Q4 2024 Texas Capital Bancshares Inc Earnings Call
profits from economic losses. 36 micronomies. 56 packages. 6 Dash for Dow Jones. 35 matrix. Total of 46 transactions. 68. Such a small production. But computers and rushing electricity are the makers of new rich
[inaudible]
Speaker Change: Thank you for your patience whilst we are waiting to begin today's conference call with Texas Capital Bank Shares.
Speaker Change: Thank you all for standing by, we'll be starting today's call momentarily.
Jingle
[inaudible]
Brika: Good morning all and thank you for attending the Texas Capital Bank Shares Inc Q4 2024 earnings conference call. My name is Brika and I will be your moderator for today.
Speaker Change: All lines will be muted during the presentation portion of the call. We will have an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Jocelyn Kukulka, Head of Investor Relations at TCBI. Thank you. You may proceed.
Speaker Change: Good morning, and thank you for joining us for TCBI's fourth quarter 2024 earnings conference call. I'm Jocelyn Kukulka, 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.
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.
Speaker Change: 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 Change: Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and subsequent filings with the SEC.
Speaker Change: 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 the call for Q&A. And now I'll turn the call over to Rob for opening remarks.
Rob Holmes: Thank you for joining us today. Our firm materially progressed its transformation in 2024, increasingly translating our proven track record of strategic success into the financial outcomes aligned with our well-communicated plans.
Rob Holmes: Our differentiated Texas-based platform continues to provide an increasing number of clients with the widest possible range of products and services, customized to their needs.
Rob Holmes: Multi-year client acquisition trends accelerated again this year, with nearly 40% more new significant clients onboarded in 2024 compared to 2023.
Rob Holmes: Contributions from across the platform enabled full-year adjusted financial results, highlighted by fee revenue growth of 30%,
Rob Holmes: pre-provisioned net revenue growth of 9 percent, earnings per share growth of 15 percent, and tangible book value growth of 8 percent, finishing the year at the highest level in firm history.
Rob Holmes: On an adjusted basis, full-year return on average assets of 0.74%, return on average common equity of 7%.
Rob Holmes: Pre-provisioned net revenue of $369 million, fee income of $211 million, and earnings per share of $4.43. All reached record levels since the beginning of the transformation.
Rob Holmes: Importantly, we achieve these financial milestones while maintaining industry-leading capital and liquidity, a proven competitive advantage through market and rate cycles.
Rob Holmes: Year-end tangible common equity to tangible assets of 10% ranking first amongst the largest banks in the country.
Rob Holmes: With cash and securities of 25%, together allow for a consistent and proactive market-facing posture that clients and prospects have come to trust.
Rob Holmes: Our sustained market momentum and unwavering strategic focus position the firm to continue delivering on stated goals throughout 2025.
Rob Holmes: As the materially expanded offerings and capabilities of the firm mature, persistent progress in our fee-income areas of focus continue to contribute meaningfully to improved financial results.
Rob Holmes: Fees generated by Investment Banking, Treasury Solutions, and Private Wealth grew 36%, or $47 million this year to $178 million.
Rob Holmes: as our ability to support clients across the full breadth of their financial needs is increasingly represented by accelerating revenue contribution from non-interest income.
Rob Holmes: Investment banking and trading income increased 47% year-over-year, led by elevated contribution from syndications, capital markets, and sales and trading.
Rob Holmes: We believe the proven success of these still-maturing offerings continues to warrant additional investment in products, services, and talent, all of which are incorporated in the 25 Outlook that Matt will detail later in the call.
Rob Holmes: The deliberate evolution of our Treasury Solutions Platform, while both time- and resource-intensive, is consistently proving to be one of the most critical investments made during the transformation.
Rob Holmes: Client adoption across our now best-in-class cash management suite continued this quarter with gross payment revenues increasing over 10% for the second consecutive year.
