses.
With all that said, if expectations for the forward curve are realized, simply redeploying these proceeds into cash coupled with offset and forecast non-interest expense results in a relatively neutral impact to 2023 EPS. That's our starting point with the transaction. Then to Rob's earlier comments, we've got a proven ability six quarters in a row of growing C&I in excess of peer. Which as you know, is sort of the initial transaction with the clients that we want to bank, ultimately resulting in the full- service relationship which drives the operating deposits that we're after. That's in general, I think the economics of the transaction and then our priorities for redeployment. We're redeploying exactly consistent with the strategy laid out on September 1st and consistent with the actions you've observed since.
Great. Thank you, guys. That's all my questions.
Thanks.
As a reminder, to ask any further questions, please press star one on your telephone keypad now. Our next question comes from Gary Tenner from D.A. Davidson. Your line is open. Please go ahead.
Thanks. Good morning. Just to follow Matt on what you just ran through in terms of the financial impact for 2023. You know, you've kind of suggested neutral, but that assumes full redeployment of the expenses. That's kind of the question I wanted to get to, because I know obviously there was a lot of expense savings as you reduced the mortgage business, but very rapidly redeployed over this past several quarters. I'm just wondering, is the assumption that those expenses get redeployed very rapidly as we're looking at 2023?
Yeah. Thanks for the question, Gary. Let me be as clear as I can. If you realize the benefits of the forward curve, you pocket the $36 million of direct operating expense, and you just put the proceeds of this transaction in cash. We believe it's EPS neutral in 2023.
Today we don't see immediate, w ith zero deployment expense. Okay.
Say that again. Deployment of that expense. Today we don't. [crosstalk]
Go ahead.
Sorry, Matt. I was just gonna say, so you're saying that's with zero redeployment of expenses, if you pocket this, the expense savings in that scenario?
Exactly. Exactly.
Okay. I appreciate that. Just, you know, given the reduction, and the cash you'll have on hand, is there any opportunity to accelerate the reduction of any of those higher beta wholesale deposits or are those more purely contractual?
Yeah, they're not contractual. We'll evaluate balance sheet positioning upon close. You can expect a continuation of the strategy we've employed over the previous few quarters. We want to invest in the C&I, primarily invest in the Texas-based C&I franchise, and we want to reduce our asymmetric rate exposure. The transaction will increase our IRR sensitivity. Takes you from a published nine nine and 100 basis point shock up over 11. You'll see us take action against that increased asset sensitivity.
Okay, thank you for taking my questions.
This concludes our Q&A. I'll now hand back to Rob Holmes for final remarks.
Thank you everybody for your interest and continued interest in the firm. Appreciate the questions, especially on short notice. I would just say at the close of this transaction in the fourth quarter, Texas Capital will be better capitalized than it's ever been with great liquidity, a sound strategy, a new platform, more than two times the revenue producers, a very strong loan book, and we're really excited about where we are, in the completion of the strategy and look forward to updating you after the third quarter. Thank you.
Today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.