Texas Capital Bancshares Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 18, 2024

There are 9 speakers on the call.

Operator

Hello, and welcome to the Texas Capital Bancshares Inc. Q4 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today. I'd now like to hand over to Jocelyn Culcoca, Head of Investor Relations. The floor is yours.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining us for TCBI's Q4 2023 Earnings Conference Call. I'm Jocelyn Kokolka, Head of Investor Relations. Before we begin, please be aware this call will include forward looking statements that are based on our Current expectations of future results or events. Forward looking statements are subject to both known and unknown risks and uncertainties that could cause 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.

Speaker 1

Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release and our most recent annual report on Form 10 ks and We will refer to slides during today's presentation, which can be found along with the press release in the Investor Relations section of our website at texascapitalbank.com. Our speakers for the call today are Rob Holmes, President and CEO and Matt Scurlock, CFO. At the conclusion of our prepared remarks, our operator will open up a Q and A session. I'll now turn the call over to Rob for opening remarks.

Speaker 2

Thank you for joining us today. Our firm materially progressed its transformation in 2023, increasingly translating a now sustained track record of strategic success into financial outcomes consistent with long term value creation. We are now operating a unique Texas based platform, providing our clients with the widest possible range of differentiated products and services on parity with the largest money center banks. And we are positioned to serve as a relevant trusted partner for the best clients in all of our markets. We know that the success of our clients We'll define our firm.

Speaker 2

A core element of our strategy is maintaining balance sheet positioning sufficient to support our clients through any circumstance. Our industry leading liquidity and capital afford us a competitive advantage through market and rate cycles. Year end CET1, a 12.6 percent, ranked 4th amongst the largest banks in the country. Tangible common equity to tangible assets of 10.2% ranked 1st among the largest banks in the country And an all time high for the firm. And liquid assets of 26% allows for a consistent and proactive market facing posture As we are distinctly capable of supporting the diverse and broad needs of our clients and what continues to be A dynamic and challenging operating environment for all industries.

Speaker 2

We have, over the last 3 years, clearly prioritized Enhancing the resiliency of both our balance sheet and business model over near term growth and earnings. The extensive investments made to deliver a higher quality operating model, supporting a defined set of scalable businesses is resulting in the intended outcomes. The entire platform contributed to our full year adjusted financial results With fee revenue growth of 60%, PPNR growth of 14% and EPS growth of 23%. The foundation of our transformation is a deliberate evolution of our treasury solutions platform from a series of disparate deposit gathering verticals Into a best in class payments offering able to successfully compete for, win and serve as the primary operating relationship for the best clients in our markets. The volumes flow through our payment system have increased 23% in the last 2 years, Contributing to an 11% improvement in gross payment revenues in 2023 as treasury business awarded in prior quarters Our firm now provides faster, more seamless client onboarding than the major money center banks In ongoing frictionless client journeys that match or exceed theirs with high touch, local service and decisioning.

Speaker 2

This theme extends to our investment bank as a capability set on par with the top Wall Street Banks, ensures clients will never outgrow The services we can provide for them. Market affirmation was evident this year as investment banking and trading income increased 146%. With the largest product offerings, syndications, capital markets, Capital Solutions, M and A and Sales and Trading, each contributing over $10,000,000 in fee based revenue, A significant milestone for a still maturing offering. When we launched the strategy, we acknowledged that results generated by the newly formed investment bank Would not be linear, and it would take several years to mature the business with a solid base of consistent and repeatable revenues. Despite broad based early success, we expect revenue trends to be inconsistent in the near term, the same as all firms, as we work to translate early momentum into a sustainable contributor to future earnings.

Speaker 2

The firm has been and remains committed to banking the mortgage finance industry as it weathers the most challenging operating environment in the last 15 years. Over the previous 18 to 24 months, we have refocused client selection and improved the service model as we look not to expand market share, but to instead deepen relationships through improved relevance with the right clients. Of those that started with just a warehouse line, 100% now do some form of treasury business with Texas Capital and nearly 50% are open with a broker dealer, Paving the way for improved utilization of our sales and trading platform and accelerated return on capital. While the rate environment 23 did disproportionately impact This client set, as evidenced in our financial results for the quarter, which Matt will walk you through, our commitment To effectively serving these clients will, over time, deliver risk adjusted returns consistent with firm wide objectives. A foundational tenor of the financial resiliency we have established and will preserve is continued focus on tangible book value, Which finished the year up nearly 9%, ending at $61.34 per share, an all time high for our firm.