Rob Holmes: Earning the right to become our client's core operating bank is resulting in both improved fee income and increased deposit balances.
with Treasury product fees growing 18% this year.
and Toll Deposits.
expanding $2.9 billion or 13% for the year.
Rob Holmes: The full rebuild of our wealth platform is now substantially complete, with a notably improved client experience and significantly expanded suite of private banking solutions, providing the foundation for accelerating growth this year.
Rob Holmes: Moving into 2025, we remain steadfast in our commitment to delivering improved risk-adjusted returns consistent with firm-wide objectives.
Rob Holmes: while maintaining financially resilient posture necessary to support our clients through all stages of their business or personal life, regardless of the market or rate cycle, resulting in achievement of our financial targets in the second half of this year.
Rob Holmes: Finally, I want to express my appreciation to all our employees whose relentless commitment and daily efforts over the last four years in executing our strategy are the foundation of our firm's current and future success.
I'll turn it over to Matt for the financial results.
Thanks, Rob, and good morning.
Starting on slide five.
Year-over-year quarterly revenue increased 15% to $283.7 million.
Rob Holmes: A strong fee generation and realized structural efficiencies supported the second consecutive quarter of preprovisioned net revenue at or near all-time highs.
Rob Holmes: For the full year, total adjusted revenue increased $36 million, or 3%, as the modest rate-driven decline in net interest income was more than offset by a record year of adjusted fee revenue, which increased 30%, or $49 million for the full year.
Rob Holmes: Quarterly total non-interest expense declined 9% compared to Q3 on an adjusted basis, as the full impact of third quarter actions were realized alongside regular adjustments to compensation accruals.
Rob Holmes: Full-year adjusted non-interest expense increased less than 1% as we executed on our strategy of realizing operational enhancements associated with prior investments while effectively positioning the firm for future scale.
Rob Holmes: Taken together, full-year adjusted PPNR increased 31 million, or 9%, to 369 million, which as Rob mentioned, represents the high-water mark since the transformation began.
Rob Holmes: This quarter's provision expense of $18 million resulted from charge-offs against previously identified problem credits and moderate loan growth, with full-year provision expense in line with guidance as a percentage of average LHI excluding mortgage finance at 40 basis points.
Rob Holmes: That income to common was $67 million for the quarter, or $1.43 per share, with full year adjusted at income to common of $208 million, an 11% increase over adjusted 2023 levels.
Rob Holmes: Our continued financial progress, coupled with disciplined capital management, contributed to a 15% increase in full-year adjusted earnings per share.
Rob Holmes: Our balance sheet positioning remains exceptionally strong, with period and cash balances of 10% of total assets and cash insecurities of 25%, in line with year-end targeted ratios.
Rob Holmes: Ending period gross LHI balance is increased by approximately $162 million or 1% late quarter. As C&I and real estate loan growth offset expected seasonal declines in mortgage finance loans.
Rob Holmes: Total deposits decreased by $627 million or 2% during the quarter, driven predominantly by known seasonality from annual tax payments remitted out of mortgage finance on interest-bearing accounts.
Rob Holmes: Excluding that anticipated and temporary reduction, deposits grew by nearly 1 billion or 5 percent, with now well-established growth trends augmented by expected seasonal inflows from select commercial clients.
Rob Holmes: Total gross LHI excluding mortgage finance increased 5% for the full year and 11% annualized late quarter. Commercial loan balances expanded $178 million or 6% annualized with broad contributions across areas of industry and geographic coverage.
Rob Holmes: Real estate loan growth of $300 million was driven by increased client activity and slightly slower payoffs, resulting from the material move higher and the 10-year U.S. Treasury rates this quarter.
Rob Holmes: We continue to provide value in multiple ways for those clients to whom we choose to extend balance sheet, which manifests in the sustainability of the deposit and fee income trends noted earlier.
Rob Holmes: Average mortgage finance loans increased 5% during the quarter driven by mortgage rate declines late in the third quarter and modestly increased dwell times.
