2 0 1 1 A N N U A L R E P O RT
TEXAS CAPITAL BANCSHARES, INC.
TEXAS CAPITAL BANK
NASDAQ ®: TCBI
Texas Capital Bancshares, Inc. is the parent company of Texas Capital
Bank, a commercial bank that caters to businesses and successful
professionals and entrepreneurs with offi ces in Austin, Dallas, Fort
Worth, Houston and San Antonio.
IN VESTMENT H IGH LI GH TS
•
Industry leading growth and record profi tability in 2011
•
Reduction in credit costs and improved credit quality in 2011
•
Strong growth in loans in 2011
•
Continued expansion of market share in 2011
2011 FIN AN CIA L SUM MARY
Dollars in the thousands
Dec 2011
Dec 2010
% Change
Total Assets
Total Deposits
Loans Held for Investment
Total Loans
Net Income
Diluted Earnings Per Share
Return on Assets
Return on Equity
$8,137,225
$5,556,257
$5,572,371
$7,652,452
$ 76,102
$
1.99
$6,445,679
$5,455,401
$4,711,330
$5,905,539
$ 37,323
$
1.00
26%
2%
18%
30%
104%
99%
1.12%
0.63%
—
13.39% 7.23% —
DEPOS IT A ND LO A N GROWTH
Loans Held for Investment CAGR: 15%
13%
Total Deposits CAGR:
17%
Total Assets CAGR:
0
4
1
5
,
7
2
0
,
4
3
3
3
,
3
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
8
5
,
2
0
9
7
,
1
5
6
5
,
1
0
9
1
,
2
5
4
4
,
1
0
3
2
,
1
3
0
0
,
5 3
9
4
,
6 2
7
0
,
2
($ in millions)
$9,000
$8,500
$8,000
$7,500
$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
8
3
1
,
8
2
7
5
,
5
6
5
5
,
5
6
4
4
,
6
5
5
4
,
5
1
1
7
,
4
8
9
6
,
5
7
5
4
,
4
1
2
1
,
4
2003
2004
2005
2006
2007
2008
2009
2010
2011
Loans HFI* Deposits Total Assets^
* Excludes loans held for sale.
^From continuing operations.
Dear Shareholder:
We are pleased to report another year of industry-leading growth and record profitability for Texas Capital.
Especially noteworthy are improvements in operating leverage, credit quality and market share gains in key
lines of business. Our core earnings power has never been better. We believe our performance has been
exceptional in light of what remains a challenging environment for the banking industry.
Our operating leverage improved with the achievement of a more favorable earning asset composition and a
reduction in excess liquidity. We improved our funding profile which resulted in an excellent cost of funds.
Our credit costs and non-performing assets decreased substantially in 2011, and we expect additional
reductions in 2012. Credit quality continues to be a strong attribute of your company and is evidence of the
strength of our model.
Texas Capital was only one of the few banks in the country to grow loans during the 2007-2011 economic
cycle, and we grew them across multiple lines of business and in all of our markets. We have experienced
significant success in lines of business that benefit from counter-cyclical trends, offer opportunity for
additional growth in market share and provide for more consistent earnings contributions. Our growth is a
product of our focus on hiring the best bankers in the state and having them bring their best customers to
our bank. We are taking market share and doing so organically without any bank acquisitions because we
believe that brings the greatest value to our shareholders.
In closing, I would like to emphasize the following points:
• Our strong core earnings power will continue in 2012.
• We will maintain a capital position needed to grow the business. We are now growing capital
internally at approximately the same rate of growth of our loans held for investment.
• Credit will remain a focus and is expected to continue to improve.
• We have a strong pipeline in place and expect that to be reflected in continuing growth in our loans
held for investment and loans held for sale.
Lastly, I would like to thank our valued shareholders, customers and employees for their support and
loyalty over the last year. We are working hard on their behalf to justify and retain the title of “The Best
Business Bank in Texas.”
Sincerely yours,
George F. Jones, Jr.
President and Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
È
‘
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 2011
Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from
to
Commission file number 001-34657
TEXAS CAPITAL BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or other jurisdiction of incorporation or organization)
2000 McKinney Avenue, Suite 700,
Dallas, Texas, U.S.A.
(Address of principal executive officers)
75-2679109
(I.R.S. Employer Identification Number)
75201
(Zip Code)
214/932-6600
(Registrant’s telephone number,
including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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
(Name of Exchange on Which Registered)
No È
No È
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the issuer is a well-known seasoned issuer pursuant to Section 13 or Section 15(d) of the Securities
Act. Yes ‘
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 ‘
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes È
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 È
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. ‘
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer È
Non-Accelerated Filer ‘ Smaller Reporting Company ‘
Accelerated Filer ‘
No ‘
‘ No
(Do not check if a smaller reporting company)
No È
the registrant
Indicate by check mark whether
Act). Yes ‘
As of June 30, 2011, 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 on the closing price per share of the registrant’s
common stock as reported on The Nasdaq Global Select Market, was approximately $916,485,000. There were 37,774,773
shares of the registrant’s common stock outstanding on February 22, 2012.
is a shell company (as defined in Rule 12b-2 of
the Exchange
Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement relating to the 2012 Annual Meeting of Stockholders, which will be filed no later
than April 5, 2011, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
[Removed and Reserved]
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
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
1
10
18
18
20
20
20
23
26
53
56
100
100
102
102
102
102
102
102
102
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 our primary 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
successful professionals and entrepreneurs, 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 businesses and successful professionals and entrepreneurs,
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 2007 through December 2011 (in
thousands):
2011
2010
December 31
2009
2008
2007
Loans held for investment
Total loans(1)
Assets(1)
Demand deposits
Total deposits
Stockholders’ equity
(1) From continuing operations.
$5,572,371
7,652,452
8,137,225
1,751,944
5,556,257
616,331
$4,711,330
5,905,539
6,445,679
1,451,307
5,455,401
528,319
$4,457,293
5,150,797
5,698,318
899,492
4,120,725
481,360
$4,027,871 $3,462,608
4,524,222 3,636,774
5,141,034 4,287,853
529,334
3,333,187 3,066,377
295,138
587,161
387,073
The following table provides information about the growth of our loan portfolio by type of loan from
December 2007 to December 2011 (in thousands):
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
2011
2010
December 31
2009
2008
2007
$3,275,150
2,241,277
422,026
1,819,251
2,080,081
$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
$2,276,054 $2,035,049
1,656,221 1,347,429
573,459
773,970
174,166
667,437
988,784
496,351
393
61,792
24,822
490
95,607
21,470
586
99,129
25,065
648
86,937
32,671
731
74,523
28,334
1
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 providers of financial services, such as savings and loan associations, credit unions, consumer finance
companies, securities firms, insurance companies, commercial finance and leasing companies, full service
brokerage firms and discount brokerage firms. We believe that many middle market companies and
successful professionals and entrepreneurs 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 successful
professionals and entrepreneurs 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 successful professionals and entrepreneurs;
• 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.
2
Individual Customers. We also provide complete banking services for our individual customers, including:
• personal trust and wealth management services;
• certificates of deposit;
• 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;
• loans, both secured and unsecured; and
• internet banking.
Lending Activities
We target our lending to middle market businesses and successful professionals and entrepreneurs 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 and Risk 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 and Risk 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,
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.
including historical and projected financial
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
concentration 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
professionals 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 administrative 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, 2011, our Cayman Islands
deposits totaled $480.3 million.
Employees
As of December 31, 2011, we had 786 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 statutory dividend restrictions. 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
4
dividends), such authority may require, generally after notice and hearing, that such institution or holding
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
guidelines 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 use 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, among other covered transactions, 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. 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. 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.
the
“well
levels
at which institutions
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
capitalized”,
are
category,
“undercapitalized”, “significantly 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
level for any capital measure. An institution is critically
requiring it to maintain a specific capital
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 10.12% at December 31, 2011 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.
capitalized”,
“adequately
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 prohibited from paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
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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
including us, from
privacy. The financial privacy provisions generally prohibit financial
disclosing non-public personal financial information to non-affiliated third parties unless customers have
the opportunity to “opt out” of the disclosure.
institutions,
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 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
7
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 Wall Street Reform and
Consumer Protection Act of 2010 Act (“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 effect on us.
• The Dodd-Frank Act significantly reduces the ability of national banks to rely upon federal
preemption 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
in turn, result in significant new regulatory requirements
compliance obligations. This could,
applicable 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 institutions when the reserve ratio exceeds certain thresholds. Several of
these provisions could increase the FDIC deposit insurance premiums paid by us.
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• 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 national bank’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) prohibits 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
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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 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 ability to raise capital
through the sale of common stock and debt securities may become limited by market conditions beyond
our control, as has been evidenced with the economic downturn and issues affecting the financial services
industry. Due to changes in regulation, trust preferred is no longer viable as source of long-term debt
capital, and treatment of trust preferred as capital may be changed by regulation prior to the maturity of the
trust preferred. Change in capital treatment of trust preferred may require the Company to issue securities
at times and with maturity, conditions, and rates that are disadvantageous. 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 December 31, 2012 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 yields on loans and other earning assets and 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, as well as general economic consequences of international
conditions, such as weakness in European sovereign debt and the impact of that weakness on the
US and global economies;
• incidence of customer fraud evident at times of severe economic weakness;
• the supply and demand for investable funds;
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• 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. We rely on investors to purchase our loans held for sale participations in a timely manner. Due
to industry and economic conditions, investors may slow their purchase or refuse to purchase the loans.
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.
Our business is susceptible to fraud. As a financial institution, we may experience fraud risk with our loan
customers and deposit customers, both directly and indirectly. As a lender we rely on financial data which
could turn out to be fraudulent, both when we’re the originator of a loan or when we are purchasing
participation interests in loans originated by others. We believe we have the underwriting and operational
controls in place to prevent or detect, but in some cases of collusion with multiple parties the fraud might
not be readily detected and could result in losses that would affect our financial results. In addition, our
lending customers could experience fraud in their business which would have an effect on their ability to
repay us. Our deposit customers could be victims of fraud that may not result from ineffective controls on
our part, but we could be expected to share in losses as a result of, and as a means to maintain, our
relationship with the customer.
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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,
insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other financial institutions.
Many of these competitors 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.
securities brokerages,
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 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
13
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 and our reliance on third party
service providers who provide many of our technology services. 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. Federal regulation is also
designed to cause the banking system to support governmental policies that may not be beneficial to our
bank. 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 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 Dodd-Frank Act and 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. Over a year after the adoption of the Dodd-Frank Act,
there are still many related regulations that have not been written, so the effects of those are unknown at
this time. 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.
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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.
significant
control over us. Our current executive officers and directors
Our management maintains
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 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 contract claims and litigation pertaining to lending activities, employment practices, fiduciary
responsibility related to our wealth management services and other general business matters. From time to time,
customers make claims and take legal action pertaining to our performance of any of the above. Whether
customer claims and legal action related to our performance 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
which could require us to increase capital 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
15
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;
• 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;
• 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
characteristics 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.
16
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, 2011, 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.
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, economic conditions in foreign markets, 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,
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
impose upon us more stringent capital,
17
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
In deciding whether to extend credit or enter into other transactions, we may rely on
counterparties.
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
undergoing 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
ITEM 2. PROPERTIES
As of December 31, 2011, we conducted business at thirteen 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.
18
The following table sets forth the location of our executive offices, operations center and each of our
banking centers.
Type of Location
Address
Executive offices, banking location
Operations center, banking location
Banking location
Banking location
Banking location
Executive offices
Banking location
Executive offices, banking location
Banking location
Banking location
Executive offices, banking location
Banking location
Executive offices, banking location
Banking location
2000 McKinney Avenue
Banking Center — Suite 190
Executive Offices — Suite 700
Dallas, Texas 75201
2350 Lakeside Drive
Banking Center — Suite 105
Operations Center — Suite 800
Richardson, Texas 75082
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
570 Throckmorton
Fort Worth, Texas 76102
114 West 7th Street
Banking center — Suite 100
Executive offices — Suite 300
Austin, Texas 78701
3818 Bee Caves Road
Austin, Texas 78746
One Chisholm Trail
Suite 225
Round Rock, Texas 78681
745 East Mulberry Street
Banking center — Suite 150
Executive offices — Suite 350
San Antonio, Texas 78212
7373 Broadway
Suite 100
San Antonio, Texas 78209
One Riverway
Banking center — Suite 150
Executive offices — Suite 2100
Houston, Texas 77056
Westway II
4424 West Sam Houston Parkway N.
Suite 170
Houston, TX 77041
19
ITEM 3. LEGAL PROCEEDINGS
We are aggressively defending against a $65.4 million jury verdict that was rendered in August 2011, in
Antlers, Oklahoma, a town in rural Pushmataha County. The case was filed by one of the guarantors of a
defaulted loan. A judgment has been entered by the trial court. We are pursuing a dismissal of the suit, a
change in verdict or a new trial. We will appeal any further adverse judgment that is entered. We have been
advised by counsel that there are numerous grounds for dismissal, change in verdict and any appeal.
In addition, we intend to pursue aggressively our suit filed in Texas in April 2010 against the plaintiff in the
Oklahoma case and other guarantors of the defaulted loan. The loss related to the loan was recognized in
the second quarter of 2010, and we have no remaining balance sheet exposure on the principal balance of
the loan. As we currently believe a materially negative outcome in this matter is not probable, we have not
established a reserve related to any potential exposure.
We are also involved in 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, 2012, there were approximately 291 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 2010 and 2011.
Quarter Ended
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
March 31, 2011
June 30, 2011
September 30, 2011
December 31, 2011
Price Per Share
Low
High
19.39
21.45
18.85
22.73
26.48
26.79
29.48
30.98
13.75
14.86
15.03
16.65
20.20
23.96
21.39
21.70
20
Equity Compensation Plan Information
The following table presents certain information regarding our equity compensation plans as of
December 31, 2011.
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
2,214,602
—
2,214,602
$16.31
—
$16.31
447,065
—
447,065
21
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.
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Texas Capital
Bancshares, Inc. $
14.48 $
21.62 $
22.38 $
19.88 $
18.25 $
13.36 $
13.96 $
21.34 $
30.61
Russell 2000
Index RTY
Nasdaq Bank
556.91
658.72
681.26
796.70
775.75
509.18
633.31
792.00
751.12
Index CBNK
2,899.18
3,288.71
3,154.28
3,498.55
2,746.89
2,098.35
1,693.34
1,882.37
1,654.00
TCBI Stock Performance Graph
300
260
220
180
140
100
60
A ug-03
D ec-03
A pr-04
A ug-04
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
A pr-11
A ug-11
D ec-11
TCBI
Russell 2000 Index
NASDAQ Bank Index
Source: Bloomberg
22
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.
