Q4 2023 Texas Capital Bancshares Inc Earnings Call
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Ladies and gentlemen, thank you for your patience this call will begin shortly.
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Speaker Change: Hello, and welcome to the Texas Capital Bancshares, Inc, Q4, 2023 earnings call.
Elliot: My name is Elliot and I'll be coordinating your call today.
Elliot: If you would like to register a question during today's advanced Please press star followed by one on your telephone keypad.
Speaker Change: I'd now like to Honda the Joslyn <unk> head of Investor Relations. The floor is yours. Please go ahead.
Speaker Change: Good morning, and thank you for joining us for <unk> fourth quarter 2023 earnings Conference call I'm, Jonathan Kolka head of Investor Relations.
Speaker Change: Before we begin please be aware of this call will include forward looking statements that are based on our current expectations of future results or events.
Speaker Change: Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements are 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.
Speaker Change: 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 and the Investor Relations section of our website at Texas Capital Bank Dot Com our speakers for the call today are Rob Holmes, President and CEO and Matt Scurlock CFO at the conclusion.
Speaker Change: Of our prepared remarks, our operator will open up a Q&A session I'll now turn the call over to Rob for opening remarks.
Thank you for joining us today are affirmed materially progressed. This transformation in 2023 increasingly translating analysis, a track record of strategic success into financial outcomes consistent with long term value creation.
Speaker Change: 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 our largest money center banks and.
Speaker Change: 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 will define our firm.
Speaker Change: A core element of our strategy is maintaining balance sheet positioning sufficient to support our clients through any circumstance our.
Speaker Change: Our industry, leading liquidity and capital afford us a competitive advantage through market and rate cycles.
Speaker Change: Year end CET, one of 12, 6% ranked fourth amongst the largest banks in the country.
Speaker Change: Tangible common equity to tangible assets of 10, 2% ranked first among the largest banks in the country and an all time high for the firm.
Speaker Change: 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 Change: We have over the last three years, clearly prioritize enhancing the resiliency of both our balance sheet and business model over near term growth and earnings.
Speaker Change: The extensive investments made to deliver a higher quality operating model supporting a defined set of scalable businesses.
Speaker Change: Is resulting in the intended outcomes.
Speaker Change: Entire platform contributed to our full year adjusted financial results with fee revenue growth of 60%.
Speaker Change: <unk> growth of 14% and EPS growth of 23%.
Speaker Change: The foundation of our transformation as 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 wind and serve as the primary operating relationship for the best clients in our markets.
Speaker Change: The volumes flow through our payment system have increased 23% in the last two years.
Speaker Change: Contributing to an 11% improvement in gross payment revenues in 2023.
Speaker Change: As treasury business awarded in prior quarters continues to ramp.
Speaker Change: Our firm now provides faster more seamless client onboarding and a major money center banks and ongoing frictionless client journeys that match or exceed theirs with high touch local service and Decisioning.
Speaker Change: This theme extends to our investment bank as a capability set on par with the top wall Street banks insurance 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%.
Speaker Change: With the largest product offerings syndications capital markets capital solutions, M&A and sales and trading each contributing over $10 million and fee based revenue.
Speaker Change: A significant milestone for a still maturing offering.
Speaker Change: When we launched the strategy, we acknowledged that results generated by the newly formed investment bank would not be linear and then 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 and to a sustainable contributor to future earnings.
Speaker Change: 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.
Speaker Change: Over the previous 18 to 24 months, we have refocused client selection and improve the service model as we look not to expand market share, but to instead deepened relationships through improved relevance with the right clients.
Speaker Change: Of those that started with just a warehouse line, 100% now do some form of the Treasury business with Texas capital.
Speaker Change: And nearly 50% are open with the broker dealer.
Speaker Change: Having the way for improved utilization of our sales and trading platform and accelerate a 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 overtime.
Speaker Change: Liver risk adjusted returns consistent with firm wide objectives.
Speaker Change: A foundational 10 out of the financial resiliency, we are established and will preserve.
Speaker Change: As continued focus on tangible book value, which finished the year up nearly 9%.
Speaker Change: At $61 34 per share an all time high for our firm.
Speaker Change: 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.
Speaker Change: During 2023, we repurchased three 7% of total shares outstanding at a weighted average price equal to the prior months tangible book value.
Speaker Change: And at 86% of tangible book value when adjusting for OCI impacts.
Speaker Change: We entered 2024 from a position of unprecedented strength fully committed to improving financial performance over time.
Speaker Change: <unk> decisions made over the last three 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 realize operational efficiency.
Speaker Change: Yes.
Speaker Change: All objectives that we've made significant headway on this year.
Speaker Change: Thank you for your continued interest in and support of our firm.
Speaker Change: I will turn it over to Matt to discuss the financial results.
Matt Olney: Thanks, Rob and good morning, starting on slide four which depicts both current quarter and full year progress against our stated 2021 strategic performance drivers.
