Texas Capital Bancshares, Inc. (TCBI) Q3 2024 Earnings Report, Transcript and Summary

Good morning, all, and thank you all for attending the Texas Capital Bancshares Third Quarter 2024 Earnings Conference Call. My name is Breka, and I will be your moderator for today. [Operator Instructions] Thank you. I would now like to pass the conference over to your host, Jocelyn Kukulka, Head of Investor Relations. Thank you. You may proceed, Jocelyn.

Good morning, and thank you for joining us for TCBI's third quarter 2024 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, 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 the call for Q&A. And now, I’ll turn the call over to Rob for opening remarks.

Thank you for joining us today. This quarter marks three years since the announcement of our strategic plan in September of 2021. Our collective and deliberate actions over the last several years, including those announced last month, continue to establish our firm as worthy of serving the best clients in our markets with superior product breadth and banker execution, increasingly resulting in high quality financial outcomes, which we believed the model would ultimately be capable of producing. On an adjusted basis, this quarter featured record performance across a variety of important financial metrics. Quarterly return on average assets of 1%, return on common equity of 10%, pre-provision net revenue of $115 million, fee income of $64.8 million, and earnings per share of $1.59, all reached record levels since the beginning of the transformation, while investment banking, trading income, and tangible book value per share reached the highest levels in firm history. With unquestioned market momentum, an increasingly complete and differentiated platform, and robust capital liquidity, we are well positioned to execute throughout 2025. Sustained multi-year growth in our fee income areas of focus continued again this quarter as treasury product fees, wealth management fees, and investment banking and trading income delivered $54 million in non-interest revenue, up 25% linked-quarter and 32% year-over-year. This is the second consecutive record quarter since the beginning of the transformation, as year-to-date adjusted total non-interest income is 19% of adjusted total revenue, firmly within our target range for fee income contribution for full year 2025. This fee income realization is simply a market-facing indicator of the increased frequency and quality of client solutions being delivered across our platform. Investment banking and trading income increased 32% quarter-over-quarter to a record of $40.5 million, led by syndications, capital markets, and sales and trading. Our syndication business executed a record number of transactions in the quarter, placing us eighth in the middle market league tables nationwide, as our distinct capabilities enable clients to access bank funding in what was still a tight market. We also continue to differentiate by facilitating client access to non-bank financing, with capital markets delivering records this quarter in both fees and transaction volumes. The investment banking platform, while still maturing in both product offerings and execution capabilities, is building a base of consistent and repeatable revenues that will be both a differentiator in the marketplace and a meaningful contributor to future earnings. The treasury solutions platform, which provides both payment products and services, in parity with the major money center banks, with a differentiated client journey, which is faster and more efficient, is increasingly realizing growth in stable and reoccurring revenue resulting from three years of significant investment. Client and product onboarding continues to be on pace with expectations, as year-over-year treasury product fees increase 16%, led by a 10% increase in gross payment revenues year-to-date. This is now six consecutive quarters of year-over-year growth, exceeding three times that experienced by the industry. The full build of the private wealth business, which will be completed by year-end, includes an entirely new operating platform, along with significantly enhanced products and services, and is providing early signs of increased client adoption, with wealth and related fees increasing 9% this quarter. The materially enhanced client journey should enable improved connectivity to the rest of our platform, allowing for accelerated client adoption moving into 2025 and significant future scale. As discussed for multiple quarters, while our platform breadth is enabling new client acquisition at a pace consistent with internal expectations, with year-to-date new relationships onboarded, now over 110% of new relationships for full year 2023, lower system-wide client demand for bank credit has limited immediate earning asset expansion. We were, however, able to again leverage our disciplined capital allocation process this quarter to support continued buildout of our industry-focused corporate banking platform by acquiring a portfolio of approximately $400 million in committed exposure to companies in the healthcare sector. Texas Capital has significant institutional knowledge of many of the companies in the portfolio, which importantly, are supported by sector-focused sponsors with notable track records of value creation. These clients will benefit from an extensive solutions-focused platform, with revenue cycle management, healthcare asset-based lending, and other sector-specific products integrated with differentiated cash management, commercial banking, and investment banking capabilities. The multi-year trend of clients increasingly leveraging our distinct cash management capabilities continued this quarter, with non-brokered interest-bearing deposits now up 24% or $3.1 billion year-over-year. Importantly, non-interest-bearing deposits, excluding mortgage finance, increased 4% to $3.4 billion this quarter, as our sustained focus on earning the right to become our clients primary operating bank is having the anticipated balance sheet impact. In addition to noted financial performance, we remain focused on our consistently stated objective of financial resilience. The firm finished the quarter with tangible common equity to tangible assets of 9.65%, ranked first amongst the largest banks in the country, a reserve ratio of 1.87%, excluding mortgage finance loans, which is top decile amongst our peer group, and liquid assets of 27% above peer medians. Our commitment to achieving improved financial performance is unwavering, and our position of unprecedented strength is enabling us to serve clients in our markets who seek a financial partner to support them through all stages of their business or personal lifecycle. We will drive attractive through-cycle shareholder returns, with both higher quality earnings and a lower cost of capital as we ramp high value businesses through increased client adoption, improved client journeys and realized operational efficiencies, all objectives that we made significant headway on year-to-date, with roadmaps to accelerate scale in 2025. Finally, I want to acknowledge the dedication of our employees who execute this strategy every single day and are the unquestioned driving force behind the continued success of our firm. Now, I'll turn it over to Matt for the financial results.