Rob Holmes: Given ongoing rate volatility, we remain cautious on our outlook going into 2025. Estimates from professional forecasters suggest total market originations to increase by mid-teens percent in 2025, compared to our internal estimates of approximately 10 percent should the rate outlook remain intact.
Rob Holmes: Q4 marked the second consecutive quarter of growth in non-interest bearing deposits excluding mortgage finance, which increased 4% or $127 million year-over-year, finishing at the highest levels since the third quarter of 2023.
Rob Holmes: When combined with client interest-bearing deposit growth of $943 million over the same period, our sustained success in attracting high-quality funding associated with our core offerings is enabling maintenance of decade-low broker deposit levels.
Rob Holmes: and continued select reduction of higher cost deposits where we are unable to earn an adequate return on the aggregate relationship.
Rob Holmes: Period of mortgage finance on interest-bearing deposits decreased $1.6 billion quarter-over-quarter.
Rob Holmes: As escrow balances related to tax payments are remitted in late November and run through January Before beginning to predictably rebuild over the course of the year For the quarter average mortgage finance deposits were 107 percent of average mortgage finance loans down modestly from the prior quarter and in line with our previous guidance of 110 percent
Rob Holmes: Ending period non-integrating deposits excluding mortgage finance were 14% of total deposits and our expectation is that that percentage remains relatively stable in the near term.
Rob Holmes: Our modeled earnings at risk were relatively flat quarter over quarter, with current and prospective balance sheet positioning continuing to reflect a business model that is intentionally more resilient to changes in interest rates.
Rob Holmes: Given both the volume of maturing swaps and currently more conducive interest rate curve, we do anticipate future interest rate derivative or securities actions in 2025, augmenting potential rates fall earnings generation at materially better terms than available during our deliberate pause through the mid part of last year.
Rob Holmes: The predictable quarterly decline in NEM and net interest income at 23 basis points and 10.5 million, respectively.
Rob Holmes: was primarily related to seasonal mortgage warehouse factors, as well as timing differences associated with the impact of lower interest rates on our SOFR-weighted loan portfolio, relative to Fed funds-driven realized benefits of rate reductions on overall deposit costs, which will be more fully reflected in January financials.
Rob Holmes: Adjusted quarterly non-interest expense decreased $17.9 million to $172.2 million as the full quarter expense benefit of the strategic actions taken in the third quarter were realized, along with regular adjustments to compensation accruals.
Rob Holmes: As a reminder, first quarter non-interest expense will be elevated due to certain seasonal expenses related to payroll and compensation expense.
Rob Holmes: The total allowance for credit loss, including off-balance sheet reserves, increased $5.9 million on a link quarter basis to $325 million, of $29 million year-over-year, which when excluding mortgage finance is 1.87% of LHI, a high since the adoption of CECL in 2020.
Rob Holmes: Quarter-over-quarter criticized loans declined 184 million or 20 percent driven by both more upgrades and fewer downgrades across commercial and real estate credits than in any quarter since 2022.
Rob Holmes: Criticized loans as a percentage of LHI exited the year at 3.18 percent, down 45 basis points or 24 million relative to the fourth quarter of last year.
Rob Holmes: Despite these notable improvements, we remain highly focused on proactively managing credit risk across both a range of macroeconomic and portfolio specific scenarios, including those associated with the recent backup and interest rates.
Rob Holmes: Net charge off of 12.1 million or 22 basis points of average LHI is driven predominantly by the partial resolution of previously identified problem credits.
Rob Holmes: Consistent with prior quarters, capital levels remain at or near the top of the industry.
Rob Holmes: Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile.
Rob Holmes: CET1 finished the quarter at 11.38 percent, a 19 basis point increase from prior quarter. This capital generation outpaced increased risk-weighted assets associated with quarterly loan growth.
Rob Holmes: We continue to manage capital in a proactive and analytically rigorous manner, with near-term capital availability supported by the implementation of enhanced credit structures for a portion of our mortgage warehouse facilities, which could result in a subset of that loan portfolio being eligible for reduced risk weighting.