Matt Olney: Full year fee income as a percentage of revenue increased to 15% this year up $60 million or 60% year over year as our multi year investment in products and services to provide a comprehensive solution set for our clients continues to translate into improved financial outcomes.
Matt Olney: Great product fees were $7 8 million in the quarter up 10% from the fourth quarter of last year as we continue to add primary banking relationships at a pace consistent with our long term plan.
Matt Olney: We're also increasingly able to solve a wider range of our clients' cash management needs as outsized investments in our card and merchant and FX offering that show the firm's treasury capabilities are on par or superior to peers in a highly competitive market.
Matt Olney: Wealth management income decreased 7% during the year and large part due to temporary client preference for managed liquidity options given market rates.
Matt Olney: 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.
Matt Olney: Year over year growth in assets under management in total clients of 8% and 11% respectively is on pace with plan as we continue to invest in this high potential offering heading into 2024.
Matt Olney: Investment banking and trading income of $10 7 million decrease from consecutive record levels in the prior four quarters, which were marked by a series of more key transactions on a still emerging platform.
Matt Olney: <unk> generally representative of an initial baseline level of quarterly revenue 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.
Matt Olney: And all we are both pleased with the 64% growth in our fee income areas of focus for the year.
Matt Olney: And our collective ability to further differentiate our value proposition in the market.
Matt Olney: As expected total revenue declined linked quarter to $246 million as both net interest income and noninterest revenue pulled back from respective highs experienced in the preceding quarters net.
Matt Olney: Net interest income was pressured primarily by anticipated seasonal and cyclical impacts of mortgage finance as peak stuff funding levels reduced net interest income by $18 million roughly equivalent to the firm's total quarter decline.
Matt Olney: Total adjusted revenue increased $99 million or 10% for the full year benefiting from a 60% increase in noninterest income coupled with disciplined balance sheet repositioning into higher earning assets associated with our long term strategy.
Matt Olney: Quarterly total adjusted noninterest expense increased less than 1% linked quarter and is nearly flat relative to adjusted fourth quarter of last year.
Matt Olney: During the year, we have demonstrated our ability to realize structural efficiencies associated with our go forward operating model.
Matt Olney: Which are improving near term financial performance, while also enabling select investments associated with long term capability built.
Matt Olney: Taken together full year, adjusted <unk> increased 14% to $338 million.
Matt Olney: This quarter's provision expense of $19 million resulted primarily from an increase in criticized loans as well as resolution of identified problem credits the charge off.
Matt Olney: All year provision expense totaled $72 million or <unk> 45 basis points of average <unk>, excluding mortgage finance loans consistent with communicated expectations.
Matt Olney: Adjusted net income to common was $31 million for the quarter and $187 million for the year, an increase of 17% over adjusted 2022 levels.
Matt Olney: 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.
Matt Olney: Our balance sheet metrics continue to be exceptionally strong.
Matt Olney: Period end cash balances remain in excess of 10% of total assets with a $950 million decline this quarter, mainly due to anticipated annual tax payments remitted out of mortgage finance deposit accounts.
Matt Olney: Ending period balances declined by approximately $270 million 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.
Matt Olney: Total <unk>, excluding mortgage finance increased $181 million during the quarter and 8% for the year commercial loan balances remained relatively flat during the quarter, increasing $45 million, which while marginally unfavorable to near term earnings expansion obscures continued strong underlying momentum in the commercial businesses do.
Matt Olney: New relationships onboard in 2023 were up nearly 10% relative to elevated 2022 levels.
Matt Olney: With the proportion of new activity that includes more than just the loan product trending over 95%.
Matt Olney: I noted progress on winning client Treasury business is highly correlated with the increasing percentage of commercial relationships in which we are the lead bank.
Matt Olney: This manifest 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.
Matt Olney: We are nearing the end of a multi year process of recycling capital into a client base that benefits from our broadening platform of available product solutions delivered within an enhanced client journey.
Matt Olney: And after consecutive years of capital build wood.
Matt Olney: I would expect the sustained pace of new client acquisition to result in modest balance sheet re leveraging over the next year.
Matt Olney: Peered in real estate balances increased $142 million or 3% in the quarter as payoff rates normalize from record highs in the prior year. Despite a modest increase we are positioned for continuation of realized pay up trends in the medium term.
Matt Olney: Our clients are new origination volume also remained suppressed with new credit extension largely focused on multifamily, reflecting both our deep experience in this space and observed performance to credit and interest rate cycles.
Matt Olney: Average mortgage finance loans decreased $751 million or 16% in the quarter to $3 9 billion as the seasonality associated with home buying approaches its annual low moving into Q1.
Matt Olney: While both fourth quarter and full year average balances were consistent with communicated guidance. We did experience a linked quarter increase in client activity as mortgage rates declined by nearly 120 basis points up fourth quarter highs in late October, resulting in an ending balance of approximately 5% higher than expectations beginning of the quarter.
Matt Olney: As you know Q4, and Q1 are the seasonally weakest origination quarters from a home buying perspective, and after a difficult fourth quarter 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.
