Texas Capital Bancshares, Inc. Q3 FY2025 earnings call

• Rob Holmes outlined the 4-year transformation plan, noting achievement of 1.3% return on average assets, well above the target. The firm's capital position is strong with tangible common equity to tangible assets at 10.25%. The funding base has been rebuilt with index deposits down, and treasury product fees up 91% over 4 years.
• Matt Scurlock discussed revenue growth driven by net interest income and fee-based revenue, noninterest expense control, record preprovision net revenue, balance sheet momentum, mortgage finance portfolio improvements, and strong capital levels with CET1 at 12.14%.

Third quarter total revenue increased $35.4 million or 12% relative to Q3 adjusted total revenue last year, supported by 13% growth in net interest income and 6% growth in fee-based revenue. Linked quarter adjusted total revenue increased 10% or $31 million. Year-over-year adjusted preprovision net revenue increased 30% or $34.9 million to $149.8 million, an all-time record. Total noninterest expense increased just $1.7 million compared to Q2. Quarter's provision expense of $12 million resulted from modest growth in gross LHI, net charge-offs, and conservative economic view. Record quarterly net income to common of $100.9 million, a 36% increase from last year. Balance sheet metrics remain strong with average commercial loan balances up 3%, mortgage finance loans up 3% linked quarter, and capital levels at top industry levels.

• Reaffirms revenue guidance of low double-digit percent growth despite two 25-basis point rate cuts in October and December. Decreases noninterest expense outlook to mid-single-digit percent growth from prior mid- to high single percent. Full year provision outlook remains 30 to 35 basis points of loans held for investment excluding mortgage finance.

• Conservative stance on economic environment, with provision expense influenced by uncertain economic conditions. Monitoring credit quality closely, including assessing macroeconomic and portfolio-specific scenarios. Paranoia about downside scenarios and tabletop exercises to prepare for potential disruptions.

Q: Just wanted to start with -- if I could pick anything apart in this quarter. It seems like maybe the loan growth as we went through the quarter, the period end was a little bit lower on the held for investment side than the average. Just wanted to see if there's any paydowns because it does look like the -- you guys had pretty nice growth in commitments. I think they were up 11% or so Q-on-Q.

A: Yes. You bet, Michael. You broke up a little bit. So if you have a follow on, feel free to go ahead and ask. I think at this point, our track record suggests we are uniquely differentiated in our ability to effectively access the right type of capital for our clients. And our focus is squarely on providing the right solution for them, not on where it ultimately shows up in our financials.

Q: I really appreciate the color. That's really helpful, Matt. Maybe just as my follow-up, just as we do think about that investment banking trading line item, obviously, really good results. I know you guys have kind of talked about $50 million a quarter run rate at some point. Can you just update maybe some expectations there? And then would you expect any near-term headwinds maybe from the government shutdown [Technical Difficulty] or things like that?

A: Yes. I'll talk about the outlook, Michael, and then Rob would talk about the investment banking business in general. So obviously, the Q3 fees were on the high end of the guide, which is from the fourth consecutive quarter for us in TS reporting a year-over-year growth in excess of 20%. We did have a record investment banking quarter that despite some meaningfully sized transactions, it was really characterized by the volume of client interactions, the breadth of the capabilities that they chose to utilize, and then as I mentioned, the increased granularity and repeatability of those fees. We're nearing full year fee income guide to $230 million to $235 million, with expectations for fourth quarter noninterest income of $60 million to $65 million on the back of $35 million to $40 million again in the investment banking business.

Q: I wanted to start on NII. I appreciate the comment about how despite a 125 basis point reduction in short-term rates, you were able to increase NII 13% year-to-date. So in light of the September cut and kind of the expected additional cuts from here, how do you think about your ability to continue to grow NII with that backdrop?

A: Yes. The other stats that we quoted related to that year-to-date performance, Woody, where revenue and PPNR up 12% and 35%, respectively, with a 100 basis point reduction in short-term rates. So I think for us, that experience suggests it's really less about the absolute level of rates, and it's more about the timing. So as you know, it does take us a quarter or 2 for the balance sheet to fully reprice after a series of cuts with implied forwards, and therefore, our guidance suggesting that's going to occur again in October and December. So against that backdrop, we think about 4Q net interest income is $255 million to $260 million with net interest margin around 3.3%.

Q: Dating back to 2021, it's been a remarkable transformation. It's easy for us to see from an earnings standpoint, a capital standpoint because we can see the numbers. But I know that there's been a credit transformation as well. And it seems like sometimes the market unfairly punishes you based on some of the legacy that predates your leadership. So I'd love to just hear about the credit transformation dating back to 2021?

A: Thanks. I kind of take it, then you take the specifics. Look, I think this quarter, criticized loans down $368 million or 41% that Matt discussed is on par with strategy, right? We're really, really aggressive when it comes to client solutioning and we're very, very conservative as it relates to risk. Whether it's credit risk, operating risk, market risk, whatever risk you want to contemplate, we think client selection is the #1 mitigant. And I think that client selection, if you're banking the right clients, they do the right things, even when there's a problem. And most of the time, more often than not versus adverse client selection, you're not having those problems. And that's -- I think that really manifests itself here recently with a lot of banks being caught without collateral or without the proper underwriting and diligence by their teams. And, as you know, that did not happen here. So I'm really pleased with the intensity of the risk platform, how they proactively manage the loan book, but also our bankers. Our bankers are very focused on client selection as it relates to risk, just as much as they are on treasury or other parts of the platform. So I think it's foundational to what we've built and goes along with being well capitalized.