Texas Capital Bancshares Inc (TCBIO) 2023 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience.

This call will begin shortly.

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.

(Operator Instructions)

I would now like to hand over to Jocelyn Kukulka, Head of Investor Relations.

The floor is yours.

Please go ahead.

Good morning, and thank you for joining us for TCBI's fourth-quarter 2023 earnings conference call.

I'm Jocelyn Kukulka, Head of Investor Relations.

Before we begin, please be aware that this call will include forward-looking statements that are based on our current expectations of future results or events.

Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements.

Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them.

Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release and 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 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&A session.

I'll now turn the call over to Rob for opening remarks.

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.

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.

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, at 12.6%, ranked fourth among the largest banks in the country.

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.

And liquid assets at 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 in what continues to be a dynamic and challenging operating environment for all industries.

We have over the last three 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 payment 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 two years, contributing to an 11% improvement in gross payment revenues in 2023 as treasury business awarded in prior quarters continues to ramp.

Our firm now provides faster, more seamless client onboarding than the major money center banks and ongoing frictionless client journeys that match or exceed [theirs] with high touch, local service, and decisioning.

This theme extends to our investment bank as the 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&A, and sales and trading each contributing over $10 million 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 that 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.

The firm has been and remains committed to banking and 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 in '23 did disproportionately impact at 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 tenet 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.

While we continue to bias capital used 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 long-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 in 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 realized operational efficiencies, all objectives that we made significant headway on this year.

Thank you for your continued interest in and support of our firm.

I'll turn it over to Matt to discuss the financial results.

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 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.

Treasury 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.

We are 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, which are the firm's treasury capabilities, are on par or superior to peers in a highly competitive market.

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% and 11%, respectively, is on pace with plan as we continue to invest in this high-potential offering heading into 2024.

Investment banking and trading income of $10.7 million decreased from consecutive record levels in the prior four quarters which were marked by a series of marquee transactions on a still-emerging platform.

The result is 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.

In all, we are both pleased with the 64% growth in our fee income areas of focus for the year and in our collective ability to further differentiate our value proposition in the market.

As expected, total revenue declined linked quarter to $246 million as both net interest income and non-interest revenue pull back from respective highs experienced in the preceding quarters.

Net interest income was pressured primarily by anticipated seasonal and cyclical impacts in mortgage finance as peaks of funding levels reduced net interest income by $18 million, roughly equivalent to the firm's total-quarter decline.

Total adjusted revenue increased $99 million 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.

Quarterly total adjusted non-interest [expense] increased less than 1% linked quarter and is nearly flat relative to adjusted fourth quarter 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 select investments associated with long-term capability built.

Taken together, full-year adjusted PPNR increased 14% to $338 million.

This quarter's provision expense of $19 million 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 million or 45 basis points of average LHI, excluding mortgage finance loans, consistent with communicated expectations.

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.

This financial progress continues to be supported by a 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.

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.

Ending period LHI 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.

Total LHI, 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.

New relationships onboarded in 2023 were up nearly 10% relative to elevated 2022 levels, 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 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.

And after consecutive years of capital build, we would expect to sustain pace of new client acquisition to result in modest balance sheet releveraging over the next year.

Period-end real estate balances increased $142 million, or 3% in the quarter, as pay-off rates normalized from record highs in the prior year.

Despite the modest increase, we are positioned for a continuation of realized pay-off trends in the medium term.

Our clients' new origination volume also remain suppressed with new credit extension largely focused on multi-family, reflecting both our deep experience in this space and observed performance through credit and interest rate cycles.

Average mortgage finance loans has decreased $751 million, or 16% in the quarter, to $3.9 billion as the seasonality associated with homebuying approaches its annual low moving into Q1.

While both fourth-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 the fourth 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.

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.

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 out performance 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 brokered deposits, year-over-year growth of 4% reemphasizes our success at attracting quality funding associated with core offerings during a challenging year.

Period-end mortgage finance non-interest bearing deposit balances decreased $1.7 billion 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 in mortgage origination volume weighs on client's short-term credit needs.

We expect the ratio of average mortgage finance deposits to average mortgage finance loans of approximately 120% in the first quarter, modestly easing pressure on mortgage finance yields as origination volumes begin to recover through the year.

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 $3.6 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 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.

Brokered 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 anticipate additional declines in brokered CDs during the first quarter, as $300 million 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 and modeled up 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.

Downward rate exposure remained relatively flat quarter over quarter at 4.4% of $40 million 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 or fee-based income.

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.

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 $17.4 million, predominantly as a function of the previously described impact of relationship pricing on mortgage finance loan yields, an 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 three consecutive quarters while retaining an excess of two 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.

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 LHI at quarter end, up $21 million 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 than during the pandemic peak in third quarter 2020.

