Texas Capital Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company is a bank holding company serving commercial businesses and professionals, with substantial lending exposure to Texas and specialized lending businesses operating nationally. Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $205.5 | $189.5 | $389.1 | $384.3 |
| Provision for credit losses | $22.0 | $(19.0) | $20.0 | $(25.0) |
| Non-interest income | $26.2 | $37.6 | $46.5 | $82.0 |
| Non-interest expense | $164.3 | $149.1 | $317.4 | $299.4 |
| Net income | $34.2 | $73.5 | $73.8 | $145.4 |
| Diluted EPS | $0.59 | $1.31 | $1.28 | $2.65 |
| Net interest margin | 2.68% | 2.02% | 2.45% | 2.03% |
- Profitability and margins: Q2 net income fell about 54% year over year; six-month net income fell about 49%. Management attributed the quarterly decline primarily to higher credit-loss provision. The six-month decline also reflected lower non-interest income and higher expenses. Q2 return on average assets was 0.44% (0.76% prior year), return on average common equity was 4.35% (9.74%), and the efficiency ratio was 70.9% (65.6%).
- Balance sheet: Total assets were $32.34 billion, down from $34.73 billion at December 31, 2021. Deposits were $25.44 billion, down from $28.11 billion. Gross loans held for investment were $24.14 billion, up from $22.87 billion; growth in commercial, energy and real-estate lending more than offset lower mortgage-finance balances. Allowance for loan losses was $229.0 million, or 0.95% of loans.
- Cash flow and liquidity: For the first half, operating cash flow was $146.5 million, investing cash flow was negative $1.53 billion, and financing cash flow was negative $2.28 billion. Cash and cash equivalents ended at $4.28 billion, down $3.67 billion from year-end. Core customers represented 95.1% of period-end deposits. Short-term borrowings were $2.65 billion, primarily FHLB advances; long-term debt was $917.1 million. The company reported $6.44 billion of available FHLB capacity, $1.46 billion of unused federal funds lines and $3.48 billion of unused Federal Reserve borrowing capacity.
- Capital: Stockholders’ equity was $3.01 billion versus $3.21 billion at year-end, with accumulated other comprehensive loss widening to $272.2 million from $47.7 million. The company and bank remained above regulatory well-capitalized thresholds. Company CET1 and total capital ratios were 10.46% and 14.42%, respectively.
- Credit quality: Non-accrual loans were $50.5 million, down from $72.5 million at year-end; non-accrual loans were 0.21% of loans. First-half net charge-offs were $2.1 million versus $8.8 million a year earlier. Criticized loans were $603.5 million, up from $582.9 million at year-end. Management linked the increase from the prior quarter primarily to one mortgage-finance credit, which it said was adequately reserved and expected to be resolved in Q3.
Material changes and unusual items
- Rising rates lifted Q2 net interest margin and net interest income year over year, while increasing funding costs. The Q2 cost of deposits rose to 0.33% from 0.20% in the prior-year quarter.
- Non-interest income declined, largely reflecting the 2021 sale of mortgage servicing rights and transition of the mortgage correspondent aggregation program; brokered loan fees and other income also contributed to the first-half decline. Higher salaries, headcount and marketing expense increased operating costs.
- In Q1, the company transferred $1.02 billion of available-for-sale securities to held-to-maturity in response to rising rates. At June 30, available-for-sale securities had $279.6 million of gross unrealized losses; held-to-maturity securities had $81.7 million of unrealized losses. Management attributed available-for-sale losses to interest-rate changes, not issuer or underlying-loan credit quality, and stated it did not intend or expect to be required to sell the securities before recovery.
- The board authorized up to $150 million of common-stock repurchases in April. The company bought back 941,879 shares for $50.0 million in Q2 at a weighted average $53.11 per share; approximately $100.0 million remained authorized at June 30. No common dividends were paid.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year or future performance. It expected the cited mortgage-finance credit to be resolved in Q3.
- Interest-rate sensitivity modeling estimated next-12-month net interest income increases of $91.5 million under an immediate sustained 100-basis-point rise and $163.1 million under a 200-basis-point rise, and a $114.8 million decrease under a 100-basis-point decline. These are model estimates based on uncertain assumptions, not forecasts.
- Key stated risks include credit quality, inflation and recession risk, interest rates, Texas economic and real-estate conditions, energy-sector volatility, mortgage markets, cyber and technology risks, regulatory changes and execution of the LIBOR transition. The company said it had stopped originating LIBOR-based products and continued transitioning remaining exposures to alternative benchmarks.
- Management said it was not aware of events reasonably likely to materially adversely affect liquidity, capital resources or operations. Ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
- The allowance estimate is sensitive to economic assumptions: management said the quantitative allowance estimate would increase by approximately $107 million under sole consideration of its most severe downside scenario, before qualitative overlays and other adjustments.
Important facts for investors to verify
- Whether loan growth, deposit trends and funding costs support sustainable net interest margin as rates and customer behavior change.
- The resolution and ultimate loss exposure of the mortgage-finance credit, and movements in criticized loans and the allowance.
- The extent to which unrealized securities losses affect capital or liquidity if securities must be sold, notwithstanding management’s stated intent and ability to hold.
- Actual results against the interest-rate sensitivity model and the company’s assumptions for deposit repricing and asset yields.
- Progress on the LIBOR transition, remaining exposure to Texas and energy-sector conditions, and the pace of further share repurchases.