Thanks, Rob. Good morning. Starting on Slide 5, total adjusted revenue increased $38 million or 14% for the quarter to $305 million, as a $23.5 million increase in net interest income was augmented by $14.4 million or 29% linked-quarter increase in non-interest revenue. The $64.8 million of fee income delivered this quarter is a high watermark since we began the transformation in January of 2021. Our year-to-date adjusted non-interest revenue of $157 million is more than doubled the amount delivered in full year 2020, when normalizing warehouse-related fees and adjusting for businesses we've sold or wound down. Quarterly total adjusted non-interest expense increased 1% linked-quarter as expected growth in occupancy and communications and technology expense was partially offset by a reduction in salary and benefits costs. Taken together, linked-quarter adjusted PPNR increased 45% to $115 million. This marks the resumption of quarterly operating leverage against the comparable quarter in the prior year, achieved a quarter earlier than indicated during the July earnings call. The modest reduction in this quarter's provision expense to $10 million resulted from slowing charge-offs and moderate loan growth, partially offset by a sustained conservative posture related to our economic outlook. Year-to-date provision expense as a percentage of average LHI, excluding mortgage finance, is within our through-cycle range at 39 basis points annualized. Net income to common, when including the realization of losses associated with the AFS bond portfolio repositioning and certain non-recurring items, was negative $65.6 million, while adjusted net income to common was $74.3 million, up $36.6 million or 97% linked-quarter. The tax rate for the quarter decreased to 23.3%, and we expect the full year tax rate to be around 34%. Our balance sheet positioning remains exceptionally strong, with period end cash balances of 13% of total assets and cash and securities of 27%, both higher this quarter and in line with year-end targeted ratios. Ending period gross LHI balances increased approximately $522 million or 2% linked-quarter, driven primarily by slightly higher than anticipated seasonal growth in the mortgage finance business and the acquisition of C&I healthcare loan portfolio, which closed at quarter-end, with funded balances of approximately $330 million. Total deposits increased by $2 billion or 9% during the quarter, with gains in both commercial non-interest bearing and interest-bearing accounts. This core client growth should support continued proactive reductions of our highest-cost deposits, where we have limited additional product touch points elsewhere on the platform, while also supporting a multi-quarter low loan to deposit ratio of 86%. AOCI improved by $240 million in the quarter or 65% related to both the bond repositioning and the 80 basis points decline in five-year treasury rates during the period. Total gross LHI, excluding mortgage finance, was relatively flat linked-quarter, increasing a modest $71 million, as limited credit demand experienced over the last 12 months and now increasing commercial real estate payoffs suppressed loan volumes across the industry. Commercial loans grew $434 million in this quarter, inclusive of the $330 million loan portfolio acquisition that Rob detailed, and are up $602 million or 6% year-over-year. Our expectation that the sustained pace of new client acquisition would result in modest balance sheet and loan growth this year is occurring, although at a slower pace than contemplated in our original 2024 guidance. Commercial real estate period end balances decreased $374 million or 7% in the quarter, as payoff rates continue to be elevated and current and trailing 18-month origination limited, given the market backdrop. $80 million of the decline resulted from payoffs in the office portfolio, which now comprises just 2% of total loans. Overall, the real estate portfolio remains weighted to multi-family, which is $2.3 billion or 44% of outstanding balances, reflecting both our deep experience in the space and observed performance through credit and interest rate cycles. Anticipated seasonal growth in mortgage finance was augmented by the reduction in 30-year mortgage rates experience from early August through mid-September, resulting in a linked-quarter increase in average mortgage finance loans of $795 million or 18% to $5.2 billion. Given ongoing rate volatility, we remain cautious on the outlook, with now full-year expectations for year-over-year increase in average warehouse volumes of 10% to $4.5 billion, supported