2
0
1
0
A
N
N
U
A
L
R
E
P
O
R
T
2 0 1 0 A N N U A L R E P O RT
TEXAS CAPITAL BANCSHARES, INC.
TEXAS CAPITAL BANK
www.texascapitalbank.com
NASDAQ ®: TCBI
Texas Capital Bancshares, Inc. is the parent company of Texas Capital
Bank, a commercial bank that caters to businesses and private clients
with offi ces in Austin, Dallas, Fort Worth, Houston and San Antonio.
CO R PO R ATE INFO RMATION
IN VESTMEN T HI GH LIG HTS
•
Solid earnings growth in 2010
•
Exceptional deposit growth, especially in demand deposits
•
Continued focus on credit quality
•
Signifi cant growth in loans in 2010
2010 FIN ANCIA L SUMMA RY
Dollars in the thousands
Dec 2010
Dec 2009
% Change
Total Assets
Total Deposits
Loans Held for Investment
Total Loans
Net Income
Diluted Earnings Per Share
Return on Assets
Return on Equity
$6,445,679
$5,455,401
$4,711,330
$5,905,539
$ 37,323
$
1.00
$5,698,318
$4,120,725
$4,457,293
$5,150,797
$ 24,387
$
0.55
13%
32%
6%
15%
53%
82%
0.63%
0.46%
—
7.23% 5.15% —
DEP OSIT AN D LOA N GROWTH
Loan Held for Investment CAGR:
Total Deposits CAGR:
Total Assets CAGR:
18%
17%
17%
7
8
2
,
4
3
6
4
,
3
6
6
0
,
3
9
5
6
,
3
9
6
0
,
3
2
2
7
,
2
3
0
0
,
3
5
9
4
,
6 2
7
0
,
2
3
8
5
,
2
0
9
7
,
1
5
6
5
,
1
0
9
1
,
2
5
4
4
,
0 1
3
2
.
1
($ in millions)
$7,000
$6,500
$6,000
$5,500
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
6
4
4
,
6
5
5
4
,
5
1
1
7
,
4
8
9
6
,
5
7
5
4
,
4
1
2
1
,
4
0
4
1
5
,
7
2
0
,
4
3
3
3
,
3
2003
2004
2005
2006
2007
2008
2009
2010
Note: All balances above reflect continuing operations
* Excludes loans held for sale.
^From continuing operations.
Loans HFI* Deposits Total Assets^
Stock Exchange
Texas Capital Bancshares, Inc is
traded under the symbol TCBI
on the Nasdaq Stock Market.®
Transfer Agent
Computershare Investor Services LLC
250 Royall Street, Mail Stop 1A
Canton, Massachusetts 02021
800.568.3476
Annual Meeting
The annual meeting of shareholders
will be held on May 17 at 10 a.m. at
2000 McKinney Avenue 7th fl oor
in Dallas.
Other Information
Corporate governance and other
investor information may be found at
www.texascapitalbank.com
LO CAT IO NS
Corporate Headquarters
Dallas/Premier Place
Plano
2000 McKinney Avenue
5910 North Central Expressway
5800 Granite Parkway
Dallas, Texas 75201
214.932.6600
Austin
114 West 7th Street
Austin, Texas 78701
512.236.6770
Midway/Spring Valley
14131 Midway Road
Addison, Texas 75001
972.450.5050
Dallas, Texas 75206
214.890.5800
Fort Worth
500 Throckmorton
Plano, Texas 75024
972.963.3000
San Antonio
745 East Mulberry
Fort Worth, Texas 76102
San Antonio, Texas 78212
817.212.8333
210.785.3600
Houston
One Riverway
San Antonio/Quarry Heights
7373 Broadway
Houston, Texas 77056
San Antonio, Texas 78209
713.439.5900
210.283.5220
BOAR D O F DIRE CT O RS
Frederick B. Hegi, Jr.
Lee Roy Mitchell
James R. Holland, Jr.
George F. Jones, Jr.
W.W. “Bo” McAllister III
Elysia Holt Ragusa
Steven P. Rosenberg
Robert W. Stallings
Ian J. Turpin
Peter B. Bartholow
James H. Browning
Joseph M. Grant
Larry L. Helm
Dear Shareholder:
It has been another record year for Texas Capital with record earnings, assets and deposits. It was a year of very
solid earnings growth, which came even as the persistent weakness of the national economy caused credit
costs to remain elevated throughout the banking industry.
We continued our focus on credit quality in 2010. Credit costs remained higher than historical levels for Texas
Capital, but they were manageable, consistent with our expectations and showed an improved trajectory at
year end. In fact, we expect to see a reduction in credit costs in 2011. By every credit metric, Texas Capital has
continued to maintain a strong position among peers throughout the nation.
Texas Capital is well positioned in Texas, the state with what we believe is the best regional economy in the
United States. We have extremely strong core earnings power and were one of the few banks in the country
showing real, organic growth in net revenue and profit. That is and has been our story for quite some time. We
grow organically and not by acquisition because we believe that brings the greatest returns to our
shareholders.
In closing, I would like to emphasize five very important points.
• Our core earnings power should continue to improve in 2011.
• We have had and expect to continue to benefit from industry leading growth in loans held for
investment.
• Our capital position is strong.
• Prospects for improving credit quality and reduction in credit costs are very positive for 2011.
• Texas Capital is well positioned to take advantage of market opportunities as economic conditions
improve.
Lastly, I would like to thank our shareholders, customers and employees without whom we could not remain
“The Best Business Bank in Texas.”
Sincerely yours,
George Jones
President and Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
¥ Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 2010
n Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from
to
(No fee required)
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
001-34657
(Commission File Number)
75-2679109
(I.R.S. Employer Identification Number)
2000 McKinney Avenue, Suite 700,
Dallas, Texas, U.S.A.
(Address of principal executive offices)
75201
(Zip Code)
214-932-6600
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Common stock, par value $0.01 per share
(Title of class)
The Nasdaq Stock Market LLC
No ¥
No ¥
(Name of Exchange on Which Registered)
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the issuer is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities
Act. Yes n
Indicate by check mark whether the issuer (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 ¥
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 n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer n
Smaller reporting company n
Non-accelerated filer n
Accelerated filer ¥
No n
No n
(Do not check if a smaller reporting company)
Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Securities
Act). Yes n
No ¥
As of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the
aggregate market value of the shares of common stock held by non-affiliates, based upon the closing price per
share of the registrant’s common stock as reported on The Nasdaq Global Select Market, was approximately
$572,842,000. There were 37,116,772 shares of the registrant’s common stock outstanding on February 22,
2011.
Portions of the registrant’s Proxy Statement relating to the 2011 Annual Meeting of Stockholders, which will
be filed no later than April 7, 2011, are incorporated by reference into Part III of this Form 10-K.
Documents Incorporated by Reference
1
10
17
18
19
19
19
21
26
54
57
93
93
96
96
96
96
96
96
96
TABLE OF CONTENTS
PART I
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
[Removed and Reserved]
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Consolidated Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial
Item 9.
Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
PART IV
i
ITEM 1. BUSINESS
Background
Texas Capital Bancshares, Inc., a financial holding company, is the parent of Texas Capital Bank, National
Association, a Texas-based bank headquartered in Dallas, with banking offices in Dallas, Houston, Fort Worth,
Austin and San Antonio, the state’s five largest metropolitan areas. All of our business activities are conducted
through our bank subsidiary. Our market focus is commercial businesses and high net worth individuals, and
we offer a variety of banking products and services to our customers. We have focused on organic growth,
maintenance of credit quality and bankers with strong personal and professional relationships in their
communities.
We focus on serving the needs of commercial and high net worth customers, the core of our model since our
organization in March 1998. We do not incur the costs of competing in an over-branched and over-crowded
consumer market. We are primarily a secured lender in Texas, and, as a result, we have experienced a low
percentage of charge-offs relative to both total loans and non-performing loans since inception. Our loan
portfolio is diversified by industry, collateral and geography in Texas.
Growth History
We have grown substantially in both size and profitability since our formation. The table below sets forth data
regarding the growth of key areas of our business from December 2006 through December 2010 (in
thousands):
2010
2009
$4,711,330
5,905,539
6,448,179
1,451,307
5,455,401
528,319
$4,457,293
5,150,797
5,698,318
899,492
4,120,725
481,360
December 31
2008
$4,027,871
4,524,222
5,141,034
587,161
3,333,187
387,073
2007
2006
$3,462,608
3,636,774
4,287,853
529,334
3,066,377
295,138
$2,722,097
2,921,111
3,659,445
513,930
3,069,330
253,515
Loans held for investment
Total loans(1)
Assets(1)
Demand deposits
Total deposits
Stockholders’ equity
(1) From continuing operations.
The following table provides information about the growth of our loan portfolio by type of loan from
December 2006 to December 2010 (in thousands):
2010
2009
$2,592,924
2,029,766
270,008
1,759,758
1,194,209
$2,457,533
1,903,127
669,426
1,233,701
693,504
December 31
2008
$2,276,054
1,656,221
667,437
988,784
496,351
2007
2006
$2,035,049
1,347,429
573,459
773,970
174,166
$1,602,577
1,068,963
538,586
530,377
199,014
490
95,607
21,470
586
99,129
25,065
648
86,937
32,671
731
74,523
28,334
16,844
45,280
21,113
Commercial loans
Total real estate loans
Construction loans
Real estate term loans
Loans held for sale
Loans held for sale from
discontinued
operations
Equipment leases
Consumer loans
The Texas Market
The Texas market for banking services is highly competitive. Texas’ largest banking organizations are
headquartered outside of Texas and are controlled by out-of-state organizations. We also compete with other
1
providers of financial services, such as savings and loan associations, credit unions, consumer finance
companies, securities firms, insurance companies, insurance agencies, commercial finance and leasing
companies, full service brokerage firms and discount brokerage firms. We believe that many middle market
companies and high net worth individuals are interested in banking with a company headquartered in, and
with decision-making authority based in, Texas and with established Texas bankers who have the expertise to
act as trusted advisors to the customer with regard to its banking needs. Our banking centers in our target
markets are served by experienced bankers with lending expertise in the specific industries found in their
market areas and established community ties. We believe our bank can offer customers more responsive and
personalized service. We believe that, if we service these customers properly, we will be able to establish long-
term relationships and provide multiple products to our customers, thereby enhancing our profitability.
Business Strategy
Utilizing the business and community ties of our management and their banking experience, our strategy is
building an independent bank that focuses primarily on middle market business customers and high net worth
individuals in each of the five major metropolitan markets of Texas. To achieve this, we seek to implement the
following strategies:
• target middle market businesses and high net worth individuals;
• grow our loan and deposit base in our existing markets by hiring additional experienced Texas bankers;
• continue the emphasis on credit policy to provide for credit quality consistent with long-term
objectives;
• improve our financial performance through the efficient management of our infrastructure and capital
base, which includes:
• leveraging our existing infrastructure to support a larger volume of business;
• maintaining stringent internal approval processes for capital and operating expenses;
• extensive use of outsourcing to provide cost-effective operational support with service levels
consistent with large-bank operations; and
• extend our reach within our target markets of Austin, Dallas, Fort Worth, Houston and San Antonio
through service innovation and service excellence.
Products and Services
We offer a variety of loan, deposit account and other financial products and services to our customers.
Business Customers. We offer a full range of products and services oriented to the needs of our business
customers, including:
• commercial loans for general corporate purposes including financing for working capital, internal
growth, acquisitions and financing for business insurance premiums;
• real estate term and construction loans;
• equipment leasing;
• treasury management services;
• trust and wealth management services; and
• letters of credit.
Individual Customers. We also provide complete banking services for our individual customers, including:
• personal trust and wealth management services;
• certificates of deposit;
2
• interest bearing and non-interest bearing checking accounts with optional features such as Visa» debit/
ATM cards and overdraft protection;
• traditional money market and savings accounts;
• consumer loans, both secured and unsecured;
• branded Visa» credit card accounts, including gold-status accounts; and
• internet banking.
Lending Activities
We target our lending to middle market businesses and high net worth individuals that meet our credit
standards. The credit standards are set by our standing Credit Policy Committee with the assistance of our
Bank’s Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our
portfolio. Our Credit Policy Committee is comprised of senior Bank officers including our Bank’s Chief
Executive Officer, our Bank’s President/Chief Lending Officer and our Bank’s Chief Credit Officer. We
believe we have maintained a diversified loan portfolio. Credit policies and underwriting guidelines are
tailored to address the unique risks associated with each industry represented in the portfolio. Our credit
standards for commercial borrowers reference numerous criteria with respect to the borrower, including
historical and projected financial information, strength of management, acceptable collateral and associated
advance rates, and market conditions and trends in the borrower’s industry. In addition, prospective loans are
also analyzed based on current industry concentrations in our loan portfolio to prevent an unacceptable
concentration of loans in any particular industry. We believe our credit standards are consistent with achieving
business objectives in the markets we serve and will generally mitigate risks. We believe that we differentiate
our bank from its competitors by focusing on and aggressively marketing to our core customers and
accommodating, to the extent permitted by our credit standards, their individual needs.
We generally extend variable rate loans in which the interest rate fluctuates with a predetermined indicator
such as the United States prime rate or the London Interbank Offered Rate (LIBOR). Our use of variable rate
loans is designed to protect us from risks associated with interest rate fluctuations since the rates of interest
earned will automatically reflect such fluctuations.
Deposit Products
We offer a variety of deposit products to our core customers at interest rates that are competitive with other
banks. Our business deposit products include commercial checking accounts, lockbox accounts, cash con-
centration accounts, and other treasury management services, including an on-line system. Our treasury
management on-line system offers information services, wire transfer initiation, ACH initiation, account
transfer, and service integration. Our consumer deposit products include checking accounts, savings accounts,
money market accounts and certificates of deposit. We also allow our consumer deposit customers to access
their accounts, transfer funds, pay bills and perform other account functions over the Internet and through
ATM machines.
Trust and Wealth Management
Our trust and wealth management services include investment management, personal trust and estate
services, custodial services, retirement accounts and related services. Our investment management profes-
sionals work with our clients to define objectives, goals and strategies for their investment portfolios. We assist
the customer with the selection of an investment manager and work with the client to tailor the investment
program accordingly. We also offer retirement products such as individual retirement accounts and admin-
istrative services for retirement vehicles such as pension and profit sharing plans.
3
Cayman Islands Branch
In June 2003, we received authorization from the Cayman Islands Monetary Authority to establish a branch of
our bank in the Cayman Islands. We believe that a Cayman Islands branch of our bank enables us to offer more
competitive cash management and deposit products to our core customers. Our Cayman Islands branch
consists of an agented office to facilitate our offering of these products. We opened our Cayman Islands branch
in September 2003. All deposits in the Cayman Branch come from U.S. based customers of our Bank. Deposits
do not originate from foreign sources, and funds transfers neither come from nor go to facilities outside of the
U.S. All deposits are in U.S. dollars. As of December 31, 2010, our Cayman Islands deposits totaled
$458.9 million.
Employees
As of December 31, 2010, we had 699 full-time employees relating to our continuing operations. None of our
employees is represented by a collective bargaining agreement and we consider our relations with our
employees to be good.
Regulation and Supervision
Current banking laws contain numerous provisions affecting various aspects of our business. Our bank is
subject to federal banking laws and regulations that impose specific requirements on and provide regulatory
oversight of virtually all aspects of our operations. These laws and regulations are generally intended for the
protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, or the
FDIC, and the banking system as a whole, rather than for the protection of our stockholders. Banking
regulators have broad enforcement powers over financial holding companies and banks and their affiliates,
including the power to establish regulatory requirements, impose large fines and other penalties for violations
of laws and regulations. The following is a brief summary of laws and regulations to which we are subject.
National banks such as our bank are subject to examination by the Office of the Comptroller of the Currency,
or the OCC. The OCC and the FDIC regulate or monitor all areas of a national bank’s operations, including
security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest rate risk management, establishment
of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to
carry on safe lending and deposit gathering practices. The OCC requires national banks to maintain capital
ratios and imposes limitations on its aggregate investment in real estate, bank premises and furniture and
fixtures. National banks are currently required by the OCC to prepare quarterly reports on their financial
condition and to conduct an annual audit of their financial affairs in compliance with minimum standards and
procedures prescribed by the OCC.
Restrictions on Dividends and Repurchases. Our source of funding to pay dividends is our bank. Our bank is
subject to the dividend restrictions set forth by the OCC. Under such restrictions, national banks may not,
without the prior approval of the OCC, declare dividends in excess of the sum of the current year’s net profits
plus the retained net profits from the prior two years, less any required transfers to surplus. In addition, under
the Federal Deposit Insurance Corporation Improvement Act of 1991, our bank may not pay any dividend if
payment would cause it to become undercapitalized or in the event it is undercapitalized.
It is the policy of the Federal Reserve, which regulates financial holding companies such as ours, that financial
holding companies should pay cash dividends on common stock only out of income available over the past
year and only if prospective earnings retention is consistent with the organization’s expected future needs and
financial condition. The policy provides that financial holding companies should not maintain a level of cash
dividends that undermines the financial holding company’s ability to serve as a source of strength to its
banking subsidiaries.
If, in the opinion of the applicable federal bank regulatory authority, a depository institution or holding
company is engaged in or is about to engage in an unsound practice (which could include the payment of
dividends), such authority may require, generally after notice and hearing, that such institution or holding
4
company cease and desist such practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution’s or holding company’s capital base to an inadequate level would be such
an unsafe banking practice. Moreover, the Federal Reserve and the FDIC have issued policy statements
providing that financial holding companies and insured depository institutions generally should only pay
dividends out of current operating earnings.
Supervision by the Federal Reserve. We operate as a financial holding company registered under the Bank
Holding Company Act, and, as such, we are subject to supervision, regulation and examination by the Federal
Reserve. The Bank Holding Company Act and other Federal laws subject financial holding companies to
particular restrictions on the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
Because we are a legal entity separate and distinct from our bank, our right to participate in the distribution of
assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of
the subsidiary’s creditors. In the event of a liquidation or other resolution of a subsidiary, the claims of
depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of
holders of any obligation of the institution to its stockholders, including any financial holding company (such
as ours) or any stockholder or creditor thereof.
Support of Subsidiary Banks. Under Federal Reserve policy, a financial holding company is expected to act as
a source of financial and managerial strength to each of its banking subsidiaries and commit resources to their
support. Such support may be required at times when, absent this Federal Reserve policy, a holding company
may not be inclined to provide it. As discussed below, a financial holding company in certain circumstances
could be required to guarantee the capital plan of an undercapitalized banking subsidiary in order for it to be
accepted by the regulators.
In the event of a financial holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the
bankruptcy trustee will be deemed to have assumed and is required to cure immediately any deficit under any
commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of
an insured depository institution, and any claim for breach of such obligation will generally have priority over
most other unsecured claims.
Capital Adequacy Requirements. The bank regulators have adopted a system using risk-based capital guide-
lines to evaluate the capital adequacy of banking organizations. Under the guidelines, specific categories of
assets and off-balance sheet activities such as letters of credit are assigned different risk weights, based
generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a “risk weighted” asset base. The guidelines require a minimum total risk-based capital
ratio of 8% (of which at least 4% is required to consist of Tier 1 capital elements).
In addition to the risk-based capital guidelines, the OCC and the Federal Reserve uses a leverage ratio as an
additional tool to evaluate the capital adequacy of banking organizations. The leverage ratio is a company’s
Tier 1 capital divided by its average total consolidated assets. Banking organizations must maintain a
minimum leverage ratio of at least 3%, although most organizations are expected to maintain leverage ratios
that are at least 100 to 200 basis points above this minimum ratio.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally
applicable to banking organizations that meet specified criteria, assuming that they have the highest
regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital
positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements
for a particular banking organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve and OCC guidelines also provide that banking organizations experiencing significant
internal growth or making acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the
regulations of the bank regulators provide that concentration of credit risks arising from non-traditional
activities, as well as an institution’s ability to manage these risks, are important factors to be taken into account
by regulatory agencies in assessing an organization’s overall capital adequacy.
5
Transactions with Affiliates and Insiders. Our bank is subject to Section 23A of the Federal Reserve Act which
places limits on the amount of loans or extensions of credit to affiliates that it may make. In addition,
extensions of credit must be collateralized by Treasury securities or other collateral in prescribed amounts.
Most of these loans and other transactions must be secured in prescribed amounts. It also limits the amount of
advances to third parties which are collateralized by our securities or obligations or the securities or obligations
of any of our non-banking subsidiaries.
Our bank also is subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits an
institution from engaging in transactions with affiliates unless the transactions are on terms substantially the
same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with non-affiliates.
We are subject to restrictions on extensions of credit to executive officers, directors, principal stockholders and
their related interests. These restrictions contained in the Federal Reserve Act and Federal Reserve
Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions
include limits on loans to one borrower and conditions that must be met before such a loan can be made.
There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot
exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser
amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation
of applicable restrictions. See additional restrictions on transactions with affiliates and insiders discussed in
the Dodd-Frank Act section.
Corrective Measures for Capital Deficiencies. The Federal Deposit Insurance Corporation Improvement Act
imposes a regulatory matrix which requires the federal banking agencies, which include the FDIC, the OCC
and the Federal Reserve, to take “prompt corrective action” with respect to capital deficient institutions. The
prompt corrective action provisions subject undercapitalized institutions to an increasingly stringent array of
restrictions, requirements and prohibitions as their capital levels deteriorate and supervisory problems mount.
Should these corrective measures prove unsuccessful in recapitalizing the institution and correcting its
problems, the Federal Deposit Insurance Corporation Improvement Act mandates that the institution be
placed in receivership.
Pursuant to regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act, the
corrective actions that the banking agencies either must or may take are tied primarily to an institution’s
capital levels. In accordance with the framework adopted by the Federal Deposit Insurance Corporation
Improvement Act, the banking agencies have developed a classification system, pursuant to which all banks
and thrifts are placed into one of five categories. Agency regulations define, for each capital category, the
levels at which institutions are “well capitalized”, “adequately capitalized”, “undercapitalized”, “signifi-
cantly undercapitalized” and “critically undercapitalized.” A well capitalized bank has a total risk-based
capital ratio (total capital to risk-weighted assets) of 10% or higher; a Tier 1 risk-based capital ratio (Tier 1
capital to risk-weighted assets) of 6% or higher; a leverage ratio (Tier 1 capital to total adjusted assets) of 5% or
higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital
level for any capital measure. An institution is critically undercapitalized if it has a tangible equity to total
assets ratio that is equal to or less than 2%. Our bank’s total risk-based capital ratio was 10.19% at December 31,
2010 and, as a result, it is currently classified as “well capitalized” for purposes of the OCC’s prompt corrective
action regulations. The bank’s capital category of “well capitalized” is determined solely for the purposes of
applying prompt corrective action and that the capital category may not constitute an accurate representation
of the bank’s overall financial condition or prospects. The OCC, Federal Reserve and FDIC may, pursuant to
changes in their regulatory or statutory responsibilities, determine that additional capital may be required.
In addition to requiring undercapitalized institutions to submit a capital restoration plan which must be
guaranteed by its holding company (up to specified limits) in order to be accepted by the bank regulators,
agency regulations contain broad restrictions on activities of undercapitalized institutions including asset
growth, acquisitions, branch establishment and expansion into new lines of business. With some exceptions,
an insured depository institution is prohibited from making capital distributions, including dividends, and is
6
prohibited from paying management fees to control persons if the institution would be undercapitalized after
any such distribution or payment.
As an institution’s capital decreases, the OCC’s enforcement powers become more severe. A significantly
undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid
and transactions with affiliates, removal of management and other restrictions. The OCC has only very limited
discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver
or conservator (the FDIC) if the capital deficiency is not corrected promptly.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain
administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no tangible capital.
BASEL III. On December 15, 2010, the Basel Committee released its final framework for strengthening
international capital and liquidity regulation, known as Basel III. When fully phased in on January 1, 2019,
Basel III requires banks to maintain the following new standards and introduces a new capital measure
“Common Equity Tier 1”, or “CET1”. Basel III increases the CET1 to risk-weighted assets to 4.5%, and
introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets,
raising the target CET1 to risk-weighted assets ratio to 7%. It requires banks to maintain a minimum ratio of
Tier 1 capital to risk weighted assets of at least 6.0%, plus the capital conservation buffer effectively resulting
in Tier 1 capital ratio of 8.5%. Basel III increases the minimum total capital ratio to 8.0% plus the capital
conservation buffer, increasing the minimum total capital ratio to 10.5%. Basel III also introduces a non-risk
adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new
liquidity standards. The Basel III capital and liquidity standards will be phased in over a multi-year period,
but the implementation of the new framework will commence January 1, 2013. On that date, banks will be
required to meet the following minimum capital ratios: 3.5% CET1 to risk-weighted assets, 4.5% Tier 1
capital to risk-weighted assets and 8.0% total capital to risk-weighted assets. Although the Basel III framework
is not directly binding on the U.S. bank regulatory agencies, the regulatory agencies will likely implement
changes to the capital adequacy standards applicable to the insured depository institutions and their holding
companies in light of Basel III.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) contains important
requirements for public companies in the area of financial disclosure and corporate governance. In accordance
with Section 302(a) of Sarbanes-Oxley, written certifications by our chief executive officer and chief financial
officer are required. These certifications attest that our quarterly and annual reports do not contain any untrue
statement of a material fact.
Financial Modernization Act of 1999. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (“the
Modernization Act”):
• allows bank holding companies meeting management, capital and Community Reinvestment Act
standards to engage in a substantially broader range of non-banking activities than was permissible
prior to enactment, including insurance underwriting and making merchant banking investments in
commercial and financial companies;
• allows insurers and other financial services companies to acquire banks; and
• removes various restrictions that applied to bank holding company ownership of securities firms and
mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank
holding companies that also engage in insurance and securities operations.
The Modernization Act also modifies other current financial laws, including laws related to financial privacy.
The financial privacy provisions generally prohibit financial institutions, including us, from disclosing non-
public personal financial information to non-affiliated third parties unless customers have the opportunity to
“opt out” of the disclosure.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (“CRA”) requires depository
institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking
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practice. Under the CRA, each depository institution is required to help meet the credit needs of its market
areas by, among other things, providing credit to low- and moderate-income individuals and communities.
Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In
order for a financial holding company to commence new activity permitted by the Bank Holding Company
Act, each insured depository institution subsidiary of the financial holding company must have received a
rating of at least “satisfactory” in its most recent examination under the CRA.
The USA Patriot Act, the International Money Laundering Abatement and Financial Anti-Terrorism Act and the Bank
Secrecy Act. A major focus of governmental policy on financial institutions in recent years has been aimed at
combating money laundering and terrorist financing. The USA Patriot Act of 2001 and the International
Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 substantially broadened the scope of
United States anti-money laundering laws and penalties, specifically related to the Bank Secrecy Act, and
expanded the extra-territorial jurisdiction of the United States. The United States Treasury Department has
issued a number of implementing regulations which apply various requirements of the USA Patriot Act to
financial institutions such as our bank. These regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and
terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with
relevant laws or regulations, could have serious legal, reputational and financial consequences for the
institution. Because of the significance of regulatory emphasis on these requirements, we will continue to
expend significant staffing, technology and financial resources to maintain programs designed to ensure
compliance with applicable laws and regulations and an effective audit function for testing our compliance
with the Bank Secrecy Act on an ongoing basis.
