Texas Capital Bancshares, Inc. — 2012 Form 10-K
Business context and period. The company is a Texas-focused financial holding company whose banking subsidiary serves middle-market businesses, professionals and entrepreneurs, primarily across Austin, Dallas, Fort Worth, Houston and San Antonio. The filing reports the fiscal year ended December 31, 2012, with comparisons to 2011 and quarterly data including Q4.
Key financial metrics
- Profitability: Net income was $120.7 million ($3.00 diluted EPS), up 59% from $76.0 million ($1.98 diluted EPS) in 2011. Return on average assets was 1.35% (1.12% in 2011); return on average equity was 16.93% (13.39%).
- Revenue and margins: Net interest income increased 24% to $376.9 million; non-interest income rose to $43.0 million from $32.2 million. Net interest margin narrowed to 4.41% from 4.68%. The efficiency ratio improved to 52.35% from 56.15%.
- Expenses and credit costs: Non-interest expense rose 17% to $219.8 million, including a $4.0 million litigation settlement charge. Provision for credit losses fell to $11.5 million from $28.5 million. Net charge-offs declined to $6.1 million from $29.2 million.
- Balance sheet growth: At year-end, loans held for investment were $6.79 billion, loans held for sale $3.18 billion, deposits $7.44 billion and stockholders’ equity $836.2 million. Total assets were about $10.54 billion. Total deposits increased 34% year over year; loans held for investment increased 22%.
- Asset quality: Non-performing assets fell to $71.9 million from $90.2 million; non-accrual loans were $55.8 million. The allowance for loan losses was $74.3 million, or 1.10% of loans held for investment; combined credit-loss reserves, including unfunded commitments, were $78.2 million.
- Cash flow: Cash and cash equivalents ended the year at $206.3 million, versus $110.6 million in 2011. Continuing-operations operating cash flow was negative $1.02 billion, and investing cash flow was negative $1.17 billion; financing provided $2.28 billion. The filing’s large mortgage-warehouse originations and sales materially affect operating cash flow.
- Debt and liquidity: Year-end borrowings totaled approximately $2.17 billion, including $1.65 billion of FHLB advances, $111 million of subordinated notes and $113.4 million of trust-preferred debentures. The bank’s total risk-based capital ratio was 10.34%, just above the 10% “well-capitalized” threshold; its Tier 1 risk-based ratio was 8.72%. Average net loans to average deposits were 129.97%.
Material changes versus 2011
- Earnings increased primarily through higher net interest income, lower credit-loss provisioning and stronger fee income, partly offset by higher operating expenses and taxes.
- Net interest income benefited from a $2.1 billion increase in average earning assets, especially loan growth; the net interest margin nevertheless declined 27 basis points.
- Mortgage warehouse activity expanded: loans held for sale grew to $3.18 billion from $2.08 billion, while brokered loan fees increased to $17.6 million from $11.3 million.
- Credit quality improved overall: non-performing assets and net charge-offs declined, though construction lending grew substantially and the reserve ratio decreased.
- Capital was bolstered by an August stock offering that raised $87.0 million net and a September issuance of $111.0 million in subordinated notes. Shares outstanding also increased.
Outlook, risks and unusual items
- Management expected some continued credit-quality improvement in 2013, but provided no specific earnings or growth guidance. It noted that future fee-income growth could be constrained by competition and weaker mortgage-warehouse demand.
- Interest-rate risk is material. A company simulation estimated that a sustained 200-basis-point rate increase would add $56.2 million to net interest income over 12 months versus its “most likely” scenario; management cautioned that model assumptions are uncertain.
- Key exposures include concentration in Texas and commercial lending, real-estate collateral values, rapid loan growth, dependence on wholesale/FHLB funding to support assets, and potential changes to regulatory capital treatment of mortgage-warehouse assets. The company also cited evolving Basel III and Dodd-Frank requirements.
- A confidential settlement resolved Oklahoma and Texas litigation connected to a defaulted auto-dealership loan and a prior jury verdict. The company recorded a $4.0 million pretax charge, said the settlement was within insurance policy limits, and intended to pursue additional recovery from its insurer.
- The discontinued residential mortgage business still had $302,000 of loans held for sale and potential exposure to repurchase requests; the timing and value of disposition were uncertain.
- The company paid no common dividends and said it did not anticipate paying them in the foreseeable future. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the growth, underwriting and risk profile of the $3.18 billion mortgage-warehouse portfolio, including the OCC’s review of its regulatory risk weights and the effect of warehouse funding on cash flows.
- Assess whether credit quality and reserve coverage remain adequate as loans grow, construction exposure increases and the allowance ratio declines.
- Track the bank’s capital cushion above the well-capitalized threshold, funding mix, high loan-to-deposit ratio and sensitivity to deposit or borrowing-market changes.
- Check the outcome of the insurer recovery effort and any remaining discontinued-mortgage repurchase contingencies.
- Reconcile reported total assets: the balance sheet gives $10.541 billion, while selected continuing-operations data gives $10.541 billion with a $302,000 difference; confirm the presentation and scope in the audited statements.