Texas Capital Bancshares, Inc. Q1 FY2025 earnings call

• Performance: This quarter's results showed strong financial progress with year-over-year revenue growth of 9%, adjusted pre-provision net revenue growth of 21%, and tangible book value per share growth of 11%. Net income at common was $42.7 million, an increase of 44% compared to Q1 of last year.
• Client Relevance: Treasury product fees increased 22% year-over-year to a record high. Non-interest-bearing deposits excluding mortgage finance grew 7% quarter over quarter and 11% year over year. The firm effectively repriced down liabilities, supporting a 26 basis point increase in late quarter net interest margin and 10% growth in net interest income.
• Balance Sheet: Ending period cash and securities comprised 27% of total assets. Average commercial loan balances increased 4% or $401 million during the quarter, and real estate loans increased $208 million. Average mortgage finance loans decreased 27% quarter over quarter. Linked quarter deposit growth was $814 million or 3%, with non-interest-bearing deposits excluding mortgage finance increasing $250 million or 7%.
• Credit Loss: Provision expense was $17 million, with the allowance for credit loss increasing $7.2 million to $332 million, finishing the quarter at 1.85% of LHI excluding the impact of mortgage finance allowance and loan balances.
• Capital: Capital levels remained at or near the top of the industry, with tangible common equity to tangible assets at 10%. Repurchased approximately 396,000 shares or 0.86% of prior quarter's share outstanding for $31 million in the first quarter.

Total revenue in the first quarter increased $24.1 million or 9% relative to Q1 of last year, supported by 10% growth in net interest income and 8% growth in fee-based revenue. Year-over-year adjusted pre-provision net revenue grew 21% or $13.5 million to $77.5 million. Non-interest-bearing deposits, excluding mortgage finance, grew 7% quarter over quarter, the largest quarterly increase since 2021, and are up 11% year over year. Net interest margin increased 26 basis points in the late quarter, and net interest income grew 10% year over year. Adjusted pre-provision net revenue was $77.5 million, which is expected to be a low point for the year.

• Raised revenue guidance to low double digits percent growth.
• Maintained non-interest expense guidance of high single-digit percent growth, including resume progress associated with fee-based initiatives in the second half of the year.
• Full-year provision expense outlook remains 30 to 35 basis points of loans held for investment, excluding mortgage finance, enabling preservation of industry-leading coverage levels while supporting clients' growth needs.
• Anticipates achieving quarterly 1.1 ROAA in the second half of the year.

• Macroeconomic Uncertainty: Tariff actions and resulting volatility in financial markets could manifest in changes to client confidence, affecting hiring, capital investment, and M&A.
• Credit Risk: Proactive management of credit risk across a range of macroeconomic and portfolio-specific scenarios, including those associated with recent trade policy-induced market volatility, with the firm having prepared for potential tariffs since late summer 2024.

Q: How is the revenue guide motivated, especially regarding NII?

A: The revenue guide can move to the higher end if deposit data gets to sixty prior to mid-year, LHI excluding mortgage finance delivers comparable loan growth to last year, and average mortgage finance volumes could be up 10% for the full year. The majority of investment banking transactions in the pipeline haven't been canceled but delayed.

Q: How's the loan growth pipeline shaping up into the second quarter and impact of macro uncertainty on client loan demand?

A: Continue to fill clients' capital needs through various channels. There are risks to the loan growth pace, like potential accelerated payoffs in CRE, but the outlook for onboarding new C and I relationships is still strong. Macro uncertainty impacts client demand for loans as it's hard to project financial forecasts and make strategic moves until economic clarity is known.

Q: Thoughts on forward buybacks after the market pullback?

A: No change in capital priorities. Rely on disciplined allocation approach. The stock is trading below previous buyback levels, and there are multiple compelling options for near-term capital deployment, including success in implementing enhanced credit structures for mortgage finance clients.

Q: Color on increase in special mention loans and industry sectors worried about due to tariffs?

A: Observed areas worthy of heightened concern include infrastructure, transportation, logistics, general manufacturing within C and I, and commercial clients serving the low end of the consumer market. None of these segments comprise more than 1-2% of the overall loan portfolio. The firm's multiyear reserve build is based on conservative economic assumptions.

Q: Outlook for treasury solutions fees and private wealth penetration?

A: Treasury solutions fees were up 22% year over year, with eight straight quarters of three times market rate growth due to focusing on client solutions. On private wealth, the platform has been improved, and there's a great go-to-market strategy, expecting real progress moving forward as the year goes on.