Rob Holmes: Firm ended fourth quarter with tangible common equity to tangible assets of 10% which continues to be ranked first amongst the largest banks in the country and experienced an increase in tangible book value per share of 8% year-over-year to $66.32, a record level for the firm.
Rob Holmes: Turning to the Full Year Outlook, which incorporates continued realized momentum associated with multi-year investment across the platform.
Rob Holmes: Total revenue growth of high single to low double-digit percent contemplates another year of industry-leading client adoption and associated growth and our fee-income areas of focus.
Rob Holmes: A full year targeted 2025 total non-interest revenue reaching $270 million.
Rob Holmes: Anticipated non-interest expense growth of high single digits is higher than previously established guidance.
Rob Holmes: Accounts for increased salaries and benefits related spend associated with the improved fee income outlook
Rob Holmes: After the multi-year process of effectively building the Reserve to record levels reflecting our consistently conservative posture, limited remaining legacy problem credits and recent migration trends support our full-year provision outlook of 30 to 35 basis points of average LHI excluding mortgage finance.
Rob Holmes: which more closely tracks the trailing charge-off rates while preserving industry-leading coverage levels.
Rob Holmes: Taken together, this outlook suggests another year of meaningful earnings growth and achievement of quarterly 1-1 ROAA in the second half of the year.
Speaker Change: Operator, we'd now like to open up the call for questions. Thank you.
Thank you, Mark.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question, I do remind you to please press star followed by one on your telephone keypad.
Speaker Change: and if any reason you would like to remove that question please press star followed by 2 and again to ask a question press star followed by 1
Speaker Change: And as a quick reminder, if you are using your speakerphone, please remember to pick up your handset before asking a question. We'll pause here for a second whilst questions are registered.
[inaudible]
[inaudible]
Speaker Change: We have the first question from Ben Garlinger with City, please go ahead.
Hey, good morning.
Morning Ben
Speaker Change: I was wondering if we could kind of unpack the expense guidance a little bit. I get that you're implying
Speaker Change: Stronger fee income, specifically the investment banking, just typically has a higher expense base.
Speaker Change: Well, and now you're not going to give 26 guns, but is there kind of a plateauing effect, or should we kind of assume?
Speaker Change: kind of a similar correlation of this stronger fee income stronger or higher expense base kind of going forward. I'm just trying to understand the relative change on the expense front.
Speaker Change: Yeah, happy to give you some detail on that Ben, so the midpoint of that high single digit guide puts you right around $800 million or so for the year.
Speaker Change: which is $30 million higher than the $770 million that we noted on the third quarter call. That increase is almost entirely driven by additional frontline talent, primarily in investment banking and treasury solutions, which we started adding in late 2004 and would anticipate to grow through the first half of the year.
Speaker Change: You'll note that the fee income guidance was also increased by a similar amount from $2.270 from the $2.440 that we noted in October. As previously discussed, platform maturity is driving significantly tighter earnbacks on incremental investment.
Speaker Change: Based on the timing of those new frontline ads, Ben, we'd expect the fees to ramp over the duration of the year.
Speaker Change: which is consistent with our outlook of delivering a 1-1 in the back half of 25 and
Speaker Change: And to your point, given ability to translate investments into high-quality revenue growth, we would expect continued pickup in 2026.
Speaker Change: It should be nicely accreted to the full return profile. And then maybe one other comment on expenses as you work your way from the fourth quarter into the first quarter, if you want to call out the first quarter non-interest expense always includes seasonal adjustments associated with comp and benefits.
Speaker Change: Excluding that amount, the impact of the new ads late in the year through the first quarter should push dollars and benefits back up to about $120 or so exiting Q1, even both annual incentive accrual resets.
Speaker Change: As well as the new talents being on boarded to drive additional fee income
Speaker Change: Gotcha, that's helpful. And then I know previously when you're talking investment banking or just general fee income upside
Speaker Change: Some of it was predicated on lower rates. They're going to give them a different mix of action.
