Texas Capital Bancshares, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company is a Texas-focused commercial bank with additional regional and national lending businesses. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total interest income | $208.2 million | $172.4 million | $392.1 million | $332.2 million |
| Net interest income | $183.0 million | $157.1 million | $346.3 million | $301.9 million |
| Provision for credit losses | $13.0 million | $16.0 million | $22.0 million | $46.0 million |
| Non-interest income | $18.8 million | $13.9 million | $35.9 million | $25.2 million |
| Non-interest expense | $111.8 million | $94.3 million | $217.9 million | $181.1 million |
| Net income | $51.1 million | $38.9 million | $93.6 million | $64.0 million |
| Net income available to common shareholders | $48.7 million | $36.4 million | $88.8 million | $59.1 million |
| Diluted earnings per share | $0.97 | $0.78 | $1.77 | $1.27 |
- Q2 net interest margin was 3.57%, up from 3.18%; six-month margin was 3.43%, up from 3.15%. Q2 return on average assets was 0.96% and return on average common equity was 10.08%, compared with 0.77% and 9.65%, respectively, a year earlier.
- At June 30, total assets were $23.12 billion, net loans held for investment were $19.29 billion, and deposits were $17.29 billion. Since December 31, 2016, net loans grew about $2.0 billion and deposits grew $275.4 million.
- Cash and cash equivalents were $2.27 billion, down from $2.84 billion at year-end. Six-month operating cash flow was $190.2 million, investing cash flow was negative $2.08 billion, and financing cash flow was positive $1.32 billion; net cash decreased $569.7 million. Mortgage loan purchases and sales are a significant driver of these cash flows.
- At quarter-end, borrowings included $2.70 billion of other borrowings, $462.2 million of federal funds purchased and repurchase agreements, $281.2 million of subordinated notes, and $113.4 million of trust preferred subordinated debentures. The company reported $3.61 billion of additional FHLB borrowing capacity and $820 million of unused federal funds lines.
- Regulatory capital ratios included company CET1 of 8.61% and bank CET1 of 8.16%; management reported that the bank met the ratios to be considered well capitalized.
Changes and credit quality
- Compared with Q2 2016, Q2 net income rose 31%, driven principally by higher net interest income and non-interest income and a lower credit-loss provision; expense growth partly offset those gains. Six-month net income increased 46% year over year.
- Loan growth and improved loan yields supported net interest income. Higher market rates also raised funding costs: the Q2 cost of interest-bearing liabilities increased to 0.90% from 0.57%.
- Non-interest income growth included servicing income associated with the mortgage correspondent aggregation business. The residential mortgage servicing portfolio increased to $5.0 billion from $2.2 billion at year-end, and mortgage servicing rights rose to $63.0 million from $28.5 million.
- Non-interest expense increased 19% in Q2. A $5.3 million write-off of unamortized software and development costs was recorded after management concluded that a support-area system was ineffective; a replacement technology was being enabled.
- Non-accrual loans were $123.7 million, down from $167.8 million at year-end; total non-performing assets were $142.4 million, down from $186.8 million. The allowance for loan losses was $174.2 million, or 0.90% of loans held for investment; the combined loan and unfunded-commitment allowance was $183.4 million.
- Energy loans were approximately $1.1 billion, or 5% of total loans. Energy non-accruals declined to $82.6 million from $125.9 million at June 30, 2016. Management cited improvement in the energy portfolio but noted continued uncertainty and maintained a qualitative reserve for risks not fully captured by historical loss experience.
Outlook, risks and contingencies
- The filing provides no quantified earnings, loan-growth, or margin guidance. Management expressed expectations for continued growth in certain non-interest income components, while warning that competition could constrain growth; it also stated that it believed the allowance was adequate.
- Key risks include deterioration in commercial and energy borrower credit, oil and gas price volatility, Texas economic and real-estate conditions, interest-rate and funding risk, mortgage market and servicing valuation volatility, competition, operational and cybersecurity risks, and regulatory or capital changes.
- Mortgage loan sales and securitizations can create repurchase, indemnification, and make-whole obligations. The estimated exposure reserve was $1.1 million at June 30, 2017; reported losses from these obligations were $7,200 in the first half.
- Commitments to extend credit totaled $6.24 billion and standby letters of credit totaled $184.0 million. These contractual amounts do not necessarily represent future cash needs because commitments may expire undrawn.
- Management did not expect ordinary-course legal proceedings to have a material adverse impact. 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 decline in energy non-accruals and non-performing assets persists, and whether loan growth changes credit quality, charge-offs, or reserve adequacy.
- Whether rising deposit and borrowing costs continue to offset higher asset yields and net interest margin gains.
- How mortgage aggregation volumes, servicing-right valuations, prepayment assumptions, and loan repurchase claims affect recurring earnings and risk.
- Whether liquidity and funding remain adequate as loans and customer commitments grow, including reliance on FHLB and other borrowings.
- The future expense and execution effects of replacing the written-off technology system, alongside continued staffing, servicing, and other operating-cost growth.