Texas Capital Bancshares, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The company and its subsidiary, Texas Capital Bank, provide financial products and services primarily to commercial businesses, entrepreneurs and professionals. This unaudited report covers the quarter ended March 31, 2023; income and cash-flow comparisons are with Q1 2022, while balance-sheet comparisons are with December 31, 2022.
Key financial results
| Metric | Q1 2023 | Prior comparable period |
|---|---|---|
| Net interest income | $235.3 million | $183.5 million |
| Net interest margin | 3.33% | 2.23% |
| Provision for credit losses | $28.0 million | $(2.0) million |
| Non-interest income | $37.4 million | $20.3 million |
| Non-interest expense | $194.0 million | $153.1 million |
| Net income | $38.7 million | $39.7 million |
| Net income available to common stockholders | $34.3 million | $35.3 million |
| Diluted earnings per common share | $0.70 | $0.69 |
| Efficiency ratio | 71.1% | 75.1% |
- Growth and balance sheet: Total assets were $28.6 billion, up from $28.4 billion at year-end. Gross loans held for investment rose $791.5 million to $20.1 billion, with growth across loan categories except mortgage finance. Deposits declined $677.2 million, or about 3%, to $22.2 billion.
- Funding and liquidity: Cash and cash equivalents were $3.65 billion, down from $5.01 billion at year-end. Short-term borrowings increased to $2.10 billion from $1.20 billion, primarily FHLB borrowings. Available unused capacity included $5.81 billion from the FHLB, $1.47 billion in federal funds lines and $3.86 billion in Federal Reserve borrowing capacity. Estimated uninsured deposits were 45% of total deposits.
- Debt and capital: Long-term debt was $932.1 million. At March 31, the company reported CET1 capital of 12.42% and total capital of 16.86%; the Bank’s ratios were 13.61% and 15.80%, respectively. Management stated that the company and Bank met applicable capital adequacy requirements and exceeded well-capitalized thresholds.
- Cash flow: Operating activities provided $18.2 million, compared with $72.9 million in Q1 2022. Investing activities used $1.54 billion, while financing activities provided $155.0 million. Cash and cash equivalents decreased $1.36 billion during the quarter.
- Securities: Available-for-sale debt securities totaled $3.39 billion at fair value. Held-to-maturity securities had $919.0 million in carrying value and $811.5 million in estimated fair value, an estimated $107.4 million unrealized loss. Total stockholders’ equity was $3.08 billion.
Material changes and management commentary
- Net interest income increased by $51.8 million year over year, principally as higher market rates lifted loan and cash yields. Net interest margin rose to 3.33%, while total cost of deposits increased to 2.06% from 0.20%.
- Net income declined modestly: stronger net interest income and non-interest income were more than offset by higher credit-loss provision and operating expenses. Salaries and benefits rose to $128.7 million from $99.9 million, with management citing increased headcount. Investment banking and trading income increased to $18.8 million from $4.2 million.
- The $27.4 million loan-loss provision reflected management’s increased downside economic assumptions and higher net charge-offs and criticized loans. Net charge-offs were $19.9 million, primarily related to one commercial loan; criticized loans reached $561.1 million, up from $513.2 million at year-end.
- Non-accrual loans rose to $94.0 million from $48.3 million at year-end. The allowance for credit losses on loans was $260.9 million, or 1.30% of loans held for investment.
- Management reported minimal deposit outflow despite banking-industry volatility and described liquidity and the balance sheet as robust. It cited proactive client outreach and efforts to maximize funding sources.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year or future results.
- Risks highlighted include loss of confidence in regional banks, deposit outflows, reliance on uninsured deposits, liquidity and funding availability, rising funding costs, interest-rate exposure and potential losses if securities must be sold to meet liquidity needs. The company stated it did not intend, and did not believe it was likely to be required, to sell available-for-sale securities before recovery of their amortized cost.
- In a severe downside economic scenario, the modeled allowance estimate would increase by approximately $143 million; the filing cautions this sensitivity excludes qualitative overlays and is not a forecast of the final allowance.
- Interest-rate simulations estimated that a 100- or 200-basis-point increase could raise next-12-month net interest income by $33.7 million or $67.0 million, respectively; equivalent decreases could reduce it by $46.4 million or $93.3 million. These are model estimates, not guarantees.
- The company repurchased 1,011,909 shares for approximately $59.7 million during the quarter and had $125.0 million remaining under a new $150 million authorization at March 31. It paid no common dividends. Preferred dividends were $4.3 million.
- The company recorded $44.2 million of after-tax other comprehensive income in Q1, partly reducing accumulated other comprehensive loss. It estimated that $50.3 million of cash-flow hedge losses would be reclassified as a decrease to loan interest income over the next 12 months.
- Management did not expect ordinary-course legal proceedings to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Deposit stability and composition, especially the 45% estimated uninsured share, and the company’s actual access to backup funding if withdrawals accelerate.
- Credit quality trends, including criticized and non-accrual loans, the large commercial-loan charge-off, and whether the allowance remains adequate as economic assumptions change.
- Interest-rate and securities risks, including the unrealized held-to-maturity loss, potential forced-sale consequences and actual performance relative to modeled sensitivity estimates.
- Whether loan growth, deposit costs and operating expenses support sustainable profitability as the benefit from higher asset yields evolves.
- Capital levels, regulatory requirements and the timing or scale of additional repurchases, given liquidity needs and uncertainty in the banking environment.