Texas Capital Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company is a Texas-focused commercial bank serving middle-market businesses and professionals. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Interim statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $108.8 | $96.9 | $308.0 | $275.7 |
| Provision for credit losses | $5.0 | $3.0 | $14.0 | $7.0 |
| Non-interest income | $10.4 | $10.6 | $32.8 | $30.2 |
| Non-interest expense | $62.0 | $53.5 | $186.4 | $159.8 |
| Net income | $33.5 | $32.5 | $90.7 | $89.2 |
| Net income available to common shareholders | $31.0 | $32.5 | $85.7 | $89.2 |
| Diluted EPS | $0.74 | $0.80 | $2.05 | $2.25 |
- Net interest margin narrowed to 4.21% from 4.36% in the quarter and to 4.22% from 4.46% year to date. Higher average earning assets, particularly loans held for investment, drove net interest income growth; lower loan yields and margin compression partly offset the benefit.
- Q3 net income rose about 3%, but earnings available to common shareholders and diluted EPS declined, reflecting the new preferred-stock dividends and higher expenses. Return on average assets was 1.25% versus 1.40%; return on average common equity was 13.74% versus 17.27%.
- For the nine months, net income increased modestly, while common earnings and diluted EPS fell. Expense growth and the preferred dividend outweighed the increase in net interest income.
Balance sheet, funding and credit
- At September 30, total assets were $10.80 billion, compared with $10.54 billion at December 31, 2012. Total deposits grew to $8.96 billion from $7.44 billion; loans held for investment, net, rose to $7.97 billion from $6.71 billion. Loans held for sale declined to $2.26 billion from $3.18 billion.
- Cash and cash equivalents were $195.1 million. Total borrowings were $674.1 million, down from approximately $2.17 billion at year-end 2012, principally because other borrowings fell. The company reported $1.15 billion of unused FHLB capacity and $894 million in unused federal funds lines.
- Operating cash flow was $1.07 billion for the nine months, versus an outflow of $680.3 million in 2012. This was substantially affected by mortgage warehouse loan originations and sales; the filing says the net activity would be presented in investing activities if reported on a net basis.
- Gross loans held for investment grew to $8.10 billion. The allowance for loan losses was $84.0 million; combined reserves for loan and off-balance-sheet credit losses were $88.6 million, or 1.10% of loans held for investment. Year-to-date net charge-offs were $3.6 million.
- Non-accrual loans declined to $35.7 million from $55.8 million at year-end 2012; OREO declined to $12.8 million from $16.0 million. However, the company reported $18.7 million of potential problem loans not included in non-accrual or 90-days-past-due categories. Non-accrual loans included $24.2 million of restructured loans.
- Company capital ratios at quarter-end were 9.67% Tier 1 risk-based, 11.34% total risk-based and 10.85% leverage. Bank ratios were 7.91%, 10.42% and 8.88%, respectively. Management stated the company and bank met applicable capital requirements.
Material changes, outlook and risks
- Non-interest expense rose 16% in Q3 and 17% year to date. The filing attributes increases to business growth, compensation and marketing, among other costs. Year-to-date compensation included about $7.7 million related to the CEO retirement and transition arrangements and $2.2 million of increased expected executive incentive costs.
- A $3.0 million FDIC assessment was paid in Q3 following amended prior-year Call Reports and revised risk weighting of mortgage finance assets. The company disputes the assessment; any recovery would reduce non-interest expense in a future period.
- New FFIEC Call Report instructions led the bank to report mortgage warehouse interests as held for investment for regulatory reporting, while the company continued to classify them as held for sale in its GAAP financial statements. The filing warns that a later GAAP reclassification could require prior-period restatement, though management expects no impact on net income or total loans and anticipates cash-flow presentation changes.
- The company issued $150 million of 6.5% non-cumulative preferred stock in March 2013, with net proceeds of approximately $145 million. Preferred dividends reduced Q3 common earnings by $2.4 million. Basel III capital rules were scheduled to take effect for the company in 2015; management did not expect a material impact based on its initial assessment.
- Management expected continued growth in non-interest income but noted competition and possible resource demands from new products or business lines. No specific earnings or revenue guidance is provided. Principal risks include interest-rate changes, credit quality and allowance estimates, Texas economic concentration, competition for loans and deposits, regulatory changes, litigation, and access to capital and funding.
- The company reported a modeled $86.5 million increase in next-12-month net interest income under a 200-basis-point rate increase versus its most-likely scenario. This is a model estimate, subject to assumptions about rates, balances, prepayments and customer behavior—not a forecast of realized results.
Important facts for investors to verify
- Whether loan growth can continue without further margin compression or disproportionate operating-cost growth.
- Credit trends behind the decline in non-accrual loans, the $18.7 million of potential problem loans, and the adequacy of reserves as the portfolio expands.
- The outcome of the disputed $3.0 million FDIC assessment and any regulatory or accounting consequences of the mortgage warehouse classification and risk-weight changes.
- Funding mix and liquidity exposure, including the growth in relationship brokered deposits and the sizable customer credit commitments and standby letters of credit.
- The realized cost and dilution effects of preferred stock, executive transition and incentive compensation, and implementation of Basel III requirements.