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TCBI > SEC Filings for TCBI > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for TEXAS CAPITAL BANCSHARES INC/TX


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements and financial analysis contained in this document that are not historical facts are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"). In addition, certain statements may be contained in our future filings with SEC, in press releases, and in oral and written statements made by or with our approval that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Forward looking statements describe our future plans, strategies and expectations and are based on certain assumptions. Words such as "believes", "anticipates", "expects", "intends", "targeted", "continue", "remain", "will", "should", "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may cause actual results to differ materially from those in such statements. The important factors that could cause actual results to differ materially from the forward looking statements include, but are not limited to, the following:

(1) Changes in interest rates and the relationship between rate indices, including LIBOR and Fed Funds

(2) Changes in the levels of loan prepayments, which could affect the value of our loans or investment securities

(3) Changes in general economic and business conditions in areas or markets where we compete

(4) Competition from banks and other financial institutions for loans and customer deposits

(5) The failure of assumptions underlying the establishment of and provisions made to the allowance for credit losses and differences in assumptions utilized by banking regulators which could have retroactive impact

(6) The loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels

(7) Changes in government regulations including changes as a result of the recent economic crisis. On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry. Many of the related regulations are still not written so the potential impact is still unknown

(8) Claims and litigation, whether founded or unfounded, may result in significant financial liability if legal actions are not resolved in a manner favorable to us.

Forward-looking statements speak only as of the date on which such statements are made. We have no obligation to update or revise any forward-looking statements as a result of new information or future events. In light of these assumptions, risks and uncertainties, the events discussed in any forward-looking statements in this quarterly report might not occur.

Results of Operations

Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations at Note (9) - Discontinued Operations.

Summary of Performance

We reported net income and net income available to common shareholders of $33.1 million, or $0.80 per diluted common share, for the first quarter of 2013 compared to $27.1 million, or $0.70 per diluted common share, for the first quarter of 2012. The dividend on preferred shares reduced income available to common shareholders by $81,000 during the first quarter of 2013. Return on average common equity was 15.82% and return on average assets was 1.38% for the first quarter of 2013, compared to 17.36% and 1.33%, respectively, for the first quarter of 2012.


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Net income increased $6.0 million, or 22%, for the three months ended March 31, 2013 as compared to the same period in 2012. The $6.0 million increase during the three months ended March 31, 2013, was primarily the result of a $9.8 million increase in net interest income, a $1.0 million decrease in the provision for credit losses and a $2.1 million increase in non-interest income, offset by a $3.4 million increase in non-interest expense and a $3.4 million increase in income tax expense.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

Net interest income was $98.0 million for the first quarter of 2013, compared to $88.2 million for the first quarter of 2012. The increase was due to an increase in average earning assets of $1.5 billion as compared to the first quarter of 2012. The increase in average earning assets included a $1.2 billion increase in average loans held for investment and a $326.0 million increase in loans held for sale, offset by a $44.1 million decrease in average securities. For the quarter ended March 31, 2013, average net loans and securities represented 98% and 1%, respectively, of average earning assets compared to 98% and 2% in the same quarter of 2012.

Average interest bearing liabilities increased $451.7 million from the first quarter of 2012, which included a $853.8 million increase in interest bearing deposits and a $111.0 million increase in subordinated notes, offset by a $513.1 million decrease in other borrowings. Demand deposits increased from $1.7 billion at March 31, 2012 to $2.5 billion at March 31, 2013. The average cost of interest bearing deposits decreased from .34% for the quarter ended March 31, 2012 to .26% for the same period of 2013. The change in funding composition decreased the cost of interest bearing deposits and borrowed funds to .25% in the first quarter of 2013 compared to .30% in the first quarter of 2012.

The following table presents the changes (in thousands) in taxable-equivalent net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities.

