Texas Capital Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company is a Texas-focused commercial bank holding company, with additional regional and national lending businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
- Second quarter: Net income was $38.9 million, up 2% from $37.9 million a year earlier; diluted EPS was $0.78 versus $0.76. Net income available to common shareholders was $36.4 million.
- First half: Net income was $64.0 million, down 12% from $73.0 million; diluted EPS was $1.27 versus $1.47. Net income available to common shareholders was $59.1 million.
- Net interest income: $157.1 million in Q2, up from $142.3 million; $301.9 million for the first half, up from $272.3 million. Growth reflected higher average earning assets, while funding costs rose.
- Net interest margin: 3.18% in Q2 versus 3.22% a year earlier; 3.15% for the first half versus 3.22%. Management attributed pressure to higher funding costs and a larger share of low-yield liquidity assets.
- Credit provision: $16.0 million in Q2 versus $14.5 million; $46.0 million for the first half versus $25.5 million. First-half net charge-offs rose to $19.4 million from $6.8 million.
- Non-interest income and expense: Q2 income was $13.9 million, up from $12.8 million; expense increased 16% to $94.3 million. First-half income was $25.2 million, approximately flat year over year, while expense rose 15% to $181.1 million. Expense growth included staffing, technology, legal and FDIC assessment costs.
- Returns: Q2 ROA was 0.77% and ROE 9.65%, versus 0.83% and 10.32%. First-half ROA was 0.65% and ROE 7.91%, versus 0.84% and 10.08%.
Financial position, liquidity and capital
- Total assets were $21.08 billion at June 30, up from $18.90 billion at December 31, 2015. Loans held for investment, net, were $17.60 billion, up from $16.57 billion; total deposits were $16.70 billion, up from $15.08 billion.
- Cash and cash equivalents were $2.72 billion. Total liquidity assets, including interest-bearing deposits and federal funds sold, were $2.62 billion, versus $1.68 billion at year-end.
- Other borrowings were $2.02 billion; federal funds purchased and repurchase agreements totaled $96.0 million. Subordinated notes and trust preferred debentures totaled $394.3 million.
- First-half operating cash flow was negative $67.3 million versus positive $73.3 million a year earlier; investing cash outflow was $1.09 billion, partly offset by $2.09 billion of financing inflows. Cash and cash equivalents increased $932.1 million during the half.
- Company capital ratios at June 30 were 7.37% CET1, 8.64% Tier 1, 10.86% total capital and 8.69% Tier 1 leverage. Management said the company met capital adequacy requirements and the Bank met the ratios for “well capitalized” status. Management cautioned that quarter-end mortgage finance balances can materially affect reported capital ratios.
Changes, outlook and risks
- Credit deterioration was concentrated in energy lending amid persistently low and volatile oil and gas prices. Energy non-accrual loans were $126.7 million at June 30, compared with $104.2 million at year-end and $38.0 million a year earlier. Total non-accrual loans were $165.4 million; non-performing assets were $184.2 million.
- The allowance for loan losses was $167.4 million, or 0.94% of loans held for investment; the combined allowance for loan and off-balance-sheet credit losses was $176.8 million. The combined allowance was 1.41% of loans excluding mortgage finance loans, up from 1.28% at year-end. Management considered the allowance appropriate but noted uncertainty in energy conditions and borrower financial information.
- Potential problem loans outside non-accrual and past-due categories totaled $65.1 million, versus none at year-end. OREO increased to $18.7 million from $0.3 million, primarily following foreclosure of two commercial properties.
- The mortgage correspondent aggregation business expanded: loans held for sale were $221.3 million, versus $86.1 million at year-end, and the servicing portfolio rose to $736.3 million. The company estimated $363,000 of exposure for mortgage repurchase, indemnification and make-whole claims; it had no such losses in the first half and noted limited company-specific historical data for estimating the reserve.
- Management provided no specific financial guidance. It cited expectations for growth in certain non-interest income components, subject to competition and the costs and resources required for new products or business lines. It also described continuing investment in operations and IT security.
- Key stated risks include credit deterioration and collateral declines, especially in energy; Texas economic conditions; interest-rate and funding risk; mortgage pricing, servicing and repurchase exposure; competition; regulatory changes; cybersecurity and vendor risks. The filing reported no material change to previously disclosed risk factors. Management did not expect ordinary-course legal matters to have a material adverse financial impact.
Important facts for investors to verify
- Whether energy-sector borrower performance, collateral values, criticized loans and charge-offs continue to deteriorate, and whether reserves remain adequate.
- Whether higher operating costs and funding costs continue to outpace revenue growth and weigh on margins and returns.
- How mortgage finance growth affects liquidity, capital ratios, servicing-asset valuations and potential repurchase obligations.
- Whether deposit growth and available borrowing capacity remain sufficient to fund lending and meet obligations; assess the company’s reliance on borrowings alongside deposits.
- Confirm reported capital levels against regulatory requirements, particularly given the filing’s warning that quarter-end mortgage finance balances affect capital ratios.