The Dodd-Frank Act. On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The
Dodd-Frank Act will have a broad impact on the financial services industry, imposing significant regulatory
and compliance changes, including the designation of certain financial companies as systemically significant,
the imposition of increased capital, leverage, and liquidity requirements, and numerous other provisions
designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial
services sector. Additionally, the Dodd-Frank Act establishes a new framework of authority to conduct
systemic risk oversight within the financial system to be distributed among new and existing federal
regulatory agencies, including the Financial Stability Oversight Council, or Council, the Federal Reserve,
the OCC, and the FDIC.
The following items provide a brief description of certain provisions of the Dodd-Frank Act that may have an
affect on us.
• The Dodd-Frank Act significantly reduces the ability of national banks to rely upon federal pre-
emption of state consumer financial laws. Although the OCC, as the primary regulator of national
banks, will have the ability to make preemption determinations where certain conditions are met, the
broad rollback of federal preemption has the potential to create a patchwork of federal and state
compliance obligations. This could, in turn, result in significant new regulatory requirements appli-
cable to us and certain of our lending activities, with potentially significant changes in our operations
and increases in our compliance costs. It could also result in uncertainty concerning compliance, with
attendant regulatory and litigation risks.
• The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for insured
deposits. The Dodd-Frank Act also extends until January 1, 2013, federal deposit coverage for the full
net amount held by depositors in non-interest bearing transaction accounts. Amendments to the FDIC
Act also revise the assessment base against which an insured depository institution’s deposit insurance
premiums paid to DIF will be calculated. Under the amendments, the assessment base will no longer
be the institution’s deposit base, but rather its average consolidated total assets less its average tangible
equity. Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of
the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total
insured deposits, and eliminating the requirement that the FDIC pay dividends to depository
8
institutions when the reserve ratio exceeds certain thresholds. Several of these provisions could
increase the FDIC deposit insurance premiums paid by us.
• The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under
Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered
transactions” and an increase in the amount of time for which collateral requirements regarding
covered credit transactions must be satisfied. Insider transaction limitations are expanded through the
strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to
the various limits, including derivatives transactions, repurchase agreements, reverse repurchase
agreements and securities lending or borrowing transactions. Restrictions are also placed on certain
asset sales to and from an insider to an institution, including requirements that such sales be on market
terms and, in certain circumstances, approved by the institution’s board of directors.
• The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to
one borrower. Federal banking law currently limits a federal thrift’s ability to extend credit to one
person (or group of related persons) in an amount exceeding certain thresholds. The Dodd-Frank Act
expands the scope of these restrictions to include credit exposure arising from derivative transactions,
repurchase agreements, and securities lending and borrowing transactions.
• The Dodd-Frank Act authorizes the establishment of the Consumer Financial Protection Bureau
(“the CFPB”), which has the power to issue rules governing all financial institutions that offer financial
services and products to consumers. The CFPB has the authority to monitor markets for consumer
financial products to ensure that consumers are protected from abusive practices. Financial institutions
will be subject to increased compliance and enforcement costs associated with regulations established
by the CFPB.
• The Dodd-Frank Act may create risks of “secondary actor liability” for lenders that provide financing
to entities offering financial products to consumers. We may incur compliance and other costs in
connection with administration of credit extended to entities engaged in activities covered by Dodd-
Frank.
• The Dodd-Frank Act addresses many investor protection, corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies, including ours. The
Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on
executive compensation; (2) enhances independence requirements for compensation committee
members; (3) requires companies listed on national securities exchanges to adopt incentive-based
compensation clawback policies for executive officers; (4) provides the SEC with authority to adopt
proxy access rules that would allow stockholders of publicly traded companies to nominate candidates
for election as a director and have those nominees included in a company’s proxy materials; (5) pro-
hibits uninstructed broker votes on election of directors, executive compensation matters (including
say on pay advisory votes), and other significant matters, and (6) requires disclosure on board
leadership structure
Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be subject to
regulations implemented over the course of several years. Given the uncertainty associated with the manner
in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and
through regulations, the full extent of the impact such requirements will have on our operations is unclear.
The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities,
require changes to certain of our business practices, impose upon us more stringent capital, liquidity and
leverage requirements or otherwise adversely affect our business. These changes may also require us to invest
significant management attention and resources to evaluate and make any changes necessary to comply with
new statutory and regulatory requirements. Failure to comply with the new requirements may negatively
impact our results of operations and financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their interpretations would have on us, these
changes could be materially adverse to our investors.
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Available Information
Under the Securities Exchange Act of 1934, we are required to file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission (“SEC”). You may read and
copy any document filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public
reference room. The SEC maintains a website at www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers that file electronically with the SEC. We file electronically
with the SEC.
We make available, free of charge through our website, our reports on Forms 10-K, 10-Q and 8-K, and
amendments to those reports, as soon as reasonably practicable after such reports are filed with or furnished to
the SEC. Additionally, we have adopted and posted on our website a code of ethics that applies to our principal
executive officer, principal financial officer and principal accounting officer. The address for our website is
www.texascapitalbank.com. We will provide a printed copy of any of the aforementioned documents to any
requesting shareholder.
ITEM 1A. RISK FACTORS
An investment in our common stock involves certain risks. You should consider carefully the following risks
and other information in this report, including our financial information and related notes, before investing in
our common stock. The risks and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties that management is not aware of or focused on or that management currently deems
immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.
Risk Factors Associated With Our Business
We must effectively manage our credit risk. There are risks inherent in making any loan, including risks with
respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and
industry conditions, risks inherent in dealing with individual borrowers, including increased risks of fraud
perpetrated by customers of the bank and risks resulting from uncertainties as to the future value of collateral.
The risk of non-payment of loans is inherent in commercial banking. Although we attempt to minimize our
credit risk by carefully monitoring the concentration of our loans within specific industries and through
prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and
approval procedures will reduce these lending risks. We cannot assure you that our credit administration
personnel, policies and procedures will adequately adapt to changes in economic or any other conditions
affecting customers and the quality of the loan portfolio.
Our results of operations and financial condition would be adversely affected if our allowance for loan losses is not
sufficient to absorb actual losses. Experience in the banking industry indicates that a portion of our loans in all
categories of our lending business will become delinquent, and some may only be partially repaid or may
never be repaid at all. Our methodology for establishing the adequacy of the allowance for loan losses depends
on subjective application of risk grades as indicators of borrowers’ ability to repay. Deterioration in general
economic conditions and unforeseen risks affecting customers may have an adverse effect on borrowers’
capacity to repay timely their obligations before risk grades could reflect those changing conditions. In times
of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a
percent of total loans. Changes in economic and market conditions may increase the risk that the allowance
would become inadequate if borrowers experience economic and other conditions adverse to their businesses.
Maintaining the adequacy of our allowance for loan losses may require that we make significant and
unanticipated increases in our provisions for loan losses, which would materially affect our results of
operations and capital adequacy. Recognizing that many of our loans individually represent a significant
percentage of our total allowance for loan losses, adverse collection experience in a relatively small number of
loans could require an increase in our allowance. Federal regulators, as an integral part of their respective
supervisory functions, periodically review our allowance for loan losses. The regulatory agencies may require
us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for
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loan losses and to recognize further loan charge-offs based upon their judgments, which may be different from
ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative
effect on our results of operations and financial condition.
Our growth plans are dependent on the availability of capital and funding. Our historical dependence on trust
preferred and other forms of debt capital became limited by market conditions beyond our control, as has been
evidenced with the economic downturn and issues affecting the financial services industry. Pricing of capital,
in terms of interest or dividend requirements or dilutive impact on earnings available to shareholders, has
increased dramatically, and an increase in costs of capital can have a direct impact on operating performance
and the ability to achieve growth objectives. Costs of funding could also increase dramatically and affect our
growth objectives, as well as our financial performance. Additionally, the FDIC’s guarantee on non-interest
bearing deposits was extended to January 1, 2013 but subsequent to that date we could be adversely affected
in our ability to attract and maintain non-interest bearing deposits as a source of cost-effective funding.
Adverse changes in operating performance or financial condition or changes in statutory or regulatory
requirements could make raising additional capital difficult or extremely expensive.
Our operations are significantly affected by interest rate levels. Our profitability is dependent to a large extent on
our net interest income, which is the difference between interest income we earn as a result of interest paid to
us on loans and investments and interest we pay to third parties such as our depositors and those from whom
we borrow funds. Like most financial institutions, we are affected by changes in general interest rate levels,
which are currently at record low levels, and by other economic factors beyond our control. Prolonged periods
of unusually low interest rates may have an adverse effect on earnings or returns by reducing the value of
demand deposits, stockholders’ equity and fixed rate liabilities with rates higher than available earning assets.
Interest rate risk can result from mismatches between the dollar amount of repricing or maturing assets and
liabilities and from mismatches in the timing and rate at which our assets and liabilities reprice. Although we
have implemented strategies which we believe reduce the potential effects of changes in interest rates on our
results of operations, these strategies will not always be successful. In addition, any substantial and prolonged
increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely
affect their ability to repay their outstanding loans by increasing their costs since most of our loans have
adjustable interest rates that reset periodically. If our borrowers’ ability to repay is affected, our level of non-
performing assets would increase and the amount of interest earned on loans would decrease, thereby having
an adverse effect on operating results. Any of these events could adversely affect our results of operations or
financial condition.
Our business faces unpredictable economic and business conditions. General economic conditions and specific
business conditions impact the banking industry and our customers’ businesses. The credit quality of our loan
portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we
conduct our business. Our continued financial success depends somewhat on factors beyond our control,
including:
• national and local economic conditions, including incidence of customer fraud evident at times of
severe economic weakness;
• the supply and demand for investable funds;
• interest rates; and
• federal, state and local laws affecting these matters.
Substantial deterioration in any of the foregoing conditions, as we have experienced with the current
economic downturn, can have a material adverse effect on our results of operations and financial condition,
and we may not be able to sustain our historical rate of growth. Our bank’s customer base is primarily
commercial in nature, and our bank does not have a significant branch network or retail deposit base. In
periods of economic downturn, business and commercial deposits may tend to be more volatile than
traditional retail consumer deposits and, therefore, during these periods our financial condition and results
of operations could be adversely affected to a greater degree than our competitors that have a larger retail
customer base.
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We are dependent upon key personnel. Our success depends to a significant extent upon the performance of
certain key employees, the loss of whom could have an adverse effect on our business. Although we have
entered into employment agreements with certain employees, we cannot assure you that we will be successful
in retaining key employees.
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business. A
substantial majority of our business is located in Texas. As a result, our financial condition and results of
operations may be affected by changes in the Texas economy. A prolonged period of economic recession or
other adverse economic conditions in Texas may result in an increase in non-payment of loans, a decrease in
collateral value and higher incidence of fraud.
Our business strategy focuses on organic growth within our target markets and, if we fail to manage our growth effectively,
it could negatively affect our operations. We intend to develop our business principally through organic growth.
Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by
companies in significant growth stages of development. In order to execute our growth strategy successfully,
we must, among other things:
• identify and expand into suitable markets and lines of business;
• build our customer base;
• maintain credit quality;
• attract sufficient deposits to fund our anticipated loan growth;
• attract and retain qualified bank management in each of our targeted markets;
• identify and pursue suitable opportunities for opening new banking locations;
• maintain adequate regulatory capital; and
• maintain sufficient infrastructure to support growth,
including meeting increasing regulatory
requirements.
Failure to manage our growth effectively could have a material adverse effect on our business, future
prospects, financial condition or results of operations, and could adversely affect our ability to successfully
implement our business strategy.
We compete with many larger financial institutions which have substantially greater financial resources than we have.
Competition among financial institutions in Texas is intense. We compete with other financial and bank
holding companies, state and national commercial banks, savings and loan associations, consumer finance
companies, credit unions, securities brokerages, insurance companies, mortgage banking companies, money
market mutual funds, asset-based non-bank lenders and other financial institutions. Many of these com-
petitors have substantially greater financial resources, lending limits and larger branch networks than we do,
and are able to offer a broader range of products and services than we can. Failure to compete effectively for
deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth
rate and may have an adverse effect on our financial condition and results of operations.
The risks involved in commercial lending may be material. We generally invest a greater proportion of our assets in
commercial loans than other banking institutions of our size, and our business plan calls for continued efforts
to increase our assets invested in these loans. Commercial loans may involve a higher degree of credit risk than
some other types of loans due, in part, to their larger average size, the effects of changing economic conditions
on commercial loans, the dependency on the cash flow of the borrowers’ businesses to service debt, the sale of
assets securing the loans, and disposition of collateral which may not be readily marketable. Losses incurred
on a relatively small number of commercial loans could have a materially adverse impact on our results of
operations and financial condition.
Real estate lending in our core Texas markets involves risks related to a decline in value of commercial and residential real
estate. Our real estate lending activities, and the exposure to fluctuations in real estate values, are significant
and expected to increase. The market value of real estate can fluctuate significantly in a relatively short period
12
of time as a result of market conditions in the geographic area in which the real estate is located. If the value of
the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan
portfolio could become under-collateralized and we may not be able to realize the amount of security that we
anticipated at the time of originating the loan. Conditions in certain segments of the real estate industry,
including homebuilding, lot development and mortgage lending, may have an effect on values of real estate
pledged as collateral in our markets. The inability of purchasers of real estate, including residential real estate,
to obtain financing may weaken the financial condition of borrowers dependent on the sale or refinancing of
property. Failure to sell some loans held for sale in accordance with contracted terms may result in mark to
market charges to other operating income. In addition, after the mark to market, we may transfer the loans into
the loans held for investment portfolio where they will then be subject to changes in grade, classification,
accrual status, foreclosure, or loss which could have an effect on the adequacy of the allowance for loan losses.
When conditions warrant, we may find it beneficial to restructure loans to improve prospects of collectability,
and such actions may require loans to be treated as troubled debt restructurings and/or non-performing loans.
We are subject to environmental liability risk associated with lending activities. A significant portion of our loan
portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title
to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be
found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs,
as well as for personal injury and property damage. Environmental laws may require us to incur substantial
expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected
property. In addition, future laws or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. Although we have policies and procedures
to perform an environmental review before initiating any foreclosure action on real property, these reviews
may not be sufficient to detect all potential environmental hazards. The remediation costs and any other
financial liabilities associated with an environmental hazard could have a material adverse effect on our
financial condition and results of operations.
Our future profitability depends, to a significant extent, upon revenue we receive from our middle market business
customers and their ability to meet their loan obligations. Our future profitability depends, to a significant extent,
upon revenue we receive from middle market business customers, and their ability to continue to meet
existing loan obligations. As a result, adverse economic conditions or other factors adversely affecting this
market segment may have a greater adverse effect on us than on other financial institutions that have a more
diversified customer base.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and
other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to protect our computer equipment against damage
from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that
causes an interruption in our operations could have an adverse effect on our customers. In addition, we must
be able to protect the computer systems and network infrastructure utilized by us against physical damage,
security breaches and service disruption caused by the Internet or other users. Such computer break-ins and
other disruptions would jeopardize the security of information stored in and transmitted through our computer
systems and network infrastructure, which may result in significant liability to us and deter potential
customers. Although we, with the help of third-party service providers, will continue to implement security
technology and establish operational procedures to prevent such damage, there can be no assurance that these
security measures will be successful. In addition, the failure of our customers to maintain appropriate security
for their systems may increase our risk of loss. We have and will continue to incur costs with the training of our
customers about protection of their systems. However, we cannot be assured that this training will be
adequate to avoid risk to our customers or, under unknown circumstances to us.
We are subject to extensive government regulation and supervision. We are subject to extensive federal and state
regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal
deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our
lending practices, capital structure, investment practices, dividend policy, operations and growth, among
other things. These regulations also impose obligations to maintain appropriate policies, procedures and
13
controls, among other things, to detect, prevent and report money laundering and terrorist financing and to
verify the identities of our customers. Congress and federal regulatory agencies continually review banking
laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations or policies, could affect us in
substantial and unpredictable ways. The changes in regulation and requirements imposed on financial
institutions, such as the recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 (“Dodd-Frank Act”) and recently adopted Basel III accords, could subject us to additional costs,
impose requirements for additional capital, limit the types of financial services and products we may offer
and/or increase the ability of non-banks to offer competing financial services and products, among other
things. We expend substantial effort and incur costs to improve our systems, audit capabilities, staffing and
training in order to satisfy regulatory requirements, but the regulatory authorities may determine that such
efforts are insufficient. Failure to comply with relevant laws, regulations or policies could result in sanctions by
regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse
effect on our business, financial condition and results of operations. While we have policies and procedures
designed to prevent any such violations, there can be no assurance that such violations will not occur. In
addition, the FDIC has imposed higher general and special assessments on deposits based on general industry
conditions and as a result of changes in specific programs, and there is no restriction on the amount by which
the FDIC may increase deposit assessments in the future. These increased FDIC assessments have affected
our earnings to a significant degree, and the industry may be subject to additional assessments, fees or taxes.
Furthermore, Sarbanes-Oxley, and the related rules and regulations promulgated by the SEC and Financial
Industry Regulatory Authority (“FINRA”) that are applicable to us, have increased the scope, complexity and
cost of corporate governance, reporting and disclosure practices. As a result, we have experienced, and may
continue to experience, greater compliance costs.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our
business. Severe weather, natural disasters, acts of war or terrorism and other adverse external events could
have a significant impact on our ability to conduct business. Such events could affect the stability of our
deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing
loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.
Periodically, hurricanes have caused extensive flooding and destruction along the coastal areas of Texas,
including communities where we conduct business, and our operations in Houston have been disrupted to a
minor degree. While the impact of these hurricanes did not significantly affect us, other severe weather or
natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although
management has established disaster recovery policies and procedures, the occurrence of any such event
could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our
financial condition and results of operations.
Our management maintains significant control over us. Our current executive officers and directors beneficially
own approximately 5% of the outstanding shares of our common stock. Accordingly, our current executive
officers and directors are able to influence, to a significant extent, the outcome of all matters required to be
submitted to our stockholders for approval (including decisions relating to the election of directors) and other
significant corporate matters.
There are substantial regulatory limitations on changes of control. With certain limited exceptions, federal
regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from,
directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of
our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or
otherwise direct the management or policies of our company without prior notice or application to and the
approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with
these requirements, if applicable, in connection with any purchase of shares of our common stock.
Anti-takeover provisions of our certificate of incorporation, bylaws and Delaware law may make it more difficult for you
to receive a change in control premium. Certain provisions of our certificate of incorporation and bylaws could
make a merger, tender offer or proxy contest more difficult, even if such events were perceived by many of our
14
stockholders as beneficial to their interests. These provisions include advance notice for nominations of
directors and stockholders’ proposals, and authority to issue “blank check” preferred stock with such
designations, rights and preferences as may be determined from time to time by our board of directors.
In addition, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation
Law which, in general, prevents an interested stockholder, defined generally as a person owning 15% or more
of a corporation’s outstanding voting stock, from engaging in a business combination with our company for
three years following the date that person became an interested stockholder unless certain specified
conditions are satisfied.
We are subject to claims and litigation pertaining to fiduciary responsibility, employment practices and other general
business matters litigation. From time to time, customers make claims and take legal action pertaining to our
performance of our fiduciary responsibilities. Whether customer claims and legal action related to our
performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not
resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect the
market perception of us and our products and services as well as impact customer demand for those products
and services. In addition, employees can make claims related to our employment practices. If such claims or
legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or
adversely affect the market perception of us. Any financial liability or reputation damage could have a material
adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition
and results of operations.
Our controls and procedures may fail or be circumvented. Management regularly reviews and updates our internal
controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of
our controls and procedures or failure to comply with regulations related to controls and procedures could have
a material adverse effect on our business, results of operations and financial condition.
New lines of business or new products and services may subject us to additional risks. From time to time, we may
develop and grow new lines of business or offer new products and services within existing lines of business.
There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products and
services we may invest significant time and resources. Initial timetables for the introduction and development
of new lines of business and/or new products or services may not be achieved and price and profitability targets
may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and
shifting market preferences, may also impact the successful implementation of a new line of business or a new
product or service. Furthermore, any new line of business and/or new product or service could have a
significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these
risks in the development and implementation of new lines of business or new products or services could have a
material adverse effect on our business, results of operations and financial condition. All service offerings,
including current offerings and those which may be provided in the future, may become more risky due to
changes in economic, competitive and market conditions beyond our control.
Risks Associated With Our Common Stock
Our stock price can be volatile. Stock price volatility may make it more difficult for you to resell your common
stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to
a variety of factors including, among other things:
• actual or anticipated variations in quarterly results of operations;
• recommendations by securities analysts;
• operating and stock price performance of other companies that investors deem comparable to us;
• news reports relating to trends, concerns and other issues in the financial services industry, including
the failures of other financial institutions in the current economic downturn;
15
• perceptions in the marketplace regarding us and/or our competitors;
• new technology used, or services offered, by competitors;
• significant acquisitions or business combinations, strategic partnerships, joint ventures or capital
commitments by or involving us or our competitors;
• failure to integrate acquisitions or realize anticipated benefits from acquisitions;
• changes in government regulations; and
• geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such
as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock
price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital
and credit markets.
The trading volume in our common stock is less than that of other larger financial services companies. Although our
common stock is traded on the Nasdaq Global Select Market, the trading volume in our common stock is less
than that of other larger financial services companies. A public trading market having the desired charac-
teristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and
sellers of our common stock at any given time. This presence depends on the individual decisions of investors
and general economic and market conditions over which we have no control. Given the lower trading volume
of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our
stock price to fall. In addition, a substantial majority of common stock outstanding is held by institutional
shareholders, and trading activity involving large positions may increase volatility of the stock price.
An investment in our common stock is not an insured deposit. Our common stock is not a bank deposit and,
therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or
private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk
Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of
common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your
investment.
The holders of our junior subordinated debentures have rights that are senior to those of our shareholders. As of
December 31, 2010, we had $113.4 million in junior subordinated debentures outstanding that were issued to
our statutory trusts. The trusts purchased the junior subordinated debentures from us using the proceeds from
the sale of trust preferred securities to third party investors. Payments of the principal and interest on the trust
preferred securities are conditionally guaranteed by us to the extent not paid or made by each trust, provided
the trust has funds available for such obligations.
Our junior subordinated debentures are senior to our shares of common stock. As a result, we must make
payments on our junior subordinated debentures (and the related trust preferred securities) before any
dividends can be paid on our common stock and, in the event of our bankruptcy, dissolution or liquidation, the
holders of the debentures must be satisfied before any distributions can be made to our shareholders. If certain
conditions are met, we have the right to defer interest payments on the junior subordinated debentures (and
the related trust preferred securities) at any time or from time to time for a period not to exceed 20 consecutive
quarters in a deferral period, during which time no dividends may be paid to holders of our common stock.
We do not currently pay dividends. Our ability to pay dividends is limited and we may be unable to pay future
dividends. We do not currently pay dividends on our common stock. Our ability to pay dividends is limited by
regulatory restrictions and the need to maintain sufficient consolidated capital. The ability of our bank
subsidiary, Texas Capital Bank, to pay dividends to us is limited by its obligations to maintain sufficient capital
and by other general restrictions on its dividends that are applicable to our regulated bank subsidiary. If these
regulatory requirements are not met, our subsidiary bank will not be able to pay dividends to us, and we could
be unable to pay dividends on our common stock or meet debt or other contractual obligations.
16
Risks Associated With Our Industry
The earnings of financial services companies are significantly affected by general business and economic conditions. As a
financial services company, our operations and profitability are impacted by general business and economic
conditions in the United States and abroad. These conditions include short-term and long-term interest rates,
inflation, money supply, political issues, legislative and regulatory changes, fluctuation in both debt and
equity capital markets, broad trends in industry and finance and the strength of the U.S. economy and the
local economies in which we operate, all of which are beyond our control. Continued weakness or further
deterioration in economic conditions could result in decreases in loan collateral values and increases in loan
delinquencies, non-performing assets and losses on loans and other real estate acquired through foreclosure of
loans. Industry conditions, competition and the performance of our bank could also result in a decrease in
demand for our products and services, among other things, any of which could have a material adverse impact
on our results of operations and financial condition.
There can be no assurance that recent and future legislation will not subject us to heightened regulation, and the impact of
such legislation on us cannot be reliably determined at this time. On July 21, 2010, President Obama signed into law
the Dodd-Frank Act, which imposes significant regulatory and compliance changes. The changes resulting
from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of
our business practices, impose upon us more stringent capital, liquidity and leverage requirements or
otherwise adversely affect our business. These changes may also require us to invest significant management
attention and resources to evaluate and make any changes necessary to comply with the new statutory and
regulatory requirements. Failure to comply with the new requirements or with any future changes in laws or
regulations may negatively impact our results of operations and financial condition. We cannot predict what
additional legislation may be enacted affecting banks and bank holding companies and their operations, or
what regulations might be adopted by bank regulators or the effects thereof. In light of current economic
conditions in the financial markets and the United States economy, Congress and regulators have increased
their focus on the regulation of the banking industry. If enacted, any new legislative or regulatory initiatives
could affect us in substantial and unpredictable ways, including increased compliance costs and additional
operating restrictions on our business, and could result in an adverse effect on our business, financial condition
and results of operations.
Financial services companies depend on the accuracy and completeness of information about customers and counter-
parties.
In deciding whether to extend credit or enter into other transactions, we may rely on information
furnished by or on behalf of customers and counterparties, including financial statements, credit reports and
other financial information. We may also rely on representations of those customers, counterparties or other
third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance
on inaccurate or misleading financial statements, credit reports or other financial information could have a
material adverse impact on our business and, in turn, our results of operations and financial condition.
We compete in an industry that continually experiences technological change, and we may have fewer resources than many
of our competitors to continue to invest in technological improvements. The financial services industry is under-
going rapid technological changes, with frequent introductions of new technology-driven products and
services which our customers may require. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services to our customers.
Consumers and businesses may decide not to use banks to complete their financial transactions. Technology and other
changes are allowing parties to complete financial transactions that historically have involved banks through
alternative methods. The possibility of eliminating banks as intermediaries could result in the loss of interest
and fee income, as well as the loss of customer deposits and the related income generated from those deposits.
The loss of these revenue streams and the lower cost deposits as a source of funds could have a material
adverse effect on our results of operations and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
17
ITEM 2. PROPERTIES
As of December 31, 2010, we conducted business at nine full service banking locations and one operations
center. Our operations center houses our loan and deposit operations and the BankDirect call center. We lease
the space in which our banking centers and the operations call center are located. These leases expire
between March 2013 and May 2021, not including any renewal options that may be available.
The following table sets forth the location of our executive offices, operations center and each of our banking
centers.
Address
2000 McKinney Avenue
Suite 700
Dallas, Texas 75201
2350 Lakeside Drive
Suite 800
Richardson, Texas 75083
14131 Midway Road
Suite 100
Addison, Texas 75001
5910 North Central Expressway
Suite 150
Dallas, Texas 75206
5800 Granite Parkway
Suite 150
Plano, Texas 75024
500 Throckmorton
Suite 300
Fort Worth, Texas 76102
114 W. 7th St.
Suite 100
Austin, Texas 78701
745 East Mulberry Street
Suite 350
San Antonio, Texas 78212
7373 Broadway
Suite 100
San Antonio, Texas 78209
One Riverway
Suite 150
Houston, Texas 77056
Type of Location
Executive offices, banking location
Operations center, banking location
Banking location
Banking location
Banking location
Banking location
Banking location
Banking location
Banking location
Banking location
18
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material pending legal proceedings other than legal proceedings occurring in the
ordinary course of business. Management believes that none of these legal proceedings, individually or in the
aggregate, will have a material adverse impact on our results of operations or financial condition.
