Texas Capital Bancshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Comparisons below are against Q3 or the first nine months of 2020, unless otherwise noted. Amounts are in U.S. dollars.
Business context
The company is a Texas-focused commercial bank with national lending businesses, including mortgage warehouse finance. In 2021 it began an enterprise-wide strategic transformation focused on technology, client-facing hiring, treasury and wealth services, and expanded investment banking offerings. The bank converted from a national to a Texas state-chartered bank effective September 15, 2021.
Financial performance and condition
- Q3 earnings: Net income was $43.4 million, down from $57.1 million; income available to common shareholders was $39.1 million, versus $54.7 million. Diluted EPS was $0.76, versus $1.08. ROA was 0.47% and ROE was 5.41%, compared with 0.59% and 8.24%.
- Nine-month earnings: Net income was $188.8 million, compared with $6.1 million; common income was $174.4 million, versus a $1.2 million loss. Diluted EPS was $3.41, compared with a $0.02 loss. The sharp improvement primarily reflected lower credit-loss provision.
- Revenue and margins: Q3 net interest income was $194.1 million, down from $207.6 million; non-interest income was $21.2 million, down from $60.3 million. Net interest margin was 2.15%, versus 2.22%. For nine months, net interest income was $591.2 million versus $645.8 million, and non-interest income was $90.4 million versus $142.6 million; net interest margin was 2.12%, versus 2.42%.
- Credit costs and asset quality: Q3 provision for credit losses was $5.0 million, versus $30.0 million. For nine months, the company recorded a $20.0 million provision benefit, versus $226.0 million of provision expense in 2020. Nine-month net charge-offs fell to $11.9 million from $133.4 million. Non-performing assets were $87.5 million, down from $122.0 million at year-end 2020; criticized loans were $728.9 million, down from $918.4 million at year-end.
- Balance sheet and liquidity: Total assets were $36.4 billion, down from $37.7 billion at December 31, 2020. Net loans held for investment were $23.5 billion, down from $24.2 billion. Deposits were $29.8 billion, down from $31.0 billion, with non-interest-bearing deposits rising to $15.0 billion from $12.7 billion. Interest-bearing deposits at other banks were $8.3 billion; liquidity assets equaled 27.9% of deposits. Core customers represented 91.7% of deposits.
- Cash flow: Nine-month operating cash flow was $546.3 million, compared with $2.17 billion in 2020. Investing activities provided $223.0 million, versus $1.79 billion used; financing activities used $1.44 billion, versus $5.84 billion provided. Cash and cash equivalents declined by $671.3 million to $8.54 billion.
- Funding, debt and capital: Other borrowings were $2.2 billion, down from $3.0 billion, while long-term debt was $928.1 million, up from $395.9 million. The company issued $275 million of credit-linked notes and $375 million of 4.00% subordinated notes, and redeemed $111 million of 6.50% subordinated notes. At quarter-end, company and bank CET1 ratios were 10.70% and 10.97%; total capital ratios were 14.95% and 13.11%. Management said both exceeded applicable well-capitalized thresholds.
Material changes and unusual items
- The company sold its mortgage servicing rights portfolio and transitioned its Mortgage Correspondent Aggregation program to a third party. The transaction was completed in stages during 2021; the remaining MSRs were sold October 1, 2021. The exit reduced mortgage-related gains, brokered loan fees and servicing income compared with 2020.
- Q3 non-interest expense included a $12.0 million write-off of software assets as part of the strategic repositioning. Nine-month expenses also benefited from lower marketing, legal and professional, technology, servicing-related and merger-related costs versus 2020.
- In March, the company issued $289.7 million net proceeds from Series B preferred stock and redeemed its $150 million Series A preferred stock. Preferred dividends reduced income available to common shareholders.
- Available-for-sale securities had $65.5 million of gross unrealized losses at September 30, 2021, recorded in accumulated other comprehensive income. Management attributed the losses to non-credit factors and said it had the ability and intent to hold the securities until recovery.
Outlook, management commentary and risks
The filing provides no specific earnings or financial guidance. Management described an improving economy and credit outlook after the pandemic shock, while noting continued uncertainty for customers and sectors such as energy, lodging, restaurants, entertainment, retail and commercial real estate. The company planned to expand client-facing staffing by 2025 and invest in technology and new services. It expected to begin originating Bloomberg Short Term Yield Index-based loans in December 2021 and cease new LIBOR-based originations during Q4.
Principal risks highlighted include credit deterioration and collateral values, economic and pandemic uncertainty, energy and Texas market concentration, interest-rate and funding risk, cyber and operational risk, regulatory and capital requirements, and execution of the strategy and LIBOR transition. The company disclosed $8.26 billion of commitments to extend credit and $340.9 million of standby letters of credit. Management did not expect ordinary-course legal matters to materially affect results; it reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether lower credit costs and improving asset-quality measures persist, and whether the allowance remains adequate as economic conditions change.
- How the mortgage-program exit affects recurring fee income, earnings mix and expense levels in subsequent quarters.
- Execution, costs and returns from the new strategy, including hiring, technology investment and planned product expansion.
- Deposit stability, liquidity use and funding costs, particularly amid lower total deposits and increased long-term debt.
- Interest-rate sensitivity: the company modeled a $42.7 million increase in next-12-month net interest income for a 100-basis-point rate increase, but cautioned that model results depend on assumptions and may differ materially from actual outcomes.