2011
At or For the Year Ended December 31
2009
(In thousands, except per share, average share and percentage data)
2010
2008
2007
Consolidated Operating Data (1)
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
$ 321,600
18,663
$ 279,810
38,136
$ 243,153
46,462
$ 248,930
97,193
$ 289,292
149,540
302,937
28,500
241,674
53,500
196,691
43,500
151,737
26,750
139,752
14,000
274,437
32,232
188,201
118,468
42,366
76,102
188,174
32,263
163,488
56,949
19,626
37,323
153,191
29,260
145,542
36,909
12,522
24,387
124,987
22,470
109,651
37,806
12,924
24,882
125,752
20,627
98,606
47,773
16,420
31,353
(126)
(136)
(235)
(616)
(1,931)
75,976
—
37,187
—
24,152
5,383
24,266
—
29,422
—
$
75,976
$
37,187
$
18,769
$
24,266
$
29,422
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
$8,137,225
5,572,371
2,080,081
$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
393
143,710
1,751,944
5,556,257
412,249
1,355,867
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
113,406
616,331
113,406
528,319
113,406
481,360
113,406
387,073
113,406
295,138
23
2011
At or For the Year Ended December 31
2009
(In thousands, except per share, average share and percentage data)
2010
2008
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
$
$
$
$
2.04
2.03
1.99
1.98
15.69
16.24
$
$
1.02
1.02
1.00
1.00
13.89
14.15
$
$
0.56
0.55
0.56
0.55
12.96
13.23
$
$
0.89
0.87
0.89
0.87
12.19
12.44
1.20
1.12
1.18
1.10
10.92
11.22
Basic
Diluted
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 (2)
Non-accrual loans to loans (2)
Total NPAs to loans plus
OREO (2)
37,334,743
38,333,077
36,627,329
37,346,028
34,113,285
34,410,454
27,952,973
28,048,463
26,187,084
26,678,571
4.68%
1.12%
13.39%
56.15%
4.28%
0.63%
7.23%
59.68%
3.89%
0.46%
5.15%
64.41%
3.54%
0.55%
7.46%
62.94%
3.82%
0.80%
11.51%
61.48%
2.90%
2.88%
2.87%
2.54%
2.68%
4.68%
1.11%
13.37%
4.28%
0.62%
7.21%
3.89%
0.45%
5.10%
3.54%
0.54%
7.28%
3.82%
0.75%
10.80%
0.58%
1.14%
0.46%
0.35%
0.07%
1.26%
1.52%
1.52%
1.13%
0.92%
1.3x
0.98%
.6x
2.38%
.7x
2.15%
1.0x
1.18%
1.5x
0.62%
1.58%
3.25%
2.74%
1.81%
0.69%
24
2011
2010
At or For the Year Ended December 31
2009
(In thousands, except per share, average share and
percentage data)
2008
2007
Capital and Liquidity Ratios
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
10.56% 11.83% 11.98% 10.92% 10.56%
9.57% 10.58% 10.73% 9.97% 9.41%
8.78% 9.36% 10.54% 10.21% 9.38%
8.33% 8.67% 8.91% 7.38% 6.98%
7.29% 7.98% 8.18% 7.36% 6.73%
115.68% 105.50% 128.43% 120.03% 103.64%
(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.
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 statements 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 recent 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. Many of the related regulations are still not written so the potential impact is still
unknown.
8) Claims and litigation, whether founded or unfounded, may result in significant financial
liability if legal actions are not resolved in a manner favorable to us.
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 our banking operations in December 1998. An important aspect of our growth strategy has
been our ability to service and effectively manage a large number of loans and deposit accounts in multiple
markets in Texas. Accordingly, we 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, 2011 and 2010 and results of operations for each of the three years in the period ended
December 31, 2011. 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
26
description about our discontinued operations and how it is reflected in the following discussions of our
financial condition and results of operations.
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 $126,000 and $136,000, net of taxes, for the years 2011 and 2010,
respectively. The 2011 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 $393,000 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 will address any future requests from investors related to repurchasing loans previously sold.
While the balances as of December 31, 2011 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, 2011 compared to year ended December 31, 2010
We reported net income of $76.1 million, or $1.99 per diluted common share, for the year ended
December 31, 2011, compared to $37.3 million, or $1.00 per diluted common share, for the same period in
2010. Return on average equity was 13.39% and return on average assets was 1.12% for the year ended
December 31, 2011, compared to 7.23% and .63%, respectively, for the same period in 2010.
Net income increased $38.8 million, or 104%, for the year ended December 31, 2011 compared to the same
period in 2010. The $38.8 million increase was primarily the result of a $61.3 million increase in net interest
income and a $25.0 million decrease in the provision for credit losses, offset by a $24.7 million increase in
non-interest expense, and a $22.7 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, 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
million increase was primarily the result of a $45.0 million 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.
Net Interest Income
Net interest income was $302.9 million for the year ended December 31, 2011 compared to $241.7 million
for the same period of 2010. The increase in net interest income was primarily due to an increase of $819.4
27
million in average earning assets and the increase in our net interest margin. The increase in average earning
assets from 2010 included a $915.4 million increase in average net loans offset by a $65.6 million decrease in
average securities. For the year ended December 31, 2011, average net loans and securities represented 96%
and 2%, respectively, of average earning assets compared to 93% and 4%, respectively, in 2010.
Average interest bearing liabilities for the year ended December 31, 2011 increased $393.7 million from the
year ended December 31, 2010, which included a $48.5 million decrease in interest bearing deposits and a
$442.3 million increase in other borrowings. At the beginning of the year we actively turned away certain
higher priced deposits. For the same periods, the average balance of demand deposits increased to $1.5
billion from $1.1 billion. The average cost of interest bearing liabilities decreased from 0.89% for the year
ended December 31, 2010 to 0.40% in 2011, reflecting the continued low market interest rates, and our
focus on reducing deposit rates.
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 a $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.
Volume/Rate Analysis
(in thousands)
Interest income:
Securities(2)
Loans held for sale
Loans held for investment
Federal funds sold
Deposits in other banks
Total
Interest expense:
Transaction deposits
Savings deposits
Time deposits
Deposits in foreign branches
Borrowed funds
Years Ended December 31,
2011/2010
2010/2009
Net
Change
Change Due To(1)
Volume
Yield/Rate
Net
Change
Change Due To(1)
Volume
Yield/Rate
$ (3,123)
$ (2,942)
$
(181)
$ (4,200)
$ (4,136)
$
(64)
12,132
32,618
(173)
236
41,690
(779)
(7,980)
(6,476)
(3,124)
(1,114)
15,526
29,748
(169)
148
42,311
(104)
1,911
(4,497)
1,083
1,819
(3,394)
2,870
(4)
88
(621)
(675)
(9,891)
(1,979)
(4,207)
(2,933)
13,472
27,031
179
72
36,554
732
5,695
(9,163)
(1,779)
(3,811)
(8,326)
13,628
13,195
395
126
23,208
474
8,186
(4,833)
(161)
(3,196)
470
(156)
13,836
(216)
(54)
13,346
258
(2,491)
(4,330)
(1,618)
(615)
(8,796)
Total
(19,473)
212
(19,685)
Net interest income
$ 61,163
$42,099
$19,064
$44,880
$22,738
$22,142
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an
equal basis.
(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.
28
Net interest margin from continuing operations, the ratio of net interest income to average earning assets,
increased from 4.28% in 2010 to 4.68% in 2011. This 40 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 .64% for 2010 to .27% for 2011. Also contributing to the increase in net interest margin was
a 2 basis point increase in the yield on earning assets from 2010.
Net interest margin from continuing operations, the ratio of net interest income to average earning assets,
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.
Consolidated Daily Average Balances, Average Yields and Rates
2011
Year ended December 31
2010
2009
Average
Balance
Revenue /
Expense(1)
Yield /
Rate
Average
Balance
Revenue /
Expense(1)
Yield /
Rate
Average
Balance
Revenue /
Expense(1)
Yield /
Rate
$ 5,186
1,957
37
352
53,940
260,813
—
314,753
322,285
$ 123,124
33,996
21,897
107,734
1,210,954
5,059,134
67,888
6,202,200
6,488,951
330,137
$6,819,088
$ 391,100
2,401,997
562,654
490,703
$
195
7,797
5,231
1,727
3,846,454
723,172
14,950
1,140
4.21%
5.76%
0.17%
0.33%
4.45%
5.16%
—
5.07%
4.97%
0.05%
0.32%
0.93%
0.35%
0.39%
0.16%
$ 8,023
2,243
210
116
41,808
228,195
—
270,003
280,595
$ 183,363
39,360
112,716
47,365
883,033
4,475,668
71,942
5,286,759
5,669,563
281,448
$5,951,011
$ 437,674
2,142,541
913,616
401,155
$
974
15,777
11,707
4,851
3,894,986
280,899
33,309
1,155
4.38%
5.70%
0.19%
0.24%
4.73%
5.10%
—
5.11%
4.95%
0.22%
0.74%
1.28%
1.21%
0.86%
0.41%
$ 11,928
2,538
31
44
28,336
201,164
—
229,500
244,041
$ 269,888
44,873
8,196
12,266
596,271
4,200,174
55,784
4,740,661
5,075,884
245,034
$5,320,918
$ 147,961
1,182,442
1,188,964
411,116
$
242
10,082
20,870
6,630
2,930,483
1,023,198
37,824
4,406
4.42%
5.66%
0.38%
0.36%
4.75%
4.79%
—
4.84%
4.81%
0.16%
0.85%
1.76%
1.61%
1.29%
0.43%
113,406
2,573
2.27%
113,406
3,672
3.24%
113,406
4,232
3.73%
4,683,032
1,515,021
52,888
568,147
$6,819,088
18,663
0.40%
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
$5,320,918
46,462
1.14%
$303,622
$242,459
$197,579
4.68%
4.57%
4.28%
4.06%
3.89%
3.67%
Assets
Securities — Taxable
Securities — Non-taxable(2)
Federal funds sold
Deposits in other banks
Loans held for sale
Loans held for investment
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
Additional information from discontinued operations:
Loans held for sale from
discontinued operations
Borrowed funds
Net interest income
Net interest margin —
consolidated
$
423
423
$
564
564
$
600
600
$
33
$
36
$
61
4.68%
4.28%
3.89%
(1) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income.
Loan interest income includes loan fees totaling $27.5 million, $20.0 million and $17.1 million for the years ended December 31,
2011, 2010 and 2009, respectively.
(2) Taxable equivalent rates used where applicable assuming a 35% tax rate.
29
Non-interest income
Service charges on deposit accounts
Trust fee income
Bank owned life insurance (BOLI) income
Brokered loan fees
Equipment rental income
Other(1)
2009
2011
Year ended December 31
2010
(in thousands)
$ 6,392
3,846
1,889
11,190
4,134
4,812
$ 6,480
4,219
2,095
11,335
1,905
6,198
$ 6,287
3,815
1,579
9,043
5,557
2,979
Total non-interest income
$32,232
$32,263
$29,260
(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 decreased slightly during the year ended December 31, 2011 to $32.2 million, compared to
$32.3 million during the same period in 2010. The decrease was primarily due to a $2.2 million decrease in
equipment rental income related to a decline in the leased equipment portfolio. Offsetting this decrease was a
$1.4 million increase in other non-interest income primarily related to an increase in swap fees during 2011.
Swap fees are fees related to customer swap transactions and are received from the institution that is our
counterparty on the transaction. See Note 20 – Derivative Financial Instruments for further discussion.
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.
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.
30
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(1)
Year ended December 31
2010
2009
2011
$100,535
13,657
1,482
11,109
14,996
9,608
7,543
9,586
19,685
(in thousands)
$ 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
Total non-interest expense
$188,201
$163,488
$145,542
(1) Other expense includes such items as courier expenses, regulatory assessments other than FDIC
insurance, due from bank charges and other general operating expenses, none of which account for 1%
or more of total interest income and non-interest income.
Non-interest expense for the year ended December 31, 2011 increased $24.7 million compared to the same
period of 2010 primarily related to increases in salaries and employee benefits, marketing expense and legal
and professional expenses.
Salaries and employee benefits expense increased $15.2 million to $100.5 million during the year ended
December 31, 2011. This increase resulted primarily from general business growth.
Leased equipment depreciation expense decreased by $1.8 million during the year ended December 31,
2011 due to the decline in the leased equipment portfolio.
Marketing expense for the year ended December 31, 2011 increased $5.7 million compared to the same
period in 2010. Marketing expense for the year ended December 31, 2011 included $669,000 of direct
marketing and advertising expense and $2.6 million in business development expense compared to $246,000
and $2.2 million, respectively, in 2010. Marketing expense for the year ended December 31, 2011 also
included $7.8 million for the purchase of miles related to the American Airlines AAdvantage® program and
other treasury management deposit programs compared to $3.0 million during 2010. Marketing may increase
as we seek to further develop our brand, reach more of our target customers and expand in our target markets.
Legal and professional expense increased $3.2 million, or 27%, for the year ended December 31, 2011
compared to the same period in 2010. Our legal and professional expense will continue to fluctuate from
year to year and could increase in the future as we respond to continued regulatory changes and strategic
initiatives, but we should see a decrease in the cost of resolving problem assets under improving economic
conditions.
Communications and technology expense increased $1.1 million to $9.6 million during the year ended
December 31, 2011 as a result of general business and customer growth.
FDIC insurance assessment expense decreased by $1.7 million from $9.2 million in 2010 to $7.5 million as
a result of changes to the FDIC assessment method.
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.
31
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 $246,000 of direct
marketing and advertising expense and $2.2 million in business development expense compared to
$444,000 and $1.7 million, respectively, in 2009. Marketing expense for the year ended December 31, 2010
also included $3.0 million for the purchase of miles related to the American Airlines AAdvantage® program
compared to $926,000 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.
Analysis of Financial Condition
Loans
Our total loans have grown at an annual rate of 14%, 15% and 30% in 2009, 2010 and 2011, respectively,
reflecting the build-up of our lending operations. Our business plan focuses primarily on lending to middle
market businesses and successful professionals and entrepreneurs, and as such, commercial and real estate
loans have comprised a majority of our loan portfolio since we commenced operations, comprising 66% of
total
loans at December 31, 2011. Construction loans have decreased from 16% of the portfolio at
December 31, 2007 to 6% of the portfolio at December 31, 2011. Consumer loans generally have
represented 1% or less of the portfolio from December 31, 2007 to December 31, 2011. Loans held for sale,
which relates to our mortgage warehouse lending operations where we invest
in mortgage loan
participations that are typically sold within 10 to 20 days. Volumes fluctuate based on the level of market
demand in the product and the number of days between purchase and sale of the participated loans. If, due
to market conditions, loans are not sold within the normal timeframe they may be transferred to the loans
held for investment portfolio at a lower of cost or fair value. The loans are then subject to normal loan
review, grading and reserve allocation requirements.
We originate the substantial majority of the loans held for investment in our portfolio. We also participate
in syndicated loan relationships, both as a participant and as an agent. As of December 31, 2011, we have
$946.1 million in syndicated loans, $253.4 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, 2011, $20.0 million of our syndicated loans were nonperforming, and none are
considered potential problem loans.
The following summarizes our loans 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
2011
2010
$3,275,150
422,026
1,819,251
24,822
61,792
2,080,081
$2,592,924
270,008
1,759,758
21,470
95,607
1,194,209
December 31
2009
$2,457,533
669,426
1,233,701
25,065
99,129
693,504
2008
2007
$2,276,054
667,437
988,784
32,671
86,937
496,351
$2,035,049
573,459
773,970
28,334
74,523
174,166
Total
$7,683,122
$5,933,976
$5,178,358
$4,548,234
$3,659,501
32
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, 2011, funded commercial
loans and leases totaled approximately $3.3 billion, approximately 43% of our total funded loans.
