Texas Capital Bancshares, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. The company is a Texas-focused commercial bank and secured lender. Amounts below are in U.S. dollars; income and cash-flow figures are for the quarter.
Key financial results
| Metric | Q1 2014 | Prior comparison |
|---|---|---|
| Interest income | $116.6 million | $104.2 million |
| Net interest income | $108.3 million | $98.0 million |
| Net interest margin | 3.99% | 4.27% |
| Net income | $28.3 million | $33.1 million |
| Net income available to common shareholders | $25.8 million | $33.1 million |
| Diluted EPS | $0.60 | $0.80 |
| Net cash from operating activities | $36.7 million | $74.2 million |
- Earnings and margins: Net income fell 15% year over year. Higher net interest income was more than offset by increased operating expense, credit-loss provision and lower non-interest income. Return on average assets was 1.01% versus 1.38%; return on average common equity was 10.20% versus 15.82%.
- Expenses and other income: Non-interest expense rose 24% to $69.3 million, led by an $8.5 million increase in salaries and benefits, including performance-based compensation, and higher FDIC assessments, legal costs and occupancy expense. Non-interest income decreased to $10.4 million, mainly due to lower brokered-loan and swap fees.
- Balance sheet and liquidity: Total assets were $12.14 billion. Net loans held for investment were $11.53 billion, up $342.9 million from year-end; deposits were $9.73 billion, up $471.7 million. Cash and cash equivalents ended at $257.8 million. Investing activities used $335.5 million, primarily reflecting growth in loans excluding mortgage-finance loans; financing activities provided $402.7 million.
- Credit quality: The loan-loss provision was $5.0 million versus $2.0 million a year earlier. The allowance for loan losses was $90.2 million, with a further $5.0 million reserve for off-balance-sheet credit losses. Net charge-offs were $2.1 million. Non-accrual loans rose to $43.2 million from $32.4 million at year-end, while total non-performing assets were $45.6 million. Management cited portfolio growth and uncertainty, including borrower fraud, in maintaining reserves.
- Capital and debt: Company capital ratios were 9.85% Tier 1 risk-based, 12.70% total risk-based and 11.57% leverage; management said the Bank met the well-capitalized standard. January offerings raised $106.5 million net from common stock and $172.4 million net from $175 million of subordinated notes. Total borrowings at quarter-end were $1.08 billion. Preferred dividends were $2.4 million; no common dividends were paid.
Changes, outlook and risks
- Average earning assets increased $1.7 billion year over year, primarily from loan growth. Management attributed the lower net interest margin to lower loan yields, liquidity balances and the cost of new subordinated debt.
- Management said it expects continued growth in non-interest income, but did not provide quantified earnings, revenue or margin guidance. It noted that competition and the resources required for new products or markets may affect growth.
- Material exposures include Texas economic and industry concentration, commercial real estate and construction lending, credit losses and allowance estimates, interest-rate movements, funding access, regulatory change, fraud, competition and operational or technology risks. A 200-basis-point rate increase was modeled to raise next-12-month net interest income by $104.6 million versus the most-likely scenario; management cautioned that model assumptions are uncertain.
- The company disclosed a prior-period cash-flow classification correction: $597.4 million of Q1 2013 mortgage-finance loan cash flows was reclassified from operating to investing activities. Management said the correction did not affect earnings, total loans or total assets and did not materially misstate previously issued statements.
- Discontinued mortgage operations remain subject to investor repurchase requests and potential additional losses; the company held $0.3 million of related loans for sale. Management said ordinary-course legal matters were not expected to have a material adverse impact. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether the rise in non-accrual loans and charge-offs persists, and whether reserves remain adequate as the loan portfolio grows.
- How loan-yield pressure, deposit costs and the new subordinated notes affect future net interest margin and earnings.
- The sustainability and funding mix of loan and deposit growth, including the share of relationship-brokered deposits.
- Potential costs from discontinued mortgage-loan repurchase claims and other contingencies.
- Capital adequacy and the effect of future regulatory requirements; management noted Basel III rules were scheduled to take effect for the company on January 1, 2015.