Texas Capital Bancshares, Inc. Q3 FY2025 earnings call

• Rob Holmes discussed the 4-year transformation plan, achieving 1.3% ROA which was above the target, strong capital position with tangible common equity to tangible assets at 10.25% (all-time high), and improved funding base with index deposits down significantly. - Matt Scurlock highlighted third quarter total revenue growth, 13% growth in net interest income and 6% in fee-based revenue, year-over-year adjusted preprovision net revenue up 30%, provision expense of $12 million, strong balance sheet metrics including average commercial loan balances up 3%, and capital levels at or near industry top.

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. Year-over-year adjusted preprovision net revenue increased 30% or $34.9 million to $149.8 million, an all-time record. Record revenue was $340 million, record pre-provision net revenue was $150 million, record net income to common was $101 million, record earnings per share was $2.18, and record tangible book value per share was $73.02. Index deposits now comprise only 6% of average total deposits, down nearly $10 billion from 2020. Treasury product fees increased 91% over the past 4 years.

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

• Conservative view of uncertain economic environment, more conservative than consensus expectations. - Paranoia about downside scenarios, conducting tabletop exercises for potential disruptions like tariffs.

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. So -- I know you guys don't like to talk about loan growth per se, but [Technical Difficulty] a little bit better as we think about [Technical Difficulty] fourth quarter. So we would love to hear kind of the puts and takes and any sort of forward outlook you might have?

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. So that backdrop, we were highly active this quarter in terms of capital distribution with really strong client acquisition trends across the entirety of the platform. So as you noted, for those clients that are best served in the bank markets, we continue to be an industry leader. The C&I commitments this quarter increased by $576 million or 11% annualized, up 12.6%, $2.4 billion year-over-year. According to middle-market league tables in Q3, we arranged access to more syndicated bank debt than anyone in the country other than JPMorgan. So we noted in the prepared remarks that full year client growth continues to be broad-based across corporate, middle market and business banking really the last 4 years, trying to assure we have a platform and solution set that's tailored for each stage of our clients' life cycle. For clients whose capital needs are best met outside of the bank markets, we delivered a highly successful debt capital markets transactions and high-yield term loan B and private credit this quarter, with importantly an increased volume of repeat clients, which supports a more granular, repeatable and we certainly think higher quality fee base. And then finally, after clearing the first trade on the last day of the last quarter, equity capital markets business participated in a series of IPOs this quarter, which provides yet another capability for clients looking to access capital. So as we think about our ability to support clients when you combine record high capital levels for the firm, which, in most cases, is industry-leading and then improved capabilities across the firm, that should drive really strong revenue growth in terms of -- related with finding capital for our clients whether our balance sheet is the best spot for it or not.

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%. As you know, our variable loan portfolio will absorb those changes in rates before we can effectively reprice deposits. We continue to be really pleased with the ability to increasingly compete in deposit space based on the value that we had and not just price. So we noted in the prepared remarks that cycle-to-date beta of 70% included those September cuts, which after repricing the deposit base over the last few weeks should get current levels back to about that 80% interest-bearing deposit beta that we experienced through Q2. Also consistent with previous quarters, the guide contemplates only 60% interest-bearing deposit beta across the next 2 cuts, which reflects at least our expectation for increased liquidity costs as folks look to more aggressively extend credit and then sustained composition of commercial noninterest-bearing -- average commercial non-interest bearing at about 13% of total deposits.

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.

Q: First off, great to see all the green check marks on Slide 4, great execution. As far as capital, I think the presentation notes that the risk-weighted assets at the bank now in the top quintile of the peer group and that TCE ratio in the top quartile. I think from our side, we're trying to weigh if this capital could be a deployment opportunity in the next few years for you? Or do you feel like having this excess capital gives you a competitive advantage as you add new customers, which could suggest you want to continue to maintain these capital ratios close to current levels?

A: Thanks, Matt. I appreciate the question. I think it's more than fair. And if I repeat myself from previous calls, forgive me. But as you know, we have a very disciplined capital menu that we follow literally every day. And the first is invest in organic growth with new clients and there's an abundance of demand in the new organic growth with new and deepening clients, and then there's investing in the platform, products and services. I would argue we built the most broad relevant product platform and banking in the last 10 years with all of our capabilities, done a pretty good job with that, getting a return. Then you move on to -- not in the conventional capital menu, but I look at bond repositioning and loan portfolio acquisition that we did in the third quarter of last year. And then we move to distribution policy. We're not going to do a dividend, but we bought back 12% of the company at an average price of $59 per share, below book value -- all below book value. And then you get to M&A, which is we sold a company for $3.5 billion, which really was the foundational component that made this turnaround possible. So I think -- and by the way, we did that before other banks tried and failed. So I think we've proved to be really good stewards of capital, including the expense capital. We took out $270 million of NIE and put that back plus more in rebuilding the platform that's achieving these returns. So the last thing on that capital menu would be whole bank M&A. And until you get to profitability, that was red on the menu. We look at it. We study it. We focus on it. We're ready for it, but it was red on the capital menu. Now maybe it's yellow because we have the earnings, but we need the currency. We're super focused on tangible book value per share. That's paramount to us. That's gone up 40% since the beginning of the transformation. I think the average bank is 30% or 31%. So while doing a transformation, we outperformed, and I would just hope that we get the benefit of the doubt that we can outperform going forward, and we'll be good stewards and be highly sensitive to red, yellow and tangible book value. But Matt, let me add one quick thing because you mentioned it. It is absolutely a benefit go-to-market with clients. You cannot deny it. I have the CEO of one of the fastest-growing company, a specific industry here today at lunch with me, and we talked about that. And they do -- we were on the cover of their debt deal. They do treasury with us. They do their corporate card with us. And we talked about how well capitalized we were and how comfortable they were with us because of that. So it is undoubtedly a competitive position in the market.