Real Estate Loans. Approximately 21% of our real estate loan portfolio (excluding construction loans) and
5% 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, 2011, real estate term loans totaled approximately $1.8
billion, or 24% of our total funded loans; of this total, $1,593.1 million were loans with floating rates and
$226.2 million were loans with fixed rates.
Construction Loans. Our construction loan portfolio consists primarily of single- and multi-family
residential properties and commercial projects used in manufacturing, warehousing, service or retail
businesses. Our construction loans generally have terms of one to three years. We typically make
construction loans to developers, builders and contractors that have an established record of successful
project completion and loan repayment and have a substantial investment in 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, 2011, funded construction real estate
loans totaled approximately $422.0 million, approximately 6% of our total funded loans.
Loans Held for Sale. Our loans held for sale consist 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 underwritten consistent with established programs for permanent financing with
financially sound investors. Substantially all loans are conforming loans. At December 31, 2011, loans held
for sale totaled approximately $2.1 billion, approximately 27% 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, 2011, our commitments under letters of
credit totaled approximately $71.4 million.
Portfolio Geographic and Industry Concentrations
We continue to lend primarily in Texas. As of December 31, 2011, 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, 2011. The risks created
by these concentrations have been considered by management in the determination of the adequacy of the
33
allowance for loan losses. Management believes the allowance for loan losses is appropriate to cover
estimated losses on loans at each balance sheet date.
(in thousands)
Services
Loans held for sale
Investors and investment management companies
Petrochemical and mining
Contracting — construction and real estate development
Manufacturing
Personal/household
Wholesale
Retail
Contracting — trades
Government
Agriculture
Total
Amount
$2,425,324
2,080,081
845,958
783,913
653,023
261,098
180,688
182,605
163,970
62,414
28,499
15,549
$7,683,122
Percent of
Total Loans
31.5%
27.1%
11.0%
10.2%
8.5%
3.4%
2.4%
2.4%
2.1%
0.8%
0.4%
0.2%
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 communication, 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
to certain successful professionals and
entrepreneurs 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.
include loans
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
below sets forth information regarding the distribution of our funded loans among various types of collateral
at December 31, 2011 (in thousands except percentage data):
Collateral type:
Real property
Business assets
Participations in loans held for sale
Energy
Unsecured
Other assets
Highly liquid assets
Rolling stock
U. S. Government guaranty
Total
34
Amount
Percent of
Total Loans
$2,241,277
2,128,599
2,080,081
629,012
212,696
146,456
181,799
33,083
30,119
$7,683,122
29.1%
27.7%
27.1%
8.2%
2.8%
1.9%
2.4%
0.4%
0.4%
100.0%
As noted in the table above, 29.1% 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, 2011 (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
29.1%
5.9%
9.6%
8.2%
9.3%
5.8%
4.8%
9.0%
9.6%
3.7%
5.0%
Amount
$ 652,006
133,087
215,456
184,477
208,785
130,931
107,177
200,532
214,865
82,164
111,797
Total real estate loans
$2,241,277
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
$ 683,426
400,250
230,007
241,302
150,475
126,991
37.3%
21.8%
12.6%
13.2%
8.2%
6.9%
Total market risk real estate loans
$1,832,451
100.0%
residential and commercial
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, warehouse/distribution buildings, shopping centers, apartment
buildings,
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.
located primarily within our
tract development
35
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 by a third party to
determine reasonableness of the appraised value. The third party reviewer will challenge whether or not
the data used is appropriate 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. Additionally, the third party reviewer provides a detailed report of that analysis. Further
review is conducted by our credit officers, as well as by the Bank’s managed asset committee. These
additional steps of review ensure that the underlying appraisal and the third party analysis can be relied
upon. If we have differences, we will address those with the reviewer and determine the best method to
resolve any differences. Both the appraisal process and the appraisal review process have been 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 primarily 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 $111 million and our house limit is generally $20 million or less. Larger hold positions will
be accepted occasionally for exceptionally strong borrowers and otherwise where business opportunity and
perceived credit risk warrant a somewhat larger investment. 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):
2011
2010
Period-End Balances
Period-End Balances
Number of
Number of
Relationships Committed Outstanding
Relationships Committed Outstanding
$20.0 million and greater
$10.0 million to $19.9
million
39
159
$ 943,137
$ 683,371
2,212,434
1,593,248
25
122
$ 598,299
$ 446,093
2,242,013
1,687,786
Growth in period end outstanding balances related to large credit relationships primarily resulted from an
increase in number of commitments. The following table summarizes the average per relationship
committed and average outstanding loan balance related to our large credit relationships at year-end (in
thousands):
2011
Average Balance
2010
Average Balance
Number of
Number of
Relationships Committed Outstanding
Relationships Committed Outstanding
$20.0 million and greater
$10.0 million to $19.9
million
39
159
$24,183
$17,522
13,915
10,020
25
122
$23,932
$17,844
18,377
13,834
36
Loan Maturity and Interest Rate Sensitivity on December 31, 2011
(in thousands)
Loan maturity:
Commercial
Construction
Real estate
Consumer
Equipment leases
Remaining Maturities of Selected Loans
Total
Within 1 Year
1-5 Years
After 5 Years
$3,275,150
422,026
1,819,251
24,822
61,792
$1,483,072
151,911
516,993
14,192
4,948
$1,700,614
239,891
1,000,646
7,075
55,286
$ 91,464
30,224
301,612
3,555
1,558
Total loans held for investment
$5,603,041
$2,171,116
$3,003,512
$428,413
Interest rate sensitivity for selected loans
with:
Predetermined interest rates
Floating or adjustable interest rates
$ 971,829
4,631,212
$ 630,150
1,540,966
$ 266,660
2,736,852
$ 75,019
353,394
Total loans held for investment
$5,603,041
$2,171,116
$3,003,512
$428,413
Interest Reserve Loans
As of December 31, 2011, we had $159.9 million in loans with interest reserves, which represents
approximately 38% 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, construction 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 periodic 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, 2011, $17.3 million of our loans with interest reserves were on nonaccrual.
37
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):
Non-accrual loans(1)
Commercial
Construction
Real estate
Consumer
Leases
Total non-accrual loans
Repossessed assets:
OREO(3)
Other repossessed assets
Total other repossessed assets
Total non-performing assets
Restructured loans(4)
Loans past due 90 days and accruing(2)
As of December 31
2011
2010
2009
$12,913
21,119
19,803
313
432
$ 42,543
21
62,497
706
6,323
$ 34,021
20,023
34,764
273
6,544
54,580
112,090
95,625
34,077
1,516
42,261
451
27,264
162
35,593
42,712
27,426
$90,173 $154,802
$123,051
$25,104 $
$
$ 5,467
4,319
6,706
$
$
—
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 $5.9 million, $10.5
million and $3.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(2) At December 31, 2011, 2010 and 2009, loans past due 90 days and still accruing includes premium
finance loans of $2.5 million, $3.3 million and $2.4 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, 2011, 2010 and 2009, OREO balance is net of $10.7 million, $12.9 million and $6.6
million valuation allowance, respectively.
(4) As of December 31, 2011 and 2010, non-accrual loans included $13.8 million and $26.5 million,
respectively, in loans that met the criteria for restructured. As of December 31, 2009, we did not have
any loans that met the criteria for restructured.
Total nonperforming assets at December 31, 2011 decreased $64.6 million from December 31, 2010,
compared to a $31.8 million increase from December 31, 2009 to December 31, 2010. We experienced
decreases in levels of nonperforming assets in 2011 and an overall improvement in credit quality. As a
result, our reserve for loan losses as a percent of loans, as well as provision for credit losses, decreased. The
increase in the prior year was reflective of the overall economic deterioration during 2010. As a result our
reserve for loans losses as a percentage of loans, as well as our provision for credit losses recorded in 2010
increased over levels experienced prior to 2009.
38
The table below summarizes the non-accrual loans as segregated by loan type and type of property securing
the credit as of December 31, 2011 (in thousands):
Non-accrual loans:
Commercial
Lines of credit secured by the following:
Various single family residences and notes receivable
Assets of the borrowers
Other
Total commercial
Real estate
Secured by:
Commercial property
Unimproved land and/or developed residential lots
Rental properties and multi-family residential real estate
Single family residences
Other
Total real estate
Construction
Secured by:
Unimproved land and/or developed residential lots
Consumer
Leases (commercial leases primarily secured by assets of the lessor)
Total non-accrual loans
$ 6,134
4,815
1,964
12,913
4,877
5,374
905
5,224
3,423
19,803
21,119
313
432
$54,580
Reserves on impaired loans were $5.3 million at December 31, 2011, compared to $14.7 million at
December 31, 2010 and $18.4 million at December 31, 2009. We recognized $2.2 million in interest income
on non-accrual loans during 2011 compared to $566,000 in 2010 and $25,000 in 2009. Additional interest
income that would have been recorded if the loans had been current during the years ended December 31,
2011, 2010 and 2009 totaled $5.9 million, $10.5 million and $3.6 million, respectively. Average impaired
loans outstanding during the years ended December 31, 2011, 2010 and 2009 totaled $71.0 million, $120.6
million and $62.3 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, 2011, $19.2 million of our non-accrual loans were earning on a cash basis. 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.
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, 2011, we had $5.5 million in loans past due 90 days and still accruing interest. Of this
total, $2.3 million are loans guaranteed as to both interest and principal by the USDA. In addition, $2.5
39
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.
the face amount of debt, either
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
forgiveness of principal or accrued interest. As of
December 31, 2011 we have $25.1 million in loans considered restructured that are not already on
nonaccrual. Of the nonaccrual loans at December 31, 2011, $13.8 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. Assuming that the restructuring agreement specifies an interest rate at the time
of the restructuring that is greater than or equal to the rate that we are willing to accept for a new extension
of credit with comparable risk, then the loan no longer has to be considered a restructuring if it is in
compliance with modified terms in calendar years after the year of the restructuring.
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, 2011 and 2010, we had $18.2 million and $25.3 million, respectively, in loans
of this type which were not included in either non-accrual or 90 days past due categories.
The table below presents a summary of the activity related to OREO (in thousands):
Year ended December 31
2010
2009
2011
Beginning balance
Additions
Sales
Valuation allowance for OREO
Direct write-downs
Ending balance
$ 42,261
22,180
(23,566)
(3,922)
(2,876)
$27,264
29,559
(6,058)
(6,587)
(1,917)
$ 25,904
23,466
(14,265)
(6,619)
(1,222)
$ 34,077
$42,261
$ 27,264
The following table summarizes the assets held in OREO at December 31, 2011 (in thousands):
OREO:
Unimproved commercial real estate lots and land
Commercial buildings
Undeveloped land and residential lots
Multifamily lots and land
Other
Total OREO
$ 4,867
9,385
15,638
801
3,386
$34,077
When foreclosure occurs, fair value, which is generally based on appraised values, may result in partial
charge-off of a 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
40
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, 2011, we recorded $6.8 million in
valuation expense. Of the $6.8 million, $3.9 million related to increases to the valuation allowance, and $2.9
million related to direct write-downs.
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 $28.5 million for the
year ended December 31, 2011, $53.5 million for the year ended December 31, 2010, and $43.5 million for
the year ended December 31, 2009. The amount of reserves and provision required to support the reserve
generally increased in 2009 and 2010 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.
However, in 2011 we have experienced improvements in credit quality, which has resulted in decreases in
the levels of reserves and provision. We expect to see some continued improvement in credit quality in
2012.
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses
inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly
evaluate our reserve for loan losses to maintain an appropriate level to absorb estimated loan losses inherent
in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of
the borrower, changes in the value of pledged collateral, and general economic conditions. All loan
commitments rated substandard or worse and greater than $500,000 are specifically reviewed for loss
potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to
be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by
product types to recognize differing risk profiles among categories, and then further segregated by credit
grades. Credit grades are assigned to all loans. Each credit grade is assigned a risk factor, or reserve
allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-
weighted by product type to calculate the required reserve. A similar process is employed to calculate a
reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of
credit. 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 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
41
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. 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 reserve for credit losses, which includes a liability for losses on unfunded commitments, totaled $72.8
million at December 31, 2011, $73.4 million at December 31, 2010 and $70.9 million at December 31, 2009.
The total reserve percentage decreased to 1.31% at year-end 2011 from 1.56% and 1.59% of loans held for
investment at December 31, 2010 and 2009, respectively. The total reserve percentage had increased in
2009 and 2010 as a result of the effects of national and regional economic conditions on borrowers and
values of assets pledged as collateral. The combined reserve is starting to trend down as we recognize losses
on loans for which there were specific or general allocations of reserves and see improvement in our overall
credit quality. The overall reserve for loan losses continued to result from consistent application of the loan
loss reserve methodology as described above. At December 31, 2011, 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.
42
The table below presents a summary of our loan loss experience for the past five years (in thousands except
percentage and multiple data):
2011
Year Ended December 31
2009
2010
2008
2007
Reserve for loan losses:
Beginning balance
Loans charged-off:
Commercial
Real estate — construction
Real estate — term
Consumer
Equipment leases
Total charge-offs
Recoveries:
Commercial
Real estate — construction
Real estate — term
Consumer
Equipment leases
Total recoveries
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
Reserve for loan losses to loans held for
investment(2)
Net charge-offs 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 loans(1) (5)
OREO(4)
Other repossessed assets
$71,510
$ 67,931
$ 45,365
$31,686
$20,063
8,518
—
21,275
317
1,218
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
31,328
51,449
19,728
13,634
2,970
1,188
248
350
9
383
2,178
176
1
138
4
158
477
124
13
53
28
54
272
759
—
47
13
79
898
642
—
—
15
131
788
29,150
27,935
50,972
54,551
19,456
42,022
12,736
26,415
2,182
13,805
$70,295
$ 71,510
$ 67,931
$45,365
$31,686
$ 1,897
$
2,948
$
1,470
$ 1,135
$
940
565
(1,051)
1,478
335
195
$ 2,462
$
1,897
$
2,948
$ 1,470
$ 1,135
$72,757
$28,500
$ 73,407
$ 53,500
$ 70,879
$ 43,500
$46,835
$26,750
$32,821
$14,000
1.26%
0.58%
0.56%
6.95%
1.52%
1.14%
1.20%
0.93%
1.52%
0.46%
1.04%
1.38%
1.16%
0.35%
0.95%
0.07%
0.46%
0.73%
6.59% 26.53%
2.4x
1.4x
3.5x
3.6x
14.5x
0.14%
0.14%
0.24%
0.10%
0.09%
1.31%
1.56%
1.59%
1.16%
0.95%
$54,580
34,077
1,516
$112,090
42,261
451
$ 95,625
27,264
162
$47,499
25,904
25
$21,385
2,671
45
Total
$90,173
$154,802
$123,051
$73,428
$24,101
Restructured loans
Loans past due 90 days and still accruing(3)
Reserve as a percent of non-performing loans
$25,104
$ 5,467
1.3x
$
$
$
$
4,319
6,706
.6x
43
— $ — $ —
$ 4,147
1.5x
$ 4,115
1.0x
6,081
.7x
(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 $5.9 million, $10.5
million and $3.6 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(2) Excludes loans held for sale.