Matt Olney: Despite the modest rate pullback estimates from professional forecasters suggest total market originations to contract modestly linked quarter.
Matt Olney: 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.
Matt Olney: Should origination volume recover consistent with market expectations, we would anticipate comparable increase given our clients strong positioning.
Matt Olney: 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.
Matt Olney: <unk> focus on leveraging our cash management platform it to deeper client relationships has driven outperformance relative to the industry with annual deposits, just 2% lower year over year.
Matt Olney: When excluding predictable fluctuations in mortgage finance deposits, our deliberate reduction of index deposits and reduce reliance on broker deposits year over year growth of 4% reemphasize is our success at attracting quality funding associated with core offerings. During a challenging year period end mortgage finance noninterest bearing deposit balances decreased one seven.
Matt Olney: Billion quarter over quarter as expected as.
Matt Olney: As escrow balances related to tax payments are remitted beginning in late November and run through January.
Matt Olney: Which point the balances begin to predictably rebuild over the course of the year.
Matt Olney: Average mortgage finance deposits were 142% of average mortgage finance loans, consistent with our guidance of up to 150%.
Matt Olney: As the system wide contraction in mortgage origination volume weighs on clients' short term credit needs.
Matt Olney: We expect the ratio of average mortgage finance deposits the average mortgage finance loans of approximately 120% in the first quarter.
Matt Olney: Modest easing pressure on mortgage finance yields as origination volumes begin to recover through the year.
Matt Olney: As a reminder, this dynamic is driven by client level relationship pricing, resulting in net interest credit rate applied to the mortgage finance non interest bearing deposits that is realized through yield.
Matt Olney: Average non interest bearing deposits, excluding mortgage finance was $3 6 billion in the quarter in line with third quarter period end as previously described trends whereby select clients shifted excess balances to interest bearing deposits or to other cash management options on a platform continues to slow.
Matt Olney: Ending period noninterest bearing deposits, excluding mortgage finance remains 15% of total deposits just flat quarter over quarter.
Matt Olney: Our expectation is that this percentage remains relatively stable in the near term.
Matt Olney: Broker deposits declined $477 million during the quarter as growth in client focused deposits consistent with our long term strategy remains sufficient to satisfy desired near term balance sheet demands we.
Matt Olney: We anticipate additional declines in brokerage Cds during the first quarter is $300 million with an average rate of five 2% is likely to mature without full replacement.
Matt Olney: As expected our model the earnings at risk evolved consistent with indications of a slowing tightening cycle as the increase in modeled betas lessened remaining sensitivity to further upward rate pressure as measured in a plus 100 basis point shock scenario from $29 million in Q3 to $14 million in Q4.
Matt Olney: Download rate exposure remained relatively flat quarter over quarter at four 4% or $40 million in a down 100 basis point shock scenario.
Matt Olney: Proactive measures taken earlier in the year to achieve a more neutral position at this stage of the rate cycle have and produce the intended outcome.
Matt Olney: It is important to note. These are measures of net interest income sensitivity and do not include inevitable rate driven changes in loan volume or fee based income.
Matt Olney: Further the disclosed Downrate 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.
Matt Olney: 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.
Matt Olney: Net interest margin decreased by 20 basis points this quarter and net interest income declined $17 4 million predominantly as a function of the previously described impact 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.
Matt Olney: 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.
Matt Olney: Even when accounting for the seasonal factors associated with Q1 salaries and benefit expense has declined three consecutive quarters, while retaining an excess of two times the number of frontline employees since the transformation began.
Matt Olney: Preparation for an inevitable normalization in asset quality began in 2022 as we steadily built a reserve necessary to both address known legacy concerns and a line balance sheet metrics with our foundational objective of financial resilience.
Matt Olney: The total allowance for credit loss, including off balance sheet reserves increased $5 million on a linked quarter basis to $296 million or $1, 46% of total <unk> at quarter end up $21 million year over year in anticipation of a more challenging economic environment, while our ACL to nonaccrual loans stand at three six times for <unk>.
Matt Olney: Parison purposes. The total ACL ratio is 24 basis points higher now than during the pandemic peak in third quarter 2020.
Matt Olney: Criticized loans increased $61 million or 9% in the quarter to $738 million or 4% of total IHI is increases in special mention a predominantly commercial real estate loans were only partially offset.
Matt Olney: By payoffs and upgrades of commercial loans.
Matt Olney: 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.
Matt Olney: During the quarter, we recognized net charge offs of $13 8 million predominantly related to partial charge offs of two relationships originated in 2018.
Matt Olney: A commercial credit dependent on consumer discretionary income and hospitality loan, which has been unable to recover post the pandemic.
Matt Olney: Capital levels remain at or near the top of the industry and are near all time highs for Texas capital totaled.
Matt Olney: Total regulatory capital remains exceptionally strong relative to the peer group and our internally assess risk profile <unk>.
<unk> finished the quarter at $12, 65% five basis point decrease from prior quarter tangible common equity to tangible assets finished the quarter at 10, 2%.
