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TCBI > SEC Filings for TCBI > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for TEXAS CAPITAL BANCSHARES INC/TX

Form 10-K for TEXAS CAPITAL BANCSHARES INC/TX


21-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Forward-looking statements are subject to various risks and uncertainties, which change over time, are based on management's expectations and assumptions at the time the statements are made and are not guarantees of future results. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to, the following:

• Deterioration of the credit quality of our loan portfolio, increased default rates and loan losses or adverse changes in the industry concentrations of our loan portfolio.

• Developments adversely affecting our commercial, entrepreneur and professional customers.

• Changes in the value of commercial and residential real estate securing our loans or in the demand for credit to support the purchase and ownership of such assets.

• The failure of assumptions supporting our allowance for loan losses causing it to become inadequate as loan quality decreases and losses and charge-offs increase.

• A failure to effectively manage our interest rate risk resulting from unexpectedly large or sudden changes in interest rates or rate or maturity imbalances in our assets and liabilities.

• Failure to execute our business strategy, including any inability to expand into new markets and lines of business in Texas, regionally and nationally.

• Loss of access to capital market transactions and other sources of funding, or a failure to effectively balance our funding sources with cash demands by depositors and borrowers.

• Failure to successfully develop and launch new lines of business and new products and services within the expected time frames and budgets, or failure to anticipate and appropriately manage the associated risks.

• The failure to attract and retain key personnel or the loss of key individuals or groups of employees.

• Changes in the U.S. economy in general or the Texas economy specifically resulting in deterioration of credit quality or reduced demand for credit or other financial services we offer.

• Legislative and regulatory changes imposing further restrictions and costs on our business, a failure to remain well capitalized or regulatory enforcement actions against us.

• An increase in the incidence or severity of fraud, illegal payments, security breaches and other illegal acts impacting our bank and our customers.

• Structural changes in the markets for origination, sale and servicing of residential mortgages.

• Increased or more effective competition from banks and other financial service providers in our markets.

• Material failures of our accounting estimates and risk management processes based on management judgment, or the supporting analytical and forecasting models.

• Unavailability of funds obtained from capital transactions or from our bank to fund our obligations.

• Failures of counterparties or third party vendors to perform their obligations.

• Failures or breaches of our information systems that are not effectively managed.

• Severe weather, natural disasters, acts of war or terrorism and other external events.

• Incurrence of material costs and liabilities associated with claims and litigation.

• Failure of our risk management strategies and procedures, including failure or circumvention of our controls.


Table of Contents

Actual outcomes and results may differ materially from what is expressed in our forward-looking statements and from our historical financial results due to the factors discussed elsewhere in this report or disclosed in our other SEC filings. Forward-looking statements included herein should not be relied upon as representing our expectations or beliefs as of any date subsequent to the date of this prospectus supplement. Except as required by law, we undertake no obligation to revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise. The factors discussed herein are not intended to be a complete summary of all risks and uncertainties that may affect our businesses. Though we strive to monitor and mitigate risk, we cannot anticipate all potential economic, operational and financial developments that may adversely impact our operations and our financial results. Forward-looking statements should not be viewed as predictions and should not be the primary basis upon which investors evaluate an investment in our securities.

Overview of Our Business Operations

We commenced our banking operations in December 1998. An important aspect of our growth strategy has been our ability to service and effectively manage a large number of loans and deposit accounts in multiple markets in Texas. Accordingly, we have created an operations infrastructure sufficient to support state-wide lending and banking operations that we continue to build out as needed to serve a larger customer base and specialized industries.

The following discussion and analysis presents the significant factors affecting our financial condition as of December 31, 2013 and 2012 and results of operations for each of the three years in the periods ended December 31, 2013, 2012 and 2011. This discussion should be read in conjunction with our consolidated financial statements and notes to the financial statements appearing later in this report.

Except as otherwise noted, all amounts and disclosures throughout this document reflect continuing operations. See Part I, Item 1 herein for a discussion of discontinued operations and at Note 19 - Discontinued Operations.

