Texas Capital Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012. The company provides commercial banking services primarily in Texas, with a focus on middle-market businesses and successful professionals and entrepreneurs. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2012 / September 30, 2012 | Comparison |
|---|---|---|
| Net interest income | $96.9 million | $79.2 million in Q3 2011 |
| Net income | $32.5 million; diluted EPS $0.80 | $21.7 million; diluted EPS $0.56 in Q3 2011 |
| Net interest margin | 4.36% | 4.81% in Q3 2011 |
| Return on average assets / equity | 1.40% / 17.27% | 1.25% / 14.93% in Q3 2011 |
| Total assets | $9.88 billion | $8.14 billion at December 31, 2011 |
| Loans held for investment, net | $6.48 billion | $5.50 billion at December 31, 2011 |
| Loans held for sale | $2.82 billion | $2.08 billion at December 31, 2011 |
| Total deposits | $6.72 billion | $5.56 billion at December 31, 2011 |
| Stockholders’ equity | $802.4 million | $616.3 million at December 31, 2011 |
| Cash and cash equivalents | $149.2 million | $110.6 million at beginning of 2012 |
- For the first nine months of 2012, net interest income was $275.7 million versus $214.8 million; net income was $89.2 million versus $50.2 million, and diluted EPS was $2.25 versus $1.31.
- Non-interest income was $10.6 million in Q3, up from $7.6 million. Brokered loan fees, primarily tied to mortgage warehouse lending, were $4.8 million versus $2.8 million.
- Non-interest expense increased to $53.5 million from $46.2 million, reflecting higher salaries and benefits, marketing, and legal and professional costs.
- Provision for credit losses was $3.0 million in Q3 versus $7.0 million a year earlier; for the nine months it was $7.0 million versus $22.5 million.
- For the nine months, operating cash flow was negative $680.3 million and investing cash flow was negative $935.2 million; financing cash flow was positive $1.65 billion. Loan warehouse originations and sales were very large and substantially affected operating cash flow.
Material changes and credit quality
- Loan growth and increased mortgage warehouse activity drove much of the balance-sheet expansion. Total loans, including loans held for sale, increased to $9.29 billion from $7.58 billion at year-end 2011. Management attributed growth in loans held for sale to continued low mortgage rates.
- Q3 net income rose about 50% year over year, principally due to higher net interest income, a lower credit-loss provision, and higher non-interest income; higher expenses and income taxes partly offset the gains.
- Net interest margin declined 45 basis points year over year in Q3 to 4.36%, as yields on earning assets fell despite lower funding costs. The nine-month margin was 4.46%, versus 4.71%.
- Non-accrual loans were $57.3 million, compared with $54.6 million at year-end 2011 and $66.7 million a year earlier. Other real estate owned was $19.1 million, down from $34.1 million at year-end 2011.
- Net charge-offs were $2.6 million for the first nine months, versus $25.7 million in the comparable 2011 period. The allowance for loan losses was $73.7 million; combined reserves for credit losses were $77.2 million, or 1.18% of loans held for investment.
- The company reported $14.7 million of restructured loans included in non-accrual loans and $9.1 million of restructured loans not on non-accrual. Management cited ongoing economic and commercial real estate uncertainty, borrower fraud, portfolio growth, and collateral valuation uncertainty in explaining its reserve judgments.
Capital, liquidity, outlook and risks
- Regulatory capital ratios at September 30, 2012 were 10.35% Tier 1 risk-based, 12.55% total risk-based, and 9.63% leverage. Management said the company and bank met applicable capital requirements and that the bank remained well capitalized.
- The company raised $87.0 million net through a public offering of 2.3 million shares in August. In September it issued $111.0 million of subordinated notes, bearing 6.50% interest and maturing in 2042. Management said proceeds support general corporate purposes and continued loan growth; offering proceeds also supported repayment of $15.0 million of debt.
- Deposits were the primary funding source. Core customer deposits were 99% of total deposits at quarter-end; brokered deposits were $67.7 million, or 1.0%. Available additional FHLB borrowing capacity was $784.0 million, with $511.5 million of unused federal funds lines.
- No formal earnings guidance was provided. Management expected continued growth in non-interest income, while noting that competition and the need for new products or business lines could affect growth and require additional resources. A rate-risk simulation indicated a $55.2 million increase in net interest income over 12 months under a 200-basis-point rate increase versus its most-likely scenario; management cautioned that simulation assumptions are uncertain.
- A material litigation contingency remains: an Oklahoma jury verdict totaled $65.4 million, including $21.8 million in money damages and punitive damages. The company is appealing, believes a materially negative outcome is not probable, and has recorded no reserve because it could not determine a likely loss range. The company also reported ongoing investor claims related to repurchases of previously sold residential mortgage loans; exposure may increase, and timing and sale proceeds for remaining discontinued-operation loans are uncertain.
- Key risks include interest-rate changes, economic and Texas market conditions, competition for loans and deposits, credit-loss estimation and collateral values, regulatory change (including Dodd-Frank and Basel III), and litigation. Management reported disclosure controls were effective and no material change in risk factors previously disclosed in its 2011 Form 10-K, apart from additional industry risks described in its prospectus supplement.
Important facts for investors to verify
- Whether rapid loan and mortgage-warehouse growth can be funded sustainably without further margin compression or elevated borrowing needs.
- Whether credit quality, non-accruals, charge-offs, and the allowance remain consistent with management’s estimates as the portfolio expands.
- The ultimate outcome and potential financial effect of the $65.4 million Oklahoma verdict and the discontinued mortgage-loan repurchase contingencies.
- How the new subordinated notes, equity proceeds, and capital ratios affect funding costs, regulatory capital, and future returns.
- Whether the modeled benefit from higher interest rates materializes; actual results may differ from the simulation.