Business context and reporting period
Texas Capital Bancshares, Inc. (TCBI), the parent of Texas Capital Bank, provides financial services to businesses, entrepreneurs and individuals. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $232.1 | $239.1 | $699.4 | $628.2 |
| Provision for credit losses | $18.0 | $12.0 | $53.0 | $32.0 |
| Non-interest income | $46.9 | $25.3 | $130.3 | $71.9 |
| Non-interest expense | $179.9 | $197.0 | $555.6 | $514.4 |
| Net income | $61.7 | $41.4 | $169.0 | $115.2 |
| Net income available to common stockholders | $57.4 | $37.1 | $156.1 | $102.3 |
| Diluted earnings per share | $1.18 | $0.74 | $3.20 | $2.00 |
| Net interest margin | 3.13% | 3.05% | 3.25% | 2.64% |
- Profitability and operating trends: Q3 net income increased 49% as higher investment banking and trading income and lower expenses more than offset lower net interest income and a higher credit provision. Q3 investment banking and trading income was $29.2 million versus $7.8 million. Q3 expenses included a favorable comparison with 2022, which had $13.7 million of salary expense related to the sale of the premium finance subsidiary. Nine-month diluted EPS rose to $3.20; higher net interest and non-interest income were partly offset by higher credit provision and expenses.
- Margins and funding costs: Q3 net interest income declined 3% despite margin improvement. Deposit costs rose to 2.62% from 0.93% in Q3 2022; total funding costs rose to 2.60% from 1.04%. For the first nine months, deposit costs were 2.36% versus 0.48%.
- Balance sheet at September 30: Assets were $29.6 billion, up from $28.4 billion at December 31, 2022. Loans held for investment were $20.6 billion, up $1.3 billion; deposits were $23.9 billion, up $1.0 billion. Interest-bearing cash and cash equivalents were $4.0 billion. Short-term borrowings were $1.4 billion, primarily FHLB advances, and long-term debt was $858.5 million. Stockholders’ equity was $3.1 billion.
- Cash flow, nine months: Operating activities provided $186.1 million; investing activities used $2.1 billion; financing activities provided $1.1 billion. Cash and cash equivalents decreased $819.5 million to $4.2 billion.
- Capital and shareholder returns: At quarter-end, company CET1 and total capital ratios were 12.70% and 17.09%; the filing says the company and bank exceeded applicable well-capitalized thresholds. TCBI repurchased 1.01 million shares for approximately $59.7 million during the first nine months, leaving $125.0 million under its new $150 million authorization. It reported no common dividends declared or paid in the period.
Material changes, outlook and risks
- Credit trends: Nine-month net charge-offs rose to $37.1 million from $4.9 million, concentrated in commercial loans. Criticized loans increased to $677.4 million from $513.2 million at year-end 2022. Non-accrual loans were $63.1 million, 0.31% of loans held for investment, versus $48.3 million and 0.25% at year-end. The loan allowance was $244.9 million, or 1.19% of loans held for investment; a separate $46.3 million allowance covered off-balance-sheet exposures.
- Liquidity and securities: Management described liquidity and capital as robust amid 2023 banking-industry stress and reported proactive client outreach and review of funding capacity. Estimated uninsured deposits were about 40% of deposits. Available borrowing capacity included $6.94 billion from FHLB, $1.39 billion in unused federal funds lines and $3.05 billion at the Federal Reserve. Available-for-sale securities had $478.2 million of gross unrealized losses; held-to-maturity securities had $150.1 million. Management attributed losses primarily to interest rates, stated it did not intend to sell the available-for-sale securities and did not expect forced sale before recovery. AOCI was a loss of $505.9 million, versus $418.9 million at year-end.
- Estimates and unusual items: TCBI changed CECL model estimates in Q2 2023, including more granular loss-rate estimates and revised portfolio groupings; this shifted more allowance to off-balance-sheet exposures. Management estimated the modeled allowance would increase approximately $183.7 million under sole use of its most severe downside scenario, excluding qualitative overlays and other adjustments. Cash-flow hedges generated $66.1 million of unrealized losses during the first nine months; management estimated a further $70.9 million would be reclassified from AOCI as a decrease to loan interest income over the next 12 months.
- Outlook and principal risks: The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year or future results. Identified risks include economic deterioration, credit quality, deposit confidence and liquidity, higher rates and funding costs, securities valuations, real-estate collateral values, execution of growth plans, cybersecurity and third-party systems, and regulatory developments. Substantially all financial instruments had transitioned from LIBOR by quarter-end, with some to convert at a subsequent index reset.
- Contingencies and controls: The company is subject to ordinary-course legal claims; management does not expect their resolution to materially adversely affect results or financial statements. No material change in previously disclosed risk factors was reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- Whether rising deposit costs and funding competition continue to pressure net interest income and margins.
- Whether criticized loans, commercial charge-offs and non-accrual balances continue to rise, and whether the allowance remains adequate under changing economic forecasts.
- How uninsured deposit levels and actual access to contingent borrowing sources evolve, especially under stress.
- Whether unrealized securities losses or hedge-related AOCI reclassifications affect reported equity and future interest income.
- How management uses the remaining $125.0 million share-repurchase authorization relative to capital, liquidity and credit conditions.