Speaker Change: Investment banking fees, with rates not coming in as much as previously expected, do you think that transition still takes place, or just trying to get a sense of the fee cadence and where that business specifically is?
Speaker Change: Yeah, Ben, I think at some point we'll be big enough to be more correlated to the macro. At this point, we're pretty confident in our ability to generate fee income.
Speaker Change: The growth this year was significant across all three areas of focus. Each one of them grew by more than 10% We did over 30 capital markets transactions this year We're just outside the top 10 for middle market book runners on syndicated facilities north of a hundred billion of notional trades
Speaker Change: There's significant momentum in the investment bank. Rob noted in his comments that we'd anticipate another year of record new client growth. As those clients land on the platform, you're increasingly able to solve a wide range of...
Speaker Change: Potential financing issues for them, which is likely to result in continued upward trajectory on non-interest income.
Okay, that's helpful, Carl. Thank you.
You bet.
Speaker Change: Thank you. Your next question comes from Peter Winter with DA Davidson. Please go ahead.
Peter Winter: Good morning. I wanted to also ask about the guidance. I saw the increase the total revenue growth to high single-digit below double-digit versus prior guidance of high single-digit. So the question is
Speaker Change: Although it's strong, I'm just surprised you didn't change the lower end of the guidance given a stronger outlook for fee income, and you talked about last quarter that with less rate cuts in the forward curve, that would lead to upside as well to the forecast.
[inaudible]
Speaker Change: So the path to the higher end of the revenue guide, we gave you a 60% interest-bearing deposit beta by the mid-part of the year. Expect with a 7% 30-year fixed-rate mortgage, you're going to have a $1.9 trillion market
Speaker Change: which should drive about a 10% increase in average warehouse balances for us to about $5 billion four-year average.
$270 million of fees.
Speaker Change: If you're able to deliver between, call it mid to high single-digit LHI growth, that could push you to the higher end of the revenue guide.
Speaker Change: Rob said since he's been here and at this point is fully indoctrinated through the culture, the intent is not to grow loans. The intent is to add high quality clients and help them solve problems.
Speaker Change: To the extent that that results in additional loan growth, that ought to be accreted to the revenue guide.
Got it. And then...
Speaker Change: Yeah, we think it could get to 60. So 32% is what showed up in the quarterly financials, but through year-end, Peter, we pushed pricing down to closer to a 50% rate.
Speaker Change: So we had about 550 million of CDs mature in the quarter. They rolled off at a rate of about 515 basis points.
Speaker Change: of those 460 or so came back on at a rate closer to 440 basis points.
Speaker Change: Those actions reduced interest rate and deposit costs to $4.15 in December, relative to $4.63 in September. That's not a spot number, that's a full month number.
Speaker Change: We've got about 820 million of CDs that are going to mature in Q1 at an average rate of 5% relative to posted rates of about 4.4% And we'll look to replace or reprice those based on variety factors related to balance sheet positioning
Speaker Change: So it's with those components that we think we get to the 60 interest-bearing data by mid-year
And that's even without any ray cuts.
Yes.
That's great. Thanks, Matt.
Bebop.
Speaker Change: Thank you. We now have a question from Jared Shaw with Barclays Capital. You may begin.
Jared Shaw: Hi, good morning. Could you spend a little bit of time on margin and how we should be thinking about that in light of your 110 ROA goal at the second half of the year?
Speaker Change: Yeah, so starting with Q1, it's important to just note that there's still some remaining seasonality in the balance sheet. So with mortgage finance declines you are likely to see a bit of a pullback in NII in Q1.
Speaker Change: The rate reduction in November and December has not yet flowed through to mortgage financials. There's a bit of a delay on that, so that should support actual expansion of margin in Q1.
Speaker Change: north of three percent back to levels that we saw in Q1 of last year.
Jared Shaw: And then I think, Jared, maybe better than trying to articulate a forward margin would just be to think through the guides that we just provided on how to move to the higher end of that revenue growth.