ITEM 4.
[REMOVED AND RESERVED]
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol “TCBI”. On
February 22, 2011, there were approximately 308 holders of record of our common stock.
No cash dividends have ever been paid by us on our common stock, and we do not anticipate paying any cash
dividends in the foreseeable future. Our principal source of funds to pay cash dividends on our common stock
would be cash dividends from our bank. The payment of dividends by our bank is subject to certain
restrictions imposed by federal and state banking laws, regulations and authorities.
The following table presents the range of high and low bid prices reported on The Nasdaq Global Select
Market for each of the four quarters of 2009 and 2010.
Quarter Ended
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
Price Per Share
High
Low
13.63
16.24
18.30
17.03
19.39
21.45
18.85
22.73
6.55
9.87
14.25
12.98
13.75
14.86
15.03
16.65
Equity Compensation Plan Information
The following table presents certain information regarding our equity compensation plans as of December 31,
2010.
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of Securities
to Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
2,147,004
—
2,147,004
19
$14.81
—
$14.81
559,760
—
559,760
Stock Performance Graph
The following table and graph sets forth the cumulative total stockholder return for the Company’s common
stock beginning on August 12, 2003, the date of the Company’s initial public offering compared to an overall
stock market index (Russell 2000 Index) and the Company’s peer group index (Nasdaq Bank Index). The
Russell 2000 Index and Nasdaq Bank Index are based on total returns assuming reinvestment of dividends.
The graph assumes an investment of $100 on August 12, 2003. The performance graph represents past
performance and should not be considered to be an indication of future performance.
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
$
21.62 $
658.72
3,288.71
22.38 $
681.26
3,154.28
796.70
3,498.55
19.88 $
18.25 $
775.75
2,746.89
13.36 $
509.18
13.96 $
633.31
2,098.35 1,693.34
21.34
792.00
1,882.37
TCBI Stock Performance Graph
Texas Capital Bancshares, Inc.
Russell 2000 Index RTY
Nasdaq Bank Index CBNK
220
180
140
100
60
D ec-04
A pr-05
A ug-05
D ec-05
A pr-06
A ug-06
D ec-06
A pr-07
A ug-07
D ec-07
A pr-08
A ug-08
D ec-08
A pr-09
A ug-09
D ec-09
A pr-10
A ug-10
D ec-10
TCBI
Russell 2000 Index
NASDAQ Bank Index
Source: Bloomberg
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected financial data presented below in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
the related notes appearing elsewhere in this Form 10-K.
(in thousands, except per share,
average share and percentage data)
2010
Consolidated Operating Data (1)
At or For The Year Ended December 31
2008
2009
2007
2006
Interest income
Interest expense
$
279,810 $
38,136
243,153
46,462
$
248,930 $
97,193
289,292
149,540
$
236,482
119,312
Net interest income
Provision for credit losses
Net interest income after
provision for credit losses
Non-interest income
Non-interest expense
Income from continuing
operations before income taxes
Income tax expense
Income from continuing
operations
Income (loss) from discontinued
operations (after-tax)
241,674
53,500
196,691
43,500
151,737
26,750
139,752
14,000
117,170
4,000
188,174
32,263
163,488
153,191
29,260
145,542
124,987
22,470
109,651
125,752
20,627
98,606
113,170
17,684
86,912
56,949
19,626
36,909
12,522
37,806
12,924
47,773
16,420
43,942
14,961
37,323
24,387
24,882
31,353
28,981
(136)
(235)
(616)
(1,931)
(57)
Net income
Preferred stock dividends
37,187
—
24,152
5,383
24,266
—
29,422
—
28,924
—
Net income available to common
shareholders
$
37,187 $
18,769
$
24,266 $
29,422
$
28,924
Consolidated Balance Sheet
Data(1)
Total assets(3)
Loans held for investment
Loans held for sale
Loans held for sale from
discontinued operations
Securities available-for-sale
Demand deposits
Total deposits
Federal funds purchased
Other borrowings
Trust preferred subordinated
debentures
Stockholders’ equity
$ 6,445,679
4,711,330
1,194,209
$ 5,698,318
4,457,293
693,504
$ 5,141,034
4,027,871
496,351
$ 4,287,853
3,462,608
174,166
$ 3,659,445
2,722,097
199,014
490
185,424
1,451,307
5,455,401
283,781
14,106
586
266,128
899,492
4,120,725
580,519
376,510
648
378,752
587,161
3,333,187
350,155
930,452
731
440,119
529,334
3,066,377
344,813
439,038
16,844
520,091
513,930
3,069,330
165,955
45,604
113,406
528,319
113,406
481,360
113,406
387,073
113,406
295,138
113,406
253,515
21
(in thousands, except per share,
average share and percentage data)
2010
At or For The Year Ended December 31
2008
2009
2007
Other Financial Data
Income per share:
Basic
Income from continuing
operations
Net income
Diluted
Income from continuing
operations
Net income
Tangible book value per share(4)
Book value per share(4)
Weighted average shares:
$
1.02 $
1.02
$
.56
.55
$
.89
.87
1.20 $
1.12
1.00
1.00
13.89
14.15
.55
.55
12.96
13.23
.89
.87
12.19
12.44
1.18
1.10
10.92
11.22
2006
1.12
1.11
1.10
1.09
9.32
9.82
Basic
Diluted
36,627,329
37,346,028
34,113,285
34,410,454
27,952,973
28,048,463
26,187,084
26,678,571
25,945,065
26,468,811
Selected Financial Ratios:
Performance Ratios
From continuing operations:
Net interest margin
Return on average assets
Return on average equity
Efficiency ratio
Non-interest expense to average
earning assets
From consolidated:
Net interest margin
Return on average assets
Return on average equity
Asset Quality Ratios
Net charge-offs (recoveries) to
average loans(2)
Reserve for loan losses to loans
held for investment(2)
Reserve for loan losses to non-
accrual loans
Non-accrual loans to loans(2)
Total NPAs to loans plus
OREO(2)
4.28%
.63%
7.23%
59.68%
3.89%
.46%
5.15%
64.41%
3.54%
.55%
7.46%
62.94%
3.82%
.80%
11.51%
61.48%
3.84%
.88%
12.62%
64.45%
2.88%
2.87%
2.54%
2.68%
2.83%
4.28%
.62%
7.21%
3.89%
.45%
5.10%
3.54%
.54%
7.28%
3.82%
.75%
10.80%
4.00%
.87%
12.59%
1.14%
.46%
.35%
1.52%
1.52%
1.13%
.6x
2.38%
.7x
2.15%
1.0x
1.18%
3.25%
2.74%
1.81%
.07%
.92%
1.5x
.62%
.69%
.08%
.74%
2.2x
.33%
.37%
22
(In thousands, except per share,
average share and percentage data)
Capital and Liquidity Ratios
At or For The Year Ended December 31
2008
2009
2007
2010
2006
Total capital ratio
Tier 1 capital ratio
Tier 1 leverage ratio
Average equity/average assets
Tangible common equity/ total tangible assets(4)
Average net loans/average deposits
11.83% 11.98% 10.92% 10.56% 11.16%
9.41% 9.68%
10.58% 10.73%
9.97%
9.38% 9.18%
9.36% 10.54% 10.21%
6.98% 6.96%
7.38%
8.91%
8.67%
6.73% 6.74%
7.36%
8.18%
7.98%
105.50% 128.43% 120.03% 103.64% 93.89%
(1) The consolidated statement of operating data and consolidated balance sheet data presented above for
the five most recent fiscal years ended December 31 have been derived from our audited consolidated
financial statements. The historical results are not necessarily indicative of the results to be expected in
any future period.
(2) Excludes loans held for sale.
(3) From continuing operations.
(4) Excludes unrealized gains/losses on securities.
23
Consolidated Interim Financial Information (Unaudited)
(in thousands except per share and average share data)
Fourth
2010 Selected Quarterly Financial Data
Third
Second
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Non-interest income
Non-interest expense
Income from continuing operations before
income taxes
Income tax expense
Income from continuing operations
Loss from discontinued operations (after-tax)
Net income
Basic earnings per share:
Income from continuing operations
Net income
Diluted earnings per share:
Income from continuing operations
Net income
Average shares:
Basic
Diluted
$
$
$
$
$
$
75,432
9,477
65,955
12,000
53,955
9,178
44,582
18,551
6,475
12,076
(22)
12,054
.33
.33
.32
.32
$
$
$
$
$
$
72,600
9,994
62,606
13,500
49,106
8,101
42,602
14,605
5,074
9,531
(5)
9,526
.26
.26
.25
.25
$
$
$
$
$
$
67,472
9,587
57,885
14,500
43,385
8,036
39,118
12,303
4,187
8,116
(54)
8,062
.22
.22
.22
.22
$
$
$
$
$
$
First
64,306
9,078
55,228
13,500
41,728
6,948
37,186
11,490
3,890
7,600
(55)
7,545
.21
.21
.21
.21
36,855,000
36,784,000
36,670,000
36,191,000
37,658,000
37,445,000
37,487,000
36,784,000
24
(In thousands except per share data)
Fourth
2009 Selected Quarterly Financial Data
Third
Second
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Non-interest income
Non-interest expense
Income from continuing operations before
income taxes
Income tax expense
Income from continuing operations
Loss from discontinued operations (after-tax)
Net income
Preferred stock dividends
Net income available to common shareholders
Basic earnings per share:
Income from continuing operations
Net income
Diluted earnings per share:
Income from continuing operations
Net income
Average shares:
Basic
Diluted
$
$
$
$
$
$
65,137
10,031
55,106
10,500
44,606
7,811
42,796
9,621
3,194
6,427
(55)
6,372
—
6,372
.18
.18
.18
.18
$
$
$
$
$
$
62,197
10,631
51,566
13,500
38,066
7,133
37,067
8,132
2,779
5,353
(41)
5,312
—
5,312
.15
.15
.15
.15
$
$
$
$
$
$
60,013
11,211
48,802
11,000
37,802
7,416
35,373
9,845
3,363
6,482
(44)
6,438
4,453
1,985
.06
.06
.06
.06
$
$
$
$
$
$
First
55,806
14,589
41,217
8,500
32,717
6,900
30,306
9,311
3,186
6,125
(95)
6,030
930
5,100
.17
.16
.17
.16
35,850,000
35,754,000
33,784,000
26,528,000
36,311,000
36,304,000
33,866,000
31,072,000
25
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and financial analysis contained in this document that are not historical facts are forward looking
statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995
(the “Act”). In addition, certain statements may be contained in our future filings with SEC, in press releases,
and in oral and written statements made by or with our approval that are not statements of historical fact and
constitute forward-looking statement within the meaning of the Act. Forward looking statements describe our
future plans, strategies and expectations and are based on certain assumptions. Words such as “believes”,
“anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other
similar expressions are intended to identify forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties, many of which are beyond our control that may
cause actual results to differ materially from those in such statements. The important factors that could cause
actual results to differ materially from the forward looking statements include, but are not limited to, the
following:
(1) Changes in interest rates and the relationship between rate indices, including LIBOR and Fed
Funds
(2) Changes in the levels of loan prepayments, which could affect the value of our loans or
investment securities
(3) Changes in general economic and business conditions in areas or markets where we compete
(4) Competition from banks and other financial institutions for loans and customer deposits
(5) The failure of assumptions underlying the establishment of and provisions made to the
allowance for credit losses and differences in assumptions utilized by banking regulators which
could have retroactive impact
(6) The loss of senior management or operating personnel and the potential inability to hire
qualified personnel at reasonable compensation levels
(7) Changes in government regulations including changes as a result of the current economic crisis.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act represents a
significant overhaul of many aspects of the regulation of the financial services industry.
Forward-looking statements speak only as of the date on which such statements are made. We have no
obligation to update or revise any forward looking statements as a result of new information or future events.
In light of these assumptions, risks and uncertainties, the events discussed in any forward looking statements
in this annual report might not occur.
Overview of Our Business Operations
We commenced 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 created an operations infrastructure sufficient to support state-wide lending and banking
operations.
The following discussions and analyses present the significant factors affecting our financial condition as of
December 31, 2010 and 2009 and results of operations for each of the three years in the period ended
December 31, 2010. This discussion should be read in conjunction with our consolidated financial statements
and notes to the financial statements appearing later in this report. Please also note the below description
about our discontinued operations and how it is reflected in the following discussions of our financial
condition and results of operations.
26
On October 16, 2006, we completed the sale of our residential mortgage lending division (“RML”). The sale
was effective as of September 30, 2006, and, accordingly, all operating results for this discontinued component
of our operations were reclassified to discontinued operations. All prior periods were restated to reflect the
change. Subsequent to the end of the first quarter of 2007, Texas Capital Bank and the purchaser of its
residential mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related
to the sale of the division.
The loss from discontinued operations was $136,000 and $235,000, net of taxes, for the years 2010 and 2009,
respectively. The 2010 losses are primarily related to continuing legal and salary expenses incurred in dealing
with the remaining loans and requests from investors related to the repurchase of previously sold loans. We
still have approximately $490,000 in loans held for sale from discontinued operations that are carried at the
estimated market value at year-end, which is less than the original cost. We plan to sell these loans, but timing
and price to be realized cannot be determined at this time due to market conditions. In addition, we continue
to address requests from investors related to repurchasing loans previously sold. While the balances as of
December 31, 2010 include a liability for exposure to additional contingencies, including risk of having to
repurchase loans previously sold, we recognize that market conditions may result in additional exposure to loss
and the extension of time necessary to complete the discontinued mortgage operation. Our mortgage
warehouse lending operations were not part of the sale, and are included in the results from continuing
operations. Except as otherwise noted, all amounts and disclosures throughout this document reflect only the
Company’s continuing operations.
Year ended December 31, 2010 compared to year ended December 31, 2009
We reported net income of $37.3 million for the year ended December 31, 2010, compared to $24.4 million for
the same period in 2009. We reported net income available to common shareholders of $37.3 million, or $1.00
per diluted common share, for the year ended December 31, 2010, compared to $19.0 million, or $.55 per
diluted common share, for the same period in 2009 as a result of preferred dividends paid in 2009. Return on
average equity was 7.23% and return on average assets was .63% for the year ended December 31, 2010,
compared to 5.15% and .46%, respectively, for the same period in 2009.
Net income increased $12.9 million, or 53%, for the year ended December 31, 2010, and net income available
to common shareholders increased $18.3 million, or 96%, compared to the same period in 2009. The $12.9
increase was primarily the result of a $45.0 increase in net interest income and a $3.0 million increase in non-
interest income, offset by a $10.0 million increase in the provision for credit losses and a $17.9 million increase
in non-interest expense, and a $7.1 million increase in income tax expense.
Details of the changes in the various components of net income are further discussed below.
Year ended December 31, 2009 compared to year ended December 31, 2008
We reported net income of $24.4 million for the year ended December 31, 2009, compared to $24.9 million for
the same period in 2008. We reported net income available to common shareholders of $19.0 million, or $.55
per diluted common share, for the year ended December 31, 2009, compared to $24.9 million, or $.89 per
diluted common share, for the same period in 2008 as a result of preferred dividends paid. Return on average
equity was 5.15% and return on average assets was .46% for the year ended December 31, 2009, compared to
7.46% and .55%, respectively, for the same period in 2008.
Net income decreased $495,000, or 2%, for the year ended December 31, 2009, and net income available to
common shareholders decreased $5.9 million, or 24%, compared to the same period in 2008. The $495,000
decrease was primarily the result of a $16.8 million increase in the provision for credit losses and a $35.9 million
increase in non-interest expense, offset by a $45.0 million increase in net interest income and a $6.8 million
increase in non-interest income and a $402,000 decrease in income tax expense.
Details of the changes in the various components of net income are further discussed below.
27
Net Interest Income
Net interest income was $241.7 million for the year ended December 31, 2010 compared to $196.7 million for
the same period of 2009. The increase in net interest income was primarily due to an increase of $593.7 million
in average earning assets and the increase in our net interest margin. The increase in average earning assets
from 2009 included an $546.1 million increase in average net loans offset by a $92.0 million decrease in
average securities. For the year ended December 31, 2010, average net loans and securities represented 93%
and 4%, respectively, of average earning assets compared to 93% and 6%, respectively, in 2009.
Average interest bearing liabilities for the year ended December 31, 2010 increased $222.2. million from the
year ended December 31, 2009, which included a $964.5 million increase in interest bearing deposits and a
$742.2 million decrease in other borrowings. For the same periods, the average balance of demand deposits
increased to $1.1 billion from $760.8 million.. The average cost of interest bearing liabilities decreased from
1.14% for the year ended December 31, 2009 to 0.89% in 2010, reflecting the continued low market interest
rates, and our focus on reducing deposit rates.
Net interest income was $196.7 million for the year ended December 31, 2009 compared to $151.7 million for
the same period of 2008. The increase in net interest income was primarily due to an increase of $764.8 million
in average earning assets and the increase in our net interest margin. The increase in average earning assets
from 2008 included an $835.3 million increase in average net loans offset by a $76.6 million decrease in
average securities. For the year ended December 31, 2009, average net loans and securities represented 93%
and 6%, respectively, of average earning assets compared to 91% and 9%, respectively, in 2008.
Average interest bearing liabilities for the year ended December 31, 2009 increased $431.0 million from the
year ended December 31, 2008, which included a $206.4 million increase in interest bearing deposits and a
$224.6 million increase in other borrowings. For the same periods, the average balance of demand deposits
increased to $760.8 million from $529.5 million. The significant increase in average other borrowings is a
result of the combined effects of maturities of transaction-specific deposits and growth in loans during 2009.
The average cost of interest bearing liabilities decreased from 2.67% for the year ended December 31, 2008 to
1.14% in 2009, reflecting the significant decline in market interest rates.
28
Volume/Rate Analysis
(in thousands)
Change
Volume
Yield/Rate
Change
Volume
Yield/Rate
Years Ended December 31,
2010/2009
2009/2008
Change Due To(1)
Change Due To(1)
Interest income:
Securities(2)
Loans
Federal funds sold
Deposits in other banks
Interest expense :
Transaction deposits
Savings deposits
Time deposits
Deposits in foreign branches
Borrowed funds
$ (4,200)
40,503
179
72
$ (4,136)
26,823
395
126
$
(64)
13,680
(216)
(54)
$ (4,184)
(1,509)
(137)
13
$ (3,586)
49,955
(51)
111
$
(598)
(51,464)
(86)
(98)
36,554
23,208
13,346
(5,817)
46,429
(52,246)
732
5,695
(9,163)
(1,779)
(3,811)
(8,326)
474
8,186
(4,833)
(161)
(3,196)
258
(2,491)
(4,330)
(1,618)
(615)
(221)
(4,320)
(16,477)
(14,010)
(15,703)
178
7,299
3,532
(9,271)
5,032
(399)
(11,619)
(20,009)
(4,739)
(20,735)
470
(8,796)
(50,731)
6,770
(57,501)
Net interest income
$44,880
$22,738
$22,142
$ 44,914
$39,659
$ 5,255
(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.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets,
from continuing operations increased from 3.89% in 2009 to 4.28% in 2010. This 39 basis point increase was a
result of a decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits. Total
cost of funding decreased from .87% for 2009 to .64% for 2010. Also contributing to the increase in net interest
margin was a 14 basis point increase in the yield on earning assets from 2009.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets,
from continuing operations increased from 3.54% in 2008 to 3.89% in 2009. This 35 basis point increase was a
result of a steep decline in the costs of interest bearing liabilities and growth in non-interest bearing deposits
and stockholders’ equity. Total cost of funding decreased from 2.15% for 2008 to .87% for 2009. The benefit of
the reduction in funding costs was partially offset by a 99 basis point decline in yields on earning assets.
29
Consolidated Daily Average Balances, Average Yields and Rates
(in thousands except percentage data)
Assets
Securities — Taxable
Securities — Non-taxable(2)
Federal funds sold
Deposits in other banks
Loans held for sale
Loans
Less reserve for loan losses
Loans, net
Total earning assets
Cash and other assets
Total assets
Liabilities and stockholders’ equity
Transaction deposits
Savings deposits
Time deposits
Deposits in foreign branches
Total interest bearing deposits
Other borrowings
Trust preferred subordinated
debentures
Total interest bearing liabilities
Demand deposits
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’
equity
Net interest income
Net interest margin
Net interest spread
Average
Balance
2010
Revenue/
Expense(1)
Yield/
Rate
Year Ended December 31
2009
Revenue/
Expense(1)
Average
Balance
Yield/
Rate
Average
Balance
2008
Revenue/
Expense(1)
Yield/
Rate
$ 183,363
39,360
112,716
47,365
883,033
4,475,668
71,942
$ 8,023
2,243
210
116
41,808
228,195
—
4.38% $ 269,888
44,873
5.70%
8,196
0.19%
12,266
0.24%
4.73%
596,271
5.10% 4,200,174
55,784
—
$ 11,928
2,538
31
44
28,336
201,164
—
4.42% $ 343,870
47,450
5.66%
11,744
0.38%
2,675
0.36%
4.75%
255,808
4.79% 3,685,301
35,769
—
$ 16,000
2,650
168
31
14,842
216,167
—
4.65%
5.58%
1.43%
1.16%
5.80%
5.87%
—
5,286,759
270,003
5.11% 4,740,661
229,500
4.84% 3,905,340
231,009
5.92%
5,669,563
281,448
$5,951,011
280,595
4.95% 5,075,884
245,034
244,041
4.81% 4,311,079
206,634
249,858
5.80%
$5,320,918
$4,517,713
$ 437,674
2,142,541
913,616
401,155
3,894,986
280,899
$
974
15,777
11,707
4,851
33,309
1,155
0.22% $ 147,961
0.74% 1,182,442
1.28% 1,188,964
411,116
1.21%
0.86% 2,930,483
0.41% 1,023,198
$
242
10,082
20,870
6,630
37,824
4,406
0.16% $ 106,720
0.85%
784,685
1.76% 1,086,252
746,399
1.61%
1.29% 2,724,056
798,647
0.43%
$
463
14,402
37,347
20,640
72,852
17,896
0.43%
1.84%
3.44%
2.77%
2.67%
2.24%
113,406
3,672
3.24%
113,406
4,232
3.73%
113,406
6,445
5.68%
4,289,291
1,116,260
29,492
515,968
$5,951,011
38,136
0.89% 4,067,087
760,776
19,207
473,848
46,462
1.14% 3,636,109
529,471
18,616
333,517
97,193
2.67%
$5,320,918
$4,517,713
$242,459
$197,579
$152,665
4.28%
4.06%
3.89%
3.67%
3.54%
3.13%
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
(2) Taxable equivalent rates used where applicable.
Additional information from discontinued operations:
Loans held for sale from discontinued
operations
Borrowed funds
Net interest income
Net interest margin — consolidated
$
564
564
$
600
600
$
699
699
$
36
4.28%
$
61
3.89%
$
54
3.54%
30
Non-interest Income
(in thousands)
Service charges on deposit accounts
Trust fee income
Bank owned life insurance (BOLI) income
Brokered loan fees
Equipment rental income
Other(1)
Total non-interest income
Year Ended December 31
2009
2010
2008
$ 6,392
3,846
1,889
11,190
4,134
4,812
$ 6,287
3,815
1,579
9,043
5,557
2,979
$ 4,699
4,692
1,240
3,242
5,995
2,602
$32,263
$29,260
$22,470
(1) Other income includes such items as letter of credit fees, swap 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 $3.0 million, or 10%, during the year ended December 31, 2010 to $32.3 million,
compared to $29.3 million during the same period in 2009. The increase was primarily due to an increase in
brokered loan fees, which increased $2.2 million to $11.2 million for the year ended December 31, 2010, compared
to $9.0 million for the same period in 2009 due to an increase in our mortgage warehouse lending volume. Other
non-interest income increased $1.8 million primarily related to losses on sale of assets we experienced in 2009 not
recurring in 2010, as well as an increase in swap fees during 2010. These increases were offset by a $1.4 million
decrease in equipment rental income related to a decline in the leased equipment portfolio.
Non-interest income increased by $6.8 million, or 30%, during the year ended December 31, 2009 to
$29.3 million, compared to $22.5 million during the same period in 2008. The increase was primarily due to an
increase in brokered loan fees, which increased $5.8 million to $9.0 million for the year ended December 31,
2009, compared to $3.2 million for the same period in 2008 due to an increase in our mortgage warehouse
lending volume. Service charges increased $1.6 million to $6.3 million for the year ended December 31, 2009,
compared to $4.7 million for the same period in 2008 due to lower earnings credit rates and an increase in fees.
These increases were offset by an $877,000 decrease in trust fee income, which is due to the overall lower
market values of trust assets.
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 warehouse 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
(in thousands)
Year Ended December 31
2009
2008
2010
Salaries and employee benefits
Net occupancy expense
Leased equipment depreciation
Marketing
Legal and professional
Communications and technology
FDIC insurance assessment
Allowance and other carrying costs for OREO
Other(1)
Total non-interest expense
$ 85,298
12,314
3,297
5,419
11,837
8,511
9,202
10,404
17,206
$ 73,419
12,291
4,319
3,034
11,846
6,510
8,464
10,345
15,314
$ 61,438
9,631
4,667
2,729
9,622
5,152
1,797
1,541
13,074
$163,488
$145,542
$109,651
(1) Other expense includes such items as courier expenses, regulatory assessments other than FDIC
insurance, due from bank charges, software amortization and maintenance, and other general operating
expenses, none of which account for 1% or more of total interest income and non-interest income.
31
Non-interest expense for the year ended December 31, 2010 increased $17.9 million compared to the same
period of 2009 primarily related to increases in salaries and employee benefits, marketing expense and FDIC
assessment expenses.
Salaries and employee benefits expense increased $11.9 million to $85.3 million during the year ended
December 31, 2010. This increase resulted primarily from general business growth.
Leased equipment depreciation expense decreased by $1.0 million during the year ended December 31, 2010
due to the decline in the leased equipment portfolio.
Marketing expense for the year ended December 31, 2010 increased $2.4 million compared to the same period
in 2009. Marketing expense for the year ended December 31, 2010 included $1.0 million of direct marketing
and advertising expense and $2.2 million in business development expense compared to $515,000 and
$1.7 million, respectively, in 2009. Marketing expense for the year ended December 31, 2010 also included
$2.2 million for the purchase of miles related to the American Airlines AAdvantage» program compared to
$856,000 during 2009. Marketing may increase as we seek to further develop our brand, reach more of our
target customers and expand in our target markets.
Communications and technology expense increased $2.0 million to $8.5 million during the year ended
December 31, 2010 as a result of general business and customer growth.
FDIC insurance assessment expense increased by $738,000 from $8.5 million in 2009 to $9.2 million due to
higher rates and an increase in our deposit base. The FDIC assessment rates may continue to increase and will
continue to be a factor in our expense growth.
