03.31.2015-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2015

¨
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                      to                     
Commission file number 001-34657
 
 
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Delaware
 
75-2679109
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
2000 McKinney Avenue, Suite 700, Dallas, Texas, U.S.A.
 
75201
(Address of principal executive officers)
 
(Zip Code)

214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
Non-Accelerated Filer
 
¨
  
Smaller Reporting Company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

On April 21, 2015, the number of shares set forth below was outstanding with respect to each of the issuer’s classes of common stock:

Common Stock, par value $0.01 per share 45,774,646
 


Table of Contents

Texas Capital Bancshares, Inc.
Form 10-Q
Quarter Ended March 31, 2015
Index
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.


2

Table of Contents

PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands except share data)
 
March 31,
2015
 
December 31,
2014
 
 
 
 
Assets
 
 
 
Cash and due from banks
$
99,602

 
$
96,524

Interest-bearing deposits
734,945

 
1,233,990

Securities, available-for-sale
37,649

 
41,719

Loans held for investment, mortgage finance
5,408,750

 
4,102,125

Loans held for investment (net of unearned income)
10,760,978

 
10,154,887

Less: Allowance for loan losses
108,078

 
100,954

Loans held for investment, net
16,061,650

 
14,156,058

Premises and equipment, net
16,037

 
17,368

Accrued interest receivable and other assets
355,163

 
333,699

Goodwill and intangible assets, net
20,412

 
20,588

Total assets
$
17,325,458

 
$
15,899,946

Liabilities and Stockholders’ Equity
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
6,050,817

 
$
5,011,619

Interest-bearing
7,816,310

 
7,348,972

Interest-bearing in foreign branches
255,179

 
312,709

Total deposits
14,122,306

 
12,673,300

Accrued interest payable
2,545

 
4,747

Other liabilities
157,785

 
145,622

Federal funds purchased and repurchase agreements
125,458

 
92,676

Other borrowings
1,000,000

 
1,100,005

Subordinated notes
286,000

 
286,000

Trust preferred subordinated debentures
113,406

 
113,406

Total liabilities
15,807,500

 
14,415,756

Stockholders’ equity:
 
 
 
Preferred stock, $.01 par value, $1,000 liquidation value:
 
 
 
Authorized shares – 10,000,000
 
 
 
Issued shares – 6,000,000 shares issued at March 31, 2015 and December 31, 2014, respectively
150,000

 
150,000

Common stock, $.01 par value:
 
 
 
Authorized shares – 100,000,000
 
 
 
Issued shares – 45,772,662 and 45,735,424 at March 31, 2015 and December 31, 2014, respectively
457

 
457

Additional paid-in capital
710,943

 
709,738

Retained earnings
655,326

 
622,714

Treasury stock (shares at cost: 417 at March 31, 2015 and December 31, 2014)
(8
)
 
(8
)
Accumulated other comprehensive income, net of taxes
1,240

 
1,289

Total stockholders’ equity
1,517,958

 
1,484,190

Total liabilities and stockholders’ equity
$
17,325,458

 
$
15,899,946

See accompanying notes to consolidated financial statements.

3



TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME – UNAUDITED
(In thousands except per share data)
 
Three months ended March 31,
 
2015
 
2014
Interest income
 
 
 
Interest and fees on loans
$
139,174

 
$
115,872

Securities
358

 
540

Federal funds sold
116

 
40

Deposits in other banks
1,260

 
159

Total interest income
140,908

 
116,611

Interest expense
 
 
 
Deposits
5,628

 
4,030

Federal funds purchased
68

 
95

Repurchase agreements
4

 
4

Other borrowings
390

 
72

Subordinated notes
4,191

 
3,479

Trust preferred subordinated debentures
618

 
616

Total interest expense
10,899

 
8,296

Net interest income
130,009

 
108,315

Provision for credit losses
11,000

 
5,000

Net interest income after provision for credit losses
119,009

 
103,315

Non-interest income
 
 
 
Service charges on deposit accounts
2,094

 
1,696

Trust fee income
1,200

 
1,282

Bank owned life insurance (BOLI) income
484

 
509

Brokered loan fees
4,232

 
2,824

Swap fees
1,986

 
1,224

Other
2,271

 
2,821

Total non-interest income
12,267

 
10,356

Non-interest expense
 
 
 