by mortgage rates near 640 during the fourth quarter. Ending period deposit balances increased 9% quarter-over-quarter, and $1.1 billion or 6% when excluding the seasonally-elevated contribution of mortgage finance. Sustained success in attracting quality funding associated with our core offerings enabled growth in commercial client non-interest bearing deposits of 4% linked-quarter, while broker deposits remain at a 10-year low, comprising approximately 2% of total deposits. This positive trend will continue to support over the coming quarters selective reduction of the highest cost deposits where we're unable to earn additional business necessary to generate an appropriate return on capital. Average mortgage finance deposits were 116% of average mortgage finance loans, a slight decline quarter-over-quarter, and consistent with our guidance. We expect the ratio of average mortgage finance deposits to average mortgage finance loans to decline to 110% in the fourth quarter, as predictable changes in client deposits should match anticipated warehouse fundings. As a reminder, there's seasonality in these deposits as annual tax payments begin remittance out of escrow accounts in the second half of the fourth quarter, which continues through January. As detailed on previous calls, select mortgage finance deposits feature relationship pricing credits, which are applied to both clients mortgage finance and commercial loans based on each loan type's contribution to interest income during the quarter. Attribution of interest credits are expected to follow a similar distribution for the duration of the year, but approximately 60% associated with mortgage finance and 40% aligned to commercial loans to mortgage finance clients. Ending period non-interest-bearing deposits, excluding mortgage finance, remain 13% of total deposits, and our expectation is that this percentage remains relatively stable in the near-term. Our model of earnings at risk increased slightly in the quarter, as adjustments to the balance sheet composition resulted in marginally less forward downside rate protection, but potentially higher levels of absolute net interest income. The full impact of the 49 basis point decline in SOFR during the quarter resulted from our largely variable rate loan portfolio repricing down in advance of the fed's move in late September. The timing of deposit repricing activities are more closely aligned to actual changes in fed funds rates, and we expect our initial repricing efforts to be realized by mid-October, and are therefore only partially reflected in the net interest income sensitivity disclosures. In August, the firm continued the multi-year process of effectively rationalizing the legacy balance sheet, selling approximately $1.24 billion of available for sales securities with an average book yield of 1.23% purchased prior to 2021. Cash proceeds from the sale were used to purchase $1.06 billion of securities at a yield of 5.26%, which is expected to contribute an incremental $35 million to $40 million in net interest income on an annualized basis. We do expect continued reinvestment over the duration of the year, which will improve securities yield while maintaining rate positioning. Net interest margin expanded by 15 basis points in the quarter, and net interest income increased to $240.1 million. Quarterly net interest income benefited from the impacts of balance sheet repositioning in the higher earning assets associated with our long-term strategy. And quarterly improvements in both mortgage finance volumes and yields were supported by the lower self-funding ratio. As industry-wide asset quality normalization continues, so does our multi-year posture of prudently building the reserve to effectively address communicated legacy credits and buffer against the potential impact of an uncertain economic outlook. The total allowance for credit loss, including off balance sheet reserves increased $6.5 million on a linked-quarter basis to $319 million, up $28 million year-over-year, which when excluding mortgage finance, is 1.87% of total LHIA, a high since the adoption of CECL in 2020. Criticized loans increased slightly to 4% of total LHI, as a decrease in special mention was offset by modest migration of a diversified set of credits within both commercial real estate and commercial loan portfolios into substandard. The period end composition of criticized loans remains weighted toward commercial clients with dependencies on consumer discretionary income, as well as well-structured commercial real estate loans, supported by strong sponsors. Net