Non-interest expense for the year ended December 31, 2009 increased $35.9 million compared to the same
period of 2008 primarily related to increases in salaries and employee benefits, FDIC assessment expenses,
and expenses related to other real estate owned (“OREO”) included valuation allowances.
Salaries and employee benefits expense increased by $12.0 million to $73.4 million during the year ended
December 31, 2009. This increase resulted primarily from general business growth.
Occupancy expense increased by $2.7 million to $12.3 million during the year ended December 31, 2009
compared to the same period in 2008 and is related to expansion of leased facilities to support our general
business growth.
Legal and professional expenses increased $2.2 million, or 23%, during the year ended December 31, 2009
mainly related to general business growth, and continued regulatory and compliance costs. Regulatory and
compliance continue to be a factor in our expense growth and we anticipate that they will continue to increase.
FDIC insurance assessment expense increased by $6.7 million from $1.8 million in 2008 to $8.5 million in
2009 due to the rate increase and special assessment. The FDIC assessment rates may continue to increase
and will continue to be a factor in our expense growth.
Allowance and other carrying costs for OREO increased $8.8 million during the year ended December 31,
2009 related to deteriorating values of assets held in OREO. Of the $10.3 million expense for 2009,
$6.6 million was related to establishing and increasing the valuation allowance during the year and $1.2 million
related to direct write-downs of the OREO balance.
Analysis of Financial Condition
Loan Portfolio
Our loan portfolio has grown at an annual rate of 24%, 14% and 15% in 2008, 2009 and 2010, respectively,
reflecting the build-up of our lending operations. Our business plan focuses primarily on lending to middle
market businesses and high net worth individuals, and as such, commercial and real estate loans have
comprised a majority of our loan portfolio since we commenced operations, comprising 73% of total loans at
December 31, 2010. Construction loans have decreased from 18% of the portfolio at December 31, 2006 to 5%
of the portfolio at December 31, 2010. Consumer loans generally have represented 1% or less of the portfolio
32
from December 31, 2006 to December 31, 2010. Loans held for sale, which relates to our mortgage warehouse
lending operations and are principally mortgage loans being warehoused for sale (typically within 10 to
20 days), fluctuate based on the level of market demand in the product. Due to market conditions experienced
in the mortgage industry during 2007, loans not sold within the normal timeframe were transferred to the loans
held for investment portfolio. Loans were transferred at a lower of cost or market basis and are then subject to
normal loan review, grading and reserve allocation requirements. The remaining balance of loans transferred
was $5.5 million at December 31, 2010, and $467,000 of such loans were NPAs with allocated reserves of
approximately $158,000.
We originate substantially all of the loans held in our portfolio, except participations in residential mortgage
loans held for sale, select loan participations and syndications, which are underwritten independently by us
prior to purchase, and certain USDA and SBA government guaranteed loans that we purchase in the secondary
market. We also participate in syndicated loan relationships, both as a participant and as an agent. As of
December 31, 2010, we have $521.5 million in syndicated loans, $165.9 million of which we acted as agent. All
syndicated loans, whether we act as agent or participant, are underwritten to the same standards as all other
loans originated by us. In addition, as of December 31, 2010, none of our syndicated loans were non-
performing, and none are considered potential problem loans.
The following summarizes our loan portfolio on a gross basis by major category as of the dates indicated (in
thousands):
Commercial
Construction
Real estate
Consumer
Equipment leases
Loans held for sale
2010
2009
$2,592,924
270,008
1,759,758
21,470
95,607
1,194,209
$2,457,533
669,426
1,233,701
25,065
99,129
693,504
December 31
2008
$2,276,054
667,437
988,784
32,671
86,937
496,351
2007
2006
$2,035,049
573,459
773,970
28,334
74,523
174,166
$1,602,577
538,586
530,377
21,113
45,280
199,014
Total
$5,933,976
$5,178,358
$4,548,234
$3,659,501
$2,936,947
Commercial Loans and Leases. Our commercial loan 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. 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 making loans
on a transaction 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. At December 31, 2010, funded
commercial loans and leases totaled approximately $2.7 billion, approximately 45% of our total funded loans.
Real Estate Loans. Approximately 23% of our real estate loan portfolio (excluding construction loans) and 7%
of the total 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 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 impact of the
inability of potential purchasers and lessees to obtain financing and lack of transactions at comparable values.
At December 31, 2010, real estate term loans totaled approximately $1.8 billion, or 30% of our total funded
33
loans; of this total, $1,525.5 million were loans with floating rates and $234.2 million were loans with fixed
rates.
Construction Loans. Our construction loan portfolio consists primarily of single-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 investment of the borrowers’ equity. However, construction loans are generally based 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 extremely sensitive to overall economic conditions. Borrowers may not be able to correct
conditions of default in loans, increasing risk of exposure to classification, NPA status, reserve allocation
and actual credit loss and foreclosure. These loans typically have floating rates and commitment fees. At
December 31, 2010, funded construction real estate loans totaled approximately $270.0 million, approxi-
mately 5% of our total funded loans.
Loans Held for Sale. Our loans held for sale portfolio consists of participations purchased in single-family
residential mortgages funded through our warehouse lending group. These loans are typically on our balance
sheet for 10 to 20 days or less. We have agreements with mortgage lenders and participate in individual loans
they originate. All loans are subject to pre-committed programs for permanent financing with financially
sound investors. Substantially all loans are conforming loans. At December 31, 2010, loans held for sale totaled
approximately $1.2 billion, approximately 20% of our total funded loans.
Letters of Credit. We issue standby and commercial letters of credit, and can service the international needs of
our clients through correspondent banks. At December 31, 20010, our commitments under letters of credit
totaled approximately $54.8 million.
Portfolio Geographic and Industry Concentrations
We continue to lend primarily in Texas. As of December 31, 2010, a substantial majority of the principal
amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This
geographic concentration subjects the loan portfolio to the general economic conditions in Texas. The table
below summarizes the industry concentrations of our funded loans at December 31, 2010. The risks created
by these concentrations have been considered by management in the determination of the adequacy of the
34
allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated
losses on loans at each balance sheet date.
(in thousands)
Services
Loans held for sale
Contracting — construction and real estate development
Investors and investment management companies
Petrochemical and mining
Personal/household
Manufacturing
Retail
Wholesale
Contracting — trades
Government
Agriculture
Amount
$2,208,811
1,194,209
580,215
671,592
506,759
196,360
224,569
116,421
156,326
47,607
14,558
16,549
Percent of
Total Loans
37.2%
20.1%
9.8%
11.3%
8.5%
3.3%
3.8%
2.0%
2.6%
0.8%
0.3%
0.3%
Total
$5,933,976
100.0%
Our largest concentration in any single industry is in services. Loans extended to borrowers within the services
industries include loans to finance working capital and equipment, as well as loans to finance investment and
owner-occupied real estate. Significant trade categories represented within the services industries include,
but are not limited to, real estate services, financial services, leasing companies, transportation and com-
munication, and hospitality services. Borrowers represented within the real estate services category are largely
owners and managers of both residential and non-residential commercial real estate properties. Personal/
household loans include loans to certain high net worth individuals for commercial purposes, in addition to
consumer loans. Loans held for sale are those loans originated by our mortgage warehouse lending group.
Loans extended to borrowers within the contracting industry are comprised largely of loans to land developers
and to both heavy construction and general commercial contractors. Many of these loans are secured by real
estate properties, the development of which is or may be financed by our bank. Loans extended to borrowers
within the petrochemical and mining industries are predominantly loans to finance the exploration and
production of petroleum and natural gas. These loans are generally secured by proven petroleum and natural
gas reserves.
We make loans that are appropriately collateralized under our credit standards. Approximately 97% of our
funded loans are secured by collateral. Over 90% of the real estate collateral is located in Texas. The table
35
below sets forth information regarding the distribution of our funded loans among various types of collateral at
December 31, 20010 (in thousands except percentage data):
Collateral type:
Real property
Business assets
Loans held for sale
Energy
Unsecured
Other assets
Highly liquid assets
Rolling stock
U. S. Government guaranty
Total
Amount
Percent of
Total Loans
$2,029,766
1,736,423
1,194,209
396,489
193,266
149,477
175,064
41,021
18,261
34.2%
29.2%
20.1%
6.7%
3.3%
2.5%
3.0%
0.7%
0.3%
$5,933,976
100.0%
As noted in the table above, 34.2% of our loans are secured by real estate. The table below summarizes our real
estate loan portfolio as segregated by the type of property securing the credit. Property type concentrations are
stated as a percentage of year-end total real estate loans as of December 31, 2010 (in thousands except
percentage data):
Property type:
Market Risk
Commercial buildings
Unimproved land
Apartment buildings
Shopping center/mall buildings
1-4 Family dwellings (other than condominium)
Residential lots
Hotel/motel buildings
Other
Other Than Market Risk
Commercial buildings
1-4 Family dwellings (other than condominium)
Other
Percent of
Total
Real Estate
Loans
30.3%
8.3%
9.1%
8.2%
6.5%
3.5%
4.8%
8.3%
11.3%
4.0%
5.7%
Amount
$ 614,188
168,815
184,539
167,348
132,825
71,201
97,586
168,337
228,708
80,991
115,228
Total real estate loans
$2,029,766
100.0%
The table below summarizes our market risk real estate portfolio as segregated by the geographic region in
which the property is located (in thousands except percentage data):
Geographic region:
Dallas/Fort Worth
Houston
Austin
San Antonio
Other Texas cities
Other states
Amount
Percent of
Total
$ 654,538
307,342
189,354
244,893
87,039
121,673
40.8%
19.2%
11.8%
15.3%
5.4%
7.5%
Total market risk real estate loans
$1,604,839
100.0%
36
We extend market risk real estate loans, including both construction/development financing and limited term
financing, to professional real estate developers and owners/managers of commercial real estate projects and
properties who have a demonstrated record of past success with similar properties. Collateral properties
include office buildings, shopping centers, apartment buildings, residential and commercial tract develop-
ment located primarily within our five major metropolitan markets in Texas. As such loans are generally repaid
through the borrowers’ sale or lease of the properties, loan amounts are determined in part from an analysis of
pro forma cash flows. Loans are also underwritten to comply with product-type specific advance rates against
both cost and market value. We engage a variety of professional firms to supply appraisals, market study and
feasibility reports, environmental assessments and project site inspections to complement our internal
resources to best underwrite and monitor these credit exposures.
The determination of collateral value is critically important when financing real estate. As a result, obtaining
current and objectively prepared appraisals is a major part of our underwriting and monitoring processes.
Generally, our policy requires a new appraisal every three years. However, in the current economic downturn
where real estate values have been fluctuating rapidly, more current appraisals are obtained when warranted
by conditions such as a borrower’s deteriorating financial condition, their possible inability to perform on the
loan, and the increased risks involved with reliance on the collateral value as sole repayment of the loan.
Generally, loans graded substandard or worse where real estate is a material portion of the collateral value
and/or the income from the real estate or sale of the real estate is the primary source of debt service, annual
appraisals are obtained. In all cases, appraisals are reviewed to determine reasonableness of the appraised
value. The reviewer will challenge whether or not the data used is adequate and relevant, form an opinion as
to the appropriateness of the appraisal methods and techniques used, and determine if overall the analysis and
conclusions of the appraiser can be relied upon. Both the appraisal process and the appraisal review process
have become increasingly difficult in the current economic environment with the lack of comparable sales
which is partially as a result of the lack of available financing which has ultimately led to overall depressed real
estate values.
Large Credit Relationships
The market areas we serve include the five major metropolitan markets of Texas, including Austin, Dallas,
Fort Worth, Houston and San Antonio. As a result, we originate and maintain large credit relationships with
numerous customers in the ordinary course of business. The legal limit of our bank is approximately
$85 million and our house limit is generally $15 to $20 million. We consider large credit relationships to
be those with commitments equal to or in excess of $10.0 million. The following table provides additional
information on our large credit relationships outstanding at year-end (in thousands):
Number of
2010
Period-End Balances
Number of
2009
Period-End Balances
Relationships Committed Outstanding
Relationships Committed Outstanding
$20.0 million and greater
$10.0 million to $19.9 million
25
122
$ 598,299
2,242,013
$ 446,093
1,687,786
15
128
$ 353,585
1,733,593
$ 297,189
1,272,870
Growth in outstanding balances related to large credit relationships primarily resulted from an increase in
commitments. The following table summarizes the average per relationship committed and outstanding loan
balance related to our large credit relationships at year-end (in thousands):
Number of
2010
Average Balances
Number of
2009
Average Balances
Relationships Committed Outstanding
Relationships Committed Outstanding
$20.0 million and greater
$10.0 million to $19.9 million
25
122
$23,932
18,377
$17,844
13,834
15
128
$23,572
13,544
$19,813
9,944
37
Loan Maturity and Interest Rate Sensitivity on December 31, 2010
(in thousands)
Total
Within 1 Year
1-5 Years
After 5 Years
Remaining Maturities of Selected Loans
Loan maturity:
Commercial
Construction
Real estate
Consumer
Equipment leases
$2,592,924
270,008
1,759,758
21,470
95,607
$1,343,629
166,288
478,329
14,232
9,070
$1,201,094
100,424
987,827
3,638
83,999
$ 48,201
3,296
293,602
3,600
2,538
Total loans held for investment
$4,739,767
$2,011,548
$2,376,982
$351,237
Interest rate sensitivity for selected
loans with:
Predetermined interest rates
Floating or adjustable interest rates
$ 864,707
3,875,060
$ 491,961
1,519,587
$ 286,097
2,090,885
$ 86,649
264,588
Total loans held for investment
$4,739,767
$2,011,548
$2,376,982
$351,237
Interest Reserve Loans
As of December 31, 2010, we had $191.0 million in loans with interest reserves, which represents approx-
imately 71% of our construction loans. Loans with interest reserves are common when originating construction
loans, but the use of interest reserves is carefully controlled by our underwriting standards. The use of interest
reserves is based on the feasibility of the project, the creditworthiness of the borrower and guarantors, and the
loan to value coverage of the collateral. The interest reserve account allows the borrower, when financial
conditions precedents are met to draw loan funds to pay interest charges on the outstanding balance of the
loan. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified at
the time the credit is approved and during the initial underwriting. We have effective and ongoing controls for
monitoring compliance with loan covenants for advancing funds and determination of default conditions.
When lending relationships involve financing of land on which improvements will be constructed, construc-
tion funds are not advanced until borrower has received lease or purchase commitments which will meet cash
flow coverage requirements. We maintain current financial statements on the borrowing entity and guarantors,
as well as periodical inspections of the project and analysis of whether the project is on schedule or delayed.
Updated appraisals are ordered when necessary to validate the collateral values to support all advances,
including reserve interest. Advances of interest reserves are discontinued if collateral values do not support
the advances or if the borrower does not comply with other terms and conditions in the loan agreements. In
addition, most of our construction lending is performed in Texas and our lenders are very familiar with trends
in local real estate. At a point where we believe that our collateral position is jeopardized, we retain the right to
stop the use of the interest reserves. As of December 31, 2010, none of our loans with interest reserves were on
nonaccrual.
38
Non-performing Assets
Non-performing assets include non-accrual loans and leases and repossessed assets. The table below
summarizes our non-accrual loans by type (in thousands):
Year Ended December 31
2009
2010
2008
Non-accrual loans:(1)
Commercial
Construction
Real estate
Consumer
Equipment leases
Total non-accrual loans
Repossessed assets:
OREO(3)
Other repossessed assets
$ 42,543
21
62,497
706
6,323
$ 34,021
20,023
34,764
273
6,544
$15,676
12,392
16,209
296
2,926
112,090
95,625
47,499
42,261
451
27,264
162
25,904
25
Total other repossessed assets
42,712
27,426
25,929
Total non-performing assets
$154,802
$123,051
$73,428
Restructured loans
Loans past due 90 days and accruing(2)
$
$
4,319
6,706
$
$
— $ —
$ 4,115
6,081
(1) The accrual of interest on loans is discontinued 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 collectibility is questionable, then cash
payments are applied to principal. If these loans had been current throughout their terms, interest and
fees on loans would have increased by approximately $10.5 million, $3.6 million and $2.9 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
(2) At December 31, 2010, 2009 and 2008, loans past due 90 days and still accruing includes premium finance
loans of $3.3 million, $2.4 million and $2.1 million, respectively. These loans are generally secured by
obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of
premiums from the insurance carriers can take 180 days or longer from the cancellation date.
(3) At December 31, 2010 and 2009, OREO balance is net of $12.9 million and $6.6 million valuation
allowance, respectively.
Total nonperforming assets at December 31, 2010 increased $30.5 million from December 31, 2009, compared
to $49.6 million at December 31, 2008. The increases in the past two years are reflective of the overall
economic deterioration during 2009 and 2010. As a result our allowance for loans losses as a percentage of
loans, as well as our provision for credit losses recorded in 2009 and 2010 have increased over levels
experienced prior to 2009.
39
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing
the credit as of December 31, 2010 (in thousands):
Non-accrual loans:
Commercial
Lines of credit secured by the following:
Oil and gas properties
Various single family residences and notes receivable
Assets of the borrowers
Other
Total commercial
Real estate
Secured by:
Commercial property
Unimproved land and/or undeveloped residential lots
Rental properties and multi-family residential real estate
Single family residences
Other
Total real estate
Construction
Consumer
Leases (commercial leases primarily secured by assets of the lessor)
Total non-accrual loans
$ 19,981
10,926
8,010
3,626
42,543
16,150
24,114
8,887
8,249
5,097
62,497
21
706
6,323
$112,090
Reserves on impaired loans were $14.7 million at December 31, 2010, compared to $18.4 million at
December 31, 2009 and $13.1 million at December 31, 2008. We recognized $566,000 in interest income
on non-accrual loans during 2010 compared to $25,000 in 2009 and $33,000 in 2008. Additional interest income
that would have been recorded if the loans had been current during the years ended December 31, 2010, 2009
and 2008 totaled $10.5 million, $3.6 million and $2.9 million, respectively. Average impaired loans outstanding
during the years ended December 31, 2010, 2009 and 2008 totaled $120.6 million, $62.3 million and
$26.7 million, respectively.
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 collectibility is questionable, then cash payments are applied to principal. As
of December 31, 20010, none of our non-accrual loans were earning on a cash basis.
A loan 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 original loan
agreement. Reserves on impaired loans are measured based on the present value of the expected future cash
flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.
At December 31, 2010, we had $6.7 million in loans past due 90 days and still accruing interest. Of this total,
$3.3 million are premium finance loans. These loans are primarily secured by obligations of insurance carriers
to refund premiums on cancelled insurance policies. The refund of premiums from the insurance carriers can
take 180 days or longer from the cancellation date.
40
Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a
concession that we would not otherwise consider. This may include a transfer of real estate or other assets
from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could
potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity
date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the
face amount of debt, either forgiveness of principal or accrued interest. As of December 31, 20010 we have
$4.3 million in loans considered restructured that are not already on nonaccrual. Of the nonaccrual loans at
December 31, 2010, $26.5 million met the criteria for restructured. A loan continues to qualify as restructured
until a consistent payment history has been evidenced, generally no less than twelve months. 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.
Potential problem loans consist of loans that are performing in accordance with contractual terms, but for
which we have concerns about the borrower’s ability to comply with repayment terms because of the
borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a
regular basis. At December 31, 2010 and 2009, we had $25.3 million and $53.1 million in loans of this type,
which were not included in non-accrual loans. The decrease in the amount of potential problem loans from
December 2009 to December 2010 is consistent with the increase in nonperforming loans that we have
experienced this year.
The table below presents a summary of the activity related to OREO (in thousands):
Year Ended December 31
2009
2010
2008
Beginning balance
Additions
Sales
Valuation allowance
Direct write-downs
Ending balance
$27,264
29,559
(6,058)
(6,587)
(1,917)
$ 25,904
23,466
(14,265)
(6,619)
(1,222)
$ 2,671
28,835
(5,602)
—
—
$42,261
$ 27,264
$25,904
The following table summarizes the assets held in OREO at December 31, 2010 (in thousands):
OREO:
Unimproved commercial real estate lots and land
Commercial buildings
Undeveloped land and residential lots
Multifamily lots and land
Other
Total OREO
$ 7,561
15,170
13,031
1,228
5,271
$42,261
When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial charge-
off of loan upon taking property, and so long as property is retained, reductions in appraised values will result
in valuation adjustment taken as non-interest expense. In addition, if the decline in value is believed to be
permanent and not just driven by market conditions, a direct write-down to the OREO balance may be taken.
We generally pursue sales of OREO when conditions warrant, but we may choose to hold certain properties for
a longer term, which can result in additional exposure related to the appraised values during that holding
period. During the year ended December 31, 20010, we recorded $8.5 million in valuation expense. Of the
$8.5 million, $6.6 million related to increases to the valuation allowance, and $1.9 million related to direct
write-downs.
41
Summary of Loan Loss Experience
The provision for loan losses is a charge to earnings to maintain the reserve for loan losses at a level consistent
with management’s assessment of the collectability of the loan portfolio in light of current economic
conditions and market trends. We recorded a provision for credit losses of $53.5 million for the year ended
December 31, 2010, $43.5 million for the year ended December 31, 2009, and $26.8 million for the year ended
December 31, 2008. The amount of reserves and provision required to support the reserve have increased over
the last two years as a result of credit deterioration in our loan portfolio driven by negative changes in national
and regional economic conditions and the impact of those conditions on the financial condition of borrowers
and the values of assets, including real estate assets, pledged as collateral.
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 adequate 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 com-
mitments, specifically unfunded loan commitments and letters of credit. 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.
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, 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 considers 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. We evaluate many factors and conditions in determining
the unallocated portion of the allowance, including the economic and business conditions affecting key
lending areas, credit quality trends and general growth in the portfolio. The allowance is considered adequate
and appropriate, given management’s assessment of potential 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.
The methodology used in the periodic review of reserve adequacy, 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
adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by
executive management and presented to our board of directors for their review, consideration and ratification
on a quarterly basis.
42
The reserve for credit losses, which includes a liability for losses on unfunded commitments, totaled
$73.4 million at December 31, 2010, $70.9 million at December 31, 2009 and $46.8 million at December 31,
2008. The total reserve percentage decreased to 1.56% at year-end 2010 from 1.59% and 1.16% of loans held
for investment at December 31, 2009 and 2008, respectively. The total reserve percentage has increased over
the past two years as a result of the effects of national and regional economic conditions on borrowers and
values of assets pledged as collateral. These changes in economic conditions have resulted in increases in
loans with weakened credit quality and nonperforming loans. The overall reserve for loan losses continues to
be driven by the loan loss reserve methodology as described above. At December 31, 2010, we believe the
reserve is sufficient to cover all expected losses in the portfolio and has been derived from consistent
application of the methodology described above. Should any of the factors considered by management in
evaluating the adequacy of the allowance for loan losses change, our estimate of expected losses in the
portfolio could also change, which would affect the level of future provisions for loan losses.
43
The table below presents a summary of our loan loss experience for the past five years (in thousands except
percentage and multiple data):
2010
Year Ended December 31
2007
2008
2009
2006
Reserve for loan losses:
Beginning balance
Loans charged-off:
Commercial
Real estate — Construction
Real estate — Term
Consumer
Equipment leases
Total
Recoveries:
Commercial
Real estate — Construction
Real estate — Term
Consumer
Equipment leases
Total
Net charge-offs (recoveries)
Provision for loan losses
$ 67,931 $ 45,365 $31,686 $20,063 $18,897
27,723
12,438
9,517
216
1,555
4,000
6,508
4,696
502
4,022
7,395
1,866
4,168
193
12
2,528
313
—
48
81
2,525
—
—
3
76
51,449
19,728
13,634
2,970
2,604
176
1
138
4
158
477
124
13
53
28
54
272
759
—
47
13
79
898
642
—
—
15
131
788
462
—
—
1
247
710
50,972
54,551
19,456
42,022
12,736
26,415
2,182
13,805
1,894
3,060
Ending balance
$ 71,510 $ 67,931 $45,365 $31,686 $20,063
Reserve for off-balance sheet credit losses:
Beginning balance
Provision (benefit) for off-balance sheet credit losses
$ 2,948 $ 1,470 $ 1,135 $
1,478
(1,051)
335
940 $ —
940
195
Ending balance
$ 1,897 $ 2,948 $ 1,470 $ 1,135 $
940
Total reserve for credit losses
Total provision for credit losses
Reserve for loan losses to loans held for investment(2)
Net charge-offs (recoveries) to average loans(2)
Total provision for credit losses to average loans(2)
Recoveries to total charge-offs
Reserve for loan losses as a multiple of net charge-offs
Reserve for off-balance sheet credit losses to off-balance
sheet credit commitments
Combined reserves for credit losses to loans held for
investment(2)
Non-performing assets:
Non-accrual(1)
OREO(4)
Total
Restructured loans
Loans past due (90 days) and still accruing(3)
Reserve for loan losses to non-performing loans
44
$ 73,407 $ 70,879 $46,835 $32,821 $21,003
$ 53,500 $ 43,500 $26,750 $14,000 $ 4,000
1.52% 1.16%
.35%
.73%
.77%
.08%
.46%
1.04%
.17%
1.38% 6.59% 26.53% 27.27%
10.6x
1.52%
1.14%
1.20%
.93%
1.4x
.95%
.07%
.46%
14.5x
3.5x
3.6x
.14%
.24%
.10%
.09%
.08%
1.56%
1.59% 1.16%
.95%
.77%
$112,090 $ 95,625 $47,499 $21,385 $ 9,088
882
25,904
42,261
27,264
2,671
$154,351 $122,889 $73,403 $24,056 $ 9,970
$ 4,319 $
— $ — $ — $ —
$ 6,706 $ 6,081 $ 4,115 $ 4,147 $ 2,142
2.2x
1.5x
1.0x
.7x
.6x
(1) The accrual of interest on loans is discontinued 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 collectibility is questionable, then cash
payments are applied to principal. If these loans had been current throughout their terms, interest and
fees on loans would have increased by approximately $10.5 million, $3.6 million and $2.9 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
(2) Excludes loans held for sale.
(3) At December 31, 2010, 2009 and 2008, loans past due 90 days and still accruing includes premium finance
loans of $3.3 million, $2.4 million and $2.1 million, respectively. These loans are generally secured by
obligations of insurance carriers to refund premiums on cancelled insurance policies. The refund of
premiums from the insurance carriers can take 180 days or longer from the cancellation date.
(4) At December 31, 2010 and 2009, OREO balance is net of $12.9 million and $6.6 million valuation
allowance, respectively.
Loan Loss Reserve Allocation
(in thousands except
percentage data)
Loan category:
Commercial
Construction
Real estate
Consumer
Equipment leases
Unallocated
2010
2009
December 31
2008
2007
2006
Reserve % of Loans(1) Reserve % of Loans(1) Reserve % of Loans(1) Reserve % of Loans(1) Reserve % of Loans(1)
$15,918
7,336
38,049
306
5,405
4,496
55% $33,269
10,974
6
14,874
37
1,258
—
2,960
2
4,596
—
55% $23,348
7,563
15
10,518
28
1,095
—
1,790
2
1,051
—
56% $16,466
5,032
17
4,736
24
1,989
1
723
2
2,740
—
58% $ 8,992
4,081
17
2,910
22
589
1
482
2
3,009
—
59%
19
19
1
2
—
Total
$71,510
100% $67,931
100% $45,365
100% $31,686
100% $20,063
100%
(1) Excludes loans held for sale.
