Texas Capital Bancshares, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. The company is a Texas-focused commercial bank with mortgage finance and other national lending businesses.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $197.0 million | $209.9 million | $397.1 million | $438.2 million |
| Provision for credit losses | $(19.0) million | $100.0 million | $(25.0) million | $196.0 million |
| Non-interest income | $30.1 million | $70.5 million | $69.2 million | $82.3 million |
| Non-interest expense | $149.1 million | $222.3 million | $299.4 million | $387.8 million |
| Net income (loss) | $73.5 million | $(34.3) million | $145.4 million | $(51.0) million |
| Net income (loss) available to common stockholders | $67.2 million | $(36.8) million | $135.3 million | $(55.9) million |
| Diluted EPS | $1.31 | $(0.73) | $2.65 | $(1.11) |
| Net interest margin | 2.10% | 2.30% | 2.10% | 2.53% |
Q2 ROA was 0.76% and ROE was 9.74%; first-half ROA was 0.75% and ROE was 9.91%. Management attributed the earnings improvement principally to lower credit-loss provisions. Net interest margin declined as asset yields fell and the balance sheet held more lower-yielding liquidity and securities, partly offset by lower funding costs.
Financial position, cash flow and credit
- At June 30, total assets were $35.23 billion, down from $37.73 billion at year-end 2020. Total deposits were $28.84 billion, down $2.16 billion; net loans held for investment were $23.72 billion, down from $24.18 billion.
- Cash and cash equivalents were $6.97 billion, compared with $9.21 billion at year-end. Liquidity assets were $6.77 billion, equal to 23.5% of deposits, versus 29.1% at year-end. Management said elevated liquidity was beginning to run off as securities were purchased and certain higher-cost indexed deposits exited.
- First-half operating cash flow was $438.6 million, investing cash used was $74.7 million, and financing cash used was $2.60 billion. Cash and cash equivalents declined $2.24 billion during the period.
- Allowance for credit losses on loans was $221.5 million, or 0.93% of loans held for investment; total allowance including off-balance-sheet commitments was $238.3 million, or 1.00% of loans held for investment. First-half net charge-offs were $8.8 million, versus $131.8 million in 2020. Non-performing assets were $86.6 million, down from $122.0 million at year-end 2020.
- Company regulatory capital ratios at quarter-end included CET1 of 10.53%, Tier 1 risk-based capital of 12.05%, and total capital of 14.77%. The Bank was reported as well capitalized.
- Total long-term debt was $927.4 million, up from $395.9 million at year-end; other borrowings were $2.00 billion, down from $3.00 billion. The Bank issued $275 million of credit-linked notes in March, and the company issued $375 million of 4.00% subordinated notes in May. The company also redeemed $111 million of 6.50% subordinated notes and $150 million of Series A preferred stock.
Material changes, outlook and risks
- Non-interest income fell year over year, including a Q2 loss on sale of loans held for sale of $3.1 million versus a $39.0 million gain in Q2 2020. The decline was associated primarily with the sale of mortgage servicing rights (MSRs) and transition of the Mortgage Correspondent Aggregation program (MCA) to a third party.
- The MSR sale closed June 1. Servicing transfer was expected August 1, with transition activities expected to be substantially complete by September 30, 2021. Net MSRs were $1.3 million at quarter-end, versus $105.4 million at year-end.
- Gross loans held for investment declined $491.3 million from year-end. Energy loans declined as part of the company’s planned reduction of that portfolio; commercial loans increased. Management cited economic recovery and improved credit outlook in releasing reserves, while noting that COVID-19 effects and borrower distress remained uncertain, especially in energy, hospitality, restaurants, entertainment, retail and commercial real estate.
- No quantitative earnings or financial guidance was provided. Management described continued economic improvement but cautioned that the duration and effects of COVID-19 and variants, loan demand, credit performance, and market conditions remain uncertain.
- The Bank applied to convert from a national association to a Texas state-chartered bank; the application was under review. The company also identified LIBOR transition, interest-rate exposure, deposit and funding needs, cybersecurity and technology dependence, and credit quality as risks. Simulations estimated next-12-month net interest income increases of $24.3 million under a 100-basis-point rate increase and $79.3 million under a 200-basis-point increase; actual results may differ materially.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting. It reported no material change in previously disclosed risk factors and did not expect ordinary-course legal proceedings to have a material adverse effect.
Investor verification priorities
- Assess whether earnings remain resilient as reserve releases diminish and whether asset yields and net interest margin stabilize.
- Track criticized loans, non-performing assets, charge-offs, and the adequacy of the allowance against changing economic and industry conditions.
- Verify the effect of MCA/MSR exit activity on recurring fee income, expenses, and the timing and completion of servicing transition.
- Monitor deposit outflows, liquidity levels, borrowing costs, debt maturities, and the impact of new debt and credit-linked notes on capital and funding.
- Review interest-rate sensitivity assumptions, LIBOR transition execution, and the pending bank-charter conversion.