Texas Capital Bancshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020 unless otherwise noted. Unaudited. The company is a Texas-focused commercial bank with mortgage finance and other regional and national lending businesses.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Interest income | $228.4 million | $306.0 million in Q1 2020 |
| Net interest income | $200.1 million | $228.3 million in Q1 2020 |
| Net interest margin | 2.09% | 2.78% in Q1 2020 |
| Non-interest income | $39.1 million | $11.8 million in Q1 2020 |
| Non-interest expense | $150.3 million | $165.4 million in Q1 2020 |
| Provision for credit losses | $(6.0) million, a recovery | $96.0 million expense in Q1 2020 |
| Net income; common-stockholder income | $71.9 million; $68.2 million | Net loss of $16.7 million; common-stockholder loss of $19.1 million in Q1 2020 |
| Diluted EPS | $1.33 | $(0.38) in Q1 2020 |
| Comprehensive income/(loss) | $(0.3) million | $(20.9) million in Q1 2020 |
| Operating cash flow | $198.4 million | $1.786 billion in Q1 2020 |
| Total assets; total deposits | $40.1 billion; $33.4 billion | $37.7 billion; $31.0 billion at year-end 2020 |
| Loans held for investment, net | $24.2 billion | $24.2 billion at year-end 2020 |
| Liquidity assets | $11.2 billion | $9.0 billion at year-end 2020 |
| Long-term debt | $665.0 million | $395.9 million at year-end 2020 |
Changes, capital and credit quality
- Net income improved primarily because credit-loss provision expense fell by $102.0 million year over year. Net charge-offs were $6.4 million, versus $57.7 million in Q1 2020.
- Net interest income and margin declined as lower interest rates and a shift toward lower-yielding liquidity and securities outweighed reduced funding costs. Average earning assets increased, while average loans held for sale fell substantially.
- Non-interest income rose, including a swing to a $5.6 million gain on loan sales from a $13.0 million loss in Q1 2020. Non-interest expense declined, partly reflecting lower marketing, legal, servicing and merger-related costs; salaries and technology costs increased.
- Available-for-sale securities generated a $72.2 million after-tax unrealized loss in other comprehensive income; accumulated other comprehensive income/(loss) moved to $(56.4) million from $15.8 million at year-end.
- Criticized loans were $945.1 million, up from $918.4 million at year-end and $675.9 million a year earlier. Management said criticized balances remained elevated because of pandemic-affected borrowers. Non-performing assets were $97.7 million, down from $122.0 million at year-end and $219.2 million a year earlier, mainly due to lower non-accrual energy loans.
- The loan allowance was $242.5 million; including the off-balance-sheet allowance, total credit-loss allowance was $259.6 million, or 1.06% of loans held for investment. The company reported the Bank met well-capitalized ratios. At quarter-end, company and Bank CET1 ratios were 10.19% and 10.39%, respectively.
Outlook, risks and notable items
- Management expected financial results to improve during 2021 as economic activity recovered, while emphasizing uncertainty around COVID-19, borrower distress and recovery in affected sectors. The filing does not provide quantified earnings guidance.
- On March 9, the Bank issued $275 million of senior unsecured credit-linked notes, transferring first-loss risk on a $2.2 billion mortgage warehouse loan reference pool, up to $275 million. The notes mature in September 2024.
- The company issued Series B preferred stock in March, receiving $289.7 million net proceeds for general corporate purposes, including potential Bank capital support and possible redemption of Series A preferred stock, subject to approvals.
- After quarter-end, the company agreed to sell its mortgage servicing rights portfolio and wind down its Mortgage Correspondent Aggregation program. Completion was expected in Q2 2021, subject to customary conditions; management expected the gain and severance costs to be immaterial.
- Key exposures include credit deterioration, especially in energy and pandemic-affected industries; Texas economic concentration; interest-rate and mortgage-market risk; funding and capital access; cybersecurity and operational risk; and LIBOR transition. The company’s modeled sensitivity indicated a $38.8 million increase in next-12-month net interest income under an immediate 100-basis-point rate increase; this is a model estimate, not a forecast.
- Management expected ordinary-course legal proceedings to have no material adverse effect. The filing reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improved credit outlook and negative provision are sustainable, given elevated criticized loans and continuing pandemic-related uncertainty.
- Drivers of the lower net interest margin and the earnings effect of the unusually large liquidity and securities balances.
- Credit quality, charge-offs and allowance adequacy across energy, commercial real estate and other criticized portfolios.
- Execution and financial impact of the MSR sale and MCA wind-down, including actual closing timing and recorded gain or costs.
- Capital and funding implications of the preferred-stock issuance and credit-linked notes, including the notes’ loss-transfer terms and interest costs.