Texas Capital Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results. Unless stated otherwise, dollar amounts are in millions.
Business context
The company is a bank holding company whose wholly owned Texas Capital Bank provides commercial banking services primarily in Texas, focusing on middle-market businesses and high-net-worth customers. Loan growth included both loans held for investment and mortgage warehouse loans held for sale.
Financial performance and position
- Third-quarter earnings: Net income was $21.7 million, or $0.56 per diluted share, versus $9.5 million, or $0.25, a year earlier. Return on average assets was 1.25% and return on average equity was 14.93%.
- Nine-month earnings: Net income was $50.2 million, or $1.31 per diluted share, versus $25.1 million, or $0.67, in 2010.
- Interest income and margin: Third-quarter net interest income was $79.2 million versus $62.6 million; net interest margin rose to 4.81% from 4.27%. For the first nine months, net interest income was $214.8 million versus $175.7 million, and margin was 4.71% versus 4.34%.
- Credit costs: Provision for credit losses was $7.0 million in the quarter versus $13.5 million; nine-month provision was $22.5 million versus $41.5 million. Nine-month net charge-offs were $25.7 million, down from $33.9 million.
- Other income and expenses: Third-quarter non-interest income was $7.6 million versus $8.1 million; non-interest expense rose to $46.2 million from $42.6 million. For nine months, non-interest income was $23.2 million and expenses were $137.8 million, compared with $23.1 million and $118.9 million, respectively.
- Balance sheet at September 30: Total assets were $7.71 billion, up from $6.45 billion at December 31, 2010. Loans held for investment, net, were $5.23 billion; loans held for sale were $1.91 billion. Deposits were $5.49 billion, compared with $5.46 billion at year-end.
- Funding and capital: Total borrowings were $1.57 billion, including $1.10 billion of FHLB borrowings. Stockholders’ equity was $587.9 million. Regulatory ratios were 9.67% Tier 1 risk-based, 10.68% total risk-based, and 9.77% leverage; management reported capital above well-capitalized requirements.
- Cash flow and liquidity: Cash and cash equivalents ended at $120.6 million, down from $179.9 million at year-end. Nine-month operating cash flow was negative $682.3 million, primarily reflecting the large volume of warehouse loan originations and sales; financing cash flow was positive $1.19 billion. Unused federal funds lines were $390.7 million and additional FHLB capacity was $80.3 million.
Changes, outlook, and risks
- Management attributed earnings growth chiefly to higher net interest income, reflecting larger average earning assets and a wider margin, and lower credit-loss provisions. It cited lower deposit funding costs and growth in loans as important drivers.
- Credit indicators improved overall: non-accrual loans were $66.7 million, down from $112.1 million at December 2010; nonperforming assets were $102.5 million versus $154.4 million. The combined reserve for credit losses was $70.2 million, or 1.32% of loans held for investment, versus 1.56% at year-end.
- Credit risks remain: the portfolio is concentrated in Texas; loans held for investment grew substantially; $25.0 million of restructured loans were not on non-accrual, and $23.2 million of non-accrual loans also met restructuring criteria. OREO was $35.8 million, after $5.7 million of valuation expense in the first nine months.
- The filing gives no formal earnings guidance. Management expected continued growth in non-interest income, while noting competition and the potential need for new products or business lines. Its interest-rate model estimated a $21.8 million increase in next-12-month net interest income under a 200-basis-point rate increase versus its most-likely scenario; management cautioned that model results depend on uncertain assumptions.
- A jury returned a $65.4 million verdict in August 2011 in litigation related to a defaulted loan; no judgment had been entered. The company is contesting the matter and said a materially negative outcome was not probable, so it had not recorded a reserve. The filing also identifies potential mortgage-loan repurchase exposure from discontinued operations; the timing, price, and additional loss exposure were uncertain.
- Other stated risks include interest-rate movements, economic and competitive conditions, credit-loss estimation, regulation, staffing, and litigation. The company reported no material change to the risk factors in its 2010 Form 10-K, and management assessed disclosure controls as effective.
Most important facts for investors to verify
- Whether loan and warehouse growth can be funded sustainably, given the sharp increase in borrowings and low ending cash balance.
- Whether credit quality and reserve adequacy remain sound as the loan portfolio grows, particularly for Texas exposures, restructured loans, and OREO valuations.
- The outcome and potential financial effect of the $65.4 million verdict and any discontinued-mortgage loan repurchase claims.
- Whether higher net interest margin and lower credit provisions are durable, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Whether rising operating costs, including compensation, marketing, and legal and professional expenses, remain manageable.