charge-offs of $6.1 million or 11% of average LHI, were comprised of a small number of commercial credits. Our identified legacy problem credits have now been reduced through resolution, workouts, and payoffs to approximately $16 million, down from $200 million at the end of 2020. Consistent with prior quarters, capital levels remain at or near the top of the industry. Total regulatory capital remains exceptionally strong relative to both the peer group and our internally assessed risk profile. CET1 finished the quarter at 11.19%, a 43 basis point decrease from prior quarter, related to the securities positioning and increased risk-weighted assets from quarterly loan growth. tangible common equity tangible assets finished at 9.65%, which continues to be ranked first amongst the largest banks in the country, while tangible book value per share increased 14.3% year-over-year to $66.6, a record level for the firm. Our guidance accounts for the market base forward rate curve, which as of October 4th, implied 50 basis points of additional reduction to the Fed funds rate in November, followed by a 25-basis point cut in December to finish the year at 4.25%, which is a 100-basis point decline since our last earnings call in July. Given the significant change in near-term rate outlook, we are modestly reducing our revenue guidance to low single-digit growth for the full year. Non-interest expense guidance of approximately $765 million for the year, contemplates the actions taken in September. As shown again this quarter, we continue to effectively deploy capital in excess of our 11% CET1 minimum in support of published strategic objectives. Near-term capital priorities remain focused on growing the core business, improving future earnings generation, and increasing tangible book value per share. All are areas where we continue to show material progress. Quarterly increases in year-over-year PPNR growth should continue in Q4 2024, and then for the duration of 2025. Finally, while we maintain our conservative outlook, we are reducing our annual provision expense guidance to 40 basis points from 50 basis points of average LHI, excluding mortgage finance, given both recent balance sheet and credit migration trends. Moving to 2025, based on the economic and rate outlook as of October 4th, multi-year investments in infrastructure, data and process improvements should continue yielding expected operating and financial efficiencies, enabling targeted additional investment in talent and capabilities. Our current outlook with planned initiatives and expected revenue for full-year 2025 suggests non-interest expense of approximately $765 million to $770 million. Internal estimates against that economic backdrop also contemplate continued industry-leading client adoption and associated growth in our fee income areas of focus, with full-year targeted 2025 total non-interest revenue reaching $240 million. Given our focus on leveraging the firm's broad platform to serve clients based on their unique needs, balance sheet expansion, mix, and associated net interest income generation, remain the most difficult to estimate due to dynamic macroeconomic and political backdrop. The market rate outlook as of early October incorporated rapid decreases in short-term rates over the next nine months, with fed funds exiting the year at 4.25 and ultimately reaching 3.50 in June. In this outlook, as short-term rates come down, the curve flattened significantly, with the 10-year declining to 3.92 in December, then troughing at 3.80 in June of next year. Internal estimates in that rate environment suggest the potential for high single to low double-digit full-year average loan growth, with deposit repricing accelerating by the second half of the year, enabling high single-digit net interest income growth. Given 80% of our current loan portfolio is tied to the short end of the curve with a slower pace of reductions and/or a higher terminal value, should improve 2025 net interest income generation. After three years of aggressively building the reserve to reflect our consistently conservative posture, the near-term provision outlook has potential to move towards 30 to 35 basis points of average LHI excluding mortgage finance in 2025, more closely resembling trailing charge-off rates while preserving industry-leading coverage levels. Taken together, this outlook suggests achievement of 1.1% ROAA in the back half of next year, with potential for higher levels should the pace and magnitude of anticipated cuts moderate. Operator, we'd now like to open up the call for questions. Thank you.