Matt Olney: We remain focused on managing the hardware and capital base, and a disciplined and analytically rigorous manner focused on driving long term shareholder value and.
Matt Olney: In aggregate during 2023, we repurchased approximately one 8 million shares or three 7% of the shares outstanding at year end 2022.
For a total of $105 million at a weighted average price of approximately equal to prior month tangible book value.
Matt Olney: Our guidance accounts for the market based forward rate curve with assumed fed funds of $4 two 5% exiting the year.
Matt Olney: For 2024, we anticipate mid single digit growth in revenue supported by continued execution across fee income areas of focus and a slowing of multiyear capital recycling efforts with.
Who should increasingly enable our sustained momentum and new client acquisition to manifest into modest risk appropriate balance sheet expansion.
Matt Olney: This is in part supported by well signaled an intent to move towards an 11% CET one ratio.
Matt Olney: Which given our risk weighted asset heavy commercial orientation should still result in sector, leading tangible common equity levels. We.
Matt Olney: We expect multiyear investments in infrastructure data and process improvements to continue yielding expected operating and financial efficiencies.
Matt Olney: Which should enable targeted additional investment in talent and capabilities, while limiting full year noninterest expense growth to low single digits.
Acknowledging near term headwinds associated with the mortgage industry, we expect resumption of quarterly increases in year over year PPR growth to begin in the second half of the year accelerating as we enter 2025.
Matt Olney: Finally, despite recent market sentiment favoring a potential softer landing we maintain a conservative outlook and believe it is prudent to consider potential for further downside stress. Therefore, elevating our annual provision expense guidance to 50 basis points of <unk>, excluding mortgage finance.
Speaker Change: Operator, we'd now like to open up the call for questions. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: To withdraw your question. Please press star followed by two.
Speaker Change: Ask a question please enjoy it devices and mutates locally.
Speaker Change: Last question comes from Ben <unk> with Citigroup. Your line is open. Please go ahead.
Ben: Hey, good morning, guys.
Ben: Well on the group.
Ben: Thank you I was curious if we could just kind of parse through the revenue guidance a little bit.
Ben: That's helpful, giving kind of a year over year comp one CPR, but I guess that most of the revenue upside here, but should we expecting from fees, but when you think about just the balance sheet itself. I know you referenced the betas are probably limited for the first couple of cuts, but when we exit the year can you guys give just your overall or kind of.
Ben: 10000 foot view on deposit betas, after we get that fifth or sixth cut.
Ben: I'd say, there's probably limited in the beginning but towards we get to the Ed just any thoughts on that.
Speaker Change: Yes happy to take that so in a bifurcated between interest bearing deposit beta and then the cost of funding within the mortgage finance business. So the model a downrate scenario for interest rate deposit betas and the static balance sheet at 60% Youre not going to hit 60% over the first five cuts you've probably half of that.
Speaker Change: As it builds over the duration of that cut program.
Speaker Change: We have modeled in our guide expectation that you would actually see interest bearing deposit costs continued to drift up at a pace similar to what we experienced in the last quarter.
Speaker Change: And when the fed actually takes action.
Speaker Change: Okay.
Speaker Change: <unk> scenario as it relates to mortgage finance, which obviously had a significant impact this quarter.
$17 million to $18 million decline in net interest income.
Speaker Change: <unk> chart depicted on one of the slides that suggests you can take the entirety of that to mortgage finance.
Speaker Change: Verity.
Speaker Change: The impact is historical rate increase has had on that industry is pretty difficult to overstate. So there's really no precedent to look back too. There is certainly no, Texas capital bank experience in which to pull insights from so as volumes just evaporated for mortgage originators over the last year deposits move to compensated at a pace well in excess.
Speaker Change: Yes of historical experience that really started to accelerate towards the middle of the year.
Speaker Change: And the ultimate deposit beta which flows through relationship pricing on the yield accelerated pretty much consistent with the 80% interest bearing deposit beta.
Speaker Change: So for us that definitely impacts balance sheet positioning you can see that as we pause cash flow reinvestment on the bond portfolio and it ultimately stop the hedge program.
Speaker Change: We realized with the policy rates rising faster on that business, we're going to hit neutral a bit earlier than anticipated in a rising rate environment, but I think importantly, as the fed is signaling that they may be done raising rates and are more likely to start to cut.
Speaker Change: We also realize you're not going to need as much downside protection, because we would expect mortgage SaaS deposits to reprice down.
Speaker Change: At a beta consistent with the 80% on the way up.
Speaker Change: Got it okay.
Speaker Change: That's helpful color and definitely have to go look at the transcript the kitchen just to make sure I have everything correct.
Speaker Change: Okay.
Speaker Change: The first question des.
Speaker Change: Well, yes, I mean, thats really the million dollar question at this point, but.
Speaker Change: And as long as were you guys everybody. So when you guys specifically it seems like there is a multiyear process and you have all the seats filled with people analysis kind of execution on the plan and 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.
Speaker Change: What else or 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 or technology or is it really just you think the revenue can show up so some of it's compensation.
