Q4 2023 Texas Capital Bancshares Inc Earnings Call

Participants

Jocelyn Kukulka; Investor Relations; Texas Capital Bancshares Inc

Rob Holmes; President, Chief Executive Officer, Director; Texas Capital Bancshares Inc

Matt Scurlock; Chief Financial Officer; Texas Capital Bank NA

Presentation

Operator

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's yours. Please go ahead.

Jocelyn Kukulka

Good morning, and thank you for joining us for TCBI fourth-quarter 2023 earning conference call. I'm Jocelyn Kukulka, Head of Investor Relations.
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. 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. 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.

Rob Holmes

Thank you for joining us today (technical difficulty) 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 [16%], 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 a capability set on par with the top Wall Street banks. It ensures clients will never outgrow the services we can provide for them.
Market affirmation was evident this year, as the 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 was 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.
Foundational tenor of the financial resiliency we have established and will preserve is continued focus on tangible book value, which finished the year up nearly 9%, ending at $61.34 per share, an all time high for our firm. While we continue to [buy us] 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 operation 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.

Matt Scurlock

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 (technical difficulty) 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 firms 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 offerin 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. While there will always be some volatility associated with this specific line item, we expect increasingly broad and granular contributions to over time at least partially alleviate expected quarterly fluctuations associated with the new business.
In all, we are both pleased with the 64% growth in our fee income areas of focus for the year and in their collective ability to further differentiate our value proposition in the market. As expected, total revenue declined in the 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 pressure primarily by anticipated seasonal and cyclical impacts of 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 positioning 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 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 our 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 payoff rates normalized from record highs in the prior year. Despite a 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 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 Q4 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 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. The same professional forecasters are 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 and 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 on interest-bearing deposit balances decreased $1.7 billion quarter over quarter, as expected.
As escrow balances related to tax payments or 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 (technical difficulty) 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, the interest bearing deposits with two other cash management options on our platform continues to slow. Ending period non-interest bearing deposits, excluding mortgage finance, remains 15% of total deposits, just flat quarter over quarter. Our expectation is that this percentage remains relatively stable in the near term.
Broker deposits declined $477 million during the quarter as growth in client focus deposits consistent with our long-term strategy remains sufficient to satisfy desired near-term balance sheet demands. We anticipate additional declines in broker 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 model earnings at risk evolved consistent with indications of a slowing, tightening cycle as the increase and modeled up data lessened remaining sensitivity to further upward rate pressure as measured in a plus-100-basis-point shock scenario from $29 million in Q3 $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 deposits 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 and increased interest bearing deposit volume tied to growth in client balances, partially offset by increased income on higher average cash balances. The systematic realignment of our expense base with strategic priorities continues to deliver the expected efficiencies associated with a rebuilt and more scalable operating model.
Even when accounting for the seasonal factors associated with Q1, salaries and benefit expense has declined three consecutive quarters while retaining an excess of two times the number of frontline employees since the transformation began. Preparation for an inevitable normalization and 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 and commercial credit dependent on consumer discretionary income and 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.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Ben Gerlinger, Citigroup.

Hey, good morning, guys.

Rob Holmes

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 -- as we get to the end, just any thoughts on that?

Matt Scurlock

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 (inaudible) deposit betas in the static balance sheet is 60%. You're not going to hit 60%. You'll probably hit half of that. It builds over the duration of that cut program.
We have modeled that in our guide 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 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, that they are more likely to start to cut. Otherwise, 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 on that stuff. We definitely have to look at the transcript to (inaudible) make sure I have everything. But from --

Matt Scurlock

(multiple speakers) first question, then.

Well, yeah. I mean, that's really the million-dollar question at this point, but -- and that's just for you guys, tha's everybody. So with you guys, specifically, it seems like this multi-year process, you have all the seats filled with people about this kind of execution on the plan. It doesn't help that the Fed moved pretty dramatically, and it could move pretty dramatically again. But when you just think about overall expenses, what else are we spending money on? I guess that the ramp is not nearly as much. But what other investments, other than just people, the 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?