Thank you, Matt. [Operator instructions]. We have the first question today from Woody Lay with KBW. You may proceed.

Hey, good morning, guys. Wanted to start on the loan growth strategy and more specifically loan purchases. The healthcare purchase helped sort of stabilize growth in the quarter. Do you think we could see additional loan purchases from here? Just trying to get a gauge on the strategy there.

Hey Woody, it's Rob. I'll take that. So, I wouldn't consider this a loan purchase, if you will. We had onboarded a number of bankers from a financial firm that had relationships tied to those loans, and we're able to acquire the loans and the relationships that come with those, some immediate and some over time. And we have a much more robust platform so that we can do many more things with those same clients and sponsors, thus being more relevant to them and driving a much greater return. So, the loan purchase was a result of the strategic efforts, if you will. And I mean, to give you an example, I have personally already flown and met with the owners of over 80% of the companies that make up those loans. So, we are not buying loan portfolios for loan growth or stabilization of loans whatsoever. We've onboarded this year 110% of the same number of clients that we onboarded the same time last year. At some point, those clients will need to borrow, and they can either borrow from our balance sheet, or we can raise third-party capital like we're very good at doing now, with record number of transactions and volume this year. We're agnostic to how we solve our clients’ needs, and we advise them to solve those needs based on the best outcome for them. But loan growth will certainly come, and it has to with the amount of market share that we're taking, and the amount of primary relationships that we're onboarding. Like, you don't grow P times V in mid to high teens for three years without becoming the primary operating bank for those clients. So, you're the primary operating bank, you're talking to them more regularly on a regular basis, thus you're talking to them about capital needs on a more frequent basis. And so, we're not really concerned about loan growth as a relative matter to the industry whatsoever.

The only thing I'd add on that, Woody, is that the reason why we generally give CET1 guidance as opposed to loan growth guidance or buyback-specific guidance, is that the way we're going to deploy capital is somewhat dynamic, depending on opportunities we have to either fulfill the strategy and/or improve tangible book value. So, this is simply an action consistent with the capital menu that we've been pretty disciplined in leveraging a across the last three years.

Yes, and it's good to hear the optimism on the loan growth front. Growth in the industry has been weaker this quarter. Does it feel like there's sort of a clearing event to get loan growth to ramp back up? As you talk to clients, are they kind of wading through the election or just any color on when you expect it to ramp up?

Look, the only thing I would say is we cover from business banking, which will - with our pipelines, I bet we're a top five SBA lender to business banking. In the very near-term, that business is coming out of the ground, middle market banking, corporate banking. As you know, we have different segments in corporate banking, TMT, healthcare, fig, diversified energy, et cetera. We do see more demand and loan growth in certain segments of that than others. And the great thing is we cover the entirety with expertise and different products and services for each. I'm not going to predict loan growth whatsoever, but I would just say what I said before, we're agnostic to whether they borrow from us, or we place private credit or raise institutional debt. But we certainly anticipate with our market share gains that when loan growth does come back in the economy, we'll certainly benefit from that.

Got it. And then maybe just shifting over to the investment banking side, it was a really strong quarter for you all. Just any additional granularity you could provide on sort of what drove the investment banking income in the third quarter?