Salaries and employee benefits
45,828

 
42,056

Net occupancy expense
5,691

 
4,768

Marketing
4,218

 
3,759

Legal and professional
4,048

 
5,402

Communications and technology
5,078

 
3,924

FDIC insurance assessment
3,790

 
2,725

Allowance and other carrying costs for OREO
9

 
45

Other
7,855

 
6,638

Total non-interest expense
76,517

 
69,317

Income before income taxes
54,759

 
44,354

Income tax expense
19,709

 
16,089

Net income
35,050

 
28,265

Preferred stock dividends
2,438

 
2,438

Net income available to common stockholders
$
32,612

 
$
25,827

Other comprehensive income (loss)
 
 
 
Change in net unrealized gain on available-for-sale securities arising during period, before-tax
$
(76
)
 
$
(162
)
Income tax benefit related to net unrealized gain on available-for-sale securities
(27
)
 
(57
)
Other comprehensive loss, net of tax
(49
)
 
(105
)
Comprehensive income
$
35,001

 
$
28,160

 
 
 
 
Basic earnings per common share
$
0.71

 
$
0.61

Diluted earnings per common share
$
0.70

 
$
0.60

See accompanying notes to consolidated financial statements.

4

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
(In thousands except share data)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Shares
 
Amount
 
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
 
Total
Balance at December 31, 2013
6,000,000

 
$
150,000

 
41,036,787

 
$
410

 
$
448,208

 
$
496,112

 
(417
)
 
$
(8
)
 
$
1,628

 
$
1,096,350

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
28,265

 

 

 

 
28,265

Change in unrealized gain on available-for-sale securities, net of taxes of $57

 

 

 

 

 

 

 

 
(105
)
 
(105
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28,160

Tax benefit related to exercise of stock-based awards

 

 

 

 
955

 

 

 

 

 
955

Stock-based compensation expense recognized in earnings

 

 

 

 
1,262

 

 

 

 

 
1,262

Issuance of preferred stock

 

 

 

 

 

 

 

 

 

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
46,660

 
1

 
(707
)
 

 

 

 

 
(706
)
Issuance of common stock

 

 
1,875,000

 
19

 
106,529

 

 

 

 

 
106,548

Issuance of common stock related to warrants

 

 
773

 

 

 

 

 

 

 

Balance at March 31, 2014
6,000,000

 
$
150,000

 
42,959,220

 
$
430

 
$
556,247

 
$
521,939

 
(417
)
 
$
(8
)
 
$
1,523

 
$
1,230,131

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
6,000,000

 
$
150,000

 
45,735,424

 
$
457

 
$
709,738

 
$
622,714

 
(417
)
 
$
(8
)
 
$
1,289

 
$
1,484,190

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
35,050

 

 

 

 
35,050

Change in unrealized gain on available-for-sale securities, net of taxes of $27

 

 

 

 

 

 

 

 
(49
)
 
(49
)
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35,001

Tax benefit related to exercise of stock-based awards

 

 

 

 
263

 

 

 

 

 
263

Stock-based compensation expense recognized in earnings

 

 

 

 
991

 

 

 

 

 
991

Preferred stock dividend

 

 

 

 

 
(2,438
)
 

 

 

 
(2,438
)
Issuance of stock related to stock-based awards

 

 
37,238

 

 
(49
)
 

 

 

 

 
(49
)
Balance at March 31, 2015
6,000,000

 
$
150,000

 
45,772,662

 
$
457

 
$
710,943

 
$
655,326

 
(417
)
 
$
(8
)
 
$
1,240

 
$
1,517,958

See accompanying notes to consolidated financial statements.