Matt Scurlock

Yeah, happy to talk about that. We've been really consistent in describing our objective around non-interest expense, which has 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 byproduct 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 move 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 that typical $8 million to $10 million of seasonal comp expense in the first quarter. And then full year, you see solid 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 impact 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?

Rob Holmes

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've doubled the frontline [beta]. So that (inaudible) quantifies Matt's comments about repositioning the expense base and our successes in doing so.
But to your point about the expenses already being at a platform de Plata, the U.S. with all 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, a new commercial card and merchant lockbox new payments platform.
We basically have a brand is bank state-of-the art, 20 INR23 fake Payments Bank. And though we'll roll that out to clients at a record pace and onboarding clients at a record pace of 22 as well record at 23, and we expect 24 to to do that occurred so far, the pipelines are full. The expenses, the expense base is fully loaded and the same platform is built structurally.

That's helpful. Thank you.

Operator

Thank you. Matt Olney, Stephens.

Hey, thanks. Good morning, everybody. And there was some commentary in the outlook about on modest balance sheet to releveraging and 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, accelerate loan growth? Just anymore details behind that?

Matt Scurlock

Yes. And I think your question, but we've been quite vocal about how progressively been shopper some drops cycle on repositioning our capital base. And at the end of year three, feel like that pace into a little bit 22 before just drops covenant. We had a record year for new fine acquisition in 2022. We beat that by 10% in 2023, and we'd expect to do the same in 2020 for sustaining that pace of client acquisition, coupled with now fewer identified opportunities for needed.
Capital recycling should should ultimately result in some increased balance sheet growth. And part of having part of the deliberate build to peer leading levels of tangible common equity of tangible assets is to just ensure you've got balance sheet capacity that's adequate to support any necessary growth from the client base. So you should see the benefits of just sustain client acquisition begin to show up in for loan growth?

Rob Holmes

I would say that what Matt said was spot on, but I don't know you it is what I would appreciate how material it. That is the least likely. So think about taking a load all late subpar return loan to acquire that we don't necessarily aspire to vacate or and replacing that with a client which is a sector, a great company. It takes a sequel to us that they will all balance sheet committee where we are earning what that our cost of capital of luxury channel because we've built or because of all levels of factor that its comments about a five or so that it is about G&A more of a little late.
So that other macro set that longer term strategic use of the cycle as well, I think the US suggests it all washes. Lastly, again, reflecting the capital you see over time. But I think probably if we cover all of that capital as a product for the target Central App for the call still we have a figure does not is that that's that excess capital also gives you a bit more downside and net interest income defensibility.
Then I think what is currently appreciated are currently depicted in the static balance sheet. one 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 have, which would be we've talked earlier or joked earlier in the room would be a pretty tough time to be a bit special forecaster.
But professional forecasters suggests that one to four family mortgage originations this year is going to increase by about 15%. So if we think about eight down 100 basis point scenario, just anticipated mortgage finance growth and the associated revenue is sufficient offset. That's 40 million shock that 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 and a down rate environment on those offerings as well thing.

Okay. Okay. That's helpful. I think I heard most that line, but I think I heard most your most your commentary from. And just as a follow up with in that revenue guidance of mid-single digits, how much of that will come from fees versus first to NI?

Matt Scurlock

I draw, as Rob mentioned that the platform and associated with of fee income businesses are as good as that. It for them. So the ambition to reduce costs, you've got to be more than 10% over the last three years. That premium offerings in that sector. Car and merchant fully here at the current pipeline in the treasury business is equivalent to the full year 2023 realized the business after fourth quarter for the investment bank or you had all offerings other than sales and trading at their worst quarter of the year.
That delta between the realized 11 million in the mid 10s guide was certainly the solely related to client transactions. We're working on pushing into 2020 for that investment. Banking pipeline has significantly improved year-over-year. Direct connectivity got real our end market momentum. So I'd expect that to all those fee income areas of focus here and in a percentage of total contribution.