Speaker Change: Asking why is why are we still see upside in expenses.
Speaker Change: Yeah happy to talk about that and we've been really consistent in describing our objective around noninterest expense, which is to really improve the productivity of the expense base.
Speaker Change: And it was our view that you don't show up in a challenging revenue environment and then make the determination you want to invoke expense discipline.
Speaker Change: We think that instead, you have to make multiyear investments process infrastructure technology, which enables you over time to lower risk improve throughput. Nick. These are for your clients to do business with you that that makes your business better and then ultimately has a nice byproduct of reducing structural operating expense you could.
Speaker Change: See that 2023 expense base really near those priorities.
The multiyear build the middle and back office has really enabled us to remove a lot of manual tasks, which includes the employee experience. Then also enables us to continue to invest in the frontline.
Speaker Change: I think in 24, you'll see the typical $8 million to $10 million.
Speaker Change: Seasonal comp expense in the first quarter.
Speaker Change: And then four years, you should see solid full year, you'll see salaries and benefits grew at a pace in excess of the low single digits total noninterest expense.
Speaker Change: For noninterest expense not called salaries and benefits.
Speaker Change: <unk> got it about $70 million and then underlying composition will continue to bias towards tuck in comps as we reached our target level of change that make project portfolio. This year.
Speaker Change: Can you talk through capabilities.
Speaker Change: Yes, I would just say.
Speaker Change: Is it.
Speaker Change: That said it very well I think third quarter third quarter salaries et cetera.
Speaker Change: Down 5%.
Speaker Change: When we've doubled our frontline bankers, so that tells us to do that.
Speaker Change: Got it.
Speaker Change: Quantify as Matt's comments about repositioning the expense base.
Success in doing so but to your point about the expenses already being in the platform. The platform is fully loaded with.
Speaker Change: With all of the solutions that we wanted for our for our clients. So we've endured all the all the expense and both from products and services.
Speaker Change: Our new commercial card, new merchant lockbox payments platform.
Speaker Change: Basically have a brand new state of the art 2023 Bank payments Bank and we're rolling that out to clients at a record pace and onboarding clients at a record pace.
Speaker Change: 22 was a record 23, and we expect 2004 to to do that again, so the pipelines are full the expenses.
Speaker Change: Expense base is fully loaded and.
Speaker Change: <unk> platform is built.
Speaker Change: Gotcha, that's helpful I'll jump back in queue. Thank you.
Speaker Change: We now turn to Matt Olney with Stephens. Your line is open. Please go ahead.
Matt Olney: Thank you.
Matt Olney: Hey, Thanks, good morning, everybody.
Matt Olney: There was some commentary in the and the outlook about.
Matt Olney: Modest balance sheet re leveraging.
Matt Olney: And as well as moving that CET, one capital ratio lower during the year.
Matt Olney: Any more color on how we achieved this whether it's stock repurchase activity.
Matt Olney: The accelerated loan growth just any more details behind that thanks.
Matt Olney: Okay.
Speaker Change: Yes, thanks for the question.
Speaker Change: And quite fickle about how effectively can finish.
Speaker Change: Shopper and drops cycle and repositioning our capital base.
Speaker Change: Yes.
Speaker Change: Of your three.
Speaker Change: Ah patients begin to slow.
Speaker Change: In 2024.
Speaker Change: Drops.
Speaker Change: Record year of new client acquisition in 2022.
Speaker Change: Deep that by 10% in 2023, and we would expect to do the same in 2024, so sustaining that pace of client acquisition, coupled with now fewer identified opportunities for it needed capital recycling should should ultimately result in some increased balance sheet growth.
Speaker Change: And part of having.
Speaker Change: Part of the deliberate build to peer leading levels of tangible common equity to tangible assets.
Speaker Change: As to just ensure you've got balance sheet capacity that is adequate to support.
Speaker Change: Any necessary growth from our client base.
Speaker Change: You should see the benefits of sustained client acquisition begin to show up in an improved loan growth.
Speaker Change: I would say that.
Speaker Change: What Matt said just thought off.
Speaker Change: I don't know.
Speaker Change: One would appreciate.
Speaker Change:
Speaker Change: How material that is recycling, so think about taking a load haul a subpar return loan.
Speaker Change: To our clients.
Speaker Change: We don't necessarily aspire to bank anymore and.
Speaker Change: And replacing that with.
Speaker Change: Which is a sector with a great company.
Speaker Change: The team.
Speaker Change: Sure.
Speaker Change: Sticking with us.
Speaker Change: Well on the balance sheet.
Speaker Change: We are affirming.
Speaker Change: Cost of capital.
Speaker Change: The customer growth.
Speaker Change: No.
Speaker Change: In his comments.
Speaker Change: Thanks.
Speaker Change: Are more of the global fleet.
Speaker Change: So and the other 5% of it.
Speaker Change: Yes.
Speaker Change: For longer term strategic.
Speaker Change: Michael.
Speaker Change: Okay.