5

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—UNAUDITED
(In thousands) 
 
Three months ended March 31,
 
2015
 
2014
Operating activities
 
 
 
Net income from continuing operations
$
35,050

 
$
28,265

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
11,000

 
5,000

Depreciation and amortization
4,060

 
3,012

Amortization and accretion on securities

 
1

Bank owned life insurance (BOLI) income
(484
)
 
(509
)
Stock-based compensation expense
2,357

 
4,655

Excess tax expense from stock-based compensation arrangements
(305
)
 
(955
)
Gain on sale of assets

 
136

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable and other assets
(24,849
)
 
3,681

Accrued interest payable and other liabilities
8,885

 
(4,763
)
Net cash provided by operating activities
35,714

 
38,523

Investing activities
 
 
 
Maturities and calls of available-for-sale securities
1,950

 
7,440

Principal payments received on available-for-sale securities
2,044

 
2,651

Originations of mortgage finance loans
(21,276,920
)
 
(9,687,691
)
Proceeds from pay-offs of mortgage finance loans
19,970,295

 
9,783,912

Net increase in loans held for investment, excluding mortgage finance loans
(609,967
)
 
(444,070
)
Purchase (disposal) of premises and equipment, net
251

 
(1,161
)
Proceeds from sale of foreclosed assets
1,065

 
3,405

Net cash used in investing activities
(1,911,282
)
 
(335,514
)
Financing activities
 
 
 
Net increase in deposits
1,449,006

 
471,749

Net expense from issuance of stock related to stock-based awards
(49
)
 
(706
)
Net proceeds from issuance of common stock

 
106,548

Preferred dividends paid
(2,438
)
 
(2,438
)
Net increase in other borrowings
(100,005
)
 
(342,527
)
Excess tax benefits from stock-based compensation arrangements
305

 
955

Net increase (decrease) in Federal funds purchased and repurchase agreements
32,782

 
(5,077
)
Net proceeds from issuance of subordinated notes

 
172,375

Net cash provided by financing activities
1,379,601

 
400,879

Net increase (decrease) in cash and cash equivalents
(495,967
)
 
103,888

Cash and cash equivalents at beginning of period
1,330,514

 
153,911

Cash and cash equivalents at end of period
$
834,547

 
$
257,799

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
13,101

 
$
6,741

Cash paid during the period for income taxes
891

 
882

Transfers from loans/leases to OREO and other repossessed assets
1,092

 
851

See accompanying notes to consolidated financial statements.

6

Table of Contents

TEXAS CAPITAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Texas Capital Bancshares, Inc. (the “Company”), a Delaware corporation, was incorporated in November 1996 and commenced banking operations in December 1998. The consolidated financial statements of the Company include the accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National Association (the “Bank”). We serve the needs of commercial businesses and successful professionals and entrepreneurs located in Texas as well as operate several lines of business serving a regional or national clientele of commercial borrowers. We are primarily a secured lender, with our greatest concentration of loans in Texas.
Basis of Presentation
Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to generally accepted practices within the banking industry. Certain prior period balances have been reclassified to conform to the current period presentation.
The consolidated interim financial statements have been prepared without audit. Certain information and footnote disclosures presented in accordance with GAAP have been condensed or omitted. In the opinion of management, the interim financial statements include all normal and recurring adjustments and the disclosures made are adequate to make interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our consolidated financial statements, and notes thereto, for the year ended December 31, 2014, included in our Annual Report on Form 10-K filed with the SEC on February 19, 2015 (the “2014 Form 10-K”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly susceptible to significant change in the near term.

7

Table of Contents


(2) EARNINGS PER COMMON SHARE

The following table presents the computation of basic and diluted earnings per share (in thousands except per share data):
 
 
Three months ended 
 March 31,
 
2015
 
2014
Numerator:
 
 
 
Net income
$
35,050

 
$
28,265

Preferred stock dividends
2,438

 
2,438

Net income available to common stockholders
$
32,612

 
25,827

Denominator:
 
 
 
Denominator for basic earnings per share— weighted average shares
45,758,655

 
42,298,355

Effect of employee stock-based awards(1)
210,736

 
381,597

Effect of warrants to purchase common stock
398,479

 
540,009

Denominator for dilutive earnings per share—adjusted weighted average shares and assumed conversions
46,367,870

