Texas Capital Bancshares, Inc. — 2016 Form 10-K
Business context and period. The company is a bank holding company whose business is conducted primarily through Texas Capital Bank. It serves commercial businesses and professionals in Texas and operates specialized lending businesses nationally. This filing reports the fiscal year ended December 31, 2016; comparisons are primarily with 2015.
Financial performance and condition
- Profit: Net income was $155.1 million, up 7% from $144.9 million. Net income available to common shareholders was $145.4 million; diluted EPS was $3.11 versus $2.91. Fourth-quarter net income was $48.4 million and diluted EPS was $0.96.
- Revenue and margin: Net interest income rose 15% to $639.8 million, mainly on growth in average earning assets. Non-interest income increased 27% to $60.8 million, including higher brokered-loan and mortgage correspondent aggregation (MCA) fees. Net interest margin was unchanged at 3.14%; funding costs increased.
- Credit costs and asset quality: Provision for credit losses increased to $77.0 million from $53.3 million. Net charge-offs rose to $47.6 million from $11.1 million, primarily reflecting energy-related losses. Non-accrual loans were $167.8 million, down from $179.8 million; non-performing assets were $186.8 million, slightly above $180.3 million. The allowance for loan losses was $168.1 million; combined allowance for credit losses was $179.5 million.
- Expenses and returns: Non-interest expense increased 17% to $382.4 million, led by compensation, business build-out, technology and FDIC assessments. ROA declined to 0.74% from 0.79% and ROE to 9.27% from 9.65%.
- Balance sheet and liquidity: Total assets grew 15% to $21.7 billion. Gross loans held for investment were $17.6 billion, including $4.5 billion of mortgage finance loans; loans held for sale rose to $968.9 million from $86.1 million as MCA expanded. Deposits increased 13% to $17.0 billion. Liquidity assets were $2.7 billion, up from $1.7 billion.
- Cash flow: Operating cash flow was negative $726.3 million, largely reflecting MCA loan purchases exceeding sales and repayments. Investing cash outflow was $850.2 million; financing cash inflow was $2.6 billion, including deposit growth and common-stock proceeds. Cash and cash equivalents ended the year at $2.84 billion.
- Debt and capital: Borrowings totaled $2.50 billion, including $2.0 billion of FHLB advances, $281.0 million of subordinated notes and $113.4 million of trust-preferred subordinated debentures. The December equity offering raised $236.4 million net. The Bank reported CET1 of 8.45%, total risk-based capital of 11.19% and leverage of 8.42%, and was classified as well capitalized.
Material changes versus 2015
- Net income increased, but credit provision and charge-offs rose sharply amid energy portfolio deterioration; energy net charge-offs were $36.0 million in 2016 versus none in 2015.
- Assets, deposits and loans grew, while the company held more liquidity and expanded MCA. MCA loans held for sale reached $968.9 million at year-end.
- Non-interest expense increased $55.9 million, and average funding costs rose. Despite higher asset yields, net interest margin remained flat.
- The common-stock offering added capital but diluted shareholders; management cited this and higher credit provision as factors in lower ROE.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or growth guidance. Management describes continued organic growth, loan and deposit expansion, new business lines and credit-quality discipline as strategic priorities, while cautioning that actual results may differ materially from expectations.
- Key risks include energy-sector and Texas economic exposure, commercial and real-estate credit concentrations, large borrower relationships, deposit concentration and liquidity needs, interest-rate sensitivity, competition, regulatory costs, cybersecurity and third-party vendor risk.
- Energy loans were approximately $996 million, or 5.7% of gross loans held for investment; energy non-accruals were $121.5 million. Management said it was proactively managing the portfolio and believed reserves were appropriate, but acknowledged continued uncertainty.
- Uninsured deposits represented 54% of deposits. MCA also creates mortgage pricing, interest-rate, servicing-rights and loan repurchase/indemnification risks; the estimated mortgage repurchase exposure was $835,000 at year-end.
- Commitments to extend credit totaled $5.70 billion and letters of credit $171.3 million. Management did not expect the disposition of ordinary-course legal matters to materially affect financial statements or results.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Track energy criticized loans, non-accruals, charge-offs, reserve adequacy and the effect of energy conditions on Texas borrowers.
- Assess whether MCA growth, loan sale volumes, servicing-rights valuations and repurchase reserves remain profitable and adequately controlled.
- Review liquidity under stress, including the high share of uninsured deposits, relationship-brokered funding and reliance on FHLB borrowings.
- Reconcile the capital ratios: the selected financial data table and the regulatory-capital table appear to label company Tier 1 and total capital ratios differently. Confirm the applicable entity and ratio definitions in the detailed schedules.
- Evaluate the effect of rising rates on deposit costs, borrowers’ repayment capacity, mortgage volumes and net interest income; the filing’s sensitivity model estimates higher net interest income under rate-increase scenarios but is assumption-dependent.