Texas Capital Bancshares, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Unless noted, amounts below are in U.S. dollars. The company provides commercial banking services primarily in Texas, alongside mortgage finance activity.
Financial performance and condition
- Q2 earnings: Net income was $24.1 million, down from $29.6 million a year earlier. Net income available to common shareholders was $21.6 million, or $0.52 diluted EPS, versus $29.6 million and $0.76. Preferred dividends reduced Q2 earnings available to common shareholders by $2.4 million.
- First-half earnings: Net income was $57.2 million versus $56.7 million; diluted EPS was $1.31 versus $1.45. Preferred dividends reduced first-half earnings available to common shareholders by $2.5 million.
- Interest income and margins: Q2 net interest income rose to $101.2 million from $90.6 million; first-half net interest income was $199.3 million versus $178.9 million. Net interest margin narrowed to 4.19% from 4.49% in Q2 and to 4.23% from 4.52% for the first half.
- Credit costs and expenses: Q2 provision for credit losses was $7.0 million versus $1.0 million; first-half provision was $9.0 million versus $4.0 million. Q2 non-interest income rose to $11.1 million from $10.5 million, while non-interest expense increased 27% to $68.7 million from $54.0 million. First-half non-interest expense was $124.4 million versus $106.2 million.
- Returns: Q2 return on average assets was 0.95% versus 1.40%, and return on average common equity was 9.94% versus 18.08%. For the first half, those measures were 1.16% versus 1.36% and 11.74% versus 17.73%, respectively.
- Balance sheet at June 30: Total assets were $10.98 billion; deposits were $7.98 billion; loans held for investment, net, were $7.43 billion; loans held for sale were $2.84 billion; and total borrowings were approximately $1.86 billion. Stockholders’ equity was $1.03 billion.
- Growth and credit quality: Gross loans held for investment increased $730.6 million from year-end 2012, while loans held for sale decreased $337.0 million. Deposits increased $539.8 million. Non-accrual loans fell to $38.5 million from $55.8 million at year-end; non-performing assets were $51.5 million versus $71.9 million. The loan-loss allowance was $79.4 million, or 1.06% of loans held for investment; combined reserves including off-balance-sheet commitments were 1.11%.
- Cash flows and liquidity: First-half operating cash flow was $453.0 million, compared with cash used of $284.7 million in 2012; investing used $707.5 million and financing provided $367.3 million. Cash and cash equivalents ended at $319.0 million, up $112.7 million from year-end. Customer deposits were the principal funding source. The company reported $703 million of unused federal funds lines and $71 million of additional FHLB capacity.
- Capital: Reported company capital ratios were 9.60% Tier 1 risk-based, 11.26% total risk-based and 11.11% leverage. Management said the Bank remained well capitalized. The company issued $145 million net proceeds of 6.5% non-cumulative preferred stock in March 2013.
Material changes versus comparable periods
- Q2 net income declined $5.6 million year over year. Higher net interest and non-interest income and lower income tax expense were outweighed by the $6.0 million increase in credit-loss provision and $14.7 million increase in non-interest expense.
- First-half net income increased $0.5 million, as higher net interest and non-interest income and lower taxes largely offset increased credit provisions and operating expenses.
- Average earning assets expanded substantially, led by growth in loans held for investment and loans held for sale. Lower loan yields and a narrower net interest margin partly offset the benefit of asset growth.
- Q2 salaries and benefits rose $15.0 million year over year. Management attributed about $7.7 million to charges related to the planned CEO retirement and transition, and another $2.2 million to a higher likelihood of executive cash incentives being earned. The filing also identifies $4.1 million of Q2 cash-based performance-unit cost related to organizational changes; the relationship among the disclosed compensation figures should be checked in the full filing.
Outlook, commentary and risks
- Management expected continued growth in non-interest income, while noting that competition could constrain growth and that new products or market expansion could require additional capital and management resources. The filing provides no quantified earnings or revenue guidance.
- The company applied a 100% risk weight to mortgage loans held for sale in regulatory capital reporting, reflecting its understanding of the OCC’s interpretation, and said it was challenging that treatment. Management reported $89 million at the parent company and a $50 million available line to support the Bank; the higher risk weighting increased required capital, including approximately $43 million for the difference between Q2 quarter-end and average balances.
- Key exposures include Texas economic concentration; commercial real estate and construction lending; borrower fraud and credit losses; uncertain collateral appraisals; interest-rate changes; and possible changes to regulatory capital or risk-weight rules. The company warned that retroactive changes to mortgage-loan risk weights could require additional capital or reduced assets.
- Off-balance-sheet credit commitments totaled $2.89 billion, with standby letters of credit of $107.4 million. The company also disclosed continuing investor requests to repurchase previously sold loans from discontinued mortgage operations; the ultimate exposure and timing are uncertain.
- Interest-rate simulations indicated a modeled $73.9 million increase in net interest income over the next twelve months under a 200-basis-point rate increase versus the most-likely scenario. Management cautioned that model assumptions are uncertain and actual results may differ materially.
Important facts for investors to verify
- Whether the OCC’s 100% risk-weight treatment for mortgage loans held for sale will stand, and its effects on capital needs and mortgage-finance activity.
- Whether loan growth, credit-loss provisions, charge-offs and Texas/commercial-real-estate credit quality remain consistent with management’s reserve assumptions.
- How much of elevated compensation expense is tied to CEO transition arrangements and incentive awards, and whether additional payouts may arise.
- The potential costs and timing of discontinued-mortgage repurchase claims and related legal or investor matters.
- Whether deposit growth, borrowing capacity and capital remain adequate to fund continued loan growth under changing market and regulatory conditions.