(3) At December 31, 2011, 2010 and 2009, loans past due 90 days and still accruing includes premium
finance loans of $2.5 million, $3.3 million and $2.4 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, 2011, 2010 and 2009, OREO balance is net of $10.7 million, $12.9 million and $6.6
million valuation allowance, respectively.
(5) As of December 31, 2011 and 2010, non-accrual loans included $13.8 million and $26.5 million,
respectively, in loans that met the criteria for restructured. As of December 31, 2009, we did not have
any loans that met the criteria for restructured.
Loan Loss Reserve Allocation
(in thousands except
percentage data)
Loan category:
Commercial
Construction
Real estate
Consumer
Equipment leases
Unallocated
2011
% of
2010
% of
December 31
2009
% of
Reserve
Loans(1) Reserve
Loans(1) Reserve
Loans(1) Reserve
Loans(1) Reserve
2008
2007
% of
% of
Loans(1)
$17,337
59% $15,918
7,845
33,721
223
2,356
8,813
8%
32%
—
1%
—
7,336
38,049
306
5,405
4,496
55%
6%
37%
—
2%
—
$33,269
55% $23,348
10,974
14,874
1,258
2,960
4,596
15%
28%
—
2%
—
7,563
10,518
1,095
1,790
1,051
56%
17%
24%
1%
2%
—
$16,466
5,032
4,736
1,989
723
2,740
58%
17%
22%
1%
2%
—
Total
$70,295
100% $71,510
100%
$67,931
100% $45,365
100%
$31,686
100%
(1) Excludes loans held for sale.
During 2011, the reserve allocated to all categories of loans decreased compared to 2010 primarily due to
decreases in the level of allocations required by our loan loss reserve methodology as the level of
nonperforming loans decreased. The percentage of the reserve allocated to commercial and construction
loans increased in the current year compared to 2010, consistent with the increases in commercial and
construction portfolios during 2011. The percentage of the reserve allocated to real estate decreased in the
current year compared to 2010, consistent with the decrease in the real estate non-accruals, offset by a
slight increase in the real estate portfolio. We have traditionally maintained an unallocated reserve
component to allow for uncertainty in economic and other conditions affecting the quality of the loan
portfolio. The unallocated portion of our loan loss reserve has increased since December 31, 2010. We
believe the level of unallocated reserves at December 31, 2011 is warranted due to the ongoing weak
economic environment which has produced more frequent losses, including those resulting from fraud by
borrowers. Our methodology used to calculate the allowance considers historical losses, however, the
historical loss rates for specific product types or credit risk grades may not fully incorporate the effects of
continued weakness in the economy. In addition, a substantial portion of losses realized over the past
several years related to commercial real estate loans. Continuing uncertainty and illiquidity in the
44
commercial real estate market has produced and continues to cause material changes in appraised values
that can influence our impairment calculations on currently impaired loans and on pass-rated loans that may
experience weakness if economic conditions and valuations do not stabilize.
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, 2011, we maintained an average securities portfolio of $157.1 million
compared to an average portfolio of $222.7 million for the same period in 2010 and $314.8 million for the
same period in 2009. At December 31, 2011 and 2010, the portfolios were primarily comprised of mortgage-
backed securities. Of the mortgage-backed securities, substantially all are guaranteed by U.S. government
agencies. Our portfolio included no impaired securities during 2011 and 2010.
Our net unrealized gain on the securities portfolio value decreased due to the reduction in balances held
from a net gain of $8.2 million, which represented 4.65% of the amortized cost, at December 31, 2010, to a
net gain of $7.3 million, which represented 5.32% of the amortized cost, at December 31, 2011. During
2010, the unrealized gain on the securities portfolio value decreased, also as a result of the reduced balances
held, 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.
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 1.7 years at December 31, 2011 and 2.0
years at December 31, 2010. 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, 2011,
2010 and 2009 (in thousands):
2011
At December 31
2010
2009
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Available-for-sale:
Mortgage-backed
securities
Corporate securities
Municipals
Equity securities(1)
Other
Total available-for-sale
securities
$ 84,363
5,000
29,577
7,506
10,000
$ 90,083
5,225
30,742
7,660
10,000
$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
—
$136,446
$143,710
$177,185
$185,424
$256,644
$266,128
(1) Equity securities consist of Community Reinvestment Act funds.
45
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands except percentage data):
At December 31, 2011
Less Than
One Year
After One
Through Five
Years
After Five
Through Ten
Years
After Ten
Years
Total
Available-for-sale:
Mortgage-backed securities:(1)
Amortized cost
Estimated fair value
$
13
13
$10,420
11,095
$31,502
$42,428
$ 84,363
33,745
45,230
90,083
Weighted average yield(3)
6.50%
4.85%
4.71%
3.79%
4.26%
Corporate securities:
Amortized cost
Estimated fair value
Weighted average yield(3)
Municipals:(2)
Amortized cost
Estimated fair value
—
—
—
5,000
5,225
7.38%
4,184
4,213
18,980
19,784
—
—
—
6,413
6,745
Weighted average yield(3)
5.36%
5.51%
5.86%
Equity securities:
Amortized cost
Estimated fair value
Other securities:
Amortized cost
Estimated fair value
Weighted average yield(3)
Total available-for-sale securities:
Amortized cost
Estimated fair value
7,506
7,660
10,000
10,000
0.10%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
5,225
7.38%
29,577
30,742
5.57%
7,506
7,660
10,000
10,000
0.10%
$136,446
$143,710
(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 1.7 years at December 31, 2011.
(2) Yields have been adjusted to a tax equivalent basis assuming a 35% federal tax rate.
(3) Yields are calculated based on amortized cost.
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. We have obtained documentation from
the primary pricing service we use about their processes and controls over pricing. In addition, on a
quarterly basis we independently verify the prices that we receive from the service provider using two
additional independent pricing sources. Any significant differences are investigated and resolved.
46
At December 31, 2011, we did not have any investment securities in an unrealized loss position. The
following table discloses, as of December 31, 2010, 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
Unrealized
Loss
Fair
Value
12 Months or Longer
Unrealized
Fair
Loss
Value
Total
Fair
Value
Unrealized
Loss
Mortgage-backed securities
$3,681
$(5)
$—
$—
$3,681
$(5)
At December 31, 2010, the number of investment positions in an unrealized loss position totaled 1. The
unrealized losses at December 31, 2010 were interest rate related, and losses have decreased as rates
decreased in 2009 and remained low during 2010 and 2011. 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. 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, 2011 increased $350.2 million compared to the same
period of 2010. Average demand deposits and savings deposits increased by $398.8 million and $259.5
million, respectively, while interest bearing transaction deposits and time deposits (including deposits in
foreign branches) decreased $46.6 million and $261.4 million during the year ended December 31, 2011 as
compared to the same period of 2010. The average cost of deposits decreased in 2011 mainly due to our
focused effort to reduce rates paid on deposits.
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.
The following table discloses our average deposits for the years ended December 31, 2011, 2010 and 2009
(in thousands):
Non-interest bearing
Interest bearing transaction
Savings
Time deposits
Deposits in foreign branches
Total average deposits
Average Balances
2011
2010
2009
$1,515,021
391,100
2,401,997
562,654
490,703
$1,116,260
437,674
2,142,541
913,616
401,155
$ 760,776
147,961
1,182,441
1,188,964
411,116
$5,361,475
$5,011,246
$3,691,258
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, 2011, approximately 75% of our deposits originated out of
our Dallas metropolitan banking centers. Uninsured deposits at December 31, 2011 were 43% of total
47
deposits, compared to 50% of total deposits at December 31, 2010 and 55% of total deposits at
December 31, 2009. The presentation for 2011, 2010 and 2009 does reflect combined ownership, but does
not reflect all of the account styling that would determine insurance based on FDIC regulations.
At December 31, 2011, we had $478.0 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
2011
December 31
2010
2009
$302,319
95,474
118,649
34,887
$406,616
179,438
153,173
43,197
$632,763
132,865
120,561
26,541
$551,329
$782,424
$912,730
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, 2011 and 2010, 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
supplemented 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 CDs. These CDs are generally of short maturities, 30 to 90 days, and are used to
supplement temporary differences in the growth in loans, including growth in specific categories of loans,
compared to customer deposits. Due to the increase in loans held for sale during the fourth quarter of 2011,
we issued brokered CDs with maturities of 30 days. 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 average total deposits
Average brokered deposits
Average brokered deposits as a percent of average total deposits
48
December 31
2011
2010
$5,391.1
$5,455.4
97.0%
100.0%
$ 165.1
$ —
3.0%
0.0%
$5,344.2
$4,982.6
$
99.7%
17.3
0.3%
$
99.4%
28.6
0.6%
We have access to sources of brokered deposits of not less than an additional $3.3 billion. Based on the
increase in brokered CDs, customer deposits (total deposits minus brokered CDs) at December 31, 2011
decreased $64.3 million from December 31, 2010.
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
correspondent 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):
2011
2010
2009
Balance Rate(4)
Maximum
Outstanding at
Any Month End Balance Rate(4)
Maximum
Outstanding at
Any Month End Balance Rate(4)
Maximum
Outstanding at
Any Month End
Federal funds
purchased (5)
$ 412,249
0.27%
$
$283,781
0.32%
$
$ 580,519 0.33% $
Customer
repurchase
agreements (1)
Treasury, tax and
loan notes (2)
FHLB
borrowings (3)
Fed borrowings
TLGP
borrowings
Trust preferred
subordinated
debentures
23,801
0.06%
—
—
1,200,066
132,000
0.14%
0.75%
—
—
10,920
0.05%
3,100
0.00%
86
—
2.21%
—
—
—
25,070 0.10%
5,940 0.00%
325,000 0.11%
— —
20,500 0.84%
113,406
2.48%
113,406
2.23%
113,406 3.19%
Total borrowings
$1,881,522
$1,986,324
$411,293
$653,665
$1,070,435
$1,753,181
(1) Securities pledged for customer repurchase agreements were $28.3 million, $21.6 million and $36.0
million at December 31, 2011, 2010 and 2009, respectively.
(2) Securities pledged for treasury, tax and loan notes were $5.7 million, $7.4 million and $11.3 million at
December 31, 2011, 2010 and 2009, respectively.
(3) FHLB borrowings are collateralized by a blanket floating lien based on real estate loans and also
certain pledged securities. The weighted-average interest rate for the years ended December 31, 2011,
2010 and 2009 was 0.11%, 0.14% and 0.62%, respectively.
Interest rate as of period end.
(4)
(5) The weighted-average interest rate on federal funds purchased for the years ended December 31,
2011, 2010 and 2009 was 0.25%, 0.44% and 0.47%, respectively.
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
Total FHLB borrowing capacity
2011
2010
2009
$
4,524
15,909
$869,089
120,823
$738,682
57,101
$ 20,433
$989,912
$795,783
Unused federal funds lines available from commercial banks
$390,720
$482,460
$736,560
From time to time, we borrow overnight funds from the Federal Reserve. During 2011, we did so on seven
such occasions. Fed borrowings for the year ended December 31, 2011 averaged $1.3 million.
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.
49
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and
subsequently issued fixed and/or floating rate Capital Securities in various private offerings totaling $113.4
million. As of December 31, 2011, the details of the trust preferred subordinated debentures are
summarized below (in thousands):
Date issued
Capital securities issued
Floating or fixed rate
securities
Interest rate on subordinated
debentures
Maturity date
Texas Capital
Bancshares
Statutory
Trust I
November 19, 2002
$10,310
Floating
Texas Capital
Bancshares
Statutory
Trust II
Texas Capital
Bancshares
Statutory
Trust III
April 10, 2003
$10,310
Floating
October 6, 2005
$25,774
Fixed/Floating(1)
Texas Capital
Bancshares
Statutory
Trust IV
April 28, 2006
$25,774
Floating
Texas Capital
Bancshares
Statutory
Trust V
September 29, 2006
$41,238
Floating
3 month
LIBOR + 3.35%
November 2032
3 month
LIBOR + 3.25%
April 2033
3 month
LIBOR + 1.51%
December 2035
3 month
LIBOR + 1.60%
June 2036
3 month
LIBOR + 1.71%
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, 2011, the weighted average quarterly rate on the
subordinated debentures was 2.34%, compared to 2.27% average for all of 2011, and 3.24% for all of 2010.
Our equity capital averaged $568.1 million for the year ended December 31, 2011 as compared to $516.0
million in 2010 and $473.8 million in 2009. 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 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, 2011, the warrants to purchase 758,086
shares at $14.84 per share were still outstanding.
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. While the program remains in place, no sales
under this program have been made since July 2010.
Our capital ratios remain above the levels required to be well capitalized and have been enhanced with the
additional capital raised since 2009 through 2010 and will allow us to grow organically with the addition of
loan and deposit relationships.
50
Our actual and minimum required capital amounts and actual ratios are as follows (in thousands, except
percentage data):
Regulatory Capital Adequacy
December 31, 2011
December 31, 2010
Amount
Ratio
Amount
Ratio
$774,360
586,615
187,745
$741,595
733,140
586,512
8,455
155,083
$701,534
293,307
408,227
$668,769
439,884
293,256
228,885
375,513
$701,534
319,482
382,052
$668,769
399,283
319,427
269,486
349,342
10.56% $697,291
8.00% 471,565
2.56% 225,726
10.12% $600,331
10.00% 589,327
8.00% 471,462
0.12%
11,004
2.12% 128,869
11.83%
8.00%
3.83%
10.19%
10.00%
8.00%
0.19%
2.19%
9.57% $623,835
4.00% 235,782
5.57% 388,053
10.58%
4.00%
6.58%
9.12% $526,875
6.00% 353,596
4.00% 235,731
3.12% 173,279
5.12% 291,144
8.78% $623,835
4.00% 266,694
4.78% 357,141
8.37% $526,875
5.00% 333,297
4.00% 266,638
3.37% 193,578
4.37% 260,237
8.94%
6.00%
4.00%
2.94%
4.94%
9.36%
4.00%
5.36%
7.90%
5.00%
4.00%
2.90%
3.90%
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
51
Commitments and Contractual Obligations
The following table presents, as of December 31, 2011, 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)
FHLB
borrowings(1)
Fed borrowings(1)
Operating lease
7
7
8
8
8
8
$4,489,478
1,026,174
$ —
30,435
$ —
9,401
$
— $4,489,478
1,066,779
769
412,249
23,801
1,200,000
132,000
—
—
—
—
—
—
66
—
—
—
—
—
412,249
23,801
1,200,066
132,000
obligations(1) (2)
16
9,435
17,506
15,677
38,578
81,196
Trust preferred
subordinated
debentures(1)
Total contractual
obligations(1)
8, 9
—
—
—
113,406
113,406
$7,293,137
$47,941
$25,144
$152,753
$7,518,975
(1) Excludes interest.
(2) Non-balance sheet item.
Off-Balance Sheet Arrangements
The contractual amount of our financial instruments with off-balance sheet risk expiring by period at
December 31, 2011 is presented below (in thousands):
Commitments to extend credit
Standby and commercial letters of credit
Total financial instruments with
Within
One Year
$770,078
61,399
After One But
Within Three
Years
$682,053
8,959
After Three
But Within
Five Years
$268,980
1,002
After Five
Years
$9,690
—
Total
$1,730,801
71,360
off-balance sheet risk
$831,477
$691,012
$269,982
$9,690
$1,802,161
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.