Criticized loans increased $61 million or 9% in the quarter to $738 million or 4% of total LHI, as increases in special mention of predominantly commercial real estate loans were only partially offset by pay-offs 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.

During the quarter, we recognized net charge-offs of $13.8 million, predominantly related to partial charge-offs of two 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 remained 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.

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 1.8 million shares, or 3.7% of the shares outstanding at year end 2022, for a total of $105 million at a weighted average price approximately equal to prior-month tangible book value.

Our guidance accounts for the market-based forward rate curve with assumed Fed funds of 4.25% 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 multi-year capital recycling efforts.

We should increasingly enable our sustained momentum in new client acquisition to manifest into modest, risk-appropriate balance sheet expense.

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 multi-year investments in infrastructure, data, and process improvements to continue yielding expected operating and financial efficiencies, which 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 a resumption of quarterly increases in 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, excluding mortgage finance.

Operator, we'd now like to open up the call for questions.

Thank you.

Thank you.

(Operator Instructions) Ben Gerlinger, Citigroup.

Hey.

Good morning, guys.

Morning, Ben.

Welcome to the group.

Thank you.

I was curious if we could just parse through the revenue guidance a little bit.

It was helpful, giving the year-over-year comp on PPNR.

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 give just your overall or 10,000-foot view on deposit betas after we get that fifth or potentially sixth cut?

I guess it's probably limited in the beginning, but towards, I guess, the end, just any thoughts on that?

Yeah, Ben.

Happy to take that.

So I mean, it's bifurcated between the deposit betas and then the cost of funding within the mortgage finance business.

So the model down rate scenario for interest rate deposit betas in the static balance sheet is 60%.

You're not going to hit 60% over the first five cuts.

You'll probably hit half of that as it builds over the duration of that cut program.

We have modeled in our guide the expectation that you actually see interest-bearing deposit costs continue to drift up at a pace similar to what we experienced that in the last quarter until if and when the Fed actually takes action.

We have a different scenario as it relates to mortgage finance, which obviously had a significant impact this quarter.

So the $17 million, $18 million 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 overstate.

So there's really no precedent to look back to.

There's certainly no Texas Capital Bank experience from which to pull insights from.

So as volumes just evaporated for mortgage originators over the last year, deposits move to compensate it at a pace well in excess of historical experience that really start to accelerate toward the middle of the year.

And [open] that deposit beta which flows through the 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.

We realized with deposit rates rising faster on that business, we are 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, they are more likely to start to cut.

We also realize we are going to need as much downside protection because we would expect those mortgage [fence] deposits to reprice down at a beta consistent with the 80% on the way up.

Got it, sir.

Okay.

That's a lot.

That's helpful color.

I definitely have go through the transcript to make sure I have everything.

But from the expense

--

(multiple speakers) first question, Ben.

Well, yeah.

I mean, that's really the million-dollar question at this point, but -- and that's not just for you guys, that's everybody.

So with you guys, specifically, it seems like this multi-year process, you have all the seats filled with people (inaudible) this 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 are the investments other than just people?

Is it technology or is it really just -- do you think the revenue could show up some of its compensation?

Just asking why we still see upside in expenses.

Yeah, happy to talk about that, Ben.

We've been really consistent in describing our objective around non-interest expense, which is really improved the productivity of the expense base.

And it was our view that you don't show up in a challenging revenue environment and then make a determination you want to invoke expense discipline.

We think that instead, you have to make multi-year investments, process, infrastructure, technology, which enables you over time to lower risk, improve throughput, make it easier for clients to do business with you.

That makes your business better, and that ultimately has a nice by-product of reducing structural operating expense.

You could see that 2023 expense base really near those priorities, where the multi-year build in middle and back office 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 '24, you'll see the typical $8 million to $10 million of seasonal comp expense in the first quarter.

And then full year, you should see full-year salaries and benefits grow at a pace in excess of the low-single-digit total non-interest expense gap.

For all non-interest expense not called salaries and benefits, we can pack that at about $70 million.

And then the underlying composition will continue to bias toward [acting] comps as we reach our target level of [change and make] project portfolio this year.

Rob, do you want to talk through capabilities?

Yeah.

I would just say that I think Matt said it very well.

I think third-quarter salaries and benefits were down 5% when we doubled the frontline

[beta].

So that tells -- that 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 a platform, the platform is fully loaded with all the solutions that we wanted for our clients.

So we've endured all the expense, both from products and services, a new commercial card, a new merchant, a new [lockbox], a new payments platform.

We basically have a branded bank, 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. '22 was a record into '23, and we expect '24 to do that again.

So the pipelines are full, the expense base is fully loaded, and the platform is built.

Got you.

That's helpful.

I'll go back in the queue.

Matt Olney, Stephens.

Hey, thanks.

Good morning, everybody.

