Texas Capital Bancshares, Inc. — 2015 Form 10-K
Business context and reporting period. This annual filing covers the year ended December 31, 2015, with comparisons primarily to 2014. Texas Capital Bancshares is a bank holding company whose business is conducted through Texas Capital Bank. It focuses on commercial, real estate, construction and mortgage finance lending, mainly in Texas, with selected national lending businesses. The company launched its mortgage correspondent aggregation program in the third quarter of 2015 and closed its Cayman Islands branch during 2015.
Key financial results and condition
- Earnings: Net income was $144.9 million, up 6% from $136.4 million. Net income available to common shareholders was $135.1 million; diluted EPS was $2.91 versus $2.88. Return on average assets fell to 0.79% from 1.05%, and return on average equity fell to 9.65% from 11.31%.
- Revenue and margins: Net interest income rose 17% to $556.5 million; non-interest income increased to $47.7 million from $42.5 million. Net interest margin contracted 64 basis points to 3.14% from 3.78%, reflecting lower loan yields and a larger balance of low-yield liquidity assets. The efficiency ratio improved slightly to 54.04% from 54.88%.
- Credit costs and asset quality: Provision for credit losses increased to $53.3 million from $22.0 million. Non-accrual loans rose to $179.8 million from $43.3 million, and total non-performing assets increased to $180.3 million from $43.9 million. Management attributed the deterioration primarily to energy exposure amid falling oil and gas prices. The allowance for loan losses was $141.1 million; combined allowance for credit losses was $150.1 million.
- Balance sheet and growth: Total assets grew 19% to $18.9 billion. Gross loans held for investment increased to $16.8 billion from $14.3 billion, while total deposits grew to $15.1 billion from $12.7 billion. Non-interest-bearing demand deposits were $6.4 billion. Liquidity assets were $2.7 billion, and cash and cash equivalents were $1.8 billion at year-end.
- Cash flow: Operating cash flow was $68.9 million, down from $157.7 million. Investing activities used $2.46 billion, principally reflecting loan growth; financing activities provided $2.85 billion, chiefly from deposit growth and borrowings. Cash and cash equivalents increased by $460.4 million during the year.
- Debt and capital: Borrowings totaled $2.04 billion, including $1.5 billion of FHLB borrowings, $286 million of subordinated notes and $113.4 million of trust preferred debentures. Stockholders’ equity was $1.62 billion. At year-end, the Bank’s CET1 ratio was 7.82%, total risk-based capital ratio 10.57%, and leverage ratio 8.75%; the Bank was classified as well-capitalized. The filing notes that year-end mortgage finance balances can materially affect reported capital ratios.
Material changes versus 2014
- Net income increased $8.5 million, but provision expense rose $31.3 million and non-interest expense rose $41.4 million, offsetting much of the growth in net interest income.
- Average earning assets increased by $5.1 billion, including $2.9 billion in average net loans and $2.3 billion in liquidity assets. The larger low-yield liquidity position contributed to lower NIM and ROA.
- Non-interest expense increased 15% to $326.5 million, led by salaries and benefits, up $23.6 million, and FDIC assessments, up $6.3 million. Management cited business growth, infrastructure investment and higher assets.
- Non-accrual loans increased sharply, with energy-related non-performing assets totaling $120.4 million. Net charge-offs were $11.1 million versus $6.3 million, and the combined allowance-to-loans ratio excluding mortgage finance loans increased to 1.28% from 1.06%.
- Deposits grew, while uninsured deposits declined to 56% of total deposits from 72%. Relationship brokered deposits were $1.34 billion at year-end; the company reported no traditional brokered deposits.
Outlook, risks and unusual items
- The filing provides no quantified earnings, revenue, loan-growth or margin guidance. Management describes continued organic growth and credit-quality discipline as strategic priorities, while acknowledging that growth requires capital, deposits, staffing and investment in systems and compliance.
- Management was monitoring the effects of depressed and volatile energy prices and said the decline had been reflected in the year-end allowance. It stated it did not then expect commodity-price weakness to materially adversely affect financial position, but also warned that direct and spillover impacts could be material; energy-related non-performing assets had already risen substantially.
- Key risks include Texas and commercial borrower concentration, real estate collateral values, deposit concentration and potential rapid withdrawals, liquidity needs, interest-rate and mortgage-market volatility, regulatory requirements, cyber and vendor risks, and the adequacy of loan-loss estimates. More than half of deposits exceeded the $250,000 FDIC insurance limit, according to the filing’s risk discussion.
- The new mortgage correspondent aggregation business had $86.1 million of loans held for sale at year-end and $39.1 million of mortgage loans sold to GSEs during 2015. Estimated repurchase and indemnification exposure was $20,000; the company reported no such losses in 2015 and noted it lacked its own historical claims experience for the new business.
- The company paid $9.8 million of preferred dividends and did not pay common dividends; it said it did not expect common dividends in the foreseeable future. Management expected no material adverse effect from pending legal matters. The auditor issued unqualified opinions on the financial statements and internal controls; management also reported effective disclosure controls.
Important facts for investors to verify
- Whether energy-related credit deterioration, criticized loans and non-accrual balances continued to rise after year-end, and whether the allowance proved adequate.
- How much of loan and deposit growth is sustainable and how the liquidity portfolio affects net interest margin, returns and funding costs.
- The composition, stability and insurance status of deposits, including relationship brokered deposits and large commercial balances.
- Capital headroom under Basel III requirements, particularly given month-end mortgage finance fluctuations and growth plans.
- Profitability, hedging effectiveness and potential repurchase obligations as the mortgage correspondent aggregation business develops.
- Whether operating cash flow and expense growth improve as loan growth, compliance investment and infrastructure build-out evolve.