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
52
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” and Note 3 – Loans in the accompanying notes to the
consolidated financial statements included elsewhere in this report for further discussion of the risk factors
considered by management in establishing the allowance for loan losses.
New Accounting Standards
See Note 24 – 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, 2011, 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 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.
53
Interest Rate Sensitivity Gap Analysis
December 31, 2011
0-3 mo
Balance
4-12 mo
Balance
1-3 yr
Balance
3+ yr
Balance
Total
Balance
(in thousands)
Assets:
Securities(1)
Total variable loans
Total fixed loans
Total loans(2)
$
28,197
6,567,338
479,102
7,046,440
$
39,703
43,379
234,824
278,203
$
35,545
64,756
176,198
240,954
$
40,265
35,628
82,290
$ 143,710
6,711,101
972,414
117,918
7,683,515
Total interest sensitive assets
$7,074,637
$ 317,906
$ 276,499
$ 158,183
$7,827,225
Liabilities
Interest bearing customer
deposits
CDs & IRAs
Wholesale deposits
Total interest bearing
deposits
Repo, FF, FHLB, Fed
borrowings
Trust preferred
$3,217,806
149,400
165,146
$
— $
— $
231,356
—
30,435
—
— $3,217,806
421,361
165,146
10,170
—
3,532,352
231,356
30,435
10,170
3,804,313
1,768,050
subordinated debentures
—
Total borrowings
1,768,050
—
—
—
—
—
—
66
1,768,116
113,406
113,406
113,472
1,881,522
Total interest sensitive
liabilities
GAP
Cumulative GAP
Demand deposits
Stockholders’ equity
Total
$5,300,402
$ 231,356
$
30,435
$ 123,642
$5,685,835
$1,774,235
1,774,235
$
86,550
1,860,785
$ 246,064
2,106,849
$
34,541
2,141,390
$
—
2,141,390
$1,751,944
616,331
$2,368,275
(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, 2011 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
54
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
interest bearing transaction
balance changes on indeterminable maturity deposits (demand deposits,
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 captured 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, 2011
200 bp Increase
December 31, 2010
Change in net interest income
$25,368
$19,762
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.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2011 and December 31, 2010
Consolidated Statements of Income — Years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity — December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows — December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
Page
Reference
57
58
59
60
61
62
56
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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2011, 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, 2011, 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 23,
2012 expressed an unqualified opinion thereon.
Dallas, Texas
February 23, 2012
57
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except per share data)
Assets
Cash and due from banks
Interest-bearing deposits
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 intangible assets, net
Total assets
Liabilities:
Deposits:
Liabilities and Stockholders’ Equity
Non-interest bearing
Interest bearing
Interest bearing in foreign branches
Total deposits
Accrued interest payable
Other liabilities
Federal funds purchased
Repurchase agreements
Other borrowings
Trust preferred subordinated debentures
Total liabilities
Stockholders’ equity:
Preferred stock, $.01 par value, $1,000 liquidation value:
Authorized shares — 10,000,000
Issued shares — no shares issued at December 31, 2011 and 2010
Common stock, $.01 par value:
Authorized shares — 100,000,000
Issued shares — 37,666,708 and 36,957,104 at December 31, 2011 and
2010, respectively
Additional paid-in capital
Retained earnings
Treasury stock (shares at cost: 417 at December 31, 2011 and 2010)
Accumulated other comprehensive income, net of taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2011
December 31,
2010
$
79,248
22,010
–
143,710
2,080,081
393
5,572,371
70,295
5,502,076
11,457
278,163
20,480
$
68,627
36,239
75,000
185,424
1,194,209
490
4,711,330
71,510
4,639,820
11,568
225,309
9,483
$8,137,618
$6,446,169
$1,751,944
3,324,040
480,273
5,556,257
599
82,909
412,249
23,801
1,332,066
113,406
$1,451,307
3,545,146
458,948
5,455,401
2,579
48,577
283,781
10,920
3,186
113,406
7,521,287
5,917,850
—
—
376
349,458
261,783
(8)
4,722
616,331
369
336,796
185,807
(8)
5,355
528,319
$8,137,618
$6,446,169
See accompanying notes to consolidated financial statements.
58
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(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
Year ended December 31
2010
2009
2011
$314,753
6,458
37
352
$270,003
9,481
210
116
$229,500
13,578
31
44
321,600
279,810
243,153
14,950
602
10
528
2,573
18,663
302,937
28,500
274,437
6,480
4,219
2,095
11,335
1,905
6,198
32,232
100,535
13,657
1,482
11,109
14,996
9,608
7,543
9,586
19,685
33,309
1,097
10
48
3,672
38,136
241,674
53,500
188,174
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
37,824
2,404
53
1,949
4,232
46,462
196,691
43,500
153,191
6,287
3,815
1,579
9,043
5,557
2,979
29,260
73,419
12,291
4,319
3,034
11,846
6,510
8,464
10,345
15,314
188,201
163,488
145,542
118,468
42,366
76,102
(126)
75,976
—
56,949
19,626
37,323
(136)
37,187
—
36,909
12,522
24,387
(235)
24,152
5,383
Net income available to common shareholders
$ 75,976
$ 37,187
$ 18,769
Basic earnings per common share
Income from continuing operations
Net income
Diluted earnings per common share
Income from continuing operations
Net income
$
$
$
$
2.04
2.03
1.99
1.98
$
$
$
$
1.02
1.02
1.00
1.00
$
$
$
$
0.56
0.55
0.55
0.55
See accompanying notes to consolidated financial statements.
59
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S
TEXAS CAPITAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating activities
Net income from continuing operations
Adjustments to reconcile net income 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
Cash paid for acquisition
Net cash used in investing activities of continuing operations
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 increase (decrease) in federal funds purchased
Net cash provided by financing activities of continuing operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Non-cash transactions:
Transfers from loans/leases to OREO and other repossessed assets
2011
Year ended December 31
2010
2009
$
76,102
$
37,323
$
24,387
28,500
(6,682)
5,364
78
(2,095)
7,340
3,139
(8,970)
(27,234,509)
26,348,634
(80)
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
(68,808)
32,694
(819,293)
(29)
(819,322)
(10,000)
8,240
42,421
(890,753)
(3,286)
23,329
(11,482)
(841,531)
100,856
2,190
—
—
—
—
1,341,761
8,970
128,468
1,582,245
(78,608)
179,866
101,258
20,643
32,127
24,327
$
$
(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
$
$
See accompanying notes to consolidated financial statements.
61
(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 doing business in March 1998, but did not commence banking
operations until December 1998. The consolidated financial statements of the Company include the
accounts of Texas Capital Bancshares, Inc. and its wholly owned subsidiary, Texas Capital Bank, National
Association (“the Bank”). The Bank currently provides commercial banking services to its customers in
Texas and concentrates on middle market commercial businesses and successful professionals and
entrepreneurs.
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, 2011 and 2010.
62
Loans
Loans Held for Investment
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
origination 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.
Loans Held for Sale
We purchase participations in mortgage loans primarily for sale in the secondary market through our
mortgage warehouse lending division. These are participations purchased from non-bank mortgage
originators who are seeking additional funding through participation interests to facilitate their ability to
originate loans in their own name. The mortgage originator has no obligation to offer and we have no
obligation to purchase these participation interests. The originator closes mortgage loans consistent with
underwriting standards established by approved investors and once the loan closes, the originator delivers
the loan to the investor. We typically purchase up to a 99% participation interest with the originator
financing the remaining percentage. These loans are held by us for an interim period, usually less than 30
days and more typically 10-15 days. 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 were not sold
within the normal time frames or at previously negotiated prices. Due to market conditions, certain
mortgage warehouse lending loans were transferred to our loans held for investment portfolio at the lower
of cost or market. Mortgage warehouse lending loans transferred to our loans held for investment portfolio
could require future 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.
63
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 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.
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
compensation 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
prospective 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.
64
Accumulated Other Comprehensive Income
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 three years ended December 31, 2011 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 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:
Residential mortgage-backed securities
Corporate securities
Municipals
Equity securities(1)
Other
Available-for-Sale Securities:
Residential mortgage-backed securities
Corporate securities
Municipals
Equity securities(1)
December 31, 2011
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
$5,720
225
1,165
154
—
$7,264
$—
—
—
—
—
$—
$ 90,083
5,225
30,742
7,660
10,000
$143,710
December 31, 2010
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
$6,891
—
1,244
109
$8,244
$ (5)
—
—
—
$ (5)
$133,724
5,000
39,085
7,615
$185,424
Amortized
Cost
$ 84,363
5,000
29,577
7,506
10,000
$136,446
Amortized
Cost
$126,838
5,000
37,841
7,506
$177,185
(1) Equity securities consist of Community Reinvestment Act funds.
65
The amortized cost and estimated fair value of securities are presented below by contractual maturity (in
thousands, except percentage data):
December 31, 2011
After Five
Through
Ten Years
After One
Through
Five Years
After Ten
Years
Less Than
One Year
Total
Available-for-sale:
Residential 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
Other:(3)
Amortized cost
Estimated fair value
Weighted average yield
Total available-for-sale securities:
Amortized cost
Estimated fair value
$
13
13
6.50%
$10,420
11,095
$31,502
33,745
$42,428
45,230
$ 84,363
90,083
4.85%
4.71%
3.79%
4.26%
—
—
—
5,000
5,225
7.38%
—
—
—
4,184
4,213
5.36%
18,980
19,784
5.51%
6,413
6,745
5.86%
7,506
7,660
10,000
10,000
0.10%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,000
5,225
7.38%
29,577
30,742
5.57%
7,506
7,660
10,000
10,000
0.10%
$136,446
$143,710
(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 1.7 years at December 31, 2011.
(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 $95,573,000 and $42,253,000 were pledged to secure
certain borrowings and deposits at December 31, 2011 and 2010, respectively. See Note 8 for discussion of
securities securing borrowings. Of the pledged securities at December 31, 2011 and 2010, approximately
$67,247,000 and $20,613,000, respectively, were pledged for certain deposits.
At December 31, 2011 we did not have any investment securities in an unrealized loss position. The
following table discloses, as of December 31, 2010, 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
Mortgage-backed securities
$3,681
$(5)
$—
$—
$3,681
$(5)
66
At December 31, 2010, the number of investment positions in an unrealized loss position totaled 1. The
unrealized losses at December 31, 2010 were interest rate related, and losses have decreased as rates
decreased in 2009 and remained low during 2010 and 2011. 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. 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 $75.3 million for the year ended December 31, 2011 and comprehensive income of $36.4 million
for the year ended December 31, 2010. Comprehensive income during the year ended December 31, 2011
included a net after-tax loss of $633,000, and comprehensive income during the year ended December 31,
2010 included a net after-tax loss of $810,000 due to changes in the net unrealized gains/losses on securities
available-for-sale.
(3) Loans
Loans held for investment are summarized by category as follows (in thousands):
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
Loans held for sale
Total
December 31
2011
2010
$3,275,150
422,026
1,819,251
24,822
61,792
5,603,041
(30,670)
(70,295)
5,502,076
2,080,081
$2,592,924
270,008
1,759,758
21,470
95,607
4,739,767
(28,437)
(71,510)
4,639,820
1,194,209
$7,582,157
$5,834,029
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.
Real Estate Loans. A portion of our real estate loan portfolio is comprised of loans secured by properties
other than market risk or investment-type real estate. Market risk loans are real estate loans where the
primary source of repayment is expected to come from the sale 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.
67
Construction Loans. Our construction loan portfolio consists primarily of single- and multi-family
residential properties and commercial projects used in manufacturing, warehousing, service or retail
businesses. Our construction loans generally have terms of one to three years. We typically make
construction loans to developers, builders and contractors that have an established record of successful
project completion and loan repayment and have a substantial investment in 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.
Loans Held for Sale. Our loans held for sale consist 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 underwritten consistent with established programs for permanent financing with
financially sound investors. Substantially all loans are conforming loans.
As of December 31, 2011, 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 appropriate to cover estimated losses on loans at each
balance sheet date.
The reserve for loan losses is comprised of specific reserves for impaired loans and an estimate of losses
inherent in the portfolio at the balance sheet date, but not yet identified with specified loans. We regularly
evaluate our reserve for loan losses to maintain an appropriate level to absorb estimated loan losses inherent
in the loan portfolio. Factors contributing to the determination of reserves include the credit worthiness of
the borrower, changes in the value of pledged collateral, and general economic conditions. All loan
commitments rated substandard or worse and greater than $500,000 are specifically reviewed for loss
potential. For loans deemed to be impaired, a specific allocation is assigned based on the losses expected to
be realized from those loans. For purposes of determining the general reserve, the portfolio is segregated by
product types to recognize differing risk profiles among categories, and then further segregated by credit
grades. Credit grades are assigned to all loans. Each credit grade is assigned a risk factor, or reserve
allocation percentage. These risk factors are multiplied by the outstanding principal balance and risk-
weighted by product type to calculate the required reserve. A similar process is employed to calculate a
reserve assigned to off-balance sheet commitments, specifically unfunded loan commitments and letters of
credit, and any needed reserve is recorded in other liabilities. Even though portions of the allowance may
be allocated to specific loans, the entire allowance is available for any credit that, in management’s
judgment, should be charged off.
We have several pass credit grades that are assigned to loans based on varying levels of risk, ranging from
credits that are secured by cash or marketable securities, to watch credits which have all the characteristics
of an acceptable credit risk but warrant more than the normal level of monitoring. Within our criticized/
classified credit grades are special mention, substandard, and doubtful. Special mention loans are those that
are currently protected by sound worth and paying capacity of the borrower, but that are potentially weak
and constitute an additional credit risk. The loan has the potential to deteriorate to a substandard grade due
to the existence of financial or administrative deficiencies. Substandard loans have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility
that we will sustain some loss if the deficiencies are not corrected. Some substandard loans are
inappropriately protected by sound worth and paying capacity of the borrower and of the collateral pledged
and may be considered impaired. Substandard loans can be accruing or can be on nonaccrual depending on
the circumstances of the individual loans. Loans classified as doubtful have all the weaknesses inherent in
68
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.
lower
than past experience. Each quarter we produce an adjustment
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
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 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 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.
The following tables summarize the credit risk profile of our loan portfolio by internally assigned grades
and nonaccrual status as of December 31, 2011 and 2010 (in thousands):
Commercial
Construction
Real Estate
Consumer
Leases
Total
December 31, 2011
Grade:
Pass
Special mention
Substandard-accruing
Non-accrual
Total loans held for
investment
December 31, 2010
Grade:
Pass
Special mention
Substandard-accruing
Non-accrual
Total loans held for
investment
$3,185,625
30,872
45,740
12,913
385,639
5,064
10,204
21,119
1,717,434
32,413
49,601
19,803
24,453
50
6
313
57,255
3,952
153
432
5,370,406
72,351
105,704
54,580
$3,275,150
422,026
1,819,251
24,822
61,792
5,603,041
Commercial
Construction
Real Estate
Consumer
Leases
Total
$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
69
The following table details activity in the reserve for loan losses by portfolio segment for the years ended
December 31, 2011 and 2010. Allocation of a portion of the reserve to one category of loans does not
preclude its availability to absorb losses in other categories.
