Texas Capital Bancshares, Inc. (TCBI) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Amounts below are U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and reporting period
TCBI is a bank holding company whose principal subsidiary, Texas Capital Bank, serves commercial businesses, professionals and entrepreneurs in Texas, alongside specialized regional and national businesses including mortgage finance, lender finance and equipment leasing. The company emphasizes relationship banking and commercial lending.
On December 9, 2019, TCBI agreed to an all-stock merger of equals with Independent Bank Group (IBTX). TCBI common shareholders are to receive 1.0311 IBTX shares per TCBI share. Closing was expected in mid-2020, subject to shareholder and regulatory approvals and other conditions.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $979.7 million | $914.9 million |
| Provision for credit losses | $75.0 million | $87.0 million |
| Non-interest income | $92.4 million | $78.0 million |
| Non-interest expense | $590.0 million | $525.1 million |
| Net income | $322.9 million | $300.8 million |
| Net income available to common shareholders | $313.1 million | $291.1 million |
| Diluted earnings per share | $6.21 | $5.79 |
| Net interest margin | 3.28% | 3.78% |
| Return on average assets / common equity | 1.04% / 12.38% | 1.19% / 13.14% |
| Efficiency ratio | 55.03% | 52.89% |
For fourth-quarter 2019, net income was $73.9 million and diluted EPS was $1.42, compared with $71.9 million and $1.38 in fourth-quarter 2018. Fourth-quarter provision for credit losses was $17.0 million versus $35.0 million.
At year-end, total assets were $32.55 billion, up from $28.26 billion; total deposits were $26.48 billion, up from $20.61 billion. Gross loans held for investment were $24.74 billion, including $8.17 billion in mortgage finance loans; loans held for sale were $2.58 billion. Demand deposits were $9.44 billion. Liquidity assets totaled $4.26 billion, or 16.1% of deposits.
Cash and cash equivalents ended 2019 at $4.43 billion, compared with $3.08 billion a year earlier. Operating cash flow was negative $240.3 million, investing cash flow negative $2.28 billion, and financing cash flow positive $3.86 billion. The cash-flow profile reflects substantial mortgage-loan purchases and originations, deposit growth and funding activity.
Year-end borrowings included $2.40 billion of FHLB borrowings and $141.8 million of federal funds purchased and repurchase agreements. Subordinated notes were $282.1 million and trust preferred subordinated debentures were $113.4 million. The Bank’s reported capital ratios included CET1 of 8.96%, total risk-based capital of 10.92% and leverage of 8.20%; it was classified as well capitalized.
Material changes versus the prior period
- Net income available to common shareholders rose to $313.1 million from $291.1 million, while diluted EPS increased to $6.21 from $5.79. Net interest income increased, supported by higher average earning assets.
- Net interest margin fell by 50 basis points to 3.28%. Management attributed the decline to lower loan yields and higher funding costs; the average cost of deposits and borrowed funds rose to 1.31% from 1.02%.
- Non-interest expense rose $64.9 million, including increases in compensation, marketing, legal and professional, technology and servicing costs. Non-interest income included a $15.0 million legal-claims settlement.
- Mortgage finance loans held for investment grew to $8.17 billion from $5.88 billion and represented 33% of gross loans held for investment, versus 26% in 2018. Traditional loans held for investment declined slightly.
- Non-performing assets increased to $225.4 million from $80.5 million. Energy non-performing assets rose to $125.0 million from $37.5 million, and leveraged-lending non-performing assets rose to $73.2 million from $28.8 million. Net charge-offs were $74.3 million versus $77.8 million.
- Deposits increased substantially; uninsured deposits were 53% of total deposits, down from 57%. Liquidity assets increased to $4.26 billion from $2.87 billion.
Outlook, risks, contingencies and unusual items
- Outlook: Management said unchanged or further-declining interest rates in 2020 could hurt earnings, potentially more than for peers. No numerical earnings or revenue guidance is provided.
- Merger: Completion remained conditional. The agreement provides for a possible $115 million termination fee in specified circumstances. TCBI disclosed execution, integration, employee-retention, customer-retention, regulatory-approval and merger-value risks.
- Credit and concentration: The portfolio has significant commercial and real-estate exposure, with material Texas and energy risks. Energy loans were 5% of total loans; management reported energy-related problem assets remained elevated relative to the overall portfolio.
- Allowance and CECL: The allowance for loan losses was $195.0 million, and total allowance for credit losses, including unfunded commitments, was $203.7 million. Management estimated CECL adoption in 2020 would initially increase the allowance by approximately 5–6%, which it characterized as immaterial; actual effects depend on portfolio and economic conditions.
- Funding and commitments: Unfunded commitments to extend credit were $8.07 billion and letters of credit $261.4 million. Management highlighted reliance on commercial and large deposits, including balances above FDIC insurance limits, and variable mortgage-finance funding needs.
- Mortgage items: Mortgage servicing rights were $64.9 million net of a $5.8 million valuation allowance. Mortgage make-whole losses were $9.0 million in 2019, and estimated repurchase, indemnification and make-whole exposure was $3.6 million at year-end.
- Other risks: The filing identifies interest-rate sensitivity, LIBOR transition, cybersecurity and vendor dependence, regulatory requirements, mortgage-market volatility and natural disasters among material risks. A 100-basis-point rate increase was modeled to add $93.3 million to next-12-month net interest income; a 100-basis-point decrease was modeled to reduce it by $82.0 million. These are model estimates, not forecasts.
- Dividends and audit: TCBI had not paid common dividends and did not expect to do so in the foreseeable future. A $1.00 annual dividend for the combined company was anticipated after the merger, but was not assured. The auditor issued unqualified opinions on the financial statements and internal control; the allowance for loan losses was identified as a critical audit matter.
Most important facts for investors to verify
- Merger status, required approvals, closing timing, exchange terms and any termination-fee or integration developments.
- Whether the rise in non-performing assets—especially energy and leveraged lending—continues, and how charge-offs and criticized loans evolve.
- Whether deposit growth and funding costs support liquidity and margins, particularly given uninsured deposits and reliance on mortgage-related funding.
- The actual impact of CECL adoption and any resulting changes to the allowance, earnings or capital ratios.
- Whether mortgage finance volumes, MSR valuations and make-whole or repurchase losses remain sustainable.
- Whether the combined company declares the anticipated dividend; the filing makes clear that payment and amount are not guaranteed.