During 2010, the reserve allocated to all categories of loans increased compared to 2009 primarily due to
increases in the level of allocations required by our loan loss reserve methodology. The percentage of the
reserve allocated to construction decreased in the current year compared to 2009, consistent with the decrease
in the construction portfolio during 2010. The percentage increase in real estate reserve is related to the
overall economic downturn. Property values continued to decline in 2010, resulting in higher required
reserves for these loans. This is also consistent with the increase in nonperforming loans in this category we’ve
experienced in 2010.
Securities Portfolio
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 (loss) in
stockholders’ equity, net of taxes. Amortization of premiums or accretion of discounts on mortgage-backed
securities is periodically adjusted for estimated prepayments.
During the year ended December 31, 2010, we maintained an average securities portfolio of $222.7 million
compared to an average portfolio of $314.8 million for the same period in 2009 and $391.3 million for the same
period in 2008. At December 31, 2010 and 2009, the portfolios were primarily comprised of mortgage-backed
45
securities. Of the mortgage-backed securities, substantially all are guaranteed by U.S. government agencies.
Our portfolio included no impaired securities during 2010 and 2009.
Our net unrealized gain on the securities portfolio value decreased from a net gain of $9.5 million, which
represented 3.70% of the amortized cost, at December 31, 2009, to a net gain of $8.2 million, which
represented 4.65% of the amortized cost, at December 31, 2010. During 2009, the unrealized gain on the
securities portfolio value increased from a net gain of $2.9 million, which represented 0.77% of the amortized
cost, at December 31, 2008, to a net gain of $9.5 million, which represented 3.70% of the amortized cost, at
December 31, 2009. Changes in value reflect changes in market interest rates and the total balance of
securities.
The average expected life of the mortgage-backed securities was 2.0 years at December 31, 2010 and 2.1 years
at December 31, 2009. The effect of possible changes in interest rates on our earnings and equity is discussed
under “Interest Rate Risk Management.”
The following presents the amortized cost and fair values of the securities portfolio at December 31, 2010,
2009 and 2008 (in thousands):
2010
At December 31
2009
2008
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair
Value
$
— $
— $
— $
— $ 28,299
$ 28,296
126,838
5,000
37,841
7,506
133,724
5,000
39,085
7,615
201,824
5,000
42,314
7,506
209,987
4,683
43,826
7,632
288,701
5,000
46,370
7,506
291,716
4,810
46,531
7,399
$177,185
$185,424
$256,644
$266,128
$375,876
$378,752
Available-for-sale:
U.S. Treasuries
Mortgage-backed
securities
Corporate securities
Municipals
Equity securities(1)
Total available-for-sale
securities
(1) Equity securities consist of Community Reinvestment Act funds.
46
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands except percentage data):
At December 31, 2010
After Five
Through
Ten Years
After One
Through
Five Years
After Ten
Years
Less Than
One Year
Total
Available-for-sale:
Mortgage-backed securities (1):
Amortized cost
Estimated fair value
Weighted average yield(3)
Corporate securities :
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals : (2)
Amortized cost
Estimated fair value
Weighted average yield(3)
Equity securities :
Amortized cost
Estimated fair value
Total available-for-sale securities :
Amortized cost
Estimated fair value
$8,048
8,125
4.499%
$12,509
12,938
4.348%
$50,038
53,074
4.815%
$56,243
59,587
4.083%
$126,838
133,724
4.424%
—
—
—
5,000
5,000
7.375%
—
—
—
3,210
3,241
4.879%
21,542
22,373
5.440%
13,089
13,471
5.766%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
5,000
7.375%
37,841
39,085
5.506%
7,506
7,615
$177,185
$185,424
(1) Actual maturities may differ significantly from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment penalties. The average expected life of the
mortgage-backed securities was 2.0 years at December 31, 2010.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3) Yields are calculated based on amortized cost.
47
The following table discloses, as of December 31, 2010 and 2009, 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):
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
December 31, 2010
Mortgage-backed securities
Corporate securities
Municipals
December 31, 2009
Mortgage-backed securities
Corporate securities
Municipals
$3,681
—
—
$3,681
$ 452
—
1,018
$1,470
$ (5)
—
—
$ (5)
$ (1)
—
(2)
$ (3)
$ —
—
—
$ —
$2,553
4,683
—
$7,236
$ —
—
—
$ —
$ (28)
(317)
—
$(345)
$3,681
—
—
$8,706
$3,005
4,683
1,018
$8,706
$
(5)
—
—
$
(5)
$ (29)
(317)
(2)
$(348)
We believe the investment securities in the table above are within ranges customary for the banking industry.
At December 31, 2010, the number of investment positions in this unrealized loss position totals 1. We do not
believe these unrealized losses are “other than temporary” as (1) we do not have the intent to sell any of the
securities in the table above; and (2) it is not probable that we will be unable to collect the amounts
contractually due. The unrealized losses noted at December 31, 2009 were interest rate related, and losses
have decreased as rates have decreased in 2009 and remained low during 2010. We have not identified any
issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
Deposits
We compete for deposits by offering a broad range of products and services to our customers. While this
includes offering competitive interest rates and fees, the primary means of competing for deposits is
convenience and service to our customers. However, our strategy to provide service and convenience to
customers does not include a large branch network. Our bank offers nine banking centers, courier services and
online banking. BankDirect, the Internet division of our bank, serves its customers on a 24 hours-a-day/
7 days-a-week basis solely through Internet banking.
Average deposits for the year ended December 31, 2010 increased $1.3 billion compared to the same period of
2009. Average demand deposits, interest bearing transaction and savings increased by $355.5 million,
$289.7 million and $960.1 million, respectively, while time deposits (including deposits in foreign branches)
decreased $285.3 million during the year ended December 31, 2010 as compared to the same period of 2009.
The average cost of deposits decreased in 2010 mainly due to decreasing market interest rates during 2010, as
well as our focused effort to reduce rates paid on deposits.
Average deposits for the year ended December 31, 2009 increased $437.7 million compared to the same period
of 2008. Average demand deposits, interest bearing transaction and savings increased by $231.3 million,
$41.2 million and $397.8 million, respectively, while time deposits (including deposits in foreign branches)
decreased $232.6 million during the year ended December 31, 2009 as compared to the same period of 2008.
The average cost of deposits decreased in 2009 mainly due to decreasing market interest rates during 2009.
48
Deposit Analysis
(in thousands)
Non-interest bearing
Interest bearing transaction
Savings
Time deposits
Deposits in foreign branches
2010
Average Balances
2009
2008
$1,116,260
437,674
2,142,541
913,616
401,155
$ 760,776
147,961
1,182,441
1,188,964
411,116
$ 529,471
106,720
784,685
1,086,252
746,399
Total average deposits
$5,011,246
$3,691,258
$3,253,527
As with our loan portfolio, most of our deposits are from businesses and individuals in Texas, particularly the
Dallas metropolitan area. As of December 31, 2010, approximately 72% of our deposits originated out of our
Dallas metropolitan banking centers. Uninsured deposits at December 31, 2010 were 50% of total deposits,
compared to 55% of total deposits at December 31, 2009 and 40% of total deposits at December 31, 2008. The
presentation for 2010, 2009 and 2008 does reflect combined ownership, but does not reflect all of the account
styling that would determine insurance based on FDIC regulations.
At December 31, 2010, we had $456.1 million in interest bearing time deposits of $100,000 or more in foreign
branches related to our Cayman Islands branch.
Maturity of Domestic CDs and Other Time Deposits in Amounts of $100,000 or More
(in thousands)
Months to maturity:
3 or less
Over 3 through 6
Over 6 through 12
Over 12
Total
2010
December 31
2009
2008
$406,616
179,438
153,173
43,197
$632,796
132,865
120,561
26,541
$1,000,893
204,982
80,161
32,066
$782,424
$912,763
$1,318,102
Liquidity and Capital Resources
In general terms, liquidity is a measurement of our ability to meet our cash needs. Our objective in managing
our liquidity is to maintain our ability to meet loan commitments, purchase securities or repay deposits and
other liabilities in accordance with their terms, without an adverse impact on our current or future earnings.
Our liquidity strategy is guided by policies, which are formulated and monitored by our senior management
and our Balance Sheet Management Committee (“BSMC”), and which take into account the marketability of
assets, the sources and stability of funding and the level of unfunded commitments. We regularly evaluate all
of our various funding sources with an emphasis on accessibility, stability, reliability and cost-effectiveness.
For the years ended December 31, 2010 and 2009, our principal source of funding has been our customer
deposits, supplemented by short-term borrowings primarily from federal funds purchased and Federal Home
Loan Bank (“FHLB”) borrowings.
Our liquidity needs have typically been fulfilled through growth in our core customer deposits and supple-
mented with brokered deposits and borrowings as needed. Our goal is to obtain as much of our funding for
loans held for investment and other earnings assets as possible from deposits of these core customers. These
deposits are generated principally through development of long-term relationships with customers and
stockholders and our retail network, which is mainly through BankDirect. In addition to deposits from our
core customers, we also have access to incremental deposits through brokered retail certificates of deposit, or
49
CDs. During 2010, growth in customer deposits eliminated the need for use of brokered CDs and none were
outstanding at December 31, 2010 During 2009 brokered CDs were generally of short maturities, 30 to
90 days, and were used to supplement temporary differences in the growth in loans, including growth in
specific categories of loans, compared to customer deposits. The following tab summarizes our core customer
deposits and brokered deposits (in millions):
Deposits from core customers
Deposits from core customers as a percent of total deposits
Brokered deposits
Brokered deposits as a percent of total deposits
Average deposits from core customers
Average deposits from core customers as a percent of total quarterly
average deposits
Average brokered deposits
Average brokered deposits as a percent of total quarterly average deposits
$
December 31
2010
2009
$5,455.4
$3,902.4
100.0%
94.7%
$ — $ 218.3
0.0%
5.3%
$4,982.6
$3,163.8
99.4%
28.6
0.6%
85.7%
$ 527.5
14.3%
We have access to sources of brokered deposits of not less than an additional $3.3 billion. Based on the
reduction in brokered CDs, customer deposits (total deposits minus brokered CDs) at December 31, 2010
increased $1.6 billion from December 31, 2009.
Additionally, we have borrowing sources available to supplement deposits and meet our funding needs. Such
borrowings are generally used to fund our loans held for sale, due to their liquidity, short duration and interest
spreads available. These borrowing sources include federal funds purchased from our downstream corre-
spondent bank relationships (which consist of banks that are smaller than our bank) and from our upstream
correspondent bank relationships (which consist of banks that are larger than our bank), customer repurchase
agreements, treasury, tax and loan notes, and advances from the FHLB and the Federal Reserve. The
following table summarizes our borrowings:
(in thousands)
Balance Rate
Month End Balance Rate
Month End Balance Rate
2010
2009
2008
Maximum
Outstanding
at any
Maximum
Outstanding
at any
Maximum
Outstanding
at any
Month End
Federal funds purchased
Customer repurchase agreements
Treasury, tax and loan notes
FHLB borrowings
Other short-term borrowings
Long-term borrowings
TLGP borrowings
$283,781 .32%
10,920 .05%
3,100 .00%
86 2.21%
— —
— —
— —
Trust preferred subordinated debentures
113,406 2.23%
$ 580,519 .33%
25,070 .10%
5,940 .00%
325,000 .11%
— —
— —
20,500 .84%
113,406 3.19%
$ 350,155 .47%
77,732 .05%
2,720 .00%
800,000 .71%
10,000 1.19%
40,000 1.19%
— —
113,406 4.40%
Total borrowings
$411,293
$653,665 $1,070,435
$1,753,181 $1,394,103
$1,280,606
(1) Interest rate as of period end.
50
The following table summarizes our other borrowing capacities in excess of balances outstanding:
(in thousands)
FHLB borrowing capacity relating to loans
FHLB borrowing capacity relating to securities
2010
2009
2008
$869,089
120,823
$738,682
57,101
$139,000
62,420
Total FHLB borrowing capacity
$989,912
$795,783
$201,420
Unused federal funds lines available from commercial banks
$482,460
$736,560
$573,500
In connection with the FDIC’s Temporary Liability Guarantee Program (“TLGP”), we had the capacity to
issue up to $1.1 billion in indebtedness which will be guaranteed by the FDIC for a limited period of time to
newly issued senior unsecured debt and non-interest bearing deposits. The notes were issued prior to
October 31, 2009 and have maturities no later than December 31, 2012. As of December 31, 2010, all of these
notes had matured compared to $20.5 million outstanding at December 31, 2009.
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subse-
quently issued fixed and/or floating rate Capital Securities in various private offerings totaling $113.4 million.
As of December 31, 20010, the details of the trust preferred subordinated debentures are summarized below:
(In thousands)
Date issued
Texas Capital
Bancshares
Statutory Trust I
Texas Capital
Bancshares
Statutory Trust II
Texas Capital
Bancshares
Statutory Trust III
Texas Capital
Bancshares
Statutory Trust IV
Texas Capital
Bancshares
Statutory Trust V
November 19, 2002
April 10, 2003
October 6, 2005
April 28, 2006
September 29, 2006
Capital securities issued
Floating or fixed rate securities
$10,310
Floating
$10,310
Floating
$25,774
Fixed/Floating(1)
$25,774
Floating
$41,238
Floating
Interest rate on subordinated debentures 3 month LIBOR + 3.35% 3 month LIBOR + 3.25% 3 month LIBOR + 1.51% 3 month LIBOR + 1.60% 3 month LIBOR + 1.71%
Maturity date
November 2032
April 2033
December 2035
June 2036
September 2036
(1) Interest rate is a fixed rate of 6.19% for five years through December 15, 2010, and a floating rate of
interest for the remaining 25 years that resets quarterly to 1.51% above the three-month LIBOR.
After deducting underwriter’s compensation and other expenses of each offering, the net proceeds were
available to the Company to increase capital and for general corporate purposes, including use in investment
and lending activities. Interest payments on all subordinated debentures are deductible for federal income tax
purposes. As of December 31, 2010, the weighted average quarterly rate on the subordinated debentures was
3.06%, compared to 3.24% average for all of 2010, and 3.73% for all of 2009.
Our equity capital averaged $516.0 million for the year ended December 31, 2010 as compared to $473.8 mil-
lion in 2009 and $333.5 million in 2008. We have not paid any cash dividends on our common stock since we
commenced operations and have no plans to do so in the foreseeable future.
On September 10, 2008, we completed a sale of 4 million shares of our common stock in a private placement to
a number of institutional investors. The purchase price was $14.50 per share, and net proceeds from the sale
totaled $55 million. The new capital is being used for general corporate purposes, including capital for support
of anticipated growth of our bank.
On January 16, 2009, we completed the issuance of $75 million of perpetual preferred stock and related
warrants under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP” or “the
Program”). The preferred stock was repurchased in May 2009. In connection with the repurchase, we
recorded a $3.9 million accelerated deemed dividend in the second quarter of 2009 representing the
unamortized difference between the book value and the carrying value of the preferred stock repurchased
from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled
preferred dividend of $523,000 for the second quarter of 2009 and the preferred dividend of $930,000 paid in
the first quarter of 2009, resulted in a total dividend and reduction of earnings available to common
stockholders of $5.4 million for the year ended December 31, 2009. In the first quarter of 2010, the Treasury
auctioned these warrants, and as of December 31, 2010, the warrants to purchase 758,086 shares at $14.84 per
share were still outstanding.
51
On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The
purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital is
being used for general corporate purposes, including capital for support of anticipated growth of our bank.
On January 27, 2010, we entered into an Equity Distribution Agreement with Morgan Stanley & Co.
Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having
aggregate gross sales proceeds of up to $40,000,000. Sales of the shares were made by means of brokers’
transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the
sale or as otherwise agreed to by us and Morgan Stanley. During the year ended December 31, 2010 we sold
734,835 shares at an average price of $17.58. Net proceeds on the sales are approximately $12.5 million, are
being used for general corporate purposes. During the fourth quarter of 2010, we did not sell any shares under
the program.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the
additional capital raised since 2008 through 2010 and will allow us to grow organically with the addition of loan
and deposit relationships.
Our actual and minimum required capital amounts and actual ratios are as follows (in thousands, except
percentage data):
Total capital (to risk-weighted assets):
Company
Actual
Minimum required
Excess above minimum
Bank
Actual
To be well-capitalized
Minimum required
Excess above well-capitalized
Excess above minimum
Tier 1 capital (to risk-weighted assets):
Company
Actual
Minimum required
Excess above minimum
Bank
Actual
To be well-capitalized
Minimum required
Excess above well-capitalized
Excess above minimum
Tier 1 capital (to average assets):
Company
Actual
Minimum required
Excess above minimum
Bank
Actual
To be well-capitalized
Minimum required
Excess above well-capitalized
Excess above minimum
52
Regulatory Capital Adequacy
December 31, 2010
Amount
Ratio
December 31, 2009
Amount
Ratio
$697,291
471,565
225,726
$600,331
589,327
471,462
11,004
128,869
$623,835
235,782
388,053
$526,875
353,596
235,731
173,279
291,144
$623,835
266,694
357,141
$526,875
333,297
266,638
193,578
260,237
11.83% $642,371
8.00% 429,102
3.83% 213,269
10.19% $555,635
10.00% 536,265
8.00% 429,012
.19% 19,370
2.19% 126,623
11.98%
8.00%
3.98%
10.36%
10.00%
8.00%
.36%
2.36%
10.58% $575,338
4.00% 214,551
6.58% 360,787
10.73%
4.00%
6.73%
8.94% $488,602
6.00% 321,759
4.00% 214,506
2.94% 166,843
4.94% 274,096
9.11%
6.00%
4.00%
3.11%
5.11%
9.36% $575,338
4.00% 218,381
5.36% 356,957
10.54%
4.00%
6.54%
7.90% $488,602
5.00% 272,920
4.00% 218,336
2.90% 215,682
3.90% 270,266
8.95%
5.00%
4.00%
3.95%
4.95%
Commitments and Contractual Obligations
The following table presents, as of December 31, 2010, significant fixed and determinable contractual
obligations to third parties by payment date. Payments for borrowings do not include interest. Payments
related to leases are based on actual payments specified in the underlying contracts. Further discussion of the
nature of each obligation is included in the referenced note to the consolidated financial statements.
(in thousands)
Note
Reference
Within One
Year
After One But
Within Three Years
After Three But
Within Five Years
After Five
Years
Total
Deposits without a stated
maturity(1)
Time deposits(1)
Federal funds purchased(1)
Customer repurchase
agreements(1)
Treasury, tax and loan
notes(1)
FHLB borrowings(1)
Operating lease
obligations(1)
Trust preferred
subordinated
debentures(1)
7
7
8
8
8
8
$4,146,219
1,260,682
283,781
$ —
29,542
—
$ — $
18,180
—
— $4,146,219
778
1,309,182
— 283,781
10,920
3,100
—
—
—
—
—
—
86
—
—
—
10,920
3,100
86
16
8,463
17,002
15,772
44,206
85,443
8, 9
—
—
—
113,406
113,406
Total contractual
obligations(1)
(1) Excludes interest.
Off-Balance Sheet Arrangements
$5,713,165
$46,544
$34,038
$158,390 $5,952,137
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at
December 31, 2010 is presented below:
(in thousands)
Commitments to extend credit
Standby and commercial letters
of credit
Total financial instruments with
off-balance sheet risk
Within One
Year
After One
But Within
Three Years
After Three
But Within
Five Years
After Five
Years
Total
$662,642
$472,302
$151,810
$20,117
$1,306,871
45,256
8,911
664
—
54,831
$707,898
$481,213
$152,474
$20,117
$1,361,702
Due to the nature of our unfunded loan commitments, including unfunded lines of credit, the amounts
presented in the table above do not necessarily represent amounts that we anticipate funding in the periods
presented above.
Critical Accounting Policies
SEC guidance requires disclosure of “critical accounting policies.” The SEC defines “critical accounting
policies” as those that are most important to the presentation of a company’s financial condition and results,
and require management’s most difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
53
We follow financial accounting and reporting policies that are in accordance with accounting principles
generally accepted in the United States. The more significant of these policies are summarized in Note 1 to
the consolidated financial statements. Not all these significant accounting policies require management to
make difficult, subjective or complex judgments. However, the policy noted below could be deemed to meet
the SEC’s definition of critical accounting policies.
Management considers the policies related to the allowance for loan losses as the most critical to the financial
statement presentation. The total allowance for loan losses includes activity related to allowances calculated
in accordance with Accounting Standards Codification (“ASC”) 310, Receivables, and ASC 450, Contingencies.
The allowance for loan losses is established through a provision for loan losses charged to current earnings.
The amount maintained in the allowance reflects management’s continuing evaluation of the loan losses
inherent in the loan portfolio. The allowance for loan losses is comprised of specific reserves assigned to
certain classified loans and general reserves. Factors contributing to the determination of specific reserves
include the credit-worthiness of the borrower, and more specifically, changes in the expected future receipt of
principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the
carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective
interest rate or the fair value of the collateral for certain collateral dependent loans. For purposes of
determining the general reserve, the portfolio is segregated by product types in order to recognize differing
risk profiles among categories, and then further segregated by credit grades. See “Summary of Loan Loss
Experience” for further discussion of the risk factors considered by management in establishing the allowance
for loan losses.
New Accounting Standards
See Note 22 — New Accounting Standards in the accompanying notes to consolidated financial statements
included elsewhere in this report for details of recently issued accounting pronouncements and their expected
impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial
instrument. These changes may be the result of various factors, including interest rates, foreign exchange
rates, commodity prices, or equity prices. Additionally, the financial instruments subject to market risk can be
classified either as held for trading purposes or held for other than trading.
We are subject to market risk primarily through the effect of changes in interest rates on our portfolio of assets
held for purposes other than trading. The effect of other changes, such as foreign exchange rates, commodity
prices, and/or equity prices do not pose significant market risk to us.
The responsibility for managing market risk rests with the Balance Sheet Management Committee, which
operates under policy guidelines established by our board of directors. The negative acceptable variation in
net interest revenue due to a 200 basis point increase or decrease in interest rates is generally limited by these
guidelines to +/- 5%. These guidelines also establish maximum levels for short-term borrowings, short-term
assets and public and brokered deposits. They also establish minimum levels for unpledged assets, among
other things. Compliance with these guidelines is the ongoing responsibility of the BSMC, with exceptions
reported to our board of directors on a quarterly basis.
Interest Rate Risk Management
Our interest rate sensitivity is illustrated in the following table. The table reflects rate-sensitive positions as of
December 31, 2010, and is not necessarily indicative of positions on other dates. The balances of interest rate
sensitive assets and liabilities are presented in the periods in which they next reprice to market rates or mature
and are aggregated to show the interest rate sensitivity gap. The mismatch between repricings or maturities
within a time period is commonly referred to as the “gap” for that period. A positive gap (asset sensitive),
where interest rate sensitive assets exceed interest rate sensitive liabilities, generally will result in the net
interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative
54
gap (liability sensitive) will generally have the opposite results on the net interest margin. To reflect
anticipated prepayments, certain asset and liability categories are shown in the table using estimated cash
flows rather than contractual cash flows.
Interest Rate Sensitivity Gap Analysis
December 31, 2010
(in thousands)
Securities(1)
Total variable loans
Total fixed loans
0-3 mo
Balance
4-12 mo
Balance
1-3 yr
Balance
3+ yr
Balance
Total
Balance
$
30,933
4,964,900
364,676
$
44,218
48,588
268,894
$
49,740
7,855
189,874
$
60,533
—
89,679
$ 185,424
5,021,343
913,123
Total loans(2)
5,329,576
317,482
197,729
89,679
5,934,466
Total interest sensitive assets
$5,360,509
$ 361,700
$ 247,469
$ 150,212
$6,119,890
Liabilities:
Interest bearing customer
deposits
CDs & IRAs
Total interest-bearing
deposits
Repo, FF, FHLB borrowings
Trust preferred subordinated
debentures
Total borrowing
$3,153,860
433,221
$
— $
— $
368,513
29,542
— $3,153,860
850,234
18,958
3,587,081
297,887
368,513
—
29,542
—
18,958
—
4,004,094
297,887
—
297,887
—
—
—
—
113,406
113,406
113,406
411,293
Total interest sensitive liabilities
$3,884,968
$ 368,513
$
29,542
$ 132,364
$4,415,387
GAP
Cumulative GAP
Demand deposits
Stockholders’ equity
Total
$1,475,541
1,475,541
$
(6,813)
1,468,728
$ 217,927
1,686,655
$
17,848
1,704,503
$
—
1,704,503
$1,451,307
528,319
$1,979,626
(1) Securities based on fair market value.
(2) Loans include loans held for sale and are stated at gross.
The table above sets forth the balances as of December 31, 2010 for interest bearing assets, interest bearing
liabilities, and the total of non-interest bearing deposits and stockholders’ equity. While a gap interest table is
useful in analyzing interest rate sensitivity, an interest rate sensitivity simulation provides a better illustration
of the sensitivity of earnings to changes in interest rates. Earnings are also affected by the effects of changing
interest rates on the value of funding derived from demand deposits and stockholders’ equity. We perform a
sensitivity analysis to identify interest rate risk exposure on net interest income. We quantify and measure
interest rate risk exposure using a model to dynamically simulate the effect of changes in net interest income
relative to changes in interest rates and account balances over the next twelve months based on three interest
rate scenarios. These are a “most likely” rate scenario and two “shock test” scenarios.
The “most likely” rate scenario is based on the consensus forecast of future interest rates published by
independent sources. These forecasts incorporate future spot rates and relevant spreads of instruments that
55
are actively traded in the open market. The Federal Reserve’s Federal Funds target affects short-term
borrowing; the prime lending rate and the LIBOR are the basis for most of our variable-rate loan pricing. The
10-year mortgage rate is also monitored because of its effect on prepayment speeds for mortgage-backed
securities. These are our primary interest rate exposures. We are currently not using derivatives to manage our
interest rate exposure.
The two “shock test” scenarios assume a sustained parallel 200 basis point increase or decrease, respectively,
in interest rates. As short-term rates continued to fall during 2009 and remain low in 2010, we could not assume
interest rate changes of any amount as the results of the decreasing rates scenario would not be meaningful.
We will continue to evaluate these scenarios as interest rates change, until short-term rates rise above 3.0%.
Our interest rate risk exposure model incorporates assumptions regarding the level of interest rate or balance
changes on indeterminable maturity deposits (demand deposits, interest bearing transaction accounts and
savings accounts) for a given level of market rate changes. These assumptions have been developed through a
combination of historical analysis and future expected pricing behavior. Changes in prepayment behavior of
mortgage-backed securities, residential and commercial mortgage loans in each rate environment are cap-
tured using industry estimates of prepayment speeds for various coupon segments of the portfolio. The
impact of planned growth and new business activities is factored into the simulation model. This modeling
indicated interest rate sensitivity as follows (in thousands):
Anticipated Impact Over the Next Twelve
Months as Compared to Most Likely Scenario
200 bp Increase
December 31, 2010
200 bp Increase
December 31, 2009
Change in net interest income
$19,762
$17,731
The simulations used to manage market risk are based on numerous assumptions regarding the effect of
changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer
behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual
results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as
well as changes in market conditions and management strategies, among other factors.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2010 and December 31, 2009
Consolidated Statements of Operations — Years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2010, 2009
and 2008
Consolidated Statements of Cash Flows — Years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
Page
Reference
58
59
60
61
62
63
57
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Texas Capital Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas Capital Bancshares, Inc. as of
December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2010. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Texas Capital Bancshares, Inc. at December 31, 2010 and 2009, and the
consolidated results of their operations and their cash flows for each of the three fiscal years in the period
ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Texas Capital Bancshares, Inc.’s internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2011 expressed an
unqualified opinion thereon.
