Texas Capital Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Texas Capital Bancshares is a bank holding company whose subsidiary serves Texas commercial clients and selected regional and national lending markets.
Financial performance and condition
- Earnings: Net income was $39.7 million, down from $71.9 million in Q1 2021. Net income available to common shareholders was $35.3 million, or diluted EPS of $0.69, compared with $68.2 million and $1.33. Return on average assets was 0.47% (0.73%); return on average common equity was 4.97% (10.08%).
- Revenue and margins: Net interest income was $183.5 million, versus $194.8 million. Net interest margin improved to 2.23% from 2.04%. Non-interest income fell to $20.3 million from $44.4 million, while non-interest expense rose to $153.1 million from $150.3 million. The efficiency ratio increased to 75.1% from 62.9%.
- Credit costs: The provision for credit losses was a benefit of $2.0 million, compared with a $6.0 million benefit in Q1 2021. Net recoveries were $0.5 million versus $6.4 million of net charge-offs. The allowance for loan losses was $211.2 million, or 0.97% of loans held for investment. Criticized loans were $476.1 million, compared with $945.1 million a year earlier.
- Loans and deposits: Loans held for investment totaled $21.7 billion, down from $22.8 billion at year-end 2021, primarily due to a $1.6 billion decline in mortgage finance loans; commercial and real estate lending increased. Deposits were $25.4 billion, down from $28.1 billion. Core customer deposits were 94.7% of total deposits.
- Liquidity and debt: Cash and cash equivalents were $5.4 billion, down from $7.9 billion at year-end. Short-term borrowings were $1.4 billion, down from $2.2 billion; long-term debt was $929.4 million. Available borrowing capacity included $7.6 billion from the FHLB, $1.1 billion in unused federal funds lines, and $2.8 billion in unused Federal Reserve capacity.
- Cash flow: Operating activities provided $72.9 million; investing activities provided $866.1 million; financing activities used $3.5 billion. Cash and cash equivalents decreased $2.6 billion during the quarter.
- Capital and comprehensive income: Total stockholders’ equity was $3.09 billion, down from $3.21 billion at year-end, principally reflecting a $157.7 million after-tax other comprehensive loss. The company and bank exceeded regulatory well-capitalized thresholds; company CET1 and total capital ratios were 11.46% and 15.68%, respectively.
Material changes and unusual items
- Lower net interest income reflected reduced average earning assets, including lower mortgage finance balances and reduced interest-bearing cash. The higher net interest margin reflected a shift in earning-asset composition and improved securities yields.
- Non-interest income declined mainly because 2021 included mortgage servicing and loan-sale-related income; the company had sold its mortgage servicing rights portfolio and transitioned its mortgage correspondent aggregation program. Higher salaries and benefits, primarily associated with increased headcount, partly offset lower servicing-related costs.
- In response to rising rates, the company transferred $1.0 billion of available-for-sale securities to held-to-maturity. The transferred securities carried a $69.2 million discount at transfer; the related unrealized loss in accumulated other comprehensive income will be amortized into interest income over time. The filing attributes the broader securities unrealized losses primarily to interest-rate changes, not credit deterioration.
- On April 19, 2022, the board authorized a discretionary share repurchase program of up to $150 million. No common-stock dividends were declared or paid in Q1.
Outlook, commentary and risks
- The filing provides no specific earnings or financial guidance and cautions that quarterly results are not necessarily indicative of full-year results.
- Interest-rate simulations estimate next-12-month net interest income increases of $70.9 million under an immediate, sustained 100-basis-point increase and $149.1 million under a 200-basis-point increase versus the most likely scenario. Management cautions that model results depend on uncertain assumptions and actual outcomes may differ.
- Management cited risks including credit quality, interest rates, Texas and broader economic conditions, commercial and residential real estate values, energy-sector exposure, funding availability, regulatory changes, cybersecurity, and execution of the LIBOR transition. The company reported no material change in previously disclosed risk factors.
- Management said it was not aware of events reasonably likely to materially adversely affect liquidity, capital resources, or operations. Ordinary-course legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether deposit outflows and lower mortgage finance balances continue, and how they affect funding needs and net interest income.
- Whether the securities portfolio’s unrealized losses, including the held-to-maturity transfer, affect capital, liquidity flexibility, or reported interest income.
- Credit trends, especially criticized and non-accrual loans, energy exposures, and the adequacy of the allowance as lending grows.
- Actual interest-rate sensitivity relative to the company’s model, including deposit repricing and customer behavior.
- Whether any share repurchases occur under the $150 million authorization and their effect on capital and share count.