No, I'll start then maybe Matt can do the number thing. I would just say, it’s exciting to see the investment bank. Remember, we didn't build the investment bank for a different set of clients than the commercial bank or corporate bank or private bank. It is the same group of clients. It's, one way to provide solutions to their very specific needs. So, my point is, it's a group effort from the entirety of the firm to have record earnings in the investment bank. Having said that, the thing that's most rewarding, if you will, on the investment banking side, is it came from syndications, which were a top arranger of middle market bank debt in the entirety of the US. It came from record volumes in fees in capital markets. It came from sales and trading and all different pockets of sales and trading, not just mortgage. So, it's a universally increasing source of repeatable and recurring revenues at a much more granular level. Now, we did do a big deal, but that's not the entirety of why we had a record quarter. So, we’re really excited about the investment bank and what it is today, but also what it can be. Remember, there's still a lot of pockets in investment banking where we have the entirety of the expense base consumed into the platform. For an example, public finance, we built sales and trading on the back of mortgage warehouse, I mean mortgage trading, excuse me, which we built on the back of mortgage warehouse, so mortgage trading, so risk compliance, controls, process, procedures, the people to run it, et cetera, technology, all those investments were already within the platform. And then we also had a government not-for-profit business covering schools, towns, municipalities, and the like, that are consumers of public finance. So, all you do is you add the sales and traders for underwriting this debt with very little expense. And then on the C&I side, you've got more things you can offer to the clients you're already covering. So, it's a revenue synergy and it's an expense synergy, and we have that across the entirety of the platform with a lot of earnings potential to move forward. So, I don't see the investment bank going backwards. It's not going to be straight linear up, but the strategy is proven. The clients hire us in a - I think we're growing investment banking fees at a faster rate than any firm, certainly over the same period that we've been doing this.

Yes, I think the record fee quarter, Woody, isn't just isolated to the investment bank. So, the $54 million that we delivered in the fee income areas of focus, which are treasury, private wealth, and investment banking, that's 13% more this quarter than we delivered for full-year 2020. So, really strong performance across the board in all those areas that we've invested in heavily since Rob’s arrival. We do call out in the slides and worth noting here that after two consecutive record quarters in the investment bank, you are likely to see a modest pull-back in the fourth quarter as pipelines rebuild in pursuit of the non-interest income levels that we gave you for full-year 2025. So, I'd look for the fourth quarter in IB to be around $20 million to $25 million, which should pull fees somewhere into the $45 million to $50 million range for the fourth quarter.

Got it. All right. That's helpful color. Thanks for taking my questions.

We will now move onto the next question. We have Ben Gerlinger with Citi. Your line is open, Ben.

Hey, morning guys. It seems like you've made a ton of progress. I get that it's a bit of a coiled spring here. But when you guys look at 2025, just kind of, what assumption are you guys using on mortgage warehouse yield or the NIM? I guess that every quarter is going to be different based on the seasonality. I'm just kind of looking at just going forward, it seems like you’ve cleaned that up quite a bit behind the scenes. Just any sort of numbers would be helpful.

Yes, feel free to title your research note the coiled spring. I'm not sure that's been used yet. I like it. Ben, we gave a ton of insight into our view for 2025. So, I don't know that we're going to get a lot more detailed on individual yields that are potentially 12 months in front of us. I will talk to a bit just about the rate curve because to your point, it does have a pretty significant impact, both on balance sheet volumes and on yield as you move into 2025. So, the curve that we use, which we’re incredibly specific on the date given how much it's been moving, was as of early October. So, October 4th to be specific. So, it exits the year with fed funds at 4.25. Fed funds moves down to about 3.50 in June, and then the 10-year, which is going to be mostly closely correlated with mortgage finance volumes, exits this year at about 3.9, and then sits at about 3.8 midyear. So, I mentioned in the prepared remarks that the curve starts to flatten. In that environment, we think net interest income picks up high single digits. So, that, coupled with $240 million of fee-based revenue and 765 to 770 of non-interest expense is what our internal views suggests drives a 1.1 sometime in the back end of next year.

Got you. Okay. So, you're looking at a quarterly 1.1 kind of a run rate by the end of 2025. Is that also - I mean, to get more of the ROTC number, how do you presume buybacks or, I mean, capital deployment obviously is better for loan growth or usage for revenue production. I get that. It's a strong strategy, but does this mean you're going to completely stop buying back stock or just kind of how you approach capital deployment. Assuming there's not a lot of activity kind of in the fourth quarter here, it seems like things might slow down a little bit temporarily.