Year ended December 31, 2013 compared to year ended December 31, 2012

We reported net income of $121.0 million and net income available to common shareholders of $113.7 million, or $2.72 per diluted common share, for the year ended December 31, 2013, compared to net income and net income available to common shareholders of $120.7 million, or $3.01 per diluted common share, for the same period in 2012. Return on average equity was 12.82% and return on average assets was 1.17% for the year ended December 31, 2013, compared to 16.93% and 1.35%, respectively, for the same period in 2012.

Net income increased $337,000 for the year ended December 31, 2013 compared to 2012. The $337,000 increase was primarily the result of a $42.6 million increase in net interest income, a $984,000 increase in non-interest income and a $1.1 million decrease in income tax expense, offset by a $7.5 million increase in the provision for credit losses and a $36.9 million increase in non-interest expense.

Details of the changes in the various components of net income are further discussed below.

Year ended December 31, 2012 compared to year ended December 31, 2011

We reported net income of $120.7 million, or $3.01 per diluted common share, for the year ended December 31, 2012, compared to $76.1 million, or $1.99 per diluted common share, for the same period of 2011. Return on average equity was 16.93% and return on average assets was 1.35% for the year ended December 31, 2012, compared to 13.39% and 1.12%, respectively, for the same period of 2011.

Net income increased $44.6 million, or 59%, for the year ended December 31, 2012 compared to the same period of 2011. The $44.6 million increase was primarily the result of a $73.9 million increase in net interest income, a $17 million decrease in the provision for credit losses and a $10.8 million increase in non-interest income, offset by a $31.6 million increase in non-interest expense and a $25.5 million increase in income tax expense.

Details of the changes in the various components of net income are further discussed below.


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Net Interest Income

Net interest income was $419.5 million for the year ended December 31, 2013 compared to $376.9 million for the same period of 2012. The increase in net interest income was primarily due to an increase of $1.4 billion in average earning assets as compared to the same period of 2012. The increase in average earning assets from 2012 included a $1.4 billion increase in average net loans offset by a $40.2 million decrease in average securities. For the year ended December 31, 2013, average net loans and securities represented 98% and 1%, respectively, of average earning assets compared to 98% and 1%, respectively, in 2012.

Average interest bearing liabilities for the year ended December 31, 2013 increased $95.6 million from the year ended December 31, 2012, which included a $947.9 million increase in interest bearing deposits, a $932.4 million decrease in other borrowings and an $80.1 million increase in subordinated notes. For the same periods, the average balance of demand deposits increased to $3.0 billion from $2.0 billion. The average cost of interest bearing liabilities increased from 0.35% for the year ended December 31, 2012 to 0.40% in 2013 related to the subordinated notes issued in the third quarter of 2012.

Net interest income was $376.8 million for the year ended December 31, 2012 compared to $302.9 million for the same period of 2011. The increase in net interest income was primarily due to an increase of $2.1 billion in average earning assets as compared to the same period of 2011. The increase in average earning assets from 2011 included a $2.2 billion increase in average net loans offset by a $39.7 million decrease in average securities. For the year ended December 31, 2012, average net loans and securities represented 98% and 1%, respectively, of average earning assets compared to 96% and 2%, respectively, in 2011.

Average interest bearing liabilities for the year ended December 31, 2012 increased $1.5 billion from the year ended December 31, 2011, which included a $613.4 million increase in interest bearing deposits, an $862.6 million increase in other borrowings and a $30.9 million increase in subordinated notes. For the same periods, the average balance of demand deposits increased to $2.0 billion from $1.5 billion. The average cost of interest bearing liabilities decreased from 0.40% for the year ended December 31, 2011 to 0.35% in 2012, reflecting the continued low market interest rates, and our focus on reducing deposit rates.

