Texas Capital Bancshares(TCBI) - 2022 Q3 - Quarterly Report

Part I: Financial Information Item 1. Financial Statements The company's financial position weakened due to decreased assets and deposits, with a key event being the sale of its BDCF subsidiary - On September 6, 2022, the company announced the sale of its insurance premium finance subsidiary, BankDirect Capital Finance (BDCF), for approximately $3.4 billion in an all-cash transaction[16] - The sale includes a loan portfolio of about $3.1 billion, which has been reclassified as held for sale[16] Consolidated Balance Sheets Total assets declined significantly, driven by reductions in both loans held for investment and total deposits Consolidated Balance Sheet Highlights (Unaudited) | (in thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Total assets | $30,408,513 | $34,731,738 | | Loans held for investment, net | $19,553,168 | $22,595,088 | | Loans held for sale | $3,142,178 | $8,123 | | Liabilities & Equity | | | | Total deposits | $24,498,563 | $28,109,365 | | Total liabilities | $27,522,738 | $31,522,122 | | Total stockholders' equity | $2,885,775 | $3,209,616 | - Total assets decreased by approximately $4.3 billion from year-end 2021, largely driven by a $3.6 billion decrease in total deposits and a $3.0 billion net decrease in loans held for investment[7] Consolidated Statements of Income Net interest income grew, but higher credit loss provisions and non-interest expenses led to a decline in net income Consolidated Income Statement Highlights (Unaudited) | (in thousands except per share data) | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $239,080 | $190,536 | $628,158 | $574,805 | | Provision for credit losses | $12,000 | $5,000 | $32,000 | $(20,000) | | Total non-interest income | $25,333 | $24,779 | $71,857 | $106,771 | | Total non-interest expense | $197,047 | $152,987 | $514,442 | $452,363 | | Net income | $41,418 | $43,390 | $115,227 | $188,809 | | Diluted earnings per common share | $0.74 | $0.76 | $2.00 | $3.41 | - Net interest income increased by 25.5% YoY for Q3 2022, driven by a rising interest rate environment[9] - This was offset by a $7 million increase in the provision for credit losses and a $44.1 million increase in non-interest expense, leading to a slight decline in net income[9] - For the nine months ended September 30, 2022, net income decreased by 39% YoY, primarily due to a $52 million swing in the provision for credit losses and a $34.9 million decrease in non-interest income[9] Consolidated Statements of Stockholders' Equity Stockholders' equity decreased due to significant unrealized losses on securities and common stock repurchases - Total stockholders' equity decreased from $3.21 billion at December 31, 2021, to $2.89 billion at September 30, 2022[7][12] - The decrease was primarily driven by a significant increase in Accumulated Other Comprehensive Loss from $(47.7) million to $(435.4) million and the repurchase of $50.0 million of common stock[12] Consolidated Statements of Cash Flows A significant net decrease in cash resulted from major outflows in financing activities, mainly deposit reductions Net Cash Flow Summary (Unaudited) | (in thousands) | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $214,100 | $546,313 | | Net cash provided by/(used in) investing activities | $(341,189) | $223,015 | | Net cash used in financing activities | $(4,179,323) | $(1,440,657) | | Net decrease in cash and cash equivalents | $(4,306,412) | $(671,329) | - A significant use of cash in financing activities was driven by a $3.6 billion net decrease in deposits and $50.0 million of common stock repurchases[13] Notes to Consolidated Financial Statements Key notes cover securities transfers, improved credit quality with fewer criticized loans, and strong capital adequacy - In Q1 2022, the company transferred $1.0 billion of available-for-sale debt securities to held-to-maturity in response to rising interest rates[25] - Criticized loans totaled $484.0 million at September 30, 2022, a decrease from $582.9 million at December 31, 2021[39] - The company and its bank subsidiary meet all capital adequacy requirements and are considered well capitalized as of September 30, 2022[52][53] Item 2. Management's Discussion and Analysis (MD&A) Rising interest rates expanded the net interest margin, but higher credit provisions and expenses reduced overall profitability Results of Operations Higher net interest income was offset by increased credit loss provisions and non-interest expenses, impacting net income Key Performance Indicators | | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest margin | 3.05% | 2.11% | 2.64% | 2.06% | | Return on average assets (ROA) | 0.52% | 0.47% | 0.47% | 0.66% | | Return on average common equity (ROE) | 5.36% | 5.41% | 4.90% | 8.35% | | Efficiency ratio | 74.5% | 71.1% | 73.5% | 66.4% | - Q3 2022 net income decreased slightly YoY, as a $48.6 million increase in net interest income was offset by higher provision for credit losses and non-interest expense[89] - Non-interest expense for Q3 2022 increased by $44.1 million YoY, including costs related to the sale of the insurance premium finance subsidiary[111] Analysis of Financial Condition The loan portfolio decreased due to a major divestiture, while credit quality improved and funding remained deposit-focused - Total loans held for investment decreased by $3.0 billion from year-end 2021, primarily due to a $3.1 billion reclassification of the insurance premium finance loan portfolio to 'loans held for sale'[113] Non-Performing Assets (NPAs) | (in thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total non-accrual loans held for investment | $35,864 | $72,502 | | Total non-performing assets | $37,204 | $72,502 | | NPAs to total assets | 0.12% | 0.21% | - The company's primary source of funding is customer deposits, which comprised 94.7% of total deposits at September 30, 2022[125][127] - During the nine months ended September 30, 2022, the company repurchased 941,879 shares of its common stock for an aggregate price of $50.0 million[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is significantly asset-sensitive to interest rate changes and is actively managing the transition from LIBOR Interest Rate Sensitivity Impact on Net Interest Income (Next 12 Months) | (in thousands) | September 30, 2022 | | :--- | :--- | | 200 bps Increase | $134,859 | | 100 bps Increase | $76,688 | | 100 bps Decrease | $(103,564) | - The company has significant exposure to LIBOR-dependent financial instruments and ceased originating new LIBOR-based products in December 2021[159] Item 4. Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective with no material changes - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[161] - No material changes in internal control over financial reporting occurred during the quarter[162] Part II: Other Information Item 1. Legal Proceedings Ongoing legal matters are not expected to have a material adverse effect on the company's financial condition - The company states that it does not expect the disposition of any current legal matters to have a material adverse impact on its financial statements or operations[164] Item 1A. Risk Factors No material changes to risk factors have been identified since the last annual report - No material changes in risk factors were reported compared to the 2021 Form 10-K[165] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company executed stock repurchases under its authorized program, with significant capacity remaining Common Stock Repurchases (Nine Months Ended Sep 30, 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | May 2022 | 902,418 | $53.22 | $101,975,648 | | June 2022 | 39,461 | $50.66 | $99,976,436 | | Jul-Sep 2022 | — | — | $99,976,436 | | Total | 941,879 | $53.11 | $99,976,436 | - On April 19, 2022, the board authorized a new share repurchase program for up to $150.0 million of outstanding common stock[166] Item 6. Exhibits This section lists key filed documents, including the BDCF sale agreement and required CEO/CFO certifications - Key exhibits filed include the Purchase Agreement for the sale of BDCF, CEO/CFO certifications under Rule 13a-14(a), and Section 1350 certifications[168]