 
43,219,961

Basic earnings per common share
$
0.71

 
$
0.61

Diluted earnings per common share
$
0.70

 
$
0.60

 
(1)
Stock options, SARs and RSUs outstanding of 168,300 at March 31, 2015 and 23,000 at March 31, 2014 have not been included in diluted earnings per share because to do so would have been anti-dilutive for the periods presented.
(3) SECURITIES
Securities are identified as either held-to-maturity or available-for-sale based upon various factors, including asset/liability management strategies, liquidity and profitability objectives, and regulatory requirements. Held-to-maturity securities are carried at cost, adjusted for amortization of premiums or accretion of discounts. Available-for-sale securities are securities that may be sold prior to maturity based upon asset/liability management decisions. Securities identified as available-for-sale are carried at fair value. Unrealized gains or losses on available-for-sale securities are recorded as accumulated other comprehensive income in stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed securities is periodically adjusted for estimated prepayments. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on sale of securities. The cost of securities sold is based on the specific identification method.
At March 31, 2015, our net unrealized gain on the available-for-sale securities portfolio was $1.9 million compared to $2.0 million at December 31, 2014. As a percent of outstanding balances, the unrealized gain was 5.34% and 4.99% at March 31, 2015, and December 31, 2014, respectively. The increase in the unrealized gain percentage at March 31, 2015 is related to the increase in market prices offset by the reduction in the portfolio balance.

8

Table of Contents

The following is a summary of securities (in thousands):
 
 
March 31, 2015

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
Available-for-Sale Securities:







Residential mortgage-backed securities
$
26,912


$
2,006

 
$

 
$
28,918

Municipals
1,308


5

 

 
1,313

Equity securities(1)
7,522


26

 
(130
)
 
7,418


$
35,742


$
2,037

 
$
(130
)
 
$
37,649

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated
Fair
Value
Available-for-Sale Securities:







Residential mortgage-backed securities
$
28,957

 
$
2,108

 
$

 
$
31,065

Municipals
3,257

 
10

 

 
3,267

Equity securities(1)
7,522

 
16

 
(151
)
 
7,387


$
39,736

 
$
2,134

 
$
(151
)
 
$
41,719

 
(1)
Equity securities consist of Community Reinvestment Act funds.
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in thousands, except percentage data):
 
 
March 31, 2015

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Available-for-sale:









Residential mortgage-backed securities:(1)









Amortized cost
$

 
$
7,967

 
$
5,250

 
$
13,695

 
$
26,912

Estimated fair value

 
8,394

 
5,904

 
14,620

 
28,918

Weighted average yield(3)

 
4.79
%
 
5.54
%
 
2.36
%
 
3.73
%
Municipals:(2)
 
 
 
 
 
 
 
 
 
Amortized cost
745

 
563

 

 

 
1,308

Estimated fair value
747

 
566

 

 

 
1,313

Weighted average yield(3)
5.51
%
 
5.69
%
 

 

 
5.59
%
Equity securities:(4)
 
 
 
 
 
 
 
 
 
Amortized cost
7,522

 

 

 

 
7,522

Estimated fair value
7,418

 

 

 

 
7,418

Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
35,742

Estimated fair value
 
 
 
 
 
 
 
 
$
37,649


9

Table of Contents

 
December 31, 2014

Less Than
One Year

After One
Through
Five Years

After Five
Through
Ten Years

After Ten
Years

Total
Available-for-sale:









Residential mortgage-backed securities:(1)









Amortized cost
$
1

 
$
9,151

 
$
5,661

 
$
14,144

 
$
28,957

Estimated fair value
1

 
9,662

 
6,333

 
15,069

 
31,065

Weighted average yield(3)
6.50
%
 
4.79
%
 
5.54
%
 
2.36
%
 
3.75
%
Municipals:(2)
 
 
 
 
 
 
 
 
 
Amortized cost
1,669

 
1,588

 

 

 
3,257

Estimated fair value
1,674

 
1,593

 

 

 
3,267

Weighted average yield(3)
5.78
%
 
5.79
%
 

 

 
5.79
%
Equity securities:(4)
 
 
 
 
 
 
 
 
 
Amortized cost
7,522

 

 

 

 
7,522

Estimated fair value
7,387

 

 

 

 
7,387

Total available-for-sale securities:
 
 
 
 
 
 
 
 
 
Amortized cost
 
 
 
 
 
 
 
 
$
39,736

Estimated fair value
 
 
 
 
 
 
 
 
$
41,719

 
(1)
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
(2)
Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3)
Yields are calculated based on amortized cost.
(4)
These equity securities do not have a stated maturity.
Securities with carrying values of approximately $28.8 million were pledged to secure certain borrowings and deposits at March 31, 2015. Of the pledged securities at March 31, 2015, approximately $9.4 million were pledged for certain deposits, and approximately $19.4 million were pledged for repurchase agreements.
The following table discloses, as of March 31, 2015 and December 31, 2014, our investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months (in thousands):
 