Speaker 2

While we continue to bias capital use towards supporting franchise accretive client segments where we are delivering our entire platform, We do recognize that at times of market dislocation, it can be prudent to selectively utilize share repurchases as a tool for creating longer term shareholder value. During 2023, we repurchased 3.7% Of total shares outstanding at a weighted average price equal to the prior month tangible book value and At 86% potential book value when adjusting for AOCI impacts. We entered 2024 from a position of unprecedented strength, Fully committed to improving financial performance over time. Intentional decisions made over the last 3 years have positioned us to deliver attractive Through cycle shareholder returns with both higher quality earnings and a lower cost of capital. As we continue to scale high value businesses through increased client adoption, improved client journeys and realized operational efficiencies, All objectives that we made significant headway on this year.

Speaker 2

Thank you for your continued interest in and support of our firm. I'll turn it over to Matt to discuss the financial results.

Speaker 3

Thanks, Rob. Good morning. Starting on Slide 4, which depicts Both current quarter and full year progress against our stated 2021 strategic performance drivers. Full year fee income as a percentage of revenue increased to 15% this Up $60,000,000 or 60% year over year is our multiyear investment in products and services to provide a comprehensive solution set for our clients Continues to translate into improved financial outcomes. Treasury product fees were $7,800,000 in the quarter, up 10% from the Q4 of last year As we continue to add primary banking relationships at a pace consistent with our long term plan, we're also increasingly able to solve a wider range of our clients' cash management needs As outsized investments in our card, merchant and FX offering ensure the firm's treasury capabilities are on par or superior to peers in a highly competitive market.

Speaker 3

Wealth management income decreased 7% during the year, in large part due to temporary client preference for managed liquidity options given market rates. Similar to the treasury offerings, we are at this point more focused on client growth and platform use than our quarterly changes in revenue contribution. Year over year growth in assets under management and total clients of 8% 11%, respectively, is on pace with plan We continue to invest in this high potential offering heading into 2024. Investment banking and trading income of $10,700,000 decreased from record levels in the prior four quarters, which were marked by a series of marquee transactions on a still emerging platform. Results are generally representative of an initial baseline level of quarterly revenue.

Speaker 3

And while there will always be some volatility associated with this specific line item, We expect increasingly broad and granular contributions to over time at least partially alleviate expected quarterly fluctuations associated with the new business. In all, we are both pleased with the 64% growth in our fee income areas of focus for the year and in their collective ability to further differentiate our value proposition in the market. As expected, total revenue declined linked quarter to $246,000,000 as both net interest income and non interest revenue pulled back from respective highs experienced in the preceding quarters. Net interest income was pressured primarily by anticipated seasonal and cyclical impacts of mortgage finance, As peak self funding levels reduced net interest income by $18,000,000 roughly equivalent to the firm's total quarter decline. Total adjusted revenue increased $99,000,000 or 10% for the full year, benefiting from a 60% increase in non interest income, Coupled with disciplined balance sheet repositioning into higher earning assets associated with our long term strategy.

Speaker 3

Quarterly total adjusted non interest expense increased less than 1% linked quarter and is nearly flat relative to adjusted Q4 of last year. During the year, we have demonstrated our ability to realize structural efficiencies associated with our go forward operating model, which are improving near term financial performance, while also enabling Taken together, full year adjusted PPNR increased 14% to 338000000 This quarter's provision expense of $19,000,000 resulted primarily from an increase in criticized loans as well as resolution of identified problem credits via charge off. Full year provision expense totaled $72,000,000 or 45 basis points of average LHI excluding mortgage finance loans, consistent with communicated expectations. Adjusted net income to common was $31,000,000 for the quarter and $187,000,000 for the year, An increase of 17% over adjusted 2022 levels. This financial progress continues to be supported by disciplined and proactive capital management program, Which also contributed to a 23% increase in year over year adjusted earnings per share to $3.85 Our balance sheet metrics continue to be exceptionally strong.

Speaker 3

Period end cash balances remain in excess of 10% of total assets With a $950,000,000 decline this quarter, mainly due to anticipated annual tax payments remitted out of mortgage finance deposit accounts. Ending period LHI balances declined by approximately $270,000,000 or 1% linked quarter, driven predominantly by predictable seasonality in the mortgage finance business, whereby both average balances and end of period balances declined, reflecting slower nationwide home buying activity in the winter months. Total LHI excluding mortgage finance increased $181,000,000 during the quarter and 8% for the year. Commercial loan balances remained relatively flat during the quarter increasing $45,000,000 which while marginally unfavorable to near term earnings expansion, obscures continued strong underlying momentum in the commercial businesses. New relationships onboarded in 2023 were up nearly 10% relative to elevated 2022 levels.

