TEXAS CAPITAL BANCSHARES INC annual report, FY2023

Texas Capital Bancshares, Inc. — FY 2023 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023, with comparisons primarily to FY 2022. Texas Capital Bancshares is a Texas-based financial holding company; substantially all operations are conducted through Texas Capital Bank. Its business is primarily commercial banking, with mortgage finance, investment banking, wealth management and online banking operations.

Key financial metrics

MetricFY 2023 / year-end 2023FY 2022 / year-end 2022
Net interest income$914.1 million$875.8 million
Net interest margin3.17%2.79%
Net income$189.1 million$332.5 million
Net income available to common stockholders$171.9 million$315.2 million
Diluted earnings per share$3.54$6.18
Return on average assets / common equity0.64% / 6.15%1.04% / 11.33%
Total assets$28.36 billion$28.41 billion
Total deposits$22.37 billion$22.86 billion
Loans held for investment, net$20.09 billion$19.03 billion
Allowance for credit losses on loans$250.0 million$253.5 million
Cash and cash equivalents$3.24 billion$5.01 billion
Short-term borrowings / long-term debt$1.50 billion / $859.1 million$1.20 billion / $931.4 million

Performance, changes and financial condition

  • Net interest income rose 4.4%, and net interest margin improved 38 basis points, principally as higher market rates lifted loan and cash yields. This was partly offset by higher funding costs: average total deposit cost rose to 2.47% from 0.74%.
  • Net income fell 43%. The main comparison factor was a $248.5 million gain from the sale of the premium finance subsidiary recognized in 2022, with no comparable gain in 2023. FY 2023 non-interest income was $161.4 million versus $349.5 million.
  • Non-interest expense increased 4.0% to $756.9 million. FDIC assessment expense rose to $36.8 million, including a $19.9 million special assessment; salaries and technology costs also increased. The efficiency ratio deteriorated to 70.4% from 59.4%.
  • Operating cash flow was $373.7 million; investing cash outflow was $1.76 billion and financing cash outflow was $387.7 million. Cash and cash equivalents declined $1.77 billion during the year.
  • Period-end deposits decreased 2.1%. Estimated uninsured deposits declined to $9.7 billion, or 43% of deposits, from $12.4 billion, or 54%. Customer deposits were 95.9% of period-end deposits; brokered deposits were 4.1%.
  • Loan balances grew 5.5%. Commercial real estate loans increased to $5.50 billion, while mortgage finance loans were $3.98 billion. Approximately 59% of CRE collateral was in Texas; office loans represented 8.2% of the CRE portfolio.
  • Credit indicators weakened: non-accrual loans rose to $81.4 million from $48.3 million; criticized loans increased to $738.2 million from $513.2 million; and net charge-offs increased to $50.9 million from $19.9 million. The allowance for credit losses on loans was 1.23% of loans, versus 1.31%.
  • Regulatory capital remained above well-capitalized thresholds. At year-end, company CET1 and total capital ratios were 12.65% and 17.07%; bank ratios were 14.01% and 15.41%, respectively.
  • Available-for-sale securities had $347.1 million of unrealized losses at year-end; held-to-maturity securities had a $101.6 million fair-value shortfall to amortized cost. Accumulated other comprehensive loss improved to $362.0 million from $418.9 million.

Outlook, commentary, risks and unusual items

  • Management reported that liquidity and the balance sheet remained robust despite banking-sector volatility, and described capital as historically high. The filing provides no specific earnings, revenue, margin or balance-sheet guidance.
  • Management highlighted proactive client outreach and enhanced review of borrowing and liquidity positions in response to 2023 bank failures and industry concerns.
  • Interest-rate sensitivity modeling estimated next-12-month net interest income would change by +3.2% under a 200-basis-point increase and −9.1% under a 200-basis-point decrease. These are model results, not forecasts, and depend on assumptions about deposit pricing, prepayments and customer behavior.
  • Material risks include commercial credit and real estate exposure, Texas economic concentration, deposit volatility and uninsured deposits, funding costs, interest-rate and securities valuation risk, regulatory changes, cybersecurity and third-party/vendor risk. The company noted that past cyber incidents had not materially affected it, while warning that future incidents could.
  • The ACL model was revised during Q2 2023, including more granular loss estimates and revised allocation between loan and off-balance-sheet reserves. Management estimated that the model’s quantitative allowance would be about $220.4 million higher under the most severe downside scenario alone; this sensitivity excludes qualitative adjustments and is not a forecast of required reserves.
  • The company repurchased 1.82 million shares for an aggregate $105.0 million including excise tax. A new authorization of up to $150 million was approved in January 2024. The company has not paid common dividends and reported no plans to do so in the foreseeable future.
  • Management did not expect the disposition of pending legal matters to materially adversely affect the financial statements or results. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Most important facts for investors to verify

  • Whether rising criticized, non-accrual and charge-off measures persist, and how CRE and commercial exposures perform.
  • Deposit stability, uninsured-deposit concentration, funding mix and the cost of deposits relative to asset yields.
  • Liquidity capacity under stress, including availability and terms of FHLB, Federal Reserve and other borrowing sources.
  • Realized or potential effects of securities marks, AOCI and interest-rate movements on earnings and capital.
  • Allowance adequacy and the effects of the revised CECL model, forecast assumptions and qualitative overlays.
  • Execution of repurchases and capital plans, while maintaining regulatory capital and liquidity buffers.