Texas Capital Bancshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. The company is a Texas-focused commercial bank holding company serving middle-market businesses and high-net-worth customers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
- Q2 net income: $16.7 million, versus $8.1 million in Q2 2010; diluted EPS was $0.43 versus $0.22. Continuing-operations diluted EPS was $0.44.
- First-half net income: $28.5 million versus $15.6 million; diluted EPS was $0.74 versus $0.42. Continuing-operations diluted EPS was $0.75.
- Net interest income: Q2 $71.1 million, up from $57.9 million; first half $135.6 million, up from $113.1 million. Net interest margin rose to 4.86% from 4.32% for Q2 and to 4.66% from 4.37% for the first half.
- Interest and fee income on loans: Q2 $73.5 million versus $64.9 million; first half $141.5 million versus $126.5 million. Non-interest income was $8.0 million in Q2, approximately flat year over year, and $15.6 million for the first half, up from $15.0 million.
- Credit costs: Provision for credit losses was $8.0 million in Q2 versus $14.5 million; first-half provision was $15.5 million versus $28.0 million. First-half net charge-offs were $19.5 million, down from $21.8 million.
- Expenses and returns: Q2 non-interest expense increased 16% to $45.3 million; first-half expense increased 20% to $91.7 million. Q2 return on average assets/equity was 1.08%/12.13%, compared with 0.58%/6.33%; first-half was 0.93%/10.54%, compared with 0.63%/7.23%.
- Cash flow, first half: Operating cash flow was $114.1 million versus an outflow of $255.8 million. Investing activities used $441.0 million, mainly reflecting a $472.2 million net increase in loans held for investment and $11.5 million paid for an acquisition. Financing activities provided $236.4 million. Cash and cash equivalents ended at $89.3 million, down from $179.9 million at year-end.
Financial position, funding and asset quality
- Assets and loans: Total assets were $6.71 billion, up from $6.45 billion at year-end. Loans held for investment, net, were $5.10 billion, up from $4.64 billion; loans held for sale were $1.12 billion, down from $1.19 billion. Total deposits were $5.42 billion, down slightly from $5.46 billion.
- Borrowings and equity: Balance-sheet borrowings excluding trust preferred debentures included $204.0 million of federal funds purchased, $14.6 million of repurchase agreements, and $343.3 million of other borrowings, compared with $3.2 million of other borrowings at year-end. Trust preferred subordinated debentures were $113.4 million. Stockholders’ equity was $563.9 million, versus $528.3 million.
- Liquidity: Management reported no brokered CDs outstanding at June 30. Available additional capacity included $687.4 million of FHLB borrowing capacity and $393.4 million of unused federal funds lines. Core customer deposits were reported as 100% of deposits.
- Credit quality: Nonperforming assets were $105.2 million, down from $154.4 million at year-end; nonaccrual loans were $77.9 million versus $112.1 million. OREO was $27.3 million versus $42.3 million. The combined reserve for credit losses was $69.4 million, or 1.34% of loans held for investment, versus $73.4 million, or 1.56%, at year-end. Allowance for loan losses was $67.7 million; first-half net charge-offs were $19.5 million.
- Capital: Reported June 30 ratios were 10.16% Tier 1 risk-based, 11.25% total risk-based and 10.46% leverage. Management said the company and bank met applicable capital requirements and that the bank exceeded the well-capitalized thresholds.
Material changes and management commentary
- Net income more than doubled year over year in Q2. Management attributed the improvement mainly to higher net interest income and lower credit-loss provisions, partly offset by increased operating expenses and taxes.
- Loan growth and lower funding costs supported net interest income and margin. Average earning assets increased, while the average cost of interest-bearing deposits fell to 0.36% in Q2 from 0.90% a year earlier.
- Non-interest expense growth reflected business expansion, including higher salaries, marketing, occupancy, legal and technology costs. First-half OREO carrying and valuation costs rose to $5.1 million; $4.0 million related to valuation expense and write-downs.
- Commercial and construction loans grew materially from year-end. Management said roughly half of Q2’s $8.0 million provision supported loan growth and believed the allowance was adequate; it cautioned that estimates depend on borrower conditions, collateral values and economic factors.
Outlook, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management expected continued non-interest income growth but noted competition and the possible need for new products or business lines, which could require additional capital and management resources.
- Key risks include the Texas concentration of lending, changes in interest rates and loan prepayments, competition for loans and deposits, economic conditions, credit-loss estimation, regulatory changes and the ability to retain personnel. The company’s interest-rate model estimated that a 200-basis-point increase would raise next-12-month net interest income by $11.8 million versus its base scenario; modeled results are assumption-sensitive. A meaningful falling-rate shock scenario was not presented because rates were already low.
- Off-balance-sheet exposure included $1.57 billion in commitments to extend credit and $104.8 million in standby letters of credit; these contractual amounts do not necessarily represent future funding needs.
- Residual discontinued mortgage operations generated a $54,000 after-tax Q2 loss. The company continued to face investor requests to repurchase previously sold loans and stated that further losses or an extended resolution period were possible. Approximately $396,000 of related loans held for sale remained, with sale timing and proceeds uncertain.
- Fair values for impaired loans and OREO relied on Level 3 appraisals and other inputs that management said could be more subjective amid limited real-estate market activity. The filing reported no material change in previously disclosed risk factors and no material weakness in disclosure controls.
Important facts for investors to verify
- Whether loan growth is accompanied by stable credit performance, particularly in Texas commercial, construction and real-estate exposures; review nonaccruals, restructurings, charge-offs and collateral assumptions.
- Whether the reduced reserve ratio remains adequate as the portfolio expands, and how much future provision may be needed.
- The drivers and sustainability of the higher net interest margin, including deposit pricing, asset yields, loan floors and the sensitivity model’s assumptions.
- The composition, maturity and cost of the sharp increase in other borrowings, alongside the deposit decline from year-end and available borrowing capacity.
- Progress in resolving discontinued mortgage repurchase claims and any additional contingent liabilities or losses.
- The acquisition associated with the $11.5 million cash outflow and the increase in goodwill and intangible assets; the supplied filing text does not clearly identify the transaction.