Speaker Change: Lastly.
Speaker Change: No.
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: We termed that out.
Speaker Change: Capital.
Speaker Change: As the products and services.
Speaker Change: Okay.
Speaker Change: Even with the cost.
Speaker Change: Yes.
Speaker Change: Yes, Matt.
Speaker Change: Is that.
Speaker Change: That excess capital also gives you a bit.
Speaker Change: Bit more downside net interest income defensibility than I think what is currently appreciated or currently depicted in the static balance sheet 100 basis point shock scenarios.
Speaker Change: So we carry that excess capital so we can support clients through any cycle.
Speaker Change: 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 which would be we've talked earlier joked earlier in the room would be a pretty tough time to be a professional forecaster, but professional forecasters suggest that one to four family mortgage originations. This year is going to increase by about 15%.
Speaker Change: <unk>.
Speaker Change: So if we think about a down 100 basis point scenario.
Speaker Change: <unk> anticipated mortgage finance growth and the associated revenue is sufficient to offset that $40 million shock that's shown.
And the sensitivity modeling and then of course because of the real focus on building fee income verticals over the last few years.
Speaker Change: You will be able to generate additional revenue in a down rate environment on those offerings as well.
Speaker Change: Yes.
Speaker Change: Okay. Okay.
Okay. That's helpful. I think I heard most of that there is some feedback coming from the line, but I think I heard most of your most of your commentary.
Speaker Change: And just as a follow up within that revenue guidance of the mid single digits any more color on how much of that will come from.
Speaker Change: Fees versus versus NII.
Speaker Change: Yeah.
Speaker Change: As Rob mentioned, Matt.
Speaker Change: Associated with fee income businesses are as good as it is for.
Speaker Change: Sure Ben.
Speaker Change: So it will be accretive.
Speaker Change: 10% over the last three years.
Speaker Change: Three new offerings that FX card and merchant full.
Full year current pipeline and the Treasury business is equivalent to the full year 2023 realize the business.
Speaker Change: After fourth quarter for the investment Bank, where you had offerings other than sales and trading had their worst quarter of the year.
Speaker Change: The delta between the realized $11 million in the mid teens guide was.
Speaker Change: Solely related to client transactions, we're working on pushing into 2020 for that investment banking pipeline has significantly improved year over year. So we now have the right coverage you've got the right connectivity and we've got real earned market momentum So I'd expect that Aldo.
Speaker Change: All of those fee income areas of focus to increase both in terms of revenue this year and in a percentage of total contribution.
I'll just highlight one other thing what Matt said about three times to be growing in addition to 10%.
Speaker Change: Each year for the past three years, the market norm that I'm used to historically, it's like too so.
Speaker Change: So to be growing that business at at 11%.
Speaker Change: Is something that I have not seen before especially on a sustained basis.
Speaker Change: In my career, so really really good about that.
Speaker Change: Yeah.
Speaker Change: Plus.
Speaker Change: Got it.
Speaker Change: And infrastructure.
Good as any.
Speaker Change: Money Center Bank that has to do with new client charities, because the digital onboarding and ramp.
Speaker Change: Great.
Speaker Change: The revenues forward.
Speaker Change: And by the way.
Speaker Change: Okay.
Speaker Change: You actually realize before fees.
So.
Speaker Change: The contribution there.
Speaker Change: And one last thing.
Speaker Change: Part of it.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Alright.
Speaker Change: Hum.
Speaker Change: Part B.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: All of us.
Speaker Change: <unk> revenue.
Speaker Change: Contribution.
Speaker Change: Hi, Eric.
Speaker Change: Thanks.
Speaker Change: Capital markets capital solutions M&A in sales and trading.
Speaker Change: Super encouraging as a very healthy.
Speaker Change: Investment Bank.
Speaker Change: Okay. Thanks, Scott.
Speaker Change: Our next question comes from Woody lay with <unk>. Your line is open. Please go ahead.
Woody Lay: Hey, good morning, guys.
Woody Lay: I wanted to start on the deposit base.
Woody Lay: Broker deposits continued to move lower in the quarter and then the slide you call out that the funding base continue this transition to a target date composition can you just remind us what you think the target date composition looks like when we look out a couple of years from now.
Woody Lay: We will never hit our target state composition of our funding base.
If any bank CEO tells you they have big concern. So we will always look to improve that.
Woody Lay: Funding base.
Woody Lay: We have made.
Woody Lay: Efficacy progress.
Woody Lay: With our base.
Woody Lay: It's dramatically.
Woody Lay: As we said.
Woody Lay: We know every client.
Woody Lay: That is all.
Woody Lay: Okay.
Woody Lay: As you saw the broker.
Woody Lay: And.
Woody Lay: Sure Mike.
Woody Lay: No.
Woody Lay: Plus got here to just over one so we feel like we've made.
Woody Lay: Dramatically.
Woody Lay: The quality.
With all the client also.
Woody Lay: There will be no.
Woody Lay: There will be no exploration.
Woody Lay: Target base.