Yes, our capital priorities, Ben, haven't really changed. I mean, I think the actions this quarter, we've pulled about every single lever that a management team can pull over the last 12 months. I think we’re pretty pleased that the stock price makes buybacks marginally less appealing at this point than at levels where we repurchased over the previous few years. But we will evaluate forward buybacks the same way we have since Rob's arrival. If we think about prioritization of different performance metrics, ROA has been one that's increasing in relevance for us since we made the determination that we were unwilling to push CET1 levels down to the 9% to 10% that was incorporated in the original September 1st strategic plan. Our view is that financial resilience, which was a foundation of the company, has only increased in importance post the events of last spring. So, we're likely to keep CET1 around that 11% number. So, we're really focused on generating the right level of PPNR to average assets, hitting a 1.1 ROA. The rate environment I just described, I think is one that's fairly punitive, should we not experience as many rate cuts and/or those rate cuts occur at a slower pace that's met accretive to 2025 ROA. So, our, our commitment to you guys is we would get to this quarter and start to lay out in detail our internal view of 2025 financials, and we hope that we've done that for you.

Got you. That's helpful. Thanks, guys.

Thank you [Operator instructions] We now have the next question from Matt Olney with Stephens. You may proceed, Matt.

Hey, thanks. Good morning, guys. Appreciate all the forward outlooks here. Most of my stuff has been addressed, but I also just want to ask about the impact of the hedges. I think you disclosed the hedge impact this quarter was $18 million drag. Just trying to appreciate the impact of the hedge as the notional balances come down, as the Fed starts to cut overnight and kind of what you're assuming within that 2025 guidance. Thanks.

Yes, great question, Matt. So, we hope that we improve the disclosure for you in the earnings presentation, the slide where we generally talk about NII sensitivity, the bottom left. We've now depicted both the maturities and the associated receive rates. The majority of those are tied to SOFR and there are some prime swaps, but the majority are tied to SOFR. So, you can follow the spot SOFR curve of your choosing to make the determination of the pickup in terms of receive fix moving back to float. The first big slug of maturities is in the second quarter. Current spot SOFR is around 340 in that period with a receive rate of three. So, we pick up about 40 basis points as those swaps ultimately expire. And then the balance sheet positioning in general, the curve is not particularly conducive to adding any additional downside rate protection at this point. So, you will likely not see us reinvest cash flows in the bond portfolio. Recent purchases have been around 450 or so. We'd expect about $120 million a quarter given current rates.

Okay, great color, and I'll go back and look at that updated disclosure. Thanks for including that. And then just lastly on expenses, you've given us a good kind of outlook here for the fourth quarter and for next year. And it sounds like for the most part, the infrastructure's been built out, but you also talk about technology and how that really should improve the operating leverage for the company. Any more color on kind of technology you're using and how you're able to kind of effectively keep expense levels flat next year? Thanks.

Yes, so that's a really long answer, but in short, we have a persistent funding model of technology where we're investing a prescribed amount of money every year in change the bank while we try to be more efficient with how we run the bank. As you know, with our expense reductions and efficiencies that we've taken in the third quarter of this year, first quarter of last year, and at other points in time, we do have a proficiency in re-imagining our operations and eliminating or digitizing certain actions so that we take out expense. But more importantly, or just as importantly, we reduce operating risk. And we have over 30% of our tech spend on our own engineers, we're really focused on client journey. So, take Initio. There's no way in the world we could have grown P times V 14% to 17% quarter-over-quarter here every quarter for a long time now without Initio, which is an improved client journey which reduces the time and the amount of money that our clients spend to onboard, and they can do it in a day instead of five weeks, as we talked about. This quarter, we will complete the installation of a new platform for our wealth business. Our advisors and private bankers have been working, doing a great job and hitting a record of 15% increase in fees, but they've done it really without the help of the institution. Well, now technology's catching up and our clients will have a better digital experience, a better client journey. And so, whether loan optimization, we now have workflow for credit. We didn't have workflow before. As you all well know, that helps in a lot of ways gain efficiencies, mine data. It creates an ability to measure what we're doing well, what we're not doing. That'll flow straight into our loan system, which - through the investment of technology, which also reduce operating risk and gains efficiency. So, it’s happening all over the firm. And investment in technology is something that I know - I remember when we started, there was a real question on whether we could - there were concerns about us spending the money and making those investments. And I think with the reductions, we've proven that we're actually pretty really good at it. And also, you’ve got to remember, our tech stack is - we've written off most of the tech debt and we have one stack. And so, we're not a combination of two, three or four banks spending money on technology for one system to talk to another. We’re one clean tech stack that we're investing in and improving, which I think is another - I can make another point, which by definition, if we rebuilt the entirety of our tech stack and with a payments platform, merchant lockbox card, et cetera, over the past three years, by definition, we have the most tech, the newest tech stock. And so, we're able to - we have the most recent version of the best corporate card in market. We have the most recent version of a lot of these things. So, we're really, really excited and pleased that we can realize efficiencies from tech spend, and you should look for more of it.

