Texas Capital Bancshares, Inc. — 2017 Form 10-K
Business context and reporting period. The company is a Texas-focused bank holding company whose principal business is commercial lending and banking, with mortgage finance and other specialized lending lines serving regional and national customers. This filing covers the fiscal year ended December 31, 2017; comparisons are primarily with 2016.
Financial results and condition
- Earnings: Net income was $197.1 million, up 27% from $155.1 million. Net income available to common stockholders was $187.3 million, or $3.73 per diluted share, versus $145.4 million, or $3.11. Return on average assets was 0.87% (0.74% in 2016); return on average equity was 9.51% (9.27%).
- Interest income and margin: Interest income was $879.3 million and net interest income was $761.3 million, up 19% from $639.8 million. Net interest margin rose to 3.49% from 3.14%, as loan yields and earning-asset yields increased with rates and asset growth. Funding costs also rose: average cost of interest-bearing liabilities increased to 0.97% from 0.58%.
- Other income and expenses: Non-interest income increased to $74.3 million from $60.8 million, primarily from mortgage servicing income. Non-interest expense rose to $465.9 million from $382.4 million; the efficiency ratio increased to 55.75% from 54.58%.
- Credit costs and asset quality: Provision for credit losses fell to $44.0 million from $77.0 million; net charge-offs were $29.8 million versus $47.6 million. Non-accrual loans declined to $101.4 million from $167.8 million, and non-performing assets to $113.2 million from $186.8 million. Potential problem loans nevertheless increased to $49.1 million from $19.3 million. The allowance for loan losses was $184.7 million; total allowance including unfunded commitments was $193.7 million.
- Balance sheet and funding: Total assets grew 15.6% to $25.1 billion. Gross loans held for investment were $20.8 billion, up from $17.6 billion; deposits rose 12.4% to $19.1 billion. Liquidity assets were $2.7 billion. Borrowings totaled $3.56 billion, including $2.8 billion of FHLB advances; subordinated notes and trust-preferred debentures totaled $394.8 million. Stockholders’ equity was $2.20 billion.
- Cash flow: Operating activities provided $132.2 million, investing activities used $3.22 billion, and financing activities provided $3.15 billion. Cash and cash equivalents increased $66.2 million to $2.91 billion.
- Capital: The Bank reported a CET1 ratio of 8.28%, total risk-based capital ratio of 10.67%, and leverage ratio of 8.59% at year-end, and was classified as well capitalized. The company’s CET1 ratio was 8.45%.
Material changes versus 2016
- Net interest income grew with higher loan balances and rising loan yields; the net interest margin expanded 35 basis points.
- Lower credit-loss provision and improving energy-credit performance supported earnings. Energy non-accruals fell to $65.2 million from $121.5 million; 2017 energy net charge-offs were $20.0 million, compared with $36.0 million in 2016.
- Operating costs increased substantially, including compensation, marketing, technology and servicing costs. Mortgage servicing rights increased to $85.3 million net from $28.5 million.
- The Tax Cuts and Jobs Act prompted a $17.6 million deferred-tax-asset write-off, contributing to a 40% effective tax rate versus 36% in 2016. The 2017 fourth quarter included $50.1 million of income tax expense and net income of $44.7 million.
- Assets and deposits expanded, while uninsured deposits rose to 59% of total deposits from 54%.
Outlook, risks and unusual items
- Management expected the reduction in the federal corporate tax rate to 21% to increase after-tax net income in 2018 and future years, and expected tax savings to recover the deferred-tax-asset write-off in 2018. The filing provides no specific earnings or revenue guidance; management cautioned that competition, customer borrowing behavior and other factors could reduce the anticipated benefit.
- Key exposures include commercial and real-estate credit concentration, Texas economic conditions, energy-price volatility, interest-rate and funding costs, and mortgage-market, servicing-rights and repurchase risks. Energy loans were approximately 6% of total loans; more than half of total loan exposure was outside Texas, but Texas remained a significant concentration.
- Liquidity depends substantially on customer deposits and wholesale borrowing. Uninsured deposits were 59% of deposits, and the company disclosed $7.19 billion of commitments to extend credit and letters of credit. Mortgage finance balances can vary materially with month-end activity.
- Unusual 2017 charges included the $17.6 million tax-related write-off, a $6.1 million write-down of one foreclosed property, and a $2.8 million MSR impairment related primarily to an anticipated Ginnie Mae MSR sale in early 2018. The filing reports $1.3 million of estimated exposure for mortgage-loan repurchase and indemnification obligations.
- Management identified cyber and vendor risk, regulatory and compliance costs, and the potential effect of hurricanes and other adverse events as additional risks. A $4.5 million provision for the potential impact of Hurricanes Harvey and Irma contributed to the qualitative loan-loss reserve.
- No material adverse effect was expected from pending legal matters. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether improving energy credit metrics and lower provisions persist, and how the increase in potential problem loans develops.
- Whether loan growth, rising deposit costs and wholesale funding needs sustain margins and liquidity; monitor uninsured and relationship-brokered deposit concentrations.
- Whether the expected Tax Act benefit is realized after competition, customer demand and other tax-accounting adjustments.
- Performance and valuation of mortgage servicing rights, the planned Ginnie Mae MSR sale, and mortgage repurchase or indemnification claims.
- Credit quality and concentration within commercial, real-estate, financial-services and large borrower exposures, alongside the adequacy of reserves and capital as the portfolio grows.