Jared Shaw: I think you're going to be sustainably above 3% based on that outlook, but have a variety of different paths to deliver the revenue targets.
Okay, all right, thanks.
and then...
Speaker Change: Looking at capital and the buyback announcement, should we be thinking that buybacks are a bigger part of the plan going forward or is this more of just you know an administrative renewal of the prior buyback?
Speaker Change: We'll use the same approach that we've used since Ralph's arrival, to be honest, Jared. So, we said before we're trying to build a business model balance sheet for all cycles.
Speaker Change: which includes inevitable increase at some point in client appetite for bank debt and quite adamant that having especially high tangible common equity levels is
what we believe to be a competitive advantage.
Speaker Change: We also noted in the remarks the potential for increased regulatory capital from enhanced credit structures for a portion of the mortgage warehouse facilities.
Speaker Change: That's not enabled through use of an expensive derivative, but instead adjustments to facility structure, which that reflects what clients are used to with large bank counterparties.
Speaker Change: We did migrate a few clients into that structure prior to year end and have potential for up to 10% of warehouse balances to qualify for reduced risk weighting by end of Q1.
Speaker Change: Too early to get into full-year impacts on that, but we'll certainly keep you up to date as it moves along. Obviously we would potentially create some excess regulatory capital.
Speaker Change: Okay, thanks. And just finally for me, I guess, what would be the sensitivity of the fee income guide if we got one or zero rate cuts from the UCR impact to that?
Speaker Change: We feel pretty confident in the 270 regardless of the rate outlook. I mean our ability to onboard gross P times V is I think peer-leading so we grew at 11 percent this year, 18 percent growth in treasury product fees.
Speaker Change: That's not an initiative that was spun up close to a company bank, that's a core component of how we want to build the franchise. So I'd anticipate continued growth in core operating deposits this year alongside continued growth in treasury product fees and again feel pretty good about the 270 regardless of economic outlook.
Speaker Change: Rob, do you have anything you want to add on that? No, I think you've articulated it well.
Great, thanks a lot.
https://www.youtube.com
Speaker Change: Thank you Jared. Your next question comes from Anthony Ilion with J.P. Morgan
Anthony Ilion: Hi, everyone. Just a follow-up on the outlook. Last quarter, you guided 2025 NII to increase high single digits, but if I do the math right, your revenue guide implies NII increasing about mid-single digits now. Matt, just what changed in the implied lowered NII guide? Is it just a higher-for-longer rate outlook?
Anthony Ilion: Yeah, I'm not sure that the NII guides changed a whole lot, so you get mid to high single digit loan growth.
Anthony Ilion: which is just going to be an outcome of the products and services that clients choose to use on the platform, you could settle into the higher end of that revenue guide.
Speaker Change: Okay, so even using the Ford... Go ahead. Yeah, alongside $5 billion in average warehouse...
60% interest rate and deposit beta in the mid-year.
Speaker Change: Okay and then my follow-up, the additional frontline talent you plan to make this year, is this in segments and products you are already in or are there still areas you may be considering to enter as well? Thank you.
Speaker Change: skillset and talent base across all of our different industry verticals and segments in the investment bank, as well as treasury services.
Speaker Change: So, no real new introduction of new products and services other than what we've recently introduced such as public finance, but none for the quarter going forward.
Thank you.
Speaker Change: Thank you. As a quick reminder, please press star followed by one if you would like to register a question.
John Armstrong: and we now have John Armstrong with RBC on the line.
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Joan, can you please ensure your line is unmuted locally before speaking?
Thank you very much.
Speaker Change: John Armstrong, could you please ensure your line is unmuted locally?
Speaker Change: We will close this question and I can confirm that that concludes the question and answer session here. I would like to hand it back to Rob Holmes for some closing remarks.
Rob Holmes: Thank you all for joining today's call. I can confirm today's call has now concluded. Please enjoy the rest of your day and you may now disconnect from the call.