Rob Holmes

I would just highlight one other thing. What Matt said, about eight times the ROE and in addition to 10% each year for the past three years, the market norm that onto so to be growing that business at at 11% is something that I have not seen before, especially on a sustained basis in my entire career. So that really really good about that. That has resonated with clients such as do with it, epi shelter, it is good, but it has any funnies that are right, doesn't do a new client charities because the digital home are you able to ramp faster and ready for others forward.
So that's for primary and by the way, a feel how it goes down or they could and I'll show you that relies Warface. So the contribution there are low because that will unlock say this at a lot of the fee, a portfolio of a I think it over to Bob. So part of the importance of a $10 million or loss, the revenue contributions from five different areas of the breadth of the bank, syndicate shares, capital markets, capital solutions, M&A is sales and trading. That's that's super encouraging in a very healthy investment bank through.

Operator

Brady Gailey, KBW.

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

Matt Scurlock

The we will never hit our targets. State composition of our funding base 40, if any bank CEO. tells you they have vacated chart. So we will always look to improve the funding base. We have made significant progress within our funding base. It is dramatically as perfect as we said, what do you know, every client software, commercial client, that is all the platforms that membership also as you saw, broker deposits are down into deposits have shrunk over like 9 billion plus got easier to just over one.
So we feel like we're going to go back and put that in detail the quality of the deposit with the audio client. It also there will be Bill overall fee level at 40 ships. The jury target supply base, the Corvette revenue, that's a higher, highly profitable. But I saw yesterday the Board of your higher quality client base.

That makes sense. Maybe moving to the asset sensitivity. You touched on that at I move to lower on a as evident on slide 9. The seasonality in mortgage impact on, does that impact the disclosure? Or is that not really an impact?

Matt Scurlock

No. I mean, it definitely impacts the disclosure would disclose sensitivity based off end-of-period balance sheet. So it did 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 you're looking at that's going to impact your forward NI, which shows up right below that chart as base. And I that's in part why it's lower this quarter. So that certainly impacts us.

Yes. Got it. And maybe a little more. Lastly, other IT finance unit. Go ahead.

Matt Scurlock

No, go ahead, please.

Yes. Just lastly on the on the mortgage financing, you note in the slides that the deposit to loan level should sort of normalize back to where it was in the third quarter. I mean, do you think the yield on pop back up to that mid 2% range or area? Is that a little bit aggressive next quarter? I think the we think the does move out from though one, 12, if it is greatly influence the self funding ratio. So you had one 45 ish self funding ratio this quarter. Should that move that out?

Matt Scurlock

So once again in Q1, which is very typical expectation, Cedar Hills of up to think about full year if the rate curve flattens out as market expect it to their average retail categories because it will still be lower by 24. And it was a fee for that volumes should be sufficient to generate higher net interest income. So you'd have lower yields, the higher NI. And then to Rob's earlier comments, our focus in that business is well is currently 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 And I I should also result in incremental revenue elsewhere on the platform.

Got it, right. That's all for me. Thanks for taking my questions.

Operator

Anthony Elian, JPMorgan.

Good morning. I'm 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 continue to decline to about $3.6 million in 4Q. What drove that sequentially? And do you think that the 3.6 billion in average or three, three and a period represents a bottom?

Matt Scurlock

Yes. So the three six average in the fourth quarter, Tony matches almost exactly the third quarter end-of-period balance, which would suggest that the decline that unfortunately occurred on the last day of the quarter just due to general client transactions as opposed to some sustained or potentially emerging trend so that that trend of folks actively looking to reposition excess cash into higher-paying and options on our platform has largely abated.
So fluctuation that period, Andrew, just to be driven by client acquisition or by client transactions. And then if I think about if we think about full year 24, the double digit growth in gross BTZ., there's 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 every 26 to 18 months after you win the business, you should see start some of that begin to show up in the middle to latter half of this year.
And then just last comment, I know you know this, Tony, but others on the call may not fully appreciate it. I mean, our our non-interest bearing deposit base, 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 at surprise side, I'd say the trends we described in Q1, Q2 or folks were actively seeking higher options. That's largely abated at this point.