Commercial Construction Real Estate Consumer Leases Unallocated Total
December 31, 2011
(in thousands)
Beginning balance
Provision for possible
loan losses
Charge-offs
Recoveries
Net charge-offs
(recoveries)
$15,918
$7,336
$38,049
$306
$ 5,405
$4,496
$71,510
8,749
8,518
1,188
261
—
248
16,597
21,275
350
225
317
9
(2,214)
1,218
383
4,317
27,935
— 31,328
2,178
—
7,330
(248)
20,925
308
835
— 29,150
Ending balance
$17,337
$7,845
$33,721
$223
$ 2,356
$8,813
$70,295
Period end amount
allocated to:
Loans individually
evaluated for impairment $ 3,124
$ 298
$ 1,732
$ 52
$
65
$ — $ 5,271
Loans collectively
evaluated for
impairment
—
—
—
—
Ending balance
$ 3,124
$ 298
$ 1,732
$ 52
$
—
65
—
—
$ — $ 5,271
Commercial Construction Real Estate Consumer Leases Unallocated Total
December 31, 2010
(in thousands)
Beginning balance
Provision for possible loan
losses
Charge-offs
Recoveries
$33,269
$10,974
$14,874
$1,258
$2,960
$4,596
$67,931
10,196
27,723
176
8,799
12,438
1
32,554
9,517
138
(740)
216
4
3,842
1,555
158
(100)
54,551
— 51,449
477
—
Net charge-offs
27,547
12,437
9,379
212
1,397
— 50,972
Ending balance
$15,918
$ 7,336
$38,049
$ 306
$5,405
$4,496
$71,510
Period end amount
allocated to:
Loans individually
evaluated for
impairment
Loans collectively
evaluated for
impairment
$ 5,594
$
425
$ 6,714
$ 163
$1,829
$ — $14,725
—
—
—
—
—
—
—
Ending balance
$ 5,594
$
425
$ 6,714
$ 163
$1,829
$ — $14,725
We have traditionally maintained an unallocated reserve component to allow for uncertainty in economic
and other conditions affecting the quality of the loan portfolio. The unallocated portion of our loan loss
reserve has increased since December 31, 2010. We believe the level of unallocated reserves at December
31, 2011 is warranted due to the ongoing weak economic environment which has produced more frequent
losses, including those resulting from fraud by borrowers. Our methodology used to calculate the allowance
70
considers historical losses, however, the historical loss rates for specific product types or credit risk grades
may not fully incorporate the effects of continued weakness in the economy. In addition, a substantial
portion of losses realized over the past several years related to commercial real estate loans. Continuing
uncertainty and illiquidity in the commercial real estate market has produced and continues to cause
material changes in appraised values that can influence our impairment calculations on currently impaired
loans and on pass-rated loans that may experience weakness if economic conditions and valuations do not
stabilize.
The table below presents a summary of our loan loss experience for the year ended December 31, 2009 (in
thousands):
Year ended
December 31, 2009
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 for off-balance sheet credit losses
Ending balance
Total reserve for credit losses
Total provision for credit losses
$45,365
4,000
6,508
4,696
502
4,022
19,728
124
13
53
28
54
272
19,456
42,022
$67,931
$ 1,470
1,478
$ 2,948
$70,879
$43,500
Generally we place loans on non-accrual when there is a clear indication that the borrower’s cash flow may
not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.
When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest
income is subsequently recognized on a cash basis as long as the remaining unpaid principal amount of the
loan is deemed to be fully collectible. If collectability is questionable, then cash payments are applied to
principal. We recognized $2.2 million in interest income on non-accrual loans during 2011 compared to
$566,000 in 2010 and $25,000 in 2009. Additional interest income that would have been recorded if the
loans had been current during the years ended December 31, 2011, 2010 and 2009 totaled $5.9 million,
$10.5 million and $3.6 million, respectively. As of December 31, 2011, $19.2 million of our non-accrual
loans were earning on a cash basis. A loan is placed back on accrual status when both principal and interest
71
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. The table below summarizes our non-accrual loans by type
and purpose as of December 31, 2011 (in thousands):
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Total non-accrual loans
$12,913
21,119
11,140
6,384
2,279
313
432
$54,580
As of December 31, 2011, non-accrual loans included in the table above included $13.8 million related to
loans that met the criteria for restructured.
A loan held for investment is considered impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due (both principal and interest) according to the
terms of the loan agreement. In accordance with FASB ASC 310 Receivables, we have included accruing
TDRs in our impaired loan totals. The following table details our impaired loans, by portfolio class as of
December 31, 2011 (in thousands):
December 31, 2011
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
$ 1,716
$10,378
$—
$ 1,697
$ —
19,236
19,236
5,711
4,575
—
—
—
11,217
4,575
—
—
—
—
—
—
—
—
—
19,315
291
7,064
5,111
899
—
—
—
—
—
—
—
Total impaired loans with no allowance
recorded
$31,238
$45,406
$—
$34,086
$291
72
December 31, 2011
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With an allowance recorded:
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Total impaired loans with an
allowance recorded
Combined:
Commercial
Business loans
Construction
Market risk
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
$11,197
$11,197
$3,124
$11,056
$ —
1,883
1,882
298
1,916
30,533
1,809
2,279
313
432
34,275
1,809
2,279
313
432
1,131
271
330
52
65
19,146
730
1,465
310
2,328
—
—
—
—
—
—
$48,446
$52,187
$5,271
$36,951
$ —
$12,913
$21,575
$3,124
$12,753
$ —
21,119
21,118
298
21,231
291
36,244
6,384
2,279
313
432
45,492
6,384
2,279
313
432
1,131
271
330
52
65
26,210
5,841
2,364
310
2,328
—
—
—
—
—
Total impaired loans with an allowance
recorded
$79,684
$97,593
$5,271
$71,037
$291
73
December 31, 2010
With no related allowance recorded:
Commercial
Business loans
Energy
Construction
Market risk
Secured by 1-4 family
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
$
30
—
—
—
2,525
532
494
—
—
$
30
—
—
—
7,384
532
494
—
—
$ —
—
—
—
—
—
—
—
—
Total impaired loans with no allowance recorded
$
3,581
$
8,440
$ —
With an allowance recorded:
Commercial
Business loans
Energy
Construction
Market risk
Secured by 1-4 family
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
$ 22,512
20,001
$ 28,440
20,001
$ 4,594
1,000
2,641
—
51,688
6,010
1,248
706
6,323
2,641
—
54,661
6,010
1,248
706
6,323
425
—
6,507
125
82
163
1,829
Total impaired loans with an allowance recorded
$111,129
$120,030
$14,725
Combined:
Commercial
Business loans
Energy
Construction
Market risk
Secured by 1-4 family
Real estate
Market risk
Commercial
Secured by 1-4 family
Consumer
Leases
$ 22,542
20,001
$ 28,470
20,001
$ 4,594
1,000
2,641
—
54,213
6,542
1,742
706
6,323
2,641
—
62,045
6,542
1,742
706
6,323
425
—
6,507
125
82
163
1,829
Total impaired loans with an allowance recorded
$114,710
$128,470
$14,725
74
Average impaired loans outstanding during the years ended December 31, 2011, 2010 and 2009 totaled
$71.0 million $120.6 million and $62.3 million respectively.
The table below provides an age analysis of our past due loans that are still accruing as of December 31,
2011 (in thousands):
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than 90
Days
Total Past
Due
Current
Total
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
$ 8,086
—
$ 2,265
4,998
$5,394
—
$15,745 $2,556,476 $2,572,221
690,016
685,018
4,998
$5,394
—
—
—
3,036
4,855
—
53
903
—
—
5,512
799
—
—
—
—
—
—
—
73
—
—
—
—
393,757
7,150
393,757
7,150
8,548
5,654
73
53
903
1,408,716
294,993
81,464
24,456
60,457
1,417,264
300,647
81,537
24,509
61,360
—
—
—
—
73
—
—
$16,933
$13,574
$5,467
$35,974 $5,512,487 $5,548,461
$5,467
(1) Loans past due 90 days and still accruing includes premium finance loans of $2.5 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.
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, or either forgiveness of either principal or accrued interest. As of
December 31, 2011, we have $25.1 million in loans considered restructured that are not already on
nonaccrual. Of the nonaccrual loans at December 31, 2011, $13.8 million met the criteria for restructured. A
loan continues to qualify as restructured until a consistent payment history or change in borrower’s financial
condition has been evidenced, generally no less than twelve months. Assuming that the restructuring
agreement specifies an interest rate at the time of the restructuring that is greater than or equal to the rate
that we are willing to accept for a new extension of credit with comparable risk, then the loan no longer has
to be considered a restructuring if it is in compliance with modified terms in calendar years after the year of
the restructure.
The following table summarizes, as of December 31, 2011, loans that have been restructured during 2011
(in thousands):
Number of
Contracts
Pre-Restructuring
Outstanding Recorded
Investment
Post-Restructuring
Outstanding Recorded
Investment
Commercial business loans
Construction market risk
Real estate market risk
Real estate — 1-4 family
Total new restructured loans in 2011
$ 2,140
2,620
43,374
1,217
$49,351
$ 1,829
1,882
30,193
1,327
$35,231
3
1
9
1
14
75
The restructured loans generally include terms to temporarily place loan on interest only, extend the
payment terms or reduce the interest rate. We have not forgiven any principal on the above loans. The
$14.1 million decrease in the post-restructuring recorded investment compared to the pre-restructuring
recorded investment is due to $7.2 million in charge-offs and $6.9 million in paydowns. At December 31,
2011, $10.1 million of the above loans restructured in 2011 are on non-accrual.
The following table provides information on how loans were modified as a TDR during the year ended
December 31, 2011 (in thousands):
Extended maturity
Adjusted payment schedule
Combination of maturity extension and payment schedule adjustment
Other
Total
$11,152
19,806
3,855
418
$35,231
The following table summarizes, as of December 31, 2011, loans that were restructured within the last 12
months that have subsequently defaulted (in thousands):
Real estate — market risk
Number of
Contracts
Recorded
Investment
1
$4,371
The loan above was subsequently foreclosed and is included in the December 31, 2011 OREO balance.
(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
2010
2009
2011
Beginning balance
Additions
Sales
Valuation allowance for OREO
Direct write-downs
Ending balance
$ 42,261
22,180
(23,566)
(3,922)
(2,876)
$27,264
29,559
(6,058)
(6,587)
(1,917)
$ 25,904
23,466
(14,265)
(6,619)
(1,222)
$ 34,077
$42,261
$ 27,264
(5) Goodwill and Other Intangible Assets
In June 2011, we acquired the assets of a premium finance company and recorded a total intangible asset of
$11.5 million. Of this total, $7.2 million was allocated to goodwill, $4.1 million to customer relationships and
$181,000 to trade name. The $4.1 million customer relationship intangible will be amortized over 18 years
and the $181,000 intangible related to the trade name will be amortized over 5 years.
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.
76
Goodwill and other intangible assets at December 31, 2011 and 2010 are summarized as follows (in
thousands):
December 31, 2011
Goodwill
Intangible assets—customer relationships and
trademarks
Total goodwill and intangible assets
December 31, 2010
Goodwill
Intangible assets—customer relationships and
trademarks
Gross Goodwill
and Intangible
Assets
Accumulated
Amortization
Net Goodwill
and Intangible
Assets
$14,416
$ (374)
$14,042
7,996
$22,412
(1,558)
6,438
$(1,932)
$20,480
$ 7,225
$ (374)
$ 6,851
3,705
(1,073)
2,632
Total goodwill and intangible assets
$10,930
$(1,447)
$ 9,483
Amortization expense related to intangible assets totaled $485,000 in 2011 and $323,000 in 2010 and
$189,000 in 2009. The estimated aggregate future amortization expense for intangible assets remaining as
of December 31, 2011 is as follows (in thousands):
2012
2013
2014
2015
2016
Thereafter
$ 587
587
582
481
383
3,818
$6,438
(6) Premises and Equipment
Premises and equipment at December 31, 2011 and 2010 are summarized as follows (in thousands):
Premises
Furniture and equipment
Accumulated depreciation
Total premises and equipment, net
December 31
2011
2010
$ 11,967
24,290
36,257
(24,800)
$ 11,092
22,159
33,251
(21,683)
$ 11,457
$ 11,568
Depreciation expense for the above premises and equipment was approximately $3,397,000, $3,201,000 and
$3,311,000 in 2011, 2010 and 2009, respectively.
77
(7) Deposits
Deposits at December 31, 2011 and 2010 are as follows (in thousands):
Non-interest bearing demand deposits
Interest-bearing deposits
Transaction
Savings
Time
Deposits in foreign branches
Total interest-bearing deposits
Total deposits
2011
2010
$1,751,944
$1,451,307
448,730
2,288,804
586,506
480,273
346,052
2,348,860
850,234
458,948
3,804,313
4,004,094
$5,556,257
$5,455,401
The scheduled maturities of interest bearing time deposits are as follows at December 31, 2011
(in thousands):
2012
2013
2014
2015
2016
2017 and after
$1,026,174
21,742
8,693
8,567
834
769
$1,066,779
At December 31, 2011 and 2010, the Bank had approximately $26,549,000 and $44,753,000, respectively, in
deposits from related parties, including directors, stockholders, and their related affiliates on terms similar
to those from third parties.
At December 31, 2011 and 2010, interest bearing time deposits, including deposits in foreign branches, of
$100,000 or more were approximately $1,029,352,000 and $1,238,526,000, respectively.
(8) Borrowing Arrangements
The following table summarizes our borrowings at December 31, 2011, 2010 and 2009 (in thousands):
2011
2010
2009
Balance
Rate(4) Balance Rate(4)
Balance
Rate(4)
Federal funds purchased(5)
Customer repurchase agreements(1)
Treasury, tax and loan notes(2)
FHLB borrowings(3)
Fed borrowings
TLGP borrowings
Trust preferred subordinated debentures
Total borrowings
$ 412,249
23,801
—
1,200,066
132,000
—
113,406
$1,881,522
Maximum outstanding at any month end
$1,986,324
0.27% $283,781
10,920
0.06%
3,100
—
86
0.14%
—
0.75%
—
—
2.48% 113,406
0.32% $ 580,519
25,070
0.05%
0.00%
5,940
325,000
2.21%
—
—
20,500
—
113,406
2.23%
0.33%
0.10%
0.00%
0.11%
—
0.84%
3.19%
$411,293
$653,665
$1,070,435
$1,753,181
78
(1) Securities pledged for customer repurchase agreements were $28.3 million, $21.6 million and $36.0
million at December 31, 2011, 2010 and 2009, respectively.
(2) Securities pledged for treasury, tax and loans notes were $5.7 million, $7.4 million and $11.3 million at
December 31, 2011, 2010 and 2009, respectively.
(3) FHLB borrowings are collateralized by a blanket floating lien based on real estate loans and also certain
pledged securities. The weighted-average interest rate for the years ended December 31, 2011, 2010
and 2009 was 0.11%, 0.14% and 0.62%, respectively.