Speaker 3

With the proportion of new activity that includes more than just the loan product trending over 95%. The noted progress On winning clients' treasury business is highly correlated with the increasing percentage of commercial relationships in which we are the lead bank. This manifests in the fee income trends noted earlier as we continue to provide value in multiple ways for clients for whom we choose to extend balance sheet. We are nearing the end of a multiyear process of recycling capital into a client base that benefits from our broadening platform of available product solutions Delivered within an enhanced client journey. And after consecutive years of capital build, we would expect the sustained pace of new client acquisition to result in modest balance sheet releveraging over the next year.

Speaker 3

Period end real estate balances increased $142,000,000 or 3% in the quarter As payoff rates normalize from record highs in the prior year, despite a modest increase, we are positioned for a continuation of realized payoff trends in the medium term. Our clients' new origination volume also remained suppressed, with new credit extension largely focused on multifamily, reflecting both our deep experience in the space And observe performance through credit and interest rate cycles. Average mortgage finance loans decreased $751,000,000 or 16% in the quarter to $3,900,000,000 as the seasonality associated with home buying approaches its annual low moving into Q1. While both 4th quarter and full year average balances were consistent with communicated guidance, we did experience a late quarter increase in client activity As mortgage rates declined by nearly 120 basis points off 4th quarter highs in late October, resulting in an ending balance approximately 5% Higher than expectations beginning the quarter. As you know, Q4 and Q1 are the seasonally weakest origination quarters from a home buying perspective.

Speaker 3

And after a difficult Q4 for the mortgage space, our expectation remains that the next quarter will be amongst the toughest the industry has seen in the last 15 years. Despite the modest rate pullback, estimates from professional forecasters suggest total market originations to contract modestly linked quarter. Should the rate outlook remain intact, industry volumes are expected to recover over the duration of the year, with the same professional forecasters Expecting a full year increase of 15% in total origination volume. Should origination volume recover consistent with market expectations, We would anticipate a comparable increase given our clients' strong positioning. Ending period deposits decreased 6% quarter over quarter With changes in the underlying mix reflective of both predictable seasonality and continued funding transition in a tightening rate environment, Sustained focus on leveraging our cash management platform into deeper client relationships has driven outperformance relative to the industry, With annual deposits just 2% lower year over year, when excluding predictable fluctuations in mortgage finance deposits, our deliberate reduction of index deposits And reduced reliance on broker deposits, year over year growth of 4% reemphasizes our success in attracting quality funding associated with core offerings during a challenging year.

Speaker 3

Period end mortgage finance non interest bearing deposit balances decreased $1,700,000,000 quarter over quarter as expected. As escrow balances related to tax payments are remitted beginning in late November and run through January, at which point the balances begin to predictably rebuild over the course of the year. Average mortgage finance deposits were 142% of average mortgage finance loans, consistent with our guidance of up to 150%. As the system wide contraction and mortgage origination volume weighs on clients' short term credit needs. We expect a ratio of average mortgage finance deposits The average mortgage finance loans of approximately 120% in the Q1 modestly easing pressure on mortgage finance yields as origination volumes begin to recover through the year.

Speaker 3

As a reminder, this dynamic is driven by client level relationship pricing resulting in an interest credit rate applied to the mortgage finance non interest bearing deposits that is realized through yield. Average non interest bearing deposits, excluding mortgage finance, was $3,600,000,000 in the quarter, in line with 3rd quarter period end as Previously described trends whereby select clients shifted excess balances to interest bearing deposits or to other cash management options on our platform Continues to slow. Ending period non interest bearing deposits excluding mortgage finance remains 15% of total deposits, just flat quarter over quarter. Our expectation is that this percentage remains relatively stable in the near term. Broker deposits declined $477,000,000 during the quarter as growth in client Focused deposits consistent with our long term strategy remain sufficient to satisfy desired near term balance sheet demands.

Speaker 3

We anticipate additional declines in brokered CDs during the Q1 as $300,000,000 with an average rate of 5.2% is likely to mature without full replacement. As expected, our modeled earnings at risk evolved consistent with indications at a slowing tightening cycle As the increase in modeled up betas lessened remaining sensitivity to furthered upward rate pressure as measured in a +100basispoint shock scenario From $29,000,000 in Q3 to $14,000,000 in Q4. Downward rate exposure remained relatively flat quarter over quarter at 4.4 percent or $40,000,000 in a down 100 basis point shock scenario. Proactive measures taken earlier in the year to achieve a more neutral position at this stage of the rate cycle Have and produced the intended outcome. It is important to note these are measures of net interest income sensitivity and do not include inevitable rate driven changes in loan volume Further, the disclosed down rate deposit betas are higher than what are contemplated in the guidance, as we do not expect deposit pricing to immediately adjust should the Fed deliver against market rate expectations.