                                                   Three months ended
                                                  March 30, 2013/2012
                                          Net               Change Due To
                                         Change        Volume        Yield/Rate
         Interest income:
         Securities(2)                  $   (398 )    $   (460 )    $         62
         Loans held for sale               1,326         2,985            (1,659 )
         Loans held for investment        10,082        13,781            (3,699 )
         Federal funds sold                    5             3                 2
         Deposits in other banks               3            22               (19 )

         Total                            11,018        16,331            (5,313 )
         Transaction deposits                113           107                 6
         Savings deposits                    214           535              (321 )
         Time deposits                      (506 )        (329 )            (177 )
         Deposits in foreign branches        (48 )         (63 )              15
         Borrowed funds                    1,462          (239 )           1,701

         Total                             1,235            11             1,224

         Net interest income            $  9,783      $ 16,320      $     (6,537 )

(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

(2) Taxable equivalent rates used where applicable.

Net interest margin from continuing operations, the ratio of net interest income to average earning assets from continuing operations, was 4.27% for the first quarter of 2013 compared to 4.54% for the first quarter of 2012. This 27 basis point decrease was a result of a decrease in interest income as a percent of earning assets offset by a reduction in funding costs. Funding cost including demand deposits and borrowed funds decreased from


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.23% for the first quarter of 2012 to .17% for the first quarter of 2013. The cost of subordinated debt issued in September 2012 and the trust preferred as a percent of total earning assets was .11% for the first quarter of 2013. Total cost of funding, including all deposits and stockholders' equity increased from .24% for the first quarter of 2012 to .26% for the first quarter of 2013.

Non-interest Income

The components of non-interest income were as follows (in thousands):



                                                 Three months ended March 31,
                                                   2013                 2012
    Service charges on deposit accounts       $         1,701       $       1,604
    Trust fee income                                    1,241               1,114
    Bank owned life insurance (BOLI) income               498                 521
    Brokered loan fees                                  4,744               3,651
    Swap fees                                           1,652                 797
    Other                                               1,445               1,503

    Total non-interest income                 $        11,281       $       9,190

Non-interest income increased $2.1 million during the three months ended March 31, 2013 compared to the same period of 2012. This increase is primarily related to an increase of $1.1 million in brokered loan fees due to an increase in our mortgage warehouse lending volume. Swap fee income increased $855,000 during the three months ended March 31, 2013 compared to the same period of 2012 due to an increase in swap transactions. Swap fees are fees related to customer swap transactions and are received from the institution that is our counterparty on the transaction. See Note 11 - Derivative Financial Instruments for further discussion.

While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new lines of business or expand existing lines of business. Any new product introduction or new market entry could place additional demands on capital and managerial resources.

Non-interest Expense

The components of non-interest expense were as follows (in thousands):



                                                   Three months ended March 31,
                                                     2013                 2012
  Salaries and employee benefits                $       33,541       $       29,019
  Net occupancy expense                                  3,857                3,604
  Marketing                                              3,972                2,823
  Legal and professional                                 3,940                3,991
  Communications and technology                          3,122                2,483
  Allowance and other carrying costs for OREO              430                3,342
  Other                                                  6,838                7,014

  Total non-interest expense                    $       55,700       $       52,276

Non-interest expense for the first quarter of 2013 increased $3.4 million, or 7%, to $55.7 million from $52.3 million in the first quarter of 2012. The increase is primarily attributable to a $4.5 million increase in salaries and employee benefits, which was primarily due to general business growth and incentive expense directly related to our performance and the increase in the price of our common stock.

Marketing expense for the three months ended March 31, 2013 increased $1.1 million, or 39%, compared to the same quarter in 2012, which was primarily due to general business growth and treasury management programs.


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For the three months ended March 31, 2013, allowance and other carrying costs for OREO decreased $2.9 million, to $430,000, $71,000 of which related to deteriorating values of assets held in OREO. The $71,000 valuation expense in the first quarter of 2013 related to direct write-downs of the OREO balance.

