Texas Capital Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a Texas-focused commercial bank with additional regional and national lending businesses, including mortgage finance.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Net interest income | $252.2 million | $232.2 million | Up 8.6% |
| Net interest margin | 3.16% | 3.70% | Down 54 basis points |
| Non-interest income | $20.3 million | $25.5 million | Down $5.2 million |
| Non-interest expense | $149.4 million | $136.1 million | Up $13.2 million |
| Net income | $88.1 million | $85.6 million | Up 3.0% |
| Net income available to common stockholders | $85.7 million | $83.1 million | Up 3.1% |
| Diluted EPS | $1.70 | $1.65 | Up $0.05 |
| ROA / ROE | 1.06% / 13.22% | 1.31% / 14.68% | Both declined |
For the first nine months, net interest income was $731.3 million versus $674.2 million; net income was $248.9 million versus $228.9 million; and diluted EPS was $4.80 versus $4.41. Net interest margin was 3.41%, down from 3.78%. Higher average earning assets supported earnings, while higher funding costs and lower loan yields pressured margins.
Financial position, liquidity and credit
- Total assets were $33.53 billion at September 30, up from $28.26 billion at year-end 2018. Total loans held for investment, net, were $24.53 billion, compared with $22.38 billion.
- Deposits were $27.41 billion, up from $20.61 billion. Non-interest-bearing deposits rose to $10.29 billion from $7.32 billion.
- Liquidity assets were $4.99 billion, or 18.2% of deposits, versus $2.87 billion and 13.9% at year-end. Cash and cash equivalents ended the period at $5.21 billion.
- Other borrowings were $2.50 billion, down from $3.90 billion; federal funds purchased and repurchase agreements were $140.0 million, down from $641.2 million. The filing reports substantial unused borrowing capacity.
- For the nine months, operating cash flow was negative $429.6 million and investing cash flow was negative $2.34 billion; financing provided $4.90 billion, principally from deposit growth. Cash increased $2.13 billion.
- Non-performing assets were $120.7 million, compared with $80.5 million at year-end 2018. Non-accrual loans included $63.2 million in oil-and-gas loans and $8.8 million in hotel/motel real estate loans.
- Nine-month net charge-offs were $61.5 million versus $45.1 million in the comparable 2018 period. The allowance for loan losses was $190.1 million; the combined allowance for loan and off-balance-sheet credit losses was $199.5 million.
- At September 30, the company’s CET1 ratio was 8.59% and total capital ratio was 11.05%; management said the company and bank met applicable capital requirements.
Material changes and notable items
- Average mortgage finance loans rose substantially, contributing to balance-sheet and asset growth. Mortgage finance loans held for investment were $7.95 billion at quarter-end versus $5.88 billion at year-end 2018.
- Q3 non-interest income declined, mainly due to a larger loss on sale of loans held for sale and lower servicing income. Nine-month non-interest income increased, partly because of a $15.0 million settlement of legal claims included in other income.
- The company recorded an $8.4 million MSR impairment for the first nine months, associated with lower mortgage rates and higher prepayment speeds. It also incurred $4.5 million of make-whole obligation losses, compared with $0.2 million in the prior-year period.
- Marketing, technology, salaries and servicing-related expenses increased amid business growth and continued infrastructure build-out.
- Management refined its allowance methodology in 2019, reallocating reserves to product types and credit grades and eliminating the additional qualitative reserve component. The allowance’s coverage of loans declined as the portfolio grew.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management identifies credit quality, Texas and energy-market conditions, real estate values, funding costs, interest-rate movements, mortgage-market volatility, competition and operational risks as factors that could affect results. The company’s modeled sensitivity indicated that a 100-basis-point rate increase would add approximately $97.1 million to next-12-month net interest income relative to its “most likely” scenario, while a 100-basis-point decrease would reduce it by approximately $99.8 million; management cautions that actual results may differ materially.
The company is preparing for the expected transition away from LIBOR after 2021; the financial impact is not yet known. It also expects to adopt CECL on January 1, 2020, but could not yet reasonably estimate the effect. The filing notes ordinary-course legal claims, with no material adverse effect expected by management, and $8.14 billion of commitments to extend credit plus $277.8 million of standby letters of credit.
Important facts for investors to verify
- Whether rising non-accrual loans, charge-offs and energy-related exposures lead to further credit costs or allowance changes.
- Whether deposit growth and available liquidity remain adequate and cost-effective as loan balances and funding needs change.
- Whether margin pressure from funding costs and lower rates continues, and how actual rate outcomes compare with the company’s modeled sensitivity.
- How CECL adoption affects the allowance and retained earnings, and whether LIBOR transition preparations adequately address affected contracts.
- Whether MSR valuations, mortgage loan-sale economics and make-whole obligations create further earnings volatility.