Texas Capital Bancshares, Inc. — Q1 2012 Form 10-Q
Business context and period. Texas Capital Bancshares is a Texas-focused commercial bank serving middle-market businesses and professionals. This unaudited filing covers the three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2012 | Comparable period / prior date |
|---|---|---|
| Interest income | $93.1 | $70.1 in Q1 2011 |
| Net interest income | $88.2 | $64.5 in Q1 2011 |
| Net interest margin | 4.54% | 4.46% in Q1 2011 |
| Provision for credit losses | $3.0 | $7.5 in Q1 2011 |
| Non-interest income | $9.2 | $7.7 in Q1 2011 |
| Non-interest expense | $52.3 | $46.4 in Q1 2011 |
| Net income | $27.1 | $11.9 in Q1 2011 |
| Diluted earnings per share | $0.70 | $0.31 in Q1 2011 |
| Return on average assets / equity | 1.33% / 17.36% | 0.78% / 8.91% in Q1 2011 |
- Net income rose 127% year over year. Management attributed the increase primarily to higher net interest income, lower credit-loss provision, and increased non-interest income, partly offset by higher operating expenses and taxes.
- Net interest income increased $23.7 million, mainly as average earning assets grew $1.9 billion. Average loans held for investment and loans held for sale increased $939.1 million and $1.3 billion, respectively. Lower funding costs helped raise net interest margin.
- Non-interest income rose $1.5 million, including higher brokered loan fees and other income; equipment rental income declined. Non-interest expense increased 13%, principally from salaries and benefits, legal and professional costs, and marketing.
- At March 31, total assets were $8.56 billion, up from $8.14 billion at year-end. Total loans, including loans held for sale, were $7.98 billion, up from $7.58 billion. Loans held for investment, net, were $5.72 billion; loans held for sale were $2.26 billion.
- Total deposits were $6.06 billion, up from $5.56 billion. Borrowings totaled $1.77 billion, including $1.25 billion of FHLB borrowings, $383.9 million of federal funds purchased, $23.7 million of repurchase agreements, and $113.4 million of trust preferred debentures.
- Cash and cash equivalents were $148.8 million. Cash provided by financing activities was $401.9 million, while operating and investing activities used $153.0 million and $201.3 million, respectively; cash and cash equivalents increased $47.6 million during the quarter. Operating cash flow was affected by large mortgage warehouse loan originations and sales.
- Stockholders’ equity was $647.3 million, versus $616.3 million at year-end. Regulatory capital ratios were 9.46% Tier 1 risk-based, 10.43% total risk-based, and 8.95% leverage; management said the company and bank met applicable capital requirements.
Material changes, outlook, and risks
- Credit quality: Non-accrual loans declined to $50.2 million from $54.6 million at year-end and $116.5 million a year earlier. Net charge-offs were $0.8 million, versus $9.0 million in Q1 2011. The allowance for loan losses was $72.0 million, or 1.24% of loans held for investment; combined reserves for credit losses were $74.9 million, or 1.29% of loans held for investment.
- Continuing exposures: OREO was $32.6 million, down from $34.1 million at year-end. The quarter included $2.7 million of OREO valuation expense, including $1.9 million of direct write-downs. Management cited continuing economic weakness, potential borrower fraud, commercial real estate illiquidity, and uncertainty in appraised values as reserve considerations. Most loans held for investment were to Texas borrowers, concentrating exposure in that market.
- Funding and liquidity: Core customer deposits were 95.7% of deposits; brokered deposits were $261.0 million, or 4.3%. The company reported $469.9 million of unused federal funds lines and $67.1 million of additional FHLB borrowing capacity. A new $50 million non-revolving credit line, maturing in March 2014, had no outstanding balance at quarter-end.
- Management commentary: Management reported improving credit quality and expected continued growth in non-interest income, while noting competition could constrain growth and new products or business lines could require added capital and management resources. No numerical earnings or growth guidance was provided.
- Legal contingency: The company was defending a $65.4 million jury verdict in Oklahoma related to a defaulted loan. Management said a materially negative outcome was not probable and recorded no reserve. Separately, on April 18, 2012, the company received summary judgment in a Texas action ordering a guarantor to pay approximately $7.0 million; the related loan loss had already been recognized in 2010.
- Other risks and unusual items: The discontinued residential mortgage business retained approximately $0.4 million of loans held for sale and potential exposure to investor repurchase claims; timing and recovery value were uncertain. Interest-rate changes, credit-loss estimates, Texas economic conditions, competition, regulatory changes, and litigation were identified as risks. The filing reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether rapid loan and deposit growth can be sustained without weakening underwriting standards or increasing dependence on wholesale funding and brokered deposits.
- Whether the allowance and OREO valuations remain adequate given Texas real estate conditions, non-accrual trends, and the sensitivity of collateral appraisals.
- How much of earnings growth reflects durable core net interest income versus mortgage warehouse volume and other variable sources of non-interest income.
- The ultimate outcome and potential financial impact of the $65.4 million Oklahoma verdict and the remaining discontinued-mortgage repurchase exposure.
- Whether capital and liquidity remain adequate as the bank grows and meets contractual funding needs; the filing’s interest-rate simulation estimated a $37.8 million increase in next-twelve-month net interest income under a 200-basis-point increase, subject to modeling assumptions.