Speaker 3

There were no new bond purchases in the quarter, But we are likely to resume cash flow reinvestment in anticipation of a lower rate environment moving into 2024. Net interest margin decreased by 20 basis points this quarter, And net interest income declined $17,400,000 predominantly as a function of the previously described impact of relationship pricing on mortgage finance loan yields And increased interest bearing deposit volume tied to growth in client balances, partially offset by increased income on higher average cash balances. The systematic realignment of our expense base with strategic priorities continues to deliver the expected efficiencies associated with a rebuilt and more scalable operating model. Even when accounting for the seasonal factors associated with Q1, salaries and benefit expense has declined 3 consecutive quarters, We're retaining in excess of 2 times the number of frontline employees since the transformation began. Preparation for an inevitable normalization in asset quality began in 2022 as we steadily built the reserve necessary to both address known legacy concerns and align balance sheet metrics with our foundational objective of financial resilience.

Speaker 3

The total allowance for credit loss, including off balance sheet reserves, increased $5,000,000 on a linked quarter basis to $296,000,000 or 1 point 46% of total LHI at quarter end, up $21,000,000 year over year in anticipation of a more challenging economic environment, While our ACL to non accrual loans stand at 3.6 times. For comparison purposes, the total ACL ratio is 24 basis points higher now During the pandemic peak in Q3 2020. Criticized loans increased $61,000,000 or 9% in the quarter to 738,000,000 4% of total LHI. As increases in special mention of predominantly commercial real estate loans were only partially offset by payoffs and upgrades of commercial loans. As in prior quarters, the composition of criticized loans remains weighted towards Commercial clients with dependencies on consumer discretionary income plus well structured commercial real estate loans supported by strong sponsors.

Speaker 3

During the quarter, we recognized net charge offs of $13,800,000 predominantly related to partial charge offs of 2 relationships originated in 2018. A commercial credit dependent on consumer discretionary income and a hospitality loan, which has been unable to recover post the pandemic. Capital levels remain at or near the top of the industry and are near all time highs for Texas Capital. Total regulatory capital remains exceptionally strong relative to the peer group and our internally assessed risk profile. CET1 finished the quarter at 12.65%, 5 basis point decrease from prior quarter.

Speaker 3

Tangible common equity to tangible assets finished the quarter at 10.22%. We remain focused on managing the hard earned capital base in a disciplined and analytically rigorous manner, focused on driving long term shareholder value. In aggregate, during 2023, we repurchased approximately 1,800,000 shares or 3.7% of the shares outstanding at year end 2022 For a total of $105,000,000 at a weighted average price approximately equal to prior month tangible book value. Our guidance accounts for the market based forward rate curve, which assumes Fed funds of 4.25 percent exiting the year. For 2024, we anticipate mid single digit growth in revenue, supported by continued execution across fee income areas of focus And the slowing of multiyear capital recycling efforts, we should increasingly enable our sustained momentum in new client acquisition to manifest into modest Risk appropriate balance sheet expansion.

Speaker 3

This is in part supported by well signaled intent to move towards an 11% CET1 ratio, which given our risk weighted asset heavy commercial orientation should still result in sector leading tangible common equity levels. We expect multiyear investments in infrastructure, data and process improvements to continue yielding expected operating and financial efficiencies. We should enable targeted additional investment in talent and capabilities while limiting full year non interest expense growth to low single digits. Acknowledging near term headwinds associated with the mortgage industry, we expect resumption of quarterly increases and year over year PPNR growth to begin in the second half of the year, accelerating as we enter 2025. Finally, despite recent market sentiment favoring a potential softer landing, We maintain our conservative outlook and believe it's prudent to consider potential for further downside stress, therefore elevating our annual provision expense guidance to 50 basis points of LHI, Operator, we'd now like to open up the call for questions.

Speaker 3

Thank you.

Operator

Thank you. When preparing to ask your question, please ensure your device is unmuted locally. First question comes from Ben Gurlinger with Citigroup. Your line is open. Please go ahead.

Speaker 3

Hey, good morning, guys. Good morning. Good morning. Welcome to the group.

Speaker 4

Thank you. I was curious if we could just kind of parse through the revenue guidance a little bit. It's helpful giving Kind of a year over year comp on CPNR, but I guess that most of the revenue upside here we should be expecting from fees. But when you think about just the balance sheet itself, I know you referenced that betas are probably limited for the first couple of cuts, but when we exit the year, can you kind of give just Your overall or kind of 10,000 foot view on deposit betas after we get that 5th or potentially 6th cut, I guess it's probably limited in the beginning, but towards we get to the end, just any thoughts on that?