Volume/Rate Analysis



                                                            Years Ended December 31,
                                            2013/2012                                      2012/2011
                               Net              Change Due To(1)             Net              Change Due To(1)
(in thousands)                Change        Volume        Yield/Rate        Change        Volume         Yield/Rate
Interest income:
Securities(2)                $ (1,845 )    $ (1,780 )    $        (65 )    $ (1,912 )    $  (1,788 )    $       (124 )
Loans held for investment,
mortgage finance loans         (5,411 )       1,765            (7,176 )      39,335         48,450            (9,115 )
Loans held for investment      53,177        64,598           (11,421 )      39,460         56,178           (16,718 )
Federal funds sold                 52            49                 3           (24 )          (18 )              (6 )
Deposits in other banks            23            96               (73 )        (144 )         (152 )               8

Total                          45,996        64,728           (18,732 )      76,715        102,670           (25,955 )
Interest expense:
Transaction deposits             (165 )         172              (337 )         634            180               454
Savings deposits                1,857         3,110            (1,253 )         877          1,178              (301 )
Time deposits                  (1,146 )        (698 )            (448 )      (2,456 )         (296 )          (2,160 )
Deposits in foreign
branches                         (160 )        (220 )              60          (361 )         (277 )             (84 )
Other borrowings               (1,922 )      (1,847 )             (75 )       2,001          1,360               641
Long-term debt                  5,070         5,272              (202 )       2,220              -             2,220

Total                           3,534         5,789            (2,255 )       2,915          2,145               770

Net interest income          $ 42,462      $ 58,939      $    (16,477 )    $ 73,800      $ 100,525      $    (26,725 )


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(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.

Net interest margin from continuing operations, the ratio of net interest income to average earning assets, decreased from 4.41% in 2012 to 4.22% in 2013. This 19 basis point decrease was a result of a decrease in interest income as a percent of earning assets offset by a reduction in funding costs. Funding cost including demand deposits and borrowed funds decreased from .21% for 2012 to .17% for 2013. The cost of subordinated debt issued in September 2012 and the trust preferred as a percent of total earning assets was .10% for 2013 compared to .06% for 2012. Total cost of funding, including all deposits and stockholders' equity remained consistent at .24% for 2013.

Net interest margin from continuing operations decreased from 4.68% in 2011 to 4.41% in 2012. This 27 basis point decrease was a result of a decrease in interest income as a percent of earning assets offset by a reduction in funding costs. Total cost of funding decreased from .27% for 2011 to .24% for 2012.

         Consolidated Daily Average Balances, Average Yields and Rates



                                                                                                      Year ended December 31
                                                           2013                                                2012                                               2011
                                         Average          Revenue /         Yield /          Average         Revenue /         Yield /          Average         Revenue /          Yield /
                                         Balance          Expense(1)         Rate            Balance         Expense(1)         Rate            Balance         Expense(1)          Rate
Assets
Securities-Taxable                     $     59,031      $      2,325           3.94 %     $    90,796      $      3,681           4.05 %     $   123,124      $      5,186            4.21 %
Securities-Non-taxable(2)                    18,147             1,061           5.85 %          26,579             1,550           5.83 %          33,996             1,957            5.76 %
Federal funds sold                           54,547                65           0.12 %          11,497                13           0.11 %          21,897                37            0.17 %
Deposits in other banks                      89,503               231           0.26 %          61,192               208           0.34 %         107,734               352            0.33 %
Loans held for investment, mortgage
finance loans                             2,342,149            87,864           3.75 %       2,298,651            93,275           4.06 %       1,210,954            53,940            4.45 %
Loans held for investment                 7,471,676           353,450           4.73 %       6,148,860           300,273           4.88 %       5,059,134           260,813            5.16 %
Less reserve for loan losses                 78,282                 -              -            72,087                 -              -            67,888                 -               -

Loans, net                                9,735,543           441,314           4.53 %       8,375,424           393,548           4.70 %       6,202,200           314,753            5.07 %

Total earning assets                      9,956,771           444,996           4.47 %       8,565,488           399,000           4.66 %       6,488,951           322,285            4.97 %
Cash and other assets                       391,633                                            400,472                                            330,137

