Texas Capital Bancshares, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. The company is a Texas-focused commercial bank holding company operating through Texas Capital Bank, serving businesses and professionals, with additional mortgage-finance lending.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $477.0 million | $419.5 million |
| Net income | $136.4 million | $121.1 million |
| Net income available to common shareholders | $126.6 million | $113.7 million |
| Diluted earnings per share | $2.88 | $2.72 |
| Net interest margin | 3.78% | 4.22% |
| Return on average assets / equity | 1.05% / 11.31% | 1.17% / 12.82% |
| Efficiency ratio | 54.88% | 55.39% |
| Total assets | $15.90 billion | $11.72 billion |
| Gross loans | $14.31 billion | $11.32 billion |
| Total deposits | $12.67 billion | $9.26 billion |
| Stockholders’ equity | $1.48 billion | $1.10 billion |
Cash flow: Operating activities provided $152.0 million; investing activities used $2.98 billion, largely reflecting loan growth; financing activities provided $4.00 billion. Cash and cash equivalents ended the year at $1.33 billion.
Credit and capital: Provision for credit losses was $22.0 million, up from $19.0 million. Net charge-offs were $6.3 million; nonperforming assets were $43.9 million, versus $37.5 million. The combined reserve for credit losses was $108.0 million. At year-end, the Bank’s total risk-based capital ratio was 10.57% and leverage ratio was 9.75%; it was classified as well capitalized under applicable prompt-corrective-action standards.
Debt and liquidity: Borrowings totaled $1.59 billion, including $1.10 billion of FHLB borrowings, $286 million of subordinated notes and $113.4 million of trust-preferred subordinated debentures. The Bank reported $3.60 billion of additional FHLB borrowing capacity and $1.19 billion of unused Federal funds lines. Securities available for sale were $41.7 million. Uninsured deposits were reported as 72% of total deposits.
Material changes versus 2013
- Net income rose $15.3 million, mainly because net interest income increased $57.5 million as average earning assets expanded. Asset growth included $2.4 billion of higher average net loans.
- Net interest margin fell 44 basis points to 3.78%, reflecting lower loan yields, a greater share of lower-yielding mortgage-finance loans, higher liquidity balances and the cost of new subordinated debt.
- Non-interest expense increased $28.4 million to $285.1 million, including higher compensation, occupancy, technology, professional fees and FDIC assessments. Non-interest income declined $1.5 million, mainly due to lower brokered-loan and swap fees.
- Loans grew 26% and deposits grew approximately 37% year over year. Two common-stock offerings raised $256.2 million net, and the Bank issued $175 million of subordinated notes. These capital actions supported growth but increased share count and contributed to lower return on equity.
- Nonperforming assets increased $6.4 million, although the ratio of nonperforming assets to loans plus OREO improved slightly to 0.31% from 0.33%.
Outlook, commentary and risks
- Management’s strategy is continued organic growth in Texas and selected regional or national lending businesses, while maintaining credit standards and investing in infrastructure. The filing gives no specific earnings or revenue guidance.
- Management said it did not expect the then-current decline in oil and gas prices to have a material effect on financial position, but was monitoring the impact. Approximately 7% of loans were to energy-related borrowers; adverse energy-sector conditions could also affect the broader Texas economy and collateral values.
- Management anticipated no material impact from Basel III capital rules and believed the company and Bank would meet fully phased-in requirements. The company became subject to annual regulatory stress testing; results were due to regulators in March 2015, with summary disclosure planned for June 2015.
- Key risks include commercial and real-estate credit concentrations, loan-loss-estimate uncertainty, interest-rate and margin pressure, deposit concentration and rapid withdrawal risk, reliance on borrowings for mortgage-finance lending, regulatory and compliance costs, and cybersecurity/vendor risks. The filing notes that more than half of deposits in recent periods were from customers with balances above the $250,000 FDIC insurance limit.
- The company reported no common-stock dividends and did not expect to pay them in the foreseeable future. Management did not expect the disposition of pending ordinary-course legal matters to materially affect the financial statements or results. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether energy-price declines or related economic effects are increasing criticized loans, nonaccruals, charge-offs or required reserves.
- Whether loan growth can be sustained without further deterioration in credit quality or continued pressure on net interest margin and returns.
- The stability and cost of funding, particularly uninsured and relationship-brokered deposits, and the company’s reliance on FHLB capacity and other borrowings.
- How regulatory stress-test results and fully phased-in capital rules affect capital needs, growth, dividends and earnings.
- The effects of 2014 equity issuance and outstanding warrants and awards on diluted share count and per-share earnings.