March 31, 2015
Less Than 12 Months

12 Months or Longer

Total
 
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$

 
$

 
$
6,370

 
$
(130
)
 
$
6,370

 
$
(130
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
Less Than 12 Months

12 Months or Longer

Total
 
Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss

Fair
Value

Unrealized
Loss
Equity securities
$

 
$

 
$
6,349

 
$
(151
)
 
$
6,349

 
$
(151
)
At March 31, 2015, we owned one security with an unrealized loss position. This security is a publicly traded equity fund and is subject to market pricing volatility. We do not believe this unrealized loss is “other than temporary”. We have evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and based on that evaluation have the ability and intent to hold the investment until recovery of fair value.
Unrealized gains or losses on our available-for-sale securities (after applicable income tax expense or benefit) are included in accumulated other comprehensive income (loss), net. Comprehensive income for the three months ended March 31, 2015 and 2014 included net after-tax losses of $49,000 and $105,000, respectively, due to changes in the net unrealized gains/losses on securities available-for-sale.

10

Table of Contents

(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
At March 31, 2015 and December 31, 2014, loans were as follows (in thousands):
 
 
March 31,
2015
 
December 31,
2014
Commercial
$
6,188,958

 
$
5,869,219

Mortgage finance
5,408,750

 
4,102,125

Construction
1,559,545

 
1,416,405

Real estate
2,957,786

 
2,807,127

Consumer
17,868

 
19,699

Leases
93,051

 
99,495

Gross loans held for investment
16,225,958

 
14,314,070

Deferred income (net of direct origination costs)
(56,230
)
 
(57,058
)
Allowance for loan losses
(108,078
)
 
(100,954
)
Total
$
16,061,650

 
$
14,156,058

Commercial Loans and Leases. Our commercial loan and lease portfolio is comprised of lines of credit for working capital and term loans and leases to finance equipment and other business assets. Our energy production loans are generally collateralized with proven reserves based on appropriate valuation standards and take into account the risk of oil and gas price volatility. Our commercial loans and leases are underwritten after carefully evaluating and understanding the borrower’s ability to operate profitably. Our underwriting standards are designed to promote relationship banking rather than to make loans on a transactional basis. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually and are supported by accounts receivable, inventory, equipment and other assets of our clients’ businesses.
Mortgage Finance Loans. Our mortgage finance loans consist of ownership interests purchased in single-family residential mortgages funded through our mortgage finance group. These interests are typically on our balance sheet for 10 to 20 days. We have agreements with mortgage lenders and purchase interests in individual loans they originate. All loans are underwritten consistent with established programs for permanent financing with financially sound investors. Substantially all loans are conforming loans. Balances as of March 31, 2015 and December 31, 2014 are stated net of $429.8 million and $358.3 million participations sold, respectively.
Construction Loans. Our construction loan portfolio consists primarily of single- and multi-family residential properties and commercial projects used in manufacturing, warehousing, service or retail businesses. Our construction loans generally have terms of one to three years. We typically make construction loans to developers, builders and contractors that have an established record of successful project completion and loan repayment and have a substantial equity investment in the borrowers. Loan amounts are derived primarily from the bank's evaluation of expected cash flows available to service debt from stabilized projects under hypothetically stressed conditions. Construction loans are also based in part upon estimates of costs and value associated with the completed project. Sources of repayment for these types of loans may be pre-committed permanent loans from other lenders, sales of developed property or an interim loan commitment from us until permanent financing is obtained. The nature of these loans makes ultimate repayment sensitive to overall economic conditions. Borrowers may not be able to correct conditions of default in loans, increasing risk of exposure to classification, non-performing status, reserve allocation and actual credit loss and foreclosure. These loans typically have floating rates and commitment fees.
Real Estate Loans. A portion of our real estate loan portfolio is comprised of loans secured by properties other than market risk or investment-type real estate. Market risk loans are real estate loans where the primary source of repayment is expected to come from the sale, permanent financing or lease of the real property collateral. We generally provide temporary financing for commercial and residential property. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Our real estate loans generally have maximum terms of five to seven years, and we provide loans with both floating and fixed rates. We generally avoid long-term loans for commercial real estate held for investment. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Appraised values may be highly variable due to market conditions and the impact of the inability of potential purchasers and lessees to obtain financing and a lack of transactions at comparable values.

