Texas Capital Bancshares, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2014. The company is a Texas-focused commercial bank, with additional regional and national lending businesses.
Financial performance
- Q2 earnings: Net income was $37.9 million, up 14% from $33.4 million a year earlier. Net income available to common stockholders was $35.5 million; diluted EPS was $0.76 versus $0.71.
- Six-month earnings: Net income was $73.0 million, up 18%; diluted EPS was $1.47 versus $1.30.
- Net interest income: Q2 was $142.3 million, up $26.9 million (23%) year over year; the six-month total was $272.3 million, up $48.6 million (22%). Q2 net interest margin declined to 3.22% from 3.87%; the six-month margin was 3.22% versus 3.93%.
- Other income and expenses: Q2 non-interest income rose to $12.8 million from $10.5 million, led by brokered loan and swap fees. Non-interest expense increased 16% to $81.3 million, principally reflecting higher compensation, occupancy, technology and FDIC assessment costs.
- Credit provision: Q2 provision for credit losses was $14.5 million, versus $4.0 million a year earlier; the six-month provision was $25.5 million versus $9.0 million. Six-month net charge-offs were $6.8 million, compared with $4.6 million.
- Returns: Q2 ROA was 0.83% and ROE 10.32%, down from 1.08% and 11.38%. Management attributed lower returns partly to reduced loan yields and higher average liquidity; the prior-year equity offering also increased average common equity and diluted per-share comparisons.
Financial position, liquidity and capital
- Assets and lending: Total assets were $17.82 billion, up from $15.90 billion at year-end. Net loans held for investment were $15.91 billion, up $1.75 billion; gross loans were $16.09 billion. Mortgage finance loans reached $4.91 billion, typically held for only 10–20 days.
- Funding: Deposits totaled $14.19 billion, up $1.51 billion from year-end. Core customer deposits were 89% of deposits, versus 86% at year-end. Other borrowings were $1.40 billion; subordinated notes and trust preferred debentures totaled $399.4 million.
- Liquidity and cash flow: Cash and cash equivalents were $1.45 billion. For the first six months, operating cash flow was $73.3 million, investing activities used $1.78 billion (primarily reflecting loan growth), and financing activities provided $1.83 billion, including deposit growth and borrowings. Management reported $4.12 billion of additional FHLB borrowing capacity and $1.28 billion of unused federal funds lines.
- Credit quality and reserves: Non-accrual loans rose to $122.9 million from $43.3 million at year-end; non-performing assets were $123.5 million. Commercial non-accrual loans were $92.1 million, including $38.0 million secured by oil and gas properties; construction non-accruals were $16.7 million. The allowance for loan losses was $118.8 million, or 0.74% of gross loans; combined loan and off-balance-sheet reserves were $126.7 million, or 1.14% of loans excluding mortgage finance.
- Capital: At June 30, company CET1, Tier 1, total capital and leverage ratios were 7.43%, 8.82%, 11.03% and 9.03%, respectively. Management said the company met capital adequacy requirements and the Bank met the regulatory ratios for “well capitalized.”
Changes, outlook and risks
- Growth in average loans and liquidity drove higher net interest income, but lower yields—particularly from a larger proportion of mortgage finance loans and substantial low-yield liquidity balances—compressed net interest margin.
- Management said the higher credit provision reflected traditional loan growth and changes in risk weights and portfolio mix. It considered reserves adequate, while noting uncertainty in economic conditions and the possibility that borrower financial information or collateral values may prove inaccurate.
- Management provided no specific earnings or revenue guidance. It expects growth in some non-interest income components, but cited competition and the capital and management demands of new products and markets.
- Interest-rate simulations estimated higher net interest income over the next 12 months under parallel rate increases: $84.9 million for +100 basis points and $178.3 million for +200 basis points versus the “most likely” scenario. These are model estimates dependent on assumptions, not forecasts; a falling-rate scenario was not presented.
- Principal risks include deterioration in commercial credit, Texas economic conditions, oil and gas price volatility, real estate values, interest-rate exposure, funding access, competition, regulatory costs, cybersecurity and operational or third-party failures. Management did not expect the current commodity-price decline to materially harm financial position, but sustained or further declines could affect energy borrowers.
- Ordinary-course legal matters were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the rise in non-accrual loans—particularly commercial and energy-related credits—continues, and how recoveries, charge-offs and reserve coverage develop.
- How loan growth, mortgage finance volumes and low-yield liquidity affect net interest margin and profitability.
- The quality and persistence of deposit growth, reliance on relationship-brokered deposits, and use of short-term FHLB borrowings.
- Whether regulatory capital ratios remain adequate as balance-sheet and mortgage finance volumes change; quarter-end mortgage finance balances can affect reported ratios.
- Whether modeled benefits from higher rates materialize; actual results may differ from the sensitivity model’s assumptions.