Speaker 3

Yes, Ben, happy to take that. So I mean bifurcated between interest bearing deposit betas and then the cost of funding within the mortgage finance business. So the model down rate scenario for interest bearing deposit betas and the static balance sheet is 60%. You're not going to hit 60% over the first five cuts. You probably hit half of that as it builds over the duration of that cut program.

Speaker 3

We have modeled in our guide expectation that you actually see interest bearing deposit costs continue to drift up at a pace similar to what we experienced in the last quarter until if and when the Fed actually takes Action, bit of a different scenario as it relates to mortgage finance, which obviously had a significant impact this quarter. So that's $17,000,000 $18,000,000 decline in net interest income. There's a great chart depicted on one of the slides that suggests You can take the entirety of that to mortgage finance. The severity of the impact that this historical rate increase has had on that industry is pretty difficult to over So there's really no precedent to look back to. There's certainly no Texas Capital Bank experience in which to pull insights from.

Speaker 3

So as volumes just evaporated from mortgage originators over the last year, deposits moved to compensated at a pace well in excess of historical experience. That really started to accelerate toward the middle of the year. And the ultimate deposit beta, which flows through relationship pricing On the yield accelerated pretty much consistent with the 80% interest bearing deposit beta. So for us, that Definitely impacts balance sheet positioning. You could see that as we pause cash flow reinvestment on the bond portfolio and ultimately stop the hedge program.

Speaker 3

We realized with deposit rates rising faster on that business, we were going to hit neutral a bit earlier than anticipated in a rising rate environment. I think importantly, as the Fed is signaling that they may be done raising rates and are more likely to start to cut, We also realize we aren't going to need as much downside protection because we would expect those mortgage finance deposits to reprice down At a beta consistent with the 80% on the way up.

Speaker 4

Got it. Okay. That's a lot. It's helpful color. I definitely have to look at the transcript to

Speaker 3

get to make sure I have everything And for that,

Speaker 4

I mean, that's really the $1,000,000 question at this point. But And that's not

Speaker 3

just for you guys, that's everybody. So when you guys specifically, it

Speaker 4

seems like this multi year process, you have all the seats Filled with people, now it's just kind of execution on the plan. It doesn't help that the Fed moved pretty dramatically and it could move pretty dramatically again. But when you just think about Overall expenses, what else are we spending money on? I guess that the ramp is not nearly as much, but What other investments other than just people's technology? Or is it really just do you think the revenue could show up so that some of its compensation?

Speaker 4

Just kind of Asking why we still see upside in expenses?

Speaker 3

Yes, happy to talk about that. We've been really consistent And describing our objective around non interest expense, which is to really improve the productivity of the expense base. And it was our view that you don't show up in a challenging revenue environment and make the determination you want to invoke expense discipline. We think that instead you have to make multiyear investments, process, infrastructure, technology, which enables you over time to lower risk, improve throughput, Make these if you're a client to do business with you. That makes your business better and then ultimately has a nice byproduct of reducing structural operating expense.

Speaker 3

You can see that 2023 expense base really near those priorities where the multiyear build in middle and back office It has really enabled us to remove a lot of manual tasks, which improves the employee experience then also enables us to continue to invest in the frontline. So I think in 2024, you'll see the typical $8,000,000 to $10,000,000 seasonal comp expense in the Q1. And then full year, you should see salaries and benefits grow at pace in excess of the low single digits total non interest expense scale. For all of my interest expense, not called salaries and benefits, you can peg that at about $70,000,000 And then underlying composition will continue to bias towards lagging comps as we reach Our target level of change in big project portfolio this year, Rob, do you want to talk through capabilities?

Speaker 5

Yes. I would just say that, I think Matt said it very well. I think Q3 or Q3 Salaries and benefits were down 5%, when we've doubled the frontline bankers. So that tells you that's kind of Quantifies Matt's comments about repositioning the expense base and our successes in doing so. But To your point about the expenses already being in the platform, the platform is fully loaded With all the solutions that we wanted for our clients.

Speaker 5

So we've endured all the expense And both from products and services, a new commercial card, new merchant, new lockbox, new payments platform, We basically have a brand new bank, state of the art 2023 bank payments bank, and we're rolling that out Clients at a record pace and onboarding clients at a record pace. 22 was a record and then 23 and we expect 2024 To do that again, so the pipelines are full, the expenses the expense base is fully loaded And the platform is built.

Speaker 3

Got you. That's helpful. I'll step back in the queue. Thank you.

Operator

We now turn to Matt Olney with Stephens. Your line is open. Please go ahead.

Speaker 6

Hey, thanks. Good morning, everybody. There was some commentary in the outlook about Modest balance sheet releveraging and as well as moving that CET1 capital ratio lower during the year. Any more color on how we achieve this, whether it's stock repurchase activity, accelerated loan growth, just any more details behind that? Thanks.