Total assets                           $ 10,348,404                                        $ 8,965,960                                        $ 6,819,088

Liabilities and stockholders'
equity
Transaction deposits                   $    908,415      $        664           0.07 %     $   752,040      $        829           0.11 %     $   391,100      $        195            0.05 %
Savings deposits                          3,756,560            10,531           0.28 %       2,765,089             8,674           0.31 %       2,401,997             7,797            0.32 %
Time deposits                               397,329             1,629           0.41 %         530,816             2,775           0.52 %         562,654             5,231            0.93 %
Deposits in foreign branches                345,506             1,206           0.35 %         411,891             1,366           0.33 %         490,703             1,727            0.35 %

Total interest bearing deposits           5,407,810            14,030           0.26 %       4,459,836            13,644           0.31 %       3,846,454            14,950            0.39 %
Other borrowings                            653,318             1,219           0.19 %       1,585,723             3,141           0.20 %         723,172             1,140            0.16 %
Subordinated notes                          111,000             7,327           6.60 %          30,934             2,037           6.58 %               -                 -               -
Trust preferred subordinated
debentures                                  113,406             2,536           2.24 %         113,406             2,756           2.43 %         113,406             2,573            2.27 %

Total interest bearing liabilities        6,285,534            25,112           0.40 %       6,189,899            21,578           0.35 %       4,683,032            18,663            0.40 %
Demand deposits                           2,967,063                                          1,984,171                                          1,515,021
Other liabilities                            94,592                                             78,700                                             52,888
Stockholders' equity                      1,001,215                                            713,190                                            568,147

Total liabilities and stockholders'
equity                                 $ 10,348,404                                        $ 8,965,960                                        $ 6,819,088

equity
Net interest income                                      $    419,884                                       $    377,422                                       $    303,622
Net interest margin                                                             4.22 %                                             4.41 %                                              4.68 %
Net interest spread                                                             4.07 %                                             4.31 %                                              4.57 %

(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. Loan interest income includes loan fees totaling $33.8 million, $33.7 million and $27.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.

(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.


Table of Contents

Non-interest Income



                                                       Year ended December 31
                                                   2013         2012         2011
                                                           (in thousands)
       Service charges on deposit accounts       $  6,783     $  6,605     $  6,480
       Trust fee income                             5,023        4,822        4,219
       Bank owned life insurance (BOLI) income      1,917        2,168        2,095
       Brokered loan fees                          16,980       17,596       11,335
       Swap fees                                    5,520        4,909        1,935
       Other(1)                                     7,801        6,940        6,168

       Total non-interest income                 $ 44,024     $ 43,040     $ 32,232

(1) Other income includes such items as letter of credit fees and other general operating income, none of which account for 1% or more of total interest income and non-interest income.

Non-interest income increased by $1.0 million during the year ended December 31, 2013 to $44.0 million, compared to $43.0 million during the same period in 2012. The increase was primarily due to an $861,000 increase in other non-interest income.

Non-interest income increased by $10.8 million during the year ended December 31, 2012 to $43.0 million, compared to $32.2 million during the same period in 2011. The increase was primarily due to a $6.3 million increase in brokered loan fees due to an increase in our mortgage finance lending volume. Swap fee income increased $3.0 million during the year ended December 31, 2012 due to an increase in swap transactions during 2012. Swap fees are fees related to customer swap transactions and are received from the institution that is our counterparty on the transactions. See Note 20 - Derivative Financial Instruments for further discussion.

While management expects continued growth in non-interest income, the future rate of growth could be affected by increased competition from nationwide and regional financial institutions and by decreased demand in mortgage finance lending volume. In order to achieve continued growth in non-interest income, we may need to introduce new products or enter into new markets. Any new product introduction or new market entry could place additional demands on capital and managerial resources.