(4) Interest rate as of period end.
(5) The weighted-average interest rate on federal funds purchased for the years ended December 31, 2011,
2010 and 2009 was 0.25%, 0.44% and 0.47%, respectively.
The following table summarizes our other borrowing capacities in addition to balances outstanding at
December 31, 2011, 2010 and 2009 (in thousands):
FHLB borrowing capacity relating to loans
FHLB borrowing capacity relating to securities
Total FHLB borrowing capacity
2011
2010
2009
$
4,524
15,909
$869,089
120,823
$1,382,682
57,101
$ 20,433
$989,912
$1,439,783
Unused federal funds lines available from commercial banks
$390,720
$482,460
$ 736,560
The scheduled maturities of our borrowings at December 31, 2011, were as follows (in thousands):
Federal funds purchased(1)
Customer repurchase
agreements(1)
FHLB borrowings(1)
Fed borrowings(1)
Trust preferred subordinated
debentures(1)
Total borrowings
Within One
Year
After One
But Within
Three Years
After Three
But Within
Five Years
After
Five
Years
Total
$ 412,249
$—
$—
$
— $ 412,249
23,801
1,200,000
132,000
—
—
—
—
—
—
66
—
—
—
—
—
23,801
1,200,066
132,000
113,406
113,406
$1,768,050
$—
$66
$113,406
$1,881,522
(1) Excludes interest.
(9) Trust Preferred Subordinated Debentures
From November 2002 to September 2006 various Texas Capital Statutory Trusts were created and
subsequently issued fixed and/or floating rate Capital Securities in various private offerings totaling $113.4
million. As of December 31, 2011, 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
November 19, 2002
$
10,310 $
April 10, 2003 October 6, 2005
25,774
10,310 $
$
April 28, 2006
25,774 $
September 29, 2006
41,238
Floating
3 month LIBOR +
Floating
3 month LIBOR
Fixed/Floating(1)
3 month LIBOR
Floating
3 month LIBOR +
Floating
3 month LIBOR +
3.35%
+ 3.25%
+ 1.51%
1.60%
1.71%
November 2032
April 2033 December 2035
June 2036
September 2036
Date issued
Capital securities issued
Floating or fixed rate
securities
Interest rate on subordinated
debentures
Maturity date
(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.
79
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 $49.4 million at December 31, 2011, which relates primarily to our
loan origination fees and stock compensation.
allowance for loan losses, OREO valuation reserve,
Management 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.
At December 31, 2010, we had a gross deferred tax asset of $48.1 million, which related primarily to our
allowance for loan losses, OREO valuation reserve, loan origination fees and stock compensation.
Income tax expense/(benefit) consists of the following for the years ended (in thousands):
Year ended December 31
2010
2009
2011
Current:
Federal
State
Total
Deferred
Federal
State
Total
Total expense
Federal
State
Total
$47,799
1,183
$24,329
840
$20,955
219
$48,982
$25,169
$21,174
$ (6,927)
245
$ (5,248)
(365)
$ (8,774)
—
$ (6,682)
$ (5,613)
$ (8,774)
$40,872
1,428
$19,081
475
$12,181
219
$42,300
$19,556
$12,400
The following table shows the breakdown of total income tax expense for continuing operations and
discontinued operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):
Total expense (benefit):
From continuing operations
From discontinued operations
Total
2011
2010
2009
$42,366
(66)
$19,626
(70)
$12,522
(122)
$42,300
$19,556
$12,400
80
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):
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
December 31
2011
2010
$ 25,787
142
6,432
3,776
401
19
5,416
811
6,074
526
$ 26,426
162
4,774
5,769
486
453
3,009
842
5,754
432
49,384
48,107
(1,054)
(723)
(11,174)
(1,235)
(2,542)
(293)
(991)
(697)
(16,153)
(1,966)
(2,884)
(77)
(17,021)
(22,768)
$ 32,363
$ 25,339
statement
the financial
ASC 740-10, Income Taxes — Accounting for Uncertainties in Income Taxes (“ASC 740-10”) prescribes a
recognition and
recognition threshold and a measurement attribute for
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 2008.
81
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
Total
(11) Employee Benefits
Year ended December 31
2009
2010
2011
35%
35%
35%
1%
1%
1%
1%
1%
1%
(1)% (2)% (3)%
36%
35%
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 $819,000, $595,000, and $627,000 for
the years ended
December 31, 2011, 2010 and 2009, 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, 2011, 2010 and 2009, 76,561, 66,504 and
53,281 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 (“SARs”), cash-based performance units
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, 2011, 2010 and 2009 were 15,865, 60,760 and 116,728,
respectively. Total shares which may be issued under the 2010 Plan at December 31, 2011 and 2010 was
431,200 and 498,400, respectively.
The fair value of our stock option and SAR grants are estimated at the date of grant using the Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed 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.
82
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
Market price volatility factor
Weighted-average expected life of options
2011
2010
2009
1.83%
2.26%
2.23%
0.414
5 years
0.418
5 years
0.423
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 2011, 2010 and 2009 is as follows (in
thousands, except per share data):
December 31, 2011
December 31, 2010
December 31, 2009
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Options outstanding at beginning of year
Options exercised
Options forfeited
943,820 $12.62
12.00
(374,410)
—
—
1,167,736 $12.07
8.80
(155,366)
11.33
(68,550)
1,460,461 $11.54
(226,485)
7.69
15.35
(66,240)
Options outstanding at year-end
569,410 $13.02
943,820 $12.62
1,167,736 $12.07
Options vested and exercisable at year-end
Intrinsic value of options vested and
569,410 $13.02
943,820 $12.62
1,131,486 $11.76
exercisable
$10,015,721
$8,263,646
$2,490,378
Weighted average remaining contractual
life of options vested and exercisable
(in years)
Fair value of shares vested during year
Intrinsic value of options exercised
Weighted average remaining contractual
life of options currently outstanding
(in years)
2.06
2.85
3.52
—
$
$ 5,496,861
$ 219,193
$1,619,409
$ 245,422
$1,608,048
2.06
2.85
3.58
There was no expense related to stock option awards in 2011. We expensed approximately $219,000 and
$629,000 in 2010 and 2009, respectively, related to stock option awards. Expenses are calculated utilizing
the straight-line method. No stock options were granted in 2009, 2010 or 2011.
In connection with the 2005 Long-term Incentive Plan, stock appreciation rights were issued in 2011, 2010
and 2009. 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.
83
December 31, 2011
December 31, 2010
December 31, 2009
Weighted
Average
Exercise
Price
SARs /
PSARs
Weighted
Average
Exercise
Price
SARs /
PSARs
Weighted
Average
Exercise
Price
SARs
SARs outstanding at beginning of year
SARs granted
SARs exercised
SARs forfeited
1,213,257 $19.42
24.70
19.86
16.56
33,000
(236,610)
(25,947)
1,206,738 $16.16
17.81
15.38
17.97
109,500
(16,000)
(86,981)
1,007,579 $16.66
14.93
—
20.51
246,500
—
(47,341)
SARs outstanding at year-end
983,700 $19.56
1,213,257 $19.42
1,206,738 $16.16
SARs vested and exercisable at year-end
Weighted average remaining contractual
life of SARs vested
Compensation expense
Weighted average fair value of SARs
granted during 2011, 2010 and 2009 (in
years)
687,175 $20.29
689,144 $20.48
491,254 $20.92
5.24
5.99
6.85
$1,272,000
$1,994,000
$1,709,000
Fair value of shares vested during the year $1,612,435
Weighted average remaining contractual
life of SARs currently outstanding (in
years)
$ 9.54
$ 6.97
$ 5.93
$1,626,811
$1,278,207
5.95
6.72
5.61
As of December 31, 2011 and 2010, the intrinsic value of SARs vested was $7,093,144 and $929,900,
respectively. As of December 31, 2009 the intrinsic value of SARs vested was negative as the December 31,
2009 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):
Non-Vested Stock Awards
Outstanding
Weighted-
Average
Grant-
Date Fair
Value
$19.49
12.81
19.59
19.98
17.04
15.72
18.25
17.82
14.64
24.77
16.07
18.70
Number of
Shares
626,248
257,210
(134,570)
(34,489)
714,399
365,000
(162,394)
(19,654)
897,351
165,891
(364,065)
(37,685)
661,492
$17.44
Balance, January 1, 2009
Granted
Vested and issued
Forfeited
Balance, December 31, 2009
Granted
Vested and issued
Forfeited
Balance, December 31, 2010
Granted
Vested and issued
Forfeited
Balance, December 31, 2011
84
The RSUs granted during 2011, 2010 and 2009 generally vest over four to five years. Compensation cost for
restricted stock units was $6,068,000, $4,559,000, $3,623,000 for years ended December 31, 2011, 2010 and
2009, respectively. The weighted average remaining contractual life of RSUs currently outstanding is 7.87
years.
In connection with the 2010 Long-term Incentive Plan, a total of 217,337 cash-based performance units
were issued in 2011. Of the units, 54,400 are service-based and vest over a period of five years. Additionally,
162,937 units contain both service and performance based vesting requirements: 25% of the units will vest
on the third anniversary of the date of grant, and 75% will vest based on attainment of certain performance
metrics developed by our Board of Directors’ HR Committee.
Total compensation cost for all share-based arrangements, net of taxes, was $4,771,000, $4,434,000 and
$3,904,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Total compensation cost
for all cash-based arrangements for the year ended December 31, 2011 was $339,000.
Unrecognized stock-based compensation expense related to SAR grants issued through December 31, 2011
is $1.7 million. At December 31, 2011, the weighted average period over which this unrecognized expense
is expected to be recognized was 2.8 years. Unrecognized stock-based compensation expense related to
RSU grants through December 31, 2011 is $10.2 million. At December 31, 2011, the weighted average
period over which this unrecognized expense is expected to be recognized was 3.2 years.
Cash flows from financing activities included $8,970,000, $1,774,000 and $213,000 in cash inflows from
excess tax benefits related to stock compensation in 2011, 2010 and 2009, respectively. The tax benefit
realized from stock options exercised is $3,139,000, $621,000 and $75,000 in 2011, 2010 and 2009,
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
termination 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.
85
At December 31, 2011 and 2010, commitments to extend credit and standby and commercial letters of
credit were as follows (in thousands):
Commitments to extend credit
Standby letters of credit
(13) Regulatory Restrictions
December 31
2011
2010
$1,730,801
71,360
$1,306,871
54,831
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, 2011, 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
Company’s capital ratios exceed the regulatory definition of well capitalized as of December 31, 2011 and
2010. As of June 30, 2011, 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.
86
(In thousands except percentage data)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized
Under Prompt
Corrective
Action Provisions
As of December 31, 2011:
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, 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
$774,360
741,595
10.56% $586,615
10.12% 586,512
8.00%
N/A
8.00% $733,140
N/A
10.00%
$701,534
668,769
9.57% $293,307
9.12% 293,256
4.00%
N/A
4.00% $439,884
$701,534
668,769
8.78% $319,482
8.37% 319,427
4.00%
N/A
4.00% $399,283
N/A
6.00%
N/A
5.00%
$697,291
600,331
11.83% $471,565
10.19% 471,462
8.00%
N/A
8.00% $589,327
N/A
10.00%
$623,835
526,875
10.58% $235,782
8.94% 235,731
N/A
4.00%
4.00% $353,596
$623,835
526,875
9.36% $266,694
7.90% 266,638
N/A
4.00%
4.00% $333,297
N/A
6.00%
N/A
5.00%
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 2011,
2010 or 2009.
The required balance at the Federal Reserve at December 31, 2011 and 2010 was approximately
$28,219,000 and $27,610,000, respectively.
87
(14) Earnings Per Share
The following table presents the computation of basic and diluted earnings per share (in thousands except
share data):
Year ended December
2010
2009
2011
Numerator:
Net income from continuing operations
Preferred stock dividends
$
$
76,102
—
$
37,323
—
24,387
5,383
Net income from continuing operations available to
common shareholders
Loss from discontinued operations
Net income
Denominator:
76,102
(126)
37,323
(136)
19,004
(235)
$
75,976
$
37,187
$
18,769
Denominator for basic earnings per share-weighted
average shares
Effect of employee stock-based awards(1)
Effect of warrants to purchase common stock
Denominator for dilutive earnings per share-adjusted
weighted average shares and assumed conversions
Basic earnings per common share from continuing
operations
Basic earnings per common share
Diluted earnings per share from continuing operations
Diluted earnings per common share
37,334,743
682,694
315,640
36,627,329
594,707
123,992
34,113,285
278,882
18,287
38,333,077
37,346,028
34,410,454
$
$
$
$
2.04
2.03
1.99
1.98
$
$
$
$
1.02
1.02
1.00
1.00
$
$
$
$
0.56
0.55
0.55
0.55
(1) Stock options, SARs and RSUs outstanding of 98,000, 978,567 and 1,669,686 in 2011, 2010 and 2009,
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, 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. 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.
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
88
liabilities. Level 2 assets include U.S. government and agency mortgage-backed debt
securities, 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
methodologies, 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, 2011 are as follows (in thousands):
Available for sale securities:(1)
Mortgage-backed securities
Corporate securities
Municipals
Equity securities
Other
Loans(2)(4)
OREO(3)(4)
Derivative asset(5)
Derivative liability(5)
Fair Value Measurements Using
Level 3
Level 2
Level 1
$—
—
—
—
—
—
—
—
—
$ 90,083
5,225
30,742
7,660
10,000
—
—
20,071
(20,071)
$ —
—
—
—
—
12,448
34,077
—
—
(1) Securities are measured at fair value on a recurring basis, generally monthly.
(2) 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
(5) Derivative assets and liabilities are measured at fair value on a recurring basis, generally quarterly.
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.
Loans During the three months ended December 31, 2011, certain impaired loans were reevaluated
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 $12.4 million total above includes
impaired loans at December 31, 2011 with a carrying value of $12.5 million that were reduced by specific
valuation allowance allocations totaling $11,000 for a total reported fair value of $12.4 million based on
89
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.
OREO Certain foreclosed assets, upon initial recognition, were valued based on third party appraisals.
At December 31, 2011, OREO with a carrying value of $44.8 million was reduced by specific valuation
allowance allocations totaling $10.7 million for a total reported fair value of $34.1 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.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosure of fair value information about financial
instruments, 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):
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
December 31, 2011
December 31, 2010
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$ 101,258
143,710
2,080,081
393
5,502,076
20,071
5,556,257
412,249
1,355,867
113,406
20,071
$ 101,258
143,710
2,080,081
393
5,506,899
20,071
5,557,062
412,249
1,355,869
113,406
20,071
$ 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
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
approximate their fair value.
for cash and cash equivalents
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. We have obtained documentation from
the primary pricing service we use about their processes and controls over pricing. In addition, on a
90
quarterly basis we independently verify the prices that we receive from the service provider using two
additional independent pricing sources. Any significant differences are investigated and resolved.
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 obtained from independent pricing services. On a
quarterly basis, we independently verify the fair value using an additional independent pricing source.
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 other
borrowings approximates their
fair value. The fair value of other 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 $7,982,000, $6,916,000 and $6,968,000 for the years
ended December 31, 2011, 2010 and 2009, respectively.