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Table of Contents

At March 31, 2015 and December 31, 2014, we had a blanket floating lien on certain real estate-secured loans, mortgage finance loans and certain securities used as collateral for Federal Home Loan Bank (“FHLB”) borrowings.
Portfolio Geographic Concentration
As of March 31, 2015, a substantial majority of our loans held for investment, excluding our mortgage finance loans and other national lines of business, were to businesses with headquarters and operations in Texas. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Additionally, we may make loans to these businesses and individuals secured by assets located outside of Texas. The risks created by this concentration have been considered by management in the determination of the appropriateness of the allowance for loan losses. Management believes the allowance for loan losses is appropriate to cover probable losses inherent in the loan portfolio at each balance sheet date.
Summary of Loan Loss Experience
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly evaluate our reserve for loan losses to maintain an appropriate level to absorb estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of reserves include the credit-worthiness of the borrower, changes in the value of pledged collateral and general economic conditions. All loan commitments rated substandard or worse and greater than $500,000 are specifically reviewed for loss potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by product types to recognize differing risk profiles among categories, and then further segregated by credit grades. Credit grades are assigned to all loans. Each credit grade is assigned a risk factor, or reserve allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-weighted by product type to calculate the required reserve. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of credit, and any needed reserve is recorded in other liabilities. Even though portions of the allowance may be allocated to specific loans, the entire allowance is available for any credit that, in management’s judgment, should be charged off.
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring. Within our criticized/classified credit grades are special mention, substandard and doubtful. Special mention loans are those that are currently protected by the current sound worth and paying capacity of the borrower, but that are potentially weak and constitute an additional credit risk. The loan has the potential to deteriorate to a substandard grade due to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are insufficiently protected by the current sound worth and paying capacity of the borrower and of the collateral pledged and may be considered impaired. Substandard loans can be accruing or can be on non-accrual depending on the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high. All doubtful loans are on non-accrual.
The reserve allocation percentages assigned to each credit grade have been developed based primarily on an analysis of our historical loss rates. The allocations are adjusted for certain qualitative factors for such things as general economic conditions and changes in credit policies and lending standards. Changes in the trend and severity of problem loans can cause the estimation of losses to differ from past experience. In addition, the reserve reflects the results of reviews performed by independent third party reviewers as reflected in their confirmations of assigned credit grades within the portfolio. The portion of the allowance that is not derived by the allowance allocation percentages compensates for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. Examples of risks that support the Bank's maintaining an unallocated reserve include the possibility of precipitous negative changes in economic conditions and borrowers' submission of financial statements or certifications of collateral value that subsequently prove to be materially inaccurate for reason of either misstatement or omission of critical information. These situations, while not common, do not necessarily correlate well with the general risk profile presented by assigned credit grade and product type categories. We evaluate many factors and conditions in determining the unallocated portion of the allowance, including amount and frequency of losses attributable to issues not specifically addressed or included in the determination and application of the allowance allocation percentages. The allowance is considered appropriate, given management’s assessment of probable losses within the portfolio as of the evaluation date, the significant growth in the loan and lease portfolio, current economic conditions in the Company’s market areas and other factors.

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Table of Contents

The methodology used in the periodic review of reserve appropriateness, which is performed at least quarterly, is designed to be dynamic and responsive to changes in portfolio credit quality. The changes are reflected in the general reserve and in specific reserves as the collectability of larger classified loans is evaluated with new information. As our portfolio has matured, historical loss ratios have been closely monitored, and our reserve appropriateness relies primarily on our loss history. The review of the reserve appropriateness is performed by executive management and presented to a committee of our board of directors for their review. The committee reports to the board as part of the board’s review on a quarterly basis of the Company’s consolidated financial statements.
The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades and non-accrual status as of March 31, 2015 and December 31, 2014 (in thousands):
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
5,933,412

 
$
5,408,750

 
$
1,557,507

 
$
2,939,032

 
$
17,640

 
$
85,253

 
$
15,941,594

Special mention
139,110

 

