Texas Capital Bancshares on Thursday reported a hefty uptick in criticized loans, and executives said they are prepared for additional deterioration in the commercial real estate book in particular.
Loans identified as criticized totaled $859.5 million in the first quarter, up 53.2% compared with the same quarter last year, the parent company of Texas Capital Bank disclosed in its first-quarter earnings presentation. Of those, $580 million were in the special-mention bucket, roughly double from a year earlier; CRE loans made up more than half of the special mention loans at March 31.
The Dallas-based company had previously warned that criticized loans would increase in the current economic environment of high interest rates and post-pandemic disruption of the real estate market.
During a call with analysts to discuss the company's first-quarter results, Chief Financial Officer Matt Scurlock described the composition of Texas Capital's criticized loans as "weighted towards well-structured commercial real estate loans supported by strong sponsors" as well as "commercial clients with dependencies on consumer discretionary income." There were no consumer loans or mortgage finance loans included in the current criticized loan category.
"A few" multifamily loans and one office loan drove the increase in special mention loans, Scurlock said. Such loans have potential weakness that could lead to repayment issues.
While over time things like the "quality of the sponsor projects" should limit the potential for realized losses, the firm "would in no way be surprised by continued migration," he added.
Texas Capital is in the third year of
Currently, 30% of Texas Capital's overall loan book is made up of commercial real estate loans. The segment — of which 8% are office loans — is a point of interest for investors and analysts of the bank. Industrywide,
To help guard against potential loan losses, Texas Capital has been setting aside provisions. In the first quarter, it set aside $19 million to account for the increase in criticized and nonaccrual loans as well as to cover $10.8 million in net charge-offs and an uptick in loans held for investment.
"We're as prepared as we possibly could be for the uncertain credit environment," Scurlock said.
On Thursday, Texas Capital reaffirmed its guidance for all of 2024, which calls for revenue growth in the mid-single digits and expense growth in the low-single digits. It expects positive operating leverage beginning in the second half of the year, and it still thinks it can achieve a common equity tier 1 ratio of at least 11% for the full year. The metric was 12.4% through March.
The revenue guide is about 10% above the first-quarter run rate, Casey Haire, an analyst at Jefferies, said in a note. During the quarter, revenues totaled $256.3 million, the bank said.
That implies "a steep ramp for the remainder of the year," Haire wrote.
Net income for the first quarter was $21.8 million, or 46 cents per share, down from $34.3 million, or 70 cents per share, in the year-earlier period. Net interest income declined about 8.5% to $215 million year over year, while noninterest expenses rose by 4% to $202.4 million.
The higher expenses included an increase in legal and professional service fees, more spending on technology and communications and a $5 million legal settlement, the company said.
The Dallas bank's full-year results showed progress toward its long-term strategic goals despite a fourth-quarter drop-off in net interest income heavily tied to its mortgage business, executives said on an earnings call.
Noninterest income was a bright spot, coming in at $41.3 million, or about 10% higher than the year-earlier quarter, as a result of higher investment banking and advisory fees, the company said.
Noninterest income now makes up about 16% of Texas Capital's total revenue, much higher than in the past, Holmes said on the call. The company's treasury solutions platform is a main driver of the growth, and it's helping to bring in more non-interest-bearing deposits, he added.
"It's a part of our culture now," Holmes said. "It's not treasury in a line of business on their own trying to achieve certain goals for the bank. It's a holistic effort by the entirety of the culture."
In a regulatory filing Thursday, Texas Capital announced that Chief Risk Officer Tim Storms plans to retire around mid-June and the company will conduct a search for his successor.
Storms, who came from JPMorgan and was hired by Holmes, will "provide certain consulting and advisory services" to the company after his retirement, the filing said.