Dallas, Texas
February 23, 2011
58
December 31
2010
2009
$ 104,866
75,000
185,424
1,194,209
490
4,711,330
71,510
4,639,820
11,568
225,309
9,483
$6,446,169
$
80,459
44,980
266,128
693,504
586
4,457,293
67,931
4,389,362
11,189
202,890
9,806
$5,698,904
$ 899,492
2,837,163
384,070
4,120,725
2,468
23,916
580,519
25,070
351,440
113,406
5,217,544
Texas Capital Bancshares, Inc.
Consolidated Balance Sheets
(in thousands except share data)
ASSETS
Cash and due from banks
Federal funds sold
Securities, available-for-sale
Loans held for sale
Loans held for sale from discontinued operations
Loans held for investment (net of unearned income)
Less: Allowance for loan losses
Loans held for investment, net
Premises and equipment, net
Accrued interest receivable and other assets
Goodwill and other intangible assets, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing
Interest bearing in foreign branches
Accrued interest payable
Other liabilities
Federal funds purchased
Repurchase agreements
Other short-term borrowings
Trust preferred subordinated debentures
Total liabilities
Stockholders’ equity:
$1,451,307
3,545,146
458,948
5,455,401
2,579
48,577
283,781
10,920
3,186
113,406
5,917,850
Preferred stock, $.01 par value, $1,000 liquidation value:
Authorized shares — 10,000,000
Issued shares — no shares issued at December 31, 2010 and 2009,
respectively
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares — 36,957,104 and 35,919,941 at December 31, 2010 and 2009,
respectively
Additional paid-in capital
Retained earnings
Treasury stock (shares at cost: 417 at December 31, 2010 and 2009
Deferred compensation
Accumulated other comprehensive income, net of taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
369
336,796
185,807
(8)
—
5,355
528,319
359
326,224
148,620
(8)
—
6,165
481,360
$6,446,169
$5,698,904
See accompanying notes to consolidated financial statements
59
Texas Capital Bancshares, Inc.
Consolidated Statements of Operations
Year Ended December 31
2010
2008
2009
(in thousands except per share data)
Interest income:
Interest and fees on loans
Securities
Federal funds sold
Deposits in other banks
Total interest income
Interest expense:
Deposits
Federal funds purchased
Repurchase agreements
Other borrowings
Trust preferred subordinated debentures
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income:
Service charges on deposit accounts
Trust fee income
Bank owned life insurance (BOLI) income
Brokered loan fees
Equipment rental income
Other
Total non-interest income
Non-interest expense :
Salaries and employee benefits
Net occupancy expense
Leased equipment depreciation
Marketing
Legal and professional
Communications and technology
FDIC insurance assessment
Allowance and other carrying costs for OREO
Other
Total non-interest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Loss from discontinued operations (after-tax)
Net income
Preferred stock dividends
Net income available to common shareholders
Basic earnings per share:
Income from continuing operations
Net income
Diluted earnings per share:
Income from continuing operations
Net income
$270,003 $229,500 $231,009
17,722
168
31
13,578
31
44
9,481
210
116
279,810
243,153
248,930
33,309
1,097
10
48
3,672
38,136
37,824
2,404
53
1,949
4,232
46,462
72,852
8,232
541
9,123
6,445
97,193
241,674
53,500
196,691
43,500
151,737
26,750
188,174
153,191
124,987
6,392
3,846
1,889
11,190
4,134
4,812
32,263
85,298
12,314
3,297
5,419
11,837
8,511
9,202
10,404
17,206
6,287
3,815
1,579
9,043
5,557
2,979
4,699
4,692
1,240
3,242
5,995
2,602
29,260
22,470
73,419
12,291
4,319
3,034
11,846
6,510
8,464
10,345
15,314
61,438
9,631
4,667
2,729
9,622
5,152
1,797
1,541
13,074
163,488
145,542
109,651
56,949
19,626
37,323
(136)
37,187
—
36,909
12,522
24,387
(235)
24,152
5,383
37,806
12,924
24,882
(616)
24,266
—
$ 37,187 $ 18,769 $ 24,266
$
$
$
$
1.02 $
.56 $
1.02 $
.55 $
1.00 $
.55 $
1.00 $
.55 $
.89
.87
.89
.87
See accompanying notes to consolidated financial statements
60
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B
Texas Capital Bancshares, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income from continuing operations
Adjustments to reconcile net income from continuing operations to net cash used in
operating activities:
Provision for credit losses
Deferred tax benefit
Depreciation and amortization
Amortization and accretion on securities
Bank owned life insurance (BOLI) income
Stock-based compensation expense
Tax benefit from stock option exercises
Excess tax benefits from stock-based compensation arrangements
Originations of loans held for sale
Proceeds from sales of loans held for sale
Loss on sale of assets
Changes in operating assets and liabilities:
Accrued interest receivable and other assets
Accrued interest payable and other liabilities
Net cash used in operating activities of continuing operations
Net cash used in operating activities of discontinued operations
Net cash used in operating activities
Investing activities
Purchases of available-for-sale securities
Maturities and calls of available-for-sale securities
Principal payments received on available-for-sale securities
Net increase in loans held for investment
Purchase of premises and equipment, net
Proceeds from sale of foreclosed assets
Purchase of non-controlling interest of bank owned subsidiary
Net cash used in investing activities
Financing activities
Net increase in deposits
Proceeds from issuance of stock related to stock-based awards
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock and related warrants
Repurchase of preferred stock
Dividends paid
Net increase (decrease) in other borrowings
Excess tax benefits from stock-based compensation arrangements
Net federal funds purchased
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for interest
Cash paid during the year for income taxes
Non-cash transactions:
Transfers from loans/leases to OREO and other repossessed assets
Year Ended December 31
2009
2010
2008
$
37,323
$
24,387
$
24,882
53,500
(5,613)
6,821
139
(1,889)
6,770
621
(1,774)
(22,859,900)
22,359,195
93
43,500
(8,775)
7,819
228
(1,579)
5,959
75
(213)
(16,582,314)
16,399,677
1,273
26,750
(4,104)
7,666
280
(1,240)
4,676
1,584
(4,527)
(7,552,614)
7,230,429
—
(24,287)
25,207
(403,794)
(128)
(403,922)
—
4,425
74,895
(303,618)
(3,832)
5,980
(10,152)
(232,302)
1,334,676
866
12,477
—
—
—
(362,404)
1,774
(296,738)
690,651
54,427
125,439
179,866
38,025
27,134
29,559
$
$
$
$
(28,894)
(1,867)
(140,724)
(186)
(140,910)
—
32,300
86,704
(466,304)
(4,550)
12,194
—
(339,656)
787,538
1,578
59,446
75,000
(75,000)
(1,219)
(553,942)
213
230,364
523,978
43,412
82,027
125,439
50,415
14,892
23,466
(44,724)
(4,218)
(315,160)
(529)
(315,689)
(40,219)
36,270
69,263
(577,999)
(5,817)
—
—
(518,502)
266,810
3,669
54,993
—
—
—
491,414
4,527
5,342
826,755
(7,436)
89,463
82,027
96,402
22,475
23,232
$
$
See accompanying notes to consolidated financial statements
62
1. Operations and Summary of Significant Accounting Policies
Organization and Nature of Business
Texas Capital Bancshares, Inc. (“the Company”), a Delaware financial holding company, was incorporated in
November 1996 and commenced operations in March 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”). The Bank currently provides commercial banking services
to its customers in Texas and concentrates on middle market commercial and high net worth customers.
Basis of Presentation
The accounting and reporting policies of Texas Capital Bancshares, Inc. conform to accounting principles
generally accepted in the United States and to generally accepted practices within the banking industry. Our
consolidated financial statements include the accounts of Texas Capital Bancshares, Inc. and its subsidiary,
the Bank. Certain prior period balances have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States 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 possible 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.
Cash and Cash Equivalents
Cash equivalents include amounts due from banks and federal funds sold.
Securities
Securities are classified as trading, available-for-sale or held-to-maturity. Management classifies securities at
the time of purchase and re-assesses such designation at each balance sheet date; however, transfers between
categories from this re-assessment are rare.
Trading Account
Securities acquired for resale in anticipation of short-term market movements are classified as trading, with
realized and unrealized gains and losses recognized in income. To date, we have not had any activity in our
trading account.
Held-to-Maturity and Available-for-Sale
Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified
as held-to-maturity or trading and marketable equity securities not classified as trading are classified as
available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized gains and losses reported in a separate
component of accumulated other comprehensive income (loss), net of tax. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of
mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is
included in interest income from securities. 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.
All securities are available-for-sale as of December 31, 2010 and 2009.
63
Loans
Loans held for investment (which include equipment leases accounted for as financing leases) are stated at
the amount of unpaid principal reduced by deferred income (net of costs). Interest on loans is recognized
using the simple-interest method on the daily balances of the principal amounts outstanding. Loan origi-
nation fees, net of direct loan origination costs, and commitment fees, are deferred and amortized as an
adjustment to yield over the life of the loan, or over the commitment period, as applicable.
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. Reserves on impaired loans are measured based on the present value of expected
future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The accrual of interest on loans is discontinued 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 book balance of the asset
is deemed to be collectible. If collectibility is questionable, then cash payments are applied to principal. 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.
We purchase participations in mortgage loans primarily for sale in the secondary market through our mortgage
warehouse lending division. Accordingly, these loans are classified as held for sale and are carried at the lower
of cost or fair value, determined on an aggregate basis. As a result of dislocations in the mortgage industry
starting in 2007, some loan participations may not be sold within the normal time frames or at previously
negotiated prices. Due to market conditions, certain mortgage warehouse lending loans have been transferred
to our loans held for investment portfolio, and such loans are transferred at a lower of cost or market. Mortgage
warehouse lending loans transferred to our loans held for investment portfolio could require allocations of the
allowance for loan losses or be subject to charge off in the event the loans become impaired.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses charged against income. The
allowance for loan losses includes specific reserves for impaired loans and an estimate of losses inherent in the
loan portfolio at the balance sheet date, but not yet identified with specific loans. Loans deemed to be
uncollectible are charged against the allowance when management believes that the collectibility of the
principal is unlikely and subsequent recoveries, if any, are credited to the allowance. Management’s periodic
evaluation of the adequacy of the allowance is based on an assessment of the current loan portfolio, including
known inherent risks, adverse situations that may affect the borrowers’ ability to repay, the estimated value of
any underlying collateral and current economic conditions.
Repossessed Assets
Repossessed assets, which are included in other assets on the balance sheet, consist of collateral that has been
repossessed. Collateral that has been repossessed is recorded at fair value less selling costs through a charge to
the allowance for loan losses, if necessary. Write-downs are provided for subsequent declines in value and are
recorded in other non-interest expense.
Other Real Estate Owned
OREO, which is included in other assets on the balance sheet, consists of real estate that has been foreclosed.
Real estate that has been foreclosed is recorded at the lower of the amount of the loan balance or the fair value
of the real estate, less selling costs, through a charge to the allowance for loan losses, if necessary. Subsequent
write-downs required for declines in value are recorded through a valuation allowance, or taken directly to the
asset, charged to other non-interest expense.
64
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which range from three to ten years. Gains or
losses on disposals of premises and equipment are included in results of operations.
Marketing and Software
Marketing costs are expensed as incurred. Ongoing maintenance and enhancements of websites are expensed
as incurred. Costs incurred in connection with development or purchase of internal use software are
capitalized and amortized over a period not to exceed five years. Internal use software costs are included
in other assets in the consolidated financial statements.
Goodwill and Other Intangible Assets
Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on
its own or in combination with a related contract, asset, or liability. Our intangible assets relate primarily to
loan customer relationships. Intangible assets with definite useful lives are amortized on an accelerated basis
over their estimated life. Intangible assets are tested for impairment annually or whenever events or changes
in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at fair value.
Segment Reporting
We have determined that all of our lending divisions and subsidiaries meet the aggregation criteria of
ASC 280, Segment Reporting, since all offer similar products and services, operate with similar processes, and
have similar customers.
Stock-based Compensation
We account for all stock-based compensation transaction in accordance with ASC 718, Compensation — Stock
Compensation (“ASC 718”), which requires that stock compensation transactions be recognized as compen-
sation expense in the statement of operations based on their fair values on the measurement date, which is the
date of the grant. We transitioned to fair value based accounting for stock-based compensation using a
modified version of prospective application (“modified prospective application”). Under modified prospec-
tive application, as it is applicable to us, ASC 718 applies to new awards and to awards modified, repurchased
or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the
requisite period has not been rendered (generally referring to nonvested awards) that are outstanding as of
January 1, 2006 are being recognized as the remaining requisite service is rendered during and after the period
of adoption of ASC 718.
The compensation expense for the earlier awards is based on the same method and on the same grant date fair
values previously determined for the pro forma disclosures required for all companies that did not previously
adopt the fair value accounting method for stock-based compensation.
Accumulated Other Comprehensive Income (Loss)
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. Accumulated comprehensive income
(loss), net for the year ended December 31, 2010 and 2009 is reported in the accompanying consolidated
statements of changes in stockholders’ equity.
Income Taxes
The Company and its subsidiary file a consolidated federal income tax return. We utilize the liability method
in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based
65
upon the difference between the values of the assets and liabilities as reflected in the financial statements and
their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be
recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. A valuation reserve is provided against deferred tax assets unless it is
more likely than not that such deferred tax assets will be realized.
Basic and Diluted Earnings Per Common Share
Basic earnings per common share is based on net income available to common stockholders divided by the
weighted-average number of common shares outstanding during the period excluding non-vested stock.
Diluted earnings per common share include the dilutive effect of stock options and non-vested stock awards
granted using the treasury stock method. A reconciliation of the weighted-average shares used in calculating
basic earnings per common share and the weighted average common shares used in calculating diluted
earnings per common share for the reported periods is provided in Note 14 — Earnings Per Share.
Fair Values of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for
measuring fair value under GAAP and enhances disclosures about fair value measurements.
2. Securities
The following is a summary of securities (in thousands):
Available-for-Sale Securities:
Mortgage-backed securities
Corporate securities
Municipals
Equity securities(1)
Available-for-Sale Securities:
Mortgage-backed securities
Corporate securities
Municipals
Equity securities(1)
Amortized
Cost
$126,838
5,000
37,841
7,506
$177,185
Amortized
Cost
$201,824
5,000
42,314
7,506
$256,644
December 31, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$6,891
—
1,244
109
$8,244
$ (5)
—
—
—
$ (5)
$133,724
5,000
39,085
7,615
$185,424
December 31, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$8,192
—
1,514
126
$9,832
$ (29)
(317)
(2)
—
$209,987
4,683
43,826
7,632
$(348)
$266,128
(1) Equity securities consist of Community Reinvestment Act funds.
66
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands, except percentage data):
Less Than
One Year
After One
Through
Five Years
At December 31, 2010
After Five
Through
Ten Years
After Ten
Years
Total
Available-for-sale:
Mortgage-backed securities:(1)
Amortized cost
Estimated fair value
Weighted average yield(3)
Corporate securities:
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals:(2)
Amortized cost
Estimated fair value
Weighted average yield(3)
Equity securities:
Amortized cost
Estimated fair value
Total available-for-sale
securities:
Amortized cost
Estimated fair value
$8,048
8,125
4.499%
$12,509
12,938
4.348%
$50,038
53,074
4.815%
$56,243
59,587
$126,838
133,724
4.083%
4.424%
—
—
—
5,000
5,000
7.375%
—
—
—
3,210
3,241
4.879%
21,542
22,373
5.440%
13,089
13,471
5.766%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
5,000
7.375%
37,841
39,085
5.506%
7,506
7,615
$177,185
$185,424
(1) Actual maturities may differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties. The average expected life of the mortgage-
backed securities was 2.0 years at December 31, 2010.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3) Yields are calculated based on amortized cost.
Securities with carrying values of approximately $42,253,000 and $152,888,000 were pledged to secure certain
borrowings and deposits at December 31, 2010 and 2009, respectively. See Note 8 for discussion of securities
securing borrowings. Of the pledged securities at December 31, 2010 and 2009, approximately $20,613,000
and $116,923,000, respectively, were pledged for certain deposits.
The following tables disclose, as of December 31, 2010 and 2009, 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):
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
December 31, 2010
Mortgage-backed securities
Corporate securities
Municipals
$—
—
—
$—
$—
—
—
$—
$3,681
—
—
$3,681
$ (5)
—
—
$ (5)
$3,681
—
—
$3,681
$ (5)
—
—
$ (5)
67
December 31, 2009
Corporate securities
Municipals
Equity securities
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
$ 452
—
1,018
$1,470
$ (1)
—
(2)
$ (3)
$2,553
4,683
—
$7,236
$ (28)
(317)
—
$(345)
$3,005
4,683
1,018
$8,706
$ (29)
(317)
(2)
$(348)
At December 31, 2010, the number of investment positions in this unrealized loss position totals 1. We do not
believe these unrealized losses are “other than temporary” as (1) we do not have the intent to sell any of the
securities in the table above; and (2) it is not probable that we will be unable to collect the amounts
contractually due. The unrealized losses noted at December 31, 2009 were interest rate related, and losses
have decreased as rates have decreased in 2009 and remained low during 2010. We have not identified any
issues related to the ultimate repayment of principal as a result of credit concerns on these securities.
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. We had comprehensive income of
$36.4 million for the year ended December 31, 2010 and comprehensive income of $28.4 million for the year
ended December 31, 2009. Comprehensive income during the year ended December 31, 2010 included a net
after-tax loss of $810,000, and comprehensive income during the year ended December 31, 2009 included a
net after-tax gain of $4.3 million due to changes in the net unrealized gains/losses on securities
available-for-sale.
3. Loans and Allowance for Credit Losses
Loans held for investment are summarized by category as follows (in thousands):
December 31
2010
2009
Commercial
Construction
Real estate
Consumer
Equipment leases
Gross loans held for investment
Deferred income (net of direct origination costs)
Allowance for loan losses
Total loans held for investment, net
$2,592,924
270,008
1,759,758
21,470
95,607
$2,457,533
669,426
1,233,701
25,065
99,129
4,739,767
(28,437)
(71,510)
4,484,854
(27,561)
(67,931)
$4,639,820
$4,389,362
We continue to lend primarily in Texas. As of December 31, 2010, a substantial majority of the principal
amount of the loans held for investment in our portfolio was to businesses and individuals in Texas. This
geographic concentration subjects the loan portfolio to the general economic conditions within this area. The
risks created by this concentration have been considered by management in the determination of the
adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to
cover estimated losses on loans at each balance sheet date.
During the normal course of business, the Company and subsidiary may enter into transactions with related
parties, including their officers, employees, directors, significant stockholders and their related affiliates. It is
the Company’s policy that all such transactions are on substantially the same terms as those prevailing at the
time for comparable transactions with third parties. Loans to related parties, including officers and directors,
were approximately $13,120,000 and $14,158,000 at December 31, 2010 and 2009, respectively. During the
68
years ended December 31, 2010 and 2009, total advances were approximately $12,388,000 and $10,314,000
and total paydowns were $13,426,000 and $11,451,000, respectively.
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 adequate 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 com-
mitments, specifically unfunded loan commitments and letters of credit. 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 credits, 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 supervision. Within our criticized/
classified credit grades are special mention, substandard, and doubtful. Special mention loans are those that
are currently protected by 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 are inadequately protected by sound
worth and paying capacity of the borrower and of the collateral pledged. 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. Substandard loans can
be accruing or can be on nonaccrual 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 highly questionable and improbable. The possibility of loss
is extremely high. All doubtful loans are on nonaccrual.
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, changes in credit policies and lending standards. Historical loss rates are
adjusted to account for current environmental conditions which we believe are likely to cause loss rates to be
higher or lower than past experience. Each quarter we produce an adjustment range for environmental factors
unique to us and our market. Changes in the trend and severity of problem loans can cause the estimation of
losses to differ from past experience. In addition, the reserve considers 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 com-
pensates 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 evaluate many factors and conditions in determining the unallocated portion of the
allowance, including the economic and business conditions affecting key lending areas, credit quality trends
and general growth in the portfolio. The allowance is considered adequate and appropriate, given manage-
ment’s assessment of potential 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.
The methodology used in the periodic review of reserve adequacy, 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
69
adequacy relies primarily on our loss history. Currently, the review of reserve adequacy is performed by
executive management and presented to our board of directors for their review, consideration and ratification
on a quarterly basis.
The following table summarizes the credit risk profile of our loan portfolio by internally assigned grades and
nonaccrual status as of December 31, 2010 (in thousands):
Commercial Construction Real Estate Consumer
Leases
Total
Grade:
Pass
Special mention
Substandard-accruing
Non-accrual
Total loans held for
investment
$2,461,769
45,754
42,858
42,543
$243,843
19,856
6,288
21
$1,549,400
59,294
88,567
62,497
$20,312
76
376
706
$78,715
1,552
9,017
6,323
$4,354,039
126,532
147,106
112,090
$2,592,924
$270,008
$1,759,758
$21,470
$95,607
$4,739,767
The table below presents a summary of our loan loss experience (in thousands):
Year Ended December 31
2009
2010
2008
Reserve for loan losses:
Beginning balance
Loans charged-off:
Commercial
Real estate — Construction
Real estate — Term
Consumer
Equipment leases
Total
Recoveries:
Commercial
Real estate — Construction
Real estate — Term
Consumer
Equipment leases
Total
Net charge-offs
Provision for loan losses
Ending balance
Reserve for off-balance sheet credit losses:
Beginning balance
Provision (benefit) for off-balance sheet credit losses
Ending balance
Total reserve for credit losses
Total provision for credit losses
70
$67,931
$45,365
$31,686
27,723
12,438
9,517
216
1,555
4,000
6,508
4,696
502
4,022
7,395
1,866
4,168
193
12
51,449
19,728
13,634
176
1
138
4
158
477
124
13
53
28
54
272
759
—
47
13
79
898
50,972
54,551
19,456
42,022
12,736
26,415
$71,510
$67,931
$45,365
$ 2,948
(1,051)
$ 1,470
1,478
$ 1,135
335
$ 1,897
$ 2,948
$ 1,470
$73,407
$70,879
$46,835
$53,500
$43,500
$26,750
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. The
table below summarizes our non-accrual loans by type and purpose as of December 31, 2010 (in thousands):
Commercial
Business loans
Energy
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Total non-accrual loans
$ 22,542
20,001
21
54,213
6,542
1,742
706
6,323
$112,090
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 collectibility is questionable, then cash payments are applied to
principal. We recognized $566,000 in interest income on non-accrual loans during 2010 compared to $25,000
in 2009 and $33,000 in 2008. Additional interest income that would have been recorded if the loans had been
current during the years ended December 31, 2010, 2009 and 2008 totaled $10.5 million, $3.6 million and
$2.9 million, respectively. As of December 31, 2010, none of our non-accrual loans were earning on a cash
basis.
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
71
of the loan agreement. The following table details our impaired loans, by portfolio class as of December 31,
2010 (in thousands):
With no related allowance recorded:
Commercial
Business loans
Energy
Other
Construction
Market risk
Secured by 1-4 family
Other
Real estate
Market risk
Commercial
Secured by 1-4 family
Other
Consumer
Leases
Total impaired loans with no related allowance
recorded
With an allowance recorded:
Commercial
Business loans
Energy
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
—
$
—
$ —
—
—
—
22,542
20,001
2,641
54,213
6,542
1,742
706
6,323
28,470
20,001
2,641
62,045
6,542
1,742
706
6,323
4,594
1,000
425
6,507
125
82
163
1,829
Total impaired loans with an allowance recorded
114,710
128,470
14,725
Combined:
Commercial
Business loans
Energy
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
22,542
20,001
2,641
54,213
6,542
1,742
706
6,323
28,470
20,001
2,641
62,045
6,542
1,742
706
6,323
4,594
1,000
425
6,507
125
82
163
1,829
Total impaired loans
$114,710
$128,470
$14,725
Average impaired loans outstanding during the years ended December 31, 2010, 2009 and 2008 totaled
$120.6 million $62.3 million and $26.8 million respectively.
72
The following table summarizes the allowance for loan losses related to impaired loans and the impaired loan
balances by portfolio segment at December 31, 2010 (in thousands):
Commercial
Construction
Real Estate
Consumer
Leases
Total
Allowance for loan losses:
Ending balance
$ 5,594
$ 425
$ 6,714
$163
$1,829
$ 14,725
Ending balance
individually evaluated
for impairment
Ending balance
collectively evaluated
for impairment
Loans held for investment:
5,594
425
6,714
163
1,829
14,725
—
—
—
—
—
—
Ending balance
$42,543
$2,641
$62,497
$706
$6,323
$114,710
Ending balance
individually evaluated
for impairment
Ending balance
collectively evaluated
for impairment
42,543
2,641
62,497
706
6,323
114,710
—
—
—
—
—
—
The table below provides an age analysis of our past due loans that are still accruing as of December 31, 2010
(in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than 90
Days
Total Past
Due
Current
Total
Recorded
Investment Greater
Than 90 Days and
Accruing(1)
Commercial
Business loans
Energy
Construction
Market risk
Secured by 1-4
family
Real estate
Market risk
Commercial
Secured by 1-4
family
Consumer
Leases
Total loans held for
investment
$ 4,490
—
$ 3,541
1,222
$5,670
—
$13,701
1,222
$2,107,502 $2,121,203
429,178
427,956
$5,670
—
2,620
17,057
— 19,677
236,708
256,385
—
—
—
—
13,602
13,602
24,957
2,437
4,639
237
5,107
2,551
—
—
234
1,620
531
458
28,039
2,895
1,274,560
317,332
1,302,599
320,227
—
24
23
4,639
495
6,750
69,796
20,269
82,534
74,435
20,764
89,284
—
—
531
458
—
24
23
$44,487
$26,225
$6,706
$77,418
$4,550,259 $4,627,677
$6,706
(1) Loans past due 90 days and still accruing includes premium finance loans of $3.3 million. These loans are
generally secured by obligations of insurance carriers to refund premiums on cancelled insurance policies.
The refund of premiums from the insurance carriers can take 180 days or longer from the cancellation
date.
73
4. OREO and Valuation Allowance for Losses on OREO
The table below presents a summary of the activity related to OREO (in thousands):
Year Ended December 31
2009
2010
2008
Beginning balance
Additions
Sales
Valuation allowance for OREO
Direct write-downs
Ending balance
$27,264
29,559
(6,058)
(6,587)
(1,917)
$ 25,904
23,466
(14,265)
(6,619)
(1,222)
$ 2,671
28,835
(5,602)
—
—
$42,261
$ 27,264
$25,904
5. Goodwill and Other Intangible Assets
In November 2009, we acquired another premium finance company and recorded a total intangible asset of
$2.3 million. Of this total, $224,000 was allocated to goodwill, $1.9 million to customer relationships and
$162,000 to trade name. The $1.9 million customer relationship intangible will be amortized over 15 years and
the $162,000 intangible related to the trade name will be amortized over 5 years.
