Texas Capital Bancshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are against December 31, 2014. Unless stated otherwise, amounts are in U.S. dollars.
Business context
The company is a Texas-focused commercial bank serving businesses, professionals and entrepreneurs, with additional regional and national lending lines. Its portfolio includes commercial, real estate, construction and short-term mortgage finance loans. Most non-mortgage-finance loans are to Texas-based borrowers.
Financial performance and condition
- Earnings: Net income was $35.1 million, up 24% from $28.3 million in Q1 2014. Net income available to common stockholders was $32.6 million; diluted EPS was $0.70 versus $0.60. Preferred dividends were $2.4 million in each period.
- Interest income and margin: Net interest income increased to $130.0 million from $108.3 million, primarily as average earning assets expanded. Net interest margin fell to 3.22% from 3.99%; management cited lower loan yields and substantial growth in lower-yielding liquidity assets, including mortgage finance balances.
- Other income and expenses: Non-interest income was $12.3 million, up from $10.4 million, led by brokered loan fees and swap fees. Non-interest expense rose 10% to $76.5 million, including higher salaries, occupancy, technology and FDIC assessments; legal and professional expense declined.
- Credit costs: Provision for credit losses was $11.0 million versus $5.0 million. Net charge-offs were $3.1 million. The allowance for loan losses was $108.1 million, and combined reserves including off-balance-sheet commitments were $115.9 million.
- Assets and loans: Total assets were $17.33 billion, up from $15.90 billion at year-end. Net loans held for investment were $16.06 billion, up from $14.16 billion. Mortgage finance loans rose to $5.41 billion from $4.10 billion; management notes these balances can fluctuate materially around period-end.
- Deposits, debt and liquidity: Deposits increased to $14.12 billion from $12.67 billion. Core customer deposits were 87.9% of deposits. Period-end cash and cash equivalents were $834.5 million, down from $1.33 billion. Borrowings included $1.00 billion of FHLB advances, $125.5 million of federal funds purchased and repurchase agreements, $286.0 million of subordinated notes and $113.4 million of trust preferred debentures.
- Cash flow: Operating activities provided $35.7 million; investing activities used $1.91 billion, largely reflecting loan activity; financing activities provided $1.38 billion, principally from deposit growth. Cash and cash equivalents decreased $496.0 million during the quarter.
- Capital: At March 31, the company reported CET1 of 7.18%, Tier 1 capital of 8.57%, total capital of 10.71% and leverage of 9.53%. Ratios declined from year-end. Management said the Bank met the ratios to be well capitalized; quarter-end mortgage finance balances can materially affect reported capital ratios.
Material changes versus comparable periods
- Compared with Q1 2014, net interest income rose $21.7 million and net income rose $6.8 million, while provision expense increased $6.0 million and non-interest expense increased $7.2 million.
- Average earning assets increased $5.4 billion year over year, including $3.5 billion in average net loans and $1.9 billion in average liquidity assets. The resulting asset growth did not prevent margin compression.
- Non-accrual loans increased to $68.3 million from $43.3 million at December 31, 2014; non-performing assets rose to $68.9 million from $43.9 million. The allowance-to-non-accrual-loans ratio decreased to 1.6x from 2.3x.
- The company completed a common equity offering in December 2014, increasing equity by $149.7 million; management cited the larger equity base as a factor in lower year-over-year ROE and EPS dilution.
Outlook, risks and other notable matters
- The filing provides no specific earnings or growth guidance. Management expects continued growth in some non-interest income areas but notes competition and resource demands could affect that growth.
- Management attributed the higher loan-loss provision partly to loan growth and anticipated downgrades in energy credits. It identifies sustained or further declines in oil and gas prices, Texas economic conditions, real estate values, credit quality and funding access as key risks. Management did not expect then-current commodity-price declines to have a material adverse effect, but acknowledged uncertainty.
- Interest-rate simulations estimated a $79.9 million increase in net interest income under a 100-basis-point rate increase and a $169.0 million increase under a 200-basis-point increase over the next 12 months versus the most-likely scenario. These are model estimates dependent on assumptions about repricing, balances and customer behavior, not forecasts.
- Commitments to extend credit were $5.18 billion and standby letters of credit were $173.2 million. These contractual amounts do not necessarily represent future cash requirements.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether growth in commercial and energy exposures, anticipated energy-credit downgrades and the increase in non-accrual loans lead to further provisions, charge-offs or weaker reserve coverage.
- How mortgage finance loan volumes and period-end balances affect future reported liquidity, capital ratios and net interest margin.
- Whether deposits continue to fund loan growth and whether reliance on FHLB advances or other borrowings changes.
- Whether lower asset yields, expense growth and margin compression persist, and how these trends affect returns on assets and equity.
- The assumptions underlying management’s allowance estimates and interest-rate sensitivity simulations, given their stated estimation uncertainty.