Non-interest Expense



                                                        Year ended December 31
                                                   2013          2012          2011
                                                            (in thousands)
   Salaries and employee benefits                $ 157,752     $ 121,456     $ 100,535
   Net occupancy expense                            16,821        14,852        13,657
   Marketing                                        16,203        13,449        11,109
   Legal and professional                           18,104        17,557        14,996
   Communications and technology                    13,762        11,158         9,608
   FDIC insurance assessment                         8,057         5,568         7,543
   Allowance and other carrying costs for OREO       1,788         9,075         9,586
   Litigation settlement expense                     (908)         4,000             -
   Other(1)                                         25,155        22,729        21,167

   Total non-interest expense                    $ 256,734     $ 219,844     $ 188,201

(1) Other expense includes such items as courier expenses, regulatory assessments other than FDIC insurance, due from bank charges and other general operating expenses, none of which account for 1% or more of total interest income and non-interest income.


Table of Contents

Non-interest expense for the year ended December 31, 2013 increased $36.9 million compared to the same period of 2012 primarily related to increases in salaries and employee benefits, marketing expense, communications and data processing and FDIC insurance assessment, offset by decreases in allowance and other carrying costs for OREO and litigation settlement expense.

Salaries and employee benefits expense increased $36.3 million to $157.8 million during the year ended December 31, 2013. Of the $36.3 million increase during 2013, approximately $7.7 million related to a charge taken to reflect the financial effect of the planned organization change announced during the second quarter of 2013 related to the retirement and transition of our CEO and includes assumptions about future payouts that may or may not occur. These payouts, when and if realized, will be directly linked to our performance and stock price, but are required to be estimated at the time of the event. Additionally, there was another $2.2 million of charges recorded in the second quarter of 2013 related to the increased probability that certain company financial performance targets for executive cash-based incentives will be met. Additionally, these cash-based and performance units are expensed based on current stock prices, which has increased significantly during 2013 resulting in a $3.7 million increase in expense as compared to 2012. The remaining $23.3 million increase was primarily due to general business growth and build-out.

Marketing expense for the year ended December 31, 2013 increased $2.8 million compared to the same period in 2012. Marketing expense for the year ended December 31, 2013 included $1.0 million of direct marketing and advertising expense and $4.0 million in business development expense compared to $850,000 and $3.1 million, respectively, in 2012. Marketing expense for the year ended December 31, 2013 also included $11.2 million for the purchase of miles related to the American Airlines AAdvantageฎ program and treasury management deposit programs compared to $9.5 million during 2012. Marketing expense may increase as we seek to further develop our brand, reach more of our target customers and expand in our target markets.

Legal and professional expense increased $547,000, or 3%, for the year ended December 31, 2013 compared to the same period in 2012. Our legal and professional expense will continue to fluctuate from year to year and could increase in the future with growth and as we respond to continued regulatory changes and strategic initiatives. We expect to see a decrease in the cost of resolving problem assets under improving economic conditions.

Communications and technology expense increased $2.6 million to $13.8 million during the year ended December 31, 2013 as a result of general business and customer growth and continued build-out needed to support that growth.

FDIC insurance assessment expense increased $2.5 million from $5.6 million in 2012 to $8.1 million primarily as a result of a $3.0 million assessment by the FDIC that was paid during the third quarter of 2013. The assessment related to the year-end call reports for 2011 and 2012, which were amended for the change in the risk weight applicable to our mortgage finance loan portfolio as described in Note 13 - Regulatory Restrictions. As previously disclosed, the amendment caused one capital ratio to retroactively fall below "well-capitalized" for December 31, 2012 and 2011.

For the year ended December 31, 2013, allowance and other carrying costs for OREO decreased $7.3 million to $1.8 million, $920,000 of which related to deteriorating values of assets held in OREO. The decrease is consistent with the decrease in our OREO balances during 2013.

Non-interest expense for the year ended December 31, 2012 increased $31.6 million compared to the same period of 2011 primarily related to increases in salaries and employee benefits, marketing expense, legal and professional expenses and litigation settlement expense.

Salaries and employee benefits expense increased $20.9 million to $121.5 million . . .

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