Texas Capital Bancshares, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; comparisons are with Q1 2017 for operating results and December 31, 2017 for balance-sheet changes. The company is a Texas-based commercial bank with specialized regional and national lending businesses. The statements are unaudited.
Key financial metrics
| Metric | Q1 2018 / March 31, 2018 | Comparable period |
|---|---|---|
| Net interest income | $210.3 million | $163.4 million, Q1 2017 |
| Net interest margin | 3.71% | 3.29%, Q1 2017 |
| Provision for credit losses | $12.0 million | $9.0 million, Q1 2017 |
| Non-interest income | $19.9 million | $17.1 million, Q1 2017 |
| Non-interest expense | $127.0 million | $106.1 million, Q1 2017 |
| Net income | $71.9 million; $69.5 million available to common stockholders | $42.5 million; $40.1 million available to common stockholders |
| Diluted earnings per common share | $1.38 | $0.80, Q1 2017 |
| Assets | $24.45 billion | $25.08 billion, Dec. 31, 2017 |
| Loans held for investment, net | $20.24 billion | $20.49 billion, Dec. 31, 2017 |
| Total deposits | $18.76 billion | $19.12 billion, Dec. 31, 2017 |
| Cash and cash equivalents | $2.45 billion | $2.91 billion, Dec. 31, 2017 |
Q1 cash flows: operating activities provided $5.3 million, investing activities provided $231.5 million, and financing activities used $691.3 million. Cash and cash equivalents decreased $454.4 million during the quarter.
At quarter-end, borrowings included $535.5 million of federal funds purchased and repurchase agreements, $2.30 billion of other borrowings, $281.5 million of subordinated notes, and $113.4 million of trust preferred subordinated debentures. The company reported $2.30 billion of liquidity assets (federal funds sold and interest-bearing deposits in other banks), approximately $4.02 billion of unused FHLB borrowing capacity, and $680 million of unused federal funds lines. Company and Bank capital ratios exceeded applicable capital adequacy requirements; the Bank met the ratios for “well capitalized” status.
Material changes versus prior comparable period
- Net income rose 69% year over year. Management attributed the improvement primarily to $46.9 million higher net interest income and lower income tax expense, partly offset by higher credit provision and operating costs.
- Average earning assets increased about $2.9 billion year over year, including substantial growth in average loans held for investment. Higher loan yields and asset growth lifted net interest margin, while the average cost of total deposits and borrowed funds increased to 0.74% from 0.34%.
- Non-interest expense increased 20%, mainly from salaries and benefits, marketing, occupancy and business build-out; servicing costs also rose. OREO expense included a $2.0 million valuation allowance.
- Loans held for investment excluding mortgage finance continued to grow, while mortgage finance loans declined from $5.31 billion at year-end to $4.69 billion. Deposits declined $358.6 million from year-end but were $2.2 billion higher than March 31, 2017.
Outlook, commentary, risks and unusual items
- No specific earnings, revenue, or loan-growth guidance is provided. Management said it expects growth in certain non-interest income components, while noting competition and execution demands could affect growth.
- Energy loans were about $1.4 billion, or 7% of total loans. Energy non-accruals declined to $50.4 million from $64.2 million at year-end and $88.4 million a year earlier; Q1 energy net charge-offs were $5.1 million. Unfunded energy commitments increased to $772.6 million. Management considers the portfolio appropriately reserved but identifies commodity-price volatility as a risk.
- Total non-performing assets were $133.1 million, up $19.9 million from year-end but down $32.3 million year over year. The quarterly increase was attributed mainly to two commercial loan relationships. Non-accrual loans overall were $123.5 million, versus $101.4 million at year-end.
- The allowance for loan losses was $190.9 million; total allowance including unfunded commitments was $200.5 million. Q1 provision was $12.0 million, and net charge-offs were $5.2 million. Management’s reserve estimate depends on borrower conditions, collateral values and economic assumptions.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%; Q1 effective tax rate was 21%, versus 35% in Q1 2017. The company said its deferred-tax remeasurement remained provisional and continued analysis of certain tax-law provisions.
- Management describes the balance sheet as asset-sensitive. Its interest-rate simulation reports increases in next-12-month net interest income of $111.9 million and $224.5 million under +100 and +200 basis-point scenarios, respectively. The reported magnitudes warrant verification; the filing cautions that simulations rely on uncertain assumptions and may differ materially from actual results.
- Other risks include credit deterioration, Texas and broader economic conditions, real estate and oil-and-gas exposure, deposit and funding availability, rising funding costs, interest-rate risk, mortgage-market and MSR valuation changes, cybersecurity, regulatory requirements and execution of growth initiatives. Legal matters arise in the ordinary course; management does not expect them to have a material adverse financial impact. No material changes to previously disclosed risk factors were reported.
- The company early adopted ASU 2018-02 and adopted ASU 2016-01; the reported adoption adjustments were insignificant. CECL is scheduled for adoption January 1, 2020, and its impact was not yet reasonably estimable.
Important facts for investors to verify
- Confirm the reported interest-rate simulation figures and underlying units and assumptions.
- Track non-accrual loans, new commercial problem relationships, energy exposures, charge-offs and reserve adequacy.
- Assess whether deposit trends and rising funding costs continue to support loan growth and net interest margin.
- Monitor operating-expense growth, OREO valuation, and mortgage servicing rights and repurchase-related exposures.
- Review the eventual CECL adoption impact and any final adjustments to tax-related estimates.