Texas Capital Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. The company is a Texas-focused commercial bank with national lending businesses, including mortgage finance.
Key financial results
- Net loss: $16.7 million, versus net income of $82.8 million in Q1 2019. Loss available to common stockholders was $19.1 million; diluted loss per share was $0.38, versus earnings of $1.60 per share.
- Net interest income: $228.3 million, down from $235.6 million. Net interest margin was 2.78%, versus 3.73% a year earlier; lower asset yields outweighed lower funding costs.
- Credit costs: Provision for credit losses was $96.0 million, versus $20.0 million. Net charge-offs were $57.7 million, versus $4.6 million, including $37.3 million in energy and $15.6 million in leveraged lending charge-offs.
- Non-interest income and expense: Income was $11.8 million, down from $30.0 million, including a $13.0 million net loss on sale of loans held for sale. Expense rose to $165.4 million from $140.4 million, including $7.3 million of merger-related expense and a $10.0 million mortgage servicing rights impairment charge.
- Loans and deposits: Gross loans held for investment were $24.5 billion, down from $24.7 billion; deposits were $27.1 billion, up from $26.5 billion. Energy loans were $1.3 billion, or 5% of total loans.
- Liquidity and debt: Cash and cash equivalents were $9.7 billion, including $9.5 billion in liquidity assets, compared with $4.4 billion and $4.3 billion, respectively, at year-end. Other borrowings increased to $4.9 billion from $2.4 billion, primarily reflecting FHLB borrowings.
- Cash flow: Operating activities provided $1.79 billion and financing activities provided $3.31 billion; cash and cash equivalents increased $5.23 billion during the quarter. Mortgage lending activity materially affects these flows.
- Capital: At March 31, the company reported CET1 of 9.27%, total capital of 11.96%, and Tier 1 leverage of 8.48%. The Bank met the regulatory ratios for “well capitalized.” The company elected the five-year transition for CECL’s regulatory-capital effects.
Changes and notable items
- The company adopted the CECL expected-credit-loss standard on January 1, 2020. Adoption increased the loan allowance by $8.6 million and the off-balance-sheet allowance by $0.6 million, with the net adjustment recorded in opening retained earnings rather than current-period earnings.
- The allowance for loan losses increased to $241.0 million from $195.0 million at year-end. Criticized loans rose to $675.9 million from $584.1 million at year-end. Management cited problem energy loans, charge-offs and COVID-19-related reserve building; approximately $30 million of the provision related to COVID-19.
- Non-performing assets were $219.2 million, down from $225.4 million at year-end but up from $133.7 million a year earlier. Energy non-accrual loans were $151.9 million. Management warned that pandemic effects could drive significant increases in non-performing assets in subsequent quarters.
- Management proactively downgraded $1.8 billion of loans in categories expected to be more affected by COVID-19. At March 31, about 146 loans had temporary payment modifications, deferring approximately $3.7 million in interest payments.
- After quarter-end, the Bank reported approximately 1,267 approved Paycheck Protection Program loans totaling $689 million as of the date stated in the filing. Through April 21, it had granted about 200 additional temporary modifications, with approximately $1.4 million in further deferred interest.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said the effects of COVID-19 on 2020 results were highly uncertain and expected customer financial distress to increase. The company cited material pandemic impacts and risks to borrowers, collateral values, credit quality, liquidity, capital and operations.
- The company and Independent Bank Group had agreed to an all-stock merger of equals, with each TCBI common share to convert into 1.0311 IBTX shares. Closing was expected in mid-2020, subject to regulatory and shareholder approvals and other conditions; completion, timing, integration costs and anticipated benefits were uncertain.
- Energy exposure remains sensitive to oil and gas prices. Energy non-accruals and charge-offs increased, although management noted that 70% of E&P clients were at least 50% hedged for 2020. The filing also highlights Texas economic concentration, mortgage market and servicing risks, interest-rate exposure, funding and counterparty risks, and uncertainty related to the LIBOR transition.
- Management stated that ordinary-course legal matters were not expected to have a material adverse impact. Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pandemic-related borrower stress results in further loan downgrades, charge-offs, reserve increases or deterioration in non-performing assets, particularly in energy and leveraged lending.
- Whether elevated liquidity is sustained and how deposit mix, borrowings and funding costs evolve as lending and market conditions change.
- Whether the Independent Bank Group merger receives required approvals and closes on the expected terms and timing; review the merger proxy materials for risks, dilution and transaction costs.
- How mortgage prepayments affect mortgage servicing rights valuation and whether loan-sale losses and servicing expenses persist.
- How the CECL allowance and capital ratios develop as forecasts and actual credit performance change; note that management’s forecasts and estimates are subject to uncertainty.