Well, thanks for the commentary and congrats on the results.

Thank you, Matt. [Operator instructions]. And we have the next question from Michael Rose with Raymond James, you may proceed.

Hey, good morning, everyone. Thanks for taking my questions. Just trying to better appreciate the loan growth expectations for next year. Can you just kind of break it down? I assume some of it is a pickup and utilization. I assume some of it is a migration of customers from lenders that you've hired over the past couple of years, maybe some re-acceleration of growth in commercial real estate. But if you can just help us better appreciate the complexion of the growth, and as it relates specifically to the lenders that have been brought on over the past few years, is that - is the way you see that kind of a multi-year kind of tailwind to growth kind of regardless of what the broader economy does? Thanks.

Look, I do think there's tailwinds. Sorry, I thought I touched on this a little bit before. Our advantage is when we're more relevant to our clients and we cover the entirety of the market through business banking, middle market banking, corporate banking, and different vertical expertise in corporate banking from TMT, healthcare, fig, diversified, energy, government not for profit, whichever part of the economy expands, we will capture, and we'll capture that because we're also capturing more clients on the platform year-over-year than ever before. So, 2022 was a record year. 2023 was a record year. This year, year-to-date, we've gained 110% more clients than last year. And so, when loan demand picks up in the economy, as the economy grows, we will be the beneficiary of that. We're really excited about that. If they don't need bank debt, we could also provide third-party capital as well. So, as companies expand, whether it's in the bank market, private capital, private credit market, or institutional market, we’ll be there and advise our clients on what is best for their cost of capital.

Thanks. I'm sorry if I made you repeat some of that. Got on a little bit late. Lots of calls, but thanks.

No, no, you didn't. We like repeating that. Yes.

Okay. All right. Maybe just as kind of one follow up, I guess the way I kind of think about you guys, a lot of work done over the past couple of years, the chassis build. I think you have the product set that you want and any additions would be I would say kind of around the edges. Is that a fair character characterization? And then just kind of continuing to drive the positive operating leverage every quarter and just plan out is from here, but no real major kind of additions to the platform at this point

Michael, I can speak on behalf of every employee here saying we are grateful that that is where we are. It's been a long transformation, as you know, and we will have incremental products and services that we had, I'm sure. But they are, I would say we are wholly complete with the platform. We could run this platform and be perfectly happy with it as is for a long period of time. But we will continue to be opportunistic, if you will.

Alright. Thanks for taking my questions.

Thank you. I would now like to hand it back to Rob Holmes for some final remarks.

Look, we're really excited about where we are on the three-year anniversary of where we announced our strategic plan. We're more convinced than ever it’s the right strategic plan. The financial results would support that as our strategic actions are turning into financial outcomes, and we're grateful to our clients, our employees, and thank you for listening.

Thank you all for joining the Texas Capital Bancshares third quarter 2024 earnings conference call. I can confirm today’s call has now concluded. You may now disconnect from the call, and please enjoy the rest of your day.