Analysis of Financial Condition

Loan Portfolio

Total loans net of allowance for loan losses at March 31, 2013 decreased $592.5 million from December 31, 2012 to $9.4 billion. Combined commercial, construction and real estate loans increased $139.9 million, offset by a combined decrease in consumer loans and leases of $4.9 million. Loans held for sale decreased $597.4 million from December 31, 2012 as a result of seasonal trends.

Loans were as follows as of the dates indicated (in thousands):

                                                      March 31,        December 31,
                                                        2013               2012
 Commercial                                          $ 4,155,683      $    4,106,419
 Construction                                            760,964             737,637
 Real estate                                           1,959,808           1,892,451
 Consumer                                                 17,464              19,493
 Leases                                                   66,603              69,470

 Gross loans held for investment                       6,960,522           6,825,470
 Deferred income (net of direct origination costs)       (40,511 )           (39,935 )
 Allowance for loan losses                               (75,000 )           (74,337 )

 Total loans held for investment, net                  6,845,011           6,711,198
 Loans held for sale                                   2,577,830           3,175,272

 Total                                               $ 9,422,841      $    9,886,470

We continue to lend primarily in Texas. As of March 31, 2013, a substantial majority of the principal amount of the loans held for investment in our portfolio was to businesses and successful professionals and entrepreneurs in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions in Texas. The risks created by these concentrations have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is appropriate to cover estimated losses on loans at each balance sheet date.

We originate a substantial majority of all the loans held for investment. We also participate in syndicated loan relationships, both as a participant and as an agent. As of March 31, 2013, we have $1.2 billion in syndicated loans, $323.1 million of which we acted as agent. All syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other loans originated by us. In addition, as of March 31, 2013, none of our syndicated loans were on non-accrual.

Loans held for sale consist of legal ownership interests purchased in single-family residential mortgages funded through our warehouse lending group. These loans are typically on our balance sheet for 10 to 20 days or less. We have agreements with mortgage lenders and purchase legal ownership interest in individual loans they originate. All loans are underwritten consistent with established programs for permanent financing with financially sound investors. Substantially all loans are conforming loans or loans eligible for sale to federal agencies or government sponsored entities.

Summary of Loan Loss Experience

The provision for credit losses is a charge to earnings to maintain the reserve for loan losses at a level consistent with management's assessment of the loan portfolio in light of current economic conditions and market trends. We recorded a provision of $2.0 million during the first quarter of 2013 compared to $3.0 million in the first quarter of 2012 and $4.5 million in the fourth quarter of 2012. We have experienced improvements in credit quality and seen levels of reserves and provision decrease. We do continue to maintain


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an unallocated reserve component to allow for continued uncertainty in economic and other conditions affecting the quality of the loan portfolio. We believe the level of unallocated reserves at March 31, 2013 continues to be warranted due to the ongoing weak economic environment which has produced more frequent losses, including those resulting from fraud by borrowers.

The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an appropriate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of the borrower, changes in the value of pledged collateral, and general economic conditions. All loan commitments rated substandard or worse and greater than $500,000 are specifically reviewed for loss potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management's judgment, should be charged off.

The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates. The allocations are adjusted for certain qualitative factors for such things as general economic conditions, changes in credit policies and lending standards. Changes in the trend and severity of problem loans can cause the estimation of losses to differ from past experience. In addition, the reserve considers the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including the economic and business conditions affecting key lending areas, credit quality trends and general growth in the portfolio. The allowance is considered appropriate, given management's assessment of potential losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company's market areas and other factors.

The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans are evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve adequacy relies primarily on our loss history. The review of reserve adequacy is performed by executive management and presented to our board of directors for their review, consideration and ratification on a quarterly basis.

