Texas Capital Bancshares, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Texas-based commercial bank serving businesses, professionals and entrepreneurs, with lending activities that also reach regional and national markets. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $163.4 million | $144.8 million in Q1 2016 |
| Net interest margin | 3.29% | 3.13% in Q1 2016 |
| Provision for credit losses | $9.0 million | $30.0 million in Q1 2016 |
| Non-interest income | $17.1 million | $11.3 million in Q1 2016 |
| Non-interest expense | $106.1 million | $86.8 million in Q1 2016 |
| Net income / income available to common shareholders | $42.5 million / $40.1 million | $25.1 million / $22.7 million in Q1 2016 |
| Diluted EPS | $0.80 | $0.49 in Q1 2016 |
| ROA / return on average common equity | 0.83% / 8.60% | 0.53% / 6.13% in Q1 2016 |
| Total assets | $20.9 billion | $21.7 billion at December 31, 2016 |
| Total deposits | $16.6 billion | $17.0 billion at December 31, 2016 |
| Loans held for investment, net | $16.5 billion | $17.3 billion at December 31, 2016 |
| Cash and cash equivalents | $2.9 billion | $2.8 billion at December 31, 2016 |
| Non-performing assets | $165.4 million | $186.8 million at December 31, 2016; $190.7 million at March 31, 2016 |
Cash flow for Q1 included $161.8 million provided by operating activities, $802.4 million provided by investing activities and $882.5 million used in financing activities; cash and cash equivalents increased $81.6 million. The investing cash flow reflected mortgage finance loan payoffs and originations, among other items.
At quarter-end, borrowings included $1.5 billion of FHLB borrowings, $141.8 million of federal funds purchased and repurchase agreements, $281.1 million of subordinated notes and $113.4 million of trust preferred subordinated debentures. The company reported a 9.61% CET1 ratio and 13.30% total capital ratio; the Bank reported 9.09% CET1 and 11.97% total capital and met the regulatory well-capitalized ratios.
Material changes versus prior periods
- Net income rose 69% year over year, primarily reflecting higher net interest income, a substantially lower credit-loss provision and higher non-interest income, partly offset by higher expenses and taxes.
- Net interest income increased $18.6 million. Average earning assets grew $1.7 billion year over year, while the cost of interest-bearing liabilities rose to 0.75% from 0.57%.
- Non-interest expense increased 22%, including an $11.6 million increase in salaries and benefits, attributed to business growth and continued build-out.
- Energy non-accrual loans declined to $100.9 million from $121.5 million at year-end 2016 and $141.3 million a year earlier. Total non-accrual loans were $146.5 million; net charge-offs were $5.7 million versus $7.4 million in Q1 2016.
- Loans held for investment, net, decreased $831.7 million from year-end, largely reflecting lower mortgage finance balances. Commercial, construction and real estate balances increased. Deposits declined $411.5 million over the same period.
- The mortgage correspondent aggregation business expanded: mortgage servicing rights reached $45.5 million, compared with $28.5 million at year-end 2016. Loans held for sale were $884.6 million, versus $968.9 million.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management said it expects continued growth in certain non-interest income components, while noting competition may affect growth.
- Management said the allowance for loan losses was appropriate, but emphasized uncertainty in the economy and energy sector, borrower financial reporting and collateral valuations. The $172.0 million loan-loss allowance equaled 1.03% of loans held for investment; non-accrual loans were covered 1.2 times.
- Key exposures include energy and Texas economic conditions, real estate values, borrower credit quality, interest-rate changes, funding availability, deposit and loan commitments, and mortgage-market pricing and servicing risks. Mortgage loan sale agreements may require repurchase, indemnification or make-whole payments; estimated exposure was $971,000, with no such losses reported in the quarter.
- The company’s interest-rate model estimated next-12-month net interest income increases of $110.7 million under a 100-basis-point rate increase and $224.5 million under a 200-basis-point increase versus its most-likely scenario. These are model outputs, not guidance, and depend on uncertain assumptions.
- The company reported $5.8 billion of commitments to extend credit and $171.5 million of standby letters of credit. It stated that common dividends were not planned for the foreseeable future.
- ASU 2016-09 became effective in 2017 without significant financial-statement impact. The company was evaluating CECL and other forthcoming accounting standards; CECL adoption was scheduled for periods beginning after December 15, 2019.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said ordinary-course legal matters were not expected to have a material adverse impact; no material risk-factor changes from the 2016 Form 10-K were reported.
Important facts for investors to verify
- Whether energy-sector credit quality and collateral values continue to improve, and whether the allowance remains adequate as conditions change.
- The quality and funding stability of deposits following the quarter’s decline, alongside the company’s sizable credit commitments and borrowing needs.
- The economics and risks of mortgage correspondent aggregation, including MSR valuations, loan-sale execution and repurchase or indemnification claims.
- The sustainability of higher earnings and fee income relative to rising funding costs, compensation and other operating expenses.
- The assumptions underlying capital ratios and interest-rate sensitivity, particularly the impact of mortgage finance balance fluctuations and modeled customer behavior.