Woody Lay: The more of it.
Woody Lay: Okay.
Okay.
Woody Lay: So yes.
Woody Lay: Our higher quality clients.
Woody Lay: <unk>.
Woody Lay: That makes sense.
Woody Lay: Moving to the asset sensitivity.
Woody Lay: Touched on that.
Woody Lay: <unk> moved lower.
Woody Lay: As evident on slide nine.
Woody Lay: Or does the seasonality in mortgage impact.
Woody Lay: Does that impact the disclosure.
Woody Lay: Or is that not really an impact.
Woody Lay: No.
Woody Lay: It definitely impacts the disclosure would so the disclose sensitivity is based off end of period balance sheet.
Woody Lay: So should you have an end of period balance sheet composition that has higher weightings of cash or higher weightings of loans, which those things very for us depending on which quarter youre looking at thats going to impact your forward.
Woody Lay: Which shows up right below that charter base NII. That's in part why it's lower this quarter, so absolutely impacts us.
Speaker Change: Yes got.
Speaker Change: Got it and maybe they are more accurately other finance unit.
Speaker Change: Go ahead.
Speaker Change: No go ahead please.
Speaker Change: Yeah, just lastly on the on the mortgage finance you note in the slides that.
Speaker Change: The deposit to loan levels should sort of normalize back to where it was.
Speaker Change: In the third quarter I mean, do you think the yield.
Speaker Change: Pop back up to that mid 2% range or is that a little bit aggressive next quarter.
Speaker Change: Okay.
Speaker Change: It does move up about a 112.
Speaker Change: It is greatly influenced the self funding ratio. So you had a $1 45 ish self funded ratio this quarter should that move that money.
Speaker Change: Funny and.
Speaker Change: In Q1, which is alright external expectation, you'll see that yield above.
Speaker Change: If you think about full year.
Speaker Change: If the rate curve plays out as the market expect it too.
Speaker Change: Average.
Speaker Change: We will still be booked by 'twenty four and it was at three.
Speaker Change: But the volumes.
Speaker Change: Patient to generate higher net interest income, so you'd have lower yields but higher NII.
And then to Rob's earlier comments, our focus in that business as well as candidly all of the businesses is driving additional value beyond just the loan product.
Speaker Change: 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.
Speaker Change: Got it alright, that's all for me thanks for taking my questions.
Speaker Change: You may now tend to Anthony <unk> with Jpmorgan. Your line is open. Please go ahead.
Anthony: Good morning.
Anthony: Looking at slide eight.
Anthony: It looks like average noninterest bearing declined due to mortgage finance, but then noninterest bearing excluding mortgage finance the gray bar at the bottom continued to decline to about $3 6 billion in <unk>.
Anthony: Drove that sequentially and do you think that's the $3 6 billion average or three three and a period represents a bottom.
Speaker Change: Yes, so the three six average in the fourth quarter Tony matches, almost exactly the third quarter end of period balance.
Speaker Change: 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.
Speaker Change: So but that trend of folks actively looking to reposition excess cash into it.
Speaker Change: Higher paying options on our platform has largely abated, so fluctuation that period, Andrew just to be driven by client acquisition or by client transactions.
Speaker Change: And then if I think about if we think about full year 'twenty four.
Speaker Change: That.
Speaker Change: The double digit growth in gross P times V. There has not been sustained over the last three years it really accelerated into the back end of this year, we talked on the last call that generally shows up in between six and 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.
Speaker Change: And then maybe just the last comment I know you know this Tony but others on the call may not fully appreciate it I mean, our our noninterest bearing deposit base is commercial noninterest bearing.
Speaker Change: 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.
Speaker Change: I'd say the trends we described in Q1 Q2, where folks are actively seeking higher options thats largely abated at this point.
Speaker Change: Understood. Thank you and for my follow up.
Speaker Change: Big picture question on on Slide four it's been more than three years. Since you provided your performance metric targets on return on average assets and return on.
Speaker Change: Common equity.
Speaker Change: Do you guys feel 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 Change: Okay.
Speaker Change: It's 100% execution now that's what's so exciting about where we are in the transformation.
Speaker Change: The risk of the build is done we have a core competency now.
Speaker Change: Of.
Speaker Change: <unk>.
Taking efficiencies.
Speaker Change: Improving client journeys.
Speaker Change: We have data as a service.
Speaker Change: We feel really good about the tech platform to run the bank versus change the bank composition of the spend.
Speaker Change: We are very focused on.
Speaker Change: Well, let's put this way.
Speaker Change: No additions to the platform in terms of talent or client facing people that we need to execute the strategy.
Speaker Change: But that's just one component of it I don't think you can see I don't think you can see that.
Speaker Change: The efficiencies.
Speaker Change: As Matt said, I think you quantified them.
Speaker Change: If you'd like to ask another question. Please press star one on your telephone keypad now.
Speaker Change: Brody Preston with UBS. Your line is open. Please go ahead.
Brody Preston: Hey, good morning, everyone.
Brody Preston: February.