The combined reserve for credit losses, which includes a liability for losses on unfunded commitments, totaled $79.0 million at March 31, 2013, $78.2 million at December 31, 2012 and $74.9 million at March 31, 2012. Due to the growth in loans, the total reserve percentage decreased to 1.14% at March 31, 2013 from 1.15% and 1.29% of loans held for investment at December 31, 2012 and March 31, 2012, respectively. The total reserve percentage had increased in 2010 as a result of the effects of national and regional economic conditions on borrowers and values of assets pledged as collateral. The combined reserve percentage is starting to trend down as we recognize losses on loans for which there were specific or general allocations of reserves and see improvement in our overall credit quality. The overall reserve for loan losses continues to result from consistent application of the loan loss reserve methodology as described above. At March 31, 2013, we believe the reserve is sufficient to cover all expected losses in the portfolio and has been derived from consistent application of the methodology described above. Should any of the factors considered by management in evaluating the adequacy of the allowance for loan losses change, our estimate of expected losses in the portfolio could also change, which would affect the level of future provisions for loan losses.


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Activity in the reserve for loan losses is presented in the following table (in thousands):

                                       Three months ended            Year ended            Three months ended
                                           March 31,                December 31,               March 31,
                                              2013                      2012                      2012
Reserve for loan losses:
Beginning balance                     $             74,337         $       70,295         $             70,295
Loans charged-off:
Commercial                                           1,648                  6,708                          462
Real estate - term                                     105                    899                          559
Consumer                                                19                     49                           -
Equipment leases                                        -                     204                           95

Total charge-offs                                    1,772                  7,860                        1,116
Recoveries:
Commercial                                             397                    832                          159
Real estate - construction                              -                      10                           -
Real estate - term                                       8                    812                          108
Consumer                                                30                     33                            5
Equipment leases                                       121                    108                           16

Total recoveries                                       556                  1,795                          288

Net charge-offs                                      1,216                  6,065                          828
Provision for loan losses                            1,879                 10,107                        2,525

Ending balance                        $             75,000         $       74,337         $             71,992

Reserve for off-balance sheet
credit losses:
Beginning balance                     $              3,855         $        2,462         $              2,462
Provision for off-balance sheet
credit losses                                          121                  1,393                          475

Ending balance                        $              3,976         $        3,855         $              2,937


Total reserve for credit losses       $             78,976         $       78,192         $             74,929

Total provision for credit
losses                                $              2,000         $       11,500         $              3,000

Reserve for loan losses to loans
held for investment(2)                                1.08 %                 1.10 %                       1.24 %
Net charge-offs to average
loans(1) (2)                                          0.07 %                 0.10 %                       0.06 %
Total provision for credit
losses to average loans(2)                            0.12 %                 0.19 %                       0.21 %
Recoveries to total charge-offs                      31.38 %                22.84 %                      25.81 %
Reserve for off-balance sheet
credit losses to off-balance
sheet credit commitments                              0.13 %                 0.14 %                       0.14 %
Combined reserves for credit
losses to loans held for
investment(2)                                         1.14 %                 1.15 %                       1.29 %

Non-performing assets:
Non-accrual loans(5)                  $             43,424         $       55,833         $             50,160
OREO(4)                                             14,426                 15,991                       32,601
Other repossessed assets                                -                      42                           54

Total                                 $             57,850         $       71,866         $             82,815



Restructured loans                    $             11,755         $       10,407         $             12,582

Loans past due 90 days and still
accruing(3)                                         12,614                  3,674                        5,941

Reserve as a percent of
non-performing loans                                  1.7x                   1.3x                         1.4x

(1) Interim period ratios are annualized.

(2) Excludes loans held for sale.

(3) At March 31, 2013, December 31, 2012 and March 31, 2012, loans past due 90 days and still accruing includes premium finance loans of $4.4 million, $2.8 million and $4.4 million, respectively. These loans are generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date. In addition, the total includes a $7.9 million loan that is expected to pay off during the second quarter of 2013.

(4) At March 31, 2013, December 31, 2012 and March 31, 2012, OREO balance is net of $4.5 million, $5.6 million and $6.3 million valuation allowance, respectively.

(5) As of March 31, 2013, December 31, 2012 and March 31, 2012, non-accrual loans included $16.9 million, $19.6 million and $11.4 million, respectively, in loans that met the criteria for restructured.


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Non-performing Assets

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