There was some commentary in the outlook about modest balance sheet releveraging as well as moving that CTE1 capital ratio lower during the year.

Any more color on how we achieve this, whether it's stock repurchase activity (inaudible) loan growth?

Just any more details behind that?

Thanks.

Yeah, Matt.

Thanks for the question.

But we've been quite vocal about how progressively been (inaudible) some [drops cycle] on repositioning our capital base.

And at the end of year three, I feel like that pace should begin to slow in 2024.

So throughout -- 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.

So sustaining that pace of client acquisition, coupled with now fewer identified opportunities for our needed capital recycling, should ultimately result in increased balance sheet growth.

And part of having -- part of the deliberate build to peer-leading levels of tangible common equity and 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 just sustained client acquisition begin to show up for loan growth.

Yeah.

I would say that what Matt said was 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 aspire to bank anymore and replacing that with a client which is a sector-leading great company, great management team (inaudible) balance sheet committee where we are earning more than our cost of capital for the luxury channel because we've built more the loan-onlys.

And that (inaudible) comments 95% (inaudible) are more than loan-only.

So there's that other factor I said (inaudible) for a longer term strategic view.

So recycling the loans, if we did nothing else but just sit on (inaudible) much improved return of that capital (inaudible) client.

The other thing I'll just say on that, Matt, is that that excess capital also gives you a 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.

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, which would be -- we've talked earlier or we joked earlier in the room that it'd 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%.

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 million shock that's shown in the sensitivity modeling.

And then, of course, because of the real focused on building fee income verticals over the last few years, you'll be able to generate additional revenue on a down rate environment on those offerings as well.

Okay.

Okay.

That's helpful.

I think I heard most of that.

There was some feedback coming from the line, but I think I heard most of your commentary.

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 fees versus NII?

As Rob mentioned, Matt, the platform associated with all of the fee income businesses are as good as it's ever been.

So (inaudible) more than 10% over the last three years in that premium offering (inaudible) car and merchant fully here.

The current pipeline in the treasury business is equivalent to the full-year 2023 realized business.

After fourth quarter for the investment bank, where you had all offerings other than sales and trading have their worst quarter of the year, that delta between the realized $11 million and the mid-teens guide was solely related to client transactions we're working on pushing into 2024.

That investment banking pipeline has significantly improved year over year.

So we now have the right coverage, we got the right connectivity, and we've got real earned market momentum.

So I'd expect that to -- all those fee income areas of focus to increase both in terms of revenue this yar and in a percentage of total contribution.

I would just highlight one other thing, what Matt said about [p times v] growing in addition to 10%.

Each year for the past three years, the market norm that I'm used to historically is like

[two].

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 we're feeling really, really good about that.

That has to do with clients.

It has to do -- in infrastructure, it is good as any money center bank.

It has to do with new client journeys because the (inaudible) is able to ramp faster and (inaudible) revenues forward.

So that's going great.

And by the way, the (inaudible) was down (inaudible) to see actualize more fees.

So the contribution there will be good.

Then one last thing that's part of the (inaudible) I think it's hard to compart the importance of a broad $10 million plus the revenue contributions from five different areas of the breadth across the bank.

Syndications, capital markets, capital solutions, M&A, and sales and trading, that's super encouraging in a very healthy investment bank.

Okay.

Thanks, guys.

Woody Lay, KBW.

Good morning, guys.

I wanted to start on the deposit base.

Broker deposits continued to move lower in the quarter.

And in the slides, you called out that the funding base continues its transition to a target state composition.

Can you just remind us what you think the target state composition looks like when we look out a couple of years from now?

We will never hit our target state composition of our funding base, Woody.

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 as perfect, as we said.

We know every client, commercial client, that is on the platforms

(inaudible)

As you saw, broker deposits are down. [Interest] deposits have shrunk over like $9 billion-plus when I got here to just over $1 billion.

So we feel like we're going to need dramatic improvement in the quality of the deposit with the quality client also.

There will be (inaudible) conservative target (inaudible) base.

The

(multiple speakers)

Sorry.

Just wanted to say the more regular higher quality client, the better the

(inaudible)

That makes sense.

Maybe moving to the asset sensitivity.

You touched on that it moved lower, as evident on slide 9.

Does the seasonality in mortgage impact -- does that impact the disclosure?

Or is that not really an impact?

No.

I mean, it definitely impacts the disclosure, Woody.

So the disclosed sensitivity is based off end-of-period balance sheet.

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 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 that absolutely impacts that.

Yeah, got it.

And maybe even more (inaudible) on mortgage finance.

You -- go ahead.

No, go ahead.

Please.

Yeah.

Just lastly on the mortgage finance.

You note in the slides that the deposit-to-loan level should normalize back to where it was in the third quarter.

I mean, do you think the yield popped back up to that mid-2% range?

Or is that a little bit aggressive next quarter?

