Texas Capital Bancshares, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and reporting period
Texas Capital Bancshares is a bank holding company whose principal business is conducted through Texas Capital Bank. It serves commercial businesses and professionals, primarily in Texas, and operates national specialty businesses including mortgage finance and correspondent mortgage aggregation. The company terminated its proposed merger with Independent Bank Group by mutual agreement in May 2020; neither party paid a termination fee. Robert C. Holmes became President and CEO on January 25, 2021.
Financial results and key metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $868.8 million | $979.7 million |
| Provision for credit losses | $258.0 million | $75.0 million |
| Non-interest income | $185.5 million | $92.4 million |
| Non-interest expense | $704.4 million | $600.9 million |
| Net income | $66.3 million | $312.0 million |
| Net income available to common stockholders | $56.5 million | $302.3 million |
| Diluted earnings per share | $1.12 | $5.99 |
| Net interest margin | 2.39% | 3.28% |
| Return on average assets / common equity | 0.18% / 2.10% | 1.01% / 11.95% |
| Efficiency ratio | 66.81% | 56.04% |
Fourth-quarter 2020 net income was $60.2 million, or $1.14 per diluted share, compared with $64.4 million, or $1.23 per diluted share, in fourth-quarter 2019. Fourth-quarter provision for credit losses was $32.0 million, versus $17.0 million a year earlier.
Total assets were $37.7 billion at year-end, up from $32.5 billion. Deposits were $31.0 billion, up from $26.5 billion; loans held for investment, including mortgage finance, were $24.5 billion, slightly below $24.7 billion. Liquidity assets totaled $9.0 billion, compared with $4.3 billion. Investment securities increased to $3.2 billion from $239.9 million.
Cash and cash equivalents at year-end were $9.2 billion. Cash provided by operating activities was $2.64 billion, investing activities used $2.94 billion, and financing activities provided $5.08 billion. The filing’s cash flow statement reflects substantial mortgage loan purchases and repayments as part of normal mortgage finance activity.
Year-end borrowings included $3.0 billion of FHLB borrowings, $111.8 million of federal funds purchased and repurchase agreements, $282.5 million of subordinated notes, and $113.4 million of trust preferred subordinated debentures. The Bank reported a 9.48% CET1 ratio, 11.67% total risk-based capital ratio and 7.36% leverage ratio and was classified as well capitalized.
Material changes versus prior year
- Net income available to common stockholders fell about 81% year over year. The principal driver was a $183.0 million increase in provision for credit losses; higher non-interest expense also contributed.
- Net charge-offs rose to $198.8 million from $74.3 million, including $126.5 million in energy and $58.8 million in leveraged lending net charge-offs. The company said these largely related to previously identified problem loans.
- Net interest margin declined 89 basis points to 2.39%, as lower rates and a shift toward lower-yielding liquidity assets and mortgage finance loans outweighed lower funding costs.
- Non-interest income more than doubled, primarily from a $78.3 million improvement in gains on sales of loans held for sale, higher brokered loan fees and servicing income. This reflected favorable mortgage sale economics and higher mortgage finance volumes.
- Non-interest expense increased $103.5 million. Items included $18.0 million of workforce-reduction severance, $36.0 million of software asset write-offs, $5.9 million of PPP technology costs and $17.8 million of merger-related expenses. Management expected lower workforce and software-amortization costs to benefit results in the first half of 2021.
- The company adopted CECL on January 1, 2020. Adoption increased the allowance for credit losses by $9.1 million, with a corresponding retained-earnings adjustment and no impact to the income statement at adoption.
Outlook, commentary, risks and unusual items
Management gave no specific numerical earnings or revenue guidance. It said it intended to maintain above-average liquidity amid economic uncertainty, while seeking to improve core earnings through lower-cost funding and a better earning-asset mix. Management cited fourth-quarter expense improvements following workforce reductions and software write-offs.
COVID-19 and its economic effects remained major uncertainties. The company had funded $717.5 million of PPP loans, with $617.5 million outstanding at year-end. It had granted temporary payment modifications on 483 loans totaling $1.3 billion; 48 loans totaling $90.2 million remained on deferral at year-end. Potential problem loans increased to $193.2 million from $46.6 million, and criticized loans were $918.4 million, above the prior-year $584.1 million.
Energy loans declined to $766.2 million, or 3% of total loans held for investment, from $1.43 billion, or 6%. Energy non-accrual loans fell to $51.7 million from $125.0 million, primarily reflecting portfolio de-risking, charge-offs and resolutions. Real estate, commercial lending, Texas economic exposure and concentrated commercial deposit funding remain material risk areas. Uninsured deposits were 52% of total deposits at year-end.
Other notable considerations include mortgage servicing rights impairment expense of $20.2 million, compared with $5.8 million in 2019; continuing transition away from LIBOR; and the May 2020 merger termination. Management reported no material adverse impact expected from pending legal matters. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting, and identified the allowance for credit losses as a critical audit matter. The filing also describes revisions to prior-period financial information for an immaterial share-based liability accounting error; the company concluded prior periods were not materially misstated.
Most important facts for investors to verify
- Whether credit quality and loss trends stabilize: monitor criticized and potential problem loans, charge-offs, non-accruals, and allowance coverage, especially in commercial, energy and real estate portfolios.
- Whether the $9.0 billion liquidity position can be maintained and redeployed profitably, and whether deposit concentrations or uninsured balances create funding volatility.
- Whether margin and core earnings recover as rates, funding costs, mortgage finance volumes and earning-asset mix change.
- Whether stated expense savings materialize and how recurring operating costs compare with 2020’s severance, software write-offs and merger-related charges.
- How PPP forgiveness and servicing, mortgage repurchase obligations, MSR valuations and the LIBOR transition affect future results.
- Confirm the precise regulatory capital measures and trends: the filing reports company and Bank ratios separately, and period-end mortgage finance balances can affect reported ratios.