Texas Capital Bancshares, Inc. — 2021 Form 10-K
Business and reporting period. Texas Capital Bancshares is a Texas-focused commercial bank holding company with specialized lending and deposit businesses serving regional and national clients. This filing covers the fiscal year ended December 31, 2021, compared primarily with 2020. The Bank converted to a Texas state-chartered bank effective September 15, 2021; the company also received approval to launch its wholly owned broker-dealer, TCBI Securities.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $768.8 million | $851.3 million |
| Provision for credit losses | $(30.0) million benefit | $258.0 million expense |
| Non-interest income | $138.2 million | $203.0 million |
| Non-interest expense | $599.0 million | $704.4 million |
| Net income | $253.9 million | $66.3 million |
| Net income available to common stockholders | $235.2 million | $56.5 million |
| Diluted earnings per common share | $4.60 | $1.12 |
| Net interest margin | 2.07% | 2.34% |
| Return on average assets / common equity | 0.67% / 8.35% | 0.18% / 2.10% |
| Efficiency ratio | 66.0% | 66.8% |
- Balance sheet at year-end: Assets were $34.7 billion, down from $37.7 billion; deposits were $28.1 billion, down from $31.0 billion; and stockholders’ equity was $3.21 billion, up from $2.87 billion.
- Loans: Gross loans held for investment were $22.9 billion, down $1.6 billion year over year. Commercial loans rose to $9.9 billion; mortgage finance loans declined to $7.5 billion; real estate loans declined to $4.8 billion; energy loans were $721 million.
- Credit quality: Non-accrual loans held for investment declined to $72.5 million from $122.0 million. Net charge-offs were $12.9 million versus $198.8 million; criticized loans were $582.9 million versus $918.4 million. The loan allowance was $211.9 million, or 0.93% of loans, versus $254.6 million, or 1.04%.
- Cash flow: Operating activities provided $657 million; investing activities provided $1.23 billion; financing activities used $3.15 billion. Cash and cash equivalents ended at $7.95 billion, including $7.77 billion in interest-bearing deposits at other banks.
- Liquidity and funding: Estimated uninsured deposits were $16.1 billion, or 56% of total deposits. Year-end short-term and other borrowings were $2.20 billion, principally FHLB advances. Long-term debt was $928.7 million. The company reported $8.54 billion of unused FHLB borrowing capacity, $892 million of unused federal funds lines, and $2.41 billion of unused Federal Reserve borrowing capacity.
- Capital: Bank CET1, total risk-based capital, and leverage ratios were 11.30%, 13.42%, and 8.51%, respectively; the Bank was classified as well capitalized.
Changes, strategy, and management commentary
- Net income rose substantially from 2020, mainly because the credit-loss provision shifted to a $30 million benefit and non-interest expense fell by $105.3 million. These improvements were partly offset by lower net interest income and fee income.
- Net interest margin fell 27 basis points as asset yields declined and more earning assets were held in lower-yielding securities and bank deposits; lower funding costs provided a partial offset.
- Non-interest income declined $64.8 million, mainly reflecting the transition of the mortgage correspondent aggregation program to a third party and the sale of mortgage servicing rights. Non-interest expense included a $12 million write-off of software assets; 2020 included a $36 million software write-off and merger-related expense.
- Management’s September 2021 strategy emphasizes a technology-enabled operating model, greater investment in client-facing staff and technology, expanded treasury, wealth-management and investment-banking services, and stronger accountability and financial resilience. No specific earnings or revenue guidance was provided in the supplied filing text.
- The company issued $375 million of 4.00% subordinated notes due 2031 and the Bank issued $275 million of senior unsecured credit-linked notes due 2024. It also issued $289.7 million net proceeds of Series B preferred stock and redeemed its Series A preferred stock and $111 million of 6.50% subordinated notes due 2042.
- Management said it had ceased originating LIBOR-based products and began originating loans using the Bloomberg Short Term Yield Index in December 2021; it planned to transition remaining LIBOR-linked products over the following 18 months.
Risks, contingencies, and unusual items
- Key exposures include commercial and real-estate credit risk, Texas economic concentration, energy-sector sensitivity, and concentration in financial-services borrowers. Commercial loans were 43.2% of gross loans; financials excluding banks alone were 25.0%.
- Deposit concentration is a liquidity risk: 56% of deposits were estimated uninsured, and management notes that some large commercial and financial-services balances could be withdrawn quickly. Mortgage warehouse lending also brings variable funding needs and dependence on the secondary mortgage market.
- Interest-rate changes, LIBOR transition execution, COVID-19 and new variants, competition, cyber and vendor incidents, regulatory requirements, and climate and severe-weather impacts are identified risks. Model-based interest-rate analysis estimated that a parallel 100- or 200-basis-point increase would raise next-12-month net interest income by approximately $48.8 million or $125.0 million, respectively; actual results may differ.
- The allowance for credit losses is a significant estimate. The auditor identified it as a critical audit matter, citing judgment in qualitative adjustments and economic forecast selection. The audit report gives an unqualified opinion on the financial statements and internal controls. The filing’s auditor discussion gives total ACL of $229.1 million, which includes the $211.9 million loan allowance and approximately $17.3 million for off-balance-sheet commitments.
- Management did not expect the disposition of disclosed ordinary-course legal matters to have a material adverse effect. The filing reports no common-stock dividends and no plans to begin paying them in the foreseeable future.
Important facts for investors to verify
- Whether the lower credit-loss provision and reduced charge-offs are sustainable, and how future economic forecasts affect the allowance.
- The composition, stability, and rate sensitivity of uninsured and other large deposits, along with the Bank’s available contingent funding.
- How loan growth, especially in commercial and financial-services exposures, will affect credit concentration, asset quality, and capital needs.
- Execution costs and expected returns from the technology, hiring, and product-expansion strategy, including the economics of TCBI Securities.
- Completion and performance of the remaining LIBOR transition, including the terms and risk-transfer mechanics of the credit-linked notes.
- The impact of falling securities values reflected in 2021 other comprehensive loss of $63.5 million after tax, and potential effects on capital and liquidity.