 

 
7,153

 
9

 
4,065

 
150,337

Substandard-accruing
57,283

 

 
2,038

 
2,619

 
219

 
3,561

 
65,720

Non-accrual
59,153

 

 

 
8,982

 

 
172

 
68,307

Total loans held for investment
$
6,188,958

 
$
5,408,750

 
$
1,559,545

 
$
2,957,786

 
$
17,868

 
$
93,051

 
$
16,225,958

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Grade:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
5,738,474

 
$
4,102,125

 
$
1,414,671

 
$
2,785,804

 
$
19,579

 
$
91,044

 
$
14,151,697

Special mention
53,839

 

 
1,734

 
8,723

 
11

 
4,363

 
68,670

Substandard-accruing
43,784

 

 

 
2,653

 
47

 
3,915

 
50,399

Non-accrual
33,122

 

 

 
9,947

 
62

 
173

 
43,304

Total loans held for investment
$
5,869,219

 
$
4,102,125

 
$
1,416,405

 
$
2,807,127

 
$
19,699

 
$
99,495

 
$
14,314,070



13

Table of Contents

The following table details activity in the reserve for loan losses by portfolio segment for the three months ended March 31, 2015 and March 31, 2014. Allocation of a portion of the reserve to one category of loans does not preclude its availability to absorb losses in other categories.
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real
Estate
 
Consumer
 
Leases
 
Unallocated
 
Total
Beginning balance
$
70,654

 
$

 
$
7,935

 
$
15,582

 
$
240

 
$
1,141

 
$
5,402

 
$
100,954

Provision for loan losses
23,375

 

 
(3,472
)
 
(5,601
)
 
149

 
(138
)
 
(4,068
)
 
10,245

Charge-offs
3,102

 

 

 
346

 
62

 

 

 
3,510

Recoveries
286

 

 
83

 
8

 
4

 
8

 

 
389

Net charge-offs (recoveries)
2,816

 

 
(83
)
 
338

 
58

 
(8
)
 

 
3,121

Ending balance
$
91,213

 
$

 
$
4,546

 
$
9,643

 
$
331

 
$
1,011

 
$
1,334

 
$
108,078

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
10,958

 
$

 
$

 
$
248

 
$

 
$
26

 
$

 
$
11,232

Loans collectively evaluated for impairment
80,255

 

 
4,546

 
9,395

 
331

 
985

 
1,334

 
96,846

Ending balance
$
91,213

 
$

 
$
4,546

 
$
9,643

 
$
331

 
$
1,011

 
$
1,334

 
$
108,078

March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Commercial
 
Mortgage
Finance
 
Construction
 
Real
Estate
 
Consumer
 
Leases
 
Unallocated
 
Total
Beginning balance
$
39,868

 
$

 
$
14,553

 
$
24,210

 
$
149

 
$
3,105

 
$
5,719

 
$
87,604

Provision for loan losses
6,245

 

 
583

 
(495
)
 
56

 
(575
)
 
(1,104
)
 
4,710

Charge-offs
2,336

 

 

 

 
61

 
50

 

 
2,447

Recoveries
210

 

 

 
8

 
25

 
124

 

 
367

Net charge-offs (recoveries)
2,126

 

 

 
(8
)
 
36

 
(74
)
 

 
2,080

Ending balance
$
43,987

 
$

 
$
15,136

 
$
23,723

 
$
169

 
$
2,604

 
$
4,615

 
$
90,234

Period end amount allocated to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
6,029

 
$

 
$

 
$
993

 
$
1

 
$
6

 
$

 
$
7,029

Loans collectively evaluated for impairment
37,958

 

 
15,136

 
22,730

 
168

 
2,598

 
4,615

 
83,205

Ending balance
$
43,987

 
$

 
$
15,136

 
$
23,723

 
$
169

 
$
2,604

 
$
4,615

 
$
90,234



14

Table of Contents

Our recorded investment in loans as of March 31, 2015December 31, 2014 and March 31, 2014 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of our impairment methodology was as follows (in thousands):
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
61,233

