Texas Capital Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; selected fourth-quarter results are also noted below. Texas Capital is a bank holding company whose business is conducted primarily through Texas Capital Bank. It focuses on commercial businesses and professionals in Texas, alongside specialized regional and national lending lines.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $1.164 billion | $879.3 million |
| Net interest income | $914.9 million | $761.3 million |
| Provision for credit losses | $87.0 million | $44.0 million |
| Non-interest income | $78.0 million | $74.3 million |
| Non-interest expense | $525.1 million | $465.9 million |
| Net income | $300.8 million | $197.1 million |
| Net income available to common shareholders | $291.1 million | $187.3 million |
| Diluted EPS | $5.79 | $3.73 |
| Net interest margin | 3.78% | 3.49% |
| Return on average assets / common equity | 1.19% / 13.14% | 0.87% / 9.51% |
| Efficiency ratio | 52.89% | 55.75% |
- At year-end, total assets were $28.26 billion, gross loans held for investment were $22.68 billion, deposits were $20.61 billion, and shareholders’ equity was $2.50 billion. Assets grew about 13% and deposits about 8% year over year; gross loans held for investment grew 9%.
- Cash and cash equivalents ended at $3.08 billion, including $2.87 billion of liquidity assets. Cash flow from operations was negative $679.7 million; investing activities used $2.0 billion, while financing activities provided $2.85 billion. The filing attributes operating cash-flow movements in part to mortgage-loan purchases and sales.
- Year-end borrowings included $629.2 million of federal funds purchased, $12.0 million of repurchase agreements, $3.90 billion of FHLB borrowings, $281.8 million of subordinated notes and $113.4 million of trust-preferred subordinated debentures.
- The Bank’s year-end regulatory ratios were 8.62% CET1, 10.77% total risk-based capital and 9.53% leverage; the filing reports the Bank as well capitalized.
Fourth-quarter results
Fourth-quarter 2018 net income was $71.9 million and net income available to common shareholders was $69.5 million, or $1.38 diluted EPS. Common earnings were down from $83.1 million in Q3 2018, as the provision for credit losses rose to $35.0 million from $13.0 million and non-interest income fell to $15.3 million from $25.5 million.
Material changes versus 2017
- Net income available to common shareholders increased about 55%. Management attributed the improvement principally to $153.5 million higher net interest income and $48.7 million lower income-tax expense, partly offset by a $43.0 million increase in credit-loss provision and $59.2 million higher non-interest expense.
- Net interest margin improved as asset yields rose with rates and the earning-asset mix shifted toward loans. The average cost of deposits and borrowed funds also increased, and average demand deposits declined as customers moved toward interest-bearing deposits.
- Credit costs increased: net charge-offs were $77.8 million versus $29.8 million, and the provision for credit losses was $87.0 million versus $44.0 million. Non-performing assets declined to $80.5 million from $113.2 million, primarily reflecting improvement in energy exposures and charge-offs. Potential problem loans increased to $81.7 million from $49.1 million.
- Non-interest income included a $15.9 million loss on sale of loans held for sale, compared with a $2.4 million loss in 2017, driven by losses in the mortgage correspondent aggregation program. Non-interest expense rose with business growth and investment in staffing, marketing, occupancy and professional services.
- The effective tax rate was 21% in 2018 versus 40% in 2017. The 2017 rate included a $17.6 million deferred-tax-asset remeasurement charge following enactment of the Tax Act; 2018 benefited from the lower federal corporate rate.
Outlook, risks and unusual items
- The filing provides no specific earnings or growth guidance. Management describes a strategy of organic growth, recruiting experienced bankers, expanding specialized lending and improving technology and operating efficiency. It cautions that competition, funding costs, economic conditions and credit performance could affect results.
- Key exposures include commercial and real-estate credit concentration, Texas economic conditions, energy and commodity volatility, large borrower relationships, deposit concentration and liquidity needs. Energy loans were 8% of total loans; 57% of deposits were uninsured at year-end.
- Rising rates supported loan yields and net interest income in 2018 but also increased funding costs. The company’s simulation estimated a $101.9 million increase in next-12-month net interest income under an immediate 100-basis-point rate increase, and a $105.5 million decrease under a 100-basis-point decline; results depend on modeling assumptions and are not forecasts.
- Mortgage correspondent aggregation remains exposed to loan-sale pricing, mortgage servicing rights valuation, interest rates, repurchase claims and changing mortgage volumes. Mortgage-servicing rights fell to $42.5 million from $85.3 million, principally after sales and a strategic decision to retain fewer rights.
- Adoption of CECL was expected in 2020; management said it could not yet reasonably estimate the effect and noted that the allowance and earnings could be affected. The company expected lease-accounting adoption in 2019 to add approximately $75 million of lease liabilities, with an immaterial income-statement effect.
- Legal claims arise in the ordinary course; management did not expect their disposition to materially adversely affect the financial statements or results. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality and criticized or potential problem loans stabilize, given the sharp rise in 2018 charge-offs and provision.
- How deposit pricing, uninsured and brokered deposit balances, and FHLB borrowing affect liquidity and net interest margin.
- Whether losses in mortgage loan sales, servicing-rights valuation and repurchase exposure persist or improve.
- The eventual CECL transition impact on reserves, retained earnings and reported earnings.
- Whether growth in commercial and real-estate lending remains consistent with capital levels and the Bank’s Texas and industry concentrations.