Minimum future lease payments under operating leases are as follows (in thousands):
Year ending December 31,
2012
2013
2014
2015
2016
2017 and thereafter
91
Minimum
Payments
$ 9,435
8,881
8,625
8,066
7,611
38,578
$81,196
(17) Parent Company Only
Summarized financial information for Texas Capital Bancshares, Inc. – Parent Company Only follows (in
thousands):
December 31
2011
2010
$ 21,004 $ 88,684
554,917
8,812
707,124
12,559
$740,687 $652,413
$
698 $
113,406
114,104
376
359,610
261,883
(8)
4,722
626,583
436
113,406
113,842
369
346,948
185,907
(8)
5,355
538,571
$740,687 $652,413
Year ended December 31
2010
2009
2011
$
77
72
149
2,573
618
1,919
450
5,560
$
110
128
238
3,672
673
1,269
453
6,067
$
127
441
568
4,353
669
1,425
392
6,839
(5,411)
(1,887)
(3,524)
79,500
(5,829)
(1,989)
(3,840)
41,027
(6,271)
(2,139)
(4,132)
28,284
$75,976
$37,187
$24,152
Balance Sheet
Assets
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity
Other liabilities
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
Statement of Earnings
Dividend income
Other income
Total income
Interest expense
Salaries and employee benefits
Legal and professional
Other non-interest expense
Total expense
Loss before income taxes and equity in undistributed income of
subsidiary
Income tax benefit
Loss before equity in undistributed income of subsidiary
Equity in undistributed income of subsidiary
Net income
92
Statements of Cash Flows
2011
Year ended December 31
2010
(in thousands)
2009
Operating Activities
Net income
Adjustments to reconcile net income to net cash used in
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
Proceeds from sale of stock related to stock-based awards
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
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$ 75,976
$ 37,187
$ 24,152
(79,500)
(3,747)
3,139
(41,027)
(1,449)
621
(28,284)
(11)
75
(8,970)
262
(1,774)
(24)
(213)
(577)
(12,840)
(6,466)
(4,858)
(66,000)
(66,000)
—
—
—
—
2,190
—
—
—
—
13,343
61,024
— 75,000
— (75,000)
—
(1,219)
— (50,000)
8,970
11,160
(67,680)
1,774
15,117
8,651
213
10,018
5,160
88,684
80,033
74,873
$ 21,004
$ 88,684
$ 80,033
(18) Related Party Transactions
See Note 7 for a description of deposits with related parties.
(19) Discontinued Operations
Subsequent to the end of the first quarter of 2007, we and the purchaser of our 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 statements.
During 2011, the loss from discontinued operations was $126,000, net of taxes. The 2011 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
$393,000 in loans held for sale from discontinued operations that are carried at the estimated market value
at December 31, 2011, 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, 2011 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.
93
The results of operations of the discontinued components are presented separately in the accompanying
consolidated statements of income for 2011, 2010 and 2009, net of tax, following income from continuing
operations. Details are presented in the following tables (in thousands):
Year ended
December 31
2010
2009
2011
Revenues
Expenses
Loss before income taxes
Income tax benefit
Loss from discontinued operations
(20) Derivative Financial Instruments
$ 58
250
$ 36
242
$ 64
421
(192)
(66)
(206)
(70)
(357)
(122)
$(126) $(136) $(235)
The fair value of derivative positions outstanding is included in other assets and other liabilities in the
accompanying consolidated balance sheets.
During 2011 and 2010, 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.
The notional amounts and estimated fair values of interest rate derivative positions outstanding at
December 31, 2011 presented in the following table (in thousands):
Non-hedging interest rate derivative:
Commercial loan/lease interest rate swaps
Commercial loan/lease interest rate swaps
Notional Amount Estimated Fair Value
$ 295,914
(295,914)
$ 20,071
(20,071)
The weighted-average receive and pay interest rates for interest rate swaps outstanding at December 31,
2011 were as follows:
Non-hedging interest rate swaps
Weighted-Average
Interest Rate Received
Interest Rate Paid
5.25%
1.90%
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 $20.1 million at December 31,
2011, all of which relates to bank customers. Collateral levels are monitored and adjusted on a regular basis
for changes in interest rate swap values.
94
(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 purchase we now control 97% of the
subsidiary and the non-controlling interest on our balance sheet at December 31, 2011 is $405,000. 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.
95
(22) Quarterly Financial Data (unaudited)
The tables below summarize our quarterly financial information for the years December 31, 2011 and 2010
(in thousands except per share and average share data):
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
2011 Selected Quarterly Financial Data
Fourth
Third
Second
First
$
92,967
4,820
88,147
6,000
82,147
8,994
50,353
40,788
15,043
25,745
(5)
83,263
4,065
79,198
7,000
72,198
7,603
46,186
33,615
11,905
21,710
(7)
$
75,259 $
4,165
71,094
8,000
63,094
7,951
45,263
25,782
9,074
16,708
(54)
70,111
5,613
64,498
7,500
56,998
7,684
46,399
18,283
6,344
11,939
(60)
25,740
$
21,703 $
16,654 $
11,879
0.69
0.69
0.67
0.67
$
$
$
$
0.58
0.58
0.56
0.56
$
$
$
$
0.45 $
0.45 $
0.44 $
0.43 $
0.32
0.32
0.31
0.31
$
$
$
$
$
$
37,549,000
37,412,000
37,281,000
37,091,000
38,609,000
38,435,000
38,333,000
38,342,000
96
(In thousands except per share and average share data)
2010 Selected Quarterly Financial Data
Fourth
Third
Second
First
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)
72,600
9,994
62,606
13,500
49,106
8,101
42,602
14,605
5,074
9,531
(5)
$
67,472 $
9,587
57,885
14,500
43,385
8,036
39,118
12,303
4,187
8,116
(54)
64,306
9,078
55,228
13,500
41,728
6,948
37,186
11,490
3,890
7,600
(55)
12,054
$
9,526 $
8,062 $
7,545
0.33
0.33
0.32
0.32
$
$
$
$
0.26
0.26
0.25
0.25
$
$
$
$
0.22 $
0.22 $
0.22 $
0.22 $
0.21
0.21
0.21
0.21
36,855,000
36,784,000
36,670,000
36,191,000
37,658,000
37,445,000
37,487,000
36,784,000
(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) Legal Matters
We are aggressively defending against a $65.4 million jury verdict that was rendered in August 2011, in
Antlers, Oklahoma, a town in rural Pushmataha County. The case was filed by one of the guarantors of a
defaulted loan. A judgment has been entered by the trial court. We are pursuing a dismissal of the suit, a
change in verdict or a new trial. We will appeal any further adverse judgment that is entered. We have been
advised by counsel that there are numerous grounds for dismissal, change in verdict and any appeal.
In addition, we intend to pursue aggressively our suit filed in Texas in April 2010 against the plaintiff in the
Oklahoma case and other guarantors of the defaulted loan. The loss related to the loan was recognized in
the second quarter of 2010, and we have no remaining balance sheet exposure on the principal balance of
the loan. As we currently believe a materially negative outcome in this matter is not probable, we have not
established a reserve related to any potential exposure.
97
(24) New Accounting Standards
ASU No. 2010-20, “Receivables (Topic 310) — Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses” (“ASU 2010-20”) requires entities to provide disclosures designed to facilitate
financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of
financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses
and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be
disaggregated by portfolio segment, the level at which an entity develops and documents a systematic
method for determining its allowance for credit losses, and class of financing receivable, which is generally
a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward
of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due
loans and credit quality indicators. ASU 2010-20 became effective for our financial statements as of
December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that
relate to activity during a reporting period became effective for our financial statements on January 1, 2011.
Certain disclosures related to troubled debt restructurings were temporarily deferred by ASU 2011-01,
“Receivables (Topic 310) — Deferral of
the Effective Date of Disclosures about Troubled Debt
Restructurings in Update No. 2010-20,” and became effective on July 1, 2011 as required by ASU
No. 2011-02, “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring Is a
Troubled Debt Restructuring.” See Note 3 — Loans.
ASU No. 2010-28, “Intangibles — Goodwill and Other (Topic 350) — When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts” (“ASU 2010-28”) modifies Step 1
of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those
reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely
than not that a goodwill impairment exists. In determining whether it is more likely than not that a
goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist such as if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 201-28 became
effective for us on January 1, 2011 and did not have a significant impact on our financial statements.
ASU No. 2011-02, “Receivables (Topic 310) — A Creditor’s Determination of Whether a Restructuring Is a Troubled
Debt Restructuring,” (“ASU 2011-02”) clarifies which loan modifications constitute troubled debt
restructurings and is intended to assist creditors in determining whether a modification of the terms of a
receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording
an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring
constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified
by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession and (b) the
debtor is experiencing financial difficulties. ASU 2011-02 became effective for us on July 1, 2011, and
applies retrospectively to restructurings occurring on or after January 1, 2011. See Note 3 — Loans.
ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurements
and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) amends Topic 820, “Fair Value
Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally
accepted accounting principles and International Financial Reporting Standards (“IFRS”). ASU 2011-04
clarifies the application of existing fair value measurement requirements, changes certain principles in
Topic 820 and requires additional fair value disclosures. ASU 2011-04 is effective for annual periods
beginning after December 15, 2011, and is not expected to have a significant impact on our financial
statements.
ASU 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income” (“ASU 2011-05”)
amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’
equity be presented in either a single continuous statement of comprehensive income or in two separate
but consecutive statements. Additionally, ASU 2011-05 requires entities to present, on the face of the
financial statements, reclassification adjustments for items that are reclassified from other comprehensive
income to net income in the statement or statements where the components of net income and the
98
components of other comprehensive income are presented. The option to present components of other
comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. ASU
2011-05 is effective for annual and interim periods beginning after December 15, 2011; however certain
provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12
the Effective Date for Amendments to the
“Comprehensive Income (Topic 820) — Deferral of
Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05.” ASU 2011-05 is not expected to have a significant impact on
our financial statements.
ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment” (“ASU 2011-
08”) amends Topic 350, “Intangibles — Goodwill and Other,” to give entities the option to first assess
qualitative factors to determine whether the existence of events or circumstances leads to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, an entity determines it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test
is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the
two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value
with the carrying amount of the reporting unit. ASU 2011-08 is effective of annual and interim impairment
tests beginning after December 15, 2011, and is not expected to have a significant impact on our financial
statements.
99
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING 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 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, 2011.
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, 2011, 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, 2011, 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, 2011, 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, 2011. The report, which expresses an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2011, is included in this Item under
the heading “Report of Independent Registered Public Accounting Firm.”
100
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, 2011, 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’s 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, 2011, 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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2011 and our report dated February 23, 2012
expressed an unqualified opinion thereon.
Dallas, Texas
February 23, 2012
101
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 15, 2012, which proxy materials will be filed with the SEC no later than
April 5, 2012.
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 15, 2012, which proxy materials will be filed with the SEC no later than
April 5, 2012.
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 15, 2012, which proxy materials will be filed with the SEC no later than
April 5, 2012.
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 15, 2012, which proxy materials will be filed with the SEC no later than
April 5, 2012.
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 15, 2012, which proxy materials will be filed with the SEC no later than
April 5, 2012.
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
102
(3) Exhibits
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
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
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
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
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
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
103
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
10.1
10.2
10.3
10.4
10.5
10.6
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
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
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
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
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
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
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
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
Deferred Compensation Agreement, which is incorporated by reference to Exhibit 10.2 to our
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+
104
10.7
10.8
10.9
10.10
10.11
10.12
10.13
21
23.1
31.1
31.2
32.1
32.2
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+
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+
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+
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+
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+
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+
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*
*
Filed herewith
+ Management contract or compensatory plan arrangement
105
SIGNATURES
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.
Date: February 23, 2012
TEXAS CAPITAL BANCSHARES, INC.
By: /S/ GEORGE F. JONES, JR.
George F. Jones, Jr.
President and Chief Executive Officer
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, 2012
JAMES R. HOLLAND, JR.
/S/
James R. Holland, Jr.
Chairman of the Board and Director
Date: February 23, 2012
/S/ GEORGE F. JONES, JR.
George F. Jones, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
Date: February 23, 2012
/S/ PETER BARTHOLOW
Peter Bartholow
Executive Vice President, Chief Financial Officer
and Director
(principal financial officer)
Date: February 23, 2012
/S/
JULIE ANDERSON
Julie Anderson
Executive Vice President and Controller
(principal accounting officer)
Date: February 23, 2012
/S/
JAMES H. BROWNING
James H. Browning
Director
Date: February 23, 2012
/S/
JOSEPH M. GRANT
Joseph M. Grant
Director
Date: February 23, 2012
/S/ FREDERICK B. HEGI, JR.
Frederick B. Hegi, Jr.
Director
106
Date: February 23, 2012
/S/ LARRY L. HELM
Larry L. Helm
Director
Date: February 23, 2012
/S/ WALTER W. MCALLISTER III
Walter W. McAllister III
Director
Date: February 23, 2012
/S/ ELYSIA H. RAGUSA
Elysia H. Ragusa
Director
Date: February 23, 2012
/S/ STEVEN P. ROSENBERG
Steven P. Rosenberg
Director
Date: February 23, 2012
/S/ ROBERT W. STALLINGS
Robert W. Stallings
Director
Date: February 23, 2012
/S/ DALE W. TREMBLAY
Date: February 23, 2012
Dale W. Tremblay
Director
/S/
IAN J. TURPIN
Ian J. Turpin
Director
107
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
Corporate Headquarters
2000 McKinney Avenue
Dallas, Texas 75201
214.932.6600
Midway/Spring Valley
14131 Midway Road
Addison, Texas 75001
972.450.5050
Austin
114 West 7th Street
Austin, Texas 78701
512.236.6770
San Antonio
745 East Mulberry
San Antonio, Texas 78212
210.390.3800
Houston/Westway II
4424 West Sam Houston Parkway N.
Houston, Texas 77041
281.809.1100
Peter B. Bartholow
James H. Browning
Joseph M. Grant
Frederick B. Hegi, Jr.
Larry L. Helm
CO RP O RATE IN FO RMATIO N
Annual Meeting
The annual meeting of shareholders
will be held on May 15 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
Dallas/Premier Place
5910 North Central Expressway
Dallas, Texas 75206
214.245.1100
Plano
5800 Granite Parkway
Plano, Texas 75024
972.963.3000
Richardson
2350 Lakeside Blvd.
Richardson, Texas 75082
972.656.6700
Austin/Westlake Hills
3818 Bee Caves Road
Austin, Texas 78746
512.362.7300
San Antonio/Quarry Heights
7373 Broadway
San Antonio, Texas 78209
210.283.5220
Fort Worth
570 Throckmorton
Fort Worth, Texas 76102
817.212.8333
Round Rock
One Chisholm Trail
Round Rock, Texas 78681
512.362.5900
Houston
One Riverway
Houston, Texas 77056
832.308.7000
BO ARD O F DIRECTO RS
James R. Holland, Jr.
George F. Jones, Jr.
W.W. McAllister III
Elysia Holt Ragusa
Steven P. Rosenberg
Robert W. Stallings
Dale W. Tremblay
Ian J. Turpin
www.texascapitalbank.com