Texas Capital Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. The company operates Texas Capital Bank and serves commercial businesses, entrepreneurs and professionals, with significant Texas lending exposure.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $232.0 | $205.5 | $467.3 | $389.1 |
| Provision for credit losses | $7.0 | $22.0 | $35.0 | $20.0 |
| Non-interest income | $46.0 | $26.2 | $83.4 | $46.5 |
| Non-interest expense | $181.6 | $164.3 | $375.7 | $317.4 |
| Net income | $68.7 | $34.2 | $107.3 | $73.8 |
| Net income available to common shareholders | $64.3 | $29.8 | $98.7 | $65.2 |
| Diluted earnings per share | $1.33 | $0.59 | $2.02 | $1.28 |
| Net interest margin | 3.29% | 2.68% | 3.31% | 2.45% |
| Return on average assets | 0.95% | 0.44% | 0.74% | 0.45% |
| Return on average common equity | 9.17% | 4.35% | 7.15% | 4.67% |
| Efficiency ratio | 65.3% | 70.9% | 68.2% | 72.9% |
- Balance sheet at June 30: Total assets were $29.0 billion; loans held for investment were $21.3 billion gross ($21.1 billion net of allowance); deposits were $23.3 billion; and stockholders’ equity was $3.1 billion.
- Growth and funding: Gross loans held for investment grew $2.0 billion from year-end, led by commercial, mortgage finance and commercial real estate lending. Deposits increased $461 million. Customer deposits were 93.7% of deposits; brokered deposits were 6.3%. Management estimated uninsured deposits at approximately 40% of total deposits.
- Cash flow, six months: Operating activities provided $90.7 million; investing activities used $2.7 billion; financing activities provided $462.3 million. Cash and cash equivalents declined $2.2 billion to $2.85 billion.
- Debt and liquidity: Short-term borrowings were $1.35 billion, primarily FHLB advances; long-term debt was $857.8 million. The company reported $7.49 billion of unused FHLB capacity, $1.46 billion of unused federal funds lines and $3.73 billion of unused Federal Reserve borrowing capacity. These are stated capacities, not cash on hand.
- Capital: At June 30, the company reported CET1 of 12.18% and total capital of 16.43%; the bank reported 13.31% and 15.41%, respectively. Both exceeded the applicable “well capitalized” thresholds disclosed in the filing.
- Credit: The loan allowance was $237.3 million, or 1.11% of loans held for investment; the total allowance including off-balance-sheet exposures was 1.32%. Six-month net charge-offs were $28.1 million versus $2.1 million in 2022. Non-accrual loans rose to $81.0 million from $48.3 million at year-end; criticized loans were $619.4 million, up from $513.2 million.
Material changes and management commentary
- Q2 net income increased to $68.7 million from $34.2 million. Management attributed the improvement mainly to higher net interest and non-interest income and lower credit-loss provision, partly offset by higher expenses. For the first half, higher income was partly offset by increased provision and expenses.
- Rising rates lifted asset yields and net interest margin, but also sharply raised funding costs. Q2 total cost of deposits was 2.37%, compared with 0.33% a year earlier. Management also cited lower average earning assets as a partial offset to income growth.
- Investment banking and trading income increased to $27.5 million in Q2 from $11.1 million; other non-interest income increased to $7.2 million from $0.8 million. Salaries, legal and professional, and technology costs were among the drivers of higher expenses.
- The company reported $440.3 million of accumulated other comprehensive loss at quarter-end, including unrealized securities losses attributed primarily to interest-rate changes. Management stated it did not intend, and did not believe it was likely, to be required, to sell available-for-sale securities before recovery of amortized cost.
- During Q2, the company paid down $75 million of senior unsecured credit-linked notes. In the first half it repurchased 1.01 million common shares for approximately $59.7 million; a new $150 million repurchase authorization was in place. No common dividends were paid, and management said it had no foreseeable plans to pay them.
- Management described liquidity and the balance sheet as robust amid banking-industry volatility and cited proactive client outreach and review of borrowing and liquidity positions. The filing provides no specific earnings or financial guidance; interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Risk factors include credit quality, deposit confidence and liquidity, funding costs, interest rates and securities values, commercial and residential real estate, economic conditions, Texas concentration, cyber and technology risks, regulatory actions and execution of business strategy.
- The company revised CECL model estimates and portfolio groupings during Q2. It reported a $22.98 million first-half provision for off-balance-sheet credit losses and noted the revised model allocated more expected losses to those exposures. Under the most severe downside scenario considered, the modeled allowance estimate would rise by approximately $153.3 million; management cautioned this sensitivity excludes qualitative overlays and is not a forecast.
- Interest-rate simulation estimated next-12-month net interest income increases of $26.3 million and $52.5 million under immediate, sustained +100 and +200 basis-point shocks, and decreases of $38.8 million and $79.0 million under -100 and -200 basis-point shocks. The filing cautions that model assumptions are uncertain and actual results may differ.
- Substantially all financial instruments had transitioned from U.S. dollar LIBOR to alternative benchmark rates by June 30, 2023. Management did not expect ordinary-course legal proceedings to have a material adverse impact; the filing reported no material changes to previously disclosed risk factors.
Key facts investors should verify
- Whether deposit composition, uninsured deposit levels and available borrowing capacity remain stable, especially if customer confidence or funding costs change.
- Whether loan growth is accompanied by further deterioration in criticized, non-accrual and charge-off measures, particularly in commercial and real estate exposures.
- Whether rising deposit costs and other funding needs sustain or compress net interest margin and earnings.
- How the CECL model revisions, allowance adequacy and severe-downside sensitivity evolve in subsequent filings.
- How securities-related unrealized losses and AOCI change, and whether share repurchases continue while capital and liquidity priorities evolve.