We think the yield does move out from the [112] dynamic that has greatly influenced the self funding ratio.

So you had 145-ish self funding ratio this quarter.

Should that move back down to 120 in Q1, which is (inaudible) expectation, you'll see that yield move up.

If you think about full year, if the rate curve flows out as the market expect it to, your average yield on the mortgage business will still be low by '24 and it (inaudible) at '23.

Bu 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 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.

All right.

That's all for me.

Thanks for taking my questions.

Anthony Elian, JPMorgan.

Good morning.

Looking at slide 8, looks like average non-interest bearing declined due to mortgage finance.

But then non-interest bearing, excluding mortgage finance, the gray bar at the bottom, continued to decline to about $3.6 billion in 4Q.

What drove that sequentially?

And do you think that the $3.6 billion average or [33] in the period represents the bottom?

Yeah.

So the [36] average in the fourth quarter, Tony, matches almost exactly the third quarter end-of-period balance, which would suggest that the decline, 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 would just be driven by client transactions.

And then if we think about full year '24, the double-digit growth in gross p times v that's not been sustained over the last three years really accelerated into the back end of this year.

We talked on the last call that generally shows up in every 26 to 18 months after you win the business.

You should see some of that begin to show up in the middle to latter half of this year.

And then just the last comment, I know you know this, Tony, but others on the call may not fully appreciate it.

I mean, our non-interest bearing deposit base is commercial non-interest bearing.

It's not a bunch of very small retail checking accounts.

So for clients to transact at the end of a quarter and that could cause fluctuations is in no way a surprise.

So I'd say the trends we described in Q1, Q2 where folks were actively seeking higher options, that's largely abated at this point.

Understood.

Thank you.

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

I guess, 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.

It's 100% execution now.

That's what's so exciting about where we are in the transformation.

The risk of the build is done.

We have a core competency now of picking efficiencies, improving client journeys.

We have data as a service.

We feel really good about the tech platform to 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.

But that's just one component of it.

I don't think you see the efficiencies abate, as Matt said.

I think he quantified them.

(Operator Instructions) Brody Preston, UBS.

Good morning, everyone.

Hey, Brody.

I wanted just to clarify something, Matt, just what you said on the mortgage finance versus the static balance sheet NII sensitivity that you provided.

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?

No.

I'm saying 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 to support a flex-up in mortgage finance volumes from your existing client base, which would generate more than enough revenue to offset that $40 million declined?

So I think oftentimes -- and I totally (inaudible) but oftentimes Brody, I think folks, when they think about rate, 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

[sulfur].

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 that's required by SEC and is presented for comparison to other banks.

So we'll make sure to give you guys much detail as we can on that moving forward.

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 guys obviously have a lot of business in the IB 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?

Yeah, I'll start.

I mean, there's a number of different dynamics to this question.

One is as rates go down, investment banking fees will go up.

More transactions will take place.

The clients will be doing things with the balance sheet.

There'll be acquisition activity, et cetera.

There will 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 -- but also invest, like I said, in treasury management.

Fees will come up because [ECRs] will go down.

So I think we built the business to really succeed at any market or rate cycle.

And as we go down, we'll see an increase in ability to take advantage of that scenario.

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 rates business where you had an inverted curve and enabled 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.

Got it.

And I just had a couple last ones on the mortgage finance business.

Would you -- do you happen to have -- of the $5.6 billion of the average deposits you have this quarter, what portion of that is compensated via the relationship pricing?

I think the technical term would be significant.

Yeah, a significant portion.

That's disclosed in the deck.

And as I alluded to, Brody, the portion who are compensated has increased -- 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 a really strong.

And then the portion that had moved compensated has also increase.

And then the associated beta has also increased as they face a just, hopefully, like once-in-a-century type decline in their volumes and ability to generate sufficient cash flow.

So you've got all three of those things really pressure deposit costs.

And again, different bit on the commercial side.

We would expect a similar beta on the way down there.

We don't anticipate a material lag, if any.

Got it.

And then just last one.

Beyond the first quarter, Matt, would you 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.

Yeah, 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 [47], average, for the full year.

And you'd start to see that, Brody, pick up to Q2 and Q3.

And then the implied forward curve would suggest that you see rates come down enough in the fourth quarter, where there wouldn't be as large of a third- to fourth-quarter decline as we've historically experienced.

You'd have that buffered a bit by declining right environment and increased volumes.

Got it.

That's very helpful.

Thank you very much for taking all my questions, everyone.

You got it.

This concludes our Q&A.

I will now hand back to Rob Holmes, CEO, for closing remarks.

Thanks, everybody, for joining the call.

Have a great quarter.

Look forward to talk to you in the second quarter.

Ladies and gentlemen, today's call is now concluded.

We'd like to thank you for your participation.

You may now disconnect your lines.