Texas Capital Bancshares, Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013, with comparative results for 2012 and 2011. Texas Capital Bancshares is a bank holding company whose business is conducted through Texas Capital Bank. The bank focuses on middle-market businesses, professionals and entrepreneurs, primarily in Texas, and operates in Austin, Dallas, Fort Worth, Houston and San Antonio. This is an annual filing; fourth-quarter results are included below where disclosed.
Financial performance and position
- Earnings: 2013 net income was $121.1 million, essentially unchanged from $120.7 million in 2012. Net income available to common shareholders fell to $113.7 million from $120.7 million, principally reflecting $7.4 million of preferred dividends after the 2013 preferred-stock issuance. Diluted EPS was $2.72 versus $3.00. Return on average assets declined to 1.17% from 1.35%, and return on average equity to 12.82% from 16.93%.
- Fourth quarter: Net income was $30.4 million and net income available to common shareholders was $27.9 million; diluted EPS was $0.67. Net interest income was $111.5 million, provision for credit losses $5.0 million, and non-interest expense $70.3 million.
- Income and margins: Net interest income increased 11% to $419.5 million, primarily on growth in average earning assets. Non-interest income was $44.0 million. Net interest margin declined 19 basis points to 4.22%; the efficiency ratio rose to 55.39% from 52.35%.
- Expenses and credit costs: Non-interest expense increased 17% to $256.7 million, including higher staffing, growth-related and technology costs, a CEO transition-related charge and increased FDIC assessment expense. Provision for credit losses rose to $19.0 million from $11.5 million, largely reflecting loan growth. Net charge-offs were $4.9 million (0.05% of average loans), compared with $6.1 million (0.07%) in 2012.
- Growth and asset quality: Gross loans increased 13% to $11.32 billion; deposits rose 24% to $9.26 billion; and assets were approximately $11.71 billion. Non-performing assets declined to $37.5 million from $71.9 million, and non-accrual loans fell to $32.4 million from $55.8 million. The allowance for loan losses was $87.6 million; combined credit-loss reserves, including off-balance-sheet reserves, were $92.3 million.
- Cash flow: Continuing-operations operating cash flow was $189.1 million; investing cash flow was negative $1.276 billion and financing cash flow was positive $1.034 billion. Cash and cash equivalents decreased $52.4 million to $153.9 million. Loan growth was a major investing cash use, while deposit growth was a major funding source.
- Debt, liquidity and capital: Period-end borrowings totaled $1.25 billion, including $111.0 million of subordinated notes and $113.4 million of trust-preferred subordinated debentures. The bank had $701.8 million of additional FHLB borrowing capacity and $890 million of unused federal-funds lines. At year-end, the bank’s total risk-based capital ratio was 10.27%, Tier 1 risk-based ratio 7.55%, and Tier 1 leverage ratio 8.96%; the filing reported the bank as well capitalized. Stockholders’ equity was $1.10 billion.
Material changes and unusual items
- Loan growth shifted portfolio mix: construction loans increased to $1.26 billion from $738 million, while mortgage finance loans declined to $2.78 billion from $3.18 billion. Mortgage finance loans are generally held briefly in the warehouse business, but are classified as held for investment.
- Deposits grew strongly, including non-interest-bearing demand deposits, while borrowings declined from $2.17 billion to $1.25 billion. However, 67% of deposits were uninsured at year-end, up from 50% in 2012; relationship brokered deposits were 15.3% of deposits.
- The company issued $150 million of 6.50% non-cumulative preferred stock in March 2013 and paid $7.0 million of preferred dividends. It does not expect to pay common dividends in the foreseeable future.
- The company corrected the classification of mortgage finance loan cash flows from operating to investing activities in prior periods. The correction increased reported operating cash flows by $1.1 billion for 2012 and $885.9 million for 2011, with corresponding decreases in investing cash flows; the company said it did not materially misstate prior financial statements and earnings were unaffected.
- After regulatory guidance required a 100% risk weight for mortgage finance loans, the company amended its 2011 and 2012 Call Reports. The revised 2012 bank total risk-based capital ratio was 8.50%, below the 10% well-capitalized threshold, although above the adequately capitalized minimum. The change triggered a $3.0 million FDIC assessment paid in 2013. The bank was reported well capitalized at year-end 2013.
- Subsequent to year-end, the company raised $96.6 million net from a common-stock offering, and the bank issued $175.0 million of subordinated notes, producing $172.1 million net proceeds. Management said proceeds were available for general corporate purposes, debt retirement and loan-growth capital.
Outlook, commentary and risks
Management emphasized continued organic growth in Texas, recruiting experienced bankers, expanding lending and deposits, and maintaining credit discipline and expense controls. The filing provides no specific earnings, loan-growth or margin guidance. Management stated that it initially expected Basel III capital rules, effective for the company in 2015, to have no material impact and believed the company could meet the fully phased-in requirements.
- Key exposures include commercial and real-estate lending, construction/development credit, Texas economic concentration, energy-sector conditions, and continued rapid loan growth. Approximately 44% of funded loans were commercial; 30% were secured primarily by real estate. About 32% of construction loans had interest reserves, although none of those loans were non-accrual at year-end.
- Funding risks include the high share of uninsured deposits, concentration in larger commercial depositors, and the potential for rapid withdrawals. Management also noted that a substantial portion of assets is in loans, while securities holdings are relatively small.
- Other risks include interest-rate sensitivity, competition, reliance on key bankers and vendors, cybercrime and fraud, litigation, and increasing regulatory and compliance requirements. The company had recently exceeded $10 billion in assets, bringing additional oversight and stress-testing requirements.
- The filing describes an ongoing wind-down of a discontinued residential mortgage business, including approximately $294,000 of loans held for sale and continuing investor repurchase requests. Management said market conditions could affect the timing, price and potential losses associated with disposition and repurchase exposures.
- Legal proceedings were described as arising in the ordinary course; management did not expect their disposition to have a material adverse impact. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile the cash-flow reclassification and assess the implications of the mortgage-finance loan accounting and its 100% regulatory risk weighting.
- Track uninsured and relationship-brokered deposit balances, depositor concentration, and available borrowing capacity against loan growth and liquidity needs.
- Monitor commercial, construction, real-estate and energy credit concentrations, potential problem loans, and the adequacy of reserves as the portfolio expands.
- Assess whether revenue growth can offset expense growth and margin compression, including higher personnel, incentive-compensation and regulatory costs.
- Confirm the effect of the post-year-end equity and subordinated-debt offerings on capital ratios, dilution, interest costs and funding plans.
- Note that the filing reports total assets as $11.714 billion in the audited balance sheet and $11.714 billion with a slightly different value in selected financial data; verify the exact reported figure in the filed statements.