Speaker 3

Yes, Matt, thanks for the question. We've been quite vocal about how aggressive we've been to shop our Finbroch I will repositioning that capital base. And at the end of year 3, feel like that pace should begin Hello in 2024. So to Rob's comment, we had a record year of new client acquisition in 2022. We beat that by 10% in 2023, and we'd expect to do the same in 2024.

Speaker 3

So sustaining that pace of client acquisition, Coupled with now fewer identified opportunities for needed capital recycling should ultimately result in some increased balance sheet growth. And part of having part of the deliberate build to peer leading levels of tangible common equity of tangible assets Is to just ensure you've got balance sheet capacity that's adequate to support any necessary growth from the client base. So You should see the benefits of your sustained client acquisition begin to show up and improve loan growth.

Speaker 5

Yes. I would say that, what Matt said is spot on, but I don't know if you One would appreciate how material that is, the recycling. So Think about taking a loan only subpar return loan to a client that we don't necessarily I'm replacing that with a new client, which is a sector leading great company, Great management team, speak with us, with us a well on the spectrum balance sheet committee Where we are earning more than our cost of capital and the total relationship because we're building more than the long ones. In fact, in his comments, 95% names coming from the property today are more than the low. So it's another 5% of So just to sit on what was in the last few years, we're recycling the capital.

Speaker 5

You see over time a much improved return on that capital

Speaker 3

Matt, is that excess capital also gives you a bit more Downside net interest income, the sensibility than I think what is currently appreciated or currently depicted in the Static balance sheet, 100 basis point shock scenarios. So we carry that excess capital so we can support clients through any cycle. And this is the historically worst point of a cycle for mortgage finance, but it's not always going to be like that. So professional forecasters of We talked earlier or we joked earlier in the room, it'd be a pretty tough time to be a professional forecaster. But professional forecaster suggests that 1 to 4 family Mortgage origination this year is going to increase by about 15%.

Speaker 3

So if we think about a down 100 basis point scenario, Just anticipated mortgage finance growth and the associated revenue is sufficient to offset that $40,000,000 shock That's shown in the sensitivity modeling. And then of course, because of the real focus on building Fee income verticals over the last few years, you will be able to generate additional revenue in a down rate environment on those offerings as well.

Speaker 6

Okay. Okay. That's helpful. I think I heard most of that. There There's some feedback coming from the line, but I think I heard most of your commentary.

Speaker 6

And just as a follow-up, within that revenue guidance So the mid single digits, any more color on how much of that will come from fees versus NII?

Speaker 3

As Rob mentioned that the pipeline associated with all of the income businesses are skewed is that So we've increased gross fee revenue more than 10% over the last 3 years. We've got 3 new offerings in FX, card and merchant for the full year. The current pipeline in the treasury business Is equivalent to the full year 2023 realized business. After 4th quarter for the Investment Bank, where you had All offerings other than sales and trading have their worst quarter of the year. The delta between the realized $11,000,000 and the mid teens guide was Solely related to client transactions we're working on pushing into 2024.

Speaker 3

That investment banking pipeline is significantly improved year over year. So we now have the right coverage, you got the right connectivity, and we've got real earned market momentum. So I'd expect that to all those The income areas are focused to increase both in terms of revenue this year and in a percentage of total contribution.

Speaker 5

I'll just highlight one other thing. What Matt said about P times V growing in addition to 10% Each year for the past 3 years, the market norm that I'm used to historically is like 2. So to be growing that business at 11% is something that I have not seen before, especially on a sustained basis in my career. So, I feel really, really good about that. That has to do with, black slush, it has to do with An infrastructure that is as good as any money in our bank, it has to do with new client journeys because the digital onboarding is able to ramp That's going great.

Speaker 5

And by the way, the ETR goes down, when the rates go down, you see you actually realize more fees. So the contribution there is really lovely to it. And one last thing that's part of the PDK I think it's hard to impart the importance of A broad $10,000,000 plus e revenue contribution from 5 different areas of a brand new Investment Bank, Communications, Capital Markets, Capital Solutions, M and A and Sales and Trading, that's Super encouraging. It's a very healthy, investment bank. Okay.

Speaker 5

Thanks guys.

Operator

Our next question comes from Woody Lay with KBW. Your line is open. Please go ahead.

Speaker 3

Hey, good morning, guys. I wanted to start on the deposit base. Broker deposits continued to move lower in the quarter. And then the slide you call out that the funding base continues its transition to a target Can you just remind us what you think the target state composition looks like when we look out a couple of years from now?

Speaker 5

We will never hit our target state composition of a funding base Woody. And if any bank CEO tells you they have, Be concerned. So we will always look to improve the funding base. We have made significant progress with our funding base. It's dramatically improved as we said.