74
Goodwill and other intangible assets at December 31, 2010 and December 31, 2009 are summarized as follows
(in thousands):
Gross Goodwill and
Intangible
Assets
Accumulated
Amortization
Net Goodwill and
Intangible Assets
December 31, 2010
Goodwill
Intangible assets — customer relationships
and trademarks
December 31, 2009
Goodwill
Intangible assets — customer relationships
and trademarks
$ 7,225
3,705
$10,930
$ 7,225
3,705
$10,930
$ (374)
(1,073)
$(1,447)
$ (374)
(750)
$(1,124)
$6,851
2,632
$9,483
$6,851
2,955
$9,806
Amortization expense related to intangible assets totaled $323,000 in 2010 and $189,000 in 2009 and $162,000
in 2008. The estimated aggregate future amortization expense for intangible assets remaining as of
December 31, 2010 is as follows:
2011
2012
2013
2014
2015
Thereafter
$ 323
323
323
317
216
1,130
$2,632
6. Premises and Equipment
Premises and equipment at December 31, 2010 and 2009 are summarized as follows (in thousands):
December 31
2010
2009
Premises
Furniture and equipment
Accumulated depreciation
Total premises and equipment, net
$ 11,092
22,159
$ 9,765
20,235
33,251
(21,683)
30,000
(18,811)
$ 11,568
$ 11,189
Depreciation expense for the above premises and equipment was approximately $3,201,000, $3,311,000 and
$2,837,000 in 2010, 2009 and 2008, respectively.
75
7. Deposits
The scheduled maturities of interest bearing time deposits are as follows at December 31, 2010 (in
thousands):
2011
2012
2013
2014
2015
2016 and after
$1,260,682
28,068
1,474
9,276
8,904
778
$1,309,182
At December 31, 2010 and 2009, the Bank had approximately $44,753,000 and $35,900,000, respectively, in
deposits from related parties, including directors, stockholders, and their related affiliates on terms similar to
those from third parties.
At December 31, 2010 and 2009, interest bearing time deposits, including deposits in foreign branches, of
$100,000 or more were approximately $1,238,526,000 and $1,293,883,000, respectively.
8. Borrowing Arrangements
The following table summarizes our borrowings at December 31, 2010, 2009 and 2008 (in thousands):
Federal funds purchased
Customer repurchase agreements(1)
Treasury, tax and loan notes(2)
FHLB borrowings(3)
Other short-term borrowings
Long-term borrowings
TLGP borrowings
Trust preferred subordinated debentures
2010
Balance
$283,781
10,920
3,100
86
—
—
—
113,406
Rate(4)
2009
Balance
Rate(4)
2008
Balance
.32% $ 580,519
25,070
.05%
5,940
.00%
325,000
2.21%
—
—
—
—
20,500
—
113,406
2.23%
.33% $ 350,155
77,732
.10%
2,720
.00%
800,000
.11%
10,000
—
40,000
—
—
.84%
113,406
3.19%
Rate(4)
.47%
.05%
.00%
.71%
1.19%
1.19%
—
4.40%
Total borrowings
$411,293
Maximum outstanding at any month end
$653,665
$1,070,435
$1,753,181
$1,394,013
$1,280,606
(1) Securities pledged for customer repurchase agreements were $21.6 million, $36.0 million and $88.2 mil-
lion at December 31, 2010, 2009 and 2008, respectively.
(2) Securities pledged for treasury, tax and loans notes were $7.4 million, $11.3 million and $13.0 million at
December 31, 2010, 2009 and 2008, respectively.
(3) FHLB borrowings are collateralized by a blanket floating lien based on real estate loans and also certain
pledged securities.
(4) Interest rate as of period end.
76
The following table summarizes our other borrowing capacities in addition to balances outstanding at
December 31, 2010, 2009 and 2008 (in thousands):
FHLB borrowing capacity relating to loans
FHLB borrowing capacity relating to securities
2010
$869,089
120,823
2009
$1,382,682
57,101
2008
$139,000
62,420
Total FHLB borrowing capacity
$989,912
$1,439,783
$201,420
Unused federal funds lines available from commercial
banks
$482,460
$ 736,560
$573,500
The scheduled maturities of our borrowings at December 31, 2010, were as follows (in thousands):
Federal funds purchased(1)
Customer repurchase agreements(1)
Treasury, tax and loan notes(1)
FHLB borrowings(1)
Trust preferred subordinated debentures(1)
Total borrowings
(1) Excludes interest.
Within One
Year
After One
But Within
Three Years
After Three
But Within
Five Years
After Five
Years
Total
$283,781
10,920
3,100
—
—
$297,801
$—
—
—
—
—
$—
$—
—
—
86
—
$86
$
— $283,781
10,920
—
3,100
—
86
—
113,406
113,406
$113,406
$411,293
9. Trust Preferred Subordinated Debentures
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and subse-
quently issued fixed and/or floating rate Capital Securities in various private offerings totaling $113.4 million.
As of December 31, 2010, the details of the trust preferred subordinated debentures are summarized below (in
thousands):
Texas
Capital
Bancshares
Statutory
Trust I
Texas
Capital
Bancshares
Statutory
Trust II
Texas
Capital
Bancshares
Statutory
Trust III
Texas
Capital
Bancshares
Statutory
Trust IV
Texas
Capital
Bancshares
Statutory
Trust V
Date issued
Capital securities issued
Floating or fixed rate
securities
Interest rate on subordinated
debentures
Maturity date
November 19, 2002
April 10, 2003
October 6, 2005
$
10,310 $
10,310 $
25,774 $
April 28, 2006
25,774
$
September 29, 2006
41,238
Floating
3 month LIBOR +
Floating
3 month LIBOR +
Fixed/Floating(1)
Floating
3 month LIBOR +
Floating
3.35%
3.25% 3 month LIBOR + 1.51%
1.60% 3 month LIBOR + 1.71%
November 2032
April 2033
December 2035
June 2036
September 2036
(1) Interest rate is a fixed rate of 6.19% for five years through December 15, 2010, and a floating rate of
interest for the remaining 25 years that resets quarterly to 1.51% above the three-month LIBOR.
After deducting underwriter’s compensation and other expenses of each offering, the net proceeds were
available to the Company to increase capital and for general corporate purposes, including use in investment
and lending activities. Interest payments on all subordinated debentures are deductible for federal income tax
purposes.
10.
Income Taxes
We have a gross deferred tax asset of $48.1 million at December 31, 2010, which relates primarily to our
allowance for loan losses, OREO valuation reserve, loan origination fees and stock compensation. Manage-
ment believes it is more likely than not that all of the deferred tax assets will be realized. Our net deferred tax
asset is included in other assets in the consolidated balance sheet.
77
At December 31, 2009, we had a gross deferred tax asset of $40.1 million, which related primarily to our
allowance for loan losses, loan origination fees and stock compensation.
Income tax expense/(benefit) consists of the following for the years ended (in thousands):
Year Ended December 31
2009
2010
2008
Current:
Federal
State
Total
Deferred:
Federal
State
Total
Total expense:
Federal
State
Total
$24,329
840
$20,955
219
$17,349
221
$25,169
$21,174
$17,570
$ (5,248)
(365)
$ (8,774)
—
$ (4,971)
—
$ (5,613)
$ (8,774)
$ (4,971)
$19,081
475
$12,181
219
$12,378
221
$19,556
$12,400
$12,599
The following table shows the breakdown of total income tax expense for continuing operations and
discontinued operations for the years ended December 31, 2010, 2009 and 2008 (in thousands):
Total expense:
From continuing operations
From discontinued operations
Total
2010
2009
2008
$19,626
(70)
$12,522
(122)
$12,924
(325)
$19,556
$12,400
$12,599
78
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of deferred tax assets and liabilities are as follows (in thousands):
December 31
2010
2009
Deferred tax assets:
Allowance for credit losses
Organizational costs/intangibles
Loan origination fees
Stock compensation
Mark to market on mortgage loans
Reserve for potential mortgage loan repurchases
Non-accrual interest
Deferred lease expense
OREO valuation allowance
Other
Deferred tax liabilities:
Loan origination costs
FHLB stock dividends
Leases
Depreciation
Unrealized gain on securities
Other
Net deferred tax asset
$ 26,426
162
4,774
5,769
486
453
3,009
842
5,754
432
$ 25,111
254
3,970
4,412
547
446
2,174
—
2,764
421
48,107
40,099
(991)
(697)
(16,153)
(1,966)
(2,884)
(77)
(871)
(678)
(15,375)
(540)
(3,319)
(28)
(22,768)
(20,811)
$ 25,339
$ 19,288
ASC 740-10, Income Taxes — Accounting for Uncertainties in Income Taxes (“ASC 740-10”) prescribes a recog-
nition threshold and a measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in
the financial statements only when it is more likely than not that the tax position will be sustained upon
examination by the appropriate taxing authority that would have full knowledge of all relevant information. A
tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of
cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized
in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no longer met. ASC 740-10 also provides
guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties.
We file income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. We are no longer
subject to U.S. federal income tax examinations by tax authorities for years before 2007.
79
The reconciliation of income attributable to continuing operations computed at the U.S. federal statutory tax
rates to income tax expense (benefit) is as follows:
Tax at U.S. statutory rate
State taxes
Non-deductible expenses
Non-taxable income
Other
Total
11. Employee Benefits
Year Ended December 31
2010
2008
2009
35%
1%
1%
(2)%
—
35%
35%
1%
1%
(3)%
—
34%
35%
1%
1%
(3)%
—
34%
We have a qualified retirement plan, with a salary deferral feature designed to qualify under Section 401 of the
Internal Revenue Code (“the 401(k) Plan”). The 401(k) Plan permits our employees to defer a portion of their
compensation. Matching contributions may be made in amounts and at times determined by the Company.
We contributed approximately $595,000, 627,000, and $588,000 for the years ended December 31, 2010, 2009
and 2008, respectively. Employees are eligible to participate in the 401(k) Plan when they meet certain
requirements concerning minimum age and period of credited service. All contributions to the 401(k) Plan are
invested in accordance with participant elections among certain investment options.
During 2000, we implemented an Employee Stock Purchase Plan (“ESPP”). Employees are eligible for the
plan when they have met certain requirements concerning period of credited service and minimum hours
worked. Eligible employees may contribute a minimum of 1% to a maximum of 10% of eligible compensation
up to the Section 423 of the Internal Revenue Code limit of $25,000. During January 2006, a plan (“2006
ESPP”) was adopted that allocated 400,000 shares to the plan. The 2006 ESPP was approved by stockholders
at the 2006 annual meeting. As of December 31, 2010, 2009 and 2008, 66,504, 53,281 and 37,556 shares had
been purchased on behalf of the employees under the 2006 ESPP.
As of December 31, 2010, we have three stock option plans, the 1999 Stock Omnibus Plan (“1999 Plan”), the
2005 Long-Term Incentive Plan (“2005 Plan”) and the 2010 Long-Term Incentive Plan (“2010 Plan”). The
1999 Plan is no longer available for grants of equity based compensation; however, options to purchase shares
previously issued under the plan will remain outstanding and be subject to administration by our board of
directors. Under both the 2005 and 2010 Plans, equity-based compensation grants were made by the board of
directors, or its designated committee. Grants are subject to vesting requirements. Under the 2005 and 2010
Plans, we may grant, among other things, nonqualified stock options, incentive stock options, restricted stock
units (“RSUs”), stock appreciation rights or any combination thereof. Both Plans include grants for employees
and directors. Totals shares authorized under the 2005 plan are 1,500,000, with 700,000 authorized under the
2010 Plan. Total shares which may be issued under the 2005 Plan at December 31, 2010, 2009, and 2008 were
60,760, 116,728 and 370,566, respectively. Total shares which may be issued under the 2010 Plan at
December 31, 2010 was 498,400.
The fair value of our stock option and stock appreciation right (“SAR”) grants are estimated at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes option valuation model was devel-
oped for use in estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily
provide the best single measure of the fair value of its employee stock options.
80
The fair value of the options and stock appreciation rights were estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions:
Risk-free rate
Dividend yield
Market price volatility factor
Weighted-average expected life of options
2010
2009
2008
2.26%
0.00
.418
5 years
2.23%
0.00
.423
5 years
3.04%
0.00
.323
5 years
Market price volatility and expected life of options is based on historical data and other factors.
A summary of our stock option activity and related information for 2010, 2009 and 2008 is as follows (in
thousands, except per share data):
December 31, 2010
December 31, 2009
December 31, 2008
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Options
Options
Options outstanding at beginning of
year
Options granted
Options exercised
Options forfeited
1,167,736
—
(155,366)
(68,550)
$12.07
—
8.80
11.33
1,460,461
—
(226,485)
(66,240)
$11.54
—
7.69
15.35
1,983,352
—
(496,051)
(26,840)
$10.63
—
7.55
17.95
Options outstanding at year-end
943,820
$12.62
1,167,736
$12.07
1,460,461
$11.54
Options vested and exercisable at
year-end
Intrinsic value of options vested and
exercisable
Weighted average remaining
contractual life of options vested
and exercisable
Fair value of shares vested during year
Intrinsic value of options exercised
Weighted average remaining
contractual life of options currently
outstanding in years:
943,820
$12.62
1,131,486
$11.76
1,337,461
$10.79
$8,263,646
$2,490,378
$3,433,347
2.85
3.52
4.13
$ 219,193
$1,619,409
$ 245,422
$1,608,048
$ 492,638
$4,551,326
2.85
3.58
4.29
We expensed approximately $219,000, $629,000 and $1,152,000 in 2010, 2009 and 2008, respectively, related
to stock option awards. Expenses are calculated utilizing the straight-line method. No stock options were
granted in 2009 or 2010.
In connection with the 2005 Long-term Incentive Plan, stock appreciation rights were issued in 2010, 2009
and 2008. These rights are service-based and generally vest over a period of five years. Of the SARs granted in
2006, 300,312 were Performance Stock Appreciation Rights (“PSARs”) which were cancelled on
December 31, 2008 as company performance targets were not met.
81
SARs outstanding at beginning of year
SARs granted
SARs exercised
SARs forfeited
December 31, 2010
December 31, 2009
December 31, 2008
Weighted
Average
Exercise
Price
$16.16
17.81
15.38
17.97
Weighted
Average
Exercise
Price
$16.66
14.93
—
20.51
SARs/
PSARs
1,007,579
246,500
—
(47,341)
Weighted
Average
Exercise
Price
$18.24
17.46
—
22.62
SARs/
PSARs
1,203,087
142,000
—
(337,508)
SARs
1,206,738
109,500
(16,000)
(86,981)
SARs outstanding at year-end
1,213,257
$19.42
1,206,738
$16.16
1,007,579
$16.66
SARs vested at year-end
Weighted average remaining contractual life of SARs
vested
Compensation expense
Weighted average fair value of SARs granted during
2010, 2009 and 2008
Fair value of shares vested during the year
Weighted average remaining contractual life of SARs
currently outstanding in years
689,144
$20.48
491,254
$20.92
315,293
$21.14
5.99
6.85
7.73
$1,994,000
$1,709,000
$1,127,000
$ 6.97
$ 5.93
$ 5.93
$1,626,811
$1,278,207
$1,255,341
6.72
5.61
6.73
As of December 31, 2010, the intrinsic value of SARs vested was $929,900. As of December 31, 2009 and 2008
the intrinsic value of SARs vested was negative as the December 31, 2009, and 2008 market prices were lower
than the grant price of the SARs.
The following table summarizes the status of and changes in our nonvested restricted stock units (in
thousands, except per share data):
Balance, January 1, 2008
Granted
Vested and issued
Forfeited
Cancelled
Balance, December 31, 2008
Granted
Vested and issued
Forfeited
Cancelled
Balance, December 31, 2009
Granted
Vested and issued
Forfeited
Cancelled
Balance, December 31, 2010
Non-Vested Stock Awards
Outstanding
Number of
Shares
526,200
205,150
(91,354)
(13,748)
—
626,248
257,210
(134,570)
(34,489)
—
714,399
365,000
(162,394)
(19,654)
—
897,351
Weighted-
Average
Grant-Date
Fair Value
20.27
18.00
20.51
20.23
—
19.49
12.81
19.59
19.98
—
$17.04
15.72
18.25
17.82
—
$14.64
The RSUs granted during 2010, 2009 and 2008 generally vest over four to five years. Compensation cost for
restricted stock units was $4,559,000, $3,623,000, $2,434,000 for years ended December 31, 2010, 2009 and
82
2008, respectively. The weighted average remaining contractual life of RSUs currently outstanding is
8.17 years.
Total compensation cost for all share-based arrangements, net of taxes, was $4,435,000, $3,904,000 and
$3,063,000 for the years ended December 31, 2010, 2009 and 2008, respectively.
Unrecognized stock-based compensation expense related to SAR grants issued during 2008, 2009 and 2010 is
$3.2 million. At December 31, 2010, the weighted average period over which this unrecognized expense is
expected to be recognized was 1.9 years. Unrecognized stock-based compensation expense related to
RSU grants during 2008, 2009 and 2010 is $11.0 million. At December 31, 2010, the weighted average
period over which this unrecognized expense is expected to be recognized was 2.0 years.
Cash flows from financing activities included $1,774,000, $213,000 and $4,527,000 in cash inflows from excess
tax benefits related to stock compensation in 2010, 2009 and 2008, respectively. The tax benefit realized from
stock options exercised is $621,000, $75,000 and $1,584,000 in 2010, 2009 and 2008, respectively.
Upon share option exercise, new shares are issued as opposed to treasury shares.
In 1999, we entered into a deferred compensation agreement with one of our executive officers. The
agreement allowed the employee to elect to defer up to 100% of his compensation on an annual basis. All
deferred compensation is invested in the Company’s common stock held in a rabbi trust. The stock is held in
the name of the trustee, and the principal and earnings of the trust are held separate and apart from other
funds of the Company, and are used exclusively for the uses and purposes of the deferred compensation
agreement. The accounts of the trust have been consolidated with the accounts of the Company. During 2009,
under the terms of the agreement, the stock was released from the trust and issued to the executive.
12. Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include commitments to extend credit
and standby letters of credit which involve varying degrees of credit risk in excess of the amount recognized in
the consolidated balance sheets. The Bank’s exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of
collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termi-
nation clauses and may require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer’s credit-worthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
At December 31, 2010 and 2009, commitments to extend credit and standby and commercial letters of credit
were as follows (in thousands):
December 31
2010
2009
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
Standby and commercial letters of credit
$1,306,871
54,831
$1,143,427
66,885
83
13. Regulatory Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and
possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect
on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2010, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the tables below. As shown below, the
Bank’s capital ratios exceed the regulatory definition of well capitalized as of December 31, 2010 and 2009. As
of June 30, 2010, the most recent notification from the OCC categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. There have been no conditions or events since the
notification that management believes have changed the Bank’s category. Based upon the information in its
most recently filed call report, the Bank continues to meet the capital ratios necessary to be well capitalized
under the regulatory framework for prompt corrective action and continues to meet the capital ratios
necessary to be well capitalized under the regulatory framework for prompt corrective action.
(in thousands except percentage data)
As of December 31, 2010:
Total capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to average assets):
Company
Bank
As of December 31, 2009:
Total capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to risk-weighted assets):
Company
Bank
Tier 1 capital (to average assets):
Company
Bank
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To Be Well
Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
$697,291
600,331
11.83% $471,565
471,462
10.19%
N/A
8.00%
8.00% $589,327
N/A
10.00%
$623,835
526,875
10.58% $235,782
235,731
8.94%
4.00%
N/A
4.00% $353,596
$623,835
526,875
9.36% $266,694
266,638
7.90%
4.00%
N/A
4.00% $333,297
N/A
6.00%
N/A
5.00%
$642,371
555,635
11.98% $429,102
429,012
10.36%
8.00%
N/A
8.00% $536,265
N/A
10.00%
$575,338
488,602
10.73% $214,551
214,506
9.11%
4.00%
N/A
4.00% $321,759
$575,338
488,602
10.54% $218,381
218,336
8.95%
4.00%
N/A
4.00% $272,920
N/A
6.00%
N/A
5.00%
84
Dividends that may be paid by subsidiary banks are routinely restricted by various regulatory authorities. The
amount that can be paid in any calendar year without prior approval of the Bank’s regulatory agencies cannot
exceed the lesser of net profits (as defined) for that year plus the net profits for the preceding two calendar
years, or retained earnings. No dividends were declared or paid on common stock during 2010, 2009 or 2008.
The required balance at the Federal Reserve at December 31, 2010 and 2009 was approximately $27,610,000
and $9,595,000, respectively.
14. Earnings Per Share
The following table presents the computation of basic and diluted earnings per share (in thousands except
share data):
2010
Year Ended December
2009
2008
Numerator:
Net income from continuing operations
Preferred stock dividends
$
37,323
—
$
24,387
5,383
$
24,882
—
Net income from continuing operations available
to common shareholders
Loss from discontinued operations
Net income
Denominator:
37,323
(136)
19,004
(235)
24,882
(616)
$
37,187
$
18,769
$
24,266
Denominator for basic earnings per share-
weighted average shares
Effect of employee stock options(1)
Effect of warrants to purchase common stock
Denominator for dilutive earnings per share-
adjusted weighted average shares and assumed
conversions
Basic earning per share from continuing operations
Basic earning per share
Diluted earnings per share from continuing
operations
Diluted earnings per share
36,627,329
594,707
123,992
34,113,285
278,882
18,287
27,952,973
95,490
—
37,346,028
34,410,454
28,048,463
$
$
$
$
1.02
1.02
1.00
1.00
$
$
$
$
.56
.55
.55
.55
$
$
$
$
.89
.87
.89
.87
(1) Stock options outstanding of 978,567, 1,669,686 and 1,761,281 in 2010, 2009 and 2008, respectively, have
not been included in diluted earnings per share because to do so would have been antidilutive for the
periods presented. Stock options are antidilutive when the exercise price is higher than the average
market price of the Company’s common stock.
15. Fair Value Disclosures
ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and enhances
disclosures about fair value measurements. Fair value is defined under ASC 820 as the price that would be
received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability
in an orderly transaction between market participants on the measurement date. The adoption of ASC 820 did
not have an impact on our financial statements except for the expanded disclosures noted below.
85
We determine the fair market values of our financial instruments based on the fair value hierarchy. The
standard describes three levels of inputs that may be used to measure fair value as provided below.
Level 1 Quoted prices in active markets for identical assets or liabilities. Level 1 assets include
U.S. Treasuries that are highly liquid and are actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt secu-
rities, corporate securities, municipal bonds, and Community Reinvestment Act funds. This
category includes derivative assets and liabilities where values are based on internal cash flow
models supported by market data inputs
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to
the fair value of the assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow method-
ologies, or similar techniques, as well as instruments for which the determination of fair values
requires significant management judgment or estimation. This category also includes impaired
loans and OREO where collateral values have been based on third party appraisals; however,
due to current economic conditions, comparative sales data typically used in appraisals may be
unavailable or more subjective due to lack of market activity. Additionally, this category
includes certain mortgage loans that were transferred from loans held for sale to loans held for
investment at a lower of cost or fair value.
Assets and liabilities measured at fair value at December 31, 2010 are as follows (in thousands):
Fair Value Measurements Using
Level 1
Level 3
Level 2
Available for sale securities:(1)
Mortgage-backed securities
Corporate securities
Municipals
Other
Loans (2)(4)
OREO (3)(4)
Derivative asset
Derivative liability
$—
—
—
—
—
—
—
—
$133,724
5,000
39,085
7,615
$ —
—
—
—
— 77,343
— 42,261
—
—
6,874
(6,874)
(1) Securities are measured at fair value on a recurring basis, generally monthly.
(2) Includes certain mortgage loans that have been transferred to loans held for investment from loans held
for sale at the lower of cost or market. Also, includes impaired loans that have been measured for
impairment at the fair value of the loan’s collateral.
(3) OREO is transferred from loans to OREO at fair value less selling costs.
(4) Fair value of loans and OREO is measured on a nonrecurring basis, generally annually or more often as
warranted by market and economic conditions
Level 3 Valuations
Financial instruments are considered Level 3 when their values are determined using pricing models,
discounted cash flow methodologies or similar techniques and at least one significant model assumption or
input is unobservable. Level 3 financial instruments also include those for which the determination of fair
value requires significant management judgment or estimation. Currently, we measure fair value for certain
loans on a nonrecurring basis as described below.
86
Loans During the year ended December 31, 2010, certain impaired loans were remeasured and reported
at fair value through a specific valuation allowance allocation of the allowance for possible loan losses based
upon the fair value of the underlying collateral. The $77.3 million total above includes impaired loans at
December 31, 2010 with a carrying value of $80.0 million that were reduced by specific valuation allowance
allocations totaling $7.4 for a total reported fair value of $72.6 million based on collateral valuations utilizing
Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current
economic conditions, comparative sales data typically used in the appraisals may be unavailable or more
subjective due to the lack of real estate market activity. Also included in this total are $5.5 million in mortgage
warehouse lending loans that were reduced by specific valuation allowance allocations totaling $795,000, for a
total reported fair value of $4.7 million. Certain mortgage loans that are transferred from loans held for sale to
loans held for investment are valued based on third party broker pricing. As the dollar amount and number of
loans being valued is very small, a comprehensive market analysis is not obtained or considered necessary.
Instead, we conduct a general polling of one or more mortgage brokers for indications of general market prices
for the types of mortgage loans being valued, and we consider values based on recent experience in selling
loans of like terms and comparable quality.
OREO Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals. At
December 31, 2010, OREO with a carrying value of $55.2 million was reduced by specific valuation allowance
allocations totaling $12.9 million for a total reported fair value of $42.3 million based on valuations utilizing
Level 3 valuation inputs. Fair values were based on third party appraisals; however, based on the current
economic conditions, comparative sales data typically used in the appraisals may be unavailable or more
subjective due to the lack of real estate market activity.
Generally accepted accounting principles require disclosure of fair value information about financial instru-
ments, whether or not recognized on the balance sheet, for which it is practical to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. This disclosure does not and is not intended to represent the
fair value of the Company.
A summary of the carrying amounts and estimated fair values of financial instruments is as follows (in
thousands):
December 31, 2010
December 31, 2009
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Cash and cash equivalents
Securities, available-for-sale
Loans held for sale
Loans held for sale from discontinued operations
Loans held for investment, net
Derivative asset
Deposits
Federal funds purchased
Borrowings
Trust preferred subordinated debentures
Derivative liability
$ 179,866
185,424
1,194,209
490
4,639,820
6,874
5,455,401
283,781
14,106
113,406
6,874
$ 179,866
185,424
1,194,209
490
4,652,588
6,874
5,457,692
283,781
14,107
113,406
6,874
$ 125,439
266,128
693,504
586
4,389,362
1,837
4,120,725
580,519
376,510
113,406
1,837
$ 125,439
266,128
693,504
586
4,542,572
1,837
4,121,993
580,519
376,510
113,876
1,837
87
The following methods and assumptions were used by the Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheet for cash and cash equivalents approximate
their fair value.
Securities
The fair value of investment securities is based on prices obtained from independent pricing services which
are based on quoted market prices for the same or similar securities.
