Texas Capital Bancshares, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company is a Texas-focused commercial bank serving middle-market businesses, professionals and entrepreneurs. Financial figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $29.6 million, or $0.76 per diluted share, versus $16.7 million, or $0.43 per diluted share, in Q2 2011. Six-month net income was $56.7 million, or $1.45 per diluted share, versus $28.5 million, or $0.74.
- Revenue and margins: Q2 net interest income rose to $90.6 million from $71.1 million; six-month net interest income was $178.9 million versus $135.6 million. Net interest margin declined to 4.49% from 4.86% in Q2 and to 4.52% from 4.66% for the six-month period. Q2 non-interest income was $10.5 million, up from $8.0 million.
- Expenses and credit costs: Q2 non-interest expense increased 19% to $54.0 million, including higher compensation and $3.8 million of OREO carrying and valuation costs. Q2 provision for credit losses was $1.0 million, compared with $8.0 million a year earlier; six-month provision was $4.0 million versus $15.5 million.
- Returns: Q2 return on average equity was 18.08% and return on average assets 1.40%, compared with 12.13% and 1.08%, respectively, in Q2 2011.
- Balance sheet and funding: Total assets were $9.14 billion at June 30, up from $8.14 billion at December 31, 2011. Deposits were $6.66 billion versus $5.56 billion; loans held for investment, net, were $6.16 billion versus $5.50 billion, and loans held for sale were $2.41 billion versus $2.08 billion. Equity was $680.7 million. Borrowings totaled approximately $1.72 billion, including $1.30 billion of FHLB borrowings.
- Cash flow and liquidity: Cash and cash equivalents ended the six-month period at $142.7 million, up from $110.6 million. Operating cash flow was negative $284.7 million, primarily reflecting mortgage warehouse loan originations and sales; investing activities used $634.6 million, while financing activities provided $951.4 million, including a $1.10 billion increase in deposits. The company reported $510.8 million of unused federal funds lines and $33.9 million of remaining FHLB capacity against securities.
- Capital: The company reported a 9.54% Tier 1 risk-based capital ratio, 10.48% total risk-based capital ratio and 9.02% leverage ratio. Management said the company and bank met applicable capital requirements; the ratios were lower than the respective 2011 figures of 10.16%, 11.25% and 10.46%.
Material changes versus comparable periods
- Earnings increased substantially, supported by loan growth, higher net interest income and lower credit-loss provisions. For Q2, management attributed the $12.9 million year-over-year increase in net income chiefly to a $19.5 million increase in net interest income and a $7.0 million decrease in provision, partly offset by higher operating expenses and taxes.
- Average earning assets expanded markedly, especially loans held for sale and loans held for investment. Lower asset yields contributed to margin compression despite lower funding costs.
- Credit measures were mixed: six-month net charge-offs fell to $1.4 million from $19.5 million, and nonaccrual loans were $56.4 million versus $77.9 million at June 2011, but were above $54.6 million at December 2011. OREO was $27.9 million, with substantial valuation allowances and write-downs.
- Core customer deposits were $6.49 billion, or 97.4% of deposits; brokered deposits were $170.1 million, or 2.6%, compared with none at June 2011.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected continued non-interest income growth, while noting competition and the potential need for new products or business lines.
- Management cited continued economic weakness, Texas loan concentration, commercial real estate valuation uncertainty, rapid portfolio growth and possible borrower fraud as factors in estimating credit losses. Loan-loss allowances depend on judgments and could change with economic conditions and credit performance.
- Interest-rate risk is material. The company’s model estimated that a sustained 200-basis-point rate increase would raise net interest income by $49.1 million over the following 12 months versus its most-likely scenario. Management cautioned that model assumptions are uncertain and actual results may differ.
- A significant legal contingency remains: an Oklahoma jury verdict totaling $65.4 million is under appeal. The company said a materially negative outcome was not probable, could not estimate a likely loss range, and recorded no reserve. A separate Texas judgment ordered the guarantor to pay the company approximately $7 million.
- The company filed an effective registration statement covering up to $250 million of debt or equity. On July 25, 2012, after quarter-end, it announced a public offering of 1.75 million common shares; proceeds were intended for general corporate purposes, including repayment of $15 million of debt and support for bank growth.
- Discontinued mortgage operations continued to involve investor repurchase requests and approximately $388,000 of loans held for sale. Management said potential further exposure and the timing and price of sale were uncertain.
Investor verification priorities
- Review the final terms and proceeds of the post-quarter 1.75 million-share offering and whether the $15 million line-of-credit borrowing was repaid.
- Track the Oklahoma appeal, potential offsets from the Texas judgment, and any subsequent change to the company’s loss assessment or reserve.
- Assess loan growth against credit quality, including the trend in nonaccrual loans, restructured loans, OREO valuations, charge-offs and allowance coverage.
- Evaluate whether margin compression persists as earning-asset yields, deposit costs and warehouse-funding needs change.
- Monitor funding concentration and liquidity, particularly FHLB and other borrowings, brokered deposits, warehouse lending flows and available borrowing capacity.