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Trailing Texas

Banks with large warehouse loan books set to follow TCBI

Regional banks with large warehouse mortgage lending books will be soon following the lead of TCBI in the CRT market, suggest analysts that follow the sector closely.

In particular, First Horizon, headquartered in Memphis, Tennessee, Flagstar Bank, based in Michigan, Texas-based Independent Bank Corporation and Veritex Community Bank, headquartered in Dallas, Texas, have been singled out as especially likely suspects.

“I bet we see some others explore something similar to TCBI. Any bank with a larger mortgage warehouse I believe could all explore a CRT deal like TCBI,” Brady Gailey, md of equity research at boutique investment bank Keefe, Bruyette and Woods, in Atlanta, told SCI.

He adds that TCBI was always a likely candidate for the debut regional bank CRT transaction in the US as warehouse loans constitute around 40% of all assets. According to data from Inside Mortgage Finance and quoted by S&P Market Intelligence, the most active warehouse lenders in 4Q 2020 were JP Morgan, Flagstar, TIAA Bank of Jacksonville, Florida, Merchants Bank of Indiana and Wells Fargo.

Mortgage warehouse loans carry a 100% risk weighting under the standardized approach to RWA rather than the 40% or 50% risk weighting ordinary home loans carry, so there is every incentive to package them into CRT deals. Moreover, loss rates in the warehouse loan market are very low as banks generally fund the underlying mortgages for only a few weeks before selling on the loan.

TCBI’s CRT deal was a three-year CLN paying Libor plus 450bp on a $2.2bn portfolio of mortgage warehouse loans, with a first loss position of $275m, or 12.5%. This first loss tranche was risk weighted at zero, while the remaining $1.925bn of loans carries a risk weighting of 20%. Thus, the risk weighting on the entire pool of $2.2bn drops from 100% to 17.5%, reducing RWA by $1.815bn.

According to analysis carried out by Keefe, Bruyette and Woods, this drastic reduction of risk weighting will have boosted TCBI’s Tier One capital ratio by 73bp from 10.92% to 11.66% while total risk-based capital ratio will have increased by 85bp from 12.76% to 13.61%.

This significant creation of excess capital could be used to increase the size of the mortgage warehouse by up to $500m, suggests the research report.


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