Brody Preston: I wanted just to clarify something Matt just what you said on the on the mortgage finance versus static balance sheet NII sensitivity that you provided where you're saying that the 15%.
Brody Preston: Pickup in mortgage activity that I think you guys typically use Moody's is project getting would be enough to offset the 4% decline in.
Brody Preston: The down 100 scenario.
Speaker Change: No I was saying in the down 100 scenario, which is a bit more aggressive than what Moody's outlook would suggest you would have mortgage do you have ample capital support to flex up and mortgage finance volumes from your existing client base.
Speaker Change: Which would generate more than enough revenue to offset that $40 million decline. So I think often I think often times in their life, but oftentimes Brady I think folks when they think about rates solely think about freight rates and that of course, it does impact us in terms of deposit pricing as it relates to fed funds and all.
Speaker Change: Commercial loan yields as it relates to sofa.
Speaker Change: But part of how we manage rate risk and the associated balance sheet positioning is 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 thats required by SEC is presented for comparison to other banks.
Speaker Change: So next year to give you guys much detail on that moving forward.
Speaker Change: Got it.
Speaker Change: Could you help us maybe think through.
Speaker Change: <unk>.
Speaker Change: You know the.
Speaker Change: The impact of down 100, you know being more aggressive than what Moody's has outlined how that would impact.
Speaker Change: The mortgage finance business you guys, obviously do a lot of business in the IV there as well. So if you had to pick up above and beyond the 15% that Moody's was forecasting how would that impact your investment banking revenue.
Speaker Change: Okay.
Speaker Change: Yes, I'll start.
Speaker Change: A number of Theres a number of different.
Speaker Change: Dynamics to the answer to question one is as rates go down.
Speaker Change: Investment banking fees will go up more attractions will take more transactions will take place.
Speaker Change: The clients will be.
Speaker Change: Doing things on the balance sheets.
Speaker Change: B acquisition activity et cetera.
Speaker Change: Sure.
Speaker Change: There'll be capital solutions opportunities there'll be just a broad base there'll be volatility on the sales and trading floor. There is a lot of things on the fee.
Speaker Change: And also invest like I said and Treasury management fees will come up because ecr's will go down.
Speaker Change: So.
Speaker Change: I think where we built the.
Speaker Change: The business to really succeed in any market a rate cycle and as we go down we will see an increase and an ability to take advantage of that area.
Speaker Change: I mean, the 146% year over year growth Brody, it's not like.
Speaker Change: We are building the investment bank with a lot of economic or structural tailwind.
Speaker Change: So I mean in fact, there's likely headwinds against all businesses, except <unk> point, the rates business, where you had an inverted curve and enable people to swap.
Speaker Change: 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.
Speaker Change: But beneficial.
Speaker Change: Got it.
Speaker Change: And then I just had a couple of last ones on the mortgage finance business.
Speaker Change: Would you do you happen to have.
Speaker Change: The $5 6 billion of the average deposits you had this quarter.
Speaker Change: What portion of that is compensated.
Speaker Change: <unk>.
Speaker Change: The relationship pricing.
Speaker Change: I think the technical term would be significant.
Speaker Change: Yes significant portion that's disclosed and that's disclosed in the deck and as I alluded to Brody the portion who are compensated has increased significantly.
Speaker Change: You can 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.
Speaker Change: Really strong.
Speaker Change: And then the portion that have moved to compensated has also increased.
Speaker Change: And then the associated data has also increased.
Speaker Change: As they face day, just hopefully like once in a century type decline in their volumes and ability to generate sufficient cash flow. So.
Speaker Change: So you've got all of those all three of those things really pressure deposit costs.
Speaker Change: 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 Change: Got it and then just last one beyond the first quarter, Matt would you kind of remind us how you think the average balances.
Matt: For the.
Matt: For the mortgage finance loans should track and then how the.
Matt: How the deposit to loan ratio for that business should track maybe in the second third and fourth quarter I'm trying to make sure we nail down the seasonality.
Speaker Change: Yes, I would use the same self funding ratio that we experienced last year, but the volume of the full year volumes again based on a forward curve that can change by the minute.
Speaker Change: But the anticipated volumes are four 7% average for the full year.
Speaker Change: And you'd start to see that really pick up to Q to Q2 and Q3.
Speaker Change: And then the implied forward curve, which suggests that you see rates come down enough in the fourth quarter.
Speaker Change: Where there wouldn't be as large of a third to fourth quarter decline as we've historically experienced you have that.
Speaker Change: Buffered a bit by declining rate environment and increased volumes.
Speaker Change: Got it that's very helpful. Thank you very much taking on my questions everyone.
Speaker Change: You got it.
Speaker Change: This concludes our Q&A I'll now hand back to Ross I'm seeing young for closing remarks.
Ross: Thanks, everybody for joining the call have a great quarter look forward to opportunities in the second quarter.
Speaker Change: Ladies and gentlemen, today's call is now concluded wed love to thank you for your participation you may now disconnect your lines.
[music].
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Okay.