Texas Capital Bancshares, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Texas Capital Bancshares operates Texas Capital Bank and serves commercial businesses, professionals and entrepreneurs, with mortgage finance and other specialized lending businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $243.6 | $231.7 | $479.2 | $442.0 |
| Provision for credit losses | $27.0 | $27.0 | $47.0 | $39.0 |
| Non-interest income | $24.4 | $17.3 | $54.4 | $37.2 |
| Non-interest expense | $141.6 | $132.1 | $281.9 | $259.1 |
| Net income | $78.0 | $71.4 | $160.8 | $143.4 |
| Net income available to common | $75.5 | $69.0 | $155.9 | $138.5 |
| Diluted EPS | $1.50 | $1.38 | $3.10 | $2.76 |
- Q2 return on average equity was 12.20% and return on average assets was 1.05%, versus 12.72% and 1.16% a year earlier. Six-month figures were 12.88% and 1.15%, respectively, versus 13.05% and 1.19%.
- Net interest margin was 3.41% in Q2, down from 3.93%; for the first half it was 3.56%, down from 3.82%. Management attributed the compression chiefly to deposit and borrowing costs rising faster than loan yields. Q2 average cost of total deposits and borrowed funds increased to 1.48% from 0.92%.
- Cash provided by operating activities was $1,025.9 million for the first half, compared with cash used of $168.9 million in 2018. Investing activities used $1,914.3 million; financing activities provided $1,452.9 million. Cash and cash equivalents ended at $3,644.6 million, up from $3,080.1 million at year-end 2018.
Balance sheet, funding and capital
- Total assets were $29,970.4 million at June 30, up from $28,257.8 million at December 31, 2018. Net loans held for investment were $24,125.3 million, versus $22,376.6 million; mortgage finance loans rose to $7,415.4 million from $5,877.5 million.
- Total deposits increased to $22,999.1 million from $20,606.1 million. Core customer deposits were 81.0% of total deposits, down from 82.6%; traditional brokered deposits increased to $2,097.0 million from $1,562.7 million.
- At period-end, borrowings included $3,100.0 million of FHLB borrowings, $494.8 million of federal funds purchased and $12.4 million of repurchase agreements. The company had $3,480.9 million in liquidity assets and reported substantial unused borrowing capacity, including $6,028.4 million of FHLB capacity.
- Stockholders’ equity was $2,668.5 million, compared with $2,500.4 million at year-end. Company CET1, Tier 1 risk-based and total capital ratios were 8.67%, 9.57% and 11.33%, respectively. Management said the company and bank met applicable capital requirements; the bank met the ratios to be considered well capitalized.
Credit, material changes and unusual items
- Non-accrual loans increased to $114.1 million from $80.4 million at year-end; non-performing assets were also $114.1 million, compared with $80.5 million. Non-accrual commercial loans included $61.1 million in oil and gas loans, versus $37.5 million at year-end. Loans graded special mention rose to $349.0 million from $191.4 million.
- The allowance for loan losses was $214.6 million, or 0.88% of gross loans held for investment, versus $191.5 million and 0.85% at year-end. First-half net charge-offs were $24.6 million, compared with $43.2 million in the prior-year period. Management cited growth in criticized loans as a factor in the higher allowance ratio.
- Non-interest income benefited from legal claim settlements: $6.5 million in Q2 and $15.0 million in the first half. The filing does not describe these as recurring operating revenue. Mortgage servicing rights were impaired by $5.8 million in the first half as mortgage rates declined; the company also recorded a $331,000 credit impairment on credit risk transfer securities in Q1.
- Operating expenses rose, with management citing business growth and continued investment, including higher salaries, marketing, technology and servicing costs. The filing reports no explicit earnings or balance-sheet guidance.
- The company adopted lease accounting in 2019 and recorded operating lease right-of-use assets of $78.0 million and liabilities of $87.7 million at June 30. It was preparing for CECL adoption on January 1, 2020; management said the impact could not yet be reasonably estimated and would depend in part on portfolio quality and economic conditions.
- Key risks identified include credit deterioration, Texas and energy-sector exposure, funding costs and liquidity, interest-rate changes, mortgage-market and MSR valuation risk, regulatory capital, competition, cybersecurity and execution of new business initiatives. Management reported disclosure controls were effective and no material change in previously disclosed risk factors. A new loan servicing system was implemented in Q1, with additional controls introduced.
Most important facts for investors to verify
- Whether growth in criticized and non-accrual loans, especially energy-related credits, leads to further charge-offs or additional allowance needs.
- Whether deposit repricing and greater use of brokered deposits continue to pressure net interest margin and funding costs.
- How mortgage finance growth, mortgage market conditions and prepayment assumptions affect earnings, liquidity and MSR valuations.
- How much of reported income growth depends on the legal settlements and whether expense growth moderates.
- The eventual retained-earnings impact of CECL adoption and any subsequent disclosures on implementation estimates.