Texas Capital Bancshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a Texas-based commercial bank and lender, with regional and national lending businesses.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $239.1 million | $190.5 million | $628.2 million | $574.8 million |
| Net interest margin | 3.05% | 2.11% | 2.64% | 2.06% |
| Non-interest income | $25.3 million | $24.8 million | $71.9 million | $106.8 million |
| Non-interest expense | $197.0 million | $153.0 million | $514.4 million | $452.4 million |
| Net income | $41.4 million | $43.4 million | $115.2 million | $188.8 million |
| Diluted EPS | $0.74 | $0.76 | $2.00 | $3.41 |
| Efficiency ratio | 74.5% | 71.1% | 73.5% | 66.4% |
Q3 return on average assets was 0.52% and return on average common equity was 5.36%, versus 0.47% and 5.41%, respectively, a year earlier. Nine-month figures were 0.47% and 4.90%, versus 0.66% and 8.35%.
Financial position, cash flow and capital
- At September 30, total assets were $30.4 billion, down from $34.7 billion at year-end 2021. Total deposits were $24.5 billion, down from $28.1 billion; loans held for investment, net, were $19.6 billion, down from $22.6 billion.
- Cash and cash equivalents totaled $3.64 billion, compared with $7.95 billion at year-end. Nine-month operating cash flow was $214.1 million; investing cash outflow was $341.2 million and financing cash outflow was $4.18 billion, largely reflecting deposit runoff and reduced borrowings. Cash and cash equivalents decreased $4.31 billion.
- Short-term borrowings were $1.70 billion and long-term debt was $930.8 million. The company reported $6.40 billion of unused FHLB borrowing capacity, $1.46 billion of unused federal funds lines and $3.57 billion of unused Federal Reserve capacity.
- Stockholders’ equity was $2.89 billion, versus $3.21 billion at year-end. Regulatory capital ratios exceeded well-capitalized thresholds; company CET1 was 11.08% and total capital was 15.25%.
- Accumulated other comprehensive loss widened to $435.4 million from $47.7 million at year-end, reflecting primarily interest-rate-related valuation declines in securities and cash-flow hedges.
Material changes and management commentary
- Q3 net interest income rose 25% year over year as higher asset yields and a shift in earning-asset mix more than offset higher funding costs. Net interest margin expanded by 94 basis points. Deposit cost rose to 0.93% in Q3 from 0.19% a year earlier.
- Q3 net income declined 5%, mainly because of higher credit-loss provision and operating expenses. Nine-month net income fell 39%, primarily due to lower non-interest income and higher provision and expenses, partly offset by stronger net interest income.
- Higher Q3 expenses included $13.7 million of salaries and benefits and $3.0 million of legal and professional costs related to the announced BankDirect Capital Finance (BDCF) sale. Headcount-related compensation and marketing also increased.
- Nine-month provision for credit losses was $32.0 million, compared with a $20.0 million release in 2021. Management cited increased downside economic forecast risks, partly offset by fewer criticized loans. Net charge-offs were $4.9 million versus $11.9 million; criticized loans were $484.0 million, down from $582.9 million at year-end 2021.
- Loans held for investment declined about $3.0 billion from year-end, primarily because approximately $3.1 billion of BDCF loans were reclassified as held for sale. Excluding that reclassification, the company reported growth across loan categories except mortgage finance.
Outlook, risks and unusual items
- BDCF was agreed to be sold to AFCO Credit Corporation for approximately $3.4 billion in cash, an 8.5% premium to the value of the roughly $3.1 billion loan portfolio at September 30. Closing was expected in Q4 2022, subject to customary conditions. The disposal group remained classified as held for sale and was not presented as discontinued operations. No quantified earnings guidance was provided.
- Management’s interest-rate simulation estimated that, compared with its most-likely scenario, a 100-basis-point increase would raise next-12-month net interest income by $76.7 million and a 200-basis-point increase by $134.9 million; a 100-basis-point decrease would reduce it by $103.6 million. These are model estimates and actual results may differ.
- Management said the modeled allowance for credit losses would increase approximately $73 million under the most severe downside economic scenario, before qualitative overlays and other adjustments. The reported loan allowance was $234.6 million.
- Risks highlighted include credit deterioration from economic weakness, inflation or recession; interest-rate and deposit-pricing sensitivity; Texas and energy-sector concentrations; market and real-estate conditions; BDCF sale execution; and LIBOR transition. The company said it had ceased originating LIBOR-based products and continued transitioning remaining exposures.
- Available-for-sale securities had $407.6 million of gross unrealized losses, which management attributed to market interest rates rather than credit quality. Management stated it did not intend, and was not more likely than not to be required, to sell these securities before recovery of amortized cost.
- The board had authorized up to $150 million in common-stock repurchases; $50 million had been used through September 30. No common dividends were paid during the nine-month period. The filing reported no material change in previously disclosed risk factors and no legal proceeding expected by management to materially affect results.
Important facts for investors to verify
- Whether and when the BDCF sale closed, the final proceeds and any closing adjustments or subsequent effects on earnings and capital.
- Deposit retention, funding costs, liquidity trends and the sustainability of the Q3 net interest margin as rates and deposit pricing change.
- Credit quality, criticized and non-accrual loans, and whether the allowance remains adequate under changing economic forecasts.
- The path of unrealized securities and hedge losses in AOCI, and any effects on tangible equity or regulatory capital.
- Future operating expense levels, particularly compensation, marketing and transaction-related costs, alongside the remaining share-repurchase authorization.