Business context and reporting period
Texas Capital Bancshares, Inc. is a financial holding company whose bank provides commercial banking services primarily in Texas, focusing on middle-market businesses and professionals. This unaudited Form 10-Q covers the quarter ended March 31, 2013; comparisons are with the first quarter of 2012 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Interest income | $104.2 million | $93.1 million |
| Net interest income | $98.0 million | $88.2 million; up $9.8 million |
| Net interest margin | 4.27% | 4.54%; down 27 basis points |
| Non-interest income | $11.3 million | $9.2 million |
| Non-interest expense | $55.7 million | $52.3 million |
| Provision for credit losses | $2.0 million | $3.0 million |
| Net income | $33.1 million | $27.1 million; up 22% |
| Net income available to common shareholders | $33.1 million | $27.1 million |
| Diluted earnings per common share | $0.80 | $0.70 |
- Management attributed the increase in net income mainly to higher net interest income, lower credit-loss provision and higher non-interest income, partly offset by higher operating and tax expenses. Return on average assets was 1.38% versus 1.33%; return on average common equity was 15.82% versus 17.36%.
- Average earning assets grew by $1.5 billion year over year, driven by loans. Average loan yields declined, contributing to margin compression; lower funding costs provided a partial offset. Brokered loan fees rose to $4.7 million from $3.7 million, and swap fees to $1.7 million from $0.8 million.
- At March 31, total assets were $10.02 billion, down from $10.54 billion at year-end 2012. Loans held for investment, net, were $6.85 billion, up from $6.71 billion; loans held for sale were $2.58 billion, down from $3.18 billion, which the company attributed to seasonal trends. Deposits were $7.75 billion, up from $7.44 billion.
- Cash and cash equivalents ended the quarter at $191.4 million, versus $206.3 million at year-end. Operating cash flow was $671.7 million, compared with cash used of $153.0 million in Q1 2012; substantial loan originations and sale proceeds in the warehouse-lending business affect this measure. Investing activities used $123.5 million and financing activities used $563.1 million.
- Total borrowings were $1.16 billion at quarter-end, including $453.0 million of federal funds purchased, $450.0 million of FHLB borrowings, $111.0 million of subordinated notes and $113.4 million of trust preferred debentures. Other borrowings on the balance sheet fell to $450.0 million from $1.65 billion at year-end, while federal funds purchased increased. Available FHLB capacity was $914.0 million and unused federal funds lines were $575.0 million.
- The allowance for loan losses was $75.0 million, or 1.08% of loans held for investment; combined reserves, including off-balance-sheet exposures, were $79.0 million, or 1.14%. Q1 net charge-offs were $1.2 million. Non-accrual loans declined to $43.4 million from $55.8 million at year-end; OREO declined to $14.4 million from $16.0 million.
- Reported capital ratios were 10.20% Tier 1 risk-based, 11.96% total risk-based and 11.33% leverage. The filing states the Bank remained well capitalized under the applicable regulatory framework.
Material changes, outlook, and risks
- The company issued 6.0 million shares of 6.5% non-cumulative preferred stock on March 28, 2013, receiving net proceeds of $145.1 million for general corporate purposes, including potential capital support for the Bank. Preferred dividends reduced common income by $81,000 in the quarter. The company reported no plans to pay common dividends in the near future.
- Regulatory treatment of mortgage-loan ownership interests is a material uncertainty. The company applied a 100% risk weight to the loans-held-for-sale portfolio in its Q1 regulatory capital reporting, while challenging the regulator’s interpretation and maintaining that the structure supports lower historical risk weights. Management said quarter-end balances required about $22 million of additional capital under the 100% weighting; it reported $157 million at the parent and a $50 million available credit line to support the Bank.
- Management said it expects continued growth in non-interest income, but noted that competition could affect the rate of growth and that new products or business lines could require additional capital and management resources. The filing provides no formal earnings or revenue guidance.
- Key risks include the Texas concentration of the loan portfolio; economic and commercial real estate conditions, collateral valuations and borrower fraud; interest-rate and funding-cost changes; competition for deposits and loans; and regulatory, capital and liquidity requirements. The company also disclosed ongoing investor requests to repurchase loans from its discontinued residential mortgage business; market conditions could increase losses or extend the time needed to resolve these matters.
- The company’s interest-rate model estimated that a 200-basis-point increase would raise net interest income by $66.3 million over the next twelve months relative to its most-likely scenario. Management cautioned that the simulation relies on uncertain assumptions and actual results may differ materially.
- Management reported improved credit quality and lower non-performing assets, but described the economic environment as weak and retained unallocated loan-loss reserves in part for uncertainty, including losses related to borrower fraud and commercial real estate valuations.
Important facts for investors to verify
- Whether loan growth and fee income can continue to offset margin compression and higher personnel, marketing and technology costs.
- The trend in criticized, non-accrual, past-due and restructured loans, and whether the allowance remains adequate as the portfolio grows and economic or collateral conditions change.
- The outcome and capital impact of the regulatory dispute over risk weighting for mortgage warehouse assets, including any potential retroactive action.
- The stability, cost and mix of deposits and borrowings, and the company’s ability to fund growth while maintaining capital and liquidity.
- Potential losses, liabilities and resolution timing related to repurchase requests from the discontinued mortgage business.