Understood. Thank you and for my phone, a big picture question on flow on Slide 4 has 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 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? Thank you.

Rob Holmes

It's 100% execution now that's what's so exciting about where we are in the transformation of 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 on.
We are very focused on, well, let's put this way. There's no additions to the platform in terms of talent or client facing people that we need to execute strategy. But that's just one component of the efficiencies abate. As Matt said, I think you quantified them.

Operator

(Operator Instructions) Brody Preston, UBS.

Good morning, everyone. Everybody up. I wanted just to clarify some of the matter of just what you said on the mortgage finance first static balance sheet and I sensitivity that you provide. Were you saying that the 15% and a pickup in mortgage activity that I think you guys typically use?
Moody's is project being would be enough to offset the 4% decline in the down 100 scenario, not 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 for to flex up and mortgage finance volumes from your existing client base, which would generate more than enough revenue to offset that 40 million declined?

Matt Scurlock

So I think often, I think oftentimes and until their flight, but oftentimes Brodie, I think folks when they think about rate. So we think about fraud rates and that, of course, it does impact us in terms of deposit pricing as it relates to Fed funds and our commercial loan yields.
As it relates to so far, but part of how we manage risk and the associated balance sheet positioning is based on the impact of longer-term rates on volumes. So it's just an imported. 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 all of next year to give you guys much detail, you could stand on that moving forward.

Got it. Could you help us maybe think through, you know, the the impact of down 100, you know, 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 a pickup above and beyond the 15% that Moody's forecasting, how that is back to your investment banking revenue

Matt Scurlock

I start. I mean, there's a number of there's a number of different dynamics to this question. one is as rates go down, investment banking fees will go up more attractive to will take more transactions will take place on the clients will be doing things with the balance sheets of the acquisition activity, et cetera, though, there will be capital solutions opportunities will be just a broad-based.
They'll be volatility of the sales and trading for. There's a lot of things on the fee, the fee were and also invest, like I said, and treasury management fees will come up because ACRs will go down. So I think or we built the business to really succeed at a market rate cycle. And as we go down, we'll see an increase and an ability to take advantage of this area.
I mean, the 146% year over year growth Brodie, 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 a inverted curve and they will enable people to switch what So we're confident in our ability to drive revenue growth. They're agnostic to the economic environment. But if you actually do see rates decline and get a bit of a tailwind has been nothing but beneficial.

Got it. I just had a couple last ones on the mortgage finance business. Tom, would you do have a point of the $5.6 billion of the average deposits you have this quarter? What portion of that is compensated via via the relationship pricing?+ I think the technical term would be significant.

Matt Scurlock

Yes, a significant portion that's disclosed and that's disclosed in the deck. And as I alluded to, Brodie portion who are compensated has increased significant midstream and take a step back. Our ability to effectively when deposit relationships with clients who use our balance sheet for other services in the mortgage space has been a really strong. And in the portion that had moved compensated has also increase.
And then the associated beta has also increased as they face day just hopefully like once-in-a-century type decline in their volumes and ability to generate sufficient cash flow. See that all of those, all three of those things really the 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 kind of remind us how you think the average balances, um, for the for the mortgage finance loans should track? And then you know how the 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.

Matt Scurlock

Yes, I would use the same self funding ratio that we experienced last year, but the volume of full year volumes, again based on a forward curve that can change by the minute. But they anticipated volumes are 47 average for the full year and you'd start to see that already pickup to do 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 declined. As we've historically experienced, you'd have that buffer to bit five declining right environment and increased volumes.

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

Operator

Got it. This concludes our Q&A. Now I hand back to Rob Holmes.

Rob Holmes

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

Operator

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