Speaker 5

We know every client, Commercial client that is on the platform that we're going to ship with them. As you saw, broker deposits are down, index deposits have shrunk probably $9,000,000,000 plus when I've got here to just over $1,000,000,000 So we feel like we've made dramatic improvement The quality of the deposit with the quality of client also, there will be no There will be no exploration of the degree in terms of target funding base. Higher quality clients and none of that makes sense.

Speaker 3

That makes sense. Maybe moving to the asset You touched on that it moved lower as evident on Slide 9. Does the seasonality and mortgage impact, does that impact the disclosure, or is that not really an impact? No, I mean that definitely impacts the disclosure would. So it's the disclosed sensitivity is based off end of period balance sheet.

Speaker 3

So should you have an inferior balance sheet composition that has higher weightings of cash or higher weightings of loans, which Those things vary for us depending on which quarter you're looking at. That's going to impact your forward NII, which shows up right below that chart as base NII, that's in part why it's lower this quarter, so it absolutely impacts that. Yes. Got it. And maybe lastly on mortgage finance.

Speaker 3

Go ahead. No, go ahead, please. Yes, just lastly on the mortgage finance. You noted in the slides That the deposit to loan level should sort of normalize back to where it was in the Q3? I mean, do you think the yield Pop back up to that mid-two percent range?

Speaker 3

Or is that a little bit aggressive next quarter? I think the yield does move up from the 112,000,000,000 the dynamic that has greatly influenced the self funding ratio. So you had a 145 ish self funded ratio this quarter. Should that move back down to 120 in Q1, which is All right. Fair enough expectation, you'll see that yield move up.

Speaker 3

If you think about full year, if the rate curve plays out as the market expected to, Your average GAAP operating business will still be below 24% and it was in Pine Street, But the volumes should be sufficient to generate higher net interest income. So you'd have lower yields, but higher NII. And then to Rob's earlier comment, our focus in that business is as well as candidly all the businesses is driving Additional value beyond just the loan product and we're increasingly bringing our broker dealer and treasury capabilities to bear within that business. So incremental NII should also result in incremental revenue elsewhere on the platform. Got it.

Speaker 3

All right. That's all for me. Thanks for taking my questions.

Operator

We now turn to Anthony Aylin with JPMorgan. Your line is open. Please go ahead.

Speaker 7

Good morning. Looking at Slide 8, it looks like average non perspiring declined due to mortgage finance, But then non interest bearing excluding mortgage finance, the gray bar at the bottom continued to decline to about $3,600,000,000 in 4Q. What drove that sequentially? And do you think that the $3,600,000,000 average or 3.3 end of period represents a bottom?

Speaker 3

Yes. So the 3.6% average in the 4th quarter, Tony, matches almost exactly the 3rd quarter end of period balance, Which would suggest that the decline that unfortunately occurred on the last day of the quarter It's just due to general client transactions as opposed to some sustained or potentially emerging trend. So that trend of folks actively looking to reposition excess cash into higher paying options on our platform has largely abated. So fluctuations at period end are just going to be driven by client acquisition or by client transactions. And then if I think about if we think about full year 2024, The double digit growth in gross speed times V has now been sustained over the last 3 years.

Speaker 3

It really accelerated into the back end of this year. We talked on the last Call that generally shows up anywhere between 6 18 months after you win the business. You should see start some of that begin to show up in the middle to latter half of this year. And then maybe just a last comment. I know you know this, Tony, but others on the call may not fully appreciate it.

Speaker 3

I mean, our non interest bearing deposit base It's commercial non interest bearing. It's not a bunch of very small retail checking accounts. So for clients to transact At the end of the quarter and that could cause slight fluctuations is in no way a surprise. So I'd say the trends we described in Q1, Our folks are actively seeking higher options. That's largely abated at this point.

Speaker 7

Understood. Thank you. And for my follow-up, big picture question on Slide 4, It's been more than 3 years since you provided your performance metric targets on return on average assets and return on tangible common equity.

Speaker 4

I guess, do you guys feel

Speaker 7

like you have everything in place now in terms of people, businesses, technology, systems In order to achieve those targets in 2025, and is it just a matter of execution now? Thank you.

Speaker 5

It's 100% execution now. That's what's so exciting about where we are in the transformation. The risk of the build We have a core competency now of taking efficiencies, improving client journeys, we have data as a service. We feel really good about the Tech platform, the run the bank versus change the bank, composition of the spend, we are very focused on Well, let's put it this way. There's no additions to the platform in terms of talent Or client facing people that we need to execute the strategy.

Speaker 5

But that's just one component of it. I don't think you see the efficiencies Update, as Matt said, and I think he quantified them.