 
$

 
$

 
$
11,910

 
$

 
$
172

 
$
73,315

Loans collectively evaluated for impairment
6,127,725

 
5,408,750

 
1,559,545

 
2,945,876

 
17,868

 
92,879

 
16,152,643

Total
$
6,188,958

 
$
5,408,750

 
$
1,559,545

 
$
2,957,786

 
$
17,868

 
$
93,051

 
$
16,225,958

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
35,165

 
$

 
$

 
$
13,880

 
$
62

 
$
173

 
$
49,280

Loans collectively evaluated for impairment
5,834,054

 
4,102,125

 
1,416,405

 
2,793,247

 
19,637

 
99,322

 
14,264,790

Total
$
5,869,219

 
$
4,102,125

 
$
1,416,405

 
$
2,807,127

 
$
19,699

 
$
99,495

 
$
14,314,070

March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Mortgage
Finance
 
Construction
 
Real Estate
 
Consumer
 
Leases
 
Total
Loans individually evaluated for impairment
$
29,023

 
$

 
$

 
$
21,112

 
$
8

 
$
42

 
$
50,185

Loans collectively evaluated for impairment
5,176,492

 
2,688,044

 
1,437,609

 
2,208,237

 
14,807

 
95,220

 
11,620,409

Total
$
5,205,515

 
$
2,688,044

 
$
1,437,609

 
$
2,229,349

 
$
14,815

 
$
95,262

 
$
11,670,594

We have traditionally maintained an unallocated reserve component to compensate for the uncertainty and complexity in estimating loan and lease losses including factors and conditions that may not be fully reflected in the determination and application of the allowance allocation percentages. We believe the level of unallocated reserves at March 31, 2015 is warranted due to the continued uncertain economic environment which has produced losses, including those resulting from borrowers' misstatement of financial information or inaccurate certification of collateral values. Such losses are not necessarily correlated with historical loss trends or general economic conditions. Our methodology used to calculate the allowance considers historical losses; however, the historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of continued weakness in the economy.
Generally we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to principal. As of March 31, 2015, $964,000 of our non-accrual loans were earning on a cash basis compared to $310,000 at December 31, 2014. A loan is placed back on accrual status when both principal and interest are current and it is probable that we will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

15

Table of Contents

A loan held for investment is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. In accordance with ASC 310 Receivables ("ASC 310"), we have also included all restructured loans in our impaired loan totals. The following tables detail our impaired loans, by portfolio class, as of March 31, 2015 and December 31, 2014 (in thousands):
March 31, 2015
 
 
 
 
 
 
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
31,214

 
$
35,375

 
$

 
$
16,810

 
$

Energy
1,266

 
1,266

 

 
422

 
10

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
3,688

 
3,688

 

 
3,719

 

Commercial
4,132

 
4,132

 

 
3,725

 

Secured by 1-4 family

 

 

 

 

Consumer

 

 

 

 

Leases

 

 

 

 

Total impaired loans with no allowance recorded
$
40,300

 
$
44,461

 
$

 
$
24,676

 
$
10

With an allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
28,117

 
$
28,117

 
$
10,860

 
$
25,741

 
$

Energy
636

 
636

 
98

 
881

 

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
1,944

 
1,944

 
46

 
3,451

 

Commercial
436

 
436

 
65

 
496

 

Secured by 1-4 family
1,710

 
1,710

 
137

 
1,833

 

Consumer

 

 

 
41

 

Leases
172

 
172

 
26

 
173

 

Total impaired loans with an allowance recorded
$
33,015

 
$
33,015

 
$
11,232

 
$
32,616

 
$

Combined:
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
Business loans
$
59,331

 
$
63,492

 
$
10,860

 
$
42,551

 
$

Energy
1,902

 
1,902

 
98

 
1,303

 
10

Construction
 
 
 
 
 
 
 
 
 
Market risk

 

 

 

 

Real estate
 
 
 
 
 
 
 
 
 
Market risk
5,632

 
5,632

 
46

 
7,170

 

Commercial
4,568

 
4,568

 
65

 
4,221

 

Secured by 1-4 family
1,710

 
1,710

 
137

 
1,833

 

Consumer

 

 

 
41

 

Leases
172

 
172

 
26

 
173

 

Total impaired loans
$
73,315

 
$
77,476

 
$
11,232

 
$
57,292

 
$
10


16

Table of Contents

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With no related allowance recorded: