TEXAS CAPITAL BANCSHARES INC/TX Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Client adoption trends accelerated, with fee income from focus areas up 62% quarter-over-quarter and 20% year-over-year.
• The Treasury Solutions platform improved, with a best-in-class payments offering enabling successful client acquisition and service. Payment volumes and treasury product fees have grown significantly.
• The private wealth business rebuild is nearing completion, with client count and AUM growing ahead of expectations.
• The investment banking segment is delivering improving contributions, with all major offerings showing quarter-over-quarter revenue growth.
• Balance sheet remains strong with CET1 at 12.4%, tangible common equity to tangible assets at 9.8%, and liquid assets at 27%.
• Focus on scaling value-accretive businesses, improving client journeys, and realizing operational efficiencies.

Segment Performance

• Treasury Solutions: Treasury product fees were $8.7 million in the quarter, a 14% improvement year-over-year. Gross payment revenues increased 14% year-over-year. Volumes through payment systems have grown significantly, contributing to a record quarter in treasury product fees.
• Private Wealth: Client count has grown nearly 40% since early 2021, and AUM has increased nearly 80% over the same period. The private wealth business rebuild is nearing completion, with a front, middle, and back office structure built on leading technology.
• Investment Banking: Investment banking and trading income more than doubled quarter-over-quarter to $23.1 million, up 23% year-over-year. All major offerings (syndications, capital markets, capital solutions, M&A, sales and trading) delivered quarter-over-quarter revenue growth.

Guidance

• Total adjusted revenue is expected to have mid-single-digit growth in 2024, supported by fee income areas and tapering capital recycling.
• Resumption of quarterly PPNR growth is anticipated in the second half of 2024, accelerating into 2025.
• Noninterest expense growth is expected to be limited to low single digits due to operational efficiencies.
• CET1 is expected to drift closer to 11% in the second quarter as seasonal factors in mortgage finance balances come into play.

Risks

• Credit Risk: Criticized loans increased $121 million to $860 million in the quarter, with special mention and substandard loans rising, particularly in commercial real estate. This is due to impact of higher rates on valuations and expenses.
• Rate Volatility: Impact on mortgage finance origination volumes and deposit balances, with ambiguity in forward rate outlook affecting origination volume estimates.
• Economic Dependence: Certain commercial clients depend on consumer discretionary income, which could be affected by economic conditions.

Question and Answer

Q: About asset quality lumpiness and rate impact A: Matt Scurlock discussed that credit migration was consistent with expectations, driven by higher rates affecting valuations and expenses, and that continued migration was expected but realized losses were limited by sponsor quality and cash equity.

Q: Funding costs and deposit margins A: Matt Scurlock noted interest-bearing deposit costs drifted higher as expected, and stabilization in commercial noninterest-bearing deposits was seen, with guidance accounting for treasury business growth.

Q: Stress testing guidance and credit trend peaks A: Matt Scurlock said it was difficult to call a peak in special mention, with macro backdrop including rates continuing to impact credit migration.

Q: Investment banking pipelines and multifamily exposure A: Rob Holmes stated investment banking pipelines were healthy, and multifamily portfolio was broad-based in Texas with mid-50s loan-to-value and strong sponsors.

Q: Noninterest-bearing deposits and legacy loans A: Matt Scurlock and Rob Holmes discussed treasury business growth and legacy loan management, with treasury clients up 105% of internal expectations and legacy loans being worked down.

Q: Return targets and platform maturation A: Rob Holmes talked about platform scaling and maturation, with investments in the platform leading to growth in fee income and operational efficiencies contributing to return targets.