Loans, net
For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are
generally based on carrying values. The fair value for all other loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair value. The carrying amount of loans
held for sale approximates fair value.
Derivatives
The estimated fair value of the interest rate swaps are based on internal cash flow models supported by
market data inputs.
Deposits
The carrying amounts for variable-rate money market accounts approximate their fair value. Fixed-term
certificates of deposit fair values are estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
Federal funds purchased, other borrowings and trust preferred subordinated debentures
The carrying value reported in the consolidated balance sheet for federal funds purchased and short-term
borrowings approximates their fair value. The fair value of term borrowings and trust preferred subordinated
debentures is estimated using a discounted cash flow calculation that applies interest rates currently being
offered on similar borrowings.
Off-balance sheet instruments
Fair values for our off-balance sheet instruments which consist of lending commitments and standby letters of
credit are based on fees currently charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of
these off-balance sheet instruments is not significant.
16. Commitments and Contingencies
We lease various premises under operating leases with various expiration dates. Rent expense incurred under
operating leases amounted to approximately $6,916,000, $6,968,000 and $4,981,000 for the years ended
December 31, 2010, 2009 and 2008, respectively.
88
Minimum future lease payments under operating leases are as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
2016 and thereafter
Minimum
Payments
$ 8,463
8,615
8,387
8,174
7,598
44,206
$85,443
17. Parent Company Only
Summarized financial information for Texas Capital Bancshares, Inc. — Parent Company Only follows (in
thousands):
Balance Sheets
Assets
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Other liabilities
Other short-term borrowings
Long-term borrowings
Trust preferred subordinated debentures
Total liabilities
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2010
2009
$ 88,684
554,917
8,812
$652,413
$ 80,033
507,930
7,363
$595,326
$
436
—
—
113,406
$
460
—
—
113,406
113,842
369
346,948
185,907
(8)
5,355
538,571
113,866
359
326,224
148,720
(8)
6,165
481,460
$652,413
$595,326
89
Statements of Earnings
(in thousands)
Year Ended December 31
2009
2010
2008
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
110
128
238
3,672
673
1,269
453
6,067
$
127
441
568
4,353
669
1,425
392
6,839
Loss before income taxes and equity in undistributed income of
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before equity in undistributed income of subsidiary . . . . . .
(5,829)
(1,989)
(3,840)
(6,271)
(2,139)
(4,132)
$
193
125
318
7,662
501
1,597
329
10,089
(9,771)
(3,375)
(6,396)
Equity in undistributed income of subsidiary . . . . . . . . . . . . . . .
41,027
28,284
30,662
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$37,187
$24,152
$24,266
Statements of Cash Flows
(in thousands)
Year Ended December 31
2009
2010
2008
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,187
Adjustments to reconcile net income to net cash used in
$ 24,152
$ 24,266
operating activities:
Equity in undistributed income of subsidiary. . . . . . . . . . . .
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock option exercises . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation
arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . .
Net cash used in operating activities of continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activity
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activity . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of preferred stock and related
warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits from stock-based compensation
arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . .
(41,027)
(1,449)
621
(1,774)
(24)
(28,284)
(11)
75
(30,662)
(657)
1,584
(213)
(577)
(4,527)
320
(6,466)
(4,858)
(9,676)
—
—
— (25,000)
— (25,000)
13,343
61,024
58,662
75,000
—
— (75,000)
—
(1,219)
— (50,000)
1,774
—
15,117
8,651
80,033
213
—
10,018
5,160
74,873
—
—
—
25,000
4,527
—
88,189
53,513
21,360
Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . $ 88,684
$ 80,033
$ 74,873
90
18. Related Party Transactions
See Notes 3 and 7 for a description of loans and deposits with related parties.
19. Sale of Discontinued Operation — Residential Mortgage Lending and TexCap Insurance
Services
Subsequent to the end of the first quarter of 2007, Texas Capital Bank and the purchaser of its residential
mortgage loan division (RML) agreed to terminate and settle the contractual arrangements related to the sale
of the division, which had been completed as of the end of the third quarter of 2006. Historical operating
results of RML are reflected as discontinued operations in the financial statement.
During 2010, the loss from discontinued operations from RML was $136,000, net of taxes. The 2010 losses are
primarily related to continuing legal and salary expenses incurred in dealing with the remaining loans and
requests from investors related to the repurchase of previously sold loans. We still have approximately
$490,000 in loans held for sale from discontinued operations that are carried at estimated market value at
December 31, 2010, which is less than the original cost. We plan to sell these loans, but timing and price to be
realized cannot be determined at this time due to market conditions. In addition, we continue to address
requests from investors related to repurchasing loans previously sold. While the balances as of December 31,
2010 include a liability for exposure to additional contingencies, including risk of having to repurchase loans
previously sold, we recognize that market conditions may result in additional exposure to loss and the
extension of time necessary to complete the discontinued mortgage operation.
The results of operations of the discontinued components are presented separately in the accompanying
consolidated statements of income for 2010, 2009 and 2008, net of tax, following income from continuing
operations. Details are presented in the following tables (in thousands):
Year Ended December 31
2008
2009
2010
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 36
242
(206)
(70)
$ 64
421
(357)
(122)
$ 105
1,046
(941)
$ (325)
Income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . .
$(136)
$(235)
$ (616)
20. Derivative Financial Instruments
The fair value of derivative positions outstanding is included in other assets and other liabilities in the
accompanying consolidated balance sheets.
During 2010 and 2009, we entered into certain interest rate derivative positions that are not designated as
hedging instruments. These derivative positions relate to transactions in which we enter into an interest rate
swap, cap and/or floor with a customer while at the same time entering into an offsetting interest rate swap,
cap and/or floor with another financial institution. In connection with each swap transaction, we agree to pay
interest to the customer on a notional amount at a variable interest rate and receive interest from the customer
on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial
institution the same fixed interest rate on the same notional amount and receive the same variable interest
rate on the same notional amount. The transaction allows our customer to effectively convert a variable rate
loan to a fixed rate. Because we act as an intermediary for our customer, changes in the fair value of the
underlying derivative contracts substantially offset each other and do not have a material impact on our results
of operations.
91
The notional amounts and estimated fair values of interest rate derivative positions outstanding at
December 31, 2010 presented in the following table (in thousands):
Notional Amount
Estimated Fair Value
Non-hedging interest rate derivative:
Commercial loan/lease interest rate swaps
Commercial loan/lease interest rate swaps
$ 221,138
(221,138)
$ 6,874
(6,874)
The weighted-average receive and pay interest rates for interest rate swaps outstanding at December 31, 2010
were as follows:
Interest Rate Received
Interest Rate Paid
Weighted-Average
Non-hedging interest rate swaps
5.21%
2.23%
Our credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all
swaps by each counterparty. In such cases collateral may be required from the counterparties involved if the
net value of the swaps exceeds a nominal amount considered to be immaterial. Our credit exposure, net of any
collateral pledged, relating to interest rate swaps was approximately $6.9 million at December 31, 2010, all of
which relates to bank customers. Collateral levels are monitored and adjusted on a regular basis for changes in
interest rate swap values.
21. Stockholders’ Equity
During 2010, we purchased a portion of a non-controlling interest in a consolidated subsidiary that is
controlled and majority owned by the Bank. The purchased resulted in a $10.2 million reduction in additional
paid in capital. Prior to the purchase, we owned 90% of the subsidiary and non-controlling interest on our
balance sheet was $869,000. Subsequent to this repurchase we now control 97% of the subsidiary and the non-
controlling interest on our balance sheet is $354,000. Based on an existing agreement with the remaining non-
controlling interest, we could purchase the remaining interest in the future based on a multiple of earnings,
which could result in a future reduction to additional paid in capital.
On January 27, 2010, we entered into an Equity Distribution Agreement with Morgan Stanley & Co.
Incorporated, pursuant to which we may, from time to time, offer and sell shares of our common stock, having
aggregate gross sales proceeds of up to $40,000,000. Sales of the shares are being made by means of brokers’
transactions on or through the NASDAQ Global Select Market at market prices prevailing at the time of the
sale or as otherwise agreed to by us and Morgan Stanley. As of December 31, 2010 we have sold 734,835 shares
at an average price of $17.58. Net proceeds on the sales are approximately $12.5 million, are being used for
general corporate purposes. During the fourth quarter of 2010, we did not sell any shares under the program.
On May 8, 2009, we completed a sale of 4.6 million shares of our common stock in a public offering. The
purchase price was $13.75 per share, and net proceeds from the sale totaled $59.4 million. The new capital is
being used for general corporate purposes, including capital for support of anticipated growth of our bank.
On January 16, 2009, we completed the issuance of $75 million of perpetual preferred stock and related
warrants under the U.S. Department of Treasury’s voluntary Capital Purchase Program (“CPP” or “the
Program”). The preferred stock was repurchased in May 2009. In connection with the repurchase, we
recorded a $3.9 million accelerated deemed dividend in the second quarter of 2009 representing the
unamortized difference between the book value and the carrying value of the preferred stock repurchased
from the Treasury. The $3.9 million accelerated deemed dividend, combined with the previously scheduled
preferred dividend of $523,000 for the second quarter of 2009 and the preferred dividend of $930,000 paid in
the first quarter of 2009, resulted in a total dividend and reduction of earnings available to common
stockholders of $5.4 million for the year ended December 31, 2009. In the first quarter of 2010, the Treasury
auctioned these warrants, and as of December 31, 2010, the warrants to purchase 758,086 shares at $14.84 per
share are still outstanding.
92
22. New Accounting Standards
FASB ASC 810 Consolidation (“ASC 810”) became effective for us on January 1, 2010, and was amended to
change how a company determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s purpose and design and a
company’s ability to direct the activities of the entity that most significantly impact the entity’s economic
performance. The new authoritative accounting guidance requires additional disclosures about the reporting
entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that
involvement as well as its affect on the entity’s financial statements. The new authoritative accounting
guidance under ASC 810 was effective January 1, 2010 and did not have a significant impact on our financial
statements.
FASB ASC 860 Transfers and Servicing (“ASC 860”) was amended to enhance reporting about transfers of
financial assets, including securitizations, and where companies have continuing exposure to the risks related
to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The
new authoritative accounting guidance also requires additional disclosures about all continuing involvements
with transferred financial assets including information about gains and losses resulting from transfers during
the period. The new authoritative accounting guidance under ASC 860 was effective January 1, 2010 and did
not have a significant impact on our financial statements.
FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality
(“Subtopic 310-30”) was amended to clarify that modifications of loans that are accounted for within a pool
under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification would
otherwise be considered a troubled debt restructuring. The amendments do not affect the accounting for
loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for
individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting
provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by Creditors. The new authoritative
accounting guidance under Subtopic 310-30 will be effective in the third quarter of 2010. This amendment
did not have a significant impact on our financial statements.
FASB ASC 310 Receivables (“ASC 310”) was amended to enhance disclosures about credit quality of financing
receivables and the allowance for credit losses. The amendments require an entity to disclose credit quality
information, such as internal risk gradings, more detailed nonaccrual and past due information, and mod-
ifications of its financing receivables. The disclosures under ASC 310, as amended, were effective for interim
and annual reporting periods ending on or after December 15, 2010. We do not expect this amendment to
have a significant impact on our financial results, but it will significantly expand the disclosures that we are
required to provide, some of which are included in this annual filing, as required, with additional disclosures
included in future filings.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT-
ING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and other procedures that are designed to ensure that
material information relating to us and our subsidiaries required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. For the period covered in this report, we
carried out an evaluation, under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
93
disclosure controls and procedures. Based on that evaluation of these disclosure controls and procedures, the
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2010.
The Chief Executive Officer and Chief Financial Officer have also concluded that there were no changes in
our internal control over financial reporting identified in connection with the evaluation described in the
preceding paragraph that occurred during the fiscal quarter ended December 31, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Our internal control over financial reporting is a process designed under the
supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our financial statements for external
purposes in accordance with generally accepted accounting principles.
As of December 31, 2010, management assessed the effectiveness of the Company’s internal control over
financial reporting based on the criteria for effective internal control over financial reporting established in
“Internal Control — Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission. Based on the assessment, management determined that the Company
maintained effective internal control over financial reporting as of December 31, 2010, based on those criteria.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated
financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation
report on the effectiveness of the Company’s internal control over financial reporting as of December 31,
2010. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2010, is included in this Item under the heading “Report
of Independent Registered Public Accounting Firm.”
94
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Texas Capital Bancshares, Inc.
We have audited Texas Capital Bancshares, Inc.’s internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Texas Capital Bancshares Inc.’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Texas Capital Bancshares Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Texas Capital Bancshares, Inc. as of December 31, 2010
and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2010 and our report dated February 22, 2011 expressed
an unqualified opinion thereon.
Dallas, Texas
February 23, 2011
95
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item is set forth in our definitive proxy materials regarding our annual meeting of
stockholders to be held May 17, 2011, which proxy materials will be filed with the SEC no later than April 7,
2011.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in our definitive proxy materials regarding our annual meeting of
stockholders to be held May 17, 2011, which proxy materials will be filed with the SEC no later than April 7, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item is set forth in our definitive proxy materials regarding our annual meeting of
stockholders to be held May 17, 2011, which proxy materials will be filed with the SEC no later than April 7,
2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information required by this item is set forth in our definitive proxy materials regarding our annual meeting of
stockholders to be held May 17, 2011, which proxy materials will be filed with the SEC no later than April 7,
2011.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is set forth in our definitive proxy materials regarding our annual meeting of
stockholders to be held May 17, 2011, which proxy materials will be filed with the SEC no later than April 7,
2011.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
(1) All financial statements
Independent Registered Public Accounting Firms’ Report of Ernst & Young LLP
(2) All financial statements required by Item 8
Independent Registered Public Accounting Firms’ Report of Ernst & Young LLP
(3) Exhibits
3.1
3.2
3.3
3.4
3.5
Certificate of Incorporation, which is incorporated by reference to Exhibit 3.1 to our registration
statement on Form 10 dated August 24, 2001
Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to
Exhibit 3.2 to our registration statement on Form 10 dated August 24, 2001
Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to
Exhibit 3.3 to our registration statement on Form 10 dated August 24, 2001
Certificate of Amendment of Certificate of Incorporation, which is incorporated by reference to
Exhibit 3.4 to our registration statement on Form 10 dated August 24, 2001
Amended and Restated Bylaws of Texas Capital Bancshares, Inc. which is incorporated by reference
to Exhibit 3.5 to our registration statement on Form 10 dated August 24, 2001
96
3.6
4.1
4.2
4.3
4.4
First Amendment to Amended and Restated Bylaws of Texas Capital Bancshares, Inc. which is
incorporated by reference to Current Report on Form 8-K dated July 18, 2007
Placement Agreement by and between Texas Capital Bancshares Statutory Trust I and SunTrust
Capital Markets, Inc., which is incorporated by reference to our Current Report on Form 8-K dated
December 4, 2002
Certificate of Trust of Texas Capital Bancshares Statutory Trust I, dated November 12, 2002 which is
incorporated by reference to our Current Report on Form 8-K dated December 4, 2002
Amended and Restated Declaration of Trust by and among State Street Bank and Trust Company of
Connecticut, National Association, Texas Capital Bancshares, Inc. and Joseph M. Grant, Raleigh
Hortenstine III and Gregory B. Hultgren, dated November 19, 2002 which is incorporated by
reference to our Current Report on Form 8-K dated December 4, 2002
Indenture dated November 19, 2002 which is incorporated by reference to our Current Report on
Form 8-K dated December 4, 2002
4.6
4.7
4.5 Guarantee Agreement between Texas Capital Bancshares, Inc. and State Street Bank and Trust of
Connecticut, National Association dated November 19, 2002, which is incorporated by reference to
our Current Report on Form 8-K dated December 4, 2002
Placement Agreement by and among Texas Capital Bancshares, Inc., Texas Capital Statutory Trust II
and Sandler O’Neill & Partners, L.P., which is incorporated by reference to our Current Report Form
8-K dated June 11, 2003
Certificate of Trust of Texas Capital Statutory Trust II, which is incorporated by reference to our
Current Report on Form 8-K dated June 11, 2003
Amended and Restated Declaration of Trust by and among Wilmington Trust Company, Texas
Capital Bancshares, Inc., and Joseph M. Grant and Gregory B. Hultgren, dated April 10, 2003, which is
incorporated by reference to our Current Report on Form 8-K dated June 11, 2003
Indenture between Texas Capital Bancshares, Inc. and Wilmington Trust Company, dated April 10,
2003, which is incorporated by reference to our Current Report on Form 8-K dated June 11, 2003
4.10 Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company,
dated April 10, 2003, which is incorporated by reference to our Current Report on Form 8-K dated
June 11, 2003
4.9
4.8
4.11 Amended and Restated Declaration of Trust for Texas Capital Statutory Trust III by and among
Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Texas Capital
Bancshares, Inc. as Sponsor, and the Administrators named therein, dated as of October 6, 2005,
which is incorporated by reference to our Current Report on Form 8-K dated October 13, 2005
4.12 Indenture between Texas Capital Bancshares, Inc., as Issuer, and Wilmington Trust Company, as
Trustee, for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures, dated as of
October 6, 2005, which is incorporated by reference to our Current Report on Form 8-K dated October
13, 2005
4.13 Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company,
dated as of October 6, 2005, which is incorporated by reference to our Current Report on Form 8-K
dated October 13, 2005
4.14 Amended and Restated Declaration of Trust for Texas Capital Statutory Trust IV by and among
Wilmington Trust Company, as Institutional Trustee and Delaware Trustee, Texas Capital
Bancshares, Inc. as Sponsor, and the Administrators named therein, dated as of April 28, 2006,
which is incorporated by reference to our Current Report on Form 8-K dated May 3, 2006
4.15 Indenture between Texas Capital Bancshares, Inc., as Issuer, and Wilmington Trust Company, as
Trustee, for Floating Rate Junior Subordinated Deferrable Interest Debentures dated as of April 28,
2006, which is incorporated by reference to our Current Report on Form 8-K dated May 3, 2006
4.16 Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company,
dated as of April 28, 2006, which is incorporated by reference to our Current Report on Form 8-K
dated May 3, 2006
4.17 Amended and Restated Trust Agreement for Texas Capital Statutory Trust V by and among Wilmington
Trust Company, as Property Trustee and Delaware Trustee, Texas Capital Bancshares, Inc., as Depositor,
and the Administrative Trustees named therein, dated as of September 29, 2006, which is incorporated by
reference to our Current Report on Form 8-K dated October 5, 2006
97
4.18 Junior Subordinated Indenture between Texas Capital Bancshares, Inc. and Wilmington Trust
Company, as Trustee, for Floating Rate Junior Subordinated Note dated as of September 29,
2006, which is incorporated by reference to our Current Report on Form 8-K dated October 5, 2006
4.19 Guarantee Agreement between Texas Capital Bancshares, Inc. and Wilmington Trust Company,
dated as of September 29, 2006, which is incorporated by reference to our Current Report on Form 8-
K dated October 5, 2006
10.1 Deferred Compensation Agreement, which is incorporated by reference to Exhibit 10.2 to our
10.2
10.3
10.4
10.5
10.6
registration statement on Form 10-K dated August 24, 2001+
Amended and Restated Deferred Compensation Agreement Irrevocable Trust dated as of November 2,
2004, by and between Texas Capital Bancshares, Inc. and Texas Capital Bank, National Association,
which is incorporated by reference to our Annual Report on Form 10-K dated March 14, 2005.+
Chairman Emeritus and Consulting Agreement between Joseph M. Grant and Texas Capital
Bancshares, Inc., dated April 8, 2008, which is incorporated by reference to our Form 10-Q dated
May 2, 2008.+
Executive Employment Agreement between George F. Jones, Jr. and Texas Capital Bancshares, Inc.
dated December 31, 2008, which is incorporated by reference to our Current Report on Form 8-K
dated January 6, 2009+
Executive Employment Agreement between C. Keith Cargill and Texas Capital Bancshares, Inc.
dated December 31, 2008, which is incorporated by reference to our Current Report on Form 8-K
dated January 6, 2009+
Executive Employment Agreement between Peter B. Bartholow and Texas Capital Bancshares, Inc.
dated December 31, 2008, which is incorporated by reference to our Current Report on Form 8-K
dated January 6, 2009+
10.7 Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares,
Inc. and George F. Jones, Jr., which is incorporated by reference to our Current Report on Form 8-K
dated December 23, 2004+
10.8 Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares,
Inc. and C. Keith Cargill, which is incorporated by reference to our Current Report on Form 8-K dated
December 23, 2004+
10.9 Officer Indemnity Agreement dated December 20, 2004, by and between Texas Capital Bancshares,
Inc. and Peter B. Bartholow, which is incorporated by reference to our Current Report on Form 8-K
dated December 23, 2004+
10.10 Texas Capital Bancshares, Inc. 1999 Omnibus Stock Plan, which is incorporated by reference to
Exhibit 4.1 to our registration statement on Form 10 dated August 24, 2001+
10.11 Texas Capital Bancshares, Inc. 2006 Employee Stock Purchase Plan, which is incorporated by
reference to our registration statement on Form S-8 dated February 3, 2006+
10.12 Texas Capital Bancshares, Inc. 2005 Long-Term Incentive Plan, which is incorporated by reference to
our registration statement on Form S-8 dated June 3, 2005+
10.13 Texas Capital Bancshares, Inc. 2010 Long-Term Incentive Plan, which is incorporated by reference to
our registration statement on Form S-8 dated May 19, 2010+
Subsidiaries of the Registrant*
Consent of Ernst & Young LLP*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act*
Section 1350 Certification of Chief Executive Officer*
Section 1350 Certification of Chief Financial Officer*
21
23.1
31.1
31.2
32.1
32.2
* Filed herewith
+ Management contract or compensatory plan arrangement
98
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
TEXAS CAPITAL BANCSHARES, INC.
By: /s/ GEORGE F. JONES, JR.
George F. Jones, Jr.
President and Chief Executive Officer
Date: February 23, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
/s/
JAMES R. HOLLAND, JR.
James R. Holland, Jr.
Chairman of the Board and Director
/s/ GEORGE F. JONES, JR.
George F. Jones, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
/s/ PETER BARTHOLOW
Peter Bartholow
Executive Vice President, Chief Financial Officer and
Director
(principal financial officer)
JULIE ANDERSON
/s/
Julie Anderson
Executive Vice President and Controller
(principal accounting officer)
99
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
/s/
JAMES H. BROWNING
James H. Browning
Director
/s/
JOSEPH M. GRANT
Joseph M. Grant
Director
/s/ FREDERICK B. HEGI, JR.
Frederick B. Hegi, Jr.
Director
/s/ LARRY L. HELM
Larry L. Helm
Director
/s/ WALTER W. MCALLISTER III
Walter W. McAllister III
Director
/s/ LEE ROY MITCHELL
Lee Roy Mitchell
Director
/s/ ELYSIA H. RAGUSA
Elysia H. Ragusa
Director
100
Date: February 23, 2011
Date: February 23, 2011
Date: February 23, 2011
/s/ STEVEN P. ROSENBERG
Steven P. Rosenberg
Director
/s/ ROBERT W. STALLINGS
Robert W. Stallings
Director
IAN J. TURPIN
/s/
Ian J. Turpin
Director
101
NASDAQ ®: TCBI
Texas Capital Bancshares, Inc. is the parent company of Texas Capital
Bank, a commercial bank that caters to businesses and private clients
with offi ces in Austin, Dallas, Fort Worth, Houston and San Antonio.
IN VESTMEN T HI GH LIGHTS
•
Solid earnings growth in 2010
•
Exceptional deposit growth, especially in demand deposits
•
Continued focus on credit quality
•
Signifi cant growth in loans in 2010
2010 FIN ANCIA L SUM MARY
Dollars in the thousands
Dec 2010
Dec 2009
% Change
Loans Held for Investment
Total Assets
Total Deposits
Total Loans
Net Income
Diluted Earnings Per Share
Return on Assets
Return on Equity
$6,445,679
$5,455,401
$4,711,330
$5,905,539
$ 37,323
$
1.00
$5,698,318
$4,120,725
$4,457,293
$5,150,797
$ 24,387
$
0.55
13%
32%
6%
15%
53%
82%
0.63%
0.46%
—
7.23% 5.15% —
DEP OSIT AN D LOA N GROWT H
($ in millions)
Loan Held for Investment CAGR:
Total Deposits CAGR:
Total Assets CAGR:
18%
17%
17%
7
8
2
,
4
3
6
4
,
3
6
6
0
,
3
6
4
4
,
6
5
5
4
,
5
1
1
7
,
4
8
9
6
,
5
7
5
4
,
4
1
2
1
,
4
0
4
1
,
5
7
2
0
,
4
3
3
3
,
3
9
5
6
,
3
9
6
0
,
3
2
2
7
,
2
3
0
0
,
3
5
9
4
,
6 2
7
0
,
2
3
8
5
,
2
0
9
7
,
1
5
6
5
,
1
0
9
1
,
2
5
4
4
0 1
,
3
2
.
1
$7,000
$6,500
$6,000
$5,500
$5,000
$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2003
2004
2005
2006
2007
2008
2009
2010
Note: All balances above reflect continuing operations
* Excludes loans held for sale.
^From continuing operations.
Loans HFI* Deposits Total Assets^
CO RPO RATE I NFO RMATIO N
Stock Exchange
Texas Capital Bancshares, Inc is
traded under the symbol TCBI
on the Nasdaq Stock Market.®
Transfer Agent
Computershare Investor Services LLC
250 Royall Street, Mail Stop 1A
Canton, Massachusetts 02021
800.568.3476
Annual Meeting
The annual meeting of shareholders
will be held on May 17 at 10 a.m. at
2000 McKinney Avenue 7th fl oor
in Dallas.
Other Information
Corporate governance and other
investor information may be found at
www.texascapitalbank.com
LO CATION S
Corporate Headquarters
Dallas/Premier Place
Plano
2000 McKinney Avenue
5910 North Central Expressway
5800 Granite Parkway
Dallas, Texas 75201
214.932.6600
Austin
114 West 7th Street
Austin, Texas 78701
512.236.6770
Midway/Spring Valley
14131 Midway Road
Addison, Texas 75001
972.450.5050
Dallas, Texas 75206
214.890.5800
Fort Worth
500 Throckmorton
Plano, Texas 75024
972.963.3000
San Antonio
745 East Mulberry
Fort Worth, Texas 76102
San Antonio, Texas 78212
817.212.8333
210.785.3600
Houston
One Riverway
San Antonio/Quarry Heights
7373 Broadway
Houston, Texas 77056
San Antonio, Texas 78209
713.439.5900
210.283.5220
BOA RD OF DI RE CTO RS
Peter B. Bartholow
James H. Browning
Joseph M. Grant
James R. Holland, Jr.
George F. Jones, Jr.
W.W. “Bo” McAllister III
Frederick B. Hegi, Jr.
Lee Roy Mitchell
Larry L. Helm
Elysia Holt Ragusa
Steven P. Rosenberg
Robert W. Stallings
Ian J. Turpin
2
0
1
0
A
N
N
U
A
L
R
E
P
O
R
T
2 0 1 0 A N N U A L R E P O RT
TEXAS CAPITAL BANCSHARES, INC.
TEXAS CAPITAL BANK
www.texascapitalbank.com