Business Context and Reporting Period
Texas Capital Bancshares, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operates Texas Capital Bank and focuses on commercial banking and lending, including mortgage finance and national specialty lending businesses.
Financial Performance and Condition
| Metric | Q2 2018 / June 30, 2018 | Comparable period or prior balance |
|---|---|---|
| Net interest income | $231.7 million | $183.0 million in Q2 2017 |
| Net income | $71.4 million; $1.38 diluted EPS | $51.1 million; $0.97 diluted EPS in Q2 2017 |
| Net income available to common shareholders | $69.0 million | $48.7 million in Q2 2017 |
| Net interest margin | 3.93% | 3.57% in Q2 2017 |
| Net interest income, six months | $442.0 million | $346.3 million in first half 2017 |
| Net income, six months | $143.4 million; $2.76 diluted EPS | $93.6 million; $1.77 diluted EPS in first half 2017 |
| Total assets | $27.78 billion | $25.08 billion at Dec. 31, 2017 |
| Deposits | $20.33 billion | $19.12 billion at Dec. 31, 2017 |
| Loans held for investment, net | $22.28 billion | $20.49 billion at Dec. 31, 2017 |
| Cash and cash equivalents | $3.46 billion | $2.91 billion at Dec. 31, 2017 |
For the first half, operating cash flow was negative $168.9 million, compared with positive $190.2 million in the prior-year period; investing cash flow was negative $1.83 billion and financing cash flow positive $2.56 billion. Cash and cash equivalents increased $557.2 million.
Q2 non-interest income was $17.3 million, down from $18.8 million a year earlier; non-interest expense was $132.1 million, up from $111.8 million. The first-half effective tax rate was 21%, versus 34% in 2017, reflecting the lower federal rate under the Tax Cuts and Jobs Act. The filing does not provide a single conventional operating-margin measure.
Material Changes and Credit Quality
- Q2 net income rose about 40% year over year, mainly on higher net interest income and lower income-tax expense; higher credit provision and operating expense partly offset those gains.
- Average earning assets and loan balances grew, while deposit and borrowing costs rose. The average cost of total deposits and borrowed funds reached 0.92% in Q2, compared with 0.43% a year earlier.
- Provision for credit losses was $27.0 million in Q2, versus $13.0 million, and $39.0 million for the first half, versus $22.0 million. Four loans identified as non-accrual at March 31 contributed to the Q2 provision. First-half net charge-offs were $43.2 million, versus $18.1 million.
- Non-accrual loans were $83.3 million, down from $101.4 million at year-end and $123.7 million a year earlier. Management attributed much of the decline in non-performing loans to charge-offs of four loans in Q2; the filing therefore does not present the decline as solely reflecting improved borrower performance. A $2.0 million OREO valuation allowance was recorded in the first half.
- Total company capital ratios included CET1 of 8.32%, Tier 1 risk-based capital of 9.31%, and total capital of 11.11%. Management reported that the company and Bank met applicable capital requirements; the Bank met the ratios for well-capitalized status.
Outlook, Risks, and Unusual Items
The filing gives no numerical earnings or growth guidance. Management cited loan and deposit growth, higher loan yields and the Tax Act as performance drivers, while noting rising funding costs and expenses. The company reported $3.29 billion in liquidity assets. At June 30, it had $4.0 billion in FHLB borrowings, $520.8 million in federal funds purchased and repurchase agreements, and $395.0 million in subordinated notes and trust preferred debentures. Traditional brokered CDs totaled $1.03 billion, compared with none at year-end.
Key risks include credit deterioration, collateral and real-estate values, oil and gas price volatility, competition for deposits, rising funding costs, interest-rate changes, mortgage-market and MSR valuation risk, and operational, cybersecurity and regulatory risks. More than half of loan exposure and deposits were sourced outside Texas, while a majority of non-mortgage-finance and non-national-line loans were to Texas businesses. The company’s interest-rate model estimated next-12-month net interest income increases of $111.5 million under a 100-basis-point rise and $223.6 million under a 200-basis-point rise, and a decrease of $121.1 million under a 100-basis-point fall; management cautioned that actual results may differ materially.
Mortgage repurchase, indemnification and make-whole exposure was estimated at $1.5 million. Off-balance-sheet commitments to extend credit totaled $7.25 billion, with $245.0 million of standby letters of credit. Management did not expect ordinary-course legal proceedings to have a material adverse impact. No material changes to previously disclosed risk factors were reported. The company was evaluating the impact of CECL, effective for it January 1, 2020, and expected operating lease assets and liabilities to increase upon adoption of the new lease standard in 2019.
Important Facts for Investors to Verify
- Whether elevated charge-offs and provisions, particularly in commercial lending, persist and how loan grades and non-accrual trends develop.
- Whether growth in interest income continues to outpace higher deposit and borrowing costs, supporting net interest margin.
- The composition and stability of deposit funding, including the use of brokered CDs and FHLB borrowings.
- Assumptions and valuation sensitivity for mortgage servicing rights, loan sales and related repurchase obligations.
- The eventual allowance and capital effects of CECL adoption, which the filing says could not yet be reasonably estimated.