Operator

We now turn to Brody Preston with UBS. Your line is open. Please go ahead.

Speaker 8

Hey, good morning, everyone.

Speaker 5

Hey, Brody.

Speaker 8

I wanted just to clarify Something, Matt, just what you said on the mortgage finance versus the static balance sheet NII sensitivity that you provide, Were you saying that the 15% pickup in mortgage activity that I think you guys typically use Moody's is projecting Would be enough to offset the 4% decline, in the down 100% scenario?

Speaker 3

No, I think in the down 100 scenario, which is a bit more aggressive than what Moody's outlook would suggest, You would have mortgage you have ample capital that support a flex up in mortgage finance volumes from your existing client base, Which would generate more than enough revenue to offset that $40,000,000 decline. So I think oftentimes, and I told them why, but oftentimes, Brody, I think folks, When they think about rates, solely think about front rates, and that, of course, does impact us in terms of deposit pricing as it relates to Fed funds And on commercial loan yields as it relates to SOFR, the part of how we manage rate risk and the associated balance sheet positioning It's based on the impact of longer term rates on volumes. So it's just an important it's an important thing to call out. It is a limitation of that Static modeling, which is obviously something that's required by SEC and is presented for comparison to other banks. So we'll make sure to give you guys as much detail as we can on that moving forward.

Speaker 8

Got it. Could you help us maybe think through The impact of down 100 being more aggressive than what Moody's has Outlined how that would impact the mortgage finance business, you obviously do a lot of business in the IB there as well. So if you had a Pick up above and beyond the 15% that Moody's was forecasting. How would that impact your investment banking revenue?

Speaker 5

Yes, I'll start. I mean, there's a number of different Dynamics to the answer to the question. One is, as rates go down, investment banking fees will go up, more tractions will take more Transactions will take place. The clients will be doing things with the balance sheets. There'll be acquisition activity, etcetera.

Speaker 5

There'll be capital solutions opportunities. There'll be Just a broad base, there'll be volatility of the sales and trading floor. There's a lot of things in the fee and also investment, like I said, in treasury management, Fees will come up because ECRs will go down. So I think we're we've built The business to really succeed at any market or rate cycle and as we go down, we'll see an increase and an ability To take advantage of that scenario?

Speaker 3

I mean, the 146% year over year growth, Brody, it's not like We are building the investment bank with a lot of economic or structural tailwinds. So I mean, in fact, there's likely headwinds against all businesses except to Rob's point, the race business, where you had to invert a curve and enable people to swap. So we're confident in our ability to drive revenue growth there agnostic to the economic environment. But if you actually do see rates decline and get a bit of a tailwind, It'd be nothing but beneficial.

Speaker 5

Got it.

Speaker 8

And then I just had a couple of last ones on the mortgage finance business. Would you do you happen to have of the $5,600,000,000 of the average deposits you had this quarter, What portion of that is compensated via the relationship pricing?

Speaker 3

I think the technical term would be significant. Yes, a significant portion that's disclosed in the deck. And as I alluded to, Brody, the portion who are compensated has increased significant, let's take a step back. Our ability to effectively win Deposit relationships with clients who use our balance sheet for other services in the mortgage space has been really strong. And then the portion that I moved to compensated has also increased, and then the associated beta has also increased as they've faced a just Hopefully, like once in a century type decline in their volumes and ability to generate sufficient cash flow.

Speaker 3

So you've had all those all three of those things really pressure deposit costs. And again, different than on the commercial side, we would expect A similar beta on the way down there. We don't anticipate a material lag, if any.

Speaker 8

Got it. And then just last one. Beyond the Q1, Matt, would you kind of remind us how you think the average balances For the mortgage finance loans should track and then How the deposit to loan ratio for that business should track maybe in the second, third and fourth quarter? I'm just trying to make sure we nail down the seasonality.

Speaker 3

Yes. I would use the same self funding ratio that we experienced last year, but the volume the full year volumes, again, based on A forward curve that can change by the minute, but the anticipated volumes are 4.7 average for the full year. And you'd start to see that RoTE pick up to Q2 and Q3. And then the Implied forward curve would suggest that you see rates come down enough in the Q4, where there wouldn't be as large of a 3rd to 4th quarter decline as we've historically experienced, you have that buffered a bit by declining rate environment and increased volumes.

Speaker 8

Got it. That's very helpful. Thank you very much for taking all my questions, everyone.

Speaker 3

You got it.

Operator

This concludes our Q and A. I'll now hand back to Rob Holmes, CEO, for closing remarks.

Speaker 5

Thanks, everybody, for joining the call. Have a great quarter. Look forward to talk

Operator

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
Texas Capital Bancshares Q4 2023
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