Texas Capital Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The company is a Texas-focused commercial bank and secured lender, with mortgage warehouse lending and other regional or national commercial lending activities. Unless stated otherwise, dollar amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2014 | Comparable period / context |
|---|---|---|
| Interest income | $124.8 million | $107.3 million in Q2 2013 |
| Net interest income | $115.4 million | $101.2 million in Q2 2013 |
| Provision for credit losses | $4.0 million | $7.0 million in Q2 2013 |
| Non-interest income | $10.5 million | $11.1 million in Q2 2013 |
| Non-interest expense | $69.8 million | $68.7 million in Q2 2013 |
| Net income | $33.4 million | $24.1 million in Q2 2013 |
| Net income available to common stockholders | $31.0 million | $21.6 million in Q2 2013 |
| Diluted EPS | $0.71 | $0.52 in Q2 2013 |
| Net interest margin | 3.87% | 4.19% in Q2 2013 |
| Return on average assets / common equity | 1.08% / 11.38% | 0.95% / 9.94% in Q2 2013 |
For the six months ended June 30, net income was $61.7 million versus $57.2 million a year earlier; diluted EPS was $1.30 versus $1.31. Net interest income was $223.7 million versus $199.3 million. The six-month net interest margin was 3.93%, down from 4.23%.
- Balance sheet at June 30: Total assets were $13.53 billion; net loans held for investment were $12.76 billion; deposits were $10.76 billion; and stockholders’ equity was $1.26 billion. Compared with December 31, 2013, assets rose about 16%, net loans about 14%, and deposits about 16%.
- Funding and liquidity: Cash and cash equivalents were $357.1 million, up from $153.9 million at year-end. Six-month operating cash flow was $25.5 million; investing activities used $1.57 billion, principally reflecting loan growth; financing activities provided $1.75 billion, including deposit growth and subordinated-note proceeds.
- Credit: The allowance for loan losses was $91.1 million; total reserves including off-balance-sheet commitments were $96.7 million. Six-month net charge-offs were $4.6 million. Non-accrual loans increased to $41.6 million from $32.4 million at year-end; non-performing assets totaled $42.3 million. Loans past due 90 days and still accruing were $4.8 million, including $4.6 million of premium-finance loans.
- Debt and capital: Borrowings totaled approximately $1.40 billion, including $286 million of subordinated notes, $700 million of FHLB borrowings, and $113.4 million of trust-preferred debentures. Company capital ratios at June 30 were 9.09% Tier 1 risk-based, 11.67% total risk-based, and 10.94% leverage; management said the Bank met the well-capitalized ratios.
Material changes versus prior periods
- Q2 net income rose 39%, primarily due to $14.2 million higher net interest income and a $3.0 million lower credit-loss provision. For the first half, net income increased 8%, as higher net interest income was partly offset by increased expenses and taxes.
- Loan growth expanded average earning assets, but lower loan yields, a greater share of lower-yielding mortgage finance loans, higher liquidity balances, and subordinated-note costs reduced net interest margin.
- Six-month non-interest expense increased $14.7 million, or 12%. Drivers included legal and professional costs, occupancy, technology, and higher FDIC assessments. Q2 salaries and benefits declined year over year, partly because Q2 2013 included $7.7 million of non-recurring succession costs.
- Non-interest income declined $1.5 million in the first half, mainly from lower brokered-loan and swap fees, partly offset by higher other income.
- In January 2014, the company issued 1.9 million common shares for $106.5 million net proceeds; the Bank issued $175 million of 5.25% subordinated notes, generating $172.4 million net proceeds. These transactions supported capital and loan growth; the notes increased interest expense.
Outlook, risks, and unusual items
- The filing provides no specific earnings, revenue, or loan-growth guidance. Management described continued growth as a strategic objective and expected growth in some non-interest income components, while noting competition and the need to develop products or expand business lines.
- Key risks include Texas economic and geographic concentration; commercial, construction, and real-estate credit quality; loan-loss estimate uncertainty; borrower fraud; interest-rate and funding risk; regulatory changes and capital requirements; competition; and operational, technology, and litigation risks.
- Management said it believed the loan-loss reserve was adequate, while acknowledging uncertainty and the possibility that actual losses could differ from estimates. It cited borrower fraud as a source of losses not necessarily reflected in historical trends.
- Interest-rate simulations estimated that a sustained 100-basis-point increase could raise next-12-month net interest income by $54.0 million, and a 200-basis-point increase by $119.0 million. These are model estimates, not forecasts; management cautioned that assumptions and actual outcomes can differ.
- The company disclosed a prior cash-flow classification correction: mortgage-finance loan purchases and sales for the six months ended June 30, 2013 were reclassified from operating to investing activities, reducing reported operating cash flow by $337 million and increasing investing cash flow correspondingly. Management said the correction did not affect earnings or total assets and did not materially misstate prior statements.
- Legacy discontinued residential-mortgage operations remain subject to investor repurchase requests and potential additional losses; timing and proceeds from the planned sale of approximately $290,000 of related loans were uncertain. Management did not expect ordinary-course legal matters to have a material adverse impact.
Important facts for investors to verify
- Whether the rise in non-accrual loans and criticized credits persists, and whether the allowance remains adequate as the loan portfolio grows.
- The durability of net interest income growth given margin compression, loan mix, funding costs, and the effect of the subordinated debt.
- Deposit composition and funding reliance: core customer deposits were 80.4% of deposits at June 30, while relationship and traditional brokered deposits represented 17.3% and 2.3%, respectively.
- How the $1.57 billion first-half investing cash outflow and substantial loan growth affect liquidity, capital needs, and credit concentration.
- Potential exposure from legacy mortgage